Asset servicers in the Mena region exist for local managers that want to expand internationally, and for international managers that want access to the Gulf and surrounding area. Here they talk about the problems faced by managers in the region and the challenges, such as automation, that asset servicers face in order to help clients. (part 1)
(head of business development, State Street)Glyn Gibbs
(head of business developent, HSBC Securities Serivces)James Martinson
(SVP, Maples Finance)Craig Roberts
(chief executive officer, Apex Fund Services, Dubai)Michael Slater
(senior vice president, Northern Trust)Thomas Sams
(business development director, Citi)
Funds Global: For fund distributors and managers, how important is it to have local facilities for fund services? To what extent can, or should, service providers offer fund services remotely for funds targeting Middle East investors?
Craig Roberts, Apex Fund Services:
Managers in the region appreciate the fact that servicers have a local presence. This solves basic issues of time zones, understanding the markets and helps us to be responsive to the local players. It takes time to understand what goes on here and why it happens in certain ways and you can’t easily learn that from London or Luxembourg. A lot of the managers do need the extra expertise that we can provide. We’re more than just a basic administrator to them; we are a resource that can help them. We can maybe translate a problem for them or solve a particular issue that they’re struggling with that may not quite be your general field of play. But partnerships between managers and servicers are a lot easier because they [the managers] have a little bit more reliance on the fact that you’re here. However, on purely operational things like currencies, we can work with any banks on their time zones; we can access them and clear a lot of the necessary things through very quickly.
Tom Sams, Citi:
I’ve worked with Middle East clients for six years and in my experience, it really depends on the requirements of the fund. If a local, in-region manager is looking to launch a Dublin Ucits fund then we will connect them with our Dublin team – the same goes for Luxembourg. This means the fund manager has the on-the-ground, jurisdictional expertise they need to best manage their fund.
In conjunction with the specific regulatory requirements of different fund domiciles, it is important to give the manager the right level of service. For example, I’ve spoken to managers whose funds require both monthly or weekly NAVs (net asset valuations), but if the NAV is delivered before Friday then they generally do not ask for the services of an in-region accountant as they’re comfortable with a hub-type solution. Conversely, an in-region solution is very important for some managers, irrespective of whether the NAV is cut daily or weekly. Moreover, if the fund is investing in this part of the world, you need to be here to be able to answer those questions on a timely basis.
In my view it is very important that you can provide all your clients with a local contact who has the right skill set and who can be the day-to-day touch point – this means being in the same time zone and available from Sunday to Thursday. This is essential when custody is added to the fund services mix as you must have an extra service layer in place in order to address another set of market requirements that the fund is likely to have.
Dimitri Arlando, State Street:
Sometimes it is more efficient for service providers to do the processing in its hub or centre of expertise. However, it is also important for the client to know that if they pick up the phone, somebody is there in the same working hours as theirs. Clients get frustrated when they pick up a phone on a Sunday or a weekend and have to wait until Monday to have their query dealt with. It’s a long wait and a lot can happen in the region in a couple of days. So, if you can create a service model where the processing is done in the provider’s hub and the client service is done locally, it satisfies the client and is often more efficient for the service provider.
We have clients based in London or Hong Kong who deal with us here in Dubai, and they get used to the fact that we work a Sunday-to-Thursday week. Sometimes, they appreciate it because it brings their weekend around quicker. They get more work done by Thursday, and then we can respond on Friday. But come Monday, they come to work after we’ve had a full day’s work – on Sunday – and we’re able to get their weekly stuff out to them. They think this is fantastic, although these clients are the exception rather than the rule as most of our clients are local. In our field, you don’t have to be in the same location, but there are advantages to being close to your client.
James Martinson, Maples Finance:
There are clear and distinct advantages to servicing clients from the region and I agree that local knowledge, which you can only really gain from being in the region, is key. We feel it’s crucial to be in the region, servicing our clients in the same time zone and during the same working week. That being said, it’s also very important to be able to support your suite of services globally from all the major time zones and key jurisdictions. That way you can interact with managers locally and facilitate client work across jurisdictions while still having that local presence to provide the necessary support on the ground in the first instance, but then also to support fund managers’ businesses globally.
Funds Global: How much of your business is Ucits driven, be it Luxembourg or Ireland, and how much of it is regional?
