Asset management in the GCC - Euromoney

Distribution holds the keyAsset managers around the world recognize the opportunities that exist in the Gulf. What they stillhave to come to grips with is exactly how to exploit those opportunities most effectively“There is a huge opportunity in the Gulf, that’s pretty much widely recognizedby everyone,” says William Wells at Schroders. “But how best totackle it is another matter.” And the biggest question for foreign managersin working that out is distribution.Deciding on a distribution strategy requires a clear understanding of thedistinct client bases in the Gulf, and what those clients want.Scott Callander, director, Middle East Institutional Advisory,AXA Investment ManagersFor most foreign asset managers, the sovereign wealth funds are themain prize. “That’s currently the majority of the business we have, andmost international asset managers would be the same,” says Wells. Formany, it’s becoming a still bigger focus. “A good period of time is beingspent on sovereign wealth funds, right now even more than in the past,”says a Middle East asset management head at a major European bank.“They’re acting as liquidity providers and are more aggressive than anyoneelse right now. The top five to 10 addresses in the Gulf make up thebulk of our business.” But what do these mega-clients want?There are sovereign funds in four nations that really matter in the Gulf,and they differ in their approach and requirements. At the top of thepile is the Abu Dhabi Investment Authority (ADIA), the richest by farof them all and probably the largest institutional investor in the world,with perhaps as much as $1 trillion under management (nobody knowsfor sure but a commonly cited figure is $875 billion, quoted last year byboth Deutsche Bank and Morgan Stanley). ADIA is known as being highlysophisticated, and rather aggressive relative to its peers, particularly inprivate equity; it takes an international approach to its staffing, ratherthan being dominated by UAE nationals. It has over the years been anearly mover into areas like emerging markets and hedge funds, andhas a highly sophisticated system for analysing and selecting potentialmanagers. “They have more closely associated themselves with a USendowment like a Harvard than they would a central bank,” says DouglasHansen-Luke at Robeco in Bahrain.Then there’s the Kuwait Investment Authority, set up in 1953 and the oldestsovereign wealth fund in the region, for whom the most commonlyquoted figure from analysts is $200 billion–250 billion under management(again, it has never been disclosed). The KIA is also consideredamong the more professional of the sovereign funds, with a very strongin-house training programme and a record of employing the brightestpeople in the country. Until recently it had a track record for conservatismbut is in the midst of implementing a much more market-savvyapproach today (though one wonders how it has fared in this globalenvironment). A review by an international consultant in August 2004,approved by KIA’s board the following June, has led to the fund establishinga target rate of return that would see it double its assets undermanagement within 10 years. Among other things, this review broughtabout the creation of a separate division for alternative investments. TheKIA is perhaps the institution most likely to outsource mandates to overseasmanagers; ADIA does so too but with reportedly a greater desire tohandle as much as possible in-house.Saudi Arabia differs in that it doesn’t have a single overall sovereign fund,but several institutions which between them amount to about $300 billionunder management and all invest in the name of the state (the twomost prominent would be the General Organization for Social Insuranceand the Saudi Arabian Monetary Authority). These are considered muchmore conservative; some managers believe as much as 70% of the investmentsfrom some of these institutions are in US dollar fixed income,chiefly government paper.And Qatar is the newer entrant, launched only in 2005 (reflecting themore recent arrival of wealth in Qatar, predicated mainly on the remarkablyfortuitous discovery of the third largest natural gas reserves in theworld in a country smaller than Connecticut). It may already have asmuch as $70 billion under management already, and has become quite acelebrity in world markets already after its tilt for the British supermarketchain J Sainsbury, accentuated by high-profile purchases of 23.5% of theLondon Stock Exchange.So what do these groups want from their fund managers, and howshould they be approached? Despite high-profile stakes in big westerninstitutions – KIA into BP, DaimlerChrysler, Merrill Lynch and ICBC; ADIAinto Citibank – they are reasonably conservative groups. “Their currentconcern is the preservation of capital, particularly for the Saudis andKuwaitis,” says Hansen-Luke. “But over the longer term they have a willingnessto make less liquid investments such as private equity, becausethey view themselves as funding the next generation.”The private equity theme turns up time and again. “We see more andmore private equity-like behaviour,” says Scott Callander at Axa. “As theyincrease their assets under management they need to adopt additionalnon-correlated strategies to deploy their assets. They are mature andresponsible investors and I think the potential barriers that are beingpresented by some of the foreign governments in the western worldare a little over-reactive; I don’t think they’re going to want to be strongactivist shareholders in the main.”This shift does present something of a challenge for foreign managers:as sovereign direct investment ability grows, the need to outsourceGUIDE TO ASSET MANAGEMENT IN THE GCC13