UAE exchanges: A United Future

The long-awaited merger of the UAE’s two main exchanges – the DFM and the ADX - appears to be nearing reality. What benefits can fund managers expect from the proposed deal, and where does it leave the UAE’s third exchange, Nasdaq Dubai?

If consolidation of the UAE’s exchanges has been on the table for some time, the main players have certainly kept their cards close to their chest; yet the last few months have suggested that they may finally be about to show their hands.

Merger talks between the Dubai Financial Market (DFM) and the Abu Dhabi Securities Exchange (ADX) first took place in 2010, only to stall on the issue of valuations. Further talks took place in 2012, leading to the plan being formally revived. Then in June this year, it was reported that the deal had progressed and was awaiting approval at the highest levels, with the valuation and structuring of the deal largely agreed upon. The Emirates Securities and Commodities Authority (SCA) is believed to be working on the development of regulations for listing of private companies and trading on a combined market.

The exchanges declined to comment on whether an announcement is imminent, but MSCI’s upgrade of the UAE - and the inflow of institutional portfolio investment which is expected to follow that decision - means that the timing for such a move would now be particularly opportune.

Brokerage advantages

Walid Hayeck, managing director of asset management at Abu Dhabi’s The National Investor (TNI), says that the main advantages of the merger from the fund manager’s point of view would be a reduction in brokerage fees and regulatory bureaucracy.

“Brokerage fees are very high in the UAE – each trade has a round trip of 54bps, which is the most expensive fee structure in the Mena region – while brokers have to report to many different regulatory bodies,” says Hayeck.

The merged entity would provide a single platform for institutional investors and a larger pool of liquidity, adds Tariq Qaqish, deputy head of asset management at Al Mal Capital. “It would also have unified regulations that would be easier for investors, especially foreign investors, to follow and help reduce the cost of doing business for brokers and investment managers. We see minimal risk for such a transaction.”

Amer Khan, director of Shuaa Asset Management, adds that a combined UAE bourse would figure more prominently among the world’s exchanges and would be a draw for a different class of international investor.

He observes that since the DFM is a publicly traded company while the ADX is private, bringing them together with different ownership structures is likely to be challenging. But the end result would “almost certainly” encourage more companies to list in the UAE.

“With a single exchange, uniform listing and reporting requirements would likely come into effect and the investor base would be broader. Both are key factors for companies considering IPOs in the UAE,” says Khan.

Enhanced liquidity

Wafic Nsouli, executive director of institutional sales at Arqaam Capital, says enhanced liquidity levels would strengthen brokerage companies working in the UAE, enabling them to produce more in-depth research and provide better insight into the market as well as encouraging product development.

The successful merger of ADX and DFM may lead to calls for the UAE’s third exchange, Nasdaq Dubai, to join the consolidation, but Nsouli believes such a development would be too problematic.

“As for the merger of all three exchanges, the main obstacle would arise from the fact that Nasdaq Dubai is not Sharia compliant. We do not see a scenario where all three exchanges could merge successfully.”

He agrees that the DFM-ADX merger could lead to more companies listing their stocks on the exchange, but adds that listing requirements would have to be revisited to ensure they are market-friendly and competitive with other global exchanges. “For example, the SCA’s mandatory listing of 51% of shares would require rehashing, in order to encourage additional companies to become listed.”

Natural partners?

Saleem Khokhar, head of equities for the National Bank of Abu Dhabi (NBAD), describes DFM and ADX as natural partners in aspects ranging from alignment of cultural interests to federal laws. “As an exchange grows in size and dominates a region it would undoubtedly attract more companies, both in the UAE and across the GCC. Generally exchanges that have high stock market capitalisation attract larger companies as they have the ability to provide liquidity for listed shares as well as enhancing capital raising capabilities.”

“Taking this a step further, a unified GCC stock exchange would generate even greater benefits, although political resistance is likely to make this a longer term project. The barriers to consolidation between all three UAE exchanges include agreeing valuations and perceived loss of independence.”

A DFM-ADX merger would simplify investing in the UAE, in particular the setting up of accounts to invest, suggests Oliver Bell, portfolio manager T Rowe Price. “Ultimately, whether it would encourage more companies to list on the UAE exchange would depend on whether the listing requirements are more attractive than the current requirements.”

Hayeck expects the deal to happen soon, but warns that on its own the merger of DFM and ADX would not be enough to increase liquidity in the UAE. “The market also requires a willingness from the various industry sectors to take companies public and more institutional money in the market,” he concludes.


Where would a combined DFM-ADX exchange leave Nasdaq Dubai?

Nasdaq Dubai, the capital markets section of the DIFC, is the third of the UAE’s exchanges and is subject to the DIFC’s offshore regulatory regime.

According to TNI’s Walid Hayeck, it would be left in a challenging position by the DFM/ADX deal. “Nasdaq Dubai has failed to attract any issues for a number of years and there are few stocks traded. It might focus on offshore companies that want to list in the DIFC, but do we want one market for onshore and one market for offshore?” he asks.

However, Al Mal Capital’s Tariq Qaqish believes it would remain viable as long as it provided different product ranges to investors. For example, its lower minimum listing requirements mean it could continue to appeal to smaller and/or newer companies.

Nasdaq Dubai occupies a niche as a gateway for international players to access the UAE market as well as for derivatives and bonds, says NBAD’s Saleem Khokhar. “It would benefit from access to the unified exchange with a likely increase in volume as ADX listed companies could then be traded seamlessly and efficiently.”

Oliver Bell of T Rowe Price is least optimistic about the prospects for the UAE’s third exchange. “The original advantage of listing on the Nasdaq Dubai has been the ability to list a lower percentage of your company, the ability to ‘book build’ in the IPO process and for foreigners to have the ability to clear the trading through Euroclear.”

Despite these advantages - some of which have been eroded by subsequent changes to the DFM/ADX listing requirements - Nasdaq Dubai is unable to attract further listings as the experience of those companies that have is very poor, suggests Bell. “DP World, Depa and Damas have all suffered from extreme illiquidity and lack of retail interest. Given this experience I believe foreign institutions are very wary of any company that wants to list on Nasdaq Dubai.”

MENA and Turkey: Turkish delights?

Turkey has all the ingredients for rapid growth, and is increasingly attracting the attention of GCC investors, especially those with a focus on private equity. But will the development of the country’s capital markets presage a wider boom in the asset management industry?

Bridging the gap between Europe and the Middle East, Turkey occupies an interesting position as an investment destination. Having overcome a major financial crisis at the beginning of the millennium, it now represents a story of rapid economic growth. Perhaps it is these growth prospects, as much as any geographical or cultural factors, that have led to growing numbers of Mena managers embracing Turkey as part of their investment universe.

