ROUNDTABLE: Questioning Qatar

Key players in Qatar’s small asset management sector discuss the challenges of building a business in a wealthy country whose financial infrastructure is developing. Chaired by George Mitton.

MENA aut roundtable

Sameer Abdi, partner, transaction advisory services, Ernst & Young
Dimitri Arlando, head of business development, State Street Mena
Afa Boran, managing director, asset management, Amwal
Akber Khan, director, asset management, Al Rayan Investment
Ajay Kumar, assistant general manager, investment & funds, QNB

Funds Global: What are Qatar’s strengths as a regional hub for asset management and what needs to be improved?

Ajay Kumar, QNB: The first one is obvious: assets. There is a lot of wealth in the region and that’s the starting point for any growth in the asset management industry. The second thing is there is vision at the top. The government has the intent, capability and capacity to create a regional hub.

The challenge is implementation. Multiple regulatory regimes are a major hurdle in improving asset management. There is also a need to increase the depth of the market with assets that are unbundled from the government and a need for market makers to increase liquidity.

The good thing is that Qatar has been the toast of the region. It’s been doing well relative to others in the region in the last three years. But the window of opportunity could shut as Saudi Arabia picks up and the UAE [United Arab Emirates] takes steps to improve its regulatory environment. 

Akber Khan, Al Rayan: Qatar has an extremely buoyant local economy. Compared to the rest of the world, even after local growth rates have halved, we’re still in a relative boom. On a practical level, location is a major positive for Qatar. It used to be that London prospered because it was between the time zones of New York and South East Asia. With world economic focus steadily moving east, the GCC [Gulf Cooperation Council] benefits from being between London and South East Asia.

There is still a perception issue, though. Qatar doesn’t market itself as well as it could as a place to live and attract skilled labour. Other countries in the region have done that far more effectively.

Our biggest challenge as a local asset manager is managing regulation. It can be frustrating but considering the almost exponential economic growth, it’s not surprising that the regulatory and legal framework hasn’t kept up in all respects. There is clear recognition among the leadership that issues need to be addressed, the challenge is to see how quickly that happens.

Sameer Abdi, Ernst & Young: Qatar has a number of positive aspects which would make it an attractive destination for international asset managers, but with the proviso that it won’t be the only asset management hub in the region. The key is differentiation and there Qatar has immense strength in its position as a net exporter of capital to the rest of the world.  

Qatar’s journey to asset management is not going to happen overnight, or in five years, but it will happen over time. One of the main drivers should be to promote the domestic asset management industry. One model the authorities could look at is the Malaysian one, which is to boost the domestic industry then open it up to foreign competition.

Dimitri Arlando, State Street Mena: From an international firm’s perspective, it was the economics and political stability that attracted us to Qatar. The country is very stable on both fronts and for an international firm, that’s important.

In the near future the education push will help. There are institutions like Carnegie Mellon offering business degrees and that will help to increase the amount of skilled labour available.

However, there is still room for improvement. If you surveyed the employees of international firms, many people would still point to Dubai as their preferred choice in terms of expatriate lifestyle.

Afa Boran, Amwal: This is a country with a very small population but $200 billion GDP and 30% current account surplus. It’s a country with very profitable industries. In the chemicals industry the return on capital here is about 40%, while anywhere else in the world it’s single digits and in some countries negative.

There are profitable companies to be invested in and a lot of excess capital being generated. There are a lot of challenges, though. The level of assets under management as a percentage of GDP is still very small.

Funds Global: It is thought that GDP growth in Qatar has slowed in recent months. What are your growth forecasts for the coming years?

Abdi: The forecasts range between 5% and 7% for 2013 onwards. Everybody is still in a bit of shock after the newspapers reported that Qatar’s GDP growth had fallen from 15% to 6%, but this level of growth on $200 billion GDP is still phenomenal; you’re still competing with some of the fastest growing countries in the world.

Khan: Growth in Qatar will be driven by infrastructure spending. Contrary to what many seem to believe, much of this is not related to the World Cup, although some has clearly been accelerated to be ready by 2022. On our forecasts we estimate expenditure over the next decade to be in excess of $300 billion, and that’s probably a conservative number when you add the potential for cost inflation and variations in project plans.

The question most commonly asked is, ‘OK, all of this is coming, but when?’ This has been a bit of a pause year and there is no benefit in rushing in to the enormous spending without taking sufficient time to plan. Designing, tendering, getting technical consultants in, all takes time. There have been about $9 billion worth of projects awarded so far in 2012 and there’s potentially $20 billion more before the end of the year.

We see 2015 to 2018 as peak years for growth this decade, and there may be a revisit of double-digit GDP growth at some point.

It’s not all about infrastructure build-out either, there is still considerable expansion ahead in oil and gas. There are at least $50 billion of projects planned over the decade that will continue to have multiplier effects on the economy. There are some challenges in Qatar, but economic growth is not one of them.