Glyn Gibbs, HSBC:
Interest in Ucits is growing. Clients are beginning to value Ucits more, over and above the less regulated structures through the Cayman Islands and British Virgin Isles. Clearly, part of that is driven by regulatory and legislative changes elsewhere in the world, but if an asset manager has ambitions to pick up large institutional investment from overseas, then being able to offer a Ucits-regulated proposition has its attractions and benefits. The manager does have to be confident of picking up sizeable investment because there are substantially higher costs associated in going down that route than going for the Cayman type set-up.
Regarding local funds, in a number of jurisdictions in this region, you have to be locally based whether it’s in Qatar or UAE [United Arab Emirates] or Saudi Arabia or Bahrain. If you’re launching a locally domiciled fund then your service providers have to be in that particular country. Therefore it’s a prerequisite you’re represented there.
It must also be remembered that we are covering twelve very different markets. It’s not as homogenous as perhaps in Europe where processes may be more efficient and much more automated; here the simple opening of a custody account in a particular country may prove complex and therefore it is certainly beneficial to have a representative in that country who is familiar with the regulation, familiar with the particular entities concerned and can explain directly what’s required in terms of paperwork and approach.
Funds Global: Can you give us a bit more insight into the difficulties you’re indicating? To what extent is the asset manager involved with those difficulties?
The key difficulty is that you’re dealing with several different countries all being lumped into the Middle East region. Then you can expand that region to include Southern Asia and North Africa. So you’re potentially covering a vast geographical area with several different countries that all have their own particular challenges and intricacies to which services need to cater. It’s not as easy as operating and providing a service to the North American market, which is largely similar, or the European market, which is again largely similar. You’re dealing with a very large amount of diversity and it’s difficult if not impossible to generalise.
Funds Global: When you’re providing local custody for a locally domiciled fund, at what type of client would that fund be aimed, from the asset manager’s point of view?
Potential clients can be anyone from friends and family of the asset manager to one or two very large investors. If an asset manager is launching a US$25m (€19.5m) to $50m fund they may seek friends and family who can help by seeding funds or perhaps they can assist by reaching out to some close allies and, hopefully, market it to a broader audience.
A fund launched under local regulation in the region would be aimed at distribution within the region and most probably just within the country of the fund sponsor. For example, Bahrain is clearly the most popular local domicile for funds, but you get a lot of Kuwaiti entities launching funds out of Bahrain, which will then be distributed in Kuwait because most of the Kuwaiti banks don’t necessarily have a big regional distribution network. However, if the fund is to be aimed at international investors, then it will probably go down the Ucits or Cayman route. Similarly, if the manager is launching an alternative fund of some sort, then invariably it’ll have to be domiciled outside the region.
Funds Global: From the perspective of a European fund manager wanting to enter these markets to offer funds, are there different options for entering the region?
The advantage of having a regional domicile is that it allows classification of the fund as a GCC [Gulf Cooperation Council] entity. Therefore it is able to invest locally and is not necessarily subject to the same foreign ownership and foreign investment restrictions of a Cayman or European domiciled fund.
Different options are available; however, restrictions do exist on who may register a fund. Funds are also impacted by marketing rules prescribed by regional central banks and regulators, which place restrictions on the marketing of funds in and across some countries in the Middle East, unless they are registered with the relevant central bank or regulator. Some of these restrictions that impact the establishment and marketing of funds across the region can be fairly subjective and are sometimes discretionary in nature so it’s not necessarily always crystal clear what the rules are, which certainly adds a layer of complexity.
Funds Global: Over the past year what have been the most in-demand products and services? And how has that been reflected by the current environment which is still defined by the crisis?
Fixed income has definitely attracted greater interest, mostly because relative returns versus the risk of stock markets were appealing. People are attracted to more fixed income products becoming available for the managers to implement a strategy. We’ve seen as much private equity, but are definitely not seeing any real estate. You would also expect some more of that opportunity-type fund to become available.
Funds Global: Fixed income is interesting because firms want greater access to capital. But to what extent does this affect your business? One player said this was quite a significant area of their business across the bank rather than purely for the asset servicing side.
