Asset management in the GCC - Euromoney

More documents

Recommendations

Info

decisions will ultimately be made by the elder member of that family,perhaps a great-grandfather, who is chiefly interested in wealth preservationfor the next generation and who is therefore conservative. Thesuccessful fund salesman here is performing something of the role of afinancial advisor. At the other end, one could argue that Saudi Arabia’sPrince Alwaleed’s $20 billion-plus holdings are a family office of sorts,though of course in terms of scale and sophistication he and his teamare clearly a key institution. One European asset manager says familyoffices are “clearly seen as institutions both in terms of their needs andtheir sophistication.”Then there’s high net worth. This group, like high net worth anywhere,varies greatly in sophistication and investment capability, but somegeneral themes emerge. “It’s definitely eyes east rather than west,” saysWells. “They tend to be either very low risk or high risk; they’re lookingfor emerging markets exposure, the India, China and Asia stories, or arelow risk and want cash plus something. There’s not much of a middleground.”Many international private banks have set up divisions in the region tocater for this marketplace, whether through top-end private client divisionsor a broader wealth management approach. Merrill Lynch and ABNAmro, for example, are highly active in this field. However, this is a competitivefield, and the competition is not just from peers in the region.Consider Saudi Arabia, where dozens of new entrants are now chasingthe same limited number of (undeniably highly wealthy) individuals.They’re not just competing with each other, but with the offshore banksthat have traditionally managed much of the very wealthiest money.“Their immediate success will hinge on persuading the richest population,who’ve got 60% of their money offshore and do private bankingin Geneva and Zurich, to do business with entities in Riyadh rather thancontinuing their offshore relationships,” says one private banker. “Privateclients do business in Geneva. Institutions are used to dealing withsuitcase bankers flying in from London. This has been going on since thefirst oil crisis in the 70s. You’ve got 30 years or more of people being accustomedto doing the most important part of their business offshore.”Below that comes retail and mass affluent. Reaching this group are thelocal banks – many of which have private banking or premium divisionsof their own – and a handful of international groups with long trackrecords (often a century or so) in the region, particularly HSBC, StandardChartered and Citibank. Other international managers reachingretail typically won’t deal with them directly, but will go through thesedistribution networks. Many have not bothered even pitching productthrough these channels, instead focusing all their effort on institutionsand the high net worth. In many cases, they have no choice: businessesregistered in the DIFC, for example, can only sell product to people withover $1 million in investible assets, although there is talk about halvingthis limit.There is some evidence of foreign managers deciding to take the jumpto retail, though. Axa Investment Management, for example, has reachedaround $17 billion under management in the Middle East, most of itinstitutional, and has decided to take the next step. A new head of distribution,James Cahill, joined on 1 June to expand Axa’s strategy along thelines of its European model, by catering for global private banks; in theMiddle East that will mean going through distributors such as UBS, BNPand HSBC, as well as local offices. “It’s a natural extension of the businessstrategy,” says Scott Callander, director, Middle East, at Axa InvestmentManagement.Harshendu Bindal, senior director for CEEMEA at FranklinTempleton Investment Management in DubaiWhy go there at all? “The primary reason for developing the distributorstrategy is that the number of mass affluent is increasing pretty consistently,”says Callander. “There is still decent demand for overseas product,to provide diversification away from their exposure to real estate andlocal markets.”With a total local mutual fund industry of only around $57 billion (seeopening chapter) relative to a more than $900 billion regional marketcapitalization, it is clear that the retail sector is under-penetrated by fundsales, and it should represent a big opportunity for those prepared tomake the effort to serve it.International funds that do sell through the established distributionchannels to retail report varied experience of fees. “In fee structures,global relationships tend to have global fee structures and local relationshipstend to be more locally derived,” says Tolchard. “Organizations arebecoming more aware of fees in terms of what needs to be competitivein the marketplace, though we’ve yet to see the transparency of feestructures that we see elsewhere in the world. The region hasn’t yet beenput under the pricing pressure that more developed markets have.”The Gulf’s unique demographics are sometimes reflected in some distinctmarketing strategies. The clearest example of this is the huge SouthAsian population in the United Arab Emirates, believed to represent asmuch as 70% of the working population of Dubai. Several foreign banks,among them Citibank and ABN Amro, have set up dedicated non-residentIndian businesses in order to accommodate that part of society.Others specialize in expatriates generally.For local banks, the model is almost universally the same: they have anasset management division (sometimes hived off into a separate legalentity, but still under the same ownership) which produces productfor distribution through the same bank’s branch network. They is someselling of foreign managers’ products through these networks, oftenthrough white labelling, but there is almost no acceptance of the ideathat a bank would distribute another local manager’s product, which isseen as a competitor.Consequently, open architecture has little purchase in the Gulf so far,but many expect it, and hope for it. “It is very important for the developmentof the local asset management industry,” says Harshendu Bindal,senior director for CEEMEA at Franklin Templeton Investment Management.“Most local asset managers are focused on supplying product toGUIDE TO ASSET MANAGEMENT IN THE GCC15
