Euromoney GCC asset management guide: regional centres
1 June, 2008
Euromoney GCC asset management guide: product
1 June, 2008

This article is one of seven that makes up the Euromoney Guide to Asset Management in the GCC, distributed with Euromoney magazine in June 2008

“There is a huge opportunity in the Gulf, that’s pretty much widely recognised by everyone,” says William Wells at Schroders. “But how best to tackle it is another matter.” And the biggest question for foreign managers in working that out is distribution.

Deciding on a distribution strategy requires a clear understanding of the distinct client bases in the Gulf, and what those clients want.

For most foreign asset managers, the sovereign wealth funds are the main prize. “That’s currently the majority of the business we have, and most international asset managers would be the same,” says Wells. For many, it’s becoming a still bigger focus. “A good period of time is being spent on sovereign wealth funds, right now even more than in the past,” says a Middle East asset management head at a major European bank. “They’re acting as liquidity providers and are more aggressive than anyone else right now. The top five to 10 addresses in the Gulf make up the bulk of our business.” But what do these mega-clients want?

There are sovereign funds in four nations that really matter in the Gulf, and they differ in their approach and requirements. At the top of the pile is the Abu Dhabi Investment Authority (ADIA), the richest by far of them all and probably the largest institutional investor in the world, with perhaps as much as US$1 trillion under management (nobody knows for sure but a commonly cited figure is US$875 billion, quoted last year by both Deutsche Bank and Morgan Stanley). ADIA is known as being highly sophisticated, and rather aggressive relative to its peers, particularly in private equity; it takes an international approach to its staffing, rather than being dominated by UAE nationals. It has over the years been an early mover into areas like emerging markets and hedge funds, and has a highly sophisticated system for analysing and selecting potential managers. “They have more closely associated themselves with a US endowment like a Harvard than they would a central bank,” says Douglas Hansen-Luke at Robeco in Bahrain.

Then there’s the Kuwait Investment Authority, set up in 1953 and the oldest sovereign wealth fund in the region, for whom the most commonly quoted figure from analysts is US$200-250 billion under management (again, it has never been disclosed). The KIA is also considered among the more professional of the sovereign funds, with a very strong in-house training program and a record of employing the brightest people in the country. Until recently it had a track record for conservatism but is in the midst of implementing a much more market-savvy approach today (though one wonders how it has fared in this global environment). A review by an international consultant in August 2004, approved by KIA’s board the following June, has led to the fund establishing a target rate of return that would see it double its assets under management within 10 years. Among other things, this review brought about the creation of a separate division for alternative investments. The KIA is perhaps the institution most likely to outsource mandates to overseas managers; ADIA does so too but with reportedly a greater desire to handle as much as possible in-house.

Saudi Arabia differs in that it doesn’t have a single overall sovereign fund, but several institutions which between them amount to about US$300 billion under management and all invest in the name of the state (the two most prominent would be the General Organisation for Social Insurance and the Saudi Arabian Monetary Authority). These are considered much more conservative; some managers believe as much as 70% of the investments from some of these institutions are in US dollar fixed income, chiefly government paper.

And Qatar is the newer entrant, launched only in 2005 (reflecting the more recent arrival of wealth in Qatar, predicated mainly on the remarkably fortuitous discovery of the third largest natural gas reserves in the world in a country smaller than Connecticut). It may already have as much as US$70 billion under management already, and has become quite a celebrity in world markets already after its tilt for the British supermarket chain J Sainsbury, accentuated by high profile purchases of 23.5% of the London Stock Exchange.

So what do these groups want from their fund managers, and how should they be approached? Despite high profile stakes in big western institutions – KIA into BP, DaimlerChrysler, Merrill Lynch and ICBC; ADIA into Citibank – they are reasonably conservative groups. “Their current concern is the preservation of capital, particularly for the Saudis and Kuwaitis,” says Hansen-Luke. “But over the longer term they have a willingness to make less liquid investments such as private equity, because they view themselves as funding the next generation.”

The private equity theme turns up time and again. “We see more and more private equity-like behaviour,” says Scott Callander at Axa. “As they increase their assets under management they need to adopt additional non-correlated strategies to deploy their assets. They are mature and responsible investors and I think the potential barriers that are being presented by some of the foreign governments in the western world are a little over-reactive; I don’t think they’re going to want to be strong activist shareholders in the main.”

