Breaking new ground

By Kathryn Gaw

14 Nov 2011

The National Bank of Abu Dhabi (NBAD) knows how to play to its strengths. A focus on GCC equities and growth funds has seen its asset management business become one of the leading players in the UAE, with AUM of approximately AED5bn ($1.36bn) and a suite of top-performing funds. A pioneering exchange-traded fund (ETF) and segregated accounts business have added weight to its portfolio and plans are now afoot to diversify and grow even further. The next few months will see a number of fixed income funds launched, as well as the development of the company’s new investment business, which will target external fund managers both in and out of Mena.

Furthermore, CIO and general manager of NBAD’s asset management group, Alan Durrant, has revealed that an acquisition may be on the cards sooner rather than later. “In the equity side of the business there is a lot of competition and so we have spent time looking for new unexploited areas,” he says. “Rather than just fighting harder in the already bloodied equity waters that we were swimming in, let’s swim into blue ocean where we can create our own businesses.”

NBAD’s asset management division manages five local equity funds, five international growth funds and one ETF, in addition to segregated accounts for high-networth individuals, corporates and sovereign wealth funds. “The asset management division of NBAD was one of the first managers of UAE equities,” says Durrant. “We launched the first open-ended local equity fund and have been pioneers of local equities ever since.” But this business model is now evolving.

“I think there was a realisation that the business had been heavily reliant on local equities,” says Durrant. “It had served us very well during the first five years or so of the business’ growth, particularly during the 2005-06 bull market. People were very new to equity markets and a lot of local investors didn’t know how to invest and, therefore, were happy to hand over the stewardship to a professional manager.

“But people learn very quickly and they enjoyed the personal interaction of investing. More recently, equity markets have performed very poorly and that’s been exacerbated by the fact that most local investors have had a great deal of leverage, far more leverage than you would see outside of the region, leading to people shying away from equities.”

Diversifying portfolio

The firm’s equity-led portfolio is certainly set for a shake up, with plans to move into the fixed income sector. A cautious fixed income fund is set to be launched in the third quarter of this year, with a cautious Islamic income fund set to follow. “There are lots of areas that we can broaden out of the current existing asset classes, so over time we might launch a high-yield fund investing into local debt, we might launch an ijara fund,” adds Durrant. While he doesn’t rule out further diversification into money market or property funds in the future, Durrant adds that any new product offering would have to be structured correctly for its clients.

“If we are going to put the NBAD name on there then it’s going to have to be something we are very proud of,” he says. “We do need to expand our core balanced fund range, so we are going to work very hard to increase it. Yes, there is a lot in the pipeline.” The company has had some success moving away from equities in the past. It launched the first Gulf Arab ETF in 2009 and has seen that fund perform consistently well ever since. Durrant is particularly bullish on ETFs as a growing Mena asset class. “It’s very clear to me that ETFs have been enormously popular over the past decade or more and I see no reason to suspect that it will reverse,” he says. ”There is now over $1trn dollars invested worldwide in ETFs from a standing start, give or take 20 years ago. It has grown from being a niche market to the dominant market in a blink of an eye. Over the next year and as people return to local equity markets I think we will find that people become far more interested in the ETF again.”

A second ETF offering would not be unthinkable for an asset manager which seems focused on following client appetite, but for the time being, Durrant will have his hands full juggling an existing and developing portfolio, not to mention his new investment role. It is this interest in diversification which is set to keep NBAD interesting in an evolving marketplace.

“We operate in a world where investors want a broad choice and so if an investor comes to us and the only thing we can offer is local equities, local debt, local cash, local properties then the chances are some of those investors are going to go elsewhere for things that we don’t offer,”

Durrant concedes. “If we can offer best-of-breed international alongside best-of-breed local then we think we will be that one stage closer to a one-stop-shop financial services business.”

Acquisition plans

Over the past few months, Durrant has been meeting fund managers with a view to investing in these best-of-breed products, but there is another reason why the company may be eyeing up external businesses. NBAD is mulling acquisition opportunities and Durrant wants local boutique fund managers to approach him with offers. “We have had very interesting conversations with people about taking on their whole book of business,” says Durrant. “We have been approached by some small fund management businesses and family offices. They have been saying, ‘we set this business up five years ago with the intention of being a big fund management business with offices all over the world and a large AUM, but we’re now down to $20m and we can’t run the business’.”

Consolidation has been a point of discussion among Mena fund managers ever since the global financial crisis, and recent regional and global market volatility has done nothing to quell rumours of potential mergers and acquisitions within the industry. In fact, many fund managers have actively called for consolidation, as a means of improving liquidity in the market, and Durrant is no exception. “When I see all of the equity funds that are out there, most of them are launched at the size they would be closed down at in the West,” he says. “In fact some whole businesses are at a size which you would seed a fund elsewhere and I can’t see how some of these businesses are covering their costs. “We have looked at a few deals but none of the have worked for us,” he adds. “But it’s something we are always very much alive to. If any of your readers would like to bring their team and book of business then we would be delighted to speak with them.”

These acquisition plans underline Durrant’s optimism for NBAD in the year ahead. He sees the company expanding in the coming years to become not just a regional superpower, but eventually a global name as well, with a world-class portfolio to match. “Over the next five or 10 years we see ourselves having the same breadth of offering that people would have in a private bank or wealth manager anywhere else in the world,” says Durrant. “There’s a great deal of work to do build that but that is a hugely exciting growth leg that we have got ahead of us.”


NBAD the investor

2011 has seen NBAD break new ground by establishing its own in-house investment group to invest in external fund managers. This move came from the realisation that NBAD does need to offer the products that it doesn’t want to manufacture, according to Durrant. “We believe that we are best-of-breed in terms of manufacturing local equity, local fixed income, local property and local cash,” he says. “We genuinely can’t think of anyone in the world we would rather give our clients money to in these areas than our own fund managers. But we also recognise that there are lots of other areas that we will never be best of breed in, therefore we should be outsourcing those.”

Durrant has already begun meeting with fund managers, although he emphasises the importance of getting the correct processes in place first. “We start with what the customers actually want and identify the broad asset classes we need to cover,” he says. “Everything from local equities to international equities, European equities, Japanese equities, US equities, international bonds, government and high yield, commodities, currencies, etc. Once we know what buckets need to be filled then we can go through a certain quantitative process that finds people who appear to have some persistency of skill and then from that we can move to actually meeting fund managers.”

The manager selection process is due to take place over the next six months, and although NBAD will predominantly be looking at non-GCC based fund managers, Durrant is not ruling anyone out. “If someone has something which is very particular to one country or particular to one part of an asset class that we don’t cover then, sure, we might look at it,” he says. “Just as we would hope that fund managers in other GCC countries might be prepared to look at our UAE expertise to complement whatever it is that they are good at.”