Kumar: GDP growth in the short-term is not going to be an issue. However, in the medium to long-term it may be a challenge.

Traditionally, Qatar has had a low multiplier when it comes to GDP and this is largely because it was dependent on government spending. Now, as the economy expands with hotels and other service industries, the multiplier will increase and that will help.

But the issue is that government expenditure is dependent on oil and gas revenue – mainly gas – and gas is being found everywhere around the world. There will be competition from the United States if the Americans decide to build up the mechanism to export shale gas, while Australia is expected to match Qatar in terms of gas capacity in the next five years.

However, Qatar sits in a wonderful place. The Middle East and North Africa region, of 400 million people, can be divided into three pieces: the GCC, which has not just current account surpluses but also consumer and producer surplus and huge reserves; the untapped or inaccessible countries – Iraq, Iran, Syria – which at some point are going to open up; and North Africa, with a demographic advantage and fiscal constraints.

Now, if you could connect your way into those markets, you could drive growth, you could make investments and would have companies of much larger scale.

Funds Global: Is there more work to be done to improve financial education and the sophistication of investors in Qatar?

Khan: The investor base here is extremely risk averse; extraordinarily rich but extraordinarily risk averse. They’ve been trained that way by the dominance of risk-free or state-backed investments. The economy is dominated by the government and institutional asset management is no different. We calculate assets under management in mutual funds domiciled in Qatar at just 460 million riyal ($125 million), of which Al Rayan accounts for more than 200 million. Of course, there is many times this amount in discretionary or segregated portfolios, but the mutual fund industry is very much in its infancy. Almost 90% of our assets under management are in segregated portfolios.

There is a major direct investment culture in Qatar and the region as a whole. It will take time for that mindset to change and it didn’t help that in 2006 and 2008 the Qatari stock market dropped 30%. Back then many investors had trusted others with their money and got burnt, so the obvious lesson was ‘don’t do it again’.

The other factor is the dividend culture. Local and regional investors require dividends and mutual funds don’t tick this box for the most part.

At present there are relatively few products available in Qatar for investors, but it’s a chicken and egg issue: do we put out products when there’s very limited demand? We are commercial entities and for now there’s far greater demand for segregated portfolios.

Ultimately, financial sophistication is not something that you can implement, it takes years for populations to develop this – expecting anything else is unreasonable – so we have to be patient.

Kumar: There is a lot more money in structured portfolios, though. If you meet family offices and high-net-worth individuals you will eventually get some assets under management.

That said, there are challenges. Investors tend to be emotionally attached to stocks. Perhaps they bought stocks 20 or 30 years back when the company was formed and they continue to hold them regardless of how they perform against the benchmark.

That will change as more institutional players enter the market and you get better regulations in terms of transparency, disclosure and governance. The market will gain from having more information and the stability of the price discovery mechanism that foreign institutional investment brings.

We can bring in more products to the market but it’s hard to convince investors to part with their money when they can make between 3% and 5% from bank deposits.

Abdi: A lack of investor sophistication cannot be blamed for private investors not ploughing liquidity into the local market directly or through managers. A survey conducted across the region for family businesses covering the last two years showed that there has been a 70% increase in families moving money away from investments into their own businesses. The reason is that they believe their businesses will outperform investment manager performance. A second reason is that family business owners are thinking of expansion to aid succession planning.

Boran: Investors here may lack financial education but they don’t lack business experience, which is a great plus. Many local families are successful entrepreneurs and are active investors in businesses. This is something very different than the wealth in the Western world, where most of the wealth is passively accumulated through salaries. This means local investors are hands-on, risk taking investors. We are working with investors on a variety of products and services to address this difference and give them a more suitable offering. At the same time we are looking to find ways of educating investors, particularly on how to objectively evaluate a manager’s performance relative to broad market indicators and competing managers.

Funds Global: What are the prospects for private pension development among the local population?

Arlando: Right now there’s no incentive for the local population to have a private pension. For example, there are no tax benefits such as you get in other countries. In addition to this, a lot of the local population work for the government and they’re well looked after when they retire. We’ve recently seen salaries and retirement benefits increase for Qataris by 40% to 120% depending which government sector they work in. If you’re a local and you’re well looked after, why save for the future? It goes back to that education process.

However, the Middle East has a window of opportunity of about ten to 15 years to build a large-scale, sustainable pension system that would help to reduce the burden of an ageing population on tomorrow’s younger generation. Just as significantly, it would provide a major boost to the development of local financial markets by creating a substantial pool of investable wealth in the region.

Khan: Qataris already contribute from their salaries to the general retirement and social insurance authority, the state pension fund, so the prospect of introducing a private pension fund provider is pretty close to zero.

Arlando: You could argue there is a pension of sorts with the end of service benefits. Perhaps the asset management industry could take these liabilities and manage the pools of cash in a way that gives the provider an increase over time.

Funds Global: Has there been progress in harmonising the regulatory environment in Qatar? What steps must still be taken?

