Coming up short

By Ruth Gillbe

12 Sep 2011

Mena-shy investors are nothing new, but the region’s long-term potential remains an attractive gambit for the world’s global institutional investors. Brazilian multi-family office Bawm Investments is increasingly interested in the new opportunities for fund managers in the ever-evolving emerging market space, and the Mena region is no exception, according to George Wachsmann, founding partner and CIO.

“Our global portfolio has about a third invested in emerging markets and I would say that less than 5% is currently in Mena,” he says. “But this could change in the future. In some ways, Mena faces the same challenges that Latin America has faced.”

The São Paulo-based firm currently has $1bn invested in Latam funds, with investments into cash, liquidity, fixed income, hedge funds and equities. According to Wachsmann, the multi-family office may be more interested in increasing its Mena allocation in the future, but intends to hold back until the local industry is more advanced, hopefully inciting the growth of more robust managers in the industry.

Limited opportunities

The company is bullish on hedge funds as an asset class, an interest that is difficult to pursue in Mena’s long-only environment. “Managers haven’t had opportunities to short, so it is pretty much a long-only strategy,” says Wachsmann. “What we look for in a manager is someone who understands that the market still lacks a good hedging opportunity. If we were looking for a Mena manager, we would try to avoid a long-only manager and find someone who could explore other areas, such as relative trading and relative base opportunities.”

Wachsmann adds that should a dynamic hedge fund sector emerge in Mena, the company would be interested in increasing its allocations, but does not anticipate this happening any time soon. “In order to get more robust managers you need a more advanced local industry,” he says. Although Bawm is not invested directly into the Mena region at present, a variety of vehicles in its portfolio have exposure to the region.

“We are a little bit shy on Mena investments,” says Wachsmann. “As a matter of fact, we don’t have direct Mena investments, but what we do have is exposure to some hedge funds which have direct investments in the region. Some of the managers that we have investments inacross the region are quite robust.”

The company has investments in a few managers based in London and Geneva, which have exposure to the Mena region, constituting about 5% of investments in total.

Balancing act

Bawm’s current allocation towards the Mena region is a result of the balancing act between opportunities and risks already provided elsewhere, explains Wachsmann. While there is an interest in the region, many competing emerging market regions offer lower risk solutions with similar returns, in general, making them more appealing for the multi-family office.

“There are still good opportunities in other developed and emerging markets as well, and at a lower risk,” says Wachsmann. “As these relationships change, it is possible we will see more opportunities in the Mena region.” In terms of new allocations to the region, potential changes in the MSCI status to the UAE and Qatar would not necessarily affect the decisions of the fund management selection at Bawm.

“We don’t make our decision based on major overweight or underweight indices,” says Wachsmann. “We think about where the potentials and challenges are, and what we want to avoid and get from them.” Making decisions based on such benchmark indices would be more likely for managers who have a direct objective in the region to increase their investments, adds Wachsmann.

Conversely, the prospect of countries such as the UAE and Qatar evolving to win emerging markets status in December would render them much more desirable to institutional investors as areas for investment over the longer term. As a result, new investments from multi-family offices such as Bawm may not be a priority as a result of reclassification, but would change the overall outlook for investment prospects in the region.

Early-mover advantage

The fund manager selection process at Bawm is one of diligence, taking time to understand the organisation of a particular fund manager before any new allocation is made. “We spend as much time and money as we think is necessary to understand what managers do, where the risks are and what their core competencies are, as well as where they can make and lose money,” says Wachsmann. Similarly, the company is not afraid of being an early investor into a fund manager, even investing into a new company from the very beginning. Knowing the real history of a manager as it develops is key to helping it follow the right investment process, says Wachsmann.

However, despite this belief, the company is not necessarily quicker to invest in a manager that is relatively new instead of an established one. “For me it is a dynamic process,” explains Wachsmann.“Every day you get to understand your client again and revisit your positions, making sure you would buy them again, that morning. “We believe we have very strong expertise in understanding managers, knowing what they’re doing and where they can add value,” he adds. “Paired with performance, it’s a matter of understanding what your client wants and making sure he understands what he’s getting into.”

Long-term outlook

Despite Mena’s relative lack of attention in recent years, particularly in light of the rise of Latin America and Asia’s strength in the emerging markets, it seems clear that the region still holds its position as one of the original cohorts of the emerging markets. However, the political unrest witnessed in the region has certainly worried potential investors, and to a certain extent, destabilised the opportunities presented in the market.

For Wachsmann, such uncertainty in the region has furthered the case for stronger investment at home into the European emerging space, detracting attention away from potential opportunities in the region. “When I talk to an emerging market manager in Europe, they are so happy with the opportunities in Eastern Europe, for example, closer to home, that they even consider the Mena region and countries like Brazil as kinds of frontier market,” he says.

As a result, emerging markets at home and across Europe, will continue to grow. The multiplicity of opportunities within different emerging markets, Mena included, could evolve, especially if the political unrest begins to settle down.