Strategy is the key to success in the GCC

To be successful in the Gulf, global asset managers must understand that strategy outcompetes speed or scale, argues Paul Doyle of Fiera Capital*

Though we as an industry speak about the money-swell in the Middle East, it surprises me how few asset managers have seen it up close. The pace of change, the evolution of the region’s cities, the scale of available capital; all of which we could call financial “sophistication”. These are temporal developments you can only feel in the flesh, representing both the GCC’s emergence as a centre of wealth – and its conviction to rapidly globalise. 

I emphasise pace, because the Gulf isn’t doing too much differently from the West from an asset allocation perspective. Like other institutional investment overseas, sovereign wealth funds, (SWFs) pension funds, family offices and endowments in the region, are on a learning curve when it comes to diversification. They, too, are becoming increasingly discerning in how, where, and what they invest in, and are rebalancing their portfolios accordingly. 

The difference is why. In the case of Gulf states, the imperative is both the speed at which they must deploy capital as well as the ticking clock of intergenerational wealth transfer. Principals want to ensure that the gains they have so far realised are safeguarded, but also cultivated sustainably by their successors. By contrast, in Europe and North America – and to some degree in the Far East – it is structural trends like demography and deglobalisation, but also domestic reform, that is agitating the asset mix. 

Intrinsic bias

The interesting thing about this step change is that investors in the Middle East are auditing their intrinsic biases. Global asset management companies like Fiera Capital, which are growing their focus on the region to support existing clients, are there to support that process. Whereas the traditional 60/40 portfolio construction may once have been a safe port and a successful passive strategy in a near-zero interest rate environment, there is broad acceptance that taking the same advice today may yield significantly lower risk-adjusted returns. 

Similarly, many investors taking similar advice may coalesce around similar construction tendencies, or concentrate their exposures in familiar ‘core’ asset classes, overlooking correlations that weaken a portfolio’s hedging benefits. 

Leveraging the strong relationships we’ve already formed in the region, we opened our first office in the Middle East in Q1 of this year, because we see an opportunity to offer differentiated advice in a marketplace for investment prospecting that is materially different to what it was a few years ago. That is, in part, a global reeling from quantitative easing. But it is also the acceleration of the Gulf’s ambition to deliver for investors at all tiers, and the demand for access to investment strategies that are both complementary to existing mandates and highly customisable. 

Fiera Capital is an independent global asset management company equipped with nearly 50 diversified strategies across public and private markets. Like our peers, our interest is in managing strategies that serve as ‘drop ins’ to complete a sector or asset class exposure to create an ‘all-cap’; or to create geographical diversification; to take in a new benchmark, or to smooth out risk weightings. On a standalone basis, strategies must also outperform. Active investors strive for alpha generation, and in our case, we do so largely across asset classes that are in latent demand in the Middle East. 

Without wanting to take the GCC as a homogenous group, there are some common themes where investors are looking for greater participation. One is in sponsor-level asset ownership in resources that are not as abundant in the region, such as timberland and agriculture. Another is in products that have synergistic qualities with investments in the Gulf, such as new economy infrastructure, renewable energy and the built environment, such as housing and logistics, which collectively make up the region’s biggest domestic focuses. 

Overlooked markets

From a public equities perspective, institutional capital is seeking guidance to capture alpha in previously overlooked markets where active management is the access and the edge. Small-to-mid cap equities abroad and emerging markets are two profiles where volatility and perceived risks have historically meant that they have been excluded in portfolio curation. Saudi Arabia, Qatar and UAE are categorised as ‘emerging’ and ‘frontier’ economies, respectively. That they should consider homegrown investments to be of a lower quality, will be out of the question. 

Perhaps most importantly, the world has become a lot more complicated as geopolitical conflict coincides with global supply chain disruption, inflationary pressure and financial retrenchment in some areas of international banking. Investors in the Gulf are searching for trusted fiduciaries that share in a long-term investment philosophy, for the good of their beneficiaries.

*Paul Doyle, Director – Institutional Markets, Fiera Capital

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