Private equity has traditionally attracted attention from the Mena region, and for some, this is still the most interesting play. NBK Capital, one of the region’s most active private equity investors, has been investing in Turkey over the past seven years and has achieved some impressive results.

Fund manager Amjad Ahmad believes that consumer-driven sectors in Turkey are particularly appealing at the moment, given the young and growing population.

“We believe that the middle class will continue to grow with disposable income and spending also climbing,” says Ahmad. “As young people enter the workforce and begin to create families, significant pressure will be put on all forms of consumer goods and services, which presents a lot of opportunities.”

One reason private equity continues to flourish is that the underdevelopment of many companies provides fertile ground for an active investment philosophy. Ahmad says that initiatives to drive efficiency and productivity in companies have been central to NBK Capital’s returns.

“There are many good companies that have not yet transformed or modernised their strategies, processes and people. This presents an opportunity for us to invest and implement an array of value creating initiatives to make businesses more agile and dynamic.”

The $250m NBK Capital Equity Partners Fund I recently enjoyed a successful exit from Dunya Goz, Turkey’s largest chain of eye hospitals, in which it had invested since 2010.

Having a proper exit strategy and understanding the nuances of the market are crucial to making successful investments, stresses Ahmad. While Turkey has grown in popularity as both an emerging European market and a destination of Mena managers, it isn’t necessarily a straightforward landscape to traverse, and getting advice on local legal and regulatory systems is crucial.

Additionally, Ahmad highlights that unlike GCC investments which are predominantly pegged to the dollar, investments in Turkey are at risk to the fluctuations of Turkey’s free-floating Lira. “It is imperative to ensure that you have a strong capital structure with the right equity/debt mix.”

Stock market development

The public equity space also presents a mixture of challenges and opportunities. Göktürk Işikpinar, chief investment officer at AK Asset Management, one of the country’s largest asset managers, says that the number of listed firms is set for a rapid expansion.

“If you look at the current market, the free float is 29%. The Istanbul Stock Exchange is conducting a campaign to increase the number of shares listed there. The major market currently has 330 stocks, but plans to increase this number to 1000 by 2020,” says Işikpinar.

If these ambitions are realised it would be good news for the local asset management industry, which is gradually taking root in the country, helped in part by a growth in the number of pension funds.

Pension funds are certainly among the biggest clients for AK Asset Management, which manages an estimated $2.7 billion on their behalf. Işikpinar believes that Turkey will see further growth in this area, as the government tries to counter the low rate of savings and the current account deficit that have previously characterised the country.

He also believes mutual funds will see an upturn in their appeal as the low interest rate environment and demand for real estate (a very popular alternative to capital market products in Turkey) loses steam.

“I believe that in three to five years we are going to see more people demanding capital market products,” says Işikpinar. “We are at the beginning of a growth period in asset management.”

One factor that may inhibit regional asset managers looking to gain a foothold in the country is distribution power. Emerging markets manager Ashmore has been in Turkey for five years, starting from scratch to now managing $200m from Istanbul. Yet Didem Gordon, chief executive officer at Ashmore Portföy Yönetimi A.S (Ashmore Asset Management, incorporated in Turkey), admits that their distribution network remains relatively limited.

“Mutual fund distribution is dominated by banking networks, which independent asset managers such as us have very limited access to,” she complains.

Işikpinar agrees that the market can be difficult to break into. “Four large asset managers make up around 90% of the market and there aren’t that many foreign asset managers in Turkey at the moment.”

“Of course the market is open just like anywhere else. Whoever can establish innovative, competitive products - whether large or small asset management companies - will attract investor attention, and there are successful examples of that,” he adds.

Emerging market wobbles

In common with other emerging markets, Turkey has experienced volatility recently driven by fears surrounding the Fed’s mooted tapering of quantitative easing. “The general market sentiment has resulted in an outflow from Turkish listed equities as well as fixed income last month,” explains Ashmore’s Gordon.

She adds: “This led to increases in bond yields, going from 6% to 9% levels, which consequently led to a re-rating of listed equities. Valuations have been coming down at a very rapid rate.”

Nonetheless, the medium-term investment outlook remains positive, with estimated annual growth earnings of around 7% for 2013 and higher in ‘14, she explains. “When markets are normalised, we’ll see valuations taking effect and investments will flow into the most attractive markets.”

Gordon goes further in pointing out that market volatility can create additional opportunities for those who know how to exploit them. “The mispricing that can occur when there is a temporary disconnect between prices and fundamentals can create opportunities to amplify returns in the long-term. Our aim is to sift through the noise and make rational investment decisions based on our analysis and research.”

NBAD Asset Management’s head of equities, Saleem Khokhar, agrees. “I expect near-term volatility but this will create opportunities to enter the market at attractive levels as the long-term outlook remains bright.” Although the NBAD MENA Dividend Leader Fund doesn’t currently have any exposure to Turkish equities, it is within their potential investment remit.

Developments in the political arena can also play a marked role in the country’s investment space; Işikpinar highlights that regional instability caused by the prolonged Syrian conflict may present a challenge to the market. He also adds that local elections in March 2014 should be monitored closely.

The political protests that recently brought Turkey to the forefront of media attention have also added to the volatility in the market as well as making some investors more cautious.

“We want to increase exposure once again, but are first looking to see some stability around the current political events, and want to see the government focus back on the economy,” says Afa Boran, Head of Asset Management at Qatari-based manager Amwal (see box).

Local, parliamentary and presidential elections are all set to take place within the next two years, but NBK Capital’s Ahmad stresses that whoever follows in the footsteps of the current regime has fairly big shoes to fill. The AKP has presided over the pro-business policies which have seen the economy flourish and investments increase.

“The next government knows that the AKP’s policies have been beneficial for business and that they will have to maintain the momentum. No matter who wins the elections, economic development and growth will be a priority,” he says.

Clearly Turkey presents interested and savvy investors with plenty of opportunities, whether in private or public equity space. Nonetheless, current global economic trends, political developments as well as market competition make this emerging market more difficult to succeed in than some may imagine.

Real Estate: Tangible Gains

With the UAE property market seemingly making a full rebound from the financial crisis, and real estate remaining a preferred asset class for Mena investors, could real estate investment trusts (REITs) finally be set to make headway in the region?

Investors in real estate - especially in Dubai - might have had their fingers burned during the financial crisis, but the signs are that the wounds have healed and largely been forgotten.

With buildings springing up at a rapid rate across the region, stoked by public spending on infrastructure, commercial and residential developments in the Emirates and elsewhere appear to have little difficulty attracting capital.

Real estate funds, which saw redemptions and suspensions during the 2009-2010 crisis, look to be back to full health. One example which demonstrates the improved situation is the Emirates NBD Real Estate Fund, which is about to fully reopen for investors (see box).

