Sharia-compliant funds are emerging as an increasingly popular investment instrument in markets across the region, and Qatar is playing an important role in this expansion. According to the Qatar Financial Centre (QFC), sharia-compliant funds accounted for $224m by end 2017; just over 50% of the assets placed in the Qatari mutual fund segment. Their prominence in the market means that they are no longer viewed as a niche investment opportunity, with an increasingly broad range of investors taking the sharia-compliant option as a result of financial, rather than religious, reasoning. However, competition for liquidity in the regional fund universe is fierce, and as the sharia fund concept is adopted in more financial centres around the world, the battle for clients is likely to further intensify.
In the early days of Islamic funds the core customer base was made up of investors seeking a return from the market in a manner that did not contravene their religious or ethical principles. Clients continue to be attracted to Islamic funds by the fact that they do not profit from companies involved in activities contrary to Islamic principles. More recently, however, fund managers have started to report a broader interest in the instruments.
With Islamic funds rivalling, and in some cases beating, the returns offered by their conventional counterparts, some investors view them as a useful way to diversify their portfolio away from the types of asset more common in the fund universe.
When the Doha-based private investment group QI nvest launched its sharia-compliant SQN Income Fund in 2017, for example, investors were offered a 7% annual return on a monthly basis – an attractive enough prospect to ensure that the fund was oversubscribed at its commencement.
Much of Qatar’s reputation as a location for sharia-compliant funds rests on a small number of prominent instruments. Qatar is home to the world’s largest single country sharia-compliant Exchange Traded Fund (ETF) and second largest Islamic fund: the sharia-compliant Masraf Al Rayan Qatar ETF was launched in March 2018 with initial assets worth $120m, and tracks the performance of the Al Rayan Islamic Price Index of sharia-compliant stocks trading on the Qatar Stock Exchange (QSE). The fact that the index has outperformed the conventional QSE index between 2013 and 2018 by more than 1.6% per annum makes the new fund a tempting prospect for general investors, as well as those seeking a sharia-compliant instrument. Its effect on the QSE’s trading volumes was immediate: approximately QR56m ($15.4m) worth of its stock was traded on its debut, which accounted for around 20% of total trading volumes for the day.
The Qatari Islamic fund market is also one of the world’s most technically advanced. QI nvest, for example, manages its sharia-compliant funds via its QI nvest Managed Account Platform, the world’s first open architecture system for the instruments. Through the platform investors are granted access to a range of sukuk (Islamic bond) and equity funds, controlled in-house and by third parties.
The continued growth of Qatar’s sharia-compliant fund universe may be spurred by the development of its supporting regulatory structure. The creation of a responsible finance regulatory framework to attract regional managers” forms part of the Islamic finance roadmap proposed by the QFC. The strategy calls for the opening up of alternative investments such as Islamic funds to a larger market through the development of a more robust regulatory framework focusing on sustainable investment.
Nearly half of sharia-compliant funds currently invest with a MENA mandate, while a third invest in the Asia Pacific region and 26% have a world-wide mandate. As the sharia-compliant fund universe matures and shifts its focus to new markets, Qatar’s ability to retain its prominent position will depend on its ability to continue to develop its regulatory framework.
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