Posts Tagged “Open Architecture”

Asset Management in the Middle East: Ten big changes to watch for in the next decade

October 4, 2020

An article by Andrew Hutchings

Andrew Hutchings, Chairman and co-founder of Universal Copywriters (Uniwriters)

Developments over the last thirty years in other parts of the world indicate where the industry could be headed in 2010-20.

In asset management, as in other industries, the short-term excitement about a change often exceeds reality. Regulatory changes, entry of new competitors, movement of high profile executives, development of new products and distribution deals can generate interesting headlines, but very rarely result in profound changes to the landscape. The changes that really matter actually come from trends that operate over five-to-ten years, if not longer.

It is now nearly 30 years since yields on U.S. Treasury bonds peaked, providing the impetus for a secular bull market in equities, which ran to the year 2000 in the U.S. and for longer in other countries. The rise in the U.S. stock market, and the international investment opportunities that became available as a result of the lowering of barriers to capital flows, shaped the development of the U.S. mutual fund industry in the 1980s and the 1990s. In Europe, the key factors were the Undertakings for Collective Investments In Transferable Securities (UCITS) directive(s), from 1985 onwards, and the widespread realization that demographics were such that individuals would have to do more to provide for their own retirement incomes. In Asia, the key issues are that economies are likely to generate superior growth rates for the foreseeable future and that capital pools are enormous and/or expanding rapidly. In all three regions, information technology has contributed to better solutions for investors.

All this begs the question: what are the ten things that really matter for asset management in general, and investment funds in particular, in the Middle East?  The starting point must be that[1] capital pools in the region, which are already substantial, will continue to grow. Over the next decade, the Middle East will continue to be a major source of natural resources – especially hydrocarbons – for the rapidly developing economies of East and Southeast Asia. The Gulf Co-operation Council (GCC) countries that are running large current account surpluses thanks to exports of oil and gas will amass additional savings in Sovereign Wealth Funds. The corollary of this is that, like China now or Japan in the 1980s and early 1990s,[2] the Middle East is a natural source of investment capital for the rest of the world. Because the GCC currencies (and most others in the Middle East and North Africa) are pegged to the U.S. dollar, investors can invest in the U.S., Hong Kong and various other places, with minimal currency risk: in this respect, the Middle East has a huge advantage relative to China and Japan.

One implication of this is that the[3] Middle East is an obvious market for the distribution of UCITS funds that are domiciled in Luxembourg or Ireland. The UCITS funds are already in existence, and provide access to every conceivable asset class that an institutional or individual investor might need. The UCITS ‘brand’ is a trusted one and is synonymous with first class regulation and transparency. As is the case in Asia, there are local asset management companies in all of the GCC countries. Most are affiliated with local universal banks or other local corporate groups. However, very few have achieved the absolute size that would give them the economies of scale enjoyed by large asset managers in  the rest of the world. Therefore, [4] many banks in the Middle East are likely to come to the conclusion that there is more money to be made from distributing investment funds than managing them. This is what happened in continental Europe in the 1990s and what is happening in China now. Nevertheless, as the fragmented financial services industries consolidate over the coming decade [5] it is a near certainty that at least one very substantial Middle East based asset management company will emerge: its business will not be confined to one country in the region.

Of course, universal banks are not the only organisations that can embrace Open Architecture and seek to profit from the distribution of products that are sourced from other companies. Thanks in part to the development of health insurance, insurance premiums are rising rapidly from low bases in almost all countries in the region.  Within the coming decade, [6] Middle Eastern insurers will turn to fund distribution as their industry matures. It is also a safe bet that [7] the growth in Open Architecture will be accompanied by a strong increase in distribution of Sharia-compliant funds. Sharia-compliant banking and Takaful have had to overcome a number of challenges, but are growing rapidly in many GCC countries and in certain countries outside the Middle East, such as Malaysia. The decade to 2020 will probably be seen as the decade in which Islamic finance moved to the mainstream.

In differing ways, the governments of Dubai, Abu Dhabi, Bahrain and Qatar have all sought to promote their states as offshore financial services centres. That each has some control over local Sovereign Wealth Funds (and, often, other institutions as well) means that they have some ability to nurture a local asset management industry. This is a formula that the government of Singapore, for instance, has made to work well. However, unlike Singapore or Hong Kong, none of the Middle Eastern centers has access to a massive hinterland (like Southeast Asia or Greater China). The implication is that [8] the Middle Eastern centers will flourish, provided each focuses on a different niche, with the result that they can develop through collaboration rather than competition.

Financial services is, of course, not the only industry that regional governments are looking to develop as economies are diversified away from energy. Massive new infrastructure projects across the region will require innovative funding. [9] Infrastructure funds and other locally-focused vehicles could well be in the mainstream of the Middle Eastern asset management industry by 2020.

Finally, it is often forgotten that the Middle East and North Africa is home to well over 200 million people. In most countries in the region, people are poor and financial services under-developed as a result of structural problems. However, most countries are making some progress towards resolution of the problems. [10] In the next ten years a very substantial funds industry will develop in at least one of Egypt, Algeria and Morocco.

By 2020, the asset management industry of the Middle East will be much larger and more sophisticated than it is today.

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About Andrew Hutchings

Andrew Hutchings is Chairman and co-founder of Universal Copywriters (Uniwriters), a consultancy that works with global investment managers, private banks, institutional banks and publishers of commercial intelligence. He has written extensively on asset management, investment fund distribution and financial market infrastructure - in the Middle East, the Asia-Pacific and Europe. He has worked as a Co-ordinating Editor for Global Custodian and has extensive experience as a Research Editor.

Post Under: Asset Management

Spotlight Series: Jean-Francois Hautemulle, Unicredit Private Banking on the quandry of too much choice

August 6, 2020

A recent article in Citywire

quoted a new survey conducted by Fidelity and Morningstar that revealed the fund of funds market in Germany has recovered strongly since the financial crisis.  The shift towards open architecture approach within these funds has continued, with 63% of fund of funds now using a diverse choice of companies, compared to 56% in 2007.

Jean -Francois Hautemulle, Head of Fund Selection, UNICREDIT PRIVATE BANKING was an expert panellist in a session moderated by Richard Romer-Lee, Research Director, OBSR entitled “OPEN & GUIDED ARCHITECTURE: The Rise of Guided Architecture And The Implications For The Distributor/ Manufacturer Relationship.  He was joined on the panel by Adrian M. Weiss, Head Investment Products & Advice, CITI GLOBAL CONSUMER GROUP EMEA; Philippe Baumann, Deputy Head of Open Architecture, LOMBARD ODIER DARIER HENTSCH & CIE and Richard Vincent, Head, Open Architecture Funds, SKANDIA INVESTMENT GROUP.

In an interview for the Spotlight Series, Jean-Francois discusses his experience of open (Germany) and guided (Italy) architectures and how choice is a good thing; too much choice is paralysing.

Post Under: Distribution Strategy


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