GCC Asset Management Faces Several Challenges

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GCC Asset Management Faces Several Challenges 25 - Aug - 2011

Kuwait Financial Centre S.A.K “Markaz” recently released a report on the GCC Asset Management industry. The report takes an in-depth look at the asset management industry across the GCC in terms of Assets under management (AUM), number and types of Funds managed, Top Managers across the various markets, Fund Costs, Benchmarks and Performance ranking and a number of other parameters.


Industry Overview

 
The GCC Asset Management Industry, with roughly 100 asset management companies, manages approximately USD 29bn in assets in about 325 funds as of 31st March 2011. Geographically, Saudi Arabia country funds account for 62% of the total, followed by Kuwait country funds with 19% share. In terms of products, Money Market funds lead the pack with a 50% share, closely followed by Equities at 47% while the remainder is in Fixed Income and other funds. Of the total, Islamic funds manage USD 17.6bn in assets implying a share of 61%. In terms of number of funds, GCC / MENA mandated funds top the table with 131 funds, followed by Saudi Arabia country funds with 109 funds and Kuwait country funds with 51 funds. Contrary to pattern seen in assets under management, there are more Conventional funds (176 funds) than Islamic funds (149 funds).

Kuwait, with USD 5.4bn of assets, had the highest AUM to GDP ratio of 4.1%, closely followed by Saudi Arabia with AUM to GDP ratio of 4%. The ratio for all other countries was less than 0.5% implying lack of institutional presence in the investment segment.


Benchmarks

Most GCC country funds adopt local stock market indices as their benchmark.  Among global index providers, MSCI and S&P are the most active in the region. Majority of Shariah complaint funds use S&P indices as benchmarks since MSCI discontinued Saudi securities from its indices.
 
In Kuwait, 7 out of the 20 conventional equity funds use KSE Weighted Index as their benchmark. 4 funds use KIC index (Kuwait Investment Company). Most GCC / MENA equity funds use S&P GCC Index and S&P Pan-Arab Shariah Index as benchmarks for conventional and Islamic funds, respectively.

Domicile


The ranking of GCC countries in terms of number of funds domiciled, indicate that country of domicile relates to the size of each country’s asset management industry with only a few exceptions.  There were 140 funds domiciled in Saudi Arabia managing USD 19.3bn in assets, followed by Kuwait with 58 funds managing USD 5.7bn. Bahrain, true to its reputation as a financial hub, has 39 funds with USD 1.1bn in assets. Most of the funds domiciled in Bahrain are mandated to invest in GCC/MENA region.
 

Given that local investors make up the bulk of participants in GCC/MENA funds, local markets tend to suffice as domiciles for these funds, with Saudi Arabia, Kuwait and Bahrain being the most popular choices and accounting for 73% of the total.
 

Specialized Funds
 

Despite the fact that the majority of funds across the region are of the “plain vanilla” equity variety, there are new and innovative types of funds which are being introduced to deal with the unique dynamics and opportunities presented by the GCC/MENA markets. In our database, such funds are grouped under “Specialized” funds and they account for approximately 3.5% of total assets under management.

 
These Specialized Funds have ranged from standard sector-specific funds focused on such important sectors like Telecom, Banking & Financials and Real Estate, to more specific funds such as those dedicated to IPO’s, infrastructure, and capital protection etc. Markaz Forsa fund (based on call options) is also a good example. Some funds use advanced quantitative tools to manage risks.

 
Managed Assets


The Central Bank of Kuwait on a monthly basis publishes a detailed break up of the assets of the investment companies, which includes – Portfolio investments (Managed Accounts), equity, debt and investment fund units held by local investment companies, custody accounts, foreign funds and commitments and guarantees. This is by far the most transparent break-up of assets of the asset management industry available in the GCC region. This provides us with a preliminary break-up between managed accounts and mutual funds for Kuwait.

 
As of May 2011, the size of Kuwait fund management industry size as disclosed by CBK is at USD 6.6bn and the assets managed under portfolio’s is at USD 54bn – a factor of 8x. Similarly for Saudi Arabia, CMA provides the total assets in mutual funds, which amounts to USD 23.6bn. However, SAMA does not provide statistics for assets managed under managed accounts. This leads us to take an intelligent guess on the proportion of managed accounts to investment funds for the rest of the region.

 
We believe that Kuwait is an extreme outlier mainly due to the presence of higher number of investment companies as compared to the rest of the region. Therefore, we believe that, Saudi Arabia and UAE will have a lesser proportion of managed accounts than Kuwait, but higher than smaller markets such as Qatar, Oman and Bahrain.

AUM to GDP ratio was 2.7% if only mutual fund assets are considered.  If Managed Accounts are also added, the AUM to GDP ratio increases to 15.3% - an increase of nearly 6 times. After accounting for assets under managed accounts, Kuwait had the highest AUM to GDP ratio of 46%, followed by Saudi Arabia with 22%.

 

1Q11 Performance

Almost all GCC stock market indices were down in the first quarter of 2011. GCC Equity funds also mirrored the performance with majority of funds giving negative returns in 1Q11. On an Asset Weighted basis, Fixed Income & Money Market funds gave better returns than equity funds in 1Q11. Islamic fixed income funds were top performers in GCC (+1.4%) and Saudi Arabia (+0.2%). Islamic money market funds topped in Kuwait (-0.3%) while Conventional money market funds topped in UAE (+0.8%).

Contrary to returns, equity funds were the top Alpha (excess return over benchmark) generators. Conventional equity funds produced highest alpha in Saudi, while Islamic equity funds gave highest alpha in GCC, Kuwait, UAE and Qatar.  In terms of Cost, as in any other markets, Fixed Income and Money Market funds are cheaper in GCC region as well. Equity Funds in the GCC region, on average, charge 1.48% as fund management fee. GCC / MENA mandated funds charge the highest management fee of 1.06% in Fixed Income category. Saudi Arabian Money Market funds charge the highest management fee of 1.61%, which is due to high cost associated with some Trade Finance funds. GCC / MENA funds are the cheapest (0.50%).

 

Given that it is a nascent industry, the GCC asset management sector faces a number of challenges going forward including, but not limited to; High Volatility, Lack of market depth, Low Liquidity, Regulatory and Legal issues, Narrow Product Range, etc.

For more details on the report, visit www.markaz.com/research

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About Kuwait Financial Centre “Markaz”

Kuwait Financial Centre S.A.K. 'Markaz', established in 1974 with total assets under management of over KD 906 million as of June 30th, 2011, is the leading and award winning asset management and investment banking institution in the Arabian Gulf Region. Markaz is listed on the Kuwait Stock Exchange (KSE) since 1997 under ticker Markaz.