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Weak inflows worry Mideast asset managers

DFSA public consultation paper on fund regulation changes by month end. Final version by mid-year. (SUPPLIED)

By Karen Remo-Listana


While most fund managers are optimistic about the considerable opportunities the region offers, the dearth of existing and new funds managed from the Middle East remains a concern.

Fund managers have put considerable efforts into growing their resources and standards to meet investors' demands, but this has not yet been matched by noteworthy inflows. This is putting pressure on the fees structure, which is already higher than in other comparable markets.

"The broader issue for the asset management industry in the Middle East is that asset under management (AUM) is still very small," Roberto Demartini, Associate Director of Fund Research, Standard &Poor's, told Emirates Business. "That is because local investors haven't managed completely to make the transition from investing directly into stocks to having someone do it on their behalf," he added.

Over the past years, the region, especially the GCC, has embarked on a diversification drive away from oil and gas. Out of this endeavour, two main asset classes have emerged to dominate the investment pie – property and stock markets. Due to the influx of liquidity brought about by high oil prices and high global economic growth buoyed by cheap credit, asset bubbles were created, which burst shortly after the Lehman Brothers bust. In the banking system, hot money speculating from a dirham revaluation at the peak of inflation in the case of the UAE, ballooned away, leaving a big gap in advances (loan) and deposits.

With stock prices below their initial public offering levels and uncertainty over property prices bottoming out, investors remained cautious and wary of investing again, especially in funds. "Probably, this year they will begin to go into new assets," Demartini said.

"There is still cash on the sidelines but the situation in the Middle East might be a little different. We have found a lot of fund managers saying that they are more cautious and conservative in estimates of how much of assets they can raise for this year from international investors, especially after recent developments in Dubai. If there are inflows to the region, then these are mostly from regional rather than international investors," he added.

More expensive funds

The issue with a small pool of capital is that fixed cost – which is a substantial cost in fund management – will end up higher. This is more so an issue in a region where funds are typically 20 per cent more expensive than in their emerging market peers. Demartini said management fees run in the 1.5 per cent to two per cent range, entry fees go up to five per cent while performance fees run up to 20 per cent if the fund returns at least 10 per cent per annum. In contrast, fund managers in Europe do not charge a performance fee.

He added: "The total expense ratio is significantly high. Funds here are quite expensive compared to other emerging market funds. Administrative fees and legal fees are too high." To reduce costs, a bigger pool of capital is needed. Hence, it is important for asset management groups in the region to raise more assets.

"The problem is that some of the costs are fixed and with the amount of money in the region being fairly limited, the fixed cost to the number of funds is high. It is not only a problem of cutting fees, it is also a problem of trying to attract more assets to the region," he said.

Although the pressure is on fund managers and on the Dubai Financial Services Authority (DFSA), which, for example, is currently drafting new rules that would substantially reduce licensing fees and other associated costs of fund managers, there is no noticeable drop in fees.

"There is still no dramatic change in the fees structure in the region," said Firas Mallah, Head of Middle East, Dexia Asset Management. "We haven't seen a real improvement in cutting fees. I don't think they are thinking at lowering management fees – it is more work on how to lower administration fees," Demartini agreed.

Meanwhile, fund managers globally are more open to negotiating fees, said Vincent Duhamel, CEO of Hong Kong-based Sail Advisors Limited. "Managers have become more open in negotiating. However, as money has started to pour in, big funds are able to command higher fees as the blue chip factor is associated with it. Smaller ones are more open to negotiating on fees," he said.

Exempt fund plan

Increasing competition could be a reason for decreasing rates but then, so is the regulatory environment. The DFSA recognises this and is in the process of launching exempt funds – a new category of fund that will be subject to lighter regulations. The exempt fund will be subject to "far less" regulations as compared with existing public and private funds but will only be available to a limited number of about 50 high net worth individuals. The DFSA is to put down these changes in a public consultation paper by the end of this month with a plan to roll out the final version by the middle of this year.

Ian Johnston, Deputy Chief Executive and Managing Director, DFSA said these changes were recommended by its market practitioner panel appointed in July 2009 to review the fund regime. "It will position us favourably against comparable jurisdictions," he said while speaking to this newspaper.

The body is also drafting rules that would allow Dubai International Financial Centre (DIFC)-based fund managers to establish funds in other reputed jurisdictions and likewise, allow fund managers established in reputed jurisdictions to establish funds in the DIFC.

"We see more funds being domiciled in Bahrain. There is competitive pressure on the DFSA and the UAE, to try to be more competitive to attract funds back into the country," Demartini said.

