This time last week we presented at ARFI’s IR forum on the subject of investor opportunity in the Middle East. For the benefit of those who weren’t able to make the event, we thought it might be helpful to summarise the key messages.
- Middle East (ME) based Sovereign Wealth Funds (SWFs) account for the vast majority (over 85%) of aggregated assets under management in the region. ME SWFs account for roughly 30% of all global SWFs under management (around $2.3tr). This compares to about $31.3tr in assets managed by mutual funds globally or $2.8tr by hedge funds.
- To recap, ME SWFs are government-owned vehicles set up primarily to manage excess oil reserves with an overarching long term strategy to diversity away from oil. While each of the funds follow diverse investment strategies with varying emphasis on risk, safety and liquidity, in each case philosophy generally comes before asset appreciation. Therefore, until recently the majority of investment by these funds was held in cash/short term security deposits, sovereign bonds and equities managed by third party managers.
- Over the last few years, SWFs have been steadily building up the capability to manage investments, including equities, in-house. Relatively speaking, equity assets managed by funds dedicated to emerging markets, and Russia specifically, remain small. So while there are undeniably investment opportunities to explore in the Middle East and Asia, it’s worth maintaining a sense of perspective from an IR point of view when evaluating these relative to the US and Europe.
- Internal versus external management and active versus indexing decisions are becoming more important for established SWFs as well as for intra-SWF collaboration, as shown by Saudi Arabia’s recent commitment to invest up to $10bn in Russia. The same themes are relevant for large developed market funds.
Change in demand for different Asset Classes by SWFs, ME and Global 2014 v 15
- Outside of SWFs, regional second tier investment managers have a higher home market bias given the location of their liabilities and in some instances the regulatory constraints on asset allocation. Local asset managers also compete with global funds who have established offices in Dubai, Cairo and Riyadh to manage MENA (Middle East and North Africa) funds from the ground. Outside of MENA investments, the local funds have not yet reached sufficient scale to significantly broaden mandates and justify a review of internal versus external management for risk assets.
- The third pillar is the region’s family offices. Given the persisting volatility in the global markets it is no surprise that they have been increasingly outsourcing their investments to wealth managers and advisory firms. This also partly explains the increase in international private banks setting up their operations in the Middle East during the last few years.
- Saudi Arabia and Iran capital markets are opening up to international investors for the first time, presenting both local and global players hundreds of new investment opportunities. Regulators and exchanges in the region support best practice investor relations and in some cases (e.g. UAE) make IR compulsory for all listed companies.
Sources: Ipreo, Invesco, SWF Institute, KPMG, Closir. All data is as of Sep-2015, or the most recent available.