Abdi: The harmonisation of the regime will happen at some point as the benefits are clear for everybody. The question is whether the regime will be set up for asset managers to more efficiently manage local assets, whether they’re invested here or abroad, or for foreign asset managers to manage local assets invested abroad. Once again, I reiterate the importance of providing incentives to grow the domestic asset management industry as a precursor to developing an ‘asset management hub’ in Qatar.

Kumar: There are three entities now: you have the Qatar Central Bank (QCB) which approves the prospectus, the Qatar Financial Markets Authority (QFMA) which gives the go-ahead for marketing the document, and the Ministry of Business and Trade which does the registration. The Qatar Financial Centre (QFC) is a different entity but in some cases a product would need to get approval of the QFMA outside the QFC.

The regulations are largely to protect retail investors, but the process of gaining approvals can take a long time. Moreover, when dealing with a multi-regulatory regime, one regulator’s comments may be different or at times in conflict with the requirement or view of another; thus, managing these issues and harmonising them could be tedious and challenging.

Harmonising regulation is actually easily done, that’s a bunch of consultants sitting with the regulators and putting a nice rule book together. It’s on implementation, where most GCC countries, including Qatar, fall short.

Khan: It has been recognised at the highest levels that the current situation is not as smooth as it should be. We are moving in the right direction; competing regulatory bodies are now under one umbrella.

In time, we will probably have a harmonised, well-functioning regulatory regime, but that isn’t the situation today and that’s partly why there has been a dearth of launches of investment products.

The only snag is that the world is not standing still. In other jurisdictions, these issues have already been overcome and the danger is Qatar will miss the opportunity to create local production capacity to manage the assets it owns.

I believe the vision behind setting up an asset management hub makes a lot of sense but we are still in the early stages of the journey and it is an evolutionary process.

Boran: I like to compare the asset management industry with another successful industry here: construction. The best construction companies in the world are here, be they German, Korean, Chinese or Turkish, because they are huge projects. On the asset management side, there is a lot of capital to be invested. Why not invite a lot of asset managers here, the best talent, and form a way of allocating your assets based on merit? Then you would develop a world-class asset management industry because you’d have the best asset managers competing for the best possible returns.

In Qatar, there is all this money to be invested, so why not set up an efficient regulatory and competitive landscape so that you have established a successful asset management industry, like you have done in the construction industry? This kind of a performance race would attract both good fund managers and investors. We are very proud of our strong performance track record and we would like to see it better noticed.

Funds Global: Where do you see Qatar’s financial services industry in five or ten years’ time?

Arlando: The vision and building blocks are there, it depends on execution. There was an opportunity, when Bahrain had its political unrest and Dubai had debt issues, to attract managers and financial institutions to Qatar but, if we’re being honest, it didn’t happen. I’m not sure those opportunities will occur again.

A lot depends on what happens elsewhere in the region. There’s a lot of talk about Saudi Arabia opening its doors, with a Qualified Foreign Institutional Investor, or QFII, scheme. If that were to happen, Qatar may have to rethink its strategy of being a regional hub because Saudi Arabia is by far the biggest market here in the region.

Kumar: I’m hopeful that a number of things will happen in five to ten years’ time. First, harmonising the regulatory environment, probably into one large single regulator. Second, creating more than one stock exchange for equities, bonds, commodities and other derivatives. Then adding instruments within the stock exchanges: derivatives, allowing shorting, allowing market making, lending and borrowing. All these measures are in the pipeline and are likely to come about over the next two or three years.

You are probably going to have a central counterparty mechanism and a central depositary as well. As long as all this does not add cost to the overall transaction, and the legal infrastructure is put in place, we will be able to attract more assets.

Khan: The financial services industry will be several times bigger than it is. There are too few investment providers. That will not be the case in five or ten years’ time. There will be more consultants, lawyers, accountants, investment bankers and wealth managers. It will be a much larger, more developed and more sophisticated industry. But for the financial services industry to achieve its potential, the regulatory and legal support structure has to keep up.

Boran: Eventually, you will have a reasonably sized asset management industry here but it will take time. Investor education is important, but also, we need to understand the local investor. In some cases, we must act as financial advisers to help investors make sense of the financial markets.

Abdi: The banking industry will likely grow between 15% and 20% per annum, but I don’t see the number or composition of players changing significantly.

I view the insurance industry in a similar vein.

Where I do expect to see significant change is in the number of foreign asset managers, with a Mena or local proposition, entering Doha, as this is clearly being promoted by the authorities. However, unless urgent steps are taken by regulators and institutional investors to promote domestic asset managers in Qatar, I fear that we may not see some of the current players remaining in the market in ten years’ time.

I also see changes in the investment banking landscape, given the recent merger between QInvest and EFG-Hermes and the growth of investment banking arms of commercial banks such as QNB Capital, Commercial Bank Capital (Comcap) and Al Rayan Investments.

©2012 funds global

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