Asset managers in the Qatari capital discuss the dangers of moral hazard, the prospect of privatisation and a profit squeeze on their managed accounts business. Edited by George Mitton.
Sameer Abdi, partner, mergers and acquisitions (Ernst & Young)
Ataf Ahmed, head of global investment products (QInvest)
Afa Boran, head of asset management (Amwal)
Ajay Kumar, assistant general manager, investment and funds (QNB)
Rod Ringrow, senior executive officer (State Street Mena)
Funds Global: MSCI says limits on foreign ownership of stocks are a barrier to Qatar gaining emerging market status. Will the authorities relax these rules, or is the prospect of emerging market status no longer important?
Sameer Abdi, Ernst & Young: It is not a priority for the government to relax foreign ownership. For example, the authorities recently announced Doha Global Investment, an investment firm backed by assets from the sovereign wealth fund, will be privatised. But the initial public offering is only open to Qatar investors, which suggests the government’s plan is to share the wealth of the country with the citizens of Qatar.
If that’s the case for the next wave of privatisations too, we won’t suddenly see a change in foreign ownership limits.
Ajay Kumar, QNB: Removing foreign ownership limits won’t make much of a difference to this market. The only time I have seen those limits reached was a couple of times in the 2007 peak.
Foreign ownership limits are not the reason foreign investors are not coming. There are reforms that are far more critical and needed. How are we going to improve liquidity, corporate governance, and improve corporate laws, implement market-making, shorting, lending and borrowing?
Qatar may have missed the boat in terms of getting upgraded into the MSCI Emerging Markets Index because, if Saudi Arabia were to change its foreign ownership rules, it would hamper Qatar’s chances.
Rod Ringrow, State Street: The biggest benefit of Qatar Global Investment going public will be to help create institutional demand in the market rather than just retail investment. The one thing all markets in the region lack are serious, long-term institutional investors. They provide the bedrock, whether they are pension funds or insurance companies.
Kumar: But you need active retail investors, too. Long-only institutions which just buy and hold will not add much value. If you have too many of them, you have a standstill market in which pricing becomes inefficient. You need investors across the liquidity, return and risk spectrums.
Ringrow: It doesn’t help that government-related entities in Qatar control about 60% of the market, but more foreign institutional investors would be a benefit.
Ataf Ahmed, QInvest: Our view is, it’s a balancing act. If you look at Saudi Arabia, there is a desire to open up, but as with everything in this region, it’s not going to happen overnight. You don’t want to open up and suddenly have a mass of money pouring in and then going back out; that’s been very disruptive to a lot of other emerging market economies.
On the question of upgrading Qatar to MSCI emerging markets status, it’s not that important. Whether MSCI classifies it one or the other doesn’t take away the attention that Qatar’s getting and the strategic importance it has. The challenge is how do institutional investors get access.
Afa Boran, Amwal: Qatar would not be a large weight. So for most international investors who do not follow the local or regional issues, changes in ownership limits may not mean much. I doubt a Californian pension fund is waiting to see if foreign ownership limits will increase so it can immediately make large equity allocations to the country. However, foreign ownership in Qatar will increase over time because there are several interesting stocks, such as Qtel, for instance, which has become a regional player.
It is the biggest mobile operator in Iraq and has access to cheap capital, so it can continue to grow.
Regardless of whether Qatar increases foreign ownership limits, there is good potential for asset management. Currently, the Qatar stock market is worth about 400 billion riyals, about $100 billion. Half of that is held by the government. Even if we assume this portion is static holdings, the rest is privately held shares. In comparison, the asset management industry is worth only about $2 billion. The challenge for asset managers is to convince investors who self-manage, or simply passively hold on to their portfolios, to seek our professional advice.
Funds Global: Will the planned spending on hotels and infrastructure ahead of the 2022 World Cup in Qatar lead to more sustainable growth for the country and the region?
Ringrow: It depends on what is planned for after the World Cup. There is little point in building for a month-long tournament if, at the end of it, there’s nothing to fill those hotels.
One question is, will the World Cup eventually be shared among other countries? For example, will Bahrain and Saudi Arabia get to host some games? That would help to develop the region rather than just Qatar, though perhaps the approach is a little controversial.
Abdi: I have a different view. Out of the roughly $164 billion of infrastructure projects that are intended to happen, only about $7.5 billion is for the World Cup itself. Most of it is infrastructure spending that should have been in place in the past 20 years.
Take the plan to spend $27 billion on roads in Qatar. If you live in Qatar you know that that money is direly needed. The rail infrastructure to connect the Gulf Cooperation Council (GCC) rail network is needed to improve trade flow.
Some question whether the plan to build 85,000 hotel rooms will lead to sustainable economic growth, but with the way tourism numbers are increasing in Qatar, there is a likelihood that occupancy, at least on weekends, will be good.
