Summer 2013

DISCRETIONARY MANAGEMENT: Family affairs

FamilyWith mutual funds in the region struggling to attract sales, many asset managers have turned to offering discretionary portfolio management to family offices. Martin Morris reports.

Five years after the Lehman Brothers bankruptcy, the mutual funds market in the Gulf is still relatively underdeveloped, at least in terms of assets under management. That may explain why some local operators, as well as those from outside, view discretionary portfolio management as a more promising activity.

Discretionary portfolios, expressed in the Gulf through the plethora of family offices, are big business. But it is not easy to gain a slice of the pie. Many players are chasing the same clients, and success requires building up personal relationships with powerful heads of families who are often secretive about their wealth.

CUSTOMISATION
In general, family offices provide financial and other services to wealthy families. Single-family offices are privately owned and serve one family, while multi-family offices serve many. Services vary among different offices, depending on what the family or families require.

For asset managers, discretionary portfolios generally require greater customisation and are more complicated to manage than mutual funds. Yet discretionary portfolio management offers the prospect of big business wins that can sustain an asset management firm for months or years.

Alastair Graham, director at Highworth Research, the international research arm for Standard & Poor’s Global Family Offices database, says the multi-family office environment in the Gulf Cooperation Council is still in an embryonic state and differs substantially from what is found in Europe or the US.

“Multi-family offices are few, and the private wealth management market for those with assets up to a few tens of millions of dollars is mainly supplied by the wealth management divisions of local banks or private banking divisions of international banks,” says Graham.

OPACITY
The single-family office market is much more developed. Single-family offices in the Gulf customarily maintain a lower profile than elsewhere and are often run as part of a merchant family’s trading company, taking the form of a mini sovereign wealth fund that represents the private money of a wealthy individual.

Graham says a regional tendency to be opaque about financial matters means figures for assets under management are often shrouded in secrecy. Where estimates can be made by factoring in the size and status of the primary merchant families and their private companies, they indicate the family office market in the Gulf to be at least several times larger than the mutual funds market.

According to Graham’s figures, the largest family offices include Kingdom Holding Company with $20 billion in assets under management and Olayan Financing Company with $12.9 billion, both from Saudi Arabia. Kuwait’s largest single-family office, Al Futtooh Holding Company, has an estimated $11.3 billion, he says.

In contrast, the region’s largest fund, the Al Ahli Saudi Riyal Trade Fund from NCB Capital, had $3.8 billion as of March 31, according to data provider Zawya Funds Monitor.

Sarah Al Suhaimi, chief investment officer at Saudi-based Jadwa Asset Management, says the preference for discretionary portfolio management by high net worth and institutional clients is part of the reason the funds market in the Gulf is small and relatively undeveloped; that, and a lingering suspicion of the capital markets caused by volatility in recent years.

“In the case of Saudi Arabia, which is the largest market in the Gulf, retail investors’ confidence in mutual funds decreased after the 2006 market crash, which further affected the popularity of mutual fund investing,” she says.

Yet the present size difference between the mutual fund and discretionary portfolio management markets need not always hold true. Steps are being taken by regulators in the region to institutionalise markets. There are also moves to adopt international best practices in capital market and funds regulation, which should help the mutual funds industry in the long run.

EMPLOYEE TURNOVER
Jahangir Aka, head of Dubai-based SEI Investments Middle East, estimates there are more than 500 family offices in the region with at least $300 million of assets under management – plenty to go around. “I would be very happy with 50 accounts at $30 million each,” he says.

But it is important to understand this segment of the market.

“Win small, understand the market and build up from there,” he says, adding that “this is a market that’s less about institutions, more about individuals”.

Aka notes that private banks often see significant employee turnover, with personnel who may come and go in an 18-month cycle. He says this puts them at a disadvantage because maintaining relationships with clients is crucial.

“How can you form a meaningful relationship with the client when there is employee turnover?” he asks.

This point is critical. Discretionary portfolio management is all about continuity of relationships. Asset managers looking to develop their presence in this market would do well to bear this principle in mind.

©2013 funds global MENA

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