This shift does present something of a challenge for foreign managers: as sovereign direct investment ability grows, the need to outsource drops back a touch. “Many sovereign managers are looking to develop their own expertise in investment management,” says Nick Tolchard at Invesco. “It may be that they become more selective in terms of awarding external mandates. We’re already seeing more activity in terms of direct equity and private equity investment.”

One western asset manager says he sees a shift towards a core-satellite approach among the sovereigns. “It’s what you see throughout the world,” he says. “On the satellite side it could be small caps, US or global; sub asset classes like emerging market debt; alternatives is a big push; real estate, infrastructure; and the hedge fund side is very sophisticated, with single strategies and single managers, moving away from funds of funds.” The flip side of that is a move towards indexation on the core side, he says, which may squeeze out mainstream active managers a little.

Another thing they appear to want is expertise in Asia. “These funds from the emirates have been investing in Asia for a long time,” says Hansen-Luke. “And it’s not only their own analysis and consciousness of what’s going on; their advisers, the bigger investment banks and sell side brokers, are advising them that Asia is the right place to go.”

Some have been explicit about this ambition: the QIA wants to get to a situation where 40% of its assets are in Asia, and the KIA’s chairman has been quoted as saying 20% would be a suitable figure for that fund. Both figures are clearly well above the weighting Asia holds in, for example, MSCI indices. This reflects both the greater perceived opportunity in Asia, perhaps a familiarity with the risk profile of Asian assets, and growing trade links between the two regions (Malaysia’s central bank governor Dr Zeti Aziz has called it “the new silk road”).

Generally, sovereigns appear to be becoming more open with the world than they used to be, though none has gone so far as to disclose their assets under management. ADIA, extraordinarily for a place whose web site features only a picture of their building and an address, hired a PR group, Burson Marsteller, this year. “Two years ago this would have been regarded as a complete joke,” says one asset manager who has worked with ADIA. “They are looking at transparency, disclosing information to the public, how they talk to newspapers; they have understood that they can’t run away from it [public scrutiny] and if they can’t run away from it they want to do it properly.”

If there was ever a time when sovereign mandates could be secured by personal relationships, it is long gone. All sovereigns have highly sophisticated evaluation techniques for potential sub-advisory mandates; the key, if there is one, is consistent performance within an area that the sovereign needs exposure to (that can get to very specific levels – ADIA, for example, is believed to break down its debt exposure into discrete mandates for global government bonds, global investment grade credit, emerging markets, global inflation-index bonds and others).

Beyond the sovereigns comes a tier of institutional investors. “As economies are growing, more companies are getting their assets professionally managed,” says Wells; sometimes this is for their own earnings, and sometimes to support the beginnings of a corporate pension environment for employees.

Pension funds tend to be state run at this stage, rather than a corporate bloc. “There are a dozen pension funds in Oman, several in the UAE, there’s a pension fund fully established here in Qatar, and in Kuwait and Saudi there are large and long-established institutions,” says Callander.  “There’s a relatively mature pensions market for government and quasi-government employees in the region. The next growth area could be the corporates building out their pension provision, though today it’s a bit limited. Future legislation coming into place could see governments around the region seeking to enhance the existing social security framework with private sector solutions as well; I do forsee a trend in that direction.”

An example of this trend can be found in Bahrain, where the central bank is expected to announce a new program called the occupational savings scheme within the next few months. This involves a change in regulation to address savings in the region, helping companies to isolate employee savings from those companies’ broader operations. It works using existing trust laws in Bahrain. “The idea behind it is very simple,” says Abdul Rahman Al Baker, executive director of financial institutions supervision at the Central Bank of Bahrain. “It’s not fair to have your savings in your company, as part of your company’s books, because if something goes wrong that will significantly affect the savings of those staff.” Under the new scheme, “if the company goes bankrupt, the savings are going to be in a separate trust so are not affected.” Measures like these should boost the appeal of corporate pension schemes. “I think it will attract more asset managers to look at these kinds of schemes,” he says.

Halfway between institutions and high net worth comes the concept of the family office, tricky to pin down; some banks serve them through institutional channels, others through private client. They vary tremendously in their sophistication and outlook. At one end comes the family who has built a business over a couple of generations; where investment decisions will ultimately be made by the elder member of that family, perhaps a great-grandfather, who is chiefly interested in wealth preservation for the next generation and who is therefore conservative. The successful fund salesman here is performing something of the role of a financial advisor. At the other end, one could argue that Saudi Arabia’s Prince Alwaleed’s US$20 billion-plus holdings are a family office of sorts, though of course in terms of scale and sophistication he and his team are clearly a key institution. One European asset manager says family offices are “clearly seen as institutions both in terms of their needs and their sophistication.”

