Institutional and retail investors in the GCC have short time horizons compared to global benchmarks

Friday 4th, June 2010 -- 23:20 GMT
Invesco Middle East Asset Management Study finds a consistently high demand for emerging markets across the region

Posted: 26-05-2010 , 09:35 GMT

Invesco Asset Management Limited today unveiled the findings of its inaugural Invesco Middle East Asset Management Study. This regional study is the first of its kind and reveals a fascinating insight into the complex and sophisticated investment habits of this continually evolving region. The company, who opened its Dubai office in 2005, has been working with Middle East clients for decades, offering financial institutions and investment professionals access to global investment expertise.

Surveying the attitudes and behaviours of both institutional and retail markets across the six Gulf Co-operation Council (GCC) countries, the study revealed a number of key findings:
• There is currently a consistently high demand for emerging markets across all companies and territories
• Institutional and retail investors in the GCC have short time horizons compared to global benchmarks
• Investor location within the GCC has a strong influence on exposure to investment sectors


Interestingly, the study also indicated that both the institutional and retail market are becoming increasingly risk averse.

Nick Tolchard, Head of Invesco Middle East commented: “The Middle East is often portrayed as a homogenous region; this report clearly shows this is not the case, though there are some surprising similarities. The influence of investor location over asset allocation makes it quite clear that the Middle East is a highly diverse investment region.”

He continued: “We believe that this diversity is explained by access to investment products, which varies across the region. Certain markets, such as Saudi Arabia, have restricted access to international investments whereas others, such as the UAE, are dominated by offshore life wrappers with large international fund ranges.”

Investor type also plays a key role in asset allocation, according to the study. In the growing retail market, preferences vary according to distributer. Private client portfolio managers favour global equities and alternative assets, while retail banks prefer local equities and cash and IFAs opt for global equities and cash.

On the institutional side, preferences are even more diverse:
o Sovereign Wealth Funds prefer alternative investments (private equity and hedge funds)
o Institutional investors tend to invest in mainstream asset classes (equities, bonds and cash)
o Corporates (commercial banks and diversified financial services) prefer local over international assets.
o Asset managers prefer property

Commenting on these asset allocation preferences, Nick Tolchard said: “Sovereign Wealth Funds’ preference for private equity and hedge funds may align to opportunistic investment strategies to exploit any short-term market volatility and below average allocations to local securities and commodities is expected given that the source of funding for Sovereign Wealth Funds (government revenue) is heavily dependent on commodity prices and the performance of the local economy.”

In addition, one of the most striking findings is the universal preference for emerging market assets. Across all participants 82% of respondents forecast exposure to emerging markets over the next 3-5 years compared to 30% for North America, 14% for Europe and 8% for Japan. The key driver for this appears to be simply that GCC investors expect returns to exceed those in developed markets.

The Retail and institutional respondents in the GCC are also unified by their perceptions of change in risk appetite – they have indicated that 79% of institutional and 70% of retail investors have changed their attitude to risk in the last six to twelve months and in both cases, more investors have become increasingly risk averse.

In addition, the study indicated that the respondents also share similar very short-term investment time horizons, 38% of retail respondents have a time horizon of less than a year compared to 33% in the institutional market. Of those surveyed, only 12% of institutional respondents have an investment horizon beyond 5 years, significantly below global comparatives for institutional markets.* Invesco believes that the short retail time horizons in the retail market can be explained by the transient nature of retail expatriate clients, investment losses during the global financial crisis and the coverage on Dubai’s debt restructuring. Looking forward it expects retail time horizons to lengthen as markets stabilise, but to remain shorter than global retail benchmarks.

Nick Tolchard explained: “Perhaps the most surprising finding was the short term and highly volatile investment attitudes in the institutional sector. However, this could be explained by nimble and fast moving investment behaviour of Sovereign Wealth Funds in the GCC region, in contrast to other institutional markets which are typically dominated by large insurance and pension funds managing a high proportion of their assets against long-term liabilities.”

He concluded: “The Middle East is a growing investor force in the world and we see this research as part of our strategic commitment to understanding the perspective of investors, as well as the investment and savings culture of the Middle East. We intend to carry out this research on a regular basis, monitoring the retail investment market as it continues to grow, and learning even more about the behaviour and preferences of the highly sophisticated institutions operating in the GCC.”
© 2010 Mena Report (www.menareport.com)

http://www.menareport.com/en/business/316494


Summary:

This research studied the investment and savings culture of the Middle East. It highlights the growing retail investment market and the behaviour and preferences of the highly sophisticated institutions operating in the GCC.