In the private equity space we’ve seen quite a lot of increased interest in small and medium enterprises in essence going back to more of a traditional venture capital model; asset classes like technology are receiving more interest lately. Many players are very interested in these small and medium enterprises and are also looking at taking longstanding and established regional family businesses, somewhat irrespective of their sector of operation, to the next level.
Funds Global: If they can persuade the families to give up the share ownership, which I’m sure is an issue, is there a drive by the respective regulators, like the QFCA or DIFC, to get local businesses to list on the exchanges, to try and bring liquidity to the market?
Whether it’s a direct drive or not, there have been initiatives on share ownership by those entities. There has been a large undertaking in respect of increasing corporate governance with the aim of eventually getting these guys listed. They have to be aware of the increased responsibility, if they do actually list on the exchanges.
There is currently an initiative in Dubai to look at maybe launching a small cap market, but that’s in the very early stages so we’ll see what that brings.
Funds Global: Talking about demand from foreign asset managers, are you still seeing a good deal of inquiries from asset managers in Europe and the United States who come here to potentially set up a business? Or has the Dubai debt crisis really dried that up?
I sat down with a large foreign player about a month ago. They came over from Europe to scope out how to set up an office, whether it should be a representative office or one based in the DIFC [Dubai International Financial Centre]. They were also trying to understand how the market was performing and the levels of demand. They left in an upbeat mood noting that some of the negativity surrounding Dubai in November 2009 had dissipated and Dubai Inc. had made headway in sorting many issues out.
It just so happened that during the week I saw them the local markets experienced increased volumes, so at least they were on the upside. But, as all of us sitting around the room know, these markets vary from one week to the next and this can really affect some firms’ decisions. The main thing is that more and more firms are waking up to the fact that they must have some exposure to the Middle East. Combine this with our, and the regions’, marketing efforts and we are seeing calls every one or two months from European managers asking for advice.
Some of the medium-sized asset managers in the US are looking to do more the emerging markets. Obviously with the Northern Trust connectivity, we have received quite a few phone calls from that perspective, but that has been more of an inquiry as opposed to actual action.
Funds Global: Asset service providers aim to bring automated processes to Middle East banks to help them sell funds. How easy is it for local banks and fund managers to plug into straight-through processing [STP]?
There isn’t really a straight-through-processing side to the business. There isn’t a huge demand, especially with some of the volumes we’re seeing, so STP tends not to get the same priority as it would do elsewhere. Plus, due to the uniqueness of the various markets and the types of structures that are involved, there often is a lot of customisation involved just to get this to work. We get one or two queries about augmenting something and although it makes sense for us and we can do it, because we’re talking about a smaller scale it does not get fully implemented.
From time to time we receive inquiries from managers wanting to place their funds on platforms for distribution, pooled funds for instance. The difficulty is whether there’s sufficient volume to justify the creation of the automated link into that platform. It comes down to a cost/benefit type of equation, both for the fund manager and for ourselves. What we have seen is that where a manager has put funds on such a platform they’re not necessarily attracting the level of flow they had been hoping for, largely due to the fact that as an investment destination, the Middle East still remains a bit out of fashion, out of favour. That’s a pendulum that will swing back, but at the moment we’re not seeing people making the call that the Middle East has bottomed out and it’s where they should put their money as opposed to, say, Bric (Brazil, Russia, India, China) countries which have outperformed substantially over the past couple of years. So for an international fund manager it’s been a no-brainer on their asset allocation strategy, but it will change, it will come back.
Funds Global: Do you think it will change once the status of some Middle Eastern countries is upgraded to being an emerging market rather than a frontier market?
Certainly that will be an important development should it happen. If the UAE gets upgraded then clearly any emerging markets benchmarked fund has to automatically invest in the country. That would result in a material inflow because there are some pretty big emerging markets funds out there. Bearing in mind the fact that a number of stocks in each of the Mena markets are relatively illiquid, gaining the relevant exposure may be more difficult for a fund than is realised. Whatever happens, the reality is it’s going to bring fund money and cash into the region and it’s going to be a boost to the relevant stock market. So perhaps now is the time to buy ahead of
I would agree. Local investment managers are not looking at the technology efficiencies. They will begin to look at how to gain these technology interfaces when they start developing the Ucits or the feeder fund infrastructures out of Dublin and Luxembourg. There are other outsourcing components that can provide such as data warehousing or web trade services. Those are the efficiencies local managers need to be able to connect to the international brokerage communities. I don’t see them gaining the efficiencies they’re looking for with local partners.