Then there’s high net worth. This group, like high net worth anywhere, varies greatly in sophistication and investment capability, but some general themes emerge. “It’s definitely eyes east rather than west,” says Wells. “They tend to be either very low risk or high risk; they’re looking for emerging markets exposure, the India, China and Asia stories, or are low risk and want cash plus something. There’s not much of a middle ground.”

Many international private banks have set up divisions in the region to cater for this marketplace, whether through top-end private client divisions or a broader wealth management approach. Merrill Lynch and ABN Amro, for example, are highly active in this field. However, this is a competitive field, and the competition is not just from peers in the region. Consider Saudi Arabia, where dozens of new entrants are now chasing the same limited number of (undeniably highly wealthy) individuals. They’re not just competing with each other, but with the offshore banks who 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 banking in Geneva and Zurich, to do business with entities in Riyadh rather than continuing their offshore relationships,” says one private banker. “Private clients do business in Geneva. Institutions are used to dealing with suitcase bankers flying in from London.  This has been going on since the first oil crisis in the 70s. You’ve got 30 years or more of people being accustomed to doing the most important part of their business offshore.”

Below that comes retail and mass affluent. Reaching this group are the local banks – many of whom have private banking or premium divisions of their own – and a handful of international groups with long track records (often a century or so) in the region, particularly HSBC, Standard Chartered and Citibank. Other international managers reaching retail typically won’t deal with them directly, but will go through these distribution networks. Many have not bothered even pitching product through these channels, instead focusing all their effort on institutions and the high net worth. In many cases, they have no choice: businesses registered in the DIFC, for example, can only sell product to people with over $1 million in investible assets, although there is talk about halving this limit.

There is some evidence of foreign managers deciding to take the jump to retail, though. Axa Investment Management, for example, has reached around US$17 billion under management in the Middle East, most of it institutional, and has decided to take the next step. A new head of distribution, James Cahill, joins on June 1 to expand Axa’s strategy along the lines of its European model, by catering for global private banks; in the Middle East that will mean going through distributors such as UBS, BNP and HSBC, as well as local offices. “It’s a natural extension of the business strategy,” says Scott Callander, director, Middle East at Axa Investment Management.

Why go there at all? “The primary reason for developing the distributor strategy 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 and local markets.”

With a total local mutual fund industry of only around US$57 billion (see opening chapter) relative to a more than US$900 billion regional market capitalisation, it is clear that the retail sector is under-penetrated by fund sales, and it should represent a big opportunity for those prepared to make the effort to serve it.

For international funds who do sell through the established distribution channels to retail, they report varied experience of fees. “In fee structures, global relationships tend to have global fee structures and local relationships tend to be more locally derived,” says Tolchard. “Organisations are becoming more aware of fees in terms of what needs to be competitive in the marketplace, though we’ve yet to see the transparency of fee structures that we see elsewhere in the world. The region hasn’t yet been put under the pricing pressure that more developed markets have.”

The Gulf’s unique demographics are sometimes reflected in some distinct marketing strategies. The clearest example of this is the huge South Asian population in the United Arab Emirates, believed to represent as much as 70% of the working population of Dubai. Several foreign banks, among them Citibank and ABN Amro, have set up dedicated non-resident Indian businesses in order to accommodate that part of society. Others specialise in expatriates generally.

For local banks, the model is almost universally the same: they have an asset management division (sometimes hived off into a separate legal entity, but still under the same ownership) which produces product for distribution through the same bank’s branch network. They is some selling of foreign managers’ products through these networks, often through white labelling, but there is almost no acceptance of the idea that a bank would distribute another local manager’s product, which is seen 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 development of 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 to 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, in which Franklin Templeton owns a minority stake, is a rare example of an independent, involved in manufacturing but doing no distribution of its own, and therefore selling to all segments of the market. There aren’t many others. “For the industry to evolve it needs to start competing,” says Bindal.

Local houses are generally resistant to change. “We structure our own funds, and for distribution we use our branch network and our institutional relationships,” says Joel D’Souza at Commercial Bank of Kuwait. “We will not distribute through our retail channel someone else’s products that 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 new licensees without an established branch network presents them with the challenge of how to distribute their product. If they hope to reach mass affluent or retail investors, the only realistic way to do so is to strike distribution deals with the banks who have the branches – unheard of today. “We’re already hearing lots of talk about third party distribution in the market but we haven’t seen it implemented,” says Sami Abdo, managing director at NCB Capital, the securities arm of National Commercial Bank.

