Regulations, Expectations Stymie Funds In Middle East

Across much of the Middle East, economic growth is strong and financial markets are picking up. But there is surprisingly little cheer in the region’s asset management industry, which faces continued pressure to cut costs and consolidate.

Many fund managers are still struggling with small pools of assets, sluggish inflows of fresh money and high operating costs. The total number of funds being launched has shrunk even as stock markets have risen.

These difficulties are being felt well beyond the confines of the industry; they are a stumbling block in the Gulf’s efforts to create, in cities such as Dubai and Doha, international financial centres which can compete with those in London, Singapore and Hong Kong.

“Going forward, consolidation is going to be a key theme for the sector. There are a lot of discussions happening in that regard,” said Nadi Bargouti, head of asset management at Dubai-based Shuaa Capital.

“Given the situation that the industry is in, fund management firms would need to consolidate to reach the optimum scale and size and keep control of costs.”

CONTRADICTION

In most parts of the world, expanding economies, increasing disposable income and climbing asset prices would be enough to galvanise the asset management industry.

Those conditions are all in place in the Gulf, where most of the Middle East’s fund managers are based. More than two years of high oil prices have left government’s sovereign wealth funds and private savers flush with cash.

Real estate and equity markets have begun to shake off the global financial crisis; Dubai’s stock market is up 22 per cent so far this year, after a 20 per cent gain last year.

But the total number of new funds launched in the Middle East and North Africa (MENA) during the first quarter of 2013 dropped to 14, from 24 in the same period last year, according to data from Zawya, a Thomson Reuters company.

Zawya estimated 46 funds focusing on investments in the region had been retired in the last 12 months.

Of $1.83 trillion of banking sector assets in the wealthy Gulf oil exporters, the Levant and Egypt, only about $41 billion have been placed in funds and $177 billion are in discretionary mandates awarded to fund managers by single investors. The rest are sitting as deposits in banks, according to Dubai-based Rasmala Investment Bank.

That means about 12 per cent of assets in the region are managed; globally, the level is estimated by analysts at above 20 per cent.

Average fund sizes in the Middle East are well below $100 million, which makes it difficult to operate cost-effectively.

“Asset management is a scale business. Without scale, fixed overhead costs eat into fund returns, making it very difficult to compete with the large international asset managers,” said Anwar Abu Sbaitan, Rasmala’s chief executive.

REGULATION

Fund managers say culture is behind some of their problems. Traditionally, many people in the Middle East have viewed real estate as the safest store of value; they are still unfamiliar with, even suspicious of financial products more complex than bank accounts.

In the wealthy, consumer-oriented societies of the Gulf, other investors demand returns which far exceed the realities of the markets, fund managers complain.

“Investors still have huge return expectations. Beating the benchmark is not enough for them. Many actually feel that they can perform better than fund managers by investing directly into stocks,” said Shuaa’s Bargouti.

An example of this approach is the Saudi Arabian stock market, where at least two-thirds of the trading is estimated to be done by individuals, many of them investing for the short term, rather than institutions.

The main difficulty, however, is with regulations; multiple rules across different national jurisdictions, and inconsistent enforcement, make it expensive and time-consuming for fund managers to operate.

“The biggest reason why the asset management business has not developed within the region is a lack of unified regulation across the MENA markets,” said Nisarg Trivedi, head of UAE sales and business development at Baring Asset Management, which runs a MENA-focused fund managing $10.2 million.

“There is still a lot of uncertainty in terms of what one can do and what they can’t in various markets, and that keeps most of the asset managers away from developing their business like our Asian peers.”

Governments are not unaware of the problems; authorities in countries including the United Arab Emirates and Kuwait are working to streamline regulation and protect investor rights. But there have been bureaucratic and administrative delays.

Fund managers see some glimmers of light on the horizon. One is the growth of the Gulf’s bond market, particularly for Islamic bonds or sukuk.

“If you look at the last two years, the local bond market has been in the limelight. A lot of MENA fixed income funds and sukuk funds have managed to raise a good amount of money, and at the same time deliver good returns to clients,” said Trivedi.

Another boost to the asset management industry could come from the eventual opening of the Saudi stock market, the Arab world’s biggest, to direct investment by foreign institutions. Saudi authorities have been preparing for the opening for several years; it is not clear when it will happen, but some managers think it could come this year.

More generally, some fund managers see an increasing willingness by state-backed funds in the Gulf to invest their money within the region rather than overseas – partly because of unstable markets abroad, and partly because of political pressure to use their resources to raise the living standards of their own citizens.

“We have seen allocations by MENA investors in to the region increase…and this is recent, perhaps over the last year or so,” said Amin Al Kholy, head of asset management at Arqaam Capital in Dubai.

“Sovereign funds, endowments and pension funds are all increasing allocations to investments in the region,” to levels higher than were seen during market booms in 2007-2008 and 2004-2006, he said.