International investors return to the Gulf fold

Fund managers say foreign institutional investors are once again looking at the region's asset managers for potential business amid a surge in capital raising.

The Arab Spring sucked capital from the Gulf's funds sector as international investors sought security in safe haven investments. Now they are back, lured by attractive income, yields and economic propects in markets such as the UAE.

Institutional investors, such as pension funds and insurance companies, invested in the UAE's markets in large numbers during the first quarter of the year, as a bull market in local equities drove share buying, according to HSBC Securities Services, the region's biggest custodian bank.

Investment from such sources tends to be less speculative and prone to sudden withdrawals than broker-dealers or hedge funds, in theory adding a degree of stability to equity markets.

"It's the underlying economy," says Saleem Khokhar, the head of equities at National Bank of Abu Dhabi. "Foreign investors see the UAE suddenly as very vibrant. They have gone through the crisis and coming out much stronger. Dubai's business boom is having a knock-on effect on Abu Dhabi. There is certainly a lot more confidence."

Next month, the index provider MSCI will decide for the sixth time since 2009 whether or not to upgrade the UAE and Qatar to "emerging market" status, giving it access to passive investors tracking US$3.4 trillion of equities in markets such as Brazil and China.

Money was wiped out of the UAE's equity markets in 2011 as foreign investors cut positions in risky asset classes in the wake of the Arab Spring uprisings that ousted leaders in Tunisia, Egypt, Libya and Yemen.

The contagion events compounded troubles for the local equity industry that was already grappling with the effects of the 2008 global financial crisis and 2009 Dubai debt crisis that dampened investor confidence to fresh lows.

Dwindling asset prices and trading volumes caused the number of stock brokerages in operation to more than halve over this period to 50 companies from 120 at the peak of Dubai's equity boom.

While the state of the brokerage industry has been widely reported in the local media, fund managers have been reluctant to divulge until recently that they had struggled to raise fresh money during their roadshows abroad.

"After the Arab Spring, we saw a lot of outflows from international investors leaving the region," said Fadi Al Said, the head of equities for ING Investment Management in Dubai.

At the peak of ING's Mena fund in January 2011, it managed $125 million on behalf of clients. The fund touched a low of $32m at the end of 2011. Many small equity houses were forced to restructure their operations and downsize.

Last year Royal Capital's head of asset management and several analysts left the company as the Abu Dhabi asset manager closed its Mena Fixed Income Plus Fund.

Haissam Arabi, the founder of Gulfmena Investments, resigned earlier this year after a decision by shareholders to close the company's two proprietary funds, Gulfmena Opportunities and Gulfmena Access, amid continued losses.

But equity prices have remarkably improved this year, with the Abu Dhabi Securities Exchange General Index up 36.4 per cent and the Dubai Financial Market General Index up 41.9 per cent in the same period.

ING's Mena fund started the year with $37m of assets under management and has since almost doubled to $67m.

"We are seeing a lot of increased interest in terms of allocating money to the region," Mr Al Said says. "The performance is doing well, the macro picture is looking solid - all on the back of a lack of bad news."

Similarly, National Bank of Abu Dhabi's assets under management grew by just under Dh600m this year. A large portion of this was fresh money from foreign investors.

"We have done extremely well in terms of fundraising this year," Mr Khokhar says. "There's a lot more money flowing in because of what's happening in the region, and globally, money parked in Switzerland is flowing in. There is a real interest in our equities as well as GCC as a whole is particularly in focus."

Much of the capital was attributed to stellar subscriptions for the bank's Mena Dividend Leader Fund launched in March, in which $100m was raised from private placements over four weeks.

The Dublin-domiciled fund has just received UAE regulatory approval to be sold to retail investors in the Emirates.

The return of foreign money has encouraged large equity houses to consider takeover targets amid a need for consolidation across the sector.

"We certainly have an interest in acquiring small asset management businesses in the Mena region," Mr Khokhar said. "Quietly behind the scenes, we are pursuing this. Asset management is a scale game."