The Middle East market in listed equity funds is evolving as local providers create new Mena products. Nick Fitzpatrick looks at selected funds and asks what regional turmoil means for their success in asset gathering.
Local Middle East investors are heavily exposed to unlisted equities and tangible investments like property, but the signs that a more traditional funds market is emerging among this client segment are easy to find.
Banks have launched active public equity and exchange-traded funds in recent years focused on returns from the Middle East and North Africa (Mena) markets, which are some of the fastest growing economies outside India and China.
A particularly notable development in the region’s funds industry came last October when the shareholders of Abraaj Capital, a Dubai-based private equity group, launched Menasa Capital Management, an independent asset management business focused on fixed income and public equity markets in the Mena and South Asia regions – a region it labelled as Menasa and from which the business takes its name.
By average fund industry standards, Menasa’s strategy is fairly sophisticated. Offering a Cayman Islands-domiciled but Dubai-regulated multi-strategy fund, the product can employ large amounts of leverage.
Menasa Capital’s regional investor-base includes sovereign wealth funds (SWFs), banks and financial institutions, and at launch it had around $350m (€242m) in assets under management, which included its segregated accounts.
A more vanilla product that launched recently was Gulfmena Investments’ Gulfmena Access Fund – a long-only relative-value product that also targets Mena listed equities.
The company’s shareholder base includes prominent families from the region, including the Malhas Family, a Saudi-based family office.
Although the Dubai Financial Services Authority regulates the investment firm, the fund itself is domiciled and regulated in Luxembourg, which reflects the ambitions of Gulf asset managers to branch out to an international client base.
Gulfmena says the actively managed strategy has an ETF-like pricing structure, “making it one the most competitive long-only products in the market”. The manager is Haissam Arabi, who is also chief executive officer and who has one of the longest and best performing track records in the region, the firm says.
Gulfmena also manages an absolute return fund and says that together with the latest long-only fund it can now cater to both alternative and traditional investors seeking access to the region.
As a sign that asset gathering in the region is still a viable exercise even amid the geopolitical unrest, and despite the older problem of Dubai’s debt, the company said it has raised more than $65m in assets under management in its second year of operations despite “difficult regional markets and a challenging fund raising environment”.
Profiting from fees
Gulfmena and Menasa Capital are just two asset management firms that could partake in the growth of asset management fees as funds under management increase in the coming years. McKinsey and Company, the management consultancy, estimated that asset management revenues in the Gulf Co-operation Council (GCC) region will have increased since 2005 by 10 to 15% annually by 2015.
At last count, there were 308 locally incorporate funds in the GCC with $29.3bn of assets, according to the National Bank of Abu Dhabi’s GCC Mutual Fund Index 2010.
Additionally, there were 311 “local origin sponsored funds” with assets of $28.2bn, and there were 283 funds with the GCC or one of its constituent markets as a geographic focus with assets of $28.3bn (all as at June 2010).
But as well as the local managers bringing in more listed equity product, familiar Western names have been staffing up their offices in the region which may open more doors to funds.
Among a string of hires this year has been Philippe Boutron, Société Générale Private Banking’s appointment of a regional chief investment officer in Dubai. As well as chairing the bank’s local asset allocation committee, Boutron will also take responsibility for developing and managing the dedicated offering of products and services for Middle East clients.
Globally, the bank has €84.5bn of assets under management (as at end December 2010) and offers mutual funds among its products.
Merrill Lynch Wealth Management made three hires to the Middle East team, including Leila Alameddine as market manager for Levant, based in Beirut. Previously she was at Audi Saradar Private Bank, where she was an executive manager covering clients in Europe and the Middle East.
Tamer Rashad, head of the Merrill business, says: “We are witnessing a rapidly growing interest from clients to expand the breadth of their portfolios and increase exposure to international investments.”
One train of thought about Middle East investors is that local tensions since the uprisings have made investors appreciate the value of diversifying their portfolios to overseas markets.
One firm that positioned itself to do this is Hyperion Asset Management, a boutique Australian equities manager. In September last year, it launched the shariah-compliant Hyperion Australian Equity Islamic Fund, authorised in Bahrain.
The fund is available for “expert” investors, defined by Bahrain authorities as individuals and institutions that have at least US$100,000 in financial assets, as well as governments and related organisations. The fund is managed in Australian dollars and reported in US dollars.
“Since we emphasise cash flow and low debt ratios in evaluating companies, our transition to Islamic investment discipline has been streamlined,” says Emmanuel Pohl, chief executive officer at Hyperion.
“Hyperion’s investment ethic aligns rather naturally with principles of shariah-compliant investing. We have never used leverage or derivatives in our core strategy,” he says.
Hyperion launched the fund before the political tension in Bahrain, where the fund is registered along with around 2,700 other funds.
But how will the tension affect those managers that offer Mena funds, which are more common among the burgeoning homegrown talent? The answer could be surprisingly positive.
Although the tensions may cause some investors to diversify into international investments, some investors targeting Mena still see good reasons to invest there – not only despite the regional unrest, but even because of it.
Tommaso Bonanata, fund manager of the Julius Baer Northern Africa Fund offered by Swiss & Global Asset Management, says stronger growth is expected after a post-crisis adjustment period.
“Following the recent regime protests in North Africa, it is true that some investors could move from the region to continents with greater political stability, such as Asia. However, there is another angle to consider. Given North Africa’s overall growth in the last decade, and how government control [has] limited economic expansion, we believe that growth will become stronger once the post-crisis adjustment period is over,” said Bonanata in a recent report.
He notes that Egypt’s finance minister, Samir Radwan, said that all outstanding infrastructure related projects would go ahead, and mentioned other measures that could aid stability.
Companies with international sales and with a competitive advantage in their respective industries remain attractive, and he also favours certain industrial companies in Egypt that are benefiting from outsourcing by European companies.
Andrew Wilkins, chief executive officer at Acordias, a distribution support platform, says: “Emerging markets have been popular with investors in the past few years, and our brokers are currently seeking more undiscovered growth opportunities.
Underperformance within the Mena region in 2009 and 2010 to wider emerging markets has left it undervalued and attractive.”
In another sign of how Middle East managers are expanding their Mena offerings out from the region, Acordias earlier this year signed a deal with Dubai-based Emirates NBD Asset Management, which has $1.6bn of assets. Acordias will support the distribution of a managed fund line to European advisers and international life companies, including Mena funds.
For the fund management firm, which is owned by Emirates NBD, a major retail bank in the UAE, the deal signified the latest and perhaps most significant push into the European market.
Deon Vernooy, chief executive officer at Emirates NBD Asset Management, said that the business had been exploring various options to enter the European market and had identified suitable channels to reach asset allocators and financial advisers.
The agreement was the latest step in the fund manager’s strategy to increase third-party distribution partnerships and follows its foray into Singapore in 2010. The group has signed agreements with “numerous” global distribution partners over the past two years.
Now Emirates NBD – along with Menasa Capital and Gulfmena – must convince investors that the region is still a viable investment, despite Moody’s downgrading of Bahrain.
Swiss & Global’s Bonanata appears to think the unrest is the beginning of true change.
“The revolutions in North Africa and the Middle East prove that autocratic regimes are no longer tolerated in fast developing societies. Investors should consider the actual reasons for such revolutions rather than their short-term negative impact.
“They are a positive step towards democracy and social improvement rather than risky unjustified events.”
©2011 funds global