However, despite the region’s love affair with real assets, and the post-crisis appeal of collective investments, one category of investment vehicle that has yet to catch on in Mena are Real Estate Investment Trusts (REITs) which are used across the world to make real estate investment more accessible and liquid. Could the recovery allow REITS to take root?

Fred Tabbal, regional head of fund services, Middle East, at Maples, says that the environment for real estate funds is certainly now buoyant.

“The theme has been quite consistent. Anything of top quality with an income component and potential for capital appreciation seems to attract significant amounts of capital.

“If you look at the Middle East market in terms of volume over the year, it is up significantly and confidence has returned to the market and the expectation is for this to be sustained over the next 4-5 years,” he says.

Funds that are investing in income-producing assets, whether commercial or residential, are delivering an attractive yield of 7-9%, which is making the asset class extremely attractive, says Tabbal.

“It’s extremely popular with investors as an asset class. I think the atmosphere is quite positive we’ve got clients that are pretty much adding a new building every two or three months and securing funding from investors,” he added.  

Listing ambitions


Despite this, the region has only a handful of REITS – an investment company in which the investor owns shares and is paid a regular dividend – and none which have listed on a stock exchange. Since the liquidity created by a listing is one of the major advantages of a REIT, regional market players have yet to truly explore the potential of the structure.

“One of the advantages is that it gives you the ability to list shares on the local market,” says Tabbal. “I understand existing real estate funds have every ambition to do that, but we haven’t really seen concrete evidence that these existing REITs are going to list their shares any time soon.

“The process has never been tested before, and it could be time consuming. I think the first one has to be the guinea pig that attempts to list the shares and see if the investors’ appetite is there before the others follow,” he said.

Regulations have permitted REITs in the DIFC since 2006, but uncertainty about their scope together with the subsequent economic climate meant that it was not until 2010 that the first was set up. The Emirates REIT, founded by Dubai Islamic Bank and Eiffel Management at the end of 2010, now has a portfolio of AED 616 million ($167m), with 80% of net profits distributed as dividends. Although it has not yet taken the plunge of an IPO, its managers still fully intend to do so when the time is right.

“In terms of the REIT, people are starting to understand what we do,” said Sylvain Vieujot, Executive Deputy Chairman of Emirate REIT. “We have a track record showing we do distribute regular dividends and we have very good returns so now people have started to be very interested in joining the REIT.”

The REIT structure offers a degree of certainty that a conventional fund cannot, according to Vieujot.

“I think there are less risks being a trust rather than being a fund. If you are a trust, you invest for the long term. For example, when we had the financial crisis, a lot of funds collapsed because people started to ask for redemption.

“As a REIT you are not so much subject to this. You can increase your share price without directly impacting your fundamentals,” he added.  

Investor preferences


Nevertheless, there are only a handful of REITs in the region, none of which have yet listed on a stock exchange. Bahrain’s Inovest REIT and Kuwait’s Al Mahrab Tower REIT are two examples which operate within a shariah-compliant framework, but both have less than $100m in capital and have not achieved a listing. The National Bank of Abu Dhabi (NBAD) last year announced it was setting up a real estate fund with Kuwait’s Gulf Investment Corporation - with a target size of $120 million and up to 10 properties – which it hopes to convert to a REIT.

Regulation is no longer an issue, with Bahrain as well the DIFC having fully developed REIT regulations. Investor attitudes are more of a barrier: while GCC investors traditionally have a preference for real estate, one of the lessons many took from the crisis was to keep it simple and invest in vehicles they understand. However, with market conditions continuing to improve, Vieujot believes that the time could be ripe for more REITs to launch.

“It’s a very good time for REITs to start because the price of the properties is still very sensible and the spread between the property yields and the bond yields is still huge,” he says.

Hannah Jeffery, Senior Executive Officer of the Emirates REIT added: “People generally are much more positive about real estate as an asset class in the UAE and wider Middle East. It allows us to be more proactive at looking on the pricing on the assets in terms of rents that we can achieve.
“It’s an attractive market for us to be acquiring assets in terms of pricing as the yields are still competitive compared to other international markets.
“The residential market is very buoyant at the moment; the commercial market is, I would say, slightly behind but starting to have more positive sentiment to it,” she concluded.

The Final Piece of the Puzzle

Oliver Bell, portfolio manager, T Rowe Price, explains why he is attracted by GCC banks but is currently steering clear of North Africa

Q: Your fund invests in both Mena and Africa. What is the investment case for this?

A: When you look at the emerging markets universe, there are a lot of Latin American, Asia (excluding Japan) and emerging Europe funds, but actually what’s missing is the final geographic bit of the puzzle. The liquidity of frontier markets on their own is very small, but by combining the regions of Africa and the Middle East, you get exposure to both South Africa and Saudi Arabia, which can trade up to $4billion a day, so you have large pools of liquidity, which then enables you to take liquidity risk in the rest of the portfolio.

I think of the region in four segments: South Africa,  Sub Saharan Africa,  North Africa/Levant and the GCC. I think each one is attractive for different reasons. The GCC has got everything going for it at the moment, and I think it is extremely exciting. I think the one area where I’m cautious is North Africa, where currently we’ve got zero exposure, because of the economic problems, exacerbated by the political problems.

Q: What risks and barriers to investment do you face?

A: There are risks in a lot of these countries: it all comes back to politics really, especially in Africa where in many cases you’ve got very nascent democracies. One problem with investing at the edge of emerging and frontier markets is you can lose an awful lot of your investment in the currency, and the currency is dictated by the economic environment. If you look at Egypt, they have wasted a lot of money defending the currency at a level that is unsustainable. Until you can be confident that exchange rates have depreciated in line with economic reality, then it’s very hard as a dollar investor to invest. And at the moment it’s impossible to get any dollars out of the country.


Q: What sectors is the fund overweight in at the moment?

A: When looking at the Mena region, the fund is neutral in financials, but within that, it’s very overweight in banks. Since the global financial crisis and the Dubai crisis that followed that, you’ve had 3-4 years where GCC banks in particular have been healing themselves, realising their non-performing loans and lifting their coverage ratios so they now have enough provisions to cover for those non-performing loans, and they’re starting to grow. In addition, they are very geared to a US interest rate rise, because they have a cheap source of funding, so on a multi-year view you can see the earnings from the loan growth and margin widening is very substantial.  At the same time because global investors haven’t been investing in this region, they are very cheap, too cheap for the profitability that they offer.

That would be key overweight for the fund as of today. In the Gulf, the consumer sector is very strong too, because you’ve got governments spending like crazy on infrastructure investments.


Q: Do you expect inflows to increase after the MSCI decision?

A: Yes, we’re already hearing the number of requests to open accounts in the UAE and Qatar has rocketed since the decision. I think it can only increase because very few are invested yet. When they do look at the region, they will realise what extraordinary value there is. I think everything is too cheap now, and there is going to be a multiple in terms of the number of investors looking at it. There are some major geopolitical risks, but I see very little downside even from these levels, and they’ve had a good YTD. I don’t see why anyone would be selling.

