TECHNOLOGY: The waiting game

IndicesTechnology vendors that hope to sell into the Mena market are having to bide their time, discovers Nicholas Pratt.

There are sovereign wealth funds, stand-alone and bank-owned asset managers in the Middle East and North Africa (Mena), and they all have different objectives when it comes to technology.

For the sovereigns, real estate and private equity portfolios are still the main products for domestic investors. Many of their listed equity funds are managed by external investment firms based overseas. The sovereigns are looking for technology to link these funds together and provide aggregated information rather than technology to manage specific funds at a granular level.

More recently, however, some sovereigns have looked to bring their funds back in-house from third party money managers and overseas sub-advisers, says Tom Driscoll, managing director, global, at Charles River, the US-based provider of front and middle office buy-side technology. This change is due to disappointment with the performance of their funds and a feeling that the funds have grown big enough to warrant managing in-house. The sovereigns are looking for suitable technology to help with this.

The bank-owned asset managers tend to link their wealth management businesses with brokerage and are often looking to stretch their wealth management systems to cover both areas – a combination that may not be typical for system providers.

Meanwhile, the stand-alone asset management market is developing quite slowly so cost constraints are a factor. Those firms that are buying asset management systems tend to buy off-the-shelf packages.

Regulation is often cited as a potential driver in the use of technology and in the Mena region there is not only the influence of international regulations like Ucits V and Dodd Frank but also local laws and standards designed to protect investors and provide more transparency.

But, says Catherine Doherty, founder and global chief executive at Investit, progress has been gradual. Local regulations are not yet as demanding as international regulations and those Mena jurisdictions that are adopting international standards, such as the Dubai International Financial Centre and the Qatar Financial Centre, are finding that international investment is not as active as anticipated.

“The hope was that Mena fund products would be sold to international investors but they are waiting for the Mena markets to graduate from ‘frontier’ to ‘emerging’ market status before they invest. So the Mena funds are being marketed to a very low level of allocation.”

The small size of domestic asset managers’ IT and operations teams is also a discouraging factor for many of the big risk management and analytics vendors, which are used to selling sophisticated systems to managers with operations teams of 15 or more.

In the Mena region, the staff of many ops teams can be counted on one hand. There is, however, another group of providers that is making headway in the Mena market.

“There is a solid base of 15 to 20 software developers coming from India and from other Mena countries [Jordan and Lebanon] and developing software that is geared towards the local Mena managers and also enables them to keep their costs down,” says Doherty.

For the Western system vendors, the Mena market is still a difficult sell. Some have committed time and resources to the Mena market, developed a physical presence and been rewarded with some flagship clients (SunGard was selected by Gulfmena Investments, for example). Advent Software signed its first Middle East client back in 1992 but focused properly on the region in 2004, selling to family offices, wealth managers and bank-based asset managers.

“The technology market is still young and there needs to be more development but we are seeing more investment in infrastructure, better interfaces and interest in cloud services,” says Hazem Elmalla, head of client services, Mena, at Advent.  

Non-listed assets like real estate and private equity are common in the Mena market, especially with sovereign wealth funds, and eFront has been a successful vendor in this sector.

“We see many companies looking to shift from Excel spreadsheets and paperwork,” says Wissem Souissi, sales manager for eFront in Dubai.

Such shifts are a few steps behind what is happening in Europe and North America, where managers are looking to upgrade to the latest and most advanced technology.

But Souissi says that the rapidly growing Mena market has an “insatiable appetite for flexible technology and easy to use platforms” and eFront has invested accordingly with offices in Dubai and Abu Dhabi.  

Risk management has not traditionally been a big focus in these markets, even the more developed ones such as Dubai. But the effects of the financial crisis have changed things, says Michel Daenen, sales director for Misys’s Capital Markets business in Mena. Misys owns the buy-side risk management product Misys Sophis Value.

Prior to the financial crisis, asset managers in Dubai mostly invested in the relatively buoyant equity markets, but they have now turned their attention to the less developed fixed income market. This has had technology implications for both asset managers and technology providers, says Daenen.

“Fixed income is a more complex instrument with a longer duration and different requirements in terms of value at risk (VaR) calculation or reporting. Whereas many asset managers may have been able to get by with spreadsheets for their equity funds, this is not the case for fixed income funds.”

There are adjustments that have to be made to vendors’ standard offerings to cater for the Mena market, from language to the changes in the weekly working schedule and the influence of Islamic law. Perhaps, though, the biggest adjustment is not adapting standard products for the complexities of the Mena market, but realising that the market is not sufficiently large or sophisticated enough to warrant the complexities and cost of the standard systems.

Consequently, most vendors have a threshold in terms of their target market. Charles River, for example, is aiming predominantly at managers with at least $1 billion of assets under management. Some vendors have also had to re-evaluate the perception that cost is not too much of a factor in a cash-rich market like the Middle East.

“Once you go beyond the handful of top firms, price sensitivity is a big issue,” says Driscoll.

In addition to setting a minimum size when identifying potential sales targets, vendors are also looking to develop new versions of their products. For example, Charles River
has a position management system using third-party data feeds and is not wholly reliant on an in-house fund accounting system.

Other vendors are relying on a modular approach to the product where a standard platform and some pre-loaded market specific metrics can be supplemented by additional functionality according to managers’ demands.

Given that even the most basic version still involves a certain level of IT resources within the asset manager to manage and maintain the system, Misys is looking at developing a service bureau model to handle the smaller managers and hedge funds.

Because a fully developed back-office infrastructure is missing from many asset managers, the adoption of hosting, service bureaus and cloud computing would make sense. And although there is greater recognition of these operating models, there is still a reluctance to store data with a third partyor in another jurisdiction, and this will hold back the adoption of cloud computing or remote hosting. 

Despite the signs of gradual progress that vendors are seeing and the changes they are adopting to make their products more suitable for Mena asset managers, the most important quality may be patience. “I think the vendors have been disappointed that the asset management market has not really developed yet,” says Doherty.

And this disappointment may remain for some time.

“Not only is the global investment climate relatively flat, there are also lots of major developments competing for airtime in the Mena region – from airports to football stadiums – and the creation of a sophisticated financial services industry has to take its place in the queue.”

©2012 funds global

Related Articles