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The fund management industry in the Gulf is expanding thanks to rising wealth from the states, fast growing economies, regulatory reform and increasing investor appetite for the region.
In the past 18 months, significant levels of foreign investment have flowed into GCC stock exchanges as international investors look for insulation from global economic turbulence.
The MSCI GCC composite index has risen by 40.5 per cent since the start of 2007, outperforming the MSCI World index by 38.0 per cent and the Emerging Markets Composite by 8.7 per cent.
Over the same period there has been a rush of fund managers going into the region to chase a slice of the lucrative market, which comprises Saudi Arabia, Kuwait, Qatar, Bahrain, Oman and the UAE.
A recent report on the growth asset management industry in the region, including Egypt, by Cerulli Associates, a US research house, showed total managed assets of foreign and domestic investment managers were more than $1.6 trillion (Dh5,890 billion) in 2007.
More than 90 per cent of foreign fund managers' business is institutional, focusing largely on sovereign wealth funds and to a lesser extent on family offices.
The region's small but growing mutual fund market was estimated to be worth $100 billion at the end of last year and is expected to grow by 15 per cent over the next five years, according to Cerulli.
"The asset management industry is young but growing rapidly," says Ali Al Shihabi, founder and chief executive of Dubai-based Rasmala Investments.
Access for foreign investors to the region's equity markets is difficult and exposure to a specific company or sector can be limited, while in Saudi Arabia the equity market is closed to international investors.
Rasmala, which has $1.3 billion assets under management, is launching a fund of funds that it plans to list on AIM this month. It is the first fund of funds focusing on the Gulf to list on the London Stock Exchange, and aims to raise capital of $200 million.
The GCC Equity Opportunity Fund, which will invest in GCC equity markets through locally-managed funds, will give foreign investors exposure to equities in the region. It is aimed at endowments, pension funds and family offices.
Rasmala, which set up in the region in 2000, already has a $120 million fund of funds focusing on the Middle East and North Africa, the Mena Equity Opportunity Fund, which has shown annual returns of more than 33 per cent since inception in 2006.
Union Bancaire Privée, the family-owned Swiss private bank, which has been in the region for the past 10 years, recently launched a multi-manager fund of funds investing in the Middle East and North Africa (Mena). About 90 per cent of the fund, a Luxembourg-based Sicav, is invested in the Gulf with the rest in Mena countries.
"We have seen major changes in the area. Local investors who have benefited from the oil wealth are now looking to invest in their own region and not abroad," says Katia Coudray Cornu, head of multi-management and fund research at UBP.
The six nations of the GCC earned $381 billion from their exports of oil in 2007, according to the Institute of International Finance. Since the terrorist attacks on the US in 2001, Middle Eastern investors have been repatriating their assets and reinvesting in the region, particularly in infrastructure. "There is also a strong decorrelation between Mena equity markets and western markets," adds Cornu.
The fund, which has raised $83 million since the end of March, is aimed at retail and institutional investors and is invested in locally incorporated funds, mainly in equities with some cash.
Although the region is often perceived as a single jurisdiction by overseas investors, the level of regulation varies between the six states. The credibility of local fund managers has been enhanced by the establishment of local regulatory frameworks in Dubai and Qatar and the continued development of existing regulation in Bahrain, while the development of financial centres in other GCC countries has accelerated in the past four years.
Transparency
"There is a well developed [asset management] culture in Kuwait, and Dubai and Bahrain are following. There are problems in Saudi where it is difficult to find good institutional fund managers," says Cornu.
The level of transparency of companies and stock exchanges in the region is still "in progress", says Al Shihabi. The strong interest in the region from foreign investors is likely to be sustained "as long as the oil price does not take a huge dive, and as long as valuations do not rise too far above those of other emerging markets", says Phillip Khoury, head of research at EFG-Hermes, which has had a presence in the area since 1992. He currently sees the region as more expensive than global emerging markets.
BNP Paribas Investment Partners recently entered into an asset management joint venture with Saudi Arabia Investment Bank, a major local player, which will allow the company to access local investors th ough SAIB's distribution networks. The two plan new products. "The GCC market is one of the most exciting in the world and is getting more sophisticated," says Gilles Glicenstein, head of BNPP IP.
One of the world's biggest money managers, Franklin Resources, which operates as Franklin Templeton Investments, has also been eyeing the region. Last September it took a 25 per cent stake in Algebra Capital, a Dubai-based asset manager, to gain greater access to managing money in the region.
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