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GLOBAL ISLAMIC ASSET MANAGEMENTREPORT 2014

REUTERS / SRDJAN ZIVULOVIC


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3GLOBAL ISLAMIC ASSET MANAGEMENT REPORT

ContentsForward 1 .....................................................................................................................................5

Forward 2 ....................................................................................................................................7

Executive Summary ....................................................................................................................9

Overview .................................................................................................................................... 13

Investor Preferences ..................................................................................................................27

Market Outlook ........................................................................................................................ 35

The Key Challenge ................................................................................................................... 43

Solution 1: Pensions .................................................................................................................. 51

Solution 2: Socially Responsible Investment (SRI) ................................................................ 63

Solution 3: Passporting .............................................................................................................71

Niche Solution: Targeting Muslims in Western Markets ......................................................... 81

Acknowledgment and Copyright ............................................................................................ 86


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REUTERS /PAUL YEUNG


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Foreword

Thomson Reuters brings you the first global Islamicasset management report. This report provides a holistic

look into the Islamic asset management sector. As the

industry has picked up and more players take steps to

develop more sophisticated products, the report delivers

critical information on the dynamics of the Islamic asset

management sector. With an objective to arm readers with

on the ground information, the report is complemented by

an asset management survey delivering insights, investor

preferences and market outlook for 2014. The survey results

will help investors, asset managers and regulators take

informed decisions that could aid in the development and

flourishing of the Islamic fund space in the years to come.

SAYD FAROOK

Global Head Islamic Capital Markets

The Islamic asset management sector has come a long way from the first Islamic fund launch, over half a century

ago. Islamic fund assets are estimated at USD 62 Billion, mainly comprised of Islamic mutual funds totalling USD

46 Billion.

Despite the fact that Islamic mutual funds saw the highest fund launches and lowest liquidations this year, their

assets under management have fallen. The lack of scale, stricter regulations, as well as stagnant markets have taken

their toll on Islamic funds.

Scale remains to be the biggest challenge for asset managers and will remain to be the case unless the retail

investor dependence is overcome.. According to our research, attracting institutional investors is the most important

objective for the survival of the industry. The conventional space enjoys a 70 percent contribution from the

institutional sector while Islamic funds a mere only 20 percent of institutional money within their portfolios.

With changing investor preference and behaviour, socially responsible investment has attracted the masses, providing

an ideal opportunity for Islamic funds to enter the space. Socially responsible investment provides a natural crossover

to Islamic funds with a market boasting over USD 33 Trillion in assets. In addition pension assets, a main driver for

assets under management on the conventional front could also provide a wealth of fund flows to the sector.

We would like to thank Basil Moftah, Managing Director, Middle East, Africa and Russia, and Russell Haworth,

Managing Director, Middle East and North Africa, for their continued support and belief in the growth and value

proposition of the Islamic finance industry.

We would also like to thank Lipper for providing us with the wealth of data used to formulate our findings and analysis.

With compliments

Sayd Farook

Global Head Islamic Capital Markets


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REUTERS /KAI PFAFFENBACH


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REUTERS /JASON LEE


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Executive Summary

2013 could prove to be a seminal year for the Islamic fund

industry. This year saw the highest number of fund launches

and lowest number of closures; resulting in a doubling of

the number of mutual funds since 2007. However, assets

under management remained stagnant.

The market for sharia-compliant funds has evolved

significantly over the past decade. This year saw the launch

of 94 new funds; the highest in the last three years. The

number of liquidated funds this year was 22, the lowest

for the last four years. In total the number of mutual funds

topped 780 this year.

.

However, assets under management have not grown in proportion with the number of funds. Since 2007 AUM

has increased 24%, but 2013 saw a dip of 1.7%. The increased number of funds but with marginal growth in AUM

points to increasing competition among fund managers, and achieving scale remains the biggest challenge facing

the industry.

Geographically the sector remains concentrated within 3 dominant markets: Saudi Arabia, Malaysia and

Luxembourg; these 3 domiciles alone hold over 71% of total Islamic funds.

Investors remain conservative, allocating US$ 3.2 billion of fund flows to money market funds, making it the largest

asset class this year. But asset managers are regaining confidence in emerging markets as we see less globally

focused funds this year and more emerging market mandates. Sukuk funds remained popular, doubling in size over

the last four years, and supporting the increased demand for Islamic fixed income products.

PERFORMANCE AND TRACK RECORD ARE THE MOST IMPORTANT INVESTMENT CONSIDERATIONFOR INVESTORSContrary to common belief, our survey indicates that investors rate performance and a minimum 3-year track record

as key considerations when making investment decisions, with little consideration given to the overall size of the

fund or asset type.

Allocation of portfolios towards funds remains small, a mere maximum 15% of most investment portfolios.

This helps to explain why Islamic funds are growing at a much slower rate compared to fixed income products.

Investors also identified diversification as being the main purpose for investing in Islamic funds, with performance

being a secondary consideration. In order to see higher growth rates, asset managers must change the perception

of Islamic funds from simply being a tool for portfolio diversification to being a primary investment asset class.

EXECUTIVE SUMMARY


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10 GLOBAL ISLAMIC ASSET MANAGEMENT REPORT

FUND LAUNCHES ARE EXPECTED TO DECLINE IN 2014, WITH FOCUS REMAINING ON SOUTHEAST ASIA AND THE GCCSoutheast Asian funds represented the bulk of funds issued this year, with 42% of funds originating from Southeast Asian countries. There were

17 Indonesian funds launched this year, supporting increased government spending, sukuk and pilgrim funds.

The GCC, on the other hand, made up 20% of fund issuances with 19 funds launched this year. But the region enjoyed the largest funds flows due

to excess liquidity in the region.

Based on our survey, we expect fewer fund launches next year with the majority being Southeast Asian funds with local/regional mandates.

ACHIEVING SCALE REMAINS THE CRITICAL CHALLENGE HOLDING BACK THE GROWTH AND DEVELOPMENT OF THE INDUSTRY,WITH ONLY 80 FUNDS MANAGING OVER US$ 100 MILLION IN ASSETS

The main reason for the lack of growth is the existing investor base of Islamic funds. The sector is dependent on retail investors, which make up 80%,

with only 20% contribution from institutional investors.

This is the direct inverse of the conventional sector where institutional investors make up 70% of the asset management sector with 30% coming from retail

investors. Insurance companies and pension funds are the largest institutional investors in the conventional sector, contributing 29% and 19% respectively.

Attracting institutional investors is critical for the survival, development and sophistication of the Islamic asset management industry.

THE ENTRANCE OF PENSION FUND ASSETS COULD BRING UP TO US$36 BILLION OF AUM, DOUBLING THE SIZE OF THE INDUSTRYWe estimate pension assets in the GCC to be over US$ 180 billion, 6% of GDP. This is significantly lower than the pension assets of developed markets

which represent over 100% of GDP, with 27% percent being diverted to the asset management industry.

There is significant room for the growth of pension assets in the GCC, and attracting 20% of existing assets could channel US$ 36 billion to the Islamic

asset management sector over half of the total current AUM.

Pension reforms that were initiated in the last few years are now bearing fruit, opening up an opportunity for larger fund flows into the sector. Tangible

steps in Turkey, Pakistan, and Malaysia to facilitate Islamic pension schemes are examples of countries involved in opening their markets. In the GCC,

Bahrain has taken a step to modernize and improve its management of public pension assets by establishing a private company to manage sovereign

assets, while other countries such as the UAE are exploring their options.

EXECUTIVE SUMMARY


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THE SOCIALLY RESPONSIBLE INVESTMENT INDUSTRY, WORTH OVER US$33 TRILLION, OFFERS A NATURAL CROSSOVER APPEALTO SHARIA PRINCIPLES AND SHOULD BE TARGETED BY FUND MANAGERSSocially Responsible Investment (SRI) is in the spotlight; globally the industry has grown over 500% since 1995. SRI provides a natural crossover for

sharia-compliant principles, creating a perfect opportunity to broaden the investor base of Islamic products.

Adopting economic, social and governance (ESG) factors to Islamic funds can facilitate better uptake in Muslim minority markets as investment culture

is becoming more and more conscious of environmental, social, humanitarian and corporate governance efforts. Islamic fund managers need to

integrate sharia and ESG principles to deliver more sophisticated products that can cater to a broader investor base.