Oliver Bell manages the T.Rowe Price Africa and Middle East Fund

Family Offices: Keeping it in the Family

High net worth families across Mena increasingly acknowledge the complexity of their wealth management requirements, but are yet to be convinced that multi-family offices (MFOs) are the best option for managing their assets 

All the conditions for family office growth appear to be present in Mena. A recent report from Capgemini/RBC Wealth Management found that the assets of the wealthiest individuals in the region are set to grow more rapidly over the next two years than anywhere else in the world, with the exception of Asia-Pacific; meanwhile, the majority of high-net worth individuals describe their wealth management needs as ‘complex’.

However, the fact is that single family offices (SFOs) still dominate multi-family offices (MFOs) both in terms of numbers and assets, according to Invesco’s 2013 Middle East Asset Management Study. The main reasons often cited for this are the continuing importance regional families place on control, trust and confidentiality.

The study highlights a significant reduction in capital flow from personal to corporate assets, which suggests that personal assets managed by family offices can expect greater autonomy from the family businesses in the future. The increase in average investment time horizons and international exposure further support this view: family offices invest 49% of their outside Mena compared to 34% three years ago, the study found.

Increased international exposure sustains the autonomy theme because it is associated with diversification away from family business assets in the region, explains Nick Tolchard, head of Invesco Middle East, who reckons increased focus on diversification may encourage families to look more closely at the MFO structure.

He accepts that the full extent of the services a multi family office can provide is probably not as well understood as it might be, with wealthy families continuing to display a preference for keeping direct control of investments.

“When considering investments, return expectations are more significant than time horizons. These families expect high returns because most wealth has been previously placed in businesses where expectations of 15% pa returns are not uncommon.”


Family office structure 

Most wealthy families in Mena have a quasi-family office structure in which they have a trusted individual or groups of individuals who cater to the needs of the family as opposed to their business activities, says UAE-based Family Business Advisory Group managing director, Walid Chiniara. “There are some structures that deal separately with business activities and personal investments, but others are still learning about the need to separate family and business.”

The fact that much of the region’s wealth is relatively new makes succession a key issue, he continues. “We are now going through a transitional phase where businesses are being passed from the first to the third or even fourth generation. Governance is also important, in terms of the business entity (corporate governance) and the way in which private wealth is structured.”

Investments are influenced by the level of sophistication of the family. Chiniara explains that traditionally they have invested alongside the major financial institutions, with very few opting for self-investment. He suggests that since 2008, many families with substantial wealth have looked to establish internal mechanisms to manage their portfolios rather than outsourcing to a third party.

“The families we work with (in excess of 20) are broadly conservative. But while most families in the region are conservative in their approach to investment and investment opportunities, there is growing appetite for diversification and expansion, locally, regionally and internationally, particularly in Asia. We are seeing investors looking towards the east and away from the traditional locations of Europe and North America – many have identified opportunities to divest their portfolio and they feel there are some common values with Asian countries.” 

Shifting perceptions


According to Asher Noor, CFO of Saudi SFO Al Touq Group, perceptions of the family office model amongst wealthy families in Mena have perceptibly shifted over the last decade from a concierge service provider role to a more robust and structured tool for investment monitoring and wealth management.

“The preference for single family offices has more to do with cultural inclinations - where ‘keeping it in the family’ trumps the economies of scale that an MFO may offer,” says Noor. “Other reasons for favouring SFOs include a shortage of top tier accounting andinvestment systems and professionals geared to do justice to an MFO set-up.”

Caroline Garnham, CEO of wealthy family network Family Bhive, also refers to the challenge of getting the right people in place. “The head of the family office will be looking for an incentive to leave a secure and safe firm of accountants, lawyers or a private bank to work for what could be a demanding family. The earning power of these people is well in excess of £500,000 and they will want some form of incentive by way of capital.”

Richard Wilson, founder of the Family Offices Group (which has more than 68,000 members worldwide) agrees that many ultra-wealthy families in Mena don’t know exactly what a family office is, who to hire if they want to start their own single family office or who to trust if they want to hire a multi-family office.

“To date they have favoured single family offices, but global and local multi-family office brands are slowly emerging and I believe that the industry will be well diversified in the region within five to seven years.”

He says family offices differentiate themselves from private banks through their independence and flat fee model. “They don’t make extra money by leading you towards an investment banking offering or a certain cash management product. They already represent a significant client base for the region’s asset management industry and will grow as a percentage of the total asset management industry as the model matures.”

SEDCO Capital: Highly Evolved

After starting life as a Saudi family office, SEDCO Capital has developed into an asset manager with a global reach, and a unique take on Shariah-compliant and ethical investing. Neal Underwood speaks to the company’s CEO Hasan Al-Jabri

Saudi-based SEDCO Capital has followed a somewhat unusual path to being an asset management firm. Originally set up as a family office responsible for managing the wealth of Sheikh Salem Bin Mahfouz - founder of the National Commercial Bank in Saudi Arabia – the company grew into a private, Shariah-compliant wealth manager after the family departed the bank in the late 1990s. After more than a decade of running listed and private equity portfolios, and building up good relationships with a host of external fund managers, the firm entered its latest stage of evolution when it was reborn as SEDCO Capital in 2010.

While it has not lost touch with its roots, CEO Hasan Al-Jabri tells Mena FM that SEDCO Capital today is a well regulated and professional organisation.

“Three years ago we started structuring funds that would allow third parties such as institutions, other family offices and other high net worth (HNW) individuals to invest with us,” says Al-Jabri. “Since then we’ve developed a number of different strategies in listed equities, emerging markets, developed markets, in defensive, tactical and high yield portfolios.”

SEDCO Capital’s client base is split across sovereign institutional investors, semi-government institutions and HNW individuals. The firm’s strength, says Al-Jabri, lies in picking the best possible manager able to deliver on Shariah compliance as well as generating alpha. He also believes the fact the firm runs discretionary accounts on behalf of its own people gives investors a lot of comfort.

“We put our money in and invite clients to do the same. We’re putting serious money in, and because of the volumes we’re working with we’re able to negotiate attractive fees when talking about custody.” 

Luxembourg Leap


The approach taken by SEDCO, of developing from a family office into a full blown asset manager, is one that some others have tried to follow, but few have succeeded, in Al-Jabri’s view. “We’ve seen some attempts where families have joined together and worked on doing something similar. It’s not that unusual but we haven’t seen a lot of success stories. Some have not created the proper structures that you see in banks and asset managers.”

