Shariah mutual fund assets under management in Southeast Asia recorded a compound annual growth rate of 12.4% from 2016 to 2020 to reach a market share of over 20% of the region's total mutual fund AUM, according to Cerulli's May 2021 Asian Monthly Product Trends report.
However, sustaining the development of the region's Shariah fund management industry requires addressing persistent challenges, the report said.
Ken Yap, Cerulli's managing director, Asia, said: "Shariah funds will be an important part of retail investors' portfolios in 2021. However, there remains a lot of work to be done in the region, including educating retail investors, to increase interest in these funds. This requires showing that these products can deliver in terms of performance."
On the retail side, a key limitation is the historically lower performance of Shariah-compliant funds compared with conventional funds, as well as limited product variety.
In Malaysia, products are predominantly Malaysian, Asian, and global equities. Indonesia is not much different except for a strong preference for foreign-invested Shariah funds.
There is also a need to promote Shariah products better. The fact that Shariah funds continue to be associated with religion means educating investors about these products still has a long way to go.
Malaysia, however, has seen some product innovation, with a number of managers starting to combine Shariah and environmental, social, and governance (ESG) principles in one product.
For example, Public Mutual launched its equity fund Public e-Islamic Sustainable Millennial Fund in 2019.
More recently, in January 2021, UOB Asset Management launched the United-i Asia ESG Income Fund, an ESG fund that complies with Shariah principles.
Although it is still too early to tell how effective this approach is as a product and marketing strategy, these funds have opened a window for foreign fund managers to bring in their ESG and sustainability research and investment capabilities. They can potentially work with local players to offer feeder funds with a global focus.
Indonesia's retail Shariah market is becoming vibrant due to demand for foreign-invested funds.
Shariah funds can invest up to 100% of their assets offshore, but conventional funds are still subject to a 15% limit. The lack of options to invest offshore through conventional retail funds has made foreign-invested Shariah products—particularly those denominated in the U.S. dollar—an increasingly popular option.
A number of Indonesia-based fund houses plan to launch new offshore equity funds in 2021. To gain meaningful offshore exposure, some managers have been offering Shariah-compliant foreign-invested funds.
There is some opportunity to work with Indonesian managers that are looking to launch China equity funds—last year saw the launch of two such products, following China's economic recovery from the pandemic.
However, working with Malaysian fund houses is easier because there are more ways to get into the market—such as through wholesale and master-feeder funds.