Jeddah-based SEDCO Capital is a pioneer in this area, coming out with its first Islamic fund to incorporate an ESG filter. The performance of this fund

could serve as a case study for other fund managers.

PASSPORTING IS ANOTHER AVENUE WHICH ISLAMIC MANGERS CAN UTILIZE TO BROADEN THEIR INVESTOR BASEPassporting allows local asset managers region-wide access and exposure as well as a medium to enter Muslim minority markets. While cross border

GCC fund mobility remains a relatively distant reality, using established passporting channels such as the EUs UCITS, can provide opportunities for

Islamic funds.

EXECUTIVE SUMMARY

THE ENTRANCE OF PENSION FUND ASSETS COULD BRINGUP TO US$36 BILLION OF AUM , DOUBLING THE SIZE OF THE INDUSTRY.

ATTRACTING INSTITUTIONAL INVESTORS IS CRITICAL FOR THE SURVIVAL,DEVELOPMENT AND SOPHISTICATION OF THE ISLAMIC ASSET MANAGEMENT INDUSTRY.


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Overview

Islamic funds (AUM) have significantly increased over the last five years, but remain a fraction of total Islamic finance assets.Malaysia, Saudi Arabia, and Luxembourg are recognized as the leading hubs for Islamic funds, collectively playing host to 71% of Islamic funds globally.

Sukuk funds greatly outperformed the benchmarks after the 2008 financial crisis. However, performance suffered post-2012 and has yet to recover.

REUTERS /ARND WIEGMANN


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14

OVERVIEW

GLOBAL ISLAMIC ASSET MANAGEMENT REPORT

Islamic funds assets under management (AUM) have significantly increased over the last

five years, but they remain a fraction of total Islamic finance assets.

Despite a 10% increase in funds, AUM has marginally declined since 2012, with managers of

smaller funds exiting the sector.

IN THE NUMBERS

1,065Number of Islamic funds

US$56 BillionTotal Islamic Asset

Management Assets

4.7Percentage of Global Islamic

Assets

Given that the Islamic funds industry is experiencing growth and development, we should be seeing higher growth numbers and a higher increase in fund

numbers. On a positive note, key markets have taken an active role in passing regulations and safeguarding investors, which is proving to be effective with

the refinement of the market. We see this year as a positive step back in hopes of a more promising year in 2014.

GLOBAL ISLAMIC FUNDS

GLOBALFINANCIALCRISIS

DUBAIFINANCIALCRISIS

ARABSPRING

EURO-ZONECRISIS

-9 -19 -35 -48 -64 -87 -24

0

10

20

30

40

50

60

70

-200

0

200

400

600

800

1000

1200

2007 2008 2009 2010 2011 2012 2013 (Sep)

Dead Funds No. of Funds AUM

2826

37

46 47

5756

Numberoffunds

AUMU

SDBillions

576

645

702

795

878

971

1065


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15

OVERVIEW


The number of Islamic mutual funds has more than doubled since 2007, with 786 active

funds today.

However, market refinement and declining performance has seen AUM fall, as witnessed in the

overall Islamic asset management industry.

Islamic funds have come to the fore in the last decade, but the sector still represents a fraction of the global industry. The financial crisis took a toll on

performance industry screens limited exposure to leveraged names, but volatility remained as managers retained their legacy geographical focus.

The strategy has remained unchanged, despite rebounding markets. Managers have taken a passive approach to asset allocation and for the most part

remain on the conservative end. Many of these funds are beta funds; few are ready to be alpha funds.

IN THE NUMBERS

786Number of Islamic Mutual Funds

US$46 BillionGlobal Islamic Mutual Funds AUM

94Fund Launches

22Fund Closures

GLOBALFINANCIALCRISIS

DUBAIFINANCIALCRISIS

ARABSPRING

EURO-ZONECRISIS84

59

77

94

0

10

20

30

40

50

60

70

80

90

100

-100

0

100

200

300

400

500

600

700

800

900

2007 2008 2009 2010 2011 2012 2013 (Sep)

AUM No of funds Dead Funds Launched

53

62

54

Numberoffunds

AUMU

SDBillions

338

397

451

541

617

687

786

84 59 53 77 62 54 94

-6 -18 -28 -43 -45 -38 -22

GLOBAL ISLAMIC MUTUAL FUNDS (2007 SEPTEMBER 2013)


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OVERVIEW


GCC witnessed the largest fund inflows in 2013, driven by the excess liquidity in the region.

GCC institutions launched 19 funds during the year (20% of the total launches), compared to 39 Asian funds (42% of the

total launches).

GGC and Asian fund issuance increased over the last year. GCC fund launches increased to 19 funds this year, while Asian fund issuance more than doubled 39 Asian funds Y TD compared to 15

funds this time last year. On the other hand, the highest fund flows occurred in the GCC, supported by excess liquidity in the region. While AUM has declined, the exit of underperforming and/or

unviable asset managers means the state of the market can improve with a refined pool of asset managers, a more efficient market, and higher product sophistication.

0

2

4

6

8

10

12

0

50

100

150

200

250

300

263

163

111

6253 53

3326 21 19 12 12 12 11

68

NoofFunds

USDB

illion

AUM (USD Billions) No. of Funds

OtherIndiaUnited Arab

Emirates

UKEgyptCanadaSouth AfricaKuwaitJerseyIrelandIndonesiaPakistanLuxembourgSaudi ArabiaMalaysia

ASSETS UNDER MANAGEMENT VERSUS NUMBER OF FUNDS (SEPTEMBER 2013)

Gulf and Asian funds tied in the last year, with 15 fund launches each


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17

OVERVIEW


Fund registration remains concentrated in a few jurisdictions, mainly because of the lack of active regulation

in other developing markets.

Malaysia, Saudi Arabia, and Luxembourg are recognized as the leading hubs for Islamic funds, collectively playing host

to 71% of Islamic funds globally.

These three markets remain the most active in developing and regulating their fund sector. A series of recent initiatives across several markets in the GCC and Asia has helped safeguard investors

while ensuring appropriate expertise and adequate capital from fund managers to support their products.

DOMICILE NO. OF FUNDS AUM (US$ MILLION)

Malaysia 263 10,164

Saudi Arabia 163 6,056

Luxembourg 111 3,401

Pakistan 62 2,364

Indonesia 53 2,157

Ireland 53 1,742

Jersey 33 1,286

Kuwait 26 705

South Africa 21 663

Canada 19 248

UK 12 248

United Arab Emirates 12 331

Other* 91 248

*Bahrain, Cayman Islands, Guernsey, Singapore, USA, Australia, India, Egypt, Qatar, Tunisia,Isle of Man, Mauritius, Morocco, France, Japan, Oman, Russia, Switzerland, Turkey

Malaysia 263

Saudi Arabia 163

Luxembourg 111

Pakistan 62

Indonesia 53

Ireland 53

Jersey 33

Kuwait 26

South Africa 21

Canada 19

Egypt 12UK 12

United Arab Emirates 12India 11

Other 68

ISLAMIC FUNDS DOMICILES


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OVERVIEW


There has been increasing diversification in terms of geographic focus, with the share of Malaysia- and Saudi

Arabia-focused funds declining significantly since 2010.

Indonesia, with 18% of all funds focusing on opportunities in Indonesia launched in 2013 compared to just 6% in 2010,

was the biggest winner.

LAUNCHED FUNDS GEOGRAPHICAL FOCUS (2013)

Malaysia 29%

Global 13%

Saudi Arabia 13%

Pakistan 8%

Indonesia 6%

GGC 5%

Kuwait 4%

MENA 3%

USA 3%

Asia Pacific 4%

Other 14%

Malaysia 12%

Global 21%

Saudi Arabia5%

Pakistan 7%

Indonesia 18%

GGC 6%

GMM 6%

Middle East 7%

India 6%

Asia Pacific 4%Asia 3%

MENA 5%

LAUNCHED FUNDS GEOGRAPHICAL FOCUS (2010)

18

Asset managers seem to be regaining confidence in markets that were previously perceived as problematic or unstable. The focus of funds, though, remains within global mandates.

Indonesia witnessed the most significant growth in terms of fund launches, driven by new infrastructure, Sukuk, and Pilgrim Funds. With a planned increase in government spending, we forecast

more Indonesian fund launches in 2014.


