We all know that Sovereign Wealth Funds (SWFs) and Pension Funds dominate the GCC institutional investor landscape, followed by Government Owned Entities (GoEs) and insurance companies. As an institutional investor category, mutual funds come a distant fifth only to be followed by private equity. The estimated size of the mutual fund industry is at $33 billion according to Reuters if you count only funds. However, given the dominance of high net worth clients, most fund houses manage more money under managed funds (discretionary or non-discretionary) than co-mingled funds. With the exception of Kuwait, it is hard to get a handle on this number, however if we were to take the number for Kuwait as a guide, one can say that total assets in managed accounts should easily be 4- 6 times that of the underlying commingled size. Even if one takes this factor, the mutual funds industry is still small to effectively influence corporate behavior and enforce corporate governance. Institutional investors, like mutual funds, are key to capital market growth and development as they broad base the market, induce a sense of corporate governance among listed companies and enhance market liquidity. This paper dwells on four ideas on how to achieve scale in this important institutional investor category.
1. Take it Retail:
The client base of GCC asset management companies mostly comprise high net worth clients and institutional investors like SWFs, pension funds and insurance companies. This is understandable given the large expat population in most GCC countries, which so far does not constitute a viable target market for mutual funds. Low skilled workers, who mostly dominate the expat population, are content sending their savings back home and hence may not be inclined to invest in local markets. However, within the expat community, the share of semi-skilled and highly skilled workers is increasing given the strong need to diversify the hydrocarbon based economies through an emphasis on a knowledge economy. Collaborating with expat home market fund houses to launch products in the GCC could turn GCC asset management into a retail focused offering. For example, given the large presence of Indian diaspora in the GCC, local asset management companies could collaborate with Indian fund houses to bring products oriented towards the Indian stock market and offer them to expats living in GCC. Such collaborations could also consider product combining Indian and GCC markets to achieve more risk diversification. Taking the industry retail would also likely expand product variety, which currently now stands focused only on money-market/trade finance and equities.
2. Move from Fund management to wealth management
The current retail product structure is more skewed towards money market/ trade finance funds followed by equities. 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. Wealth management solutions focus more on asset allocation and then identify appropriate funds, preferably at 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 have been quick to realize this potential and are moving towards elevating their private banking services to wealth management focused relationships. Such a transition for asset management companies will enable an increase in assets and client base.
3. Adopting Technology
GCC asset management industry should take a leaf or two from the banking sector in terms of adopting technology, or what is now called Fintech. The earlier idea of moving from fund management to wealth management lends itself well to technology adoption, especially in the area of portfolio construction, management and reporting. Fintech helps achieve enhanced customer experience and real time portfolio performance. Technology also helps answer client queries by using machine learning based technology that gives a near human interaction experience. The icing on the cake is that such a strategy will also result in steep cost reduction. Technology can be used in a variety of areas like customer profiling, portfolio options, product evaluation, performance reporting, etc.
4. Adapt to Gen-Z
GCC is a young population dominated by Gen-Z (born after 1995). Gen-z needs are different from Millennials (born between 1981-1995), Gen-X (born between 1961 to 1980) or Baby boomers (born between 1945 to 1960). Gen-Z are more tech savvy, flexible, more risk taking, and social media friendly. They are generally well informed, and understand trends quickly. The asset management industry should construct products that will appeal to this demographic, whose dominance will only increase more going forward. While baby boomers will still command a higher wealth share, they may represent a dwindling opportunity set for GCC asset management houses.
In summary, GCC asset management is a growth industry that will benefit from the economic expansion the region is witnessing and is likely to witness for some time. It can do well to focus on the ideas enumerated above in order to achieve respectable scale. However, among the many challenges the industry will face will be a geo political risk perception among foreign investors who tend to see GCC in the same light as non-GCC. The industry can do well to negate this perception through collective efforts in terms of road shows. There is need for the asset management industry to attain scale on par with other emerging markets in order to play an active role in modernizing GCC capital markets.