Insights

Banker Middle East: GCC Asset Managers - Strategies To Navigate Challenges And Opportunities Ahead

By Mathieu Vasseux
This article first appeared in Banker Middle East on October 7, 2018.

GCC asset managers are faced with major global disruptions of evolving investors’ needs, rising share of passive funds, greater regulatory scrutiny. Despite these challenges, GCC Wealth Management industry continues to outperform global asset management industry with sustained seven per cent annual growth rates in Assets under Management (AuM) compared to five per cent globally.  GCC wealth managers also face a set of unique challenges. Firstly, servicing the high proportion of HNWI and UHNWI in the region with large volumes of holdings overseas.  Secondly, meeting the region-specific product demands. The ability of wealth managers to turn these challenges into opportunities will be key to continue delivering growth.   We see regional leaders transforming to better service HNWI & UHNWI and strengthening the product offering to cater for clients’ appetite. 

We see regional wealth managers extending their footprint, opening offices in Switzerland, UK or Luxembourg, and establishing distribution partnerships to capture overseas flows.

Transforming to better service GCC HNWI & UHNWIS

Regional Wealth Managers have a more concentrated and differentiated client base. Twenty per cent of AuM are held by HNWI in the GCC compared to 10-12 per cent globally. GCC HNWI have a differentiated set of needs. Firstly, HNWI hold larger portions of their wealth overseas. Secondly, we see UHNWI increasingly creating or growing their own in-house asset management capabilities / family offices. Wealth Managers in the Gulf are transforming their businesses setting up subsidiaries abroad in key jurisdictions, establishing partnerships with global manufacturers and further deepening in their regional product specialisation to better serve demands of HNWI. 

MEA HNWI are estimated to hold 54 per cent of their wealth overseas compared to 16 per cent globally, UHNWI are estimated to hold an even larger share of their wealth abroad - between 60 and 70 per cent.  Only Latin America and Eastern Europe have similarly high overseas allocations, 51 per cent and 44 per cent respectively.  Large allocations overseas in the region are driven by investors’ diversification and confidentiality objectives.  This diversification push is underpinned by investor desire for access to deeper markets, broader product offerings and diversifying their exposure away their home country, decorrelating their investments and their primary source of income.  While developing rapidly, regional financial markets are yet to match depth and breadth of global centres.

NYSE and LSE, as an example, market capitalisations are 46 and eight times the market capitalisation of Tadawul, the largest exchange in Middle East. Wealth Managers also have narrower product suites compared to global leaders.  While leading GCC Wealth managers offer around 50 different investment products, international leaders have much larger product suites. Leading wealth managers typically offer 1500-2000 products in their core offering across a wide array of asset classes.  International diversification is also sought by local HNWI for wealth confidentiality purposes vis-à-vis peers, regulators and government.  Overseas investments represent a significant challenge for GCC asset managers.  We see regional wealth managers extending their footprint, opening offices in Switzerland, UK or Luxembourg, and establishing distribution partnerships to capture overseas flows.

Succeeding in international expansion is challenging.  Offices overseas typically lack the necessary scale to be able to sustain a fully-fledged international offering that can compete with global industry leaders so diversification benefit is limited.  Similarly, international branches do not meet the confidentiality requirements of regional HNWI as they remain with their parent entity and relationship is not always trusted to be fully armlength.  Partnering with leading global names to white-label and commercialise products has been a cost-effective solution adopted by some local firms to expand their product offering. Only around a third of current investment products offered by regional wealth managers corresponds to international strategies.

Partnerships provide access to an endless product catalogue of international investment products allowing managers to meet diversification objectives of their clients.  Some partnerships have proven successful for the low and mid segments of the HNWI spectrum. Well-structured partnerships can be a win-win solution that allow local players to capture distribution fees and increase customer satisfaction through an enhanced offering. But establishing a successful integrated delivery partnership which is seamless for client is a significant challenge. Moreover, GCC asset managers are concerned about exposing their clients to potential global competitors and the risk of cannibalization of their client base.  GCC UHNWI are also growing their own Family Offices and setting or transferring these to English Law jurisdictions (such as DIFC, UK), which further complicates coverage for GCC asset managers. 

Furthermore, Family Offices are increasingly trying to insource activities traditionally performed wealth managers, making coverage and client management more complex. To retain UHNWI clients, successful Asset Managers need to continuously prove that they deliver value through increased depth of analysis, superior service and product breadth which is very difficult to replicate in-house.  Similarly, a unique demand for a high-touch distribution model means the need for localized Relationship Managers with high intensity and flexibility remains critical. 

Strengthening product offering to cater for clients’ appetite 

Wealth Managers in the GCC have been traditionally equity focused due shallow regional fixed income markets and the importance of Shari’ah compliance. As an example, in Saudi Arabia, 58 per cent of public funds and currently open private funds are equity-focused compared to eight per cent focused on fixed income. Evolving client demands are pushing asset managers to enrich their product offering, with the introduction of white-labelled international products one emerging example. Demand for alternative investments, especially Real Estate investment, continues to rise among GCC investors, and leaders have had to adapt to satisfy client demands.  The rapid urban transformation observed in many GCC cities is partially a result of the appetite for Real Estate investment in the region.

Investors have traditionally focused on direct real estate investment; however, real estate investment products are becoming increasingly important in investors’ portfolios. The offer of Real Estate Funds and Real Estate Investment Trusts (REITs) has flourished over the last few years in line with client demands.  As an example, 12 out of 61 DFSA registered funds are Real Estate focused.  Similarly, since the introduction of REIT regulation in Saudi Arabia in late 2016, 15 REITs have been listed on Tadawul.  Diversification, increased liquidity, access to professional property management and the opportunity to invest in large real estate developments are only some of the benefits that these products offer to investors.  Wealth Managers are also designing tailored products to meet appetite of HNWI for international real estate. This can be challenging for regional wealth managers for two reasons: successful real estate investing requires a deep knowledge of local market and HNWI often demand access to iconic and prime properties. 

Providing these without on the ground presence in these markets is a challenge and the scale does not always justify the investments for regional houses. Leaders are overcoming these challenges through partnerships with international real estate specialists. In these arrangements, regional wealth managers facilitate access to clients as well as structuring products to meet the needs of local investors e.g.  sharia compliance.  Clients are at the heart of the transformation observed in regional wealth managers. GCC investors are becoming increasingly demanding and sophisticated. The ability of wealth managers to adapt their businesses expanding their product offerings to meet client demands and providing a true edge will determine the future of the industry in the region.