The firm took a major step last year in setting up a Luxembourg SIF (specialised investment fund) for its Shariah-compliant funds. “That will allow investors from around the world to invest,” says Al-Jabri. “It’s a diversified platform. Companies that we talked to, such as Credit Suisse and JP Morgan, want a strong product to meet the requirements of clients for Shariah-compliant products. Areas such as real estate and private equity present a big challenge and transparency and reporting are important. We believe our Luxembourg platform can provide that satisfaction for clients.” Domiciling it in Luxembourg gives the platform credibility, transparency and accessibility for institutional clients, in his view. 

An Ethical View


Another area which marks SEDCO out as different is its interest in ethical investing. The firm recently placed an environmental, social and governance (ESG) overlay on some of its funds, the first time this has been done with Shariah vehicles, according to Al-Jabri.

“We feel that being Shariah compliant, we are ethical investors. We looked at the similarities and differences: there are tremendous similarities in avoiding areas like tobacco, alcohol, gambling, nuclear energy. There are some things that we do that ESG managers do not - we don’t allow excessive leverage, for example - then there are some things that they do that we don’t: for example, they like to be actively involved in explaining to the management of companies the importance of ESG.”

Overall, says Al Jabri, having an ESG overlay on Shariah-compliant portfolios has improved their risk level. “That has encouraged us more. We’re not saying today that SEDCO is ESG compliant, but where we can we are applying it. We have two funds which are fully ESG-compliant vehicles, and we’re happy to have an ESG overlay. We’re there to make profits but at the same time want to do it in a responsible way. We make profits when we’re adding value to the economy and society and creating GDP. That ethical standard works well with what we’re already doing.”

Al Jabri says the opening of the firm’s Riyadh office in March this year was important to maintain close relationships with clients. “We have some very important clients in Riyadh. We need to be more responsive to their requirements. One of our funds is an income real estate fund in Saudi Arabia, and a good chunk is Riyadh-based.” 

Saudi shift


Looking at the Saudi market generally, Al Jabri says that two or three years ago investors, much the same as investors globally, were more risk averse. “Many were in cash. Some look at it from a protection perspective. Today I feel Saudi Arabian investors are a bit more interested in taking risk. One of the areas we’ve found to be attractive is real estate, both local and international.”

In addition, says Al Jabri, traditionally sophisticated investors in the GCC have had fairly static asset allocations, perhaps only reviewing them once a year. “Now we see it being a little bit more dynamic. There are more listed equities; they’re more excited about private equity and infrastructure. It’s a similar mix to what you see internationally.” He is hopeful the Saudi Arabian market will open up more to international investors in the future. “It depends from sector to sector. The equities market opened up a bit two years ago, and we’ll see some improvement in 2014. You can buy into it now via exchange traded funds (ETFs). People are doing business in Saudi Arabia; JP Morgan, Goldman Sachs, Barclays are here.”

SEDCO has plans to expand its Luxembourg platform from nine to at least 15 funds by the end of this year. “The major thing is we have to be convinced the investments we’re offering make a lot of sense to our clients,” says Al-Jabri. “Not all clients may like private equity, but you have to have it on the menu. We’ll be adding several private equity funds and another global investment strategy. We’re working on a global agriculture fund, and in the last month we launched the SC Income fund, which holds both murabaha and sukuk. We’ve also got a couple of real estate strategies: one for North America and one for Asia, and we’re working on a Shariah and ethical European listed equities fund.”

SEDCO’s strong track record has been achieved by stringent monitoring of external managers (“we are not tolerant of bad performance,” says Al-Jabri) and he believes this record has the potential to attract Shariah and ethical investors from across the globe. “We’re not just Shariah focused. Our platform is quite global in nature. Our asset allocation is in line with sophisticated international asset management companies, so our GCC allocation is quite small. We’re excited about ethical and hope to be able to do more and add value,” he concludes.

From a local family office to a global leader in ethical investing, SEDCO Capital has certainly gone through many stages of evolution, and it seems there may be plenty more to come.

Mena Equities: The GCC parts are greater than the Mena whole

Just as emerging markets should not be viewed as an indivisible block, investors should be selective within Mena, concentrating on the GCC at the expense of energy importing nations such as Egypt, writes Mark Diab

By Mark Diab, Head of MENA Equities, GLG Partners

Emerging markets in general have captured significant investor attention in recent years. Having collectively constituted only 1% of global market capitalisation in 1988, emerging markets now account for around 13% of the global equity opportunity set. However, this high level of overall growth effectively masks the potential flaws in viewing emerging markets holistically. Any aggregated investment approach, be it entirely passive or a benchmarked strategy weighted in accordance with the market capitalisation of individual exchanges, will by definition entail overweighting the more mainstream markets at the expense of those at the frontier of development and expansion.

At the launch of the MSCI Emerging Markets Index in 1988, Malaysia, with a 34% weighting, was the largest constituent, while Brazil was the only one of the BRIC countries to feature. Today, China has the largest individual weighting, and, together with Russia and India, commands almost a third of the index. Conversely, Malaysia’s weighting has slumped to a level of less than 5%.

Significantly, while the UAE and Qatar have now been upgraded to the main index, Saudi Arabia remains outside, although a new scheme allowing non-GCC investors to access the Saudi Arabia market directly is likely to result in its inclusion. Given its high credit ratings and strong underlying macro fundamentals, the removal of restrictions and elevated status is likely to bring fresh impetus to the Saudi market and attract significant capital flows.

These developments highlight the flaws in a pronounced tendency among international investors to view MENA as a single block. A typical reaction among such investors is that economic growth in MENA is well above average, but not sufficiently so to justify an allocation, given the higher geopolitical risks involved.

The aggregated figures for GDP and current account surplus across MENA do indeed look attractive. However, this reflects a massive contribution from a limited number of oil-rich countries, such as Qatar and Saudi Arabia, and significant underperformance on the part of the poorer oil importers, like Egypt.

From an asset management perspective, therefore, it is perfectly intuitive to seek compelling opportunities in, and accumulate positions among, companies based in the wealthier nations, which are also the locations where geopolitical risks and lower and the demographics are more favourable. In Saudi Arabia, for example, 50% of the population are aged 24 or less, and only 7% are over 55.

In terms of resources, Qatar’s natural gas reserves represent 14% of the global total and, based on current output levels, the nation has sufficient oil reserves to last for 54 years. Unsurprisingly, oil and gas represents 50% of GDP, 85% of export earnings and 70% of government revenue.

Saudi Arabia has crude oil reserves equivalent to 29% of the OPEC total, and it is the world’s largest producer and exporter of petroleum. The oil sector represents 90% of total export earnings, 80% of government revenue and 45% of GDP. The nation’s economic prosperity, particularly its current account surplus, has been boosted substantially by a four-year rally in oil prices, which touched a cyclical low of around USD 50 in April 2009.

