Dubai: Sharia-sensitive investable assets in 2008 in the GCC and Asia touched $736 billion (Dh2.7 trillion) compared to $267 billion (Dh980 billion) in 2007, said the latest report by Ernst & Young.

"This translates into a potential annual revenue pool of $3.86 billion (Dh14 billion) for the Islamic asset management industry. Fund sizes however remain small, with over 50 per cent having assets under management of $20 million (Dh73.4 million) or less," the report said.

The third annual Ernst & Young Islamic Funds and Investments Report, released yesterday at the World Islamic Funds and Capital Markets Conference, also says 25 Islamic funds were liquidated in 2008 and first quarter 2009 while 18 were liquidated in all of 2006 and 2007.

"The landscape has changed significantly now, yet the fundamentals of the Islamic fund industry remain strong. With almost $50 billion (Dh183.5 billion) in fund assets under management and a large, expanding and untapped Muslim population, there are likely to be considerable opportunities in the future. This is a time when strategic choices have to be made and market participants have to adapt to survive," said Sameer Abdi, Head of Ernst & Young's Islamic Finance Services Group.

"The economic downturn, a reduction in investor risk appetite and unclear valuations will be the most pressing business risks in 2009."

The number of new funds launched has dropped from 271 in 2006 and 2007 to only 89 in 2008 and the first quarter of 2009. "This mirrors the severe market correction shown by a 50 per cent decline in the MSCI Index for the period November 2007 to March 2009 compared to a 40 per cent return in the period May 2005 to November 2007," the report said.

Islamic indices have performed poorly worldwide.

The average return from Islamic equity funds fell to minus 39 per cent in 2008 compared to a 23 per cent return in 2007. In the first quarter of 2009, the average return was minus 3.7 per cent.

The average Islamic fixed income fund return dropped from three per cent in 2007 to one per cent in 2008 and first quarter 2009. Commodity prices declined during the second half of 2008, but signs of recovery in this asset class are emerging and in first quarter 2009 the average return on commodity funds stood at 10 per cent, a substantial increase from the minus 20.01 per cent experienced in 2008. Islamic cash funds remained constant, providing an average return of 3.9 per cent in 2008 compared to 3.4 per cent in 2007. In first quarter 2009, average returns were 0.7 per cent. Average returns from real estate funds fell from eight per cent in 2007 to minus 11 per cent in 2008 and minus five per cent in first quarter 2009.

Sukuk slowed as spreads widened. Sukuks worth $15.5 billion (Dh56.9 billion) were issued in 2008 compared to $47.1 billion (Dh172.9 billion) in 2007.

Ernst & Young's IFIR 2009 report estimates that sukuks valued at $27.5 billion (Dh101 billion) will be issued in 2009.

"Two-thirds of all players manage less than $100 million each in Islamic assets - the global competitive landscape is fragmented and a shakeout appears likely. Firms will need to select a product and distribution platform that is aligned with its strategy and position themselves as alpha-seekers or asset gatherers to set their fee structure," said Omar Bitar, Managing Partner, Middle East Advisory Services at Ernst & Young.