One would expect Middle Eastern asset managers to have it made. The Gulf Cooperation Council region is home some of the biggest pools of institutional capital in the world, combined with high and fast-rising per-capita incomes.
No such luck. The big asset owners, such as the Abu Dhabi and Qatari sovereign wealth funds, tend to invest heavily outside the region and in any case have large in-house investment teams, which they would call on to buy assets locally.
Moreover, wealthy individual investors tend to prefer making direct-type investments rather than putting money into mutual funds. They also have very unrealistic expectations, notes one Doha-based fund executive, in that they seek outsized returns but expect to take insufficient risk to achieve them.
The result: less than 5% of the $140 billion local equity market is managed professionally, says Afa Boran, head of asset management at Qatari fund house Amwal*.
But the firm – one of the longest-established in Qatar, founded in 1998 – is one of a significant number in the region that is striving to help build a more developed funds market.
At present Amwal wants to further its penetration in terms of managing local equities. As a second stage, it plans to diversify a lot more into large and popular markets in the Middle East and North Africa, such as Egypt and Turkey.
Assuming it succeeds in doing so, then it also plans to look into opportunities in east Asia, although its clients are not seeking such exposure right now, says Boran. Once it looks further east, he notes, its most likely approach would be to launch a JV or partnership with an Asian firm to allow it to offer Asian exposure to Amwal's clients, and vice versa.
It wouldn't be the first Middle Eastern firm to make such a move – it emerged in April that Kuwait's Asiya Investments had opened an investment office in Hong Kong.
“I don't see why Asian investors shouldn't invest here,” says Boran. “It's still a cheap equity market. And the same is true for local investors – why not invest big time in China? Perhaps they are worried that governance standards are some way off those in Europe, for example.”
Boran muses on what could help asset management industry develop in the Middle East. For one thing, as the first generation of Middle Eastern families comes to hand over to the second, the latter may be more inclined to seek professional help for asset management.
A huge amount of money in the region has been made in the past 10 years or so, and the first-generation wealthy has first-hand experience of building a business, so feel that they have the skills to invest directly themselves, even outside the region, Boran says.
However there's no guarantee that the second generation will want to continue running and deriving their income from the family business, note market observers. They may also have had more exposure to financial markets and investment approaches elsewhere as a result of overseas education.
Something else that might coax more locals into Middle Eastern funds could be greater interest from overseas investors.
Foreign investment limits, which historically have been low, have been raised a couple of months ago. The threshold varies from stock to stock – it had been as low as 10% previously, but now on average is around 25% and for some names it's as high as 49%, notes Boran.
On top of that, the June upgrade of Qatar and UAE stocks to emerging from frontier market status by index provider MSCI is likely to attract more foreign flows to the region – with Asia a potential source of demand.
Beyond equities, property is a very popular investment in the GCC. However, the region's bond market is very small and illiquid. Small businesses can't offer bonds and large companies are usually owned by large families or by the government – the latter rarely borrow money from markets as they don't need to.
* A special report on Qatar accompanies the latest (July) issue of AsianInvestor magazine.