Significantly, the economic outlook of both of these countries will become less dependent on energy prices with the passage of time. For example, in the first half of 2011, King Abdullah bin Abdulaziz Al Saud launched a massive construction programme to build around 500,000 new houses for Saudi citizens. This augmented an existing $700bn of infrastructure projects already underway at that time, and the implications reach way beyond the construction industry. As the effects of wealth distribution intensify, sectors such as financials, telecommunications, consumer and industrials will continue to expand, and the overlying economies will become progressively more diversified.

Of course, Qatar and Saudi Arabia are not the only attractive locations for investment in the region. A similar economic case could be made for the United Arab Emirates (UAE) for example, which continues to benefit from its safe haven status within the region. Despite the stock exchanges in Abu Dhabi and Dubai having rallied strongly in the first quarter of 2013, select opportunities remain for those who are willing and able to undertake in-depth research.

The importance of in-depth research and fundamental stock selection should not be underestimated, even within a thematic context. In common with other emerging markets, the MENA region has lagged the global rebound in equity prices and this has resulted in some very significant valuation anomalies, which we are seeking to exploit. Company visits play an important role in highlighting these opportunities and this emphasises the importance of having an investment team located in the Middle East.

Liquidity is a further consideration. We continue to believe that geopolitical risks tend to be overstated, especially in relation to Iran and the GCC. The former continues to share the world’s largest gas field with Qatar, without significant incident. Meanwhile, many regional and international players, from both the West and the East, have a vested interest in ensuring that stability is maintained within the GCC, given the huge influence of its member states on the global economy. As such, we believe that greater terrorist risks exist in certain jurisdictions outside the MENA region rather than within it. Nevertheless, in a worst-case scenario, it is clearly not desirable to be left holding a position that is difficult to unwind, so we typically focus on the larger, liquid names in our favoured markets.

From a similar perspective, we are also interested in businesses with high and sustainable dividend yields that trade at reasonable valuations. As intimated earlier, the MENA markets have lagged the global rally in equities and, should there be any delay in the anticipated catch-up, the dividend yield will act as a substantial form of compensation. Indeed, at the turn of the year, the Bloomberg GCC 200 Index yielded exactly twice that of the MSCI Emerging Markets Index. It is also worth bearing in mind that the currencies of our favoured markets are pegged to the greenback, so there are no concerns in respect of forex dilution of the income stream. In fact, given the much stronger macro backdrop, one would expect to see local currencies strengthen rather than weaken should these pegs be removed.

In terms of valuations, price/earnings ratios crept higher during 2012, reflecting modest stock market growth. However, P/Es remain below their five-year averages in all of our favoured markets and across much of the region as a whole. Interestingly, at the beginning of the year, the only MENA market with a more expensive valuation than the global average was Egypt, which we consider to be an unattractive destination for a number of additional factors.

In summary, it is essential that any assessment of the potential of investing in the MENA region is based on an analysis of the individual components of the region. As we have seen from the GDP and balance-of-payment figures, the sum of the superior parts is greater than the block of the whole.   

MSCI Upgrades: Different Class

Will MSCI’s reclassification of the UAE and Qatar to emerging market status be a breakthrough for the region?

It was all change for Mena in MSCI’s annual index reclassification on June 11th, with the UAE and Qatar gaining long-awaited Emerging Market status, and Morocco being downgraded from an emerging to a frontier market.

For the two Gulf states, the decision represents something of a triumph for the regulatory authorities, and in the case of Qatar, a somewhat unexpected one considering the ongoing issues over foreign ownership limits.

However, there appears to be no question over the benefits of MSCI’s decision for the UAE and Qatar, with inflows from international investors expected to result in increased liquidity and a more sophisticated investor base. Regional managers were delighted at the development.

Amer Khan, director and fund manager at SHUAA Asset Management, said: “I expect these upgrades to be positive for the region as a whole because it puts it on the global map. It is positive for the Mena markets and the Gulf as a whole.”

“From an investor perspective, the UAE and Qatar will now be compared to the larger emerging markets by investors, and they will have to compete for capital from the bigger emerging market index. This is positive because it brings a more sophisticated type of investor to the markets, in sharp contrast with a lot of the retail buying we have seen in our markets in the past few years. That way the markets will mature a little bit,” he said.

Attracting longer-term money

JP Morgan has provisionally estimated that net inflows arising from the upgrade will be around US$ 570million for Qatar and US$ 442million for the UAE. Not only should the amount of money coming into the markets increase, but it is also hoped the new investors will be in the region for the long term.  

“The market players will now be upgraded, the quality of institutional money targeting local markets will be of a higher quality, more long-term and sticky money as opposed to highly speculative and hot money,” said Walid Hayeck, Head of Asset Management at Abu Dhabi’s The National Investor.

“The UAE is establishing itself as a major regional market and a primary choice for regional firms who want to go for public offerings and get a global exposure. Credit goes to the regulators for this great achievement,” he said.

At current market capitalisation levels, Qatar will make up 0.45% of MSCI’s emerging market index, while the UAE will form 0.4%. Not only will equity markets be in line for a boost when index-tracking investors adapt to the new allocations, but regional funds could benefit from other categories of institutional investor taking a fresh look at the region.

“People have been talking very much about passive managers and what the potential inflow could be from them, but we must not exclude the potential benefits we will see from active fund managers,” said Yong Wei Lee, head of Mena equities at Emirates NBD.

“There are some very large emerging market funds out there which are several billion dollars in terms of size. If they see something that catches their eye, and decide they are prepared to take, say, 0.5% or a 1% weighting in their portfolio, then that inflow would be significant.”

However, Morocco’s downgrade could provide a cautionary tale for the new entrants. The north African country has suffered from ongoing liquidity problems since the financial crisis and had dropped to just 0.08% of the emerging markets index. Many managers felt able to ignore such a small weighting; could the UAE and Qatar face a similar fate in future?

“Given the relatively small weighting in MSCI emerging markets, the longer term impact will depend on the attractiveness of Qatar and UAE for investors,” said Akber Khan, director of asset management at Doha-based Al Rayan Investment. “If perceived to be unappealing, both can easily be avoided. But we believe the prospects for both countries are very bright and this upgrade will justify greater resources deployed by global investors towards the region.”

After the announcement by MSCI, the Qatar and UAE stock exchanges saw an immediate spike, mainly attributable to local investors reacting positively to the news. However, the benefits to the market are expected to continue long after the initial excitement.

Another interesting aspect of the move will be how it is perceived by other countries in the region, and it could place a particular spotlight on Saudi Arabia, according to Amer Khan.

“It puts Saudi into very sharp context,” he said. “Saudi is in the process of opening its markets up to foreigners. Perhaps this will push along the efforts to open the markets sooner and become part of the broader emerging markets at some stage.”

