Underpinned by supportive government policies, Malaysia continues to dominate Shariah-compliant assets in the Asia Pacific, accounting for 92% of overall Islamic assets under management (AUM) in the region in 2021. Shariah assets now make up 23% of Malaysia’s total mutual fund AUM.

Indonesia follows behind in terms of Shariah AUM, which trended up every year except last year. It registered a strong 11.7% compound annual growth rate (CAGR) since 2017, albeit helped by a low base. Shariah mutual fund AUM in the two markets stood at US$36.4 billion as of end-2021, charting a CAGR of 5.4% since 2017.

Malaysia has had a few decades’ worth of a head start in the Islamic asset management sector compared to Indonesia or any other Asian market, thanks to friendly regulatory policies aimed at making it a global hub for Islamic finance. Since then, the retail mutual fund space has flourished, not only in terms of AUM but also product breadth and depth. For example, there are more Asian equity and Asian mixed-asset products today, compared to the past, where the landscape had mostly been dominated by local and global products.

Another product development trend observed in Malaysia in recent years has been the combination of Shariah and ESG investing principles. “This is unsurprising and a wise move, given that the ESG label can help to market to a wider target audience. In addition, there are synergies between Shariah and ESG investment strategies, such as excluding certain stocks or sectors that do not align with sustainability or good corporate governance,” remarks Shannen Wong, senior analyst at Cerulli. Recently launched Shariah-compliant ESG funds in Malaysia include Pheim Unit Trusts’ Pheim Global ESG Islamic Fund, UOB Asset Management’s United-i Asia ESG Income Fund, and MIDF Amanah Asset Management’s ESG Mustadamah Fund.

Shariah-ESG strategies have also provided more subadvisory opportunities for global managers. For instance, RHB Asset Management partnered with J.P. Morgan Asset Management for the ESG portion of the RHB i-Global Sustainable Disruptors Fund, launched in January 2021. Other examples include Maybank Asset Management, which partnered with Schroders for the Maybank Global Sustainable Equity-I Fund, and BIMB Investment Management, which, together with its partner Arabesque, has launched a few Shariah-ESG products.

“Going forward, there is a need to promote Shariah funds more actively and to educate investors further, especially as total AUM in both Malaysia and Indonesia declined the past year,” notes Wong. “Many people are still not very familiar with these funds, including the fact that they are not only for Muslim investors. What would also help drive investor interest is performance, so managers have their work cut out to deliver strong returns.”