Clarity is key to the development of the Middle East region as a fund hub. In this roundtable discussion, senior executives outline the main challenges and their outlook for the industry. (part 2)
Stewart Adams (head of investors & intermediaries, transaction banking, Mena, Standard Chartered Bank)
Mike Cowley (head of product & client management Mena, Deutsche Bank)
Glyn Gibbs (head of business development Mena, HSBC Securities Services)
James Martinson (senior vice president, Dubai, Maples Fund Services)
Richard Street (managing director, head of securities and fund services, Middle East and Pakistan, Citi)
Funds Global: It has been said that if Qatar achieves MSCI emerging market status it would lead to an inflow of about $2bn into Qatar. Where is that money going to go? What would be the impact on the region?
Martinson: It will most likely go to Qatar and will be invested in Qatar and managed locally with limited impact on the wider region.
Street: There is an indication that MSCI status will lead global fund managers to increase their allocation [to Qatar] within the emerging market index to track it. So the managers will go into the market and buy assets which will push the prices up.
Funds Global: But is there sufficient liquidity?
Street: It depends on how quickly it [the inflow of capital] arrives in the market.
Cowley: It depends on where the foreign ownerships limits go in terms of the specific stocks included (if MSCI approval if given), there is liquidity in the tops stock and its probably only the tops stock that will be in the weighting anyhow.
Funds Global: There has been talk of a single Gulf currency and ongoing consolidation of exchanges across the region. Is market unification required in order to drive the Mena region forward and will we ever see a unified market where an investor can trade stocks on all markets across all member states?
Cowley: I’m not sure if a common currency will happen very quickly, but we’re starting to see some consistency throughout the region from a regulatory perspective. The exchange and the regulators now speak frequently and all markets seem to have adopted a Capital Markets vs. banking regulatory structure. If they can all be on the same page about how things should be structured at a high level, it will make it easier for overseas investors who do still consider the region a single market..
Having one consolidated front-end platform across the various regions is a tough ask in my eyes. Post-trade, as said it may be easier to look at a central GCC clearing platform or something that enables people to have a single point of entry for holding equities. But at present the investors might just say, “do we really need this one platform?’. The majority all use regional brokers to access the markets rather than a specific link to each market place and its local brokers. They’ve all got their networks in place, which they’re happy with. It might add some cost, but it works.
Gibbs: Markets exist to bring together providers of capital with the people that need capital. Take Qatar as an example; does Qatar need external foreign capital? No. Therefore there is no incentive for Qatar to work in a more unified way with a single exchange based somewhere else in the Gulf. And if the Qataris don’t see any reason to do this, it just won’t happen.
Street: I agree. We’re not going to see a consolidation of exchanges. They are flag bearing entities for each of these states and that’s never going to change. I’m very encouraged by the fact that these are common discussions across the GCC though, just from an educational perspective. Bringing these organisations together also creates a bit of competition between them.
Martinson: The most positive thing about the potential synchronisation of regional exchanges and a single currency is that it’s still on the agenda. Hopefully it stays that way because with it comes continued progress.
Gibbs: I have also read reports of talks between Egypt and one of the UAE markets about dual listing Egyptian stocks on the UAE exchanges. It’s still in the very early stages but I see it as an encouraging sign for more trading liquidity in the country.
Funds Global: What are the core drivers in terms of asset servicer selection for Mena based fund managers? Is this a purely cost based decision or are other factors more/just as important?
Street: In this part of the world it’s relationship driven. However, if they have a Ucits servicing requirement it has to be someone who can deliver that administration. If it’s private equity administration which requires some level of local banking and SPVs [special purpose vehicles] across the region then servicers that have a regional footprint are absolutely mandatory. This is where education comes in.
There’s a huge amount of opportunity for all asset-servicing organisations, not just to deliver regional capabilities but also to deliver global capabilities. Price is always important, particularly in times of poor performing markets or poor returns on funds.
Many clients are very keen to have local service, they want to know people will be there to assist them across the working week of the regional markets. Global expertise is critical for clients looking for administration this is true across all asset classes – it is no different here than in any other part of the world.
Adams: There is a big relationship drive as clients need to trust the partners who will safe keep their assets. Timely and concise delivery of reporting, local market knowledge and expertise together with complete transparency especially in FX margin reporting [are of great importance].
