When it comes to investment management in the Middle East, the sovereign wealth funds of the Gulf Arab oil exporters grab the spotlight. After all, the funds of the six Gulf Cooperation Council (GCC) states Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates amount to a heady $1.8 trillion.
Yet theres more to asset management in the region than just these sovereign players. Institutional and retail asset managers have been making strides of their own. Gulf oil wealth has filled private as well as public coffers, driving up demand for investment expertise. As a result, the number of asset managers in the Middle East and North Africa has risen roughly fourfold over the past decade, to 137, according to a survey sponsored in 2012 by companies including audit firm PricewaterhouseCoopers.
In recognition of this growth, Institutional Investor presents its first-ever ranking of the regions leading fund managers, the Middle East 20. NCB Capital, the asset management arm of Saudi Arabias National Commercial Bank, tops the list, with $10.9 billion in assets as of June 30, followed closely by Bahrains Investcorp Bank, with $10.5 billion. The full list, which manages a combined $63.7 billion, can be seen on the opposite page.
Those amounts are very modest by the standards of what PricewaterhouseCoopers estimates to be a $25 trillion global asset management industry, but regional executives are optimistic about the outlook. Buoyant household incomes are fostering demand for investment products. Fund managers are meeting that demand with increasingly sophisticated practices and products, including Islamic funds. And regional markets are poised for further growth, particularly with governments signaling prospects of regulatory changes that could open further avenues of opportunity.
Optimism is running especially high in equities, which account for about a quarter of the industrys assets. In May 2014 Qatar and the UAE will gain elevation to the status of emerging markets from frontier markets by MSCI, the New Yorkbased outfit whose stock indexes are tracked by investors with some $7 trillion in assets. That reclassification could draw an influx of foreign investors to those two markets, with perhaps some halo effect to surrounding markets, analysts and executives say.
Furthermore, Gulf stock markets have made strong gains this year. Dubais market, recovering from the bursting of the emirates property bubble four years ago and subsequent debt crisis, has doubled year to date, as of December 11, while for the same period bourses in Saudi Arabia and Kuwait were up 23 percent and 31 percent, respectively.
The industry here is still very young, says Bader al-Ghanim, vice president and head of GCC asset management at Kuwaits Global Investment House, which sits at No. 10 in the Middle East 20. Before 2001 nobody in the region was talking about stock exchanges. Regulators are also tightening rules to prevent the speculative trading and manipulation that have prevailed in some markets, he adds: This has changed significantly, but we are still lagging the international markets big time.
For the asset managers, the challenges ahead are considerable. Those include repercussions from the Arab Spring uprisings and a fragmented regional market in which regulatory hurdles hamper cross-border fund distribution.
Several firms did not emerge unscathed from the political turmoil that started in Tunisia in December 2010 and swept across the Arab world.
Global Investment House shut its asset management business in Egypt and canceled its Egyptian equities fund in 2011, when massive protests brought down former president Hosni Mubarak, al-Ghanim says. The asset management arms of firms such as EFG-Hermes, Egypts largest investment bank, and First Investor, a Qatar-based investment bank, say they struggled to raise assets amid investor uncertainty over the Arab Spring. Assets at EFG-Hermes, which occupies eighth place in the ranking, have plunged by about one third since the start of 2011.
It has caused our business to not grow to its full potential, says Amr Seif, the Dubai-based head of asset management at EFG-Hermes and a former fund manager at J.P. Morgan Asset Management in London. Nevertheless, he says that Egypt has had tough times before, and we managed to use our judgment as local people to manage expectations and risk.
But for others, like Dubai-based Abraaj Group, the largest private equity firm in the Middle East, the Arab Spring had little impact on their investment appetite, even in countries most affected by the unrest. Abraaj, which stands in third place in the ranking, has made two deals in Tunisia, investing in baked goods maker Moulin dOr in November 2012 and in Plastic Electromechanic Co., a maker of medical and electrical equipment, in July 2013. In August 2012 an Egyptian firm in Abraajs portfolio merged with another company to form Integrated Diagnostics Holdings, the top medical laboratories business in the Middle East.