Morocco’s downgrade

Youssef Lahlou, Casablanca-based portfolio manager at Silk Invest, said that there could be a silver lining in the decisions for Morocco, in that the upgrades for UAE and Qatar have left a gap in the frontier markets index which it will help fill. Morocco would have been around 2% of the frontier index had the GCC countries stayed in, but will now make up 6.7%.

Speaking of Morocco’s downgrade, Lahlou said: “It’s both positive and a negative at the same time. I think it’s a very positive thing in the long term and it had to happen to get our authorities to start working and looking at the stock exchange.”

“This has to be a wakeup call for the market authorities, the stock exchange and the minister of finance because of what lead us to this is the lack of visibility in Morocco and for Moroccan companies,” he said.

Lahlou believes the illiquidity which caused the country’s downgrade was partly down to companies only reporting results twice a year, compared with in most other countries in the region where it happens on a quarterly basis.

The government, he said, needs to push companies into doing this to help the market, and provide incentives for companies to launch IPOs, which have been lacking in recent years.

Gaetan Herinckx, Africa fund manager at Sustainable Capital, said Morocco’s lack of liquidity is the result of poor company transparency, and a lag when sending out financial reports, which makes it difficult for international investors and could put them off.

“Apart from when the company needs to access capital or market bonds, the level of disclosure is minimal, compared to other markets. If you compare Egypt to Morocco, the rapidity at which they get the financial reports out and level of access of financial notes is much better in Egypt than in Morocco.”

Another issue he raises is companies not publishing their reports in English, and holding press conferences in Casablanca, with no provisions for international investors to access the conference.

Remy Briant, managing director of MSCI, said that while it would be hard to gauge the direct financial impact of Morocco’s downgrade, in some respects its companies could enjoy a higher profile in the frontier index.

“In terms of representation, Morocco will be much better placed in frontier markets to represent the number of companies that would be included, and liquidity levels would be in sync with other frontier markets,” said Briant.

Analysis: Saudi moves closer to opening time

Comments by the head of Saudi Arabia’s Capital Market Authority (CMA) last month have led to renewed speculation about an opening up of the Tadawul to direct foreign investment

Seasoned watchers of the Saudi Arabian market can be under no illusions that making predictions about the timing of political decisions is fraught with difficulty, not least where the review of the country’s Capital Market Authority (CMA) regulatory framework is concerned.

The review, a process which has been ongoing for many years, is intended to bring regulations into line with international standards, with the main expected development being that of permitting foreign direct investment (FDI) into the Tadawul, the Saudi stock exchange. Currently, investors outside the GCC are allowed only to invest indirectly through swaps and p-notes.

Despite lengthy delays on the issue, comments from the head of the CMA, Mohammed bin Abdulmalik al-Sheikh, last month have led to renewed speculation that progress may be close.

Al-Sheikh said: “There are a number of government entities, including CMA, that are looking at that (direct foreign investment). We’re finalising a regulatory framework with certain parameters.

“We are attracting foreign investment to come to the market for the technical expertise and human capacity,” al-Sheikh said.

Preparations for direct investment

While regional asset managers believe the change will go ahead, and are making preparations to benefit from it, they remain in the dark as to when this will be.

Fadi Al Qutub, Head of Asset Management at Saudi-based AlBilad Investment Company, said there is a lot of work still to be done by the CMA, and while he thinks that being exposed to global economic activity may have its possible downsides, the benefits for the Saudi market outweigh the drawbacks.

“There is a lot of ground work and issues to be covered, but I think it’s a positive step in the right direction,” said Al Qutub. “It will reinforce the position of the Saudi stock exchange and help the market in moving from a frontier to an emerging market. It will make sure it’s one of the leading emerging markets and get it onto the global map.”

While admitting it is still not known when the changes might happen, Al Qutub said Saudi managers are readying themselves to embrace the change and attract investors.

“We are going to seek mandates from other fund managers who are looking to allocate to this part of the world. We are not only going to wait for them to seek us, we will proactively look at the asset managers who have a global investment approach and are looking to diversify even further into markets such as Saudi, one of the main markets in the GCC and in the Mena region,” Al Qutub added.

He said direct investment from international investors into the market will benefit asset managers by diversifying the client base, and hopes it will act as a learning curve and add value to existing local managers.

Weekend settlement problems

Oliver Bell, portfolio manager at T Rowe Price and manager of the firm’s Middle East and Africa Equity Fund, shares these views but does not expect the final decision to be announced in the near future.

“I don’t sense it is imminent, especially if you look back to about a year ago when there was a lot of excitement about it and everyone expected it. I think all the background work has been put in place and in theory it’s down to a decision,” said Bell.

“I think it will be a good thing, but it is very opaque as to when the decision will be taken. We are discussing with various people to try and keep the channels open so we are prepared for it. We understand they are looking at a QFII (Qualified Foreign Institutional Investors) process similar to in India and China.”

There are a number of practical problems the CMA will have to address in the review, such as their current requirement for trades to be settled on the day they are made.

“There are some practical issues, they trade at T+0 days to settle the trade, which, given that their weekends are Thursday and Friday, could pose some problems,” said Bell. “But I don’t think they are insurmountable.

“There is talk that the Saudi weekend might change to Friday and Saturday, and this might be part of this process to open themselves up for more foreign investment generally; of course that will affect the stock market. So I think you can see there are a lot of ducts being lined up, and at some point I’m sure they will open. With Saudi decisions tend to come from the top, so ultimately it becomes a political decision,” Bell concluded.

One Mena-wide manager, who manages a European-registered fund investing in Saudi through swaps and p-notes, said that managers are not holding their breath over the prospect of reform, and added that investing through derivatives has worked well for him. However, if the change does go ahead then the main effect on his fund in the short term would be that execution costs would be lowered.

 “In the medium term, the indirect impact on us may be more interest in the Saudi market, which will attract serious money and big tickets,” he added. “That will create more committed money and add liquidity to the market, which will also increase the level of specialist institutions.”

Fred Tabbal, Regional Head of Fund Services at Maples Fund Services, said he had not heard any recent suggestions that the push to remove investment restrictions was gaining momentum. However, he added: “The Saudi market is the largest and most well diversified in the region, and I hope the authorities realise that foreign direct investment is only going to inject liquidity and expand economic prospects. From the government’s point of view, lifting restrictions may be one of the best ways of promoting employment for the country’s young population.”

Currently, Saudi Arabia has the most restricted market for foreign investment in the Mena region. It permits KSA nationals and GCC nationals 100% direct investment, and Saudi-based foreigners can invest up to a stake of 49%. However, those resident outside the GCC can only invest in the stock exchange indirectly through swap agreements with local brokerage firms.

Al Rayan Investment: Absolute Commitment

As his flagship GCC fund brings up three years since inception, Akber Khan of Al Rayan Investment explains how the firm’s flexible approach based on absolute return is winning the trust of investors

The three year anniversary of the launch of a fund is a natural time to sit back and take stock. Have you achieved what you set out to achieve? Do the returns justify your strategy, and what message does your track record so far send out to investors?