Kumar: Say the country has 90,000 hotel rooms in 2022, and you want 70% occupancy for 365 days a year, you are looking at more than 20 million visitors. Now, that is a challenge. I agree about infrastructure, it’s a dire need and it will promote greater trade between the GCC countries, but I’m not sure about the hotels.
Ahmed: We’re speaking on the assumption that the hotels will continue as hotels after the World Cup. In the last Asia Games [hosted in Guangzhou, China], a number of temporary hotels were built and later converted. The same happens in many countries that host the Olympics.
Abdi: There’s a regional example here. In 2001, people questioned why 140,000 hotel rooms were needed in Dubai in the next 12 years.
The emirate had a strategy, they implemented it and now you can’t find a hotel room in Dubai.
Funds Global: Qataris often keep their money in fixed deposit accounts and invest directly in stocks rather than through funds. Have you seen any change in investor habits?
Ringrow: If you look at the GCC, the total funds market is worth about $30 billion. Saudi Arabia is probably 60-70% of that. The overall market is still largely discretionary portfolio and managed accounts so that’s where the inflows will come from.
Boran: Wealth in the region is very concentrated and as a result the retail market here is small, and many investments are self-managed.
Only a couple of years ago, retail investors here got a significant pay rise so their first reaction was to go out and spend. So initially, there was a boom in car sales and of other big ticket items. We’ve not seen it yet, but I suspect the next step will be a rise in saving at which point the demand for mutual funds could increase.
Abdi: But it could go two ways. Either people become more prudent and savings-oriented, or the country comes to resemble Kuwait, where there is a culture of dependency.
That’s the danger, because there’s a moral hazard in these salary increases; a moral hazard in sharing wealth without the necessary accountability that goes with it. Qatar has to be careful. Savings habits have to change and they may have to be forced on the population.
Ahmed: I see a slight change in investor habits. Part of the issue was the big market correction in 2008/09, which led to a defensive attitude and a move towards capital-protected vehicles and liquid, high-yielding instruments. Only in the past six to 12 months has the attitude shifted back towards long-term growth and equity products.
If you look across the global economy in the aftermath of a big equity market correction, you find the same pattern; everyone switches to a risk-off mindset.
Funds Global: Assets under management in Qatar are estimated to be just 6% of total stock market capitalisation. How can you encourage people to invest in funds?
Kumar: We have to move away from the model where you outsource savings responsibility to the government and let individuals do the spending; that responsibility has to be shared.
One of the ways for the government to distribute wealth is through mutual funds. Rather than giving citizens individual stocks in the market which they can immediately sell and walk away from, the government could channel money through a mutual fund and lock it in for ten years.
Ringrow: That is like the system created in Singapore: where the individuals put in, the government puts in. But here’s the problem, you don’t have the tax advantages for savers that other countries do.
Kumar: Instead of the tax break you give a discount on the mutual fund. The mutual fund, in turn, is actively trading in the market so it creates liquidity in the market and promotes saving. There is an upside for the investors and there is a process of distribution and responsibility to the individuals, too.
Boran: We have to do something as an industry. Asset management is at a low base and assets under management are small. In addition to marketing funds better, we need to educate investors on the positive impact of investing long-term.
Warren Buffett didn’t make his billions by day-trading his money. He invested first by analysing the businesses carefully and then putting in his money with a very long-term view. Our fund, Qatar Gate Fund, has outperformed the index by around 7% annually in the past three years. If you compound this number for the next ten years, it will be close to 100%. This is only the difference from the stock market index.
Kumar: We need mutual funds because it is hard to make money from managed accounts. For example, an entity with a huge amount of money said they wanted us to manage a segregated account. What they would pay was a rate equal to the discounted rate a broker would give, meaning we would have to manage money for an entire year, looking at asset allocations and making decisions, for a price equal to what a broker would get for a single transaction.
How do you expect the asset management industry to survive? That’s the problem with segregated accounts. When it comes to mutual funds you can charge, say, 1.5%. Yes, you have expenses but it’s still profitable. But Qatar does not have an efficient distribution network or a big enough investor base.
That will change as the population increases from 1.8 to around 3 million. I’ve seen growth in retail products; more money being put in by expats than by the individual Qataris on the retail side. That shows that when more and more people become affluent they will start subscribing to these retail funds. That will give you profitability. Segregated accounts are in demand, but, unfortunately, they are not going to give you a lot of profit.
Ahmed: We see opportunities for sharia-compliant products. If you go back a decade, the choices for sharia-only investors were limited. You had illiquid products, typically direct investments in companies through private equity vehicles or stakes in real estate, or zero interest deposit accounts. The first products to tackle this problem were, frankly, low-quality. They were sometimes loaded with fees and often done through wrappers and non-compliant structures.
We have seen the industry evolve. The challenge now is to make sure there are enough high-quality products to serve investor appetite. When we surveyed what was available, we concluded there were a lot of products chasing the same investment space. If you wanted to step away from a GCC or a Mena-focused vehicle, or exclude Malaysia, Indonesia or South Asian vehicles, there was little out there.