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19

OVERVIEW


With an increased risk-aversion culture among investors, money market funds have taken the forefront and have

overtaken equity funds this year for the first time.

Sukuk funds have also taken the frontline with regard to fund flows, since they offer investors a safe investment haven.

With the increased demand in

sukuk, more and more sukuk-

specific funds are being launched.

The likelihood of more funds is

linked to demand for the underlying

assets as well as to supply in

secondary markets.

ISLAMIC MUTUAL FUNDS ASSET TYPE BREAKDOWN (2010 2013)

FUND LAUNCHES AND ASSET TYPE BREAKDOWN (2009 2013)

YEAR No. of Funds Bond Equity Mixed Money Market Real Estate Other*

2013 ( Sep 31 ) 82 24 30 19 8 1 -

2012 54 9 23 9 6 3 4

2011 62 9 32 4 10 6 1

2010 77 19 34 12 7 4 1

2009 53 18 18 3 11 1 2

*Includes other funds, commodity funds, and Alternative Funds Source: Lipper

0

5

10

15

20

25

12

4 4

16 16

18

20

1514

17

20

2010 2011 2012 2013

Bond Equity Money Market

AUMU

SDBillion


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OVERVIEW


Asset allocation has remained unchanged over the last four years, with heavy concentration in certain asset classes.

Despite the increase in Sukuk fund issuance, equity funds (51%) continue to dominate the Islamic fund universe.

GLOBAL ISLAMIC FUNDS ASSET TYPE (2013)

Mixed Assets 16%

Equity 54%

Money Market 12%

Other 6%

Bond 12%

Mixed Assets 16%

Equity 54%

Money Market 12%

Other 1%

Bond 15%

Real Estate 2%Commodity 3%

GLOBAL ISLAMIC FUNDS ASSET TYPE (2010)

Equity funds continue to represent half of the funds universe (51%). While equity funds outweigh money market funds in the number of funds, money market funds are the biggest contributor

to AUM this year. Sukukfunds gained a 3% share of the pie, amounting to 15% of funds.


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21

OVERVIEW


Sukuk funds greatly outperformed the benchmarks after the 2008 financial crisis. However, performance suffered

post-2012 and has yet to recover.

Investor risk appetite is increasing; we see more investors relocating funds from sukukto equities.

Sukukfunds were able to recover after the financial crisis. Average performance produced alpha returns throughout 2009; then the political uprising affected performance. Despite the political

situation, sukukfunds were resilient before taking a downward trend YTD. Sukukissuance remains high, with 506 sukukissues. However, the average issuance has dropped, and investors seem

to have higher risk appetite. Our study shows a reallocation from sukukto equities.

SUKUKAVERAGE PERFORMANCE (2007-SEPTEMBER 2013)

-10%

-5%

0%

5%

10%

15%

2007 2008 2009 2010 2011 2012 Sep-13

LIBOR USD 3 Months LIBOR USD 6 Months Sukuk Average

%

CumulativePerformance


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OVERVIEW


Money market funds are the largest asset class within the Islamic fund sector, boasting AUM in excess of

US$20 billion and net inflows of US$3.2 billion so far for 2013.

The performance of money market funds remains volatile compared to benchmarks.

Money market funds are the top pick for investors looking to offset volatility risk. Money market funds boast the highest net inflows (YTD) as well as for overall one-year inflows US$3.2 billion.

As shown below, Islamic money market funds were able to deliver alpha returns over the benchmarks; however, they seem to have slumped YTD.

MONEY MARKET FUNDS AVERAGE PERFORMANCE (2007SEPTEMBER 2013)

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

8%

2007 2008 2009 2010 2011 2012 Sep-13

Money Market Average LIBOR USD 3 Months LIBOR USD 6 Months

%c

umulativeperformance


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OVERVIEW


Shariah-compliant equity funds were able to prevail after the 2008 financial crisis, proving that Sharia-compliant

funds are competitive with conventional funds.

The Arab Spring has put a dent in equity fund performance, with performance not yet recovered.

Despite a quick recovery and after achieving alpha post-crisis, regional volatility has hit geographically concentrated portfolios in recent years. The latter has resulted in underperformance of some

equity funds. Equity funds still represent half of the fund universe; they have accentuated their decline in AUM this year.

EQUITY AVERAGE PERFORMANCE (2007-SEPTEMBER 2013)

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

2007 2008 2009 2010 2011 2012 Sep-13

Equity Average S&P 500 Shariah TR S&P 500 TR

%C

umulativePerformance

OVERVIEW


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24

OVERVIEW


Scale remains a critical factor holding back the Islamic asset management sector.

Retail investors represent 80% of investors in the Islamic fund space. The growth of the institutional sector is critical

to achieving the sought-after scale and profitability.

The majority of Sharia-compliant funds target retail investors, but collective fund pooling requires institutional investors as well. The latter could help propel fund flows as and when the market

finds a breakthrough. Funds have yet to fully use existing distribution channels and promotions to reach target customers.

While the majority of Shariah-compliant funds target the retail investor, these investors tend to have a short-term trading mentality toward their fund holdings. Attracting institutional investors

could bring in higher volumes but more importantly reduce the volatility of assets. This could help the sustainability of fund managers in the long run.

GLOBAL ISLAMIC FUND MARKET BREAKDOWN

0

25

50

75

100

125

150

175

200

0

100

200

300

400

500

600

700

800

43

37

25

54

96

566

686

Pension Funds Insurance Funds Private Equity Funds ETFs

AUM(

Million)

AUM (USD Million) No. of Funds

Nooffunds

6

RETAIL FUNDS$59 billion 80%

INSTITUTIONAL FUNDS 20%


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REUTERS /PETER ANDREWS

Investor Preferences

The global Islamic asset management survey was distributed to asset managers, promoters, investors, and traders.

Diversification is the main purpose of Investing in funds.

Majority of investors are only willing to invest a maximum of 15% in funds of total portfolio.

INVESTOR PREFERENCES


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DEMOGRAPHICS OF SURVEY PARTICIPANTS

0%

10%

20%

30%

40%

50%

43.5%

21.0%

12.9%

6.5% 6.5% 6.5%

3.2%

Middle East &

North Africa

Europe & Central Asia Southeast Asia North America South Asia Sub-Saharan Africa East Asia & Pacific

Location

ResponsePercentage

GLOBAL ISLAMIC ASSET MANAGEMENT SURVEY

INVESTORS/TRADERS

Of the 150 approached, 27 investors and 13 traders participated in the survey. The respondents represent the market, with a margin of error of +/-11.

POPULATION AND SAMPLING

The global Islamic asset management survey was distributed to asset managers (issuers), promoters, investors, and traders.

INVESTORS/TRADERS

Investors were also targeted, based on their involvement in Islamic funds and knowledge of asset managers as (1) investors or (2) professionals within the field.



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Lack of scale in the asset management sector is inevitable, unless the investor culture is changed. According to the results below, funds are seen as a secondary means of investmentan accessory

to diversify portfolios rather than a primary form of investment. Performance comes as a secondary reason to invest in funds, which explains why primary investment fund flows do not end within

the Islamic asset management sector.

WHY DO YOU INVEST IN MUTUAL FUNDS

0%

10%

20%

30%

40%

50%

35.14%

27.73%

11.65%

7.74% 7.3%

10.45%

Diversification Performance To conform with asset

allocation strategy

Preferable form

of investment

Hedging Risk aversion

Respondantpercentage

Investors mainly invest in mutual funds as a means of diversifying their investment portfolios.

Performance is the second most important factor motivating investors.



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66.8%

11.1%

6.7%

6.7%

8.9%

0 to 15 %

15 to 30 %

30% to 45 %

45% to 60%

60% and above

HOW MUCH OF YOUR PORTFOLIO IS INVESTED IN MUTUAL FUNDSBREAKDOWN OF INVESTORS

0%

10%

20%

30%

40%

50%

60%

70% 67 67

83

80%

90%

100%

0 to 15 % 15 to 30 % 30% to 45 % 45% to 60% 60% and above

Retail Financial Corporate

13

8

33

30 00 00 0

17

10

Percentage

Portfolio allocation to Islamic funds ranges between 0% to 15% for the majority of investors.

This trend is consistent among retail, financial, and corporate investors, with few willing to allocate a greater proportion

to Islamic funds.



