Stand and deliver

By Kathryn Gaw

19 Jan 2012

The Mena fund industry needs more new investment. That isn’t exactly news. But recently there have been increased calls for the local investor community to pay more attention to the investment options on their doorstep. At the Mena Investment Management Forum in Doha, several fund managers called for provisions to be made for Mena-based investors to allocate a certain percentage to the local market, while the recent Middle East Investment Panorama (MEIP) report indicated that investor sentiment towards the local markets may be starting to cool off.

Certainly, there is no shortage of wealth in Mena, but there does seem to be a reticence to circulate this wealth in the region, at a time when fund managers are in particular need of a cash, and confidence, injection.

Wealth of options

It is not necessarily the case that Mena’s investors don’t want to invest in the region’s fund managers, rather that market sentiment, in general, is poor. Of course, investing in local managers does not have to mean investing in the local market, as many managers now run ex-Mena funds: just last month, for instance, Saudi Arabia’s Samba Capital launched its Americas Equity Fund, investing across the continents of North and South America.

Nonetheless, the fund industry has been deeply affected by a succession of financial crises and, more recently, the Arab Spring and the fact is that there are many interesting prospects abroad. Heraymila Investments, a Bahrain-based family office, has a few investments in local funds, including Bahrain’s own Investcorp. However, senior business analyst Joseph Pulikken admits that local fund investments only make up a small percentage of Heraymila’s total portfolio – around 1% or less. “We do invest in some private equity in the region,” he adds. “As a family office we like Asian emerging markets and are focusing on investment in that region.” 

Mena’s sovereign wealth funds enjoy an honourable exemption here as they generally have a remit to diversify from their primary wealth generators  (overwhelmingly petrochemicals and banking), which remain fairly standardised investment sectors across the region. But what is preventing the other big institutions, such as family offices and insurers, from considering Mena? “We don’t invest in any Mena fund managers but we do invest directly, on occasion, in the Mena markets,” says Matein Khalid, head of capital markets and advisor to the chairman at Bin Zayed Group. “I would say that most Mena markets are fairly shallow.

"There’s really no proven long/short fund manager that I know of – it’s basically long-only and if it’s a question of long-only, we feel we can replicate those returns ourselves. The only place we have invested in Mena funds was in the area of private equity because deal flow is important in that context.”

Al Wathba National Insurance Company also chooses to make its own direct investments into stocks. “We do invest in the local market,” says general  manager Bassam Chilmeran. “However, if you are asking me about fund managers that are involved with local or regional investments I would say no.”

While Al Wathba has a strategic partnership with the Vision Insurance Company in Oman, which is affiliated with the Vision suite of investment products, it also takes the view that it may as well invest directly into a local market that it already knows, and this view is echoed among its contemporaries. “We do not feel most fund managers have any kind of an edge over what we can do ourselves,” says Khalid. 

Regulatory fog

Another key issue affecting investor sentiment is regulation. This is particularly pertinent in the UAE where the Emirates Securities and Commodities Authority (ESCA) is soon expected to release the final draft of its controversial investment fund regulations. According to its initial draft, all funds will be required to obtain UAE Central Bank approval to be marketed in the UAE, although it is unclear whether the burden of obtaining approval falls with the investor or the fund manager.

It is also unclear whether life insurance companies, which have historically been regulated by the Insurance Authority and exempted from the UAE Central Bank regulations, will be able to keep offering access to fund platforms, which can provide access to scores of foreign funds. Further, draft instructions circulated by the UAE’s Insurance Authority suggest a new provision restricting investments in units of foreign funds to not more than 10% of an insurance company’s investments.

Up to 25% of the insurance company’s investments may be allocated to funds in the UAE. This regulatory confusion is so pronounced that the recent MEIP report found that the main challenge facing Mena- based fund managers is not the geopolitical situation, but the unclear and changing regulatory environment. Nearly three quarters of the 211 investment advi-sors surveyed said that they were worried about regulation, while only 14.7% saw it as an opportunity.

The elephant in the room

Inappropriate and unclear regulation, region-wide economic turmoil and easy access to direct investments seem central to investor reticence. But there is one question which remains unasked, and with good reason. Could it be that Mena’s fund managers simply aren’t up to international standards? In off-record conversations with Mena FM, some investors have been scathing in their comments on the current state of the industry, blaming a lack of  transparency, liquidity and experience among the many reasons why they won’t invest in Mena. Others are simply biding their time, waiting for the right opportunity to present itself.

“As long as the fund manager as an institution meets certain requirements, we have no geographical preference,” says Mahomed Akoob, managing director of Hannover Re Takaful. “At the moment we use a combination of our existing group international fund managers as well as Mena-based fund managers.” And Chilmaren adds that Al Wathba may be open to investing in more local fund managers in future. “We might do that – our current activities are very much linked to the market activities, which is limiting,” he says. “I am certain that things will change and that, depending on our activities, we might require a full-time person supervising this.”

However, others are not so patient, and see the recent crises as a sign of underlying trouble. “I’m not tarring the entire industry but there have been too many black holes and black swans and cowboys for it to be entirely coincidental,” says Khalid. “This industry needs some serious, serious, overhaul.”

“We are not very bullish on Mena’s investment prospects, mostly because of the political factors in the region,” says Pulikken. “As an investor, I don’t think it’s our responsibility to support local fund markets in the region.” Needlesstosay, Heraymila is not currently looking for any Mena-based fund managers.

In such a pessimistic environment, it is easy to assume that there is nothing a fund manager could do to convince neighbouring investors to make an  allocation. But investors have a fundamental approach to manager search, which should neither discount nor favour any investment options based on geography.

“We look for competence, knowledge and transparency,” says Akoob. “If a fund manager can display an exceptional level of competence in their area of expertise, has extensive and in-depth knowledge of the markets and of both conventional and Shariah-compliant investments, and is completely transparent about costs, fees, alternatives, performance measurement and the like, they can be considered for co-operation with Hannover Re in Bahrain.”

“When looking for a fund manager we look at the track record – that’s very important. And then the obvious ones – ground contacts, depth and knowledge of the region – those two are very impor-tant,” says Pulikken. “But we are not convinced on the fundamentals of the region at the moment, that’s the reason why we are not looking for investment opportunities in the Mena region now.”

Khalid agrees that the region holds little interest at the moment, adding that he would rather take any regional exposure through a foreign fund with a Mena component. “I don’t think Mena is an asset class in its own right. This is a group of frontier markets that are way too alike for them to offer any diversification value,” he says. “This industry has basically blown itself up – it’s completely lost credibility and the entire ecosystem is flawed.”

The message is hard to hear, but maybe fund managers do have to up their game; or maybe investors need to allow for extraordinary global market turbulence and the toll it takes on an emerging marketplace that is still under development. It is widely acknowledged that Mena has a lot to offer the investor community, and if local investors don’t take advantage of the current downturn, others certainly will.