For many international investors, the Middle East still represents a new frontier for compliance, transparency and fiduciary responsibility – as well as capital attraction. The reasons are many: While abundant sources of energy represent a primary appeal, business development in the region is also increasingly characterised by an expanding services sector, population growth and an educated workforce.
While local companies and financial markets are maturing at an impressive rate, a pattern similar to Latin America, China and India 20 years ago, the Middle East still represents a region that is often overlooked by international investors. What stands between greater international investment, then, and the fertile business climate in the Middle East?
It’s certainly not due to any shortage of good investment ideas. Instead, it’s more a factor of international investors looking for greater assurances that globally recognised standards of transparency and performance will be applied to products and markets. Clearly, the way business was conducted in the past requires more jurisdictional oversight to meet present needs. Today’s asset managers are looking for greater application of internationally recognised compliance and accounting standards before making a commitment.
Determining the position of a security and the daily outcome of a trade is a given in the US and Europe. Not so in one of the world’s most dynamic frontier economies. The outcome of a transaction bought and sold on the same day may not be possible here without a high level of sophisticated accounting. Such advancement is needed to fill the gap in settlement rules between different countries (while most of the exchanges follow a T+2 settlement cycle, countries like Oman and Saudi Arabia can reach T+3); as well as to address some of the particulars of foreign ownership in the region.
Applying Global Investment Performance Standards (GIPS) provides a fair representation of investment performance no matter where a trade occurs or a portfolio is managed. Overseas firms looking for regional market participation with greater oversight and a longer information history are well-served by ensuring that their processes are GIPS-compliant which results in transparency, consistency, comparability and investor comfort. Though compliance with such standards is mandatory by some regional sovereign wealth funds, it’s still not a common practice among the majority of market players. There is some prompting from regulators to adopt parts of the standards which will only improve transparency and increase the protection of prospects and investors.
Launching a product in the Middle East is one thing. Being able to invest in and redeem shares of the product elsewhere is something different. Here, the emerging standard for cross-border compliance is Ucits, the acronym for Undertakings For The Collective Investment of Transferable Securities. Ucits can be marketed within all countries that are a part of the EU provided that the fund and fund managers are registered within the domestic country. The compelling part of Ucits for Middle Eastern firms is that it does not conflict with other regulatory aspects. There have been cases where regional Shariah-compliant funds have adopted master feeder structures under Ucits.
Clearly, the Middle East needs to take a serious look at increasing performance transparency. At the recent SunGard City Day in Abu Dhabi, Colin Morrison, GIPS Executive Committee, said that, “Over 90% of developed markets’ AUM is managed out of countries where GIPS has been adopted.” As uniform standards for performance reporting, accounting and compliance help level the playing field, opportunistic international investors can compare “apples to apples” between the Middle East and elsewhere without analysing the regional frameworks. The likely result? Transparent performance reporting will be followed by more enthusiastic investment commitments and higher assets under management.
