Asset management in the GCC - Euromoney

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On the ground or in the air?Institutions accustomed to doing business with the Gulf from afar are now facing up to the need tohave a presence in the region and deciding on what scale that presence should beNobody doubts the opportunity for foreign managers in the Gulf. Buthow to play it?The key question for most foreign managers is representation on theground. Can a successful business be run out of London or another financialcentre, with representatives frequently flying in, or must a permanentpresence be established on the ground? And if so, what should thatpresence be – just sales and relationship management, or analysis andmanufacturing?Historically, many institutions have handled the region from afar, but arestarting to move resources in. UBS, for example, has had representationin the Gulf for 30 years (starting in Abu Dhabi) but on the asset managementside has only recently based somebody permanently within theDubai International Financial Centre.“Going forward the region will need people on the ground,” says onewestern asset manager. “We can’t continue covering it just from Londonor New York or Zurich.”Indeed, the rosters of the Dubai International Financial Centre and, to alesser extent, the Qatar Financial Centre, are filled with the names of foreignbanks, fund managers and insurers that in many cases are buildinga physical presence in the region for the first time.to see sell-side analysts here from the investment banks: they see thepotential of foreign investors investing in local markets, and whoeveryou are, you want to make sure it’s you’re research they’re using.”One European asset manager adds: “Originally most people, including us,put sales staff on the ground. But it’s a natural progression to see investmentstaff on the ground as well.”Those on the ground feel the debate has moved on from “should you beon the ground” to “what exactly should you put on the ground.” DanielSmaller at Algebra Capital says: “Everyone now has to decide, do youmake Dubai a centre for manufacturing? We think you should. When wecreated Algebra we felt that our competition in many ways hadn’t arrivedyet.” He says that his firm’s tie-up with Franklin Templeton was donein part because “we wanted to prepare ourselves for those asset managementgroups who were going to view Dubai as a key financial centreand have manufacturing based there. If the competition continues tomanage Middle Eastern funds out of London or New York or someplaceelse, we feel that being on the ground with nine analysts is quite enoughto differentiate ourselves.”The Franklin Templeton deal was a landmark, and closely watched. TheUS house took a 25% stake in Algebra Capital in a deal announced inSeptember. This was an example of a multinational deciding it neededBut what are they putting there? Chiefly, it’s sales people. The priority hasbeen to find ways to market existing product into the Middle East, and Survey respondents’ views on their presence in theto supplement the existing sales teams from London and Geneva with Middle East, 2007Survey respondents' views on their presence in the Middle East, 2007people who are permanently based there.If you have an office in the Middle If East, you do have you expect an office to boost in your the resources Middle in East, the next do two you years? expect to boost yourSource: Cerulli Associates resources in the next two years?This approach alone is already potent – not just to sell overseas productbut potentially to sell GCC-focused funds as well. Haissam Arabi, managingdirector of SHUAA Asset Management in Dubai, expects foreign managerstargeting the region, without necessarily being based in it, to be amajor threat. “These groups will be able to take the lion’s share of assetgathering,” he says. “The Goldmans and Merrill Lynches with their ownMENA funds managed out of London in New York don’t necessarily havethe same competitive advantage of being positioned on the ground likewe do, but they have geographic reach.”In Arabi’s view, this doesn’t necessarily require them to build productteams located in the Gulf. “As for setting up on the ground with analysts, Idoubt that will be the case,” he says.But many foreign funds do believe they have to be in the Gulf to take fulladvantage, and not just with sales staff. Take Schroders: after opening itsDIFC office about a year ago, it initially staffed it with sales people, but isunderstood to be considering bringing other professionals to join themnow. “You are seeing more people sending down or employing analystshere,” says William Wells at Schroders in Dubai. “You’re certainly goingSource: Cerulli AssociatesNo13%Yes87%GUIDE TO ASSET MANAGEMENT IN THE GCC
