Looking at the current state of the market, MYR-denominated sukuk accounts for more than 60% of the total outstanding (USD145bn equivalent), whereas the USD-denominated sukuk's share is at about 17% (USD40bn). Most sukuk investors are still mainly buy-and-hold, which limits the liquidity of a number of names. Therefore, it is not surprising that a majority of the existing global sukuk funds have fairly small assets under management.

According to Zawya data, total assets under management of all USD-denominated sukuk funds are about USD 375 million, USD 205 million of which is accounted for by EFH Global Sukuk Plus Fund, managed by QIB (UK).

On the positive side, we note that the ongoing strong growth in the asset base of Islamic banks and takaful companies is likely to further boost the sukuk market growth in two ways. First, a growth in balance sheets of Islamic financial

institutions increases the dollar-value of the sukuk demand. Second, Islamic banks in general have been expanding their fixed income trading books, which has helped improve liquidity in the secondary market.

The increase in high-grade sukuk issuance has also helped increase secondary market liquidity, as dealers find it easier to obtain risk approvals to hold inventories of high grade paper compared to sub-investment grade or unrated securities. Consequently, the bid-ask spreads in the secondary USD sukuk market have been halved over the last three years.

The global sukuk market has a way to go before reaching the depth and the breadth of the conventional credit market. However, the progress made over the last two-to-three years and the strong prospects for further growth of Islamic finance, in our view, bode well for the outlook for the global sukuk funds industry.

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Mutual funds focusing on Morocco are of a mixed nature. Fixed income funds are the dominant asset type, accounting for 36% of total Moroccan funds. According to Zawya Funds Monitor performance data, the average return of the fixed income funds sector for 2011 was 2.67%, significantly higher than the average return from equity funds, which lost 10.05% in the same period. It is clear that the Arab Spring has taken its toll on the Moroccan equity market, thus paving the way for fixed income securities to gain the preference of investors.

The aggregate assets under management of Morocco-domiciled funds as of December 2011 are USD 15,698 million, up 20% over the December 2010 level of USD 13,081 million. The funds industry recorded a net outflow of USD 300 million during the first quarter of 2011. This changed to a net inflow of USD 310 million during the second quarter of the year. The third quarter witnessed another inflow, registering a total of USD 184 million.

As regional stock markets have become less appealing to the risk-averse investor, fixed income products are attracting the capital that has been shifting within the MENA region as a whole.

2011 was a bountiful year for mutual funds across Morocco as 13 new funds were introduced. With the number of domiciled public mutual funds reaching 185 as of the fourth quarter of the year, fund managers were keen to attract investment into their products.

Although the funds industry in Morocco is not as notorious as the GCC funds industry, it is widely recognized for its stable mutual funds performance, especially in the balanced and fixed income funds. With increasing local interest in its funds, Morocco should be broadening its exposure to the neighboring financial markets by opening up its doors for foreign investment into the industry.

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