their own distribution network. There aren’t too many saying: hang on,this is my product, I want the whole market to sell it.” Algebra Capital, inwhich Franklin Templeton owns a minority stake, is a rare example of anindependent, involved in manufacturing but doing no distribution ofits own, and therefore selling to all segments of the market. There aren’tmany others. “For the industry to evolve it needs to start competing,”says Bindal.Local houses are generally resistant to change. “We structure our ownfunds, and for distribution we use our branch network and our institutionalrelationships,” says Joel D’Souza at Commercial Bank of Kuwait.“We will not distribute through our retail channel someone else’s productsthat would compete with our own.”But in some markets, regulatory change is likely to drive a shift in approach.This is clearest in Saudi Arabia, where the arrival of so many newlicensees without an established branch network presents them with thechallenge of how to distribute their product. If they hope to reach massaffluent or retail investors, the only realistic way to do so is to strike distributiondeals with the banks that have the branches – unheard of today.“We’re already hearing lots of talk about third-party distribution in themarket but we haven’t seen it implemented,” says Sami Abdo, managingdirector at NCB Capital, the securities arm of National Commercial Bank.It won’t come easy, though. “It becomes very difficult to access distributionnetworks because you are dealing with your competition, thelong-established commercial banks, to a certain extent,” says TarekSakka at Ajeej Capital. “It’s a challenging situation at this stage for thosewho target retail distribution as there are no independent distributionchannels. White labelling is one approach investment management companieswould seek.” Ajeej is itself another example of an independentfund manager appearing in the Gulf; there are likely to be more in futureif they can find the people.There are the first signs of investment platforms arriving in force in theGulf, chiefly through insurers. Groups like Zurich, Friends Provident, MFS,Alico, Omnia and Skandia offer insurance products linked to investmentplatforms. “Every month when I look at a particular platform, I see moreand more of my distributors signing up for it and putting tickets throughit,” says Harshendu Bindal at Franklin Templeton in Dubai. “If there weretwo or three using it a year ago, there are 15 to 20 now.” He adds: “Lotsof companies are finding the easiest way to get traction is to have theseunit-linked insurance plans on their platforms. That’s the easiest sell.”Invesco, which services sovereigns, institutional and retail, has “beensuccessful in getting on a number of panels of global banks and regionalbanks who are starting to engage in open architecture,” according toTolchard. His take on open architecture in the region is that “we are startingto see it appearing as infrastructure: local banks are starting to offerthose products, but I’m not sure they’ve taken off yet. They’re recruitingstaff, relationship managers to sell their propositions to the marketplace,and it’s a fairly drawn-out process before we end up in a situation wherethey all have investment platforms.”Platforms have made such headway elsewhere in the world because ofthe fee savings they represents for customers. “For a person to sell a fundand ask for a big front-end load is a big issue in this part of the world,”says Bindal. “Insurance doesn’t have those issues, and the commitmentin a lot of these plans is for the long term. All those things make it easier.”He also argues this method of distribution fits the profile of the growingand settling white collar workforce in the Gulf.Tarek Sakka, CEO of Ajeej CapitalAn interesting development took place in April when Ahli United Bank, ofBahrain, and Legal & General Group signed a memorandum of understandingto set up a new regional life insurance joint venture headquartered inBahrain. It will “initially offer a range of takaful [Islamic insurance] life andhealth insurance products and pension plans to retail and corporate customersin the Gulf region,” according to Ahli United. The trend demonstrates boththe increasing influence of Islamic finance in the region, and the role thatinsurance product can play as an agent for development of asset managementin the Gulf.Later that month, Prudential Asset Management said it had received regulatoryapproval to set up a joint venture in Saudi Arabia with Bank Al Jazira, tobe called Prudential Jazira Asset Management. In addition to selling funds, theventure will launch an Islamic insurance business, which will include Bank AlJazira’s existing takaful business. As an insurer, Prudential has been expandingin the Middle East for two years, setting up in Dubai in 2006.Haissam Arabi, managing director of SHUAA Asset Management, describes thesale of unit-linked investment products by insurers in the Gulf as “very promising,but we’re not seeing the level of awareness within local and regionalinsurance players to capture that opportunity. Big names like Old Mutualcome in with the local banks as distribution platforms to wrap things aroundtheir policies and their investment schemes. But in terms of opening the doorfor local and regional asset managers to do the same, we’re not there yet.”For domestic asset managers, a challenge is getting retail investors to see thebenefits of investing with them in the first place. “The number of mutual fundson offer, and demand for them, is on the rise, but retail investors here still preferto be in equities directly rather than investing in mutual funds,” says D’Souzaat Commercial Bank of Kuwait. Partly in recognition of this, CBK recently took amajority stake in a brokerage in Kuwait, Union Securities Brokerage.It’s gradually changing, though. “We’ve seen some positive developmentslately,” says Tarek Sakka at Ajeej. “More investors are comfortable movingto institutions to manage their money instead of managing it themselves,especially after the 2006 market crash,” he says. In Saudi in particular, it is anuphill struggle because many IPOs are geared towards the mass market: thegovernment typically sets a minimum allocation per subscriber, meaning thatif a deal is oversubscribed (and they always are these days) then it’s the smallinvestors who benefit, while institutions do not get their pro rata portion. Thisincentivises retail investors to go into IPOs, rather than to have their moneymanaged professionally. But all things change in time. “It’s not to thelevel we would like to see,” says Sakka, “but it’s in the right direction.”
Page 1 and 2: The 2008 guide toAsset management i
Page 4 and 5: A compelling opportunityfor asset m
Page 6 and 7: Number of funds in the region 2007
Page 8 and 9: On the ground or in the air?Institu
Page 10 and 11: The pressure on staff is more acute
Page 12 and 13: Three hubs to servea thriving marke
Page 14 and 15: Distribution holds the keyAsset man
Page 18 and 19: Fixed income, equity, localand inte
Page 20 and 21: Shariah-compliant markettests perce
Page 22: www.qfc.com.qaIssued by Qatar Finan

Asset management in the GCC - Euromoney

Create successful ePaper yourself

Delete template?

Save as template?