Geopolitical strife, Shariah inheritance rules and market underperformance have stifled growth in the Gulf's nascent asset management sector. Yet industry players hope structural and regulatory reforms can reinvigorate the sector, with emerging market upgrades helping to bolster the region's profile.
Recent forecasts predicted that the asset management sector in Gulf Cooperation Council, or GCC, countries would achieve huge growth by 2020, with an Emirates Investment Bank report from early 2018 claiming that 80% of regional wealthy investors believed the GCC — especially the United Arab Emirates — was an attractive venue for investment. In 2017, the Dubai International Finance Centre forecast that GCC fund managers' AUM would double to $110.9 billion in 2020 from $45.8 billion in 2016. In the UAE, AUM was forecast to surge to $18.9 billion from $1.6 billion over the same period.
The Ritz-Carlton in Riyadh, the Saudi capital, was the location at which Saudi Arabia detained businessmen and royals after accusing them of raiding government coffers.
Source: AP Images
The reality is proving far different as the political and economic blockade of Qatar — by its former allies Saudi Arabia, Bahrain, Egypt and the UAE — erode the Gulf's safe-haven status in a tumultuous region.
"The people of the region have lost faith in the region," said a Gulf-based asset manager who spoke on condition of anonymity.
Saudi Arabia's anticorruption drive in which hundreds of businessmen were detained in Riyadh's Ritz-Carlton hotel was estimated to net the government more than $100 billion as the wealthy inmates cut deals for their release. But the seizing of assets, which included crossborder assistance from the UAE central bank, according to Reuters, spooked some investors.
Many sought to move their investments outside the GCC, with some even declining to transfer these to Luxembourg-domiciled investment vehicles of Gulf-owned asset managers, said Steve Corrin, head of institutional and wholesale distribution at Dubai-based Emirates NBD Asset Management, a wholly owned subsidiary of Emirates NBD Bank PJSC.
"We're seeing assets leaving the region," said Corrin. "One solution for local asset managers is to link up with global managers to create a white-label product or subadvisory that keep the assets here but have them managed by a global adviser."
Across the region, AUM growth has stagnated, including in Saudi Arabia where open-ended investment fund AUM has fallen steadily from the start of 2018 and stood at 95.64 billion riyals as of the third quarter of last year. Meanwhile, the number of open-ended funds has also fallen to 240 in the third quarter of 2018 from 266 in the same period in 2016.
"The industry has stagnated over the last few years, but I don't see why this region can't adopt the model of Singapore, where a lot of the AUM is invested into the wider Asia region and beyond," said Ashish Marwah, chief investment officer at Abu Dhabi's ADS Investment Solutions.
Gulf stock markets' lost decade is another factor deterring investment in regional mutual funds; Saudi Arabia's Tadawul index has fallen dramatically from its 2006 record, while Dubai's exchange has recorded similar falls.
"If markets plunge, investors tend to redeem, rather than subscribe," said M.R. Raghu, managing director of Kuwait's Marmore MENA Intelligence. "More capital is leaving the region than entering here [but] if Gulf markets rebound, then some money will return. We can't blame everything on geopolitics."
Scale is also an issue. Emirates NBD Asset Management grew by more than 30% annually for a decade to reach an AUM of $4.3 billion, according to Corrin, yet it is still far from being an international player.
"We can't go up against a Fidelity or a Templeton with hundreds of billions of dollars," said Corrin. "There's no state push or corporate pension sector behind it. There are very few funds of over a few hundred million dollars. It's a tough market to be in."
The push to create new products, roll out dispute resolution mechanisms and fund regimes that are consistent with international markets could convince Gulf residents to keep more of their wealth locally.
"We have to increase the number and depth of institutional investors and high-quality differentiated advisers that understand local markets," said Steve Barnett, financial center development director at Abu Dhabi Global Market. "Now, we've got to try to build out all those components in order to generate a bigger market."
Other jurisdictions with a large proportion of well-paid foreign workers such as Hong Kong and Singapore require foreign residents to pay into state-sponsored pension schemes, whose money is then managed by regulated asset managers.
"Every day, these asset managers get a portion of the massive state pension fund," said Corrin. "If the Gulf had similar state pension schemes, it would support local equity and bond markets and have a multiplier effect. That's a structural change which has to happen in the next few years."
Additionally, tens of billions of dollars of passive funds are expected to enter the market this year once Saudi Arabia joins the MSCI and FTSE Russell Emerging Markets benchmarks in 2019 — the latter of which Kuwait joined in September 2018.
Corrin warned that Gulf expats are unwilling to keep a significant portion of their assets within the region because Shariah law makes it tricky for families to inherit.
Banks are the main distribution channel for financial services. Yet regional lenders have markedly different offerings for retail clients than their Asian counterparts, principally selling bonds rather than mutual funds.
"We have a very unbalanced distribution model — I'm not sure if it's the clients demanding bonds or the relationship managers who are comfortable selling these," said Corrin.
Despite the lackluster performance, Charles-Henry Monchau, managing director and head of investment management at Dubai's Al Mal Capital, is nonetheless optimistic about the industry's prospects in 2019, citing cheap stock valuations, strong government balance sheets and the region's dollar pegs.
"There are a lot of opportunities because markets remain inefficient," he said.
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