Martinson: I think cost remains fairly important as managers in the region are fairly cost sensitive. We have, however, seen that over the last couple of years it’s evolved from purely being a question of cost to a question of managers being more focused on receiving high quality services provided locally in the same time zone and work week, coupled with best of breed technology and efficiency. As was indicated, it’s becoming more of a question about specific expertise and services that are tailored to the nature of the fund rather than just appointing a service provider for the sake of doing so. Flexibility is absolutely a key element to ensure there is a good fit between the services being provided and the requirements of the fund or investment vehicle.
Customisation and automation that ensures a seamless interface with the manager’s systems is also becoming a more important driver of service provider selection. There tends to be a degree of different systems and applications being used across different divisions within the same investment management firm. This has evolved with managers focusing on implementing more effective systems adding more value and leading to increased sophistication and ultimately better investment allocation decision-making processes. So although cost stays important, stakeholders are looking more closely at all the other things they really need from service providers to add value to that relationship.
Cowley: I agree. We went through the boom days when markets appeared very easy in the region and people did not look to much into the cost/protection side, market access was the key. Then we all felt the pinch in a tough downturn and people started thinking about what they need to do to protect their assets and find efficiencies on the cost side. This is relevant to the whole spectrum of the post-trade environment. People are really looking at this and seeing where they can save costs and how they can better protect the assets. They’re moving away from the broker accounts relied upon in the past, we have seen more of this in the last 18 months than we had done in the previous five years.
It’s a result of increased awareness and the regulatory push, but also, the landscape has totally changed. People are taking the market more seriously as they mature and trying to move to emerging market status. So things are reasonably positive compared to two or three years ago when they were unregulated and loose.
Martinson: People have also learned from mistakes of the past. During the boom times many funds were created and a lot of administration was being done in-house. Since the region tends to have a fairly high rate of employee turnover, managers were left trying to resolve numerous issues on some of those funds. They definitely learnt that it’s far easier, although more costly perhaps, to just outsource the administration and to focus on what they do best - managing the assets. And although they may see it as slightly more expensive, the realisation that it’s more cost effective and efficient in the long run is now evident. Many funds have been wound down during the last two to three years, perhaps at least partly as a result of inadequate back and middle office processes and smaller players have fallen by the wayside. The ones that remain are more serious about having the right service providers and corporate governance in place.
Adams: Being able to demonstrate a high level of skill when it comes to the implementation and transition of clients assets to your platform is vital. This skill set allows clients to continue business as usual with minimal disruption. Many clients will be outsourcing or switching provider for the first time, hence it is vital to take them through step by step in a well executed and project-managed transition process.
Martinson: The central question asset managers need to ask themselves is, “will appointing a third party service provider give me a competitive advantage or not?”
Gibbs: Cost is always the primary discussion, but we all know what the cost is and therefore it becomes a question of how do you enhance your proposition? What are the extras that you can provide to your clients?
Funds Global: In other panel discussions we’ve held, custody bank CEOs have said that fund managers are now looking at service providers as more of a partner to help drive the business forward. Is this also the case in the Middle East ?
Martinson: We’re certainly seeing that. Whereas before you were providing a typical back-office service and you would take care of handling the investor relations to a degree, it’s definitely evolving. We are now providing more middle-to-back office-type solutions. It’s good to note that the definition of middle office differs from firm to firm and the necessary functions vary between different types of funds. But we’re definitely seeing a lot more automation, data aggregation and integration with investment managers’ systems. We’re also now providing managers with a suite of different reporting solutions and analytics that they need to meet increased regulatory demands and enhanced investor and prospective investor due diligence requirements.
Funds Global: Is there more middle office outsourcing?
Street: There is a requirement for that level of service. Middle and back office outsourcing tends to require certain levels of critical mass. So although a small boutique is probably most in need of that [outsourced administration] capability, it’s not necessarily something that a major global custodian will be prepared to deliver to a brand new start up with a short track record. Especially, for very low fees.
That said, we do see much more activity across the region for middle and back office outsourcing. It’s driven by the realisation that if managers try to be all things to all men they can’t focus on their core objectives. Therefore there is a move towards making sure that they’ve secured appropriate resource to carry out the middle- and back-office functions. This way, managers insulate themselves from the high turnover rates and from the capital expenditure of changing or enhancing systems.