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KINDLY GRADE THE BELOW PARAMETERS FOR IMPORTANCE WHEN CONSIDERINGINVESTMENT IN A FUND (1 TO 8; 1 BEING MOST IMPORTANT)

0% 5% 10% 15% 20% 25%

Friends and family

Media coverage about Fund Company

Stock market fluctuations

Opinion of professional financial advisers

Fund company

Personal experience with mutual funds

Current events in financial markets

Performance of fund investments 19%

16%

15%

15%

11%

10%

7%

7%

Percentage

Fund performance is the most important consideration for investors when they are considering investment in a fund.

Economic and financial factors are the next most important influence on investment decisions.



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0%

5%

10%

15%

20%

25%

30%

35%

40%

%o

fRespondants

37.5

25

15.6 15.6

6.3

0 0

No preference $0 $10 Million $10 Million $50 Million

$50 Million $100 Million

$100 Million $500 Million

$500 Billion $1 Billion

$1 Billion +

No track record

1 year

3 years

5 years

7 years

10 years

59%

19%

3%

9%

6%

3%

INVESTOR PREFERENCE WHAT IS THE MINIMUM TRACK RECORD YOU REQUIRE BEFOREINVESTING IN A FUND?

Investor preference indicates that fund size is not a key consideration when making investment decisions.

Most investors prefer to invest with fund managers who have a minimum track record of three years.



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INVESTOR PREFERENCE ASSET TYPE

0

20

40

60

80

100

120

140

160

180

200

Equity Funds Sukuk Funds Money Market Funds Real Estate Funds Mixed Asset Funds

FrequencyofResponses

Investors do not have a particular preference regarding fund assets.

As indicated earlier, investors consider performance to be the main indicator for investment in funds.


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Market Outlook

Market opinion is divided, indicating distortion in the marketplace.

There is great opportunity for sector growth and sophistication.

2014 may see lower fund issuance, Asia-focused funds will constitute the bulk of new funds in 2014.

MARKET OUTLOOK


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POPULATION AND SAMPLING

The global Islamic asset management survey was distributed

to asset managers (issuers), promoters, investors, and traders.

ASSET MANAGERS/PROMOTERS

In determining asset managers and promoters, we contacted

only those institutions that manage and/or invest in funds.

A group of 50 institutions was targeted and extracted fromThomson Reuters data sources as well as from Lipper,

a Thomson Reuters company.

ISSUERS/PROMOTERS

A total of 28 issuers and 9 promoters responded to the

survey of the total of 50 institutions we approached. The 37

respondents participated in the survey, with a margin of errorof +/- 11.

GLOBAL ISLAMIC ASSET MANAGEMENT SURVEY MARKET OUTLOOK

WHICH OF THE FOLLOWING BEST DESCRIBES YOUR COMPANY/ORGANIZATION?

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Financial Corporate Retail

ResponsePercentage

Company/Organisation type

MARKET OUTLOOK


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Market opinion is divided, indicating distortion in the marketplace.

Investors and promoters were happy with current market conditions. Issuers, however, anticipated better market uptake.

0%

10%

20%

30%

40%

50%

60%

70%

61.1%

55%

50%

5.6%

0%

21%

33.3%

45%

28%

Better than Anticipated As Anticipated Below Expectations

Investor / Trader Issuer Promoter

ResponsePercentage

Response Options

40%

Response Count 19

30%

Response Count 14

30%

Response Count 14

As anticipated

Below expectations

Better than anticipated

HOW WOULD YOU DEFINE THE STATE OF ISLAMIC FUNDS IN THE PAST FIVE YEARS (EFFICIENCY AND RETURN PERSPECTIVE)?

MARKET OUTLOOK


38/88


ResponsePercentag

e

Development Stage of Product Range

0

5%

10%

15%

20%

25%

30%

35%

40% 38.5%

30.8%

28.2%

2.6%

0.0%

Development Infancy Growth Maturity Saturation

76% Improving

Response Count 29

12% Deteriorating

Response Count 4

13% No change

Response Count 5

There is great opportunity for sector growth and sophistication.

The Islamic fund sector is perceived to be in the early stages of development: infancy, growth, and development.

WHAT STAGE OF DEVELOPMENT IS YOUR OWN PRODUCT RANGE? DO YOU SEE THIS IMPROVING OR DETERIORATING IN THENEXT 12 MONTHS?

MARKET OUTLOOK


39/88

0%

10%

20%

30%

40%

50%

60%

70%

37.2%

62.8%

Yes No

ResponsePercen

tage

Plans of fund launches in the next 12 months

.

.

.

.

.

.


ARE YOU CONSIDERING LAUNCHING OFFSHORE FUNDS?

Further analysis indicates that of the 37% with projected fund issuance, 50% of those funds will be local

Only 20% are forecasted to be registered offshore

DO YOU PLAN ANY FUND LAUNCHES IN THE NEXT12 MONTHS?

PROJECTED FUND ISSUANCE 2014 ASSET TYPE

The year 2014 may see lower fund issuance, since 62% of the issuers do not plan to issue new funds.

Sukukand equity funds are expected to make up the bulk of issuance in the next 12 months.

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

Sukuk Other Equity Money Market Real Estate Mixed Asset

Percentageofdi

vision

Asset Type

43.75%

37.50%

33.33%

14.58%

10.42%

8.33%

MARKET OUTLOOK


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GEOGRAPHICAL FOCUS OF PROJECTED FUND LAUNCHES IN 2014

0

5

10

15

20

25

30

Asia Middle East Europe GCC Americas Africa

No.ofProjectedFun

dLaunches

Geographical Area

25

1413

12

8

4

ARE YOU CONSIDERING LAUNCHING OFFSHORE FUNDS?

Further analysis indicates that of the 37% with projected fund issuance, 50% of those funds will be local

Only 20% are forecasted to be registered offshore

Asia-focused funds will constitute the bulk of new funds launched in 2014.

With offshore funds taking a backseat in 2014, we expect to see 2014 fund launches originate from Asian asset managers.


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Scale is the key challenge facing the Islamic asset management industry, impacting both managers of large and smaller funds.

The Islamic fund universe is dominated by a few large players.

It is critical for large asset managers to attract institutional investors.

In order to survive, smaller Asset managers must establish a three year track record and deliver competitive fund performance.

The Key Challenge

REUTERS /BENOIT TESSIER

THE KEY CHALLENGE


44/88


Asset managers of larger funds still dominate the Sharia-compliant fund space; diversification is lacking, since the same types of structures and mandates are launchedcreating a monochrome

market. This causes market concentration of products, with flows remaining with established names and with little differentiation. This practice impairs the sustainability of managers of small

funds, even though the market still seeks more sophisticated products and broader product ranges. Single product launches remain the modus operandi for most asset managers.

MARKET SCALE

0

50

100

150

200

250

300

350

400

< 10 M 10M - 49 M 50M - 99 M > 100 M

No.ofFunds

No. of Funds

346

230

7280

Fund Scale

Scale is the key challenge facing the Islamic asset management industry, impacting both managers of large and

smaller funds.

The lack of scale continues to keep pressure on the profitability of managers of larger funds, with the smaller

players facing closure.

THE KEY CHALLENGE


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THE LARGEST TEN ISLAMIC FUNDS REPRESENT 44% OF TOTAL FUND AUM

Stricter fund regulations across active markets are causing smaller asset managers to exit the market. Unable to attract scale, smaller funds are forced to liquidate, since they are unable to break

even. This confirms that the market is dominated by a few large asset managers.

Despite what one would think, these managers of larger assets are not benefiting from economies of scale and are also striving to achieve the scale required to deliver competitive performance.

Comparatively, the ten top funds in the conventional fund space represent a mere 5% of the global fund AUM.

FUND FUND MANAGER AUM (USD Millions)

ETFS Physical Gold ETFS Commodities Sec Ltd 4,968

AlAhli Saudi Riyal Trade NCB Capital CJSC 4,130

Al Rajhi Capital SAR Commodity Al-Rajhi Capital Co 3,152

International Trade Finance Fd (Sunbullah SAR) Samba Cap & Invest Mgmt 2,773

Amana Growth Fund Saturna Capital Corporation 2,136

AlAhli Diversified Saudi Riyal Trade NCB Capital CJSC 1,963

Amana Income Fund Saturna Capital Corporation 1,475

Public Ittikal Public Mutual Berhad 1,248

Public Islamic Dividend Public Mutual Berhad 1,185

CIMB Islamic DALI Equity Growth CIMB-Principal Asset Man 1,059

Total 24,000

The Islamic fund universe is dominated by a few large players.

