GCC Asset Management and its challenges

Interview with Mr. M.R.Raghu, CEO, Marmore MENA Intelligence

How big is GCC Asset Management industry and who are the major players?

The GCC Asset Management Industry manages around USD 59 billion in assets, spread across 223 funds across the region. The Saudi asset management industry leads the region managing 87% of the assets and having 57% of the funds domiciled in the country. Kuwait comes in at a distant second, having 5% of the total AUM domiciled in the county. Money market funds dominate the region followed by equities whereas assets like real estate, fixed income and other alternatives form a minor share. NCB Capital is the largest player in the region with AUM of around USD 15 billion followed by Riyad Capital with AUM of USD 14 billion. The industry’s top 7 players are based in Saudi Arabia having a cumulative AUM of USD 46 billion, representing 79% of the total GCC AUM. Kuwait Financial Centre, the parent company of Marmore MENA Intelligence, is the leading player in Kuwait, having a total AUM of USD 916 million.

How asset managers should evolve new product opportunities for the GCC region?

In the current digital-savvy times, consumers, especially HNIs, are not dependent on relationship managers alone to get educated about various products. Asset Management Companies (AMCs) in the GCC have also begun adopting digital solutions to serve customers, which along with offering tailor-made solutions will prove to be decisive factors over the next couple of years. With a growing demand for alternative products (Real Estate, Commodities, PE, VC securitization etc.) in the region, AMCs should strive to provide related products in the current low-interest rate environment where returns on money market funds have been affected. Effective analysis of risk-return profiles and structuring diversification opportunities, thereby creating multi-asset solutions will also be key. The pandemic, which has forced GCC governments to tap debt markets has created a market with ample supply of government bonds and sukuks for potential investors. Attractive yields, along with a sound credit rating has also attracted investors attention which should be capitalized by AMCs. Asset managers in the region play the safe-game and offer mostly vanilla products that have been in the market for decades and the investments are held to maturity due to the lack of an active secondary trading market. Even large AMCs do not try to offer creative products that might attract the attention of the new generation investors.

In your opinion, what are the key challenges for investment management firms in GCC?

Managed funds or discretionary portfolio management still continue to dominate the AUMs of AMCs in the region since HNIs continue to prefer the private banking route. However, the adoption of newer products and solutions would aid in reducing this mismatch. A long-standing issue for the industry is the prevalence of funds which are much smaller in size when compared to global peers. A predominant portion of existing funds are less than USD 50 million in size, due to which operating costs are high, thus eating up margins. A lack of effective distribution channels and over-dependence on AMC’s parent banks to market the funds continue to impact the industry. However, the adoption of digital solutions should help in alleviating this challenge to an extent.

How is the landscape for discretionary portfolio management in the GCC?

Discretionary Portfolio Management (DPM) solutions are generally offered to HNIs and institutional investors which are tailored made to suit the investor’s risk-return objectives. Capital market reforms enacted by GCC stock market regulators have resulted in indices entering emerging market indices, along with an increase in the percentage of shares that QFIs can invest in, resulting in the introduction of more private funds. According to Marmore’s recent research on DPM in Saudi Arabia, the number of private funds in the kingdom has increased from 274 in 2015 to 403 as on Q3 2020, reflecting a growth of 47%. However, the AUM has remained flat in the same period, which could indicate that the newer DPM investors could be from a younger population base with lower net worth. The leading asset managers of DPM and private funds are the asset management arms of leading commercial banks. The demand for DPM is bound to increase as investors look to diversify, however, a culture and trust issue still exists in the region which would take time to evolve into the industry.

Can you elaborate on how Marmore supports asset managers in the GCC region?

Being the wholly owned subsidiary of the largest Asset Management Company in Kuwait, Marmore has a wealth of expertise in the industry backing it. Our repository of reports spanning a number of verticals such as economy, capital markets, sectors and policy has aided the asset management industry to get access to intelligent analysis that is hard to find in a less researched region.

With its ongoing research efforts, Marmore has also advised Asset Managers on new product launches. Overall Marmore provides end-to-end services to asset managers right from portfolio construction, risk assessment, back testing and buy/sell-side equity research. We have assisted various asset management companies to prepare buy-side equity research reports based on thorough evaluation of the target companies. We have also helped AMCs to prepare stock screeners based on various parameters, create a database of funds with in-depth details and prepare risk reports. We can also help brokerage firms to prepare sell-side equity valuation models and research reports for their clients. We can also provide dedicated offshore analysts to our clients on a full-time basis working with them exclusively. Our research report on equity risk premium is very popular among asset management companies.

Marmore assisted investment banks on various tasks such as preparing due diligence reports, preparing pitch books and provide tailor-made sector/industry research. Our quarterly report on M&A activities in the region are well received by investment banks.