Comparing investment funds: MENA region versus the rest

Investment funds are the cornerstone of global finance, offering investors opportunities to grow their wealth through diversified portfolios.

While MENA funds benefit from strong government support and sector-specific growth opportunities but can be subject to higher geopolitical risks, international funds provide extensive diversification and stability, backed by well-established regulatory frameworks.

The MENA region has become an attractive destination for investment due to its vibrant economic landscape. Key markets such as the UAE, Saudi Arabia, and Qatar are leading the charge, particularly in sectors like energy, real estate, and technology.

A distinctive aspect of MENA investment funds is the prevalence of Sharia-compliant funds, which adhere to Islamic law and appeal to Muslim investors. In addition, government-backed initiatives and economic diversification plans, like Saudi Arabia’s Vision 2030, are driving significant growth and innovation in the region.

Internationally, established markets like the US, UK, and Japan offer a wide range of investment opportunities. These markets benefit from advanced financial infrastructures and extensive diversification options across various sectors, including technology, healthcare, and consumer goods.

Emerging markets such as China, India, and Brazil also present compelling investment opportunities with high growth potential. A recent UNCTAD report shows that global FDI hit $1.37tn in 2023, with steady investments made in major economies such as the US, UK, and Japan.

The primary advantage of international investment funds is their ability to provide broad geographical and sectoral diversification, reducing the risk associated with investing in a single region or industry.

Performance and risk analysis

MENA funds have shown robust performance, particularly in the energy sector, driven by the region’s abundant natural resources. A recent report by KPMG highlights that MENA funds, particularly in the energy sector, have shown strong performance, with Saudi Arabia’s energy sector achieving a high financial performance Index score of 98.24, driven by demand for energy services. However, MENA funds can be subject to higher volatility due to geopolitical uncertainties.

International funds, on the other hand, offer more stable returns due to diversified portfolios spread across multiple regions and sectors. Nonetheless, they are not immune to economic fluctuations, political changes, and currency risks.

Regulatory environment and investor protection

MENA countries have been improving their regulatory frameworks to attract foreign investment, ensuring greater transparency and investor protection. However, regulatory standards can vary significantly across the region.

International markets, especially those in developed countries, typically have well-established regulatory bodies that provide robust investor protection and ensure market integrity. This difference can impact fund performance, and the level of risk investors are willing to accept.

Investor preferences and behaviour

In the MENA region, there is a strong preference for Sharia-compliant funds and investments aligned with regional economic goals.

Data from S&P Global suggests that the preference for Sharia-compliant funds and investments aligned with regional economic goals is driven by cultural and religious considerations, with Islamic finance assets expected to reach $3.69tn by 2024, up from $2.88tn in 2019. ​

Conversely, international investors often seek diversification and exposure to high-growth sectors in developed and emerging markets. Understanding these preferences is crucial for fund managers looking to attract and retain investors from different parts of the world.

Technological innovation and sustainability initiatives

Countries like the UAE are investing heavily in renewable energy projects, smart cities, and fintech, aiming to reduce dependency on oil and foster sustainable economic growth. These initiatives are attracting environmentally conscious investors and those looking to capitalise on the region’s technological advancements.

Internationally, investment funds are also prioritising ESG (environmental, social, and governance) criteria, with a growing number of funds dedicated to green technology, sustainable agriculture, and clean energy.

This global shift towards sustainability is reshaping the investment landscape, offering new opportunities for growth and impact.

Role of sovereign wealth funds

Saudi Arabia and the UAE have established large sovereign wealth funds (SWFs), such as the Public Investment Fund (PIF) and the Abu Dhabi Investment Authority (ADIA), which are influential in driving economic development and diversification.

These funds invest both domestically and internationally, providing a bridge between MENA and global investment opportunities.

With $10.2bn in investments made in the first half of 2024, the PIF topped the list of state-owned investors worldwide according to a report by the consultancy Global SWF.

Abu Dhabi-based funds, including ADIA, ADQ and Mubadala, were also top GCC investors, collectively investing $38.2bn across 58 deals, highlighting strong regional investment activity.

In contrast, international SWFs, such as those from Norway and China, are known for their diversified global portfolios, investing in a wide range of sectors and regions to optimise returns and manage risks.

An opportune time to establish investment funds in MENA

While both MENA and international investment funds offer unique opportunities, the importance of operating within a regulated framework cannot be overstated. For private sector players in the MENA region, there is a significant advantage in not only participating in existing regulated funds but also in establishing their own investment funds within these frameworks.

Through creating their regulated investment funds, private sector companies can tailor their portfolios to align with their strategic goals, whether that be focusing on high-growth sectors like technology, mega real estate development and renewable energy or ensuring compliance with Sharia principles.

This approach allows businesses to leverage their industry expertise, enhance their market influence, and attract both local and international investors who value transparency and governance.

Operating within regulated structures not only mitigates risks but also builds investor confidence, which is crucial for sustainable growth.

As the MENA region continues to evolve and diversify, the private sector has a unique opportunity to drive this evolution by establishing its funds. This will enable them to capitalise on regional opportunities while contributing to the stability and maturation of the financial markets.

By taking this route, they can secure a stronger position in the global investment landscape and foster long-term economic growth.

The writer is the senior executive officer at Ento Capital.