Gulf fund houses eye foreign opportunities

Asset managers in the Middle East and North Africa are mulling expanding both regionally and further afield, according to a recent survey.
Gulf fund houses eye foreign opportunities

The Middle East and North Africa (Mena) region has a population of 380 million and a combined GDP of more than $2 trillion – and yet total funds under management stand at a mere $55.6 billion, according to research house Zawya and publication Mena Fund Manager (Mena FM).

Admittedly, it comprises emerging – in some cases frontier – markets with relatively unsophisticated retail investor bases, but it is also home to some of the biggest and most advanced sovereign wealth funds in the world.

Still, asset managers based in the region are looking abroad – as well as domestically – for business growth, according to a new report* from the Qatar Financial Centre Authority conducted on its behalf by Mena FM.

Some 70% of Mena-based firms surveyed for the study talked about establishing another regional hub. The United Arab Emirates (UAE, which includes Abu Dhabi and Dubai) proved the most popular choice (cited by 40%), followed by Saudi Arabia (30%) and Qatar (20%).

Many also spoke of setting up further afield, with London, New York and Singapore the most cited locations. Some mentioned renewed interest from European and US institutional investors, with many talking about a significant equities mandate expected from Norway's sovereign wealth fund, Norges Bank Investment Management.

And the Far East is attracting some firms from Gulf Cooperation Council (GCC) countries, with Kuwait-based Asiya having recently set up an office in Hong Kong, as reported this week by AsianInvestor.

It may come as an encouragement to regional fund houses that they say GCC sovereign funds are increasing their focus on domestic and emerging markets to capture higher yields. (Currently 68% of GCC SWFs' direct investments, for example, are in developed markets.)

And those state funds with a specific mandate to invest locally are doing so into domestic infrastructure, for example, to help stabilise economies and ease political strife.

However, the region's SWFs tend to have large, experienced investment teams and so do a substantial portion of their portfolio management in-house.

Other potentially tappable assets lie in the pensions segment, both public and private, although both – especially private schemes – are at very early stages of development. But companies in the region have begun to set up private pension schemes more like those in developed markets, a development that is likely to gain increased momentum once governments support it with regulation.

Moreover, respondents were optimistic about the prospect of tapping more of the wealth of the region's rich families, which have traditionally shied away from funds and blind pools of assets, preferring direct investments. Asset managers surveyed described a thaw in the willingness of wealthy families to invest in third-party funds.

Meanwhile, there are other reasons for firms to want to diversify beyond the Mena region.

The ongoing effect of the Arab Spring remains a major concern, with 38% (the largest response) saying political unrest could have the biggest negative impact on local markets in 2013. That was closely followed by volatile oil prices, with 35%, and a big drop to 'lack of liquidity in the markets' cited by 16% of respondents.

This is not hugely surprising, given the major effect regional turmoil has had on businesses. Asked how the Arab Spring has affected respondents' business, the largest number (54%) said they have been forced to review risk management procedures, 35% said they have struggled to raise funds and 22% said they have lost assets.

That said, 40% said the situation has given them strategy ideas, including the ability to take advantage of new regulation, and 15% said they have been able to trade the volatility.

When asked which factors could have the largest positive impact on the Mena markets in 2013, 16% said 'resolution of the political situation in the Middle East', the third most popular response. Top came 'increased spending of local governments' (42%), followed by a global rally in equities (24%).

Turning to asset classes, equities were expected to perform best in 2013 (42% of respondents), followed by property (31%), commodities (20%) and fixed income (7%).

Accordingly, 47.4% of firms plan to launch equity strategies this year. Perhaps more surprisingly, the third most popular asset class for planning new products was fixed income (39.5%). One reason cited for this was that public and private debt is becoming a more mainstream investment in Mena – plus a rise in regional debt issuance is expected in 2013.

In terms of country picks in the region, Saudi Arabia was the most popular, with 74% saying they would favour that stock market the most, followed by the UAE (70%) and Qatar (68%).

* Mena Asset Management Barometer is based on 45 in-depth interviews with senior staff at banks, asset managers, sovereign wealth funds and pension funds across Mena, specifically in the GCC, Egypt and Morocco. This is the first time it has been published, and it is expected to be an annual study.

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