"Bahrain was early in moving its regulations so we saw a number of funds launched under the Bahraini domicile. What we're seeing is a polarisation – most of the funds launched five years ago or earlier were domiciled in Saudi Arabia and Kuwait but the new ones are being domiciled in the UAE and Bahrain. Increasingly, funds are also being domiciled offshore because they are launched for European investors. But trends favour Bahrain more, the UAE less," he added.

Last year ended with assets under management reaching $12 billion (Dh44bn), with both Saudi Arabia and Kuwait seeing a decline in the fourth quarter by three per cent and 10 per cent respectively. Qatar saw a six per cent fall, the UAE, 11 per cent and Bahrain, 13 per cent. Only Oman saw flat growth in the same period.

Overall, GCC markets swung between gains and losses throughout the year – the first quarter showed lingering losses from the previous year. The fourth quarter saw a reversal of fortunes as GCC markets headed south led by Dubai sentiment. The MSCI GCC Index lost eight per cent in the fourth quarter bringing the annual gain to 18 per cent.

However, S&P said most of the 14 S&P Fund Services-rated Mena funds it interviewed were still positive about regional prospects. Demartini said these managers were largely expecting markets to rise. Most funds were fully invested after a period of holding larger cash reserves and most managers were selectively going back into the UAE. A common view was that with oil prices at $70 a barrel, economies in the region are poised for some stability and growth.

"Despite the events surrounding Dubai, the outlook for the Middle East and North Africa remains positive. We were in the region a week after the announcement and made calls after that. We have an updated view…We focus on qualitative and not short-term targets. But some who were positive before the announcement are now a bit more cautious. We saw a gradual shift in how much assets they can raise," he added.

Analysts opine that Saudi Arabia is likely to lead in attracting foreign and local investors. A Markaz study said the fourth quarter's best performance was from MSCI Saudi Arabia which limited its loss to one per cent, bringing full year gains to 33 per cent – the second best performance in 2009 (MSCI Indices). The worst performer was MSCI Kuwait, which lost 19 per cent bringing the full year decline to 11.7 per cent.

Confidence in Saudi Arabia

"Fund managers favoured Saudi Arabia throughout the year, allocating between 36 per cent and 42 per cent of assets to the kingdom in 2009," it said. "Confidence in the Kuwait market declined dramatically from 20 per cent in June to 11 per cent in December. The same can be said for the UAE, where managers allocated 17 per cent of their assets in September before cutting exposure to 10 per cent in December."

Similarly, ING Investment Management's outlook said equity markets in Saudi Arabia, Qatar, Oman and Egypt have the internal driving catalysts to attract foreign and local investors. "Saudi is one of the strongest domestic markets with one of the least geared GCC economies. Globally, Qatar is the fastest growing economy and remains attractive with its firms benefiting from government support," it said.

It added that Oman represented a short term valuation play with government expenditure forecasts stimulating spending in infrastructure which, in turn, would spark growth in many sectors.

Egypt sets the scene for strong internal growth drivers and interesting opportunities. "The team remains underweight in Kuwait, but will look for selective entry points given the significant under-performance in 2009 bringing valuations back to historical levels. Opportunities exist in the UAE, particularly in the mid-cap segment," ING said.

Islamic funds urged to innovate AND expand

The $35 billion (Dh128bn) international Islamic funds industry has been urged to offer more innovative areas of investment and expand into untapped geographical markets.

Thomson Reuters data put Islamic assets under management currently to almost $35bn across 555 worldwide funds.

But most funds are dedicated to equities and "everybody's doing that," said Dr Mohammed Daud Bakar, Managing Director of Amanie Islamic Finance Consultancy and Education in Dubai.

He said Islamic fund managers should look at commodities such as gold and silver, metals and agriculture as well as relatively untouched markets for Islamic funds like Australia, Thailand and Vietnam, Africa and Latin America.

"They would provide interesting propositions for investors while other industries like shipping, technology and aviation could be fruitful areas for innovators to look at in the creation of new funds," he said.

This, among other issues confronting the Shariah-compliant funds industry, will be discussed during the Amanie-Failaka Symposium to be held on 12 April 2010.

According to Lipper, a Thomson Reuters company, Saudi Arabia has147 Islamic funds managing more than $18bn. Malaysia, with 194 funds, manages more than $8.6bn.

The United States is the domicile for just four funds but between them they manage more than $2.5bn. A total of 36 funds in Kuwait manage $2.1bn.

South Africa with eight funds domiciled manages $644 million. Twenty funds in Bahrain manage $394m; three in the UAE manage $78m and one fund in Qatar manages $16m.


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