October 2010

MENA FUNDS: Show us the money!

pocketInternational fund managers expect wealthy individuals in the Mena region to employ funds to gain access to global markets. Yet the same is not true of home investment. Angele Spiteri Paris asks why, and listens to fund managers' expectations. A large portion of the money raised by international fund managers to invest in Mena markets has been from non-regional investors. Sovereign wealth funds (SWFs) in the Mena region have mostly preferred to put their money to work in international markets, while local individual investors that do invest in domestic markets have invested directly.
At least, this is the impression of market observers spoken to.
But they also feel that the landscape for raising money is changing now as high-net-worth individuals (HNWIs) and family offices – most of them burned by the global financial crisis and by local events, such as the debt default by Dubai World – are beginning to seek out fund management products.
It is largely felt that, particularly before the financial crisis, HNWIs in the Middle East tended to invest in their domestic markets directly.
Rami Sidani, fund manager of Schroder ISF Middle East, says: “Among local high-net-worth individuals there is a prevalent trading culture and these investors used to invest in the local markets directly.”
Schroders is a global asset management firm with €200.3bn in assets under management (AuM). The Schroder ISF Middle East has €150.3m in AuM.
Vivek Kudva, a managing director who covers the Middle East at Franklin Templeton, says: “People [in the Middle East] tend to have short-term investment horizons and although data on the exact figures are not easily available, it’s fair to say that some do invest directly.”
Franklin Templeton is a US fund manager, with around €463.7bn in AuM.
Muneer Fulayfil, director of BNP Paribas Investment Partners, Mena, agrees: “High-net-worth individuals have a bias to taking their own educated investment decisions. In this segment 90% of the equity market capitalisation in the Middle East is through direct investments.” BNP Paribas IP is a French firm with €569bn of AuM.
Direct investment by HNWIs seems to be entrenched, which threatens to make the pooled funds offered by international fund managers with a focus on the region somewhat overlooked.
Jean-Michel Bourgoin, global head of state entities coverage at Amundi, which has €675.5bn in AuM, says: “There is a tendency for Middle East investors to believe they’re more in control if they don’t invest in commingled funds. The high-net-worth individuals think they know their domestic markets well enough and that they don’t need fund managers to invest in these.”
But Sidani, from Schroders, says: “After the crisis, things started changing. You’re beginning to see more high-net-worth individuals talking more to fund managers and professionals in the field.”
Fulayfil, of BNPP IP, says: “Clients are starting to work closer with advisors and are becoming more open to being educated about diversification through those advisors. It’s about educating the high-net-worth individual clients about their investment options and introducing best practices. Then it is up to the end client to trust their advisors.” A family affair
And it’s not just the wealthy that are showing more interest in the funds market. Large Middle Eastern family offices are also becoming more receptive to fund managers, players say.
Joseph Pinto, regional head of Southern Europe and Middle East at Axa Investment Managers, says: “We’re increasing our coverage of family offices and the reception we’re getting from them is positive; they want to listen to what we have to tell them. In the past, several family offices were very active in the market directly and were very leveraged.
“But now those of them that are savvy investors are coming to fund managers for guidance.”
However, the rate of change in attitudes towards fund management is often difficult to quantify.
Kudva, at Franklin Templeton, says: “We don’t see this change directly in our dealings with the distributors and the private banks. People haven’t specifically said things
are changing.”
Pinto notes: “It is difficult to see an increase in demand for our products from HNWIs because we work behind the scenes. What we have seen, on behalf of the private banks and family offices, has been an increase in requests to better understand the products they buy.”
Sidani, of Schroders, says: “If the global recovery continues, I expect to see HNWIs coming into the markets at the beginning of 2011. Hopefully they will do so through asset managers, rather than do it themselves, which is what they used to do before they were burned by the crisis.”
Similarly, Fulayfil says: “Fund managers will see flows because clients will make more use of private banks, and those private banks need to select the best-of-breed funds from the universe.”
For the time being, some managers in the region expect flows from abroad to continue into Mena markets, and that when HNWIs from the region itself become more active, they will look to invest outside of the region for diversification.
Sidani, at Schroders, says: “In the short term, we will continue to rely on international money coming into our Middle East business; HNWIs will come later.”
Bourgoin, of Amundi, says: “We see HNWIs begin to invest, albeit reluctantly, in commingled funds within highly specialist asset classes like commodities and emerging markets.”
Will Middle East HNWIs employ fund managers for exposure to their own markets? Bourgoin doesn’t think so.
“They [local investors] still believe they have better insight into their markets than any foreigner would. They are very involved in the business and believe they’re better informed. Therefore, I’m not convinced asset managers, especially foreign asset managers, can bring much value-add to this client base, except in terms of reporting, transparency and governance,” he says.
It seems that foreign asset managers have not had much traction in terms of local money flowing into their Mena funds. Sidani says: “We never raised much money [in our Mena funds] from local investors. Our flows came from institutions in Asia and Europe – and this has not changed, those flows are still there.
“We have around $250m (€195m) in the greater Middle East region and most of that money comes from international institutions from Asia and Europe.”
A result of the financial crisis is the speeding up of the shift from West to East of global purchasing power. Does this mean, then, that Middle Eastern clients are becoming more important to global fund managers?
Again, not in terms of Mena funds, says Sidani. It is still the institutions in other parts of the world that will help fund managers achieve scale in the Middle East.
However, other fund manager offerings have proved popular.
Kudva, from Franklin Templeton, says: “The most popular products or strategies were emerging market equities, global bond funds and guaranteed/structured products. Emerging markets, which include Mena, will continue to be popular.”
Pinto, at Axa, agrees. “We saw an increase in demand for emerging markets [from Middle East clients]. Actually, investors in the region were ahead of a lot of the rest of the world when it came to exposure to the emerging markets, since historically they were well exposed to their own markets and to Asia as well.”
Sidani, at Schroders, says the firm’s global emerging markets fund has been of the best-selling products in the region.
According to Bourgoin, it is the desire for exposure to certain emerging markets that is compelling clients in the Middle East to use funds. He says: “Middle Eastern investors are ready to use commingled funds from external managers to get exposure to certain markets, like Latin America and international global fixed income.”
When it comes to fixed income, however, the broad appetite is still not really there; and this may lead to a significant opportunity for fund managers, if the interest in the asset class is aroused.
Bourgoin says: “There could be a significant opportunity for foreign fund managers offering fixed income in the Middle East but very few investors are interested in the sector at the moment. But if we see the beginnings of some spark of interest, then foreign fund managers can seek to make the most of that.” Growth forecast
Most asset managers would not make public their Mena assets under management, but they all say they are seeing growth in the region.
Kudva, of Franklin Templeton, says: “Both retail investors and SWFs have money to invest and therefore this is where the opportunity for fund managers lies. We plan to grow our client base across client segments and will be tying up with new distribution partners in order to achieve this goal.
“At present, the firm’s assets under management in the combined India and Ceemea [Central Eastern Europe, Middle East and Africa] region are around 4-5% of the $602bn total AuM, and we expect this
to increase.”
Pinto, from Axa IM, says: “The Middle East is one of our key strategic regions for growth. We have added two additional recruits to the team and are broadening out our client segments.”
Bourgoin, of Amundi, says: “We have seen strong growth in the Middle East region since 2007. This was mainly because of the high price of oil and also because SWFs kept investing, even after the crisis hit.”
Although he is not at liberty to give the exact AuM held by Amundi in the Middle East, Bourgoin says: “It’s not far from US$10bn and this covers distributors, SWFs, local banks and some large family offices.” ©2010 funds global

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