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Reform of the Gulf’s capital markets will spur development in the asset management industry
The Gulf Co-operation Council (GCC) enjoys an active retail investment culture aided by the performance of regional stock markets. In spite of their high volatility, GCC stock markets have delivered superior risk-adjusted returns over the past few years helped by their low correlation to emerging and developed markets - though that advantage is slowly disappearing.
However, GCC stock markets lack both depth and breadth; they have low institutional participation and are dominated by retail investors (although Kuwait is an exception). Sovereign wealth funds and other investment institutions have evinced little interest in local markets due to the perception of high risk, as well as a fear of stoking liquidity in an already speculative market.
Even though stock markets have been in existence since the 1980s (in Saudi Arabia and Kuwait), mutual funds came into being only recently. Hence, there are very few funds that can claim a track record of say five or 10 years. Mutual funds continue to offer a narrow range of products with very little innovation; most are direct country funds.
From a modest $120 billion in 2000, GCC market capitalisation reached $1.1 trillion by the end of 2007, an annual growth of 37 per cent, before dropping to $734 billion at the end of 2010.
Dubai is now home to all the major names in the asset management and investment banking businesses, as is Saudi Arabia. Some have wound up in response to the financial crisis but many of them continue to hold up. And, even though GCC stock markets are yet to find their rightful place within the global family of indices, they are not far from it.
The GCC asset management industry is estimated to be about $28.9 billion in size. There are currently more than 100 asset management companies which manage money under 325 funds.
At $13 billion, equity funds make up almost half of assets managed under funds spread over 208 funds, yielding a per fund value of $63 million. The Islamic segment of this constitutes 39 per cent. Saudi Arabia leads the pack in the equity segment with $5.2 billion in assets under management (AUM), a market share of 40 per cent, followed by Kuwait with a market share of 32 per cent. Saudi Arabia and Kuwait’s high share can be traced to their early adoption of mutual funds as an investment vehicle along with older stock exchanges. The market is very much concentrated among the top asset management companies, with the top 10 controlling a share of 72 per cent of the total.
The GCC asset management industry is composed of two parts: mutual funds and managed accounts. Due to the high net worth nature of the market, more assets tend to be managed through portfolios rather than mutual funds. A recent McKinsey survey estimated that AUM for managed accounts could be twice as much as that managed under funds.
It must be noted that Kuwait is the only market that discloses statistics pertaining to managed accounts. As of December 2010, Kuwait managed nearly $66 billion in managed accounts compared to $5.4 billion in funds, a factor of 12 times. Such a high ratio can be attributed to the presence of a large number of investment companies (over 100) as well as an active sovereign wealth fund, the Kuwait Investment Authority (KIA). If we assume a factor of 2x for other markets, then total assets managed, including managed funds, stand at an estimated $113 billion, with Kuwait leading the list with 58 per cent followed by Saudi Arabia with 32 per cent.
Capital markets are relatively nascent in most of the Gulf countries, providing immense scope for future growth. Due to their short history, markets exhibit inefficiencies that can be successfully exploited by fund managers through superior fund performance relative to benchmarks.
The GCC has undergone tremendous economic expansion and is expected to remain strong in the coming years. High economic growth will directly result in very strong liquidity – a situation that is highly conducive for stock markets.
Regulatory reforms in the area of capital markets will spur development in the asset management industry. The high net worth nature of the market demands product sophistication along with superior risk management propositions. As the economy expands in size, foreign investment interest is bound to develop rapidly in what is viewed as one of the most prosperous regions in the world.