Kronfol told International Adviser’s sister publication Fund Selector Asia recently that he believes his firm ranks 15th globally in terms of managing sukuk, or shariah-compliant, assets.
The firm’s sukuk business has been growing from a small base but at a “healthy pace”, which is consistent with the development of the Islamic finance in general, he said.
Kronfol estimated that sukuk investment vehicles in Asia, across all fund houses, have a total of $4bn (£2.8bn, €3.5bn) in assets under management. It is therefore still a small part of the global Islamic finance assets, which is roughly $2trn, he said.
“Our expectation is [that] we will see the development of non-bank financial services in the Islamic states as well. That trend will only increase over time.”
Kronfol expects the growth of sukuk in 2016 to be in line with the average 15-20% growth rate seen over the past 15 years, despite a slowdown the last two years.
There are two reasons for the modest slowdown, he said. First, the Central Bank of Malaysia, which has “a very large issue of sukuk”, has decided to step away from issuing very short-term paper. Second, lower oil prices have put pressure on the economic outlook for oil exporting countries, and this has resulted in a decline in the issuance of sukuk.
“For many issuers in the GCC [Gulf Cooperation Council] and other oil producing countries, the bond markets and the sukuk markets have been less attractive, as they may [instead] use syndicated loans and domestic markets for funding.
“If we see the markets continue on a healthy trajectory, then there will be a significant increase in the issuance [in the MENA region] because we have a budget deficit that needs to be financed, [and] we have massive infrastructure spending. If I take on a longer-term view, we are very optimistic on the growth of the sukuk market.”
Despite the challenges, the sukuk market has delivered strong performance, and he believes that it will continue to deliver competitive returns with lower volatility and lower correlations to other fixed income sectors.
“Not only has it outperformed many emerging and developed markets, it has also done with very little volatility. The market is also anchored by very healthy financial institutions,” he added.
Three-year performance of the Franklin Global Sukuk Fund
The issuance of sukuk has been dominated by the GCC countries and Malaysia, but he believes that these countries will be getting a smaller share going forward.
“For example, when you look at the international sukuk market today, Indonesia is the largest issuer. GCC is actually less than 50% of the market, when just a few years ago it was about two-thirds of the market. This is because there is an increase from other countries. The trend is to continue.
“Today, we have almost 30 sovereigns in the market. We expect the GCC and Malaysia will have a smaller and smaller share.“
In Hong Kong, he believes there are opportunities to tap the local investor base. “We are very encouraged to see the regulators and authorities here support the development of Islamic finance. Going forward, there will be a lot of issuance.”
The Hong Kong government launched its second sukuk offering in June 2015.