Everyone round the table probably has a system internally that allows them to connect directly with the investment manager, so faxes are dead. You’re already getting some automation because you’re putting a system in, whether it’s Northern Trust Passport or another providers, building up that house’s trading floor. So you’re already getting some efficiencies anyway.
Funds Global: If everybody’s got their own internal systems, is there the danger that, as the market grows and there is a greater need for standardisation, the different internal systems will not fit together in a straight-through kind of way?
When it comes to systems and automation we have taken the approach of in the first instance having a best-of-breed core system in place along with the key building blocks for that system. Most importantly, for all markets and the Middle East in particular, you have to remain flexible as to how you deploy that core system and its components and tailored additions. You have to be able to customise as far as possible. As long as you can provide that link into your system and generate customised reporting solutions you are able to provide clients with the bespoke solutions they require. We are also seeing a lot more demand for middle office-type services, but everybody’s definition of middle-office services is quite different. You have to retain the flexibility and have confidence that you’ve got the right key system and support structure in place that can be interfaced and be flexible enough to generate exactly what your client needs.
I don’t think it’s going to be a terrible hurdle. Fact is, if an investment manager here is looking for best practice they’re going to look to the West or the East to see what other developed investment managers have done and have implemented. All of us have operations around the globe that probably interface with a similar system – much of the time it’s how you deliver that solution locally that really matters. We have successfully implemented so many solutions across the world that it’s often an easy plug and play situation with some bespoke service and reporting agreements.
I think the onus is on the service providers to ensure that their own systems are flexible enough to be able to grow with the market and ensure that any new system developments that come into the market can be easily integrated into the existing set-up – I’m sure that this is true of the systems for all who are sitting round this table – I’d be surprised if they weren’t, to be honest.
Funds Global: Beyond the ‘commodity’ services of custody and administration, to what extent can providers deliver more complex services such as collateral management? Is it investor appetite or regulatory development that hinders this?
At present there are initiatives at various stages of progress in various countries to look at stock borrowing and stock lending. So that may be something that develops going forward to a greater extent than it is at now. But there isn’t a great deal of momentum behind it in relation to regional stocks, particularly when you take into account the beneficial ownership rules in local markets that require the share to be registered in the name of the owner. Therefore, if you go down that route and need to switch ownership of stock, brokerage costs will be incurred which begin to make it look expensive relative to the benefit being gained out of doing it.
Arlando: Local regulators are starting to look more at things like securities lending. Obviously it is a concept that needs to be handled with care in the region given the sensitivity to short selling but if you’re going to move from being a frontier market to an emerging one, products like securities lending and borrowing need to be looked at and developed locally.
Considering some of the more complex services – for example, collateral management – there’s obviously some significance for this service out here. With as much money being moved, and as quickly as it’s being moved, collateral management is a service that’s actually utilised quite a bit. Also, the alternative space is no longer that. Opposed to just holding it as single line of assets, you’re actually looking at a lot more sophistication on private equity and hedge fund servicing. For hedge funds, for example, you’re starting to look at managed accounts within hedge funds and you have to do the custody of those assets. The institutions out here are becoming a lot more sophisticated in how they’re looking at the risk, which is another area that they’re focused on. They’re looking at how they develop their risk management services to understand what they’re getting, not just in terms of custody and administration, but really understanding what the risks are and understanding how to manage sophisticated assets.
From a provider perspective, whether you have operations in a particular country in the Middle East or not, it is likely that all of us around this table have these capabilities. The primary priority is to secure some time with your clients to understand exactly what they need and want. Then, if you can deliver the right blend of lending and collateral management programmes, provide the required level of hedge fund and/or administration services and meet the manager’s in region then you should be in a good position.
That’s exactly right. We provide so many different services around the world and from a service provider’s perspective; we’re all placed to provide sophisticated and complex services to funds. One has to remember that outsourcing to service providers is not traditionally as accepted in the Mena region as it is in North America or Europe, so there is a natural progression that’s taking place here. This natural evolution will, over time, change the landscape of the market and the asset servicing industry in the region. But that being said, we’re well placed to provide whatever clients need and the actual services utilised are still very much client driven.
End of part 1
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