* Gulf economies strong, markets picking up
* But asset managers still face consolidation, cost-cutting
* Number of new MENA funds falls sharply from a year ago
* Diverse regulation boosting costs, uncertainty
* Some see trend for more Gulf money to be invested at home
By Mirna Sleiman and Dinesh Nair
DUBAI, April 17 Across much of the Middle East,
economic growth is strong and financial markets are picking up.
But there is surprisingly little cheer in the region's asset
management industry, which faces continued pressure to cut costs
Many fund managers are still struggling with small pools of
assets, sluggish inflows of fresh money and high operating
costs. The total number of funds being launched has shrunk even
as stock markets have risen.
These difficulties are being felt well beyond the confines
of the industry; they are a stumbling block in the Gulf's
efforts to create, in cities such as Dubai and Doha,
international financial centres which can compete with those in
London, Singapore and Hong Kong.
"Going forward, consolidation is going to be a key theme for
the sector. There are a lot of discussions happening in that
regard," said Nadi Bargouti, head of asset management at
Dubai-based Shuaa Capital.
"Given the situation that the industry is in, fund
management firms would need to consolidate to reach the optimum
scale and size and keep control of costs."
In most parts of the world, expanding economies, increasing
disposable income and climbing asset prices would be enough to
galvanise the asset management industry.
Those conditions are all in place in the Gulf, where most of
the Middle East's fund managers are based. More than two years
of high oil prices have left government's sovereign wealth funds
and private savers flush with cash.
Real estate and equity markets have begun to shake off the
global financial crisis; Dubai's stock market is up 22
percent so far this year, after a 20 percent gain last year.
But the total number of new funds launched in the Middle
East and North Africa (MENA) during the first quarter of 2013
dropped to 14, from 24 in the same period last year, according
to data from Zawya, a Thomson Reuters company.
Zawya estimated 46 funds focusing on investments in the
region had been retired in the last 12 months.
Of $1.83 trillion of banking sector assets in the wealthy
Gulf oil exporters, the Levant and Egypt, only about $41 billion
have been placed in funds and $177 billion are in discretionary
mandates awarded to fund managers by single investors. The rest
are sitting as deposits in banks, according to Dubai-based
Rasmala Investment Bank.
That means about 12 percent of assets in the region are
managed; globally, the level is estimated by analysts at above
Average fund sizes in the Middle East are well below $100
million, which makes it difficult to operate cost-effectively.
"Asset management is a scale business. Without scale, fixed
overhead costs eat into fund returns, making it very difficult
to compete with the large international asset managers," said
Anwar Abu Sbaitan, Rasmala's chief executive.
Fund managers say culture is behind some of their problems.
Traditionally, many people in the Middle East have viewed real
estate as the safest store of value; they are still unfamiliar
with, even suspicious of financial products more complex than
In the wealthy, consumer-oriented societies of the Gulf,
other investors demand returns which far exceed the realities of
the markets, fund managers complain.
"Investors still have huge return expectations. Beating the
benchmark is not enough for them. Many actually feel that they
can perform better than fund managers by investing directly into
stocks," said Shuaa's Bargouti.
An example of this approach is the Saudi Arabian stock
market, where at least two-thirds of the trading is estimated to
be done by individuals, many of them investing for the short
term, rather than institutions.
The main difficulty, however, is with regulations; multiple
rules across different national jurisdictions, and inconsistent
enforcement, make it expensive and time-consuming for fund
managers to operate.
"The biggest reason why the asset management business has
not developed within the region is a lack of unified regulation
across the MENA markets," said Nisarg Trivedi, head of UAE sales
and business development at Baring Asset Management, which runs
a MENA-focused fund managing $10.2 million.
"There is still a lot of uncertainty in terms of what one
can do and what they can't in various markets, and that keeps
most of the asset managers away from developing their business
like our Asian peers."
Governments are not unaware of the problems; authorities in
countries including the United Arab Emirates and Kuwait are
working to streamline regulation and protect investor rights.
But there have been bureaucratic and administrative delays.
Fund managers see some glimmers of light on the horizon. One
is the growth of the Gulf's bond market, particularly for
Islamic bonds or sukuk.
"If you look at the last two years, the local bond market
has been in the limelight. A lot of MENA fixed income funds and
sukuk funds have managed to raise a good amount of money, and at
the same time deliver good returns to clients," said Trivedi.
Another boost to the asset management industry could come
from the eventual opening of the Saudi stock market, the Arab
world's biggest, to direct investment by foreign institutions.
Saudi authorities have been preparing for the opening for
several years; it is not clear when it will happen, but some
managers think it could come this year.
More generally, some fund managers see an increasing
willingness by state-backed funds in the Gulf to invest their
money within the region rather than overseas - partly because of
unstable markets abroad, and partly because of political
pressure to use their resources to raise the living standards of
their own citizens.
"We have seen allocations by MENA investors in to the region
increase...and this is recent, perhaps over the last year or
so," said Amin Al Kholy, head of asset management at Arqaam
Capital in Dubai.
"Sovereign funds, endowments and pension funds are all
increasing allocations to investments in the region," to levels
higher than were seen during market booms in 2007-2008 and
2004-2006, he said.