While larger players are able to benefit from limited economies of scale, smaller players are forced out of the market.

THE KEY CHALLENGE


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In terms of investor types the Islamic

funds industry is actually the inverse

of the conventional funds Industry.

On the conventional front 70% of the industry

is represented by the institutional sector in the

following percentages:

Pension funds 27%

Insurance companies 42%

Banks 3 %

Other institutions 28%

The same concept needs to be applied to the

Islamic funds industry. While the Takafulsector

has yet to grow, access to pension assets,

banks, and other institutions will undoubtedly

aid in the growth of the Shariahfunds industry.

In order to achieve scale and improve profitability, managers of larger assets need to focus on attracting

institutional investors.

The industry needs to encourage pension funds, takafuloperators, and banks to play a role as key investors, if it is to

achieve profitability similar to the conventional funds industry.

Islamic BanksPension FundsTakaful CompaniesOther Institutions

SHARIAH-COMPLIANT FUNDS INDUSTRY CONVENTIONAL FUNDS INDUSTRY

RETAIL FUNDS 80%


RETAIL FUNDS 30%


Long term goal would be toattract conventional funds

Banks 3%Pension Funds 27%Insurance Companies 42%Other Institutions 28%

THE KEY CHALLENGE


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KINDLY GRADE THE BELOW PARAMETERS FOR IMPORTANCE WHENCONSIDERING INVESTMENT IN A FUND

MINIMUM TRACK RECORD REQUIRED TO INVEST IN A FUND

Managers of smaller assets must take the next few years to build their reputation in the market. Fund managers need to limit tracking errors to prove their diligence. In our opinion this, in addition

to obtaining a minimum track record of three years, will allow smaller asset managers to scale up with their larger competitors in the market.

0% 5% 10% 15% 20%

0 .00 .20 .40 .60 . 81 . 0

Friends and family

Media coverage about Fund Company

Stock market fluctuations

Opinion of professional financial advisers

Fund company

Personal experience with mutual funds

Current events in financial markets

Performance of fund investments

Managers of smaller funds are on the brink of extinction, and it is now a matter of survival.

To prevail in the market managers of small assets need to focus on survival, and their building a three-year performance

track record is the key investment consideration for investors.

59%

19%

3%

3%

10%

6%

3 years

5 years

1 year

10 years +

No Track record

7 years

THE KEY CHALLENGE


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SCALE IS THE KEY CHALLENGE FACINGTHE ISLAMIC ASSET MANAGEMENT INDUSTRY

PENSION FUNDS

Access to vast liquidity

of sovereigns

Access to institutionalinvestors

Ease of government

reserves

Collective pooling

Improved payout ratio

PASSPORTING

Broader market reach

Scale facilitation with

minimum change toproduct structure

Increase return efficiency

SOCIALLY RESPONSIBLEINVESTMENT

Complements Shariah

principles

Allows wider reach beyond

Shariah-compliant

investors

Large market exceeding

US$3 trillion in assets

Natural crossover

SOLUTION

S


49/88

REUTERS


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A robust pension system is an indicator of a developed economy.

Pension assets represent well over 100% of GDP in developed markets; GCC pension assets represent a mere 5% of GDP.

Allocation of 20% of pension assets in the GCC to the fund sector can pump US$26 billion into the fund sector.

Solution 1: Pensions

REUTERS /CHRISTIAN HARTMANN

SOLUTION 1: PENSIONS


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THE POTENTIAL ROLE OF PENSION FUNDS

THE ENTRANCE OF PENSION FUND ASSETS COULD BRING

UP TO US$36 BILLION OF AUM, DOUBLING THE SIZE OF THE INDUSTRY.

Pension fund assets are a critical tool to add scale to the Islamic asset

management sector.

Robust and efficient pension schemes are an indicator of developed

economies and financial markets.

We estimate GCC pension assets at US$180 billion.

In developed markets such as the U.K. and the Netherlands, pension

assets represent over 100% of GDP.

GCC pension assets are a minor 5% at most of GDP.

Investment restrictions are holding back the growth of pension assets.

Diverting 20% of GCC pension assets can contribute US$36 billion tothe Islamic asset management sector.

Reforms in Turkey increased pension contributions over 271% YTD, while

the voluntary pension system in Pakistan grew pension assets over

500% since 2008.

Targeting pensions funds should be a key priority for the Islamic asset management industry.

Pension funds play a key role in the conventional funds industry, and their entrance could resolve the issue of scale in the

Islamic asset management space.



53/88


PENSION SCHEMES-THE SILVER LINING OF COLLECTIVE POOLINGCan Sharia-Compliant Pension Schemes give a much-needed boost

to the Islamic Asset Management sector?

By Karim ArafaFunds AnalystThomson Reuters

Privately funded Islamic pension systems are now in full-swing in countries such as Pakistan, Turkey, and Malaysia,

while products have also appeared in the U.K. and Australia.

Evidence from the rest of the world is promising: ever since Chile introduced its privately managed pension scheme

in 1981, over two dozen countries have followed suit. The decision marked a turning point for local asset managers in

the South American country. The industry now has approximately US$40 billion in AUM across 500 mutual funds.

This means Chiles mutual fund industry by itself is close to two-thirds the size of the entire global Islamic funds

industry, an impressive growth that is mostly due to asset flows from its private pension scheme.

A number of studies and real-life examples prove that all developed and stable economies enjoy

a well-established and systematic pension scheme.

But the experience from early-adopting countries also shows that these efforts require time; in Pakistan, Turkey,

and Malaysia the market might need to wait a few more years for their systems to mature. Pakistan introduced its

Voluntary Pension Scheme (VPS) only in 2005, Turkeys reforms to its private pensions have kicked in only this year,

and Malaysias Private Retirement Scheme (PRS) is just one year old.

It is perhaps from state-owned pensions that have existing (and substantial) AUM that Islamic fund managers could

benefit the most. If these pensions would switch only a portion of their mandates into these fund managers, the

flows could fast-track the sector.

COUNTRY TOTAL ASSETS 2012(USD Billion)

% GDP(Local currency)

Australia 1,555 101%

Brazil 340 14%

Canada 1,483 84%

France 168 7%

Germany 498 15%

Hong Kong 104 40%

Ireland 113 55%

Japan 3,721 62%

Netherlands 1,199 156%

South Africa 252 64%

Switzerland 732 118%

UK 2,736 112%

US 16,851 108%

Total 29,754 78%

While sovereign wealth funds and family offices hold significant assets in the Gulf, these have barely found their way to local asset managers, much less to

those that follow Islamic investment principles. But private and publicly funded pension schemes could be more responsive to client requirements and thus

more likely to direct some of their cash to Islamic pension products and their fund managers.


N ll i d l b i i l


54/88


Not all pension systems are created equal, but empirical

evidence from the Asian development bank institute shows

that the more developed and stable an economy is, the more

developed and systematic its pension scheme will be. Another

report by the City of London Corporation showed how pension

systems and insurance companies were involved in shaping

and sustaining the financial markets of developed markets.

In the U.K., for instance, pension assets grew from 20% to80% of GDP, and insurance assets grew from 20% to 100% of

GDP from the 1980s to the 2009 period. (The largest pension

markets are in the U.S., Japan, and the U.K. with 56.6%, 12.5%,

and 9.2% of the total pension assets, respectively.)

Some of these pensions have very generous payouts, but they

are not exploiting investment options or outsourcing much

of their mandates. This impacts their financial viability and

similarly misses out on recycling those funds through local

asset managers.

Thus, pension assets represent a mere 3% to 6% of GDP in GCC

countries versus developed economies such as Switzerland,

the Netherlands, and the U.K., with 118%, 114%, and 112%,

respectively. The question is whether policymakers have made

any active decision to raise these figures to bring them in line

with the developed or emerging-market economies.

GCC pension assets are estimates to be US$180

billion; even a portion directed to the Islamic fund

sector would have a major impact.

The Islamic asset management space is held back mainly because

of its inability to attract large funds (lack of scale). It would be

sensible to divert pension fund assets or even a portion of themtoward the sector, which might break the deadlock.

