By Bernardo Vizcaino

A unit of Brazilian state-run lender Banco do Brasil SA plans to launch its first Islamic fund to help raise the profile of its Singapore unit, joining a growing list of asset managers returning to the sharia-compliant sector.

The last few years have been difficult for Islamic funds as a whole, with Western firms pulling out as slumping equity markets reduced investor interest and local managers often lacking wider distribution capabilities.

The sector is reviving: Islamic mutual funds now hold $58 billion of assets under management, up from $41 billion at the end of 2012, recovering from a low of $36 billion in 2010, according to Lipper data.

Firms such as Threadneedle Investments, Britain's fourth-largest retail fund manager, plan to grab a slice of this by launching a range of sharia compliant funds in Malaysia.

Last year, the Malaysian unit of Britain's Aberdeen Asset Management launched two such funds. Malaysia's RHB Asset Management plans Islamic funds in Hong Kong, Singapore and Indonesia in the coming year.

In turn, Banco do Brasil's asset management division, BB DTVM, will launch its Islamic fund through its three-year old Singapore subsidiary to help it win business in the region.

"We do believe that this is one of the strategies to attract Asian and Middle East investors to help BB Securities Singapore build a more diversified and competitive portfolio," said BB DTVM's chief executive Carlos Massaru Takahashi.

"If we have a clear perception and commitment of some investors about other types of funds, we will launch them."

BB DTVM conducted a roadshow for the Irish-domiciled fund in June and plans a second one in coming months, aiming to raise as much as 500 million reais ($224.9 million) for the fund.

This will include marketing tie-ups with Islamic banks, such as Singapore's Islamic Bank of Asia, which will advise on the fund's sharia-compliance matters.

Islamic fund managers screen their portfolios according to religious guidelines such as bans on tobacco, alcohol and gambling, in much the same way as socially responsible funds.

But unlike their ethical counterparts in Western markets, many have struggled with a lack of scale and limited distribution capabilities, issues which fund managers are increasingly tackling head-on.

"We do not have any exclusivity in terms of distribution, for this reason we are able to do other partnerships for distribution even in Singapore, including the Middle East," Takahashi said.

Distribution platform Allfunds Bank is also eyeing the Islamic funds market. The Madrid-based firm is expanding its presence in Asia and the Middle East, planning to add more Islamic mutual funds to its product range.