Ahmed Badreldin, head of Abraajs Middle East and North Africa business, says investing in Arab Spring countries has become easier because there is less competition and capital is more scarce, although he acknowledges that exits have become more challenging. We are actively looking at deploying more capital in places like Egypt and Tunisia given how attractive the valuations there are, he says. Still, the Middle East accounts for only a fifth of Abraajs global investments.
For some managers, especially those in the GCC, national boundaries remain the biggest hurdles to growth. The region lacks unified rules on fund distribution and marketing, making it difficult to operate across borders. Local banks dominate the distribution and management of assets in many countries, most notably Saudi Arabia.
The challenge is the ability to access distribution in what is a fragmented market, says Eric Swats, head of asset management at EIIB-Rasmala. The Dubai-based investment bank is redomiciling four of its funds from the Cayman Islands to Luxembourg to enhance its distribution efforts. We wanted to establish the funds in a jurisdiction that is widely recognized and accepted amongst many regulators, Swats says. This will help broaden our distribution opportunities not only across the GCC but also in other markets.
Sluggish economic growth across the region and a paucity of new equity and debt offerings may also curb growth prospects for fund managers. According to the International Monetary Fund, economic growth in the Middle East, North Africa, Afghanistan and Pakistan will rebound only modestly, to 3.6 percent in 2014 from 2.3 percent in 2013. Thats well below the projected 5.1 percent average growth rate for emerging and developing nations in 2014.
Despite these challenges, asset management executives say they expect to attract more investors as regional players and regulators become more professional.
Before 2008 there was no client risk profiling; transparency by companies was not looked at, says Global Investment Houses al-Ghanim. Now, because of the change in the way asset managers do business, companies have become more transparent.
First Investor, the investment banking arm of Qatars Barwa Bank, has become stricter when taking on new clients, checking their identities and examining the sources of their funds, says Robert Pramberger, the firms acting head of asset management. Now you really have to spend time to find out about your client, he says. You cannot, for example, accept cash. And money coming from outside the country is checked in more detail.
Regulators are also making significant efforts to bolster governance and investor protection. In 2013 Saudi Arabia, the GCCs biggest economy, tapped a World Bank executive, Mohammed Alsheikh, as head of the Capital Market Authority. Under his watch, the stock market regulator issued new rules governing credit rating agencies and adopted a number of measures such as limiting price fluctuations of new stock offerings on the first day of trading and requiring companies to promptly report significant developments designed to reduce the potential for market manipulation and increase transparency. The regulatory moves, combined with a government decision to shift the countrys weekend to Friday and Saturday from Thursday and Friday previously, fueled expectations that the Saudis will soon open the equity market to foreign investors. Nonresident foreigners currently can access the market only through share-swap transactions and exchange-traded funds.
In 2012 the UAE revamped its stock ownership rules, obligating buyers to inform the market if they intend to purchase 30 percent or more of a listed company. In April 2013 the authorities eased those rules in a bid to make it easier for foreign fund managers to sell to institutions while leaving stricter regulations in place for managers catering to retail investors.
Qatar in 2012 said the central bank will become its single financial regulator. According to the IMF, Qatar also plans to create a domestic debt rating agency within a year, an apparent bid to develop its government bond market to help fund major infrastructure projects ahead of the 2022 World Cup.
In a potential boost for Islamic finance in the region, in May the Egyptian parliament approved a law allowing the country to sell a sukuk, or Islamic bond. Although the plan has been put on hold following the armys ouster of the Muslim Brotherhoodbacked government in July, the new head of the Egyptian Financial Supervisory Authority has suggested it will still go ahead.
Indeed, the regions asset managers are counting on Islamic products as a major growth driver, with good reason. Islamic investment funds are asset-backed, and hence there is a level of comfort in them that even the international investment arena is seeing, says Bhavin Shah, a financial services expert at PricewaterhouseCoopers in Dubai.
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