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Mutual Fund Asset gathering in the GCC region – What it takes to click

Date : 13/09/2018

Author:  Marmore MENA Intelligence



 

Mutual fund assets in the GCC are quite small compared to the size of the GCC economy. The total Assets under management (AuM) in the six GCC countries stands just at USD 32.9 billion (Reuters). This is quite low when compared to the combined GDP of GCC countries of USD 1.5 trillion. In percentage terms, the total mutual fund AuM in GCC is just 2.2% of GDP. Considering the global equivalent of AuM to GDP at 15.2%, there is plenty of scope and opportunities for the mutual fund assets to grow in the region.
 
Asset Gathering has been difficult even in a liquidity surplus region
Asset gathering has been difficult in the region as seen from low size of mutual fund AuM compared to the GDP, in spite of the abundant private wealth and liquidity. Equity mutual funds, the primary vehicle for asset gathering were hit hard by the global financial crisis of 2008 which led most investors to pull their money out and the industry has not recovered since then. Then, there are other structural reasons as well. Local investors, many of whom have their own private family businesses have invested their surplus in overseas markets like the U.S which have performed exceptionally well since 2009. In contrast, GCC stock markets have underperformed which has created a negative cycle with fewer institutional participants leading to lower market liquidity which discourages other investors from investing in GCC focussed equity funds. Bond Funds are a relatively new product and since the GCC debt markets have only recently seen reforms, their size is also very small. Real estate funds, a popular choice of many GCC investors have given negative returns since 2015 and so have been unable to increase their AUM.


 
Source: Reuters; Data as of May, 2018
Note: Mutual funds whose geographical focus is GCC has been considered

Other asset classes like Private Equity have suffered because of corporate governance issues, lack of transparency, poor exit track record and paucity of information. Private wealth management has also not gained traction as banks focus more on offering products than offering solutions. Combination of these factors have contributed to the sluggishness of asset gathering in the region.

Private Wealth management – products not tailored to individual clients and segments
The GCC region is rich in private wealth with total investable and liquid assets expected to exceed USD 3 trillion by 2021, according to a report by the Boston Consulting Group. The percentage of households classified as ‘affluent’, those with investable assets between USD 250,000 and USD 1mn has been increasing faster than HNW and UHNW segments. And yet, GCC players have not been able to tap into this market. They are more sophisticated and tend to be engaged with their investments, but still need investment advisors to educate them and explain financial matters to them. GCC funds have also not been able to offer products tailored to individual client needs. For example, female investors are increasingly gaining in importance across all segments and have different investing styles than male investors. But, they are offered the same ‘plain vanilla’ options available to all investors and there is no specific proposition that caters to their needs. The fees charged by private wealth managers also tend to be very high, with investors paying as much as 3 -7.5% of their assets as fees every year, though this is also the case globally as well (https://www.ft.com/content/ecf13900-f0b2-11e3-8f3d-00144feabdc0).

Challenges faced by Mutual Funds in GCC
Mutual funds also face difficulty in marketing and distribution to GCC nationals who are primarily reached through banks. AMCs often enjoy exclusive access to their parent bank's distribution network. This creates a situation where it is difficult for an AMC to compete if it does not have a network of bank branches. The result is a few AMCs dominating the asset management industry with fewer options for investors. The low level of institutional participation is a big factor in the low liquidity in equity markets and discourages other institutional investors and hampers asset gathering.

Ways to overcome the challenges
Clients of GCC asset management companies generally comprise of high net worth clients and institutional investors like SWF’s, Pension funds and insurance companies. Semi-skilled and high skilled expats in the GCC could prove to be a viable customer base for them to target. Due to their affinity towards sending funds back to their home market, asset management companies in the GCC could possibly collaborate with fund houses in the expats’ home market to launch products oriented towards their home markets to attract investments from expats.

The current product structure is more skewed towards money market/ trade finance funds followed by equities whereas asset classes like real estate, bonds, commodities, etc. have negligible share. While clients do look for consistently good performing funds, they are veering more towards wealth management solutions than fund opportunities. Wealth management solutions focuses more on asset allocation and fill them up with funds, preferably low cost. Wealth management also focuses on other client needs like trust services and online portfolio tools. It will turn the game from “product” based to “solutions” based. Banks are quick to realize this potential and are moving towards elevating their private banking into wealth management focused. Such a transition for asset management companies will enable increase in asset and client base.

GCC Asset management industry also needs to evolve to keep up with the current times. Despite Baby boomers (born between 1945 and 1960) and Gen-X (born between 1961 and 1980) accounting for higher wealth share at the moment, fund houses must focus more on the growing Gen-Z population (born after 1995) as the former’s needs are already been well taken care of by now and hence may represent a dwindling opportunity for GCC asset management houses. Products must be tailored towards Gen-Z, who are more tech savvy, flexible, more risk taking, and social media friendly. Use of technology in areas like customer profiling, portfolio options, product evaluation, performance reporting, etc. would be beneficial in this regard.

Mutual funds can target segments where there are strong growth prospects like in Shariah-compliant investments. Even though Muslims comprise nearly 25% of the world population, less than 1% of financial assets are Shariah compliant. The total AuM of the global Islamic asset management industry rose from USD 53bn in 2012 to USD 59bn in 2016, a meagre annual growth rate of 2.44%. An area of potential growth is in pension funds which represent less than 1% of global Islamic funds. Considering that the size of government pension funds in the GCC is USD 438 billion, even a 10% market share would mean a USD 44bn Islamic pension fund industry, benefiting the Islamic fund Industry as a whole. These funds can also be marketed easily to GCC nationals and foreign nationals who are Muslim, who will respond favourably to a fund which has been approved by a Sharia board.

The opening up of GCC real estate sector led to the participation of institutional players like REITs, pension funds, insurance companies etc. in the real estate industry. The equity markets can also benefit similarly with more institutional players. GCC Pension funds can be mandated by regulation to invest in GCC equity markets which will increase stock market liquidity and institutional participation, ultimately leading to increased AuM. GCC Pension funds can make also use of ‘securities lending’ to short sellers to increase their returns as short selling has been introduced to GCC stock markets. American pension funds have been able to increase their returns by 4 basis points (http://www.pionline.com/article/20171030/PRINT/171039988/securities-lending-makes-comeback-with-big-funds), which can be bettered by GCC pension funds considering their huge size relative to the total GCC market capitalisation. Encouraging family owned private companies to list in stock exchanges can provide more investing options for fund managers and increase liquidity in markets.

Private Equity funds can benefit from the on-going economic reforms in the region as it diversifies away from oil. Setting up of innovation centres like UAE’s AI smart lab provides opportunities for start-ups to flourish and PE funds to invest in them and get returns. Continuing with reforms will also increase foreign fund inflows improving liquidity in equity markets allowing profitable exits of Private equity ventures. Changes in regulatory framework of privately held companies can solve corporate governance issues which hamper private equity.


 
Source: Reuters

Finally, Asset managers in the GCC need to offer a wider variety of financial products to cater to both GCC nationals and expatriate workers who come from all over the world. Creating such products and marketing them to people with different risk profiles would be both a challenge and an opportunity for GCC Asset management companies.


This article is published in "Marmore Blog"

Tags:  Funds, GCC, Mutual

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