A 2010 report by NCB covered the role of institutional investors

in the Gulf region, identifying at least US$170 billion in AUM

held by government pension funds in the GCC. Assuming aconservative growth rate of 2% per year, pension fund assets

in the GCC could now stand at around US$180 billion or more.

Pension assets in the GCC represent a minor 3%6% of GDP, compared to more developed economies

such as the U.K. and the Netherlands with 112% and 114%, respectively.

GCC COUNTRIES DEMOGRAPHICS (2012)

Population < 25

0

5

10

15

20

25

30

35

40

Bahrain Qatar Kuwait Oman United Arab Emirates Saudi Arabia

Population(Million)

Population (Million)

0.4884 0.5075 0.8251.9229

2.8143

12.0768

1.11 1.452.5

2.87

4.77

23.68



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For the moment the dynamics of pension schemes in the GCC

are pay as you go, meaning that nationals who are currently

in retirement are paid for by current workforce contributions.

With some of the highest payout ratios at 80%, this will not

be sustainable, given the current and future demographics of

the region. The case for external asset managers, especially

Islamic ones, is becoming more apparent every year.

Presently, the regions population is relatively young; roughly

50% of the population is under 25. It is estimated that

2.5 million people will join Saudi Arabias workforce by 2014.

This implies that the workforce will grow at an accelerated

pace over the next decade, piling pressure on pension

payouts as workers eventually retire. If the region continues

to implement the pay-as-you-go system, it will place a large

strain on reserves and government funds. While this is not an

immediate problem, it would require swift action today in order

to avoid a budgetary crunch in the long run.

Diverting 20% of GCC pension assets to Islamic

asset mangers could mean a sector-boosting

US$36 billion; thats more than half of the

current AUM.

If GCC pension assets are assumed at a base of US$180 billion,

a mere 20% shift from these funds into Sharia-compliant

funds could mean a sector-boosting US$36 billion would be

added. The figure could be far higher if pension schemes fromother majority-Muslim countries, such as Malaysia, Indonesia,

Pakistan, Turkey, etc., are taken into account. In a recent Reuters

report consultants Ernst & Young estimated that such a shift

across state-owned pensions in core Islamic markets could add

between US$160 billion to US$190 billion to the sector.

But, if supply is in abundance, it is demand mechanisms

that need to be put in place to access these funds. Pakistan

developed its VPS scheme back in 2005, which today holds

US$32.4 million in Islamic pension funds or 61% of all VPS

assets. In Malaysia regulators hope that over the next ten

years, AUM in the PRS industry will grow to 30.9 billion ringgit.

If the latter were done across the GCC countries, and a portion

directed toward Islamic asset management, the outcome could

completely reshape the sector. A much-discussed initiative in

the UAE has been the establishment of a pension scheme for

expatriates, although no timeline and no concrete steps have

been announced.

A key obstacle holding back the growth of the

pension sector is the applied investment restrictions

that result in pension assets being directed into local

equities and fixed income products.

One argument supporting this initiative is to keep funds from

leaving the countrys financial system, since many expats

work to send some of their money back home or invest in their

home markets. (This has been estimated to be as high as 40%

of income.) Bahrain has also taken the initiative to improve

returns on its pension assets by establishing a company

(Osool) for the sole purpose of managing its pension assets.

A key obstacle holding back the growth of the pension sectoris the applied investment restrictions that result in pension

assets being directed into local equities and fixed income

products. While this safeguards assets, it also has the potential

to constrain returns and may result in a budgetary deficit,

further aggravated by demographic trends.

In 2012 Qatars pension and social insurance authority invested

QAR1.6 billion into a real estate company. While social security

institutions are some of the biggest investors in local equities,

they can also contribute to the asset management sector and

facilitate their growth and development.

Turkey is also on the forefront with its new pension reform,

encouraging pension contributions with a 25% state

contribution. The reform went into effect on January 1, 2013.

The new law encourages contributions by granting a 10%

tax deduction of gross income. For 2012 pension policy sales

increased 27%. After introducing the new reform, pension

contributions increased 271% (June 2013 compared to first

quarter 2012).

Today, Turkeys pension assets make up 43% of the total

fund sector AUM. This directive, along with recent changes

to its fund law saw a 4.2% growth in fund assets, accordingto Reuters. At present there are 17 pension companies in the

market, with four big market players (Garanti, Anadolu, Yap

Kredi, and Avivasa) that make up a combined 66% market

share of participants and over two-thirds of AUM. With Turkeys

young population, there is an exponential opportunity for

growth in both asset managers and participants.

The dynamics of pension schemes in the GCC are pay as you go, placing a large strain on reserves in case of any shortcomings.



56/88

0

TRL 5000

TRL 10000

TRL 15000

TRL 20000

TRL 25000

0

1

2

3

4

5

TRMillion

Contributors(M

illions)

16.10.2006 13.08.2007 31.05.2008 03.04.2009 19.02.2010 24.12.2010 14.10.2011 27.07.2012 17.05.2013

Fund Size (TRL mln) No. of Contributors

TURKISH PENSION FUND ASSETS AND CONTRIBUTORS

A recent pension reform in Turkey resulted in a 271% increase in pension contributors.



industry more and more individuals and families are opting for insurance and protection


57/88


Takafulassets are another form of institutional investment that could

contribute to the Islamic asset management sector.

While such plans represent a first tier of pension planning, there is another offering that could be

applied to private companies to form a second-tier contribution. In most GCC countries companies

are required to give their departing employees a lump sum known as end-of-service benefits.

These are usually paid through available working-capital funds. Given the above, managing a fund

to cater to end-of-service benefits can again contribute to the fund management sector in much

the same way.

Another group of institutional investors in the region that is relatively untapped are insurance

companies. Currently, life and social insurance is overshadowed by motor vehicle and health

insurance, mainly for cultural reasons. However, with the rise of the Islamic insurance (takaful)

industry, more and more individuals and families are opting for insurance and protection.

Again, these represent long-term funds that need to be managed in an optimal fashion or will

risk diluting takafulasset pools.

Pension, insurance, and further endowments all form part of an extended family of institutional

investments, well beyond sovereign wealth funds and family offices. They can contribute

significantly to the asset management sector as and when a portion of their assets are directed

into asset management channels. The questions are whether there is sufficient commitment at the

policymaker level and whether a country is willing to lead the region with a realistic timeframe forthose plans.

Pension funds in developed markets make up 27% of fund investments,

contributing to all asset classes.

0%

10%

20%

30%

40%

50%

60%

70%

Equities

FixedIncom

e

Oth

er

Ca

sh

Equities

FixedIncom

e

Oth

er

Ca

sh

Equities

FixedIncom

e

Oth

er

Ca

sh

2002 2007 2012

U.S.PENSION FUNDS ASSET ALLOCATION JAPANPENSION FUNDS ASSET ALLOCATION

Equities

FixedIncom

e

Oth

er

Ca

sh

Equities

FixedIncom

e

Oth

er

Ca

sh

Equities

FixedIncom

e

Oth

er

Ca

sh

2002 2007 2012

0%

10%

20%

30%

40%

50%

60%

70%

80%



58/88

Private pension funds under the Voluntary Pension System (VPS) rules issued in 2005 were first introduced in Pakistan in 2007. The size of pension funds

remained stagnant during the initial years, mainly because of adverse market conditions, lack of awareness about the product, and fiscal inconsistencies

in the treatment of retirement schemes. However, since 2010 pension funds have shown significant growth because of positive changes in the tax regime,

favorable market conditions, launch of new pension funds, and an increase in the number of participants (investors), according to the Securities and

Exchange Commission of Pakistan (SECP).


CASE STUDY:

PAKISTANS VOLUNTARY PENSION SYSTEM

By Mr. Muhammad Afzal, Director, REITs, Pension and Private Equity Wing, Securities & Exchange Commission of Pakistan

POSITION AS OF JULY 2013

Total assets of pension fund industry Rs.5,580 million

Net assets Rs.5,355 million

Total number of pension funds 13

Shariah-compliant pension funds 7

Conventional pension funds 6

Number of pension fund managers 7

Since 2010 pension funds have shown significant growth because of positive changes in the tax regimes, favorable market conditions, and the launch of new

pension funds.

Pension funds have invested 53% in government securities, 35% in equity securities, and 8% in bank balances.

The size of Shariah-compliant pension funds reached Rs.3,404 million (61% of the total) against that of conventional pension

funds, which stood at Rs.2,176 million (39% of the total).

