* Abu Dhabi, Qatar exchanges up almost 50 pct in value in yr
* Upgrade of UAE, Qatar by index compiler MSCI helping
* Regional AUM to grow by 2.5 times 2012-2020 -PwC
* Funds look to JVs with int'l firms, offshore domiciling
By Nadia Saleem
DUBAI, June 19 International asset management
firms are showing renewed interest in setting up in the Gulf,
drawn by markets performing better than those in more volatile
Despite high incomes and large sovereign wealth funds,
countries such as the United Arab Emirates, Qatar and Saudi
Arabia have traditionally been serviced from London or New York.
Recently, some managers are reassessing how they cover the
region and are establishing a local presence as business
Nomura Asset Management, one of Asia's biggest managers,
opened its first Middle East office in Dubai this month with
five staff. Nomura's business in the region has doubled in the
last five years.
Lazard Asset Management poached the local ING Investments
team of six in February to cover MENA from a new Dubai base,
adding to its operations in Bahrain. The U.S. firm has $176
billion in global assets under management (AUM).
Ashmore Group, which has around $70 billion of AUM
globally, has hired a head of MENA ahead of opening its first
regional office, market sources said, with Dubai and Riyadh
touted as possible locations for it. Ashmore declined to comment
when contacted by Reuters.
AUM in the Middle East and Africa are expected to increase
by 2.5 times in the 2012-2020 period to $1.5 trillion, according
to consultancy PwC, with only Latin America expected to grow
"You can't ignore the growth story that you're seeing, from
Saudi Arabia, the UAE and from Qatar," said Daniel Rudd,
Dubai-based head of Middle East and Africa at HSBC Global Asset
Still, the international firms coming to the region are thus
far making little investment, usually with just one office and a
small staff reflecting the market's relatively modest size.
While Nomura now manages $7 billion of Middle East and North
African (MENA) assets, for example, that remains just a small
slice of its $300 billion in AUM globally.
Another factor drawing foreign asset managers is an upgrade
by index compiler MSCI which raised the UAE and Qatar to
emerging market status at the end of May.
Previously, many had given less weighting to the region
because it made up only a small percentage of their global asset
bases. Middle East and Africa accounted for just 0.94 percent of
the $64 trillion of global AUM at the end of 2012, PwC says.
The upgrade is one of a number of factors which have created
"the perfect cocktail" for increased foreign investor interest
in regional equities in recent months, according to Nina Lagron,
Paris-based manager of Amundi Asset Management's MENA fund,
which is concentrated in Saudi equities.
There has been a bull run on Gulf bourses with data for the
year to May 31 showing the value of exchanges in Abu Dhabi
and Qatar grew by almost 50 percent. Dubai
fared even better, growing by 115 percent.
In contrast, other emerging markets such as Thailand
struggled over the same period, hampered by political
turbulence, military interventions and currency pressures.
Thailand's SET index fell 9.4 percent.
Underpinning the Gulf's strength has been strong economic
growth, with GDP growth this year in the six Gulf Cooperation
Council countries - Saudi Arabia, UAE, Kuwait, Qatar, Oman and
Bahrain - forecast at between 3 and 6.1 percent.
Helping spur economic activity are major infrastructure
projects, including Qatar's preparation to host soccer's 2022
World Cup finals.
Despite the positives, Gulf markets still have shortcomings.
Regional markets tend to be dominated by retail investors
and foreign ownership limits remain, although some of these have
been raised in UAE and Qatar due to MSCI's upgrade of them to
its emerging market index.
Amundi's Lagron said that despite the hike in limits, what
foreign funds can buy in the region is very restrictive because
allocations for foreign investors are already filled.
The predominance of retail investors also makes Gulf markets
prone to high volatility and knee-jerk reactions. Dubai's index
shed half of its value during the 2008 financial crisis.
For local funds, more big-name foreign players setting up
locally means increased competition. MENA fund managers often
charge higher subscription, redemption and performance fees
because they can't spread their costs across a large client base
like international players.
In response, some local funds have sought tie-ups with
international names to expand their product offerings.
Dubai's Emirates NBD Asset Management, for example, signed a
deal with Jupiter Asset Management in December.
Others are opting to domicile their funds overseas in place
such as Luxembourg.
Of the approximately 870 active funds offered by Middle
Eastern firms, around 78 are domiciled outside the region,
according to data compiled from Zawya, a Thomson Reuters unit.
Fee structures are also starting to evolve.
Some MENA managers have switched to performance fees based
on how a fund performs over a number of years and not just on an
annual basis. Others are splitting the subscription fee with
half to be paid initially and the rest when the fund liquidates.
There is scope for growth in services, too, as the fixed
income market remains small and illiquid and there are no
index-tracking funds and few mutual funds.
(Editing by David French and Jason Neely)