Most wealth managers are stuck in the past, says Gary Dugan of NBAD. He says investors should forget about the US and Europe and put their money where the real growth is â in emerging and frontier markets.
There is something very wrong with the way most western wealth managers allocate client assets, says Gary Dugan, chief investment officer in the global wealth division of the National Bank of Abu Dhabi (NBAD).
Instead of allocating money to countries that will grow fast in future, they invest clients’ assets in countries which stopped growing some time ago.
“Some of the investment houses I’ve worked for, the big brand names in the West, only think about the outlook for the US and Europe,” he says. “I say to clients, why are you worrying about the markets that are dying? It’s like the last days of the Roman Empire. People should be looking at the East.”
Dugan says wealth managers make this mistake because too many of them are “steeped in history”. They use market capitalisation-weighted benchmarks which are skewed towards markets such as the US, which have large amounts of outstanding securities but which are growing slowly. Being western-based and western-owned, many of these wealth managers are too caught up in their own brand, which is anchored on investing in their own markets.
In his new role at NBAD – he joined the company two months ago – Dugan hopes to counter this trend by providing investment guidance that champions emerging markets, especially those in Asia and the Middle East. His view is in line with the mission statement of NBAD, which hopes to distinguish itself by its expertise in what it calls the “East-West corridor”, the section of the earth between the developed world and the rapidly rising markets of Asia.
Dugan is happy to take bold steps that support his views. He would reduce a client’s weighting to US assets from the 50% level implied by MSCI World index to just 20%. Europe and the UK together would have a weighting of just 5%. He would put at least half the portfolio in Asian assets, with a significant weighting to the Middle East and Latin America.
For investors who are used to allocating money to what are seen as safe and dependable developed markets, it seems a daring strategy, but Dugan says his experience working in Asia has shown that wealth managers should take that risk, because the emerging high-net-worth investors of the East have little loyalty to the old world – they want growth.
“When I was in Asia I would ask clients in Hong Kong or Singapore what they thought about Europe. They laughed and said it’s a great place to go on holiday. Is it a place they want to put their money? Absolutely not.”
Dugan spent two years working in private banking in Singapore before transferring to Abu Dhabi. He has experience in the UAE, having worked for Emirates NBD, and paid his first trip to the Middle East in the early 90s. He says he was excited to work for NBAD because the company is a Middle Eastern bank with global ambition, and has a real aim to give clients access to the emerging market story.
In addition, the global wealth division of NBAD is a significant size relative to the overall business and has representation at board level, unlike in some western banks where the wealth division might be a small part of the overall company. This gives clients confidence that the bank is focused on their needs, he says.
The firm’s client base is largely drawn from UAE residents, both nationals and expatriates, and the it is expanding abroad, with wealth platforms in Switzerland and London. In future, he believes the international banks will look to the likes of NBAD as a good source of ideas and research on the Gulf markets, especially as these countries diversify their economies away from oil and promote larger and more liquid capital markets.
TO THE SCEPTICS
So what are the arguments Dugan would offer to those sceptics who believe the emerging market story has been oversold? One point is about debt. The US has the highest debt relative to GDP in the world – hardly an attractive attribute for investors, he says. Then there are the West’s demographic problems.
“If you look at a high street in the UK or Germany, you’ll see a lot of grey hairs,” he says. “You can’t ignore population statistics and Europe is in decline. There’s not too much grey hair in India.”
In contrast to the western markets, he looks to the likes of Indonesia, which has a growing population and is investing in development and infrastructure. There is China, of course, which has slowed its growth in recent years, but is still enlarging at about 6% a year, far ahead of the US. Dugan is interested in opportunities in Africa, though with the exception of South Africa, the capital markets are not yet deep enough to absorb large flows. He also remains optimistic about Turkey.
These opportunities are attracting a broader range of investors, too. In the past, says Dugan, the only feasible customers for Indian investment products were non-resident Indians. Now, Indians in the country are buying funds and even Arab clients are interested in Indian bonds. “The pace is picking up,” he says.
In all, the emerging market story is compelling and any clients who decide to entrust their money to NBAD’s global wealth division can expect to be advised strongly to go where the growth is. To invest, in Dugan’s words, not according current index weightings but according to countries’ expected share of future growth. Do clients ever resist such a strong and, for traditionally minded investors, radical agenda?
“There’s no resistance but I don’t find people embrace it strongly enough,” he says. “Part of it is human nature, to anchor yourself in the past. But when choosing which markets to invest in, you have to look at where is the biggest opportunity in future.”
©2014 funds global mena