Changing a tiger’s stripes

Abdul-KadirMashreq Capital gave its struggling Ireland-domiciled fund a new coat of paint and relaunched it as a sharia-compliant product. Chief executive Abdul Kadir Hussain explains the strategy to George Mitton. When Abdul Kadir Hussain, chief executive of Mashreq Capital, came to Dubai eight years ago and began raising assets for his firm’s newly launched MENA fixed income fund, he encountered opposition. “People would ask, ‘Why do I need this?’,” he says. “The typical response was: ‘If I’m investing outside the region I’ll give a mandate to an international manager, if it’s in the region I can do it myself’.  “The opportunity for regional fund managers was limited, but that mindset has changed.” Local investors now appreciate the value of regional asset management, says Hussain, and this trend has led to inflows for Mashreq Capital, the asset management division of Dubai-based Mashreq Bank. The company now manages about $1 billion, nearly all of it for investors in the GCC. The firm’s institutional clients, which account for 90% of that sum, are largely regional pension funds. The firm would like to grow outside the GCC, though. One client group it has tried to reach are investors in Europe and the US. Five years ago, the firm launched an Ireland-domiciled version of its Bahrain-domiciled MENA equity fund – essentially a duplicate of the existing fund that was structured as a Ucits vehicle – in the hope of attracting inflows from these regions. The launch was not a great success, though. “Most of the investors that came in preferred the Bahrain fund because it had a longer track record,” he says.  “The asset base on the Ireland fund was pretty low, under $10 million for many years.” Hussain decided something should be done with the Ireland fund, so he took the decision to convert it to a sharia-compliant vehicle. The firm appointed a sharia board, sold any uncompliant holdings, and launched the renamed Al Islami Tigers Fund in April. It has since increased its asset base to $20 million, a combination of inflows and an increase in seed capital from the parent company. Hussain has targets for increasing the fund’s assets in future, aiming for $50 million by year end and $100 million by the end of 2015. He says he has learned lessons from the original Ireland fund. “The experience we had was that we don’t have a distribution network in Europe,” he says. “You really have to partner with somebody to distribute it in Europe. We decided that if we were going to do that, we might as well have a unique product. I think a sharia product is something people are interesting in globally.” TRACK RECORD
One of the characteristics of the Middle East asset management industry is that the net asset value of a firm’s funds give only a hint of the firm’s overall assets.  In Mashreq Capital’s case, only a fifth of the firm’s assets are in its funds. The rest is in discretionary accounts, which institutional investors often prefer because it allows them to have more control over their holdings. However, Hussain says it is important to maintain its funds since these provide “a verifiable, authentic, external track record”, which potential investors can assess before awarding the firm a mandate. Mashreq has two equity funds and two bond funds. One of each is sharia-compliant. The conventional equity and bond funds, set up in the mid-2000s before Hussain joined the firm, are domiciled in Bahrain. The aforementioned Al Islami Tigers Fund is domiciled in Ireland. The fourth fund, a sharia-compliant bond fund, is one of only a handful of funds domiciled in the Dubai International Financial Centre (DIFC). Hussain says that when the DIFC opened, Mashreq, as a local bank, wanted to support the jurisdiction. He remains impressed by the investor protection and transparency of the DIFC regime, which he says is largely similar to the European Ucits regulations. However, he admits that having four funds spread across three domiciles adds to the complexity of his operation. “It’s a bit unfortunate the way we’ve ended up, we’re probably in one too many jurisdictions,” Hussain says. So which domicile would he choose to leave, if that were an option? The answer is that it is not the DIFC. “There’s no plan to do anything with those jurisdictions, but the one we continue to look at is Bahrain. If there is an opportunity to rationalise some of our jurisdictions that’s one we might think about.” PREFERENCE
For inflows into funds to rise significantly, Hussain says the Middle East region requires more regulation. He would like to see formalised pension plans as opposed to the current system of end-of-service benefits, which are generally unfunded and paid by employers from their balance sheets. If Middle East-based employees had workplace pensions, like those in the US or the UK, the funds industry would be the main beneficiary, he says. As it is, funds are sold as standalone products, which is a hard sell. “Most expats in this region want to invest back in their home markets,” he says.  “It makes retail growth, particularly in the fund structure, difficult. You’ve almost by default got to focus on institutions.” For Mashreq Capital, these target institutions will continue to be pension schemes in the immediate future.  Although sovereign wealth funds in the region have plenty of money to invest, they tend not to invest it with regional asset managers, preferring international firms which have the scale to absorb the huge mandates they offer. Hussain says the firm is considering adding to its product range. One option that the Ucits framework allows, which the Bahrain framework does not, is leverage. The firm may add some kind of leveraged note on the Al Islami Tiger Fund, as well as an institutional share class and a UAE dirham share class too. Whatever happens, Mashreq Capital has already made significant gains. As Hussain looks back at his eight-year career in Dubai, it is the growth in the firm’s fixed income department that pleases him most. “When I came here we had little issuance, little understanding. It was an opportunity to get into a market from the ground up. We had practically zero assets under management in fixed income when I joined, now we’re at about $700 million in fixed income. It’s been fruitful.” ©2014 funds global mena

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