Gulf business models vary. The Funds Europe Asset Management Panel, hosted in Bahrain, discusses useful strategies and reasons to invest in them. (part 1)
Douglas Beal (partner & managing director, The Boston Consulting Group)
Scott Callander (director, Middle East, Axa Investment Managers)
Muneer Fulayfil (director, Mena, BNP Paribas Investment Partners)
Boyd Winton (director, financial services business development at the Economic Development Board in Bahrain)
Funds Global: At what level of development is the Gulf fund management industry, and is the role of fund management recognised among policy makers as socially useful?
Boyd Winton, Economic Development Board, Bahrain: In Bahrain, and amongst the other GCC regions, fund management is seen as vital to the development of the financial markets and also society as a whole. Bahrain wants to encourage public and private savings. They are enhancing government savings policies and practices and also encouraging development in the private fund industry by, for example, putting in best practice regulations. Central banks and the Gulf financial centres are very supportive.
Also, there are employment and other economic benefits for the region if equities are managed here rather than off-shore.
Scott Callander, Axa Investment Managers: Nine years ago, when I first came out here, the region had a much less elaborate, much less complex framework. The incidence of global asset management shops based in the region was extremely limited, bank asset management franchises were very new, and really the region was a foreign asset manager play.
The maturity that has come with the wealth creation here has been very positive from the point of view that very large financial institutions and some other players have developed successful domestic mutual fund businesses.
Governments recognise they need a framework to create social security funds throughout the region, and increasingly we are seeing efforts to implement more defined benefit plans delivered by both government entities and corporates.
Muneer Fulayfil, BNP Paribas Investment Partners: Compared to Asia and Europe, the overall penetration rate for funds and asset management services is still relatively low, so clearly we are only at the inception period for the industry in this region. Sovereign wealth funds (SWFs), government agencies and select institutional clients in terms of asset size make up the largest market segment for asset managers. This clearly presents a lot of opportunities for asset managers, and as a result, we have taken steps at BNP Paribas to position ourselves in this promising market both through a combination of organic and external growth strategies.
Overall, we feel that the role of fund management is recognised among policy makers in the region as socially useful, but this naturally varies from country to country. For example, both Bahrain and Saudi Arabia have implemented a series of measures to encourage growth of institutional asset managers.
Douglas Beal, Boston Consulting Group: Yes, we are still at the inception, and while I agree that some of the governments in the GCC are taking the right steps, I think some governments see asset management as being more important than other governments.
There are certainly a lot of international asset management firms with offices across the GCC and some of them have a significant presence, but as far as third-party funds managed in the Gulf are concerned there still are very few. There may still be only one third-party Mena fund managed in the Gulf by a foreign asset manager [Schroders].
Asset managers generally relay Mena as an asset class through London, usually as part of a global emerging markets business. This indicates that managers still do not want to put investment managers on the ground here in the Middle East.
On the other hand, there is a lot of sales development, obviously aimed at SWFs and at wealthy individuals, but as far as actually putting investment management professionals on the ground, that is still very new.
On the ground presence
Funds Global: So, generally the authorities are supportive of the industry and managers are clearly very interested in the region. It seems that the authorities would like more asset management activities based here, even for Mena funds that are sold to international clients.
DB: For a healthy asset management industry it would be good to combine local asset managers that have funds invested primarily in equities in their own countries or across the GCC and outside it, together with international asset managers that have investment professionals in the Middle East and actually manage funds in the Middle East. Generally the international players do not have people on the ground here yet.
MF: It was realised that to actually have investment management capabilities on the ground was a very important step for our development. Local asset management capabilities are needed here and cannot just be done from overseas. We have taken three core steps to date. First, BNP Paribas formed a joint venture in late 2008 with SAIB [Saudi Investment Bank]. Also we have set up a private equity business in Bahrain to invest in the GCC and Mena region. And we have introduced a sukuk fund that currently invests over 90% in Gulf corporate and sovereign sukuks.
Funds Global: What is the situation with Axa?
SC: The Gulf today is essentially where Asia was 20 years ago, which is hugely exciting given the success of financial hubs in Asia. My view is that, in the medium to long term, international asset managers will commit resources to this region; the question mark is how quickly will all the domestic markets be fully opened up to allow efficient trading and liquidity?
Saudi Arabia, for example, is a relatively closed market today, but it is the most diversified market by sector. Liquidity is relatively low throughout. If all of the emerging market equity managers took a stake in a Saudi ETF, volumes would dominate the market and you would then have unacceptable levels of volatility coupled with potentially inflated asset price rises.
But this will change, there’s no question about it. Axa has looked quite carefully at the joint venture route and the organic-build-out route, but for now our view is that, yes, this is something for the future and we will continually review this.
Our position is that we’ve been covering the GCC for around 15 years. At the inception of Axa IM, client relations were run from London.
As we successfully built out our model, global functions were centralised predominantly in Paris, manufacturing remained in our other major centres in the US and Asia where we have key franchises.
But for marketing and client service functions we have been committed to expanding our presence in each individual market that we cover. It was therefore logical for Axa IM to come to the Gulf region to be closer to our growing number of clients.