The challenge is to make sure you get the same processes and procedures you would get at any of the top firms globally. Managed accounts provide an extra degree of comfort. You get a lot more protection and control. But the fact is, it is challenging to do. It requires a lot of spending on infrastructure, a lot of know-how and there are not many groups here in the region have the skill set to offer this.
There are a very limited number of groups in the sharia space that can give you that kind of process. At QInvest, that’s what we’ve been working on.
Funds Global: Do you see development of private pension schemes or savings plans built around end-of-service benefits?
Ahmed: It’s early days. If you’re a national or Gulf employee then the assumption is the state will take care of you. For foreign workers it is pretty much their own problem.
Abdi: The problem is mobility and the transient expatriate populations. It’s estimated that between 20% and 40% of the expat population changes every year. They need mobile pensions they can take with them when they leave.
End-of-service benefits provide one option. There’s pressure for companies to start funding them because we’ve seen examples of construction companies not paying their workers on time, and not being able to meet their liabilities.
We hear of regulators stepping in to understand how best to fund end-of-service benefits.
Ringrow: We’re also seeing combinations of pension schemes and corporate savings plans by some of the large, indigenous multinationals in the region. I’ve not seen it here but I’ve seen it in the United Arab Emirates and Saudi Arabia. We’re aware of a Kuwaiti entity setting up a pan-GCC pension programme, with administration and everything else; it is coming.
Funds Global: The authorities plan to harmonise the regulatory system in Qatar by joining the Qatar Financial Centre (QFC) with the other financial bodies. Do you see progress to this goal? Do you still face difficulties in getting approval with new products?
Abdi: Harmonisation has started and it’s progressing quite quickly, but it doesn’t necessarily mean products are getting approved quicker. Not everything can happen at the same time. The key was first to ensure that QFC entities would get listed on the Qatar Exchange. The authorities now want to make sure the Central Bank regulations on the QFC related to banking are complete.
So there are plenty of large issues to deal with and the asset management industry will also benefit from this harmonisation.
Boran: There are some very good people at the QFC with a Western education and experience. We moved to the QFC about a year and a half ago. We had two entities, one was regulated by the Central Bank which sponsored the funds that we launched in 2005. We’re winding down that entity and becoming a full QFC regulated firm. Hopefully, this will become the platform for all the funds.
Kumar: But what happens to the funds launched out of that Central Bank-regulated entity, are you able to transport them under the QFC umbrella?
Boran: We are working on that, so not yet. There’s the founder issue where we can not be both the founder and the manager. So we are looking for ways to address this.
Kumar: In a small market like this, you’re not going to find Amwal founding a fund and asking QNB to manage it, or us trying to create one and giving it to Commercialbank. It’s applicable, maybe, in a much larger market but it doesn’t make sense here.
Ringrow: That’s the trouble because when they set out some of the regulations, they picked what was best in class from around the world and brought it together without necessarily reflecting the depth of what existed here.
But to answer the other question about the regulators coming together, I hear good reports of the Qatar Central Bank and its working relationship with the QFC, which is more cohesive than it’s ever been.
Ahmed: We have had a generally good experience dealing with the QFC. They are accommodating, partly because we were one of the first and largest there so you get a lot more time and access, and there’s a lot more flexibility.
Funds Global: Is the QFC doing enough to support the asset management industry, for instance, through its seeding programme? What is the balance of competition between local and foreign firms?
Ahmed: The aim of the QFC is to attract a series of firms all managed to international standards with some regional expertise. They may be international firms coming in and developing locally or local groups coming on board and lifting their own practices up. We’re seeing a bit of both.
Boran: Amwal set up in the QFC not because we needed the seed money, per se, but because we wanted the road open to us to be able to manage money and add value. We need the QFC’s help more so in pushing for investor education, trying to encourage locals to invest. We’re successful in our track record, we’re delivering strong returns and, hopefully, will attain our goal to provide better returns to a wider investor base.
Kumar: The QFC is important because it can release the seed capital needed to attract talent to Qatar. However, it is wise to give seed capital to domestic institutions first.
Build up the domestic institutions’ strength before you invite foreign institutions to come. If you do not have strong domestic institutions no amount of subsidised foreign institutions are going to offset that.
Boran: Maybe structure the seeding programme in a way based on merit that increases the quality of the industry. If investors see the government is giving money to the best managers, they might also find it comforting to invest with that fund. In a way, giving the vote of confidence to the fund.
To give you an example. We recently visited a local institution and were asked what return we had made in three years. Our number was about 40% and the institution’s manager was shocked because his fund was down 10%. Why doesn’t he seek help in better managing that? That’s the bottleneck here.
We are making slow progress in convincing these people to give us their money to manage. That’s where the QFC could really help. The seeding programme could send a signal to investors to encourage them to give their money to asset managers.
©2013 funds global MENA