Asset management in the GCC - Euromoney

On the debt side, the vast majority of funds in this area are money marketproducts, sometimes referred to locally as trade finance funds, or theirIslamic finance equivalent, murabaha. This is the biggest part of the ‘other’category referred to in the Cerulli chart on Saudi Arabia and Kuwait.But mainstream fixed income debt funds are rare indeed – 1% of theKuwait and Saudi markets. They do exist – Global Investment House,Gulf Investment Corporation, Kuwait Investment Company, HSBC andSHUAA Asset Management run bond funds – but they are strangelyunder-represented.Some see an opportunity. Algebra is in the process of launching a localcurrency corporate debt fund for the MENA region, believed to be the firstof its kind. Daniel Smaller, managing director of sales and distribution atAlgebra, says the corporate debt fund will aim to be highly liquid so localinvestors can use it in place of cash investments. “They’re getting paid 1or 2% on their deposits,” he says, whereas the yield on a debt fund shouldbe higher. It should also appeal to international investors because of lowvolatility and high credit ratings for regional debt, plus the benefits thatwill come if currencies de-peg from the US dollar and revalue upwards.Algebra also plans a sukuk fund – see the Shariah chapter for more on this.Logically, debt funds ought to have a bright future in the Middle East. “It isAlternatives generally are in increasing demand, including hedge fundsand infrastructure. UBS has formed a joint venture with Abu DhabiInvestment Co to launch a MENA infrastructure fund, where ADIC doesthe screening and UBS manages the infrastructure. The fund will sell inAsia, in Europe and the Gulf itself, with Asia expected to be a particularsource of appetite. Among hedge funds, there are some local products– two prominent examples are the Alternative Strategies Fund sold byGulf Investment Corporation in Kuwait, and a fund of funds sold by EIS,the asset management arm of Emirates Bank, in the UAE – while themost prominent international manager to have built a presence in theregion is Man Investments.Foreign fund managers are only now beginning to launch MiddleEast products of their own, and generally do so by subcontracting theinvestment process rather than trying to do it themselves. Schroders,for example, has a Middle East fund (interestingly, it can’t be sold in theUAE because it includes Israeli stocks) but runs it from London ratherthan its DIFC office, with most of the management handled by AlgebraCapital on a sub-advisory basis. Algebra is part owned by FranklinTempleton, and represents a manufacturing or sub-advisory base forthe Middle East for the US group (the two recently launched a MiddleEast fund in Korea in this way, for example). JP Morgan has a MiddleEast Equity Fund which had $756 million in it in early April.“It is estimated that $2 trillion of infrastructure spending is going to be donein the Middle East in the next five to 10 years. You can’t raise that with equity”estimated that $2 trillion of infrastructure spending is going to be done in theMiddle East in the next five to 10 years,” says Smaller. “You can’t raise that withequity, and bank lending has its limits. You need an efficient bond market.”Two asset classes are mentioned constantly by local and global managerswhen asked what is popular: real estate and private equity. Directinvestment in real estate is as popular as local stocks in the Gulf; it standsto reason that real estate funds, offered locally by several managers,should be popular too. This is despite the fact that the real estate investmenttrust market has not yet developed strongly, although legislationwas passed in 2006 for the Dubai International Financial Centre to createdomestic and international REITs.Private equity is a huge area of interest; the Gulf Venture Capital Associationbelieved there to be about $25 billion invested in private equity fundsin the Middle East by the end of 2007. Private equity fits the Gulf very well:stock markets are young and have a relatively small number of stockslisted on them, so there is a great opportunity in smaller companies thatare not yet listed and can benefit from private equity investment. Anotherimportant element of this appeal is the passing of businesses from onegeneration to another. Abraaj Capital is the best known private equitymanager in the Gulf; it has $5 billion under management.It used to be that structured products were particularly popularin the Middle East. “When I first started going to the Middle East,”recalls Nick Tolchard at Invesco, “mutual fund sales were quiterestricted and there were a lot of capital guaranteed products onthe market. In the last few years people have increased their revenuefrom mutual fund sales.” Volatile markets – the UAE stock marketdropped over 70% from its peak between mid 2006 and early 2007– do tend to make capital-protected products more appealing forinvestors, although Tolchard says: “we would argue that mutual fundsremain a good long term opportunity and we would encourageinvestors not to automatically swing back into capital guaranteedstructures like we used to see.” Nevertheless structured products doremain areas of strength for foreign houses such as SG, BNP Paribas,Deutsche Bank, ABN Amro and UBS, generally coming out of theirinvestment banking divisions rather than the assetmanagement teams.So there is plenty of activity in Gulf product manufacturing, but thelevel of penetration is still reasonably weak. “A lot is happening,” saysShahid Hameed at Global. “If you look at assets under managementin the industry overall and compare that with the bank deposit base,it is clear that the regional asset management industry is poised forseveral years of robust growth.”