ASIAN ASSET MANAGERS: Raising funds for Asia

BuildingThe economies of Asia and the Middle East are closely linked, so are Middle East investors keen on Asian funds? Not necessarily, finds George Mitton. Some, such as non-resident Indians, would rather invest their money anywhere but their home country.

The past few decades have seen a resurgence in trade between the Arab world and Asia that has led one economist to declare a “new silk road” in reference to the trade route that formerly transported silk, spices and other treasures between Asia and the Middle East.

Today, the products being exchanged are different. The likes of China, Korea and Japan are reliant on oil imports from the Gulf to keep their economies going. In return, everything from cars to microwave ovens to plastic cutlery is shipped from the factories of the East to meet consumer demand in Saudi Arabia and Egypt.

If these regional blocs are becoming more closely linked in terms of trade, does it follow that investment flows between them will rise? And could this mean opportunities for Asia-based asset managers wishing to raise assets from the Middle East?

Sovereign wealth funds in the Gulf are already exposed to Asia. These sophisticated investors have raised their allocations to the continent in recent years to reflect the growing size and importance of Asian economies.

Yet among retail investors, the trend is less clear. There is demand for global equity funds and emerging market products but, in terms of specifically Asian investment funds, it seems demand has yet to develop.

Though they rarely give precise numbers about their asset allocations, sovereign wealth funds in the Middle East are known to allocate substantial sums to Asian assets. The Abu Dhabi Investment Authority (ADIA) is bound by its own guidelines to invest between 10-20% of its portfolio in developed Asia and between 15-25% in emerging markets, many of which are in Asia.

Another Gulf fund, the Kuwait Investment Authority, has increased its allocation to China in recent years and even opened an office in Beijing in 2011. At a speech to mark the opening, managing director Bader Al Sa’ad, said the fund’s investment in Greater China had grown five times in five years to $10 billion.

The Chinese authorities have assisted in the growth of sovereign wealth fund investment in the country. In December, the State Administration of Foreign Exchange said sovereign wealth funds and central banks would be allowed to apply for quotas in excess of the $1 billion limit formerly tied to the qualified foreign institutional investors (QFII) scheme.

The sovereign wealth funds, with their teams of analysts and world-leading consultants, are well aware of the strong growth rates of Asian economies. These investors are likely to raise their allocations to Asia in line with economic trends. Yet, as always with the sovereign wealth funds, competition among asset managers to win mandates will be fierce.

What about the other investors in the Middle East, the family offices, high-net-worth and retail investors? Some fund managers say these too understand the potential of Asian investments.

“Asian economies have quite similar characteristics to the Middle East and North Africa, with young and fast-growing populations and the potential for governments to invest heavily in infrastructure assets,” says Soo Hai Lim, manager of the Baring ASEAN Frontiers Fund.

“There is also the natural resources story to consider. We believe investors based in the Mena region are able to understand and connect with the growth story of Asia.”

Lim, who is based in Hong Kong with the rest of Barings’ Asian equities team, claims the trend in Asian investment is to have more people based on the ground in the region, because proximity to markets and companies is an advantage. He suggests investors in the Middle East, as elsewhere in the world, are likely to want a locally-based asset manager to handle their Asia exposure.

But do retail investors in the Middle East want a specific allocations to Asia, as opposed to a more general allocation to global emerging market equities, for example?

If there is any group in the Middle East who might be expected to have an interest in Asian investment, it would be the non-resident Indians, who are present in large numbers in the Gulf. According to the Indian embassy in the UAE, 30% of the UAE population in 2010 was non-resident Indian. There are also large populations in Oman, Bahrain and Saudi Arabia.

Many Indians who live in the Gulf are wealthy, having built up fortunes from years of commerce, particularly in the lucrative India-Africa trade. It’s notable that until the 1970s the Indian rupee was legal tender in many Gulf countries.

These people make appealing targets for asset managers, because, unlike the Arab population of the Gulf, non-resident Indians are big investors, says Praveen Jagwani, chief executive at UTI International. “The history of the UAE – and Bahrain and Oman to an extent – is closely entwined with that of India. The really moneyed expatriates are all Indians. The non-resident Indians, alongside Pakistanis, are the ones who have the money and the attitude to invest.”

So are non-resident Indians good customers for investment funds focusing either on their home country – this is what UTI offers – or neighbouring Asian countries such as China? Do these investors want to tilt their portfolios towards India and Asia? Actually, it seems the reverse is true.

“On the contrary,” says Jagwani. “Non-resident Indians typically already have exposure to India in terms of real estate. The UAE has a lot of people from Kerala, for instance, and they all have palm oil plantations and coconut groves and real estate over south India.”

Non-resident Indians are more likely to want to invest in funds focusing anywhere but India, says Jagwani, in order to diversify their investments and reduce their exposure to the economic fortunes of their own country. Indeed, wealthy non-resident Indians are just the same as any other high-net-worth investors, he says, they want to spread their risk and maximise their returns – they do not require special treatment.

“There’s a fallacy that you only need Indian relationship managers to handle non-residents Indians,” he says. “Indians in Dubai would be as happy with a Swiss private banker handling their money as anyone else.”

So is the Middle East region a tough sell when it comes to specifically Asian funds? Jagwani says non-resident Indians often believe they have a good understanding of their own country and might not believe a fund manager can do better with their money. In contrast, family offices and high-net-worths in Europe, for instance, are often willing to entrust UTI with mandates for Indian investment. For them, India is an unfamiliar and perhaps exotic place, and entrusting money to a specialist is an appealing way to gain exposure. Perhaps, in some cases, too much familiarity is a barrier when it comes to selling investment funds.

©2013 funds europe

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