Asset management in the GCC - Euromoney

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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 $70 billion under management already, and has become quite acelebrity in world markets already after its tilt for the British supermarketchain J Sainsbury, accentuated by high-profile purchases of 23.5% of theLondon Stock Exchange.So what do these groups want from their fund managers, and howshould they be approached? Despite high-profile stakes in big westerninstitutions – KIA into BP, DaimlerChrysler, Merrill Lynch and ICBC; ADIAinto Citibank – they are reasonably conservative groups. “Their currentconcern is the preservation of capital, particularly for the Saudis andKuwaitis,” says Hansen-Luke. “But over the longer term they have a willingnessto make less liquid investments such as private equity, becausethey view themselves as funding the next generation.”The private equity theme turns up time and again. “We see more andmore private equity-like behaviour,” says Scott Callander at Axa. “As theyincrease their assets under management they need to adopt additionalnon-correlated strategies to deploy their assets. They are mature andresponsible investors and I think the potential barriers that are beingpresented by some of the foreign governments in the western worldare a little over-reactive; I don’t think they’re going to want to be strongactivist shareholders in the main.”This shift does present something of a challenge for foreign managers:as sovereign direct investment ability grows, the need to outsourceGUIDE TO ASSET MANAGEMENT IN THE GCC13
Selected Soverign Funds in the Region, 2007E US$ BillionCountry Fund Name Launch Year US$ BillionUAE (Abu Dhabi) Abu Dhabi Investment Authority 1976 875Saudi Arabia Various Funds NA 300Kuwait Kuwait Investment Authority 1953 232Libya Reserve Fund NA 50Qatar Qatar Investment Authority 2005 47Algeria Reserve Fund NA 25Iran Foreign Exchnage Reserve Fund 1999 15UAE (Dubai) Istithmar 2003 8UAE (Dubai) Dubai International Capital 2004 6Oman State General Reserve Fund 1980 7Source: Saudi Arabian Monetary Agency, Central Bank of Kuwait, Central Bank of Bahrain, Cerulli Associatesdrops back a touch. “Many sovereign managers are looking to developtheir own expertise in investment management,” says Nick Tolchard atInvesco. “It may be that they become more selective in terms of awardingexternal mandates. We’re already seeing more activity in terms of directequity and private equity investment.”the key, if there is one, is consistent performance within an area that thesovereign needs exposure to (that can get to very specific levels – ADIA,for example, is believed to break down its debt exposure into discretemandates for global government bonds, global investment grade credit,emerging markets, global inflation-index bonds and others).One western asset manager says he sees a shift towards a core-satelliteapproach among the sovereigns. “It’s what you see throughout theworld,” he says. “On the satellite side it could be small caps, US or global;sub asset classes like emerging market debt; alternatives is a big push;real estate, infrastructure; and the hedge fund side is very sophisticated,with single strategies and single managers, moving away from funds offunds.” The flip side of that is a move towards indexation on the core side,he says, which may squeeze out mainstream active managers a little.Another thing they appear to want is expertise in Asia. “These fundsfrom the emirates have been investing in Asia for a long time,” saysHansen-Luke. “And it’s not only their own analysis and consciousness ofwhat’s going on; their advisers, the bigger investment banks and sell sidebrokers, are advising them that Asia is the right place to go.”Some have been explicit about this ambition: the QIA wants to get to asituation where 40% of its assets are in Asia, and the KIA’s chairman hasbeen quoted as saying 20% would be a suitable figure for that fund. Bothfigures are clearly well above the weighting Asia holds in, for example,MSCI indices. This reflects both the greater perceived opportunity in Asia,perhaps a familiarity with the risk profile of Asian assets, and growingtrade links between the two regions (Malaysia’s central bank governor DrZeti Aziz has called it “the new silk road”).Generally, sovereigns appear to be becoming more open with the worldthan they used to be, though none has gone so far as to disclose theirassets under management. ADIA, extraordinarily for a place whose website features only a picture of its building and an address, hired a PRgroup, Burson Marsteller, this year. “Two years ago this would have beenregarded as a complete joke,” says one asset manager who has workedwith ADIA. “They are looking at transparency, disclosing information tothe public, how they talk to newspapers; they have understood that theycan’t run away from it [public scrutiny] and if they can’t run away from itthey want to do it properly.”If there was ever a time when sovereign mandates could be securedby personal relationships, it is long gone. All sovereigns have highly sophisticatedevaluation techniques for potential sub-advisory mandates;Beyond the sovereigns comes a tier of institutional investors. “As economiesare growing, more companies are getting their assets professionallymanaged,” says Wells; sometimes this is for their own earnings, andsometimes to support the beginnings of a corporate pension environmentfor employees.Pension funds tend to be state run at this stage, rather than a corporatebloc. “There are a dozen pension funds in Oman, several in the UAE,there’s a pension fund fully established here in Qatar, and in Kuwaitand Saudi there are large and long-established institutions,” says Callander.“There’s a relatively mature pensions market for governmentand quasi-government employees in the region. The next growth areacould be the corporates building out their pension provision, thoughtoday it’s a bit limited. Future legislation coming into place could seegovernments around the region seeking to enhance the existing socialsecurity framework with private sector solutions as well; I do forsee atrend in that direction.”An example of this trend can be found in Bahrain, where the central bankis expected to announce a new program called the occupational savingsscheme within the next few months. This involves a change in regulationto address savings in the region, helping companies to isolate employeesavings from those companies’ broader operations. It works using existingtrust laws in Bahrain. “The idea behind it is very simple,” says AbdulRahman Al Baker, executive director of financial institutions supervisionat the Central Bank of Bahrain. “It’s not fair to have your savings in yourcompany, as part of your company’s books, because if something goeswrong that will significantly affect the savings of those staff.” Under thenew scheme, “if the company goes bankrupt, the savings are going to bein a separate trust so are not affected.” Measures like these should boostthe appeal of corporate pension schemes. “I think it will attract more assetmanagers to look at these kinds of schemes,” he says.Halfway between institutions and high net worth comes the conceptof the family office, tricky to pin down; some banks serve them throughinstitutional channels, others through private client. They vary tremendouslyin their sophistication and outlook. At one end comes the familywho has built a business over a couple of generations; where investment
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Asset management in the GCC - Euromoney

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