The Shariah-compliant funds and conventional pension funds started business at the same time, although the former have shown

considerable growth over the years and now account for over 60% of the total pension fund assets. This growth has taken place

in spite of the fact that some lucrative sectors of the economy do not meet the eligibility and screening criteria for investment by

Islamic pension funds. Therefore, sectors including banking, insurance, tobacco, breweries, etc. do not qualify for investment by

Islamic funds. Some profitable companies do not meet the eligibility criteria because of their highly leveraged positions.


VOLUNTARY PENSION FUNDS GROWTH


59/88


0

1000

2000

3000

4000

5000

6000

0

5

10

15

20

25

2009 2010 2011 2012 Jul-13

Total Assets No. of Funds

880

1,328

1,575

2,776

5,580

7

9 911

13

The popularity of Islamic pension funds can be attributed to demand from the general public for retirement products designed in accordance with Islamic precepts.

VOLUNTARY PENSION FUNDS GROWTH

CHANGES IN TAX LAW:

The SECP has been striving to bring parity in tax treatment for the conventional retirement

schemes and the VPS. Recently, the following changes were incorporated in the tax law:

Persons retiring from VPS can withdraw up to 50% of their accumulated balance.

Persons can avail themselves of a tax credit of up to 20% of their taxable income.

The amount withdrawn in installments over a period of ten years as pension (monthly installment)

from an income payment plan after retirement is exempt from income tax.

Withdrawal of the balance transferred to a VPS account from a recognized provident fund will

continue to be exempt from tax.

CHANGES IN REGULATORY REGIME:

Revision of the investment and allocation policy for pension fundsSome of the recent changes

introduced by the SECP in the investment and allocation policies of pension funds are as follows:

A Shariah-compliant money market subfund (of a pension fund) can invest in governmentijarah

sukukshaving three years ti me to maturity.

Per-party and per-sector exposure limits for conventional and Shariah-compliant pension funds

have been synchronized.

Pension funds have been allowed to invest in commodity futures contracts traded on the Pakistan

Mercantile Exchange Limited (PMEX) to encourage diversification and to expand the scope of

choices available to investors.


FUND MANAGER PENSION LAUNCH DATE AUM JULY 2012 AUM JULY 2013FUTURE PLANS


60/88


FUND MANAGER PENSION LAUNCH DATE AUM JULY 2012 AUM JULY 2013

HBL Asset Mgmt Conventional Dec-11 163.77 264.931

Islamic Dec-11 129.199 186.03

JS Investments Conventional Jun-07 206.29 273

Islamic Jun-08 129.33 162.38

Arif Habib Investments Conventional Jun-07 295.7 436.27

Islamic Nov-07 166.00 230.96

Atlas Asset Mgmt Conventional Jul-07 175 388

Islamic Nov-07 197 376

Al Meezan Investment

Mgmt

Conventional N/A N/A N/A

Islamic Jun-07 868 1856

UBL Fund Managers Conventional May-12 296.57 616

Islamic May-10 174.5 314

NBP Fullerton Asset

Mgmt

Conventional Jul-13 0 96

Islamic Jul-13 0 94

The SECP is confident that VPS has a vast potential for growth,

given the right type of regulatory and fiscal policies are put in

place. So far, the government has been quite supportive and

has introduced gradual improvements in the fiscal regime,

which have enabled the private pension funds to gain a foothold.

The SECP hopes that the governments patronage will continue

to popularize the culture of long-term savings through pensionfunds in order to serve the dual purpose of increasing savings

rates and providing social security to senior citizens.

The government has been supportive and has

introduced gradual improvements in the fiscal

regime, which have enabled private pension

funds to gain a foothold.


61/88

REUTERS /BAZUKI MUHAMMAD


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SRI Market provides access to over USD 3 Trillion of assets.

SRI provides a natural crossover, complementing Shariah Principals.

SRI will help broaden the reach of Islamic funds beyond localized markets.

SRI facilitates the scale required to improve the efficiency of islamic funds.

Solution 2: Socially Responsible Investment (SRI)

REUTERS /NAVESH CHITRAKAR


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SOLUTION 2: SOCIALLY RESPONSIBLE INVESTMENT (SRI)

GLOBAL SRI ASSETS (2010)

SRI Offers an opportunity for more sophisticated Islamic fund products.


66/88


SRI Offers an opportunity for more sophisticated Islamic fund products.

Incorporating SRI principles into Shariah-compliant fundscrossover appeal?

A convergence of SRI and Islamic funds could boost appeal in Western markets and tap into a market that complements Shariaprinciples. According to the U.S. SIF foundation, SRI assets grew

486% since 1995, with SRI funds having over US$3.7 trillion in AUM in the U.S. alone.

66

SRI assets grew an average of 22% since 2010.

Europe

Asia

Australia

Canada

US

0 500 1000 1500 2000 2500 3000 3500

Europe Asia Australia Canada US

AUM (USD Bln) 6.5 8.5 16 530 3007

Broad SRI 5 0 60 0 0

GLOBAL SRI ASSETS (2010)

The European Sustainable Investment

Forums (Eurosif) European SRI Study,

2012 shows that all responsible investment

strategies surveyed outpaced the market,and four of the six have grown more than

35%per annum since 2009.

Today in the U.S. SRI is estimated to be

US$33.3-trillionTotal sustainable AUM in Europe now exceedsUS$15 trillion


More than one of every nine dollars under professional management in the U.S. is invested today according


67/88


TEN TOP EUROPEAN EQUITY FUNDS BY NET ASSETS: MAY 2013

RANK Fund Name Investment Manager SRI Focus Country SRI Assets

1 Pictet Water Pictet Equities Watter Switzerland 2,362

2 COIF Charities Investment CCLA Investment Asset Management Ltd Mixed Assets Dynamic UK 1,320

3 SEB Ethical Global Fund SEB Asset Mangement Equities Global Sweden 1,087

4 CBF Church of England Investment CCLA Investment Asset Management Ltd Equities Global UK 1,075

5 Black Rock Global Funds -New Energy Fund Black Rock Equities Renewable Energy /Climate Change

UK 1,023

6 Pioneer Funds Global Ecology Pioneer Investment Management Equities Environmental / Ecological Ireland 935

7 Allianz Valeurs Durables Allianz Global Investors France Equities Euroland France 723

8 F&C Stewardship Growth F&C Asset Management PLC Equities United Kingdom UK 715

9 Vanguard SRI European Stock The Vanguard Group Inc. Equities Europe Ireland 642

10 RobecoSAM Sustainable Water Fund RobecoSAM Sustainable AM Equities Water Switzerland 638

Total SRI Equity Funds Total 10,524

All SRI Equity Funds AUM 10,7164

y p g y g

to SRI strategies.

SRI has been gaining more traction over the years.


CASE STUDY:


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SEDCO CAPITAL LAUNCHES THE FIRST SHARIAH-COMPLIANT PRODUCT WITHAN ESG FILTER TO CATER TO SOCIALLY CONSCIOUS INVESTORSBy Hasan S. AlJabri, CEO, SEDCO Capital

COMMON GROUND

Both Shariahand ethical investors are looking

for profits; however, they also seek to invest

responsibly and ethically to contribute to the

development of the economies in which they

operate. The development of the UNPRI by Kofi

Anan in 2006 created clear standards for the

ethical industry. Upon reviewing these standards,

we realize that ethical and Shariahconcepts are

quite similar; both endorse responsible investing,

both avoid sinful companies (alcohol, tobacco,

companies that hurt the environment, gambling,

firearms), Shariahavoids usury and excessive

debt, and some SRI avoid excessive debt. In

addition, Shariahpartners risk and reward, while

SRI has active management objectives. Both

focus on sustainable economic development.

GIVEN THAT SHARIAHPRINCIPLES DOCOMPLY IN SOME SENSE WITH ETHICAL

FINANCING, WHAT SHORTCOMINGS AREYOU LOOKING TO OVERCOMEBY APPLYING THE SRI FILTER?

ESG drives involvement in the companies in which

we invest to fully embrace ethical and responsible

investing. Shariahdoesnt require that. Here,

the investor is involved in encouraging both

management and boards of the companies in

which they invest to ensure their compliance with

UNPRI.We continue to learn of the advantages of

having our funds be ESG-compliant.