The study indicated that the respondents share similar very short-term investment time horizons, 

• 38% of retail respondents have a time horizon of less than a year compared to 33% in the institutional market. 
• Of those surveyed, only 12% of institutional respondents have an investment horizon beyond 5 years, significantly below global comparatives for institutional markets.

* Invesco believes that the short retail time horizons in the retail market can be explained by

• the transient nature of retail expatriate clients,
• investment losses during the global financial crisis and 
• the coverage on Dubai’s debt restructuring. 

Looking forward it expects retail time horizons to lengthen as markets stabilise, but to remain shorter than global retail benchmarks.

Perhaps the most surprising finding was the short term and highly volatile investment attitudes in the institutional sector. 

• However, this could be explained by nimble and fast moving investment behaviour of Sovereign Wealth Funds in the GCC region, in contrast to other institutional markets which are typically dominated by large insurance and pension funds managing a high proportion of their assets against long-term liabilities.”

Lessons from Sovereign Wealth Funds

Agence France-Presse - 11/9/2008 3:50 AM GMT
Sovereign wealth funds turning cautious: analysts

Cash-rich sovereign wealth funds from Asia and the Middle East may be turning cautious after getting burnt by investments in Western firms hit by the current financial turmoil, analysts said.
Despite fresh opportunities, prudence now prevails as countries that own the funds sit on massive paper losses from investments made just before problems in the US housing market erupted into a full-blown global crisis.

Their multi-billion-dollar forays into Western financial giants such as Citigroup and Merrill Lynch appeared to be good bargains but the banking shakeout has since sharply reduced the value of their holdings.

"I think they've been burnt... They are not sure this is the right time and they are more cautious," said Zanny Minton-Beddoes, a Washington-based editor with The Economist, the widely-respected current affairs weekly.

"They put a lot of capital into financial institutions earlier on and they lost a lot of money," Minton-Beddoes, a former economist with the International Monetary Fund, told AFP.

Since last year, financial institutions hit by the unfolding slump in the US housing market have sought and received billions of dollars in fresh capital from sovereign wealth funds created to invest national savings and surpluses fed by crude-oil windfalls in the Gulf and rapid industrialisation in Asia.

The funds have come under increasing scrutiny after making high-profile investments in distressed banks and companies.

They were also criticised as too opaque in their operations and, in some cases, stakes in strategic sectors like telecommunications were seen as potential threats to national security.

The IMF has estimated that sovereign wealth funds collectively hold total assets of between 1.9 trillion and 2.8 trillion dollars and could be worth 12 trillion dollars by 2012, while the UN Conference on Trade and Development puts their current holdings at about 5.0 trillion dollars.

Christopher Balding, a researcher with the University of California, said sovereign wealth funds are by nature risk-averse and the ongoing financial turmoil would further accentuate that position.

"The current turmoil will, in my estimation, only reinforce the inherent conservative investment outlook," Balding, who specialises in international economics and sovereign wealth funds, told AFP.

"Right now there is a lot of fear in the marketplace from all investors... Sovereign wealth funds are not interested in making more large investments because of how their previous investments have turned out."

Singapore was among the most prominent investors with its two main funds, Temasek Holdings and the Government of Singapore Investment Corp (GIC), emerging as sought-after sources of capital by ailing Western financial firms.

Temasek invested 8.3 billion US dollars into Merrill Lynch, which was later acquired by Bank of America in an all-stock deal worth 50 billion dollars, while GIC pumped billions into Citigroup and Swiss banking behemoth UBS.

In response to AFP queries, GIC and Temasek both said they would continue to explore all investment opportunities but declined to give further details.

Funds from the oil-rich Middle East were also courted in the West.

The state-owned Kuwait Investment Authority injected a total of 5.0 billion dollars in Citigroup and Merrill Lynch in January this year.

The Abu Dhabi Investment Authority, controlled by the largest member of the United Arab Emirates, poured 7.52 billion dollars into Citigroup late last year.

Analysts said sovereign wealth funds from Asia and the Middle East would continue to be major financiers, but any potential partnerships would be carefully weighed before the cheque book is taken out.

"Western financials need the capital and they (sovereign wealth funds) have the capital... I just think they will be carefully considered," said Minton-Beddoes.

Michael Backman, an author of several business books on Asia, said now is the time for the region's funds to look at long-term investments in Western firms.

"It's a good time to have a lot of cash. Assets are being over-sold and there will be plenty of bargains," Backman told AFP from London.

"It's an excellent opportunity for sovereign wealth funds to diversify to the developed economies and to do it at bargain basement prices."

http://news.my.msn.com/regional/article.aspx?cp-documentid=1777581