manufacturing expertise in the Middle East, but opting to get it bybuying a stake in a local manager rather than building organically.The two groups are in the early stages of working together but it hascertainly helped Algebra: it has already topped $1 billion under management.“To go from zero to a billion in six months for a brand newfirm that’s beginning to find its feet, you can see how much tractionit has,” says Harshendu Bindal at Franklin Templeton. Partly, it reflectsthe fact that there are very few independents. “When you look to theMENA market and say: who can manage my money, there are onlytwo or three,” he says. The two groups recently launched a Middle Eastinvestment product in South Korea and many more are expected toroll out in coming months.terms of where the opportunity is,” he says. “The Saudi market is notyet open to foreign investors; as it opens, the amount of inflows willbe very substantial. This is by far the best economic cycle ever in theregion, and it’s all happening while valuations are in some cases notmuch higher than their lowest ever position, in the worst economiccycle. We believe there’s tremendous upside potential, both from theinvestment point of view and as a business.”Indeed, Saudi Arabia is the most natural place for independents tostart up because of the huge volume of new licences that have hit themarket for enterprises that are not affiliated with the country’s majorbanks (which are also the distribution network for funds). More businesseslike Ajeej are likely to follow.For Franklin Templeton, it gets around any challenge of having to buildlocal investment capability. “We view them almost like a manufacturerfor us in this part of the world,” he says. “We get them to sub-adviseany mandate that’s MENA-centric.”Will others follow? Well, they’d be likely to if there was a choice ofpurchases. “There’s always a possibility, but there’s a finite supply oflocal asset managers with critical mass,” says Nick Tolchard at Invesco.“We’re monitoring the players in that space and we certainly keep oureyes open. But I would have said we were in more of an organic phaseourselves.”Smaller thinks it’s already harder for new independents to set up anyway.“There may be a couple of others that pop up and want to startan asset management company, and who for some reason aren’t affiliatedwith a bank, but it’s going to get more and more difficult as thecompetition for people becomes tighter,” says Smaller. “There aren’tmany fund managers with a lot of experience. A lot of the marketsthemselves only started in the last decade.”There are, though, boutiques beginning to spring up. An example isAjeej Capital, formed by two former investors from the Olayan Groupin Saudi Arabia. “We had been investing money in the Middle Eastand GCC region for over 10 years, and started to recognize there wasa significant gap for an independent investment manager in theregion,” says Tarek Sakka, the co-founder and CEO, who also styles hisbusiness as an alternative long-biased fund which follows a convictionapproach. “Basically we believe we are only scratching the surface inThe decision on whether or not to go local will involve calculationson asset and client number thresholds. There is no hard and fastnumber here: some institutions have tens of billions of dollars ofmandates from Gulf institutions without having a major presence onthe ground, others have much less but have committed substantialresources to build further. From a distribution point of view, clearlyany foreign-based business hoping to penetrate as far as retailor mass affluent needs to be in the Gulf in force, building branchnetworks or establishing relationships with existing distributors whocan reach them. There is an increasing acceptance that high-networthclients and institutions should also be serviced by a presenceon the ground, but so long as some GCC clients prefer to keep theirmoney offshore there will still be plenty of scope for advisors basedin Zurich or London to thrive.Foreign entrants hoping to build local funds also need to considerwhat are accessible markets. It is very challenging, for example, topurchase Saudi Arabian securities; even many regional GCC funds cannotdo this, although they can buy Saudi mutual funds, which is whatmany do. Only those with local licences in Saudi Arabia can participatein that market. Other markets are easier, but even in Kuwait, perhapsthe deepest and most sophisticated stock market in the region, thereare foreign ownership caps which can impede an investment strategy.Human resources is a big issue for everyone. “Every distributor,whether a private or consumer bank or a direct channel, or agenciesattached to banks... they’re all hiring,” says Bindal. “They’re trying to getfeet on the street and roll out plans.”Distribution trends 2007100%2% 3%7% 7%80%24% 20%60%27%20%40%34%24%20%17% 17%0%Jun-07Representation in 2 years timeDirect Through local banks (excluding private banks) Through foreign banks (excluding private banks)Private banks Through independent financial advisors OthersSource: Cerulli Associates
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Asset management in the GCC - Euromoney

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