Equilibrium point

Ali-Al-GwaizSaudi investors withdrew from equity funds after a disastrous market crash in 2006. The chief executive of the country’s largest equity manager hopes the trend will soon reverse. George Mitton reports from Riyadh.

Riyad Capital recently moved offices and the new premises have yet to acquire a lived-in feel. Departments are still indicated by pieces of paper fixed to glass. However, Ali Al-Gwaiz, chief executive, is sure the move was a good thing for one reason – traffic. The new premises, no longer attached to the headquarters of Riyad Bank on King Fahd Road in Riyadh, are less prone to the tortuous traffic jams that can blight rush hour in the Saudi Arabian capital.

Moving into a separate office is the latest stage in Riyad Capital’s transition to independence, which began when the firm was spun out as an independent company in 2008.

Prior to that, the firm, which handles asset management, investment banking and brokerage, was part of Riyad Bank, one of the “big five” banks in the Saudi market. Al-Gwaiz, who was then head of investment banking, was tasked with leading the independent unit.

It was not an auspicious time to set up an asset management business. Two years before, in 2006, the Saudi stock market crashed spectacularly. Panicked investors swamped funds with redemptions, and widespread losses left an abiding distrust in the public equity markets and in fund managers which is only now starting to ease. 

“The redemptions were almost continuous,” he says. “Since 2006, the market eroded, the number of liquidations outpaced the new subscriptions even after the market started to pick up in 2012, volume and valuation-wise.”

It seems puzzling that the current bull run in the Saudi equity market has not staunched the flow of exiting investors. Al-Gwaiz says the reason is that some investors are only now taking profits on holdings that had been underwater since 2006, with the result that investor numbers are still falling even though the equity index is rising. Today, Riyad Capital has 72,000 investors, well below the number it had in 2006. (Al-Gwaiz declined to say how many investors the firm has lost, but said the industry has lost 234,000 investors since 2006, a fall of nearly half.)

However, there may finally be a glimmer of hope. Al-Gwaiz believes those investors who have taken profits will come back into funds once they see the stock market stabilise, hopefully with more realistic expectations of risk and return. “We believe we are reaching the point of equilibrium, unless the new IPOs now coming to the market will fuel further growth.”

If Saudi investors do redevelop a taste for equity investing, Riyad Capital ought to benefit. The firm is the country’s leading equity manager with 27% of the Saudi equity funds market by assets, according to Al-Gwaiz, and it boasts the highest number of investors and the most funds, 36, of any Saudi asset manager. (In terms of overall assets under management, Riyad Capital comes behind NCB Capital,  which is stronger on money market funds.)

Riyad Capital does not only do equity products. The firm launched the country’s first publicly offered real estate fund, which raised $80 million in two months, and plans to launch more real estate funds soon. The firm is also planning a kind of venture capital fund in partnership with Taqnia, an offshoot of King Abdullah City of Science and Technology. Meanwhile it has expanded its equity offering with two income funds launched this year and a small and mid-cap fund launched in 2011.

Riyad Capital also has an agreement with Fidelity Worldwide Investment dating back to 1992 to offer Fidelity-managed products to its Saudi client base. The funds are run on a sub-advisory basis, because the Saudi regulator requires Riyad Capital to put them under its own name, register them with the regulator and ensure proper controls. Most of Riyad Capital’s international funds are managed by Fidelity. Another development is the move into wealth management. Al-Gwaiz said the firm began building up its discretionary account managers to combat the outflows from equity products. 

Although the figures are not public, Al-Gwaiz says discretionary portfolio management now represents the largest asset class at Riyad Capital, exceeding the amount it manages in equity funds.

The firm’s investors, however, continue to be largely customers of Riyad Bank. Al-Gwaiz says more than 90% of his investors are clients of the bank and almost all of them are based in Saudi Arabia, with the exception of some high-net-worth and institutional clients from the other Gulf countries.

In future, one interesting growth area for the future could be institutional investors from abroad. Al-Gwaiz is hopeful that some foreign investors will consider his firm’s funds should the Saudi authorities open up the market to foreign investment, a development that has been prophesied for several years but which he assures me is “imminent”. “We have a number of local funds with good performance and a convincing track record. For international foreign investors, one logical thing to consider is to invest in our local funds.”

Despite the difficulties the industry has faced in the past six years, asset management continues to provide the largest source of income out of Riyad Capital’s lines of business. Al-Gwaiz admits the firm’s standing relative to its peers could fall if stock market trading picks up, since its brokerage business is only the seventh largest in the kingdom, and a pick up in trading will mean good revenues for brokers. But asset management provides, he says, a relative stability of income that is desirable in a market such as Saudi Arabia, which displays many of the volatilities typical of emerging markets.

And if Saudi investors put aside their bad memories of the market crash, a rise in equity fund inflows could boost asset management revenues significantly.

“Equity funds suffered a major setback in 2006 when the market witnessed a major correction. Investors were misinformed; they expected fund managers to protect them from any market adjustment. They were disappointed when this didn’t happen as the market tumbled. Now, people are exiting most likely on a profit and we expect those to come back and re-invest in the market when they see the market stabilising.”

©2014 funds global mena

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