For Qatar’s Al Rayan Investment, the report card on its flagship mutual fund - the Al Rayan GCC Fund – is impressive. Launched in May 2010 to Qatari investors (a version for foreign investors was added later that year) and investing in a mixture of equities and fixed income across the GCC, it is up 27% over three years, while GCC equities are up just 13%. Outperformance has been particularly strong over the last two years, when the fund has risen 24% against a fall of 1% for GCC equities.

In many firms, such relative performance would see a fund’s managers amply rewarded, but ARI is slightly different. With no benchmark, the $65m fund works on an absolute return basis, with a high hurdle rate of 36% over three years before performance fees are payable. It’s a set-up that reflects the economic environment in late 2009 when the fund was conceived, explains Akber Khan, Al Rayan’s Director of Asset Management.

“The world had just gone through a tumultuous period, and our industry, if I’m honest, hadn’t done itself too many favours in navigating that difficult period,” Khan remembers. “Investors were unsurprisingly not too confident about the world and even less confident about our industry’s ability to add value.”

“At that time, some managers were earning performance fees for losing money, and investors clearly didn’t appreciate that, even if they had outperformed a falling market. So we wanted to rebase expectations and help our clients understand that our approach was focused on moving the emphasis back to the investor. That was a key motivation for looking at absolute return – we are more closely aligned with investor interests and only earn performance fees when we generate absolute returns. A high hurdle reinforces the same principle that we only earn a bonus if we deliver excellent performance.” 

A unique Islamic index

It’s a philosophy that has proved popular with investors, and despite missing the initial 3-year hurdle, Khan has every reason to feel satisfied with how the business is developing. ARI now has total mandates of $530 million, its client base drawn predominantly from insurance companies, pension funds, sovereign wealth funds and corporates.  As a 100% owned subsidiary of Masraf Al Rayan, the 2nd largest bank in Qatar by market cap, all its investments are Shariah compliant. This was part of the reason why earlier this year the firm carried out a unique project in the region, when it co-operated with the Qatar Exchange to create the QE Al Rayan Islamic Index: an exchange-sponsored Shariah compliant equity index.

 “One reason we launched was that previously, if an investor mandated us to invest in Qatari equities with reference to a benchmark, we didn’t actually have one,” explains Khan. “But this index is open to anyone in the market to encourage the development of Shariah compliant investment in Qatari equities. We designed the index not from the position of an index creator, but as a market practitioner, so were far more focused on factors such as single stock concentration, sector diversification and liquidity – the weighting methodology accounts for average daily volumes traded.”

Interestingly, back-dating the index to 2010 reveals that it significantly outperformed the conventional QE All Share index, highlighting the growing power of shariah-compliant investing. Khan says that the firm is actively looking at products that could monetise the index.

“Exactly what form that takes is still work in progress, and there are regulatory issues that would need to be worked through,” he adds.

If developing the index was a new innovation, it was nevertheless typical of the kind of work that has typified Khan’s career: in-depth, painstaking research which can open the door to profitable market insight. Before moving to Qatar, he spent 11 years at Deutsche Bank, focusing on research monetisation strategies: based in London, he took methods that had proved successful for UK equities and replicated them in setting up the bank’s team for Ceema (Central and Eastern Europe, Middle East and Africa), later becoming Ceema equity strategist. It was at this time that he began to be fascinated by the growth explosion going on in Mena, and Dubai in particular.

“Many of the world’s largest emerging market investors I met were increasingly fascinated by Dubai, because to them it seemed to pop out of nowhere and had stocks going up 30, 40 or 50% in a year. As it happens, I did half of my schooling in Dubai, so I’ve been in and out of the region for the better part of the last 35 years. So, I had a natural affinity towards the GCC and my understanding of Dubai, and where it had come from, was probably a bit better than the average person sitting in London.”

Building from small beginnings

Yet when he came to make the move to the region in 2009, it was to Qatar. Khan says that while he is fond of both London and Dubai, he enjoys working in Doha precisely because it is a smaller city, albeit one that is growing fast. The challenge of building something from small beginnings was also one that was there four years ago at ARI, when the bank had only just begun to develop asset management services.

“It allowed me to get in at the ground floor, and help shape the growth of the business and the outstanding team we’ve put together,” he recalls. “So that was both a challenge and a very exciting prospect. It also meant I could be get back to investing. When you’ve been advising fund managers for over a decade, there is an element of – can you put your money where your mouth is? Are you as good as you think you are?”

So far, the investment returns of the Al Rayan GCC Fund have justified his confidence. Khan says that opportunism is at the heart of his strategy: when the fund launched there were some “once in a generation” valuations of good companies and he wanted full flexibility to take advantage. It’s another reason why he does not believe in following a benchmark, which he says means being forced to invest in companies or sectors that you often don’t believe in.

The same logic applies at country level. It is noticeable that while Saudi Arabia, Qatar and the UAE dominate the fund, there is currently a total absence of equities from Kuwait. Khan says that this is because the overall investment case for the region is based on government spending to fulfil the infrastructure and consumer needs of a young, rapidly growing population; Kuwait does not fit this model because politics is consistently getting in the way of government spending.

Asset class mix

Yet perhaps most characteristic of ARI’s flexible approach is the mix of asset classes in the flagship fund. It currently has a proportion of 25% fixed income to 75% equities, a proportion that can be changed at will according to conditions. Khan says that it is only right that they, rather than investors, should make tough decisions about asset allocation and that, moreover, combining both in one fund presents profitable opportunities.

“As professional investors, we’re paid to make those decisions and to recalibrate asset allocation as prospects change. So we launched a fund which invested in equities and fixed income so our clients wouldn’t have to worry about timing their switch from a bond to an equity fund or vice versa. Moreover, the cross asset class approach allows us to harness enormous arbitrage opportunities. As an example, the bond market began pricing an improvement in the Dubai economy 18 months ahead of the equity market. Many other similar situations still exist and the opportunity to generate alpha is considerable.”

However flexible and opportunistic Khan’s thinking, there is little doubt that he stands for a long-term approach to investment and is willing to be patient for his methods to bear fruit. He also takes a long-term viewpoint when considering the financial services industry in the region.

“One of the contradictions of our region is that if you compare it to Europe or the US, assets under management as a proportion of GDP are very low. That’s because the natural long term buyers of equities in industrialised nations are pension funds, insurance companies and asset managers and these are all areas where our private sector is not as developed as it could be, or as it will be in the coming years. As these develop, the local institutional bid will steadily increase in importance,” he predicts.

So as Al Rayan’s fund celebrates its third birthday, the firm will be hoping that with the long-term picture looking positive, there will certainly be many more to come.