Methodology and screening process:

The funds are screened for compliance with

international conventions and guidelines on

environment, human rights, and businessethics such as the UN Global Compact, OECD

Guidelines for Multinational Enterprises,

IOL Core Labor Conventions, environmental

conventions, and weapons-related conventions.

Noncompliance in this area is handled through a

process of engagement and exclusion. The fund

will incorporate proxy voting services according to

best practices in corporate governance standards

into the ESG program.

The fund strategy and how it differs from the

average Shariahfund investment strategy:

Our strategy isnt affected; we are savvy investors

who invest to make a profit. All of our investments

are Shariah-compliant and some are ethical. Adding

the ESG filters to our existing strategy still serves our

objectives. Once ethical investors invest in our funds,

they will realize that our Shariahscreens extensively

reduce the risk profile of the portfolio.

Asset allocation:

Similar to conventional investors, Shariah and

ethical investors follow sophisticated methodologies

to optimize returns while keeping within their risk

profile. Our product diversification gives our clients

and us the depth to invest across asset classes,

sectors, and management styles globally, such

as in real estate, private equity, listed equities,

commodities (such as agriculture and timber),

as well as in compliant fixed income assets.

Future funds that will break out of strictlyShariahprinciple screening:

We see interesting opportunities in Europe that

are attractively priced that will benefit from the

future recovery in Europe. Our focus is also on

companies that have a large portion of their

revenues coming from exports. Were working

on several real estate acquisitions in the U.S.

and Asia, particularly Indonesia where we see

interesting growth potential. We are also lookinginto income leasing products.

Having found very close similarities between the two belief systems, Sedco views SRI as a natural and successful venture.

HASAN AL-JABRI CEO SEDCO CAPITAL

Hasan has been a major player in investment

banking and corporate finance in the MENA

region for over 27 years holding leading positions

in two of the regions most influential financial

institutions; NCB Group and SAMBA. His

achievements have driven these institutions to

become leaders in corporate finance, corporate

banking and investment management. Hasan

has focused investments of SEDCO Capital both

locally and internationally in different asset

classes including private equity, public equity

and global real-estate, all in compliance with

Sharia guidelines, spear-heading the way into

ethical investment solutions.

Hasan sits on the boards and is a founder of

a diverse group of industries including finance

(micro- finance and mortgage), FMCG, building

materials, catering, real estate development, IT

& healthcare.

Hasan currently chairs the Worlds Presidents

Organization Chapter in Saudi and is a BSC

graduate of the American University of Beirut

and an Executive Management Program

graduate of Columbia University


There are attractive investment opportunities in Europe that are expected to benefit from the future recovery


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TOP 10 EUROPEAN FIRMS MANAGING SRI FUNDS BY NET ASSETS: MAY 2013

RANK Investment Manager Country SRI Assets

1 Nordea Fonder AB Sweden 8,688

2 Amundi Asset Management France 3,460

3 Storebrand Fondene AS Norway 2,850

4 Pictet Switzerland 2,761

5 CCLA Investment Management Ltd UK 2,396

6 Robeco SAM Sustainable Am Switzerland 1,972

7 Swedbank Robur Kapitalforvaltining AB Sweden 1,821

8 BNP Paribas Asset Management France 1,552

9 F&C Asset Management plc UK 1,527

10 Natixis Asset Management France 1,427

Total 10 Total SRI Equity Funds 28,458

in Europe.


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Passporting offers greater access to liquidity, while limiting multiple registrations.

Therefore, passporting reduces costs, while simultaneously delivering broader access.Passporting has regulatory framework guidelines.

Passporting levels the playing field, enabling managers of smaller assets to achieve economies of scale.

Passporting opens opportunities for service providers, enriching the financial and economic state of the market.

Solution 3: Passporting

REUTERS /JASON REED


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SOLUTION 3: PASSPORTING

PASSPORTING ISLAMIC FUNDS:


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A PATH FOR GROWTH?

By Bishir Shiblaq, Head of Duba Arendt & MedernachAvocats Representative Office and Florence Stainier, Partner, Investment Funds

Choosing the domicile of an investment

fund is not an easy task. A fund promoter

has to consider many aspects, in particular

the available vehicles, investment strategies,

and the reputation of the domicile. One

of the key concerns remains, however, the

possibility to distribute the fund in multiple

jurisdictions. Investment funds in the Middle

East, whether conventional or Islamic,

currently face distribution constraints, since

there are no arrangements for mutual

recognition in place that permit funds that

have been authorized in one country to

be distributed in another country without

complying with the full range of the host

countrys approval requirements.

Instead of introducing measures to harmonize the legal

frameworks, we have seen more regulation recently, in

particular in the GCC countries, making cross-border

distribution increasingly difficult. In the case of the UAE,

for example, investment funds established in the Dubai

International Financial Center (DIFC) are considered to

be foreign funds by the UAE Securities and Commodities

Authority (SCA)the federal regulator for the UAE.

According to Ernst &Youngs Islamic Funds Report, a

distribution-model access is central to the future growth

of the Islamic funds industry, pointing out a key structuralweakness. According to fund managers in the GCC,

the Islamic funds industry cannot grow substantially

unless the institutional sector, sovereign wealth funds,

pension funds, and takafulcompanies all invest in

Islamic funds. However, institutional investors require

more transparency, and the Islamic fund industry lacks

a uniform legal framework, with the consequence that

disclosure of crucial information such as fund size, types

of assets held, investment policy, management objectives,

and other matters remains voluntary. While some funds

provide detailed information, others provide little more

than their contact details and the types of financialproducts offered. Investor protection remains a host-

country matter. In order to ensure high investor protection

and sustainable growth, it remains crucial to choose a

reliable legal framework in a fund domicile that offers

optimal distribution possibilities.

BISHR SHIBLAQ

Head of Representative Office

Arendt & Medernach

Bishr Shiblaq is the head of the Dubai office of

Arendt & Medernach, where he advises MENA

based clients on Luxembourg regulatory matters.

He advises on the structuring and setting-up

of investment structures and also specialises

in banking and finance, in particular structured

finance and Islamic finance.

FLORENCE STAINIER

Partner Arendt & Medernach

Florence Stainier is a partner in the investment

funds practice of Arendt & Medernach where

she specialises in legal and regulatory aspects

of investment fund work, advising clients on the

creation, structuring and marketing of investment

funds with a particular focus on UCITS.

She has been a member of the Brussels Bar since

2001 and of the Luxembourg Bar since 2004.

SOLUTION 3: PASSPORTING

Recent trends have shown a clear and significant growth in the distribution of UCITS products in the international market, with UCITS worth EUR6.5 trillion, while

non-UCITS net assets amount to EUR2 7 trillion


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Aware of these distributional deficiencies, regulators in GCC

countriesa substantial region for Islamic funds, since it

accounts for about 80% of global Islamic assetsare at a very

early stage of considering a GCC passport for investment funds.

GCC countries, accounting for about 80% of

global Islamic assets, are at a very early stage of

considering a GCC passport for investment funds.

THE EUROPEAN PASSPORT EXPERIENCE

The GCC countries are seeking inspiration from the

harmonization efforts of the European Union (EU). The idea

of a European passport started with the single market for

financial services established in the 1970s with the adoptionof the first Insurance Directives and the Banking Directive.

Thanks to their European passport, financial institutions that

have been granted authorization to conduct their business

by the supervisory authorities of an EU member state may

following a formalized notification procedurepursue their

business in all other EU member states without requiring

further local authorization.

The concept of the EU passport for investment funds was

initiated over 25 years ago, with the establishment of the

Undertakings for the Collective Investment in Transferable

Securities (UCITS). The original UCITS directive was conceivedand launched in 1985 and implemented first by Luxembourg

in 1988. It aimed to develop a unified regulatory framework

for mutual funds across Europe, with the goal to facilitate the

distribution of funds domiciled in one member state across

all other EU member states and to offer investors in UCITS

products a consistent level of protection and confidence.

The UCITS passport marked the birth of the UCITS brand.

GLOBAL SUCCESS OF UCITS

UCITS has been at the heart of the development of the

European funds industry for the last two decades, with more

than 35,000 funds representing nearly EUR6 trillion being

distributed worldwide. According to statistics reported by the

European Fund and Asset Management Association (EFAMA),

Luxembourg was able to leverage from the development of

the UCITS brand and the introduction of the EU passport;

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