Tailor-made solutions

By Zaki Abushal

12 Dec 2011

Asset managers are never happier than when their business is expanding. In most instances, this means funds are performing well and assets under management are growing. But today, fund managers are in a difficult position. Markets are whipsawing, investors are edgy and assets are more likely to flow out than flow in. In the past, asset managers turned to funds, accessible to the public, in order to raise capital. It was a time when investors were happy to be lumped in with one another, a time when investment advisers had carte blanche to do pretty much what they wanted with investors’ capital.

For a time, Mena looked to be heading down this route – the ‘retail’ road – with the rest of the world, but it was never going to last. The breaks are now on for the retail investor, outflows continue to afflict funds and asset managers are searching for ways to attract and retain clients. “It’s not a big part of the landscape in this part of the world because the retail investor is not as sophisticated as the retail investor in the West (for instance, we don’t have 401ks and we don’t have all these saving schemes). In terms of putting money into mutual funds, it’s not a big thing,” says Abdul Khadir Hussain, chief executive at Mashreq Capital.
The high-net-worth and institutional market was always the bread and butter for Mena asset managers. As this category grows and becomes more  sophisticated, particularly in Saudi Arabia, the retail investment market will lose its importance. It isn’t the death knell for asset managers; instead, mutual funds and hedge funds will use their funds as calling cards to attract clients, not as tools to service them. 
“For the most part, assets under management come from running discretionary accounts on the back of relationships and that really comes on the back of using the public fund as the tracker. You say to people, look what we’ve done, from the performance standpoint,” says Hussain. “It essentially means that it is the discretionary accounts that give you the most size.
And if you talk to most of the asset managers in the region with the exception of maybe EFG-Hermes, which has probably had some success in raising assets for its equity funds from international asset managers wanting to put an allocation out into the region, most AUMs come through discretionary accounts.”
Discretionary accounts
“If you look at our position, more than 70% of our assets under management are in discretionary portfolios and the rest of the assets are in funds,” says Nadi Bargouti, managing director at Shuaa Asset Management. Assets under management in Shuaa’s funds business are growing, despite the taxing economic environment, yet most of any new capital through the door arrives in the form of discretionary portfolios. “We’ve crossed $1bn in AUM and most of the new money that came in was into discretionary portfolios. We didn’t really receive any subscriptions into the funds; it was more into the discretionary portfolios,” says Bargouti.
It’s very difficult to find any data on assets split in the industry except that offered by chief investment officers and CEOs. “There isn’t really any published data on discretionary portfolio AUM, but I can tell you, roughly speaking, at least 50% of asset managers’ AUMs are in discretionary portfolios. It’s a very important business – at least 50% of your AUM is in discretionary portfolios, if not more. In fact I’m being conservative when I say this,” says Bargouti. According to Bargouti, that number could be as high as 70% for a lot of firms. 
Talk to a lot of money managers inthe region and they’ll tell similar stories. “We’ve got about $450-500m in assets under management and at least 50% of
that is in discretionary. The funds are not the main part – we’re probably closer to 60% than 50% in our discretionary funds,” says Hussain.
Discretion  portfolio management (DPM) has been a very important part of the asset management business in the Mena region for some time. Investors in Mena, particularly retail investors, have endured an express, evolutionary process, beginning by playing the markets, largely off their own back. The uncertainty, volatility and subsequent losses that the vast majority endured in 2006 and 2008 led many to conclude that the markets were not for the uninitiated; paid investment advisers were the better option. The process gained considerable traction after 2008 when investors’ fears forced many to establish managed/discretionary accounts. It offered investors more control and visibility over their capital while segregating them from other investors. It also offers that all-important element, particularly to the Mena investor: personal service.
Yet the discretionary model in Mena isn’t the same one you’ll find elsewhere. DPM but not as you know it The traditional discretionary model in the West offers clients a bespoke service allowing a very active role for the client in terms of setting investment guidelines. “[DPM] is everywhere in this region but it’s different from what you see in Europe and North America. Here, each client prefers to have his own segregated accounts – basically they just aren’t comfortable investing in funds with other investors. They feel like they don’t get the attention they deserve. it isn’t for investment guideline reasons or investment objectives, but it’s really just to have their own tailor-made service,” says Bargouti.
Client attention is the key, according toBargouti. “Usually in North America, where investors have their own mandate, investors expect you to service  something for them, whereas in this region discretionary portfolios primarily follow the same investment guidelines as funds. The service is different [in Mena]. It’s more tailor-made, and the investor feels more important, and that’s why it’s becoming more important as the industry develops,” he says. 
Fees have always been a big concern for the asset management industry, particularly when markets and funds returns tanked after 2008 (and again this  year). Investors who were no longer receiving outsized returns turned to their asset manager and demanded lower fees. If not, they would move their
capital to a manager that was cheaper. Not a lot has changed. There is still something of a ‘beggar thy neighbour’ mentality in the discretionary portfolio
business in Mena. “I’d say that fees are the most important factor when a client is looking to go into a discretionary portfolio. It is the most important factor when making their decisions.
Yes, track record is important and service is important but the first thing they start negotiating is the fees. When investors negotiate, they negotiate like merchants, so if you charge a 1% or 1.5% management fee, they’ll try to cut you down even if it’s just 10bps, just to have the feeling of negotiation or bargaining. Fees are very important but can be frustrating at times because they tend to overlook your track record/performance and your service. And it puts you in the same field as those that have underperformed and haven’t serviced their clients well – if they offer lower fees then you have to lower yours,” says Bargouti. 
Some asset managers claim not to be affected by the fee squeeze imposed by discretionary clients. “Some of our competitors do try to compete on fees, but HSBC Saudi does not do that. We offer value for the service, which compensates the client for any fee that is paid us,” says Abdulhadi Shahadah, chief investment officer at HSBC Saudi. Horses for courses Discretionary accounts have never been asset managers’ best friends. “It’s much better from our standpoint to have the clients in the funds. It’s a critical mass question – once you have a certain amount in the fund it’s much easier to get others in to the fund. It’s a public track record so it’s a much easier calling card to have,” says Hussain.
“Fund managers are going through tough times tight now,” says Ammar Bakheet, head of asset management at Audi Capital. “The appetite for equities
globally over the past couple of years hasn’t been great. Most of these fund managers don’t have deep pockets or enough AUM and that’s also helping to drive them out of the business because they cannot support or keep their resources in order to keep managing these assets,“ he says. 
The growth of discretionary accounts in the Mena region means more resources allocated to fewer assets. Larger fund managers have successfully grown both the discretionary and public fund aspects of their business, but even for the largest, it’s the discretionary business showing the most promise. HSBC Saudi is one of the largest. It managed $2.4bn in discretionary accounts as of July this year, $200m more than the assets under management in its mutual funds. “DPM has been growing faster than mutual funds because the service is targeting high-net-worth individuals whereas mutual funds are more for retail investors,” says Shahadah. “Our assets under management have been growing steadily over the past few years despite the two down years of 2006 and 2008. And we have managed to exceed the highest number of clients that we reached in 2006. So our DPM business is at a lifetime high,” he says.
Discretionary portfolios are growing in Mena, just as the retail market shrinks. This is good news for the industry but heralds a shift in client interaction. Investors, more than ever, want face time with their asset manager and want to have it at a knock down price.