This warranted us having client services and sales functions in the Gulf, but the way we organised it did not warrant us bringing other centralised functions on site because it is simply more efficient for us to stick to our centralised model.
We believe that over the last three or four years, international asset managers may have over-invested in the region by expanding faster than neccessary and may have to partially reverse their positions, which has an impact from a reputational perspective.
BNP Paribas is a bank-owned asset manager and has an excellent 30-year banking history in the region, so this warrants the development of local manufacturing in several asset classes here. Axa IM is a standalone asset manager. Our long-term objectives are perhaps the same as BNP Paribas’, but our strategies to market are different.
BW: As mentioned, there is a socially useful aspect to this. What has happened in the past is that international players have visited and occasionally moved distribution roles to raise funds in the region, and indigenous regulators have been happy to invite them.
But now regulators want to see whole businesses move rather than just a few functions. They want to see the manufacturing carried out here because it will benefit the economy through employment and raising skill levels.
Gulf states all recognise that they need to provide jobs and economic diversification and just having foreign asset managers come in and take equity from the region is not the right path forward.
Funds Global: So with all this in mind, how significant a development was it that Schroders, the UK fund manager, now runs a Mena fund out of the Gulf? Is this a landmark event for the industry?
BW: It is positive, yes. I think governments and regulators will want to see a lot more of this.
DB: Most of the Gulf states can leverage their sovereign funds to attract more business functions from asset managers, banks, and insurers that are otherwise just flying in and out of the region to do these deals.
But asset managers have to ask if it is profitable to actually put investment managers in the region – and right now most of them are saying ‘no, not yet’. This is because the Gulf is still a relatively small market and there are not enough investment opportunities.
But there is a ‘carrot and a stick’ element here. The stick is the Gulf country that says to fund managers: ‘You’ve been doing a lot of business in our country, you’ve been helping us privatise, we’ve been doing deals, you’ve been managing our sovereign wealth. How come you don’t have any people here?’
Or they can say: ‘Hey! we’ve taken a 10% stake in your company!’ The Gulf could do more to leverage the ownership that they have of some of the world’s major financial institutions to access the deals that they want.
The carrot is something like what Singapore did in the 1990s when it privately told asset managers that if they managed funds inside Singapore they would get $50m-$100m of money from the Central Provident Fund. I think a lot of the GCC countries are considering doing that too.
DB: It’s true that the price tag to attract firms to a Gulf state would be much higher than it was for Singapore in the 1990s, as asset managers already had Asia funds to manage – they just had to decide whether to manage them from Hong Kong or Singapore.
In the Middle East, however, they have three decisions to make. The first is whether to have a Mena fund or somehow delineate the Mena region. Second, whether to put investment people in the region. And third, if so, where to put them.
SC: I don’t know if we’ll see SWFs act so aggressively to incentivise managers. Some of these funds may already have very substantial investments with certain asset managers. But is money like that going to bring a manager to a certain city? I don’t really think so. My sense is that asset managers, like Axa IM, will continue to be rewarded for delivering high quality solutions, competitive performance and very high levels of service.
I think this region is more likely to be part of an international asset manager’s decision to expand its business model into the Mena region. It will include the frontier markets, like Africa as a potential growth area and address this from the Middle East platforms.
More asset classes
DB: What is also important is that Gulf countries enable additional asset classes. Primarily there’s only really equities now.
A lot of local and international asset managers we talk to think that the infrastructure opportunity is one of the biggest new opportunities here in the Gulf. There is so much infrastructure being built across the region – Qatar, for example, has over $200bn in new infrastructure coming on line in the coming years. If the Gulf states embrace private-public partnerships that lead to infrastructure funds this would open up a new asset class that I think a lot of pension funds and other long-term investors would find very, very attractive.
BW: Also there are a lot of nascent bond funds because some of the yields in this region – including those on bonds that stem from infrastructure projects – will be attractive. Equities are volatile and investors in the region have so far been mainly equity driven. But levels of volatility, together with losses they might have suffered in equity and private equity, will lead to more interest in bond funds.
SC: Our emerging market equities portfolio managers buy GCC securities and we have enjoyed positive performance contributions. But in the context of the indicies, for example the Emerging Markets Free, the region accounts for about 3% and that’s an incredibly small component of the emerging markets arena. If you look at emerging market bonds I think Qatar bonds are the best recognised and among the best rated.
On the equity side, as markets have opened, investors have taken off-benchmark positions in the GCC, but they might be 7-8% maximum and consist of just four or five names. Investors are in and out of the market reasonably quickly because they don't want to get caught in a possible liquidity or volatility trap. So an ETF could actually be a good initial entry point. An ETF is a logical way for an emerging markets equity manager to get access to the region without concerning himself with liquidity, regulatory or trading issues that he might find there.
2008 marks, I think, a real turning point in mindset in terms of what actually constitutes a good investment and what constitutes a bad one. There is more rationality entering the markets. In fact it’s probably gone a bit too far now and investors are missing quite a few opportunities. But it leads them to being much more rational about future investment behaviour. I think investors want to see the development of a bond market in the region and they want to see good, high-quality stock market behaviour emerging. They want to see stock markets being left to flow freely, not protected by governments.
End of part 1
©2009 funds global