GCC fund firms face structural flaws: Lipper
Those investing in home markets have faced the uncertainty and drama of the Arab Spring and the wear and tear on affected markets. The Egyptian Stock Exchange was closed for several months while in the Gulf Cooperation Council (GCC) countries, all markets ended the first half in the red (even if the Abu Dhabi index and the Saudi Tadawul All Shares resisted well, down 0.57 percent and 0.67 percent respectively.)
Moreover, the fund industry in the region faces some deep structural flaws.
Taking the GCC alone, there are 101 fund management companies in the region managing $28.5 billion of assets between them, according to Lipper data. Those firms run a total of 337 funds with average assets under management at $84 million; taking a median figure to iron out the inflating effect of a few bigger funds that figure is just short of $20 million. To see a graphic showing AuM by asset class in the GCC, click here.
The six biggest funds in the region had cumulated assets of $10 billion and represented over a third of the market at the end of September. To see a graphic of the top funds, click here.
The upshot of this is that, at the other end of the spectrum, a quarter of the market is comprised of funds with less than $6.6 million under management.
This is not a healthy place to be. Small funds are not profitable for a fund company. In Europe, it is agreed that the threshold for profitability is around 10 million euros ($13.8 million).
In the GCC, funds should breakeven at a lower AuM level than that because of lower fiscal and regulatory pressures. But even if we take $6.6 million as the threshold it means that at least a quarter of the funds domiciled in the GCC are losing money.
Of course, funds have been deeply impacted by the sustained nature of the financial crisis; this year alone redemptions hit $1.8 billion between January and August, while there has been an inevitable depreciation of assets due to market declines. Mutual funds in the GCC have on average lost 9.67 percent since the beginning of the year, Lipper data show. To see a table of GCC fund flows over the last 5 years, click here.
There’s a more fundamental problem too. Fund managers in the GCC have the advantage of a deep understanding of their local markets but they’re running out of people to sell to. The market for retail investors is simply not big enough to absorb that many funds. Indeed, even though we talk about the GCC market as a region, it is worth noting that there is no facility for cross-border sales, a clear obstacle to the growth of funds. The obvious comparison is with Europe, where cross-border sales have allowed funds to expand through multiple markets, while we have six countries in the GCC and six distinct retail markets.
And when they do sell, it’s into a shallow pool. Even though the main distribution channel is through retail banks the culture of fund investing is not yet rooted in people’s behaviour. And that’s assuming they had the cash in the first place; revenue distribution in the region is skewed, leaving the vast majority of the population with few investable assets.
It is true that in some GCC countries, the fund market is enlivened by western expats and middle-class local populations. But these investors favor offshore funds which are usually distributed through segregated accounts or through fund platforms. Many investors will prefer to trust offshore funds — particularly if they want to invest outside the region or in niche markets — because of the fund companies’ market experience and brand recognition.
There are some steps the parent companies can take in the face of these pressures.
As the GCC local markets are relatively small, funds which are losing assets and/or posting poor performance cannot be easily merged or absorbed by other funds to benefit from the advantage of economies of scale, not least because most fund companies have only a single fund per strategy. That said, fund firms can take certain steps to strategically review their fund families and aggregate assets into bigger funds over time. And on a higher level, mergers between companies should be able to improve average assets under management which should in turn lead to lower fees for investors.
As the region is one of the least impacted in the current debt crisis there is also room for local fund managers to capitalize on one of the key trends in the asset management industry to find specialized managers with an in-depth knowledge of smaller markets. Stock picking and a full understanding of local markets have become fundamental in generating alpha and combined with a more robust AuM and the credibility and reassurance that can provide, there are the beginnings of a route through our present stormy waters.
($1 = 0.727 Euros) (Editing by Joel Dimmock) ((firstname.lastname@example.org)(Twitter: @reutersJoelD) (+44 20 7542 3505))