It won’t come easy, though. “It becomes very difficult to access distribution networks because you are dealing with your competition, the long-established commercial banks, to a certain extent,” says Tarek Sakka at Ajeej Capital. “It’s a challenging situation at this stage for those who target retail distribution as there are no independent distribution channels. White labelling is one approach investment management companies would seek.” Ajeej is itself another example of an independent fund manager appearing in the Gulf; there are likely to be more in future if they can find the people.

There are the first signs of investment platforms arriving in force in the Gulf, chiefly through insurers. Groups like Zurich, Friends Provident, MFS, Alico, Omnia and Skandia offer insurance products linked to investment platforms. “Every month when I look at a particular platform, I see more and more of my distributors signing up for it and putting tickets through it,” says Harshendu Bindal at Franklin Templeton in Dubai. “If there were two or three using it a year ago, there are 15 to 20 now.” He adds: “Lots of companies are finding the easiest way to get traction is to have these unit-linked insurance plans on their platforms. That’s the easiest sell.”

Invesco, which services sovereigns, institutional and retail, has “been successful in getting on a number of panels of global banks and regional banks who are starting to engage in open architecture,” according to Tolchard. His take on open architecture in the region is that “we are starting to see it appearing as infrastructure: local banks are starting to offer those products, but I’m not sure they’ve taken off yet. They’re recruiting staff, relationship managers to sell their propositions to the marketplace, and it’s a fairly drawn our process before we end up in a situation where they all have investment platforms.”

Platforms have made such headway elsewhere in the world because of the fee savings they represents for customers. “For a person to sell a fund and 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 commitment in 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 growing and settling white collar workforce in the Gulf.

An interesting development took place in April when Ahli United Bank, of Bahrain, and Legal & General Group signed a memorandum of understanding to set up a new regional life insurance joint venture headquartered in Bahrain. It will “initially offer a range of takaful [Islamic insurance] life and health insurance products and pension plans to retail and corporate customers in the Gulf region,” according to Ahli United. The trend demonstrates both the increasing influence of Islamic finance in the region, and the role that insurance product can play as an agent for development of asset management in the Gulf.

Later that month, Prudential Asset Management said it had received regulatory approval to set up a joint venture in Saudi Arabia with Bank Al Jazira, to be called Prudential Jazira Asset Management. In addition to selling funds, the venture will launch an Islamic insurance business, which will include Bank Al Jazira’s existing takaful business. As an insurer, Prudential has been expanding in the Middle East for two years, setting up in Dubai in 2006.

Haissam Arabi, managing director of SHUAA Asset Management, describes the sale 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 regional insurance players to capture that opportunity. Big names like Old Mutual come in with the local banks as distribution platforms to wrap things around their policies and their investment schemes. But in terms of opening the door for 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 the benefits of investing with them in the first place. “The number of mutual funds on offer, and demand for them, is on the rise, but retail investors here still prefer to be in equities directly rather than investing in mutual funds,” says D’Souza at Commercial Bank of Kuwait. Partly in recognition of this, CBK recently took a majority stake in a brokerage in Kuwait, Union Securities Brokerage.

It’s gradually changing, though. “We’ve seen some positive developments lately,” says Tarek Sakka at Ajeej. “More investors are comfortable moving to institutions to manage their money instead of managing it themselves, especially after the 2006 market crash,” he says. In Saudi in particular, it is an uphill struggle because many IPOs are geared towards the mass market: the government typically sets a minimum allocation per subscriber, meaning that if a deal is oversubscribed (and they always are these days) then it’s the small investors who benefit, while institutions do not get their pro rata portion. This incentivises retail investors to go into IPOs, rather than to have their money managed professionally. But all things change in time. “It’s not to the level we would like to see,” says Sakka, “but it’s in the right direction.”


Chris Wright
Chris Wright
Chris is a journalist specialising in business and financial journalism across Asia, Australia and the Middle East. He is Asia editor for Euromoney magazine and has written for publications including the Financial Times, Institutional Investor, Forbes, Asiamoney, the Australian Financial Review, Discovery Channel Magazine, Qantas: The Australian Way and BRW. He is the author of No More Worlds to Conquer, published by HarperCollins.

Leave a Reply

Your email address will not be published. Required fields are marked *