Islamic funds pummelled by oil price

Sharia-compliant fund managers have been hit hard by the dramatic fall in the price of oil over the last 18 months, with inflows in 2015 just a fifth of what they were in 2014.

According to figures provided to International Investment by Morningstar, US$584m flowed into Islamic funds in 2015, compared with $2.4bn in 2014. It follows peak inflows of $3.89bn in 2012, when crude oil was selling for between $110 and $125 a barrel.

As of Tuesday morning it was $33 a barrel, just over a quarter of the 2012 high.

While Morningstar did not confirm the link between oil prices and inflows into Sharia-compliant managed funds, the correlation between the two is striking.

Patrick Mahdi O’Neill, head of Islamic wealth at Holborn Group, said: “It’s inevitable there will be less inflows into sharia compliant funds as the oil price suffers – oil rich Arab Muslim investors who derive their wealth from oil will have less to invest.  Although, it’s possible Sukuk funds might benefit as cash strapped Gulf countries look at different ways to raise money to shore up their budgets and capital expenditure plans.”

Funds domiciled in oil producing regions fared much worse than those in other parts of the world. Saudi Arabian and Kuwaiti managers saw net outflows of $300m and $80 million respectively. In 2014 Saudi Arabian inflows were $444 million, while Kuwait-domiciled funds took in an additional $13.7m.

Malaysian-domiciled funds had a very different experience. Inflows in 2015 were $1.28bn, though that was a decrease from the 2014 figure of $1.73bn.

Inflows also decreased in US-, Luxembourg- and Jersey-domiciled funds, with both the US and Jersey funds seeing net outflows, Morningstar’s figures show.

Islamic funds also underperforming on returns

Mr O’Neill said, as well as losing out on inflows, there is also evidence that sharia funds have underformed their conventional counterparts. Comparing iShares MSCI World Islamic UCITS ETF (USD 101 million fund size) with its conventional counterpart iShares MSCI World UCITS ETF, he said the former was down 13.8%, while the latter was down just 8.04%.

“So over a relatively short period conventional has outperformed by over 5%.  However, if we take a longer term view (prior to the financial crisis), the returns tell a completely different story.  Since December 2012 Islamic fund has returned 21.9% versus 12.84% for its conventional counterpart.”

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