* Gulf-based sukuk funds grow 31 pct in 2011
* But half of them account for 91 pct of assets
* Aggregate size tiny compared to sukuk market
* Funds' turnover ratios generally low
* Industry still lacks firm that originates and underwrites
By Bernardo Vizcaino
SYDNEY, June 21 Gulf investment funds dedicated
to sukuk are increasing in size and number, but the growth spurt
may not be enough to solve the concentration and liquidity
issues facing the Islamic bonds market.
Assets of sukuk funds based in the Gulf now exceed $500
million, a 31 percent increase since last year, according to
Reuters calculations based on data from fund companies. This
remains small compared to the total Islamic bonds market; global
sukuk issuance was $86 billion in 2011, and $43 billion in the
first quarter of this year, according to Thomson Reuters data.
The growth of sukuk funds is partly because investors are
becoming more sophisticated in their asset allocation decisions,
and searching aggressively for yield, said Mark Watts, head of
fixed income at National Bank of Abu Dhabi.
"As the market institutionalises, there is recognition that
investments are not all about equities," Watts said. Classic
asset allocation models suggest investors should put 60 percent
of their money into fixed income, while currently that
proportion is in equities or cash for Gulf investors, he added.
A reallocation towards sukuk is now underway but it faces a
shortage of sukuk funds. This prompted NBAD to launch its own
sukuk fund in May, alongside those announced this year by HSBC
and Gulf institutions Al Hilal Bank and Rasmala Investment Bank.
The new launches join a small club of Gulf-based sukuk
funds. There are a total of 17 such funds, with half of them
accounting for some 91 percent of assets, according to the
The sukuk fund of QIB UK, a Qatar Islamic Bank subsidiary
, by itself accounts for a huge proportion of the
assets; launched in 2009, it now has $213 million in assets, of
which $100 million was raised last year, Anouar Adham, head of
asset management at QIB UK, told Reuters.
"A key differentiator for us is that we are a pure sukuk
player...Some of the competition puts a lot of different
instruments, not only sukuk, in their funds," Adham said.
Some funds allocate a large portion of their portfolios - 25
percent or more - to short-term instruments in order to manage
their liquidity needs, because most sukuk holdings are not
Many funds are unable to accomodate retail investors, which
are left out because of minimum investment restrictions. The
investor base of QIB UK's sukuk fund is approximately 80 percent
institutional, according to Adham, and comprises mostly takaful
and re-takaful institutions (Islamic insurance and
re-insurance). He said that three years ago, the fund attracted
individual investments of $3 million in size, but some were now
as large as $20 million.
The takaful sector's growth rates and profitability are
under pressure, increasing the need for products with yields
higher than cash.
This has encouraged customised investment mandates, some of
which range from $60 million to $200 million, according to
"Discretionary mandates dwarf mutual funds," Watts said,
citing one $350 million investment portfolio which allocates
over half of that amount to sukuk. Precise figures remain
elusive, but conservative estimates for the discretionary
business range from one to three times the size of the sukuk
Investors in sukuk include Islamic banks investing on their
own accounts, which adds to the institutional and stable nature
of the sukuk market, said David Marshall, head of product and
distribution at Emirates NBD Asset Management.
"There is a normalisation of sukuk as an asset class,"
Marshall said, noting net inflows of $30 million last year into
the sukuk fund of Emirates NBD, which was launched in
2010 and now has $44 million in assets.
But not all sukuk funds have enjoyed such interest, and
distribution channels for funds have a strong influence on the
make-up of investors in them, Marshall said.
"Not that many have a sustainable size, and in time, some
will fall by the wayside," said Eric Swats, head of asset
management at Rasmala Investment Bank. "Expect the industry to
contract, with more money to be held by institutional players."
Rasmala, which manages $650 million in assets, announced its
own sukuk fund in April with seed capital of $25 million. Swats
says he expects it to grow to between $60 million and $75
million by year-end.
While many analysts expect the sukuk fund industry to
continue growing in the long term, poor liquidity in the
secondary sukuk market and a relatively narrow range of sukuk
issuers threatens to slow the expansion.
Because of their small aggregate size, sukuk funds have not
contributed much trading liquidity to the secondary market.
Furthermore, sukuk issuance is dominated by sovereign and
state-linked entities, which are estimated to account for as
much as 78 percent of global issuance; funds and other investors
tend to hold these high-grade instruments to maturity, without
This explains the low turnover ratios in sukuk funds. The
funds trade as little as 40 percent of their assets in a single
year, according to Marshall. "We are not day traders," Swats
In 2011 the global sukuk market saw just 15 U.S.
dollar-denominated issuers, according to The Bank of London and
Middle East, which launched its first sukuk fund in 2009 and
another in May of last year.
There is one element missing in the market altogether: a
firm that both originates and underwrites sukuk, and which could
encourage more corporate issuance.
"What you need is to increase issuance in the primary
market. Supply will drive sukukholders to start trading," said
Abdul Rahman Mohammed Al Baker, executive director of financial
institutions supervision at Bahrain's central bank.
Bid-offer spreads reflect the lack of a liquid market, he
added. "You constantly hear sukuk oversubscribed five times," Al
Baker said. "But what happens next? Nothing."
(Editing by Andrew Torchia)