Outsourcing allows people in the asset management organisation to launch new products without being constrained by their back and middle office. We’ve seen a lot of change in that regard and I think we’ll see more.
It will be in the middle and upper tier to start with. Then, when things are delivered appropriately, it’s up to the custodian banks to package it and offer it to the smaller, more boutique firms who probably would benefit from it the most.
Gibbs: Twelve months ago it wasn’t a topic for conversation, but now it is. For a number of people the issue is cost and scale, and in many cases it simply isn’t there. But we find that beyond the new start-ups, existing well-established firms are having to look at external support as well. The amount of system investment required coupled with funds in the region becoming a little bit more sophisticated means that your plain back office may not be able to cope as easily. At the end of the day system investment is what it comes down to. The markets are difficult and many managers are looking to see whether they can save the ongoing capital outlay and benefit from providers with greater scale.
Martinson: One of the other driving factors is the quality of data that has to go into a system. Everyone wants to have a good system, however when you take this on, you don’t only have to consider the capital expenditure of a system, you also have to ensure that the data is currently in a format that allows it to provide higher quality output within your new system. This is a historic problem in the region where the data is either in spreadsheet format or in an older system and tends to be somewhat dated and incomplete.
Funds Global: In a panel back in 2009 we talked about local managers’ aspirations in terms of growing both intra gulf and internationally. Have any of these aspirations been realised? Are local managers now operating throughout the Gulf region and pushing product into other areas, such as Asia?
Street: Asset managers anywhere around the world will attract capital if they’ve got a good track record and a good product - the Middle East is no different. Private equity is the biggest asset class in the region and there are some good asset management organisations here on the PE side. I understand that they raise a good amount of capital from the Gulf as well as the Mena region and beyond.
Equity asset managers in the region are trying to work out how to position their products on a global scale. They need to figure out where Mena equity fits into the mix with international institutional investors. They will probably position themselves as frontier equities experts. Right now, Mena equities represent about 65% of the frontier markets, which include Vietnam and some South American markets. Frontier markets may be an easier product to position to European pension funds, European sovereign wealth funds and other significant institutional investors. If managers plan to deliver a frontier markets product, then you would expect to see a bit more collaboration between the larger global asset managers and some of the experts on the ground as they build it. These larger players may even mandate a portion of their frontier markets product to local Middle East personnel.
Gibbs: It’s certainly a challenge and it hasn’t changed greatly since we last spoke about it. Everybody’s struggling on the cost side of things, so they’re keen to raise money from around the region or from elsewhere. But raising assets is a long process because investors like to see you on a very regular basis over a number of years before they decide whether they want to allocate an asset or a portfolio of assets into your care. So the reality is that people are struggling. The way forward may perhaps be through more cooperation. We may see local managers work with more international firms or other local firms in other regions.
Martinson: We continue to see progress on the private equity side. Infrastructure seems to be coming back. Large government spending budgets across the region, to curb political unrest means that there has been some growth on the private equity side. On the open-ended side it comes down to strategy and how you market it. It’s very difficult for managers in the region to compete with the large global players that have established funds investing in GCC equities. The large global players are easily accessible to investors from retail right through to high-net-worth individuals across the region, making it difficult for smaller regional investment houses offering GCC equity products to compete, and limiting the progress of local managers wanting to expand globally. Obviously people have also been dealing with the global economic crisis which has significantly impacted expansion; however the markets are starting to look like they’re recovering.
Cowley: If you were to be very honest, its a tough sell for a local fund manager to go out in the current economic and political environment in the region and convince people to invest in its products. People are still holding off although things have eased off now. In fact, many people say that equities are good value now and the markets are due to recover, so maybe it is the right time to go out and push your product. The last twelve months have been a very hard sell for local managers, so maybe it gets easier from here on in.
Adams: Domestic investors put around three billion dollars a year into overseas markets. This might make international investors wonder why they don’t invest in their own region. So we need to turn some of that investment back in. A way of tapping into international money and get some niche investments like Islamic investments and real estate would be to push that specialism and promote the region in that way. Regardless, I agree with what everyone else said: it’s going to be tough.
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