Asset management in the GCC - Euromoney

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Number of funds in the region 2007 estimatesNumber of funds in the region 2007 estimates250200150100500Saudi Arabia Bahrain UAE Kuwait Egypt Qatar OmanSource: Saudi Arabian Monetary Agency, Central Bank of Kuwait, Central Bank of Bahrain, Cerulli Associatesmanagers to gain mandates for international counterparts.numbers and in some cases may not separate them out anyway.Source: Central Bank of Bahrain, Central Bank of Egypt, Central Bank of Kuwait, Muscat Securities Market, Saudi Arabian Monetary Agency, Gulfbase, Zawya, Cerulli AssociatesSaudi Arabia, the biggest market of them all with a market cap of around$400 billion, is not yet open to foreign investors except through localmutual funds; consequently it won’t be considered for MSCI indices sinceit’s not considered widely investable. If that changes, the floodgates reallywill open. “When they open that market, Saudi will see a lot of indexinvesting,” says Shahid Hameed, head of asset management for the GCCat Global Investment House in Kuwait, one of the region’s largest fundmanagers with $8 billion under management. “Investors don’t even necessarilyneed to like Saudi; if they are investing in an index and the indexinvests in the region, flows will come in.”A far bigger figure is attained by considering all institutional mandatesout of the Gulf, and the addressable assets of the sovereign wealthfunds. Cerulli estimated that the total assets in the Middle East – mutualfunds, discretionary portfolios and sovereign funds – total $2 trillion,and total managed assets $1.6 trillion. This vast difference betweenmutual funds and total assets helps to explain why most internationalfund managers that have ventured into the region have all but ignoredretail as an asset class so far, focusing their attention instead on sovereigns,institutions and the wealthy – more lucractive, with more toinvest and easier to reach without an expensive branch network.And in a global environment like this one, a market that bears little relationshipto global equities is particularly welcome. “This region propelsahead on its own dynamics,” says Joel D’Souza, senior investment managerat Commercial Bank of Kuwait. “Kuwait in particular has fared verywell compared to what’s happening in the rest of the world.” [At the timeof writing the Kuwait Stock Exchange price index was up 17.6% year todate; the Euro Stoxx 50, by comparison, was down 14.5%.]Getting a handle on just how big the industry, or the opportunity, is, isnotoriously difficult. The easiest thing to grasp is mutual funds that aremanufactured and distributed in the Gulf – but even that’s not all thateasy, with disclosure requirements quite varied and many funds notdisclosing their assets under management.Nevertheless, in 2007 it was commonly said that there was about $60billion in mutual funds in the Gulf (this refers to those actually domiciledin the region). Cerulli Associates, in one of the most detailed studies ofasset management in the region yet compiled, put the figure at $57billion at the end of 2007, although that figure included Egypt with theGCC nations. There are around 500 funds in this category, almost half ofthem from Saudi Arabia.When one considers all mutual funds sold in the Gulf – that is, addingcross-border funds being sold from overseas into the Gulf – Cerulli estimatedthe figure at $80 billion to $100 billion. This figure is harder still topin down, since foreign managers are under no obligation to report suchIn some markets, independently managed discretionary accountsappear to be the dominant class, notably in Kuwait. According to dataprovided by the Central Bank of Kuwait on the country’s investmentcompanies, at the end of 2007 there was KD19.3 billion in portfolioinvestment and only KD3.265 billion in investment funds. “80% continuesto be managed on a managed account basis,” says M R Raghu,senior vice president of research at Kuwait Financial Centre, also knownas Markaz, an investment manager in Kuwait. Whatever the style, theoutlook is good. “Asset management growth is a function of two things:organic growth of the market and growth of the savings rate,” Raghusays. “Organic growth has averaged about 17% in the last five years,and growth in the savings rate about 19%. Adding the two, 35% growthshould be normal in asset management here.”In all parts of the market, the outlook is for impressive growth. The marketcapitalisation of GCC stock markets was about $900 billion at theend of 2007; that means the local mutual fund industry represents lessthan 7% of regional market capitalisation. In other developing markets,the figure is much higher – about 25% in Malaysia, for example. Themost optimistic groups, such as SHUAA, say the Gulf’s mutual fund industryshould be around $200 billion, and expect it to get there withinfive years. Others are more conservative, but still expect considerablegrowth: Cerulli reckons $100 billion by 2012, implying a compoundannual growth rate of 12.7% in assets under management. And all thishas been done without any culture of taxation.GUIDE TO ASSET MANAGEMENT IN THE GCC
Products offered by foreign managers, June2007 and products offered by 20092%1008060% 98%402015%86%Source: Cerulli AssociatesNote: Represented in terms of percentage of funds offered0Jun ’07In two years’ timeOffshore funds (domiciled outside the Middle East)Onshore funds (manufactured in the Middle East)Haissam Arabi, managing director of SHUAA Asset Management, expectsthe regional mutual fund industry to reach $200 billion in size inthe next few years, but expects the presence of international managersin the same markets to be bigger still, at $500 billion. “What we’ve seenin the last six months is a huge shift, with lots of money coming in fromet class, June 2007 foreigners,” he says. “Seventy per cent of my client base has shifted toicate source of AUM by asset allocation as of June 2007foreign, non-GCC investors.” He says SHUAA grew 113% last year inassets under management, almost 90% of it from new funds coming infrom overseas.Additionally, Gulf nations are well aware that oil is a finite resource andare keen to diversify away from their reliance on it. Financial servicesis seen by many as an area in which they can build presence and skill.This is visible from the rapidly expanding Dubai International FinancialCentre to Bahrain’s Financial Harbour towers and the rising skyline ofDoha in Qatar, where all three compete to be the region’s key financialcentre (see separate article). But there are few sharper demonstrationsof commitment than Saudi Arabia’s King Abdullah Economic City. Thisis envisaged as a hub for energy, finance and transport, and has beenreported as involving SAR100 billion of investment, with the creation ofone million jobs and a two million population.“The industry as we see it is still at a very early stage of development,”says Hameed, at Global Investment House in Kuwait. “Traditionally in ourpart of the world it has been more about asset gathering than asset management.But now we are at an inflexion point where we are seeing institutions,both regional and international, setting up asset managementoperations, with product manufacturing capabilities on the ground.”He adds: “We are traditionally exporters of capital, but now we’re seeinginternational funds investing in our market. It’s a very importantchange you are going to be seeing now we have reached a size inmarket capitalization and liquidity that attracts internationalinvestor attention.”Source of AUM by asset allocation as of June 2007100907.4% 7.5%8.5%2.3%2.0%5.1%2.0%804.5%23.6%25.3%7016.3%6017.3%%50403063.3%65.6%2049.4%100Source: Cerulli AssociatesMutual funds Discretionary accounts Institutional accountsEquity Bond Balanced Money market Others
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Asset management in the GCC - Euromoney

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