COLUMN-Arab spring dents MENA funds

Tue May 10, 2011 5:42am EDT

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PARIS May 10 (Reuters) - The first half of 2011 has been a tough ride for investors. Disaster in Japan and the ongoing euro zone debt crisis have sent markets reeling, but perhaps the most telling long-term impact will come from the so-called Arab spring.

Funds investing in the Middle East and north Africa (MENA) have had some difficult calls to make as widespread protests threatened the old order. And the hardest task of all has been to protect client capital steadily built up during the preceding years.

At the end of 2010, there were 956 primary mutual funds domiciled in the MENA region, according to Lipper data. Some 41 percent were invested in equities and 24 percent in bonds while 19 percent were mixed asset funds invested in both equities and fixed income. The rest were either money market funds (13 percent), real estate funds or guaranteed/protected funds.

Total assets under management were 53 billion euros ($76.22 billion) at the end of 2010, up almost 33 percent from the end of 2009.

That's more than double the growth seen by Europe-domiciled funds over the year, according to figures from industry association Efama, and is a good indication of how a small sector was starting to gain some traction with investors.

The longer-term picture, however, shows investment funds in MENA countries have struggled to grow and to reflect economic development, especially in the six countries of the Gulf Cooperation Council (GCC) which benefit from sustained growth and increased oil revenues. Trouble is, the predominance of sovereign wealth funds and pension funds means these giant institutions control the majority of assets.

The fund industry also suffers from a lack of openness in domestic markets which restricts cross-border opportunities, while individual investors are often more inclined to hoard their cash than to seek to grow it through investment funds.

No surprise then that 82 percent of the mutual funds domiciled in the region managed less than $100 million at the end of 2010. That means investors aren't getting the kind of economies of scale they might expect in more developed markets.

LAUNCHES

The large bulk of assets are managed by funds in two MENA countries that have largely resisted movements for change. At the end of 2010, Morocco represented 36 percent of total MENA assets under management with 306 mutual funds, followed by Saudi Arabia which accounted for 35 percent with 223 mutual funds.

Egypt, Kuwait and Tunisia shared around 25 percent of total assets under management with 253 mutual funds domiciled in theses three countries. The remaining assets are divided between Bahrain, the UAE, Lebanon, Oman, Qatar, and Jordan.

The rate of fund launches in the region during the period 2006-2010 has been relatively steady, with 82 funds launched annually on average, against 14 funds either liquidated and merged. 2007 was the most successful year with 114 net new funds, while there were 43 net new funds in 2010.

It's a picture of steady-as-she-goes growth in assets, but what about performance?

All seven Lipper equity categories dedicated to the MENA region ended the first quarter 2011 in the red, the worst performer being Egyptian funds which lost 25.65 percent on average, badly hampered by a lengthy hiatus on the Cairo bourse as protests escalated. Kuwaiti funds lost 10.52 percent during the quarter, while equity funds invested in Morocco recorded the best performance by losing 3 percent on average.

As a basis for comparison, equity funds invested in the euro zone gained 3.2 percent on average while international equity funds fell 1.83 percent during first quarter, according to Lipper data.

One of the problems for MENA funds will be attracting assets to the region while visibility remains so limited and while geopolitical risk remains so high -- particularly if returns remain uninspiring.

The first quarter of 2010 wasn't so bad; MENA funds outpaced growth in euro zone and global equity funds. But since then it has been a tough environment and poor returns have helped deliver unflattering longer-term numbers too -- often a technical barrier to institutional investment.

In the 12 months to end-March, overall MENA fund returns were at a negative 7.53 percent compared to gains of about 6 percent among global and euro zone funds.

Over three years it's a similar tale. The average decline among MENA funds was at almost 30 percent while their euro zone-focused peers lost 12.8 percent and global funds delivered a 5.8 percent positive return.

You can view an interactive graphic of the performance numbers by clicking: r.reuters.com/pus49r

Given that growth in assets was tentative in any case, you might fear for substantial outflows once final numbers are available for the first quarter, never mind worrying about a slowdown in inflows.

Fund managers will hope though that clients who have backed the region will be emboldened by the prospect of a new era emerging from the Arab spring -- and by encouraging 2011 growth projections from the GCC -- and not bowed by the uncertainty of a race not yet entirely run. ($1=.6953 Euro) (Editing by Joel Dimmock)

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