Assets under management (AUM) in the Middle East and North Africa (Mena) region are expected to triple over the next five years to 2012, with 80 per cent of that growth coming from the GCC countries, analysts said.
According to Algebra Capital, a Dubai-based asset management company in which Franklin Templeton recently took a 25 per cent stake, the region has a current ratio of AUM to market capitalisation of less than 7.2 per cent, compared to an emerging market average of 25 per cent and developed market averages ranging between 70 and 80 per cent. Algebra has forecast that Mena AUM will rise to the $200 billion (Dh734bn) level by 2012.
Although still small in size, the Middle Eastern asset management industry is growing quickly, both through local and international players and is expected to do so for the foreseeable future after setting the foundations for its future development, international rating agency Standard and Poor’s said.
The industry still faces substantial challenges – from the turnover of personnel to the high fees that characterise most funds – but S&P believes the foundations that have been established by these groups are solid and heading in the right direction. “The standards of practice are rapidly developing and the local markets are steadily broadening,” the agency wrote in a report.
The asset management industry in the region ranks as one of the least developed globally. As usually happens in these cases, the numbers tend to vary significantly, based on the different definitions adopted as well as on the types of investments that are considered – closed-ended, open-ended, institutional, retail funds, etc.
Steadily increasing investor interest in the region is the result of several factors, ranging from strong macroeconomics in the region, to the repatriation of assets following the events of September 11 and the development of Islamic finance.
The sharp market correction in 2006 may have helped the asset management advisory industry, as private investors who lost money in the turbulence are now more willing to seek professional advice.
Wealthy families are increasingly using the ever more sophisticated banking services in the region, rather than going to Western entities as they did earlier. In its 2007 World Wealth Report, CapGemini and Merrill Lynch estimated private liquidity in the GCC to be in the order of $1.4 trillion (Dh5.14trn), and the Economist Intelligence Unit estimated private wealth to be growing at 11.9 per cent per annum, even after the fall in markets seen in 2006. In a region that accounts for 3.2 per cent of global high net-worth individuals, scope for product development is huge.
While wealth increases are greater at the higher end of the scale, wealth is also growing across the board. Between 2002-2006, the GCC countries saw growth per capita accelerating between 13 and 21 per cent (see chart). While the Mena region is characterised by its large disparities, GCC countries are, by and large, rich and tend to have similar or, in some cases, higher GDP per capita levels than developed countries such as the UK, France or Italy. In terms of GDP, the Mena region represents around eight per cent of world GDP and accounts for more than 60 per cent of the world oil reserves and 40 per cent of gas reserves.
While the main industry growth drivers are fairly easily identifiable in the countries of the GCC, the broader Mena region is far more diversified. GDP growth in the region continues to be stronger than the global average, spurred by continued economic diversification into non-oil sources of revenue (investment in non-oil related projects throughout the GCC region could reach $700bn (Dh2.5trn) over the 2006-2010 period) and population growth. The sharp falls in markets seen in 2006 had, according to the IMF World Survey of 2007, “little discernible impact” on the prospects for GDP growth.
The IMF estimates that growth will continue to be strong, although inflation is on the rise, as lower oil prices and increased consumption (imports grew by more than 25 per cent in Saudi Arabia and Qatar in 2006 and despite the 21 per cent increase in exports) are impacting external and fiscal surpluses and, to a lesser extent, exchange rates.
In the longer term, the plan for a GCC monetary union in 2010 is ambitious; a number of experts feel it was key to look for greater co-ordination and co-operation in economic policy before embarking on such a step, and indeed Oman recently announced it would not participate in the union in 2010. All GCC countries but Kuwait have currencies pegged to the US dollar. Within the Mena region, the situation is more varied, although most have currencies pegged to the dollar or to a basket of currencies.
BAHRAIN OUT IN FRONT
Within the GCC, Bahrain is at the forefront of asset management growth and has so far been the country of choice where the majority of asset managers have chosen to domicile funds. As it stands now, Bahrain has over 2,300 funds registered with the regulator, the Central Bank of Bahrain, of which more than 100 are locally domiciled.
However, by size, Saudi Arabia has the largest mutual funds market, with more than 200 vehicles and $20bn (Dh73.4bn) in assets versus around $9bn (Dh33bn) in Bahrain.
In Kuwait, in contrast, Shariah-compliant funds have increased their market share of total AUM from 19 per cent in 2001 to 58 per cent of the total by 2006, according to the Kuwait Financial Centre Market Survey of September 2007.
However, key issues remain the regulatory and industry environment, corporate governance and disclosure. The Kuwait Finance Centre report noted that some funds still did not report basic data such as the size of their top five holdings as a percentage of the total fund.
The Bahrain code is especially rigorous and similar in aspect to that of Luxembourg or the UK. New Collective Investment Scheme rules were put through in May 2007 to boost the regulatory framework. In Saudi Arabia and Qatar, substantial progress has been made with the establishment of a Capital Markets Authority in the Kingdom and the creation of the Qatar Financial Centre.
Kuwait and the UAE are still characterised by a somewhat less stringent regulation with some funds allowed to function without an administrator or registrar. Kuwait still lacks an independent regulator and a self-regulating organisation for the industry. UAE regulation is fairly broad and allows for significant freedom.
The regional asset managers are taking disclosure and governance very seriously.