Invesco middle east asset management study

Invesco Middle East Asset Management Study2013

This document is for Professional Clients only and is not for consumer use

01Invesco Middle East Asset Management Study 2013

Nick TolchardWelcome to the latest in Invesco’s series of Middle East Asset Management Studies. This is our fourth annual report and we have sought to provide a unique insight into this dynamic region. We have again worked with independent strategy consultants NMG who since the start of 2013 interviewed over 120 investment professionals across the Gulf Cooperation Council (GCC), across a number of different market segments.

This year we continue to explore the differences between Sovereign Wealth Fund (SWF) profiles, as identified in the model we originally developed in 2011. We have sought to compare and contrast investment and development SWFs, examining investment preferences and asset allocations. Continuing our focus in the institutional space we discuss the emergence of the GCC state pension fund market, a vital segment for the asset management industry. Last year we touched on the regional and international drivers of sovereign and private capital flow in the GCC and this year we take this a step further by examining private capital flow within each GCC market. Within the family office segment we have continued to examine the relationship between personal and corporate assets while considering the suitability of different family office models. From a retail market perspective we have again looked at the different expatriate segments and identified significant changes in investment time horizons. I hope this report provides you with valuable insight into the objectives and preferences of investors in a rapidly growing and evolving region. Please contact me if you would like to discuss any points in more detail.

imeams.com Visit the study webpage to view more content on this year’s themes, access previous reports and share your views through the online feedback form

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Nick TolchardHead of Invesco Middle [email protected] T +971 4425 0950

02 Invesco Middle East Asset Management Study 2013

Summary of key themes

1 Sovereign Wealth Fund profiles The difference between development

and investment SWFs and the growth of new private equity models.

2 State pension funds in the GCC The emergence and growth of the state

pension fund industry driven by local demographics and the Arab Spring.

3 UHNW investors, family offices and family businesses

A preference for light-touch single- family of ces with increasing autonomy from the family business.

4 Private capital flow between the GCC and international markets

The UAE is the most successful GCC country at attracting capital from MENA and South-South trade.

5 Expatriate investor segments and preferences

An increase in expatriate time horizons driven by length of stay or home-market bias.



1 Sovereign Wealth Fund profilesThe difference between development and investment SWFs and the growth of new private equity models.

SWFs are sovereign investors without defined liabilities. In 2011 we developed a framework classifying SWFs into four profiles (development agencies, policy supporters, diversification vehicles and asset managers) to explain SWF investment preferences (figure 1). In 2012 we highlighted the increase in government spending and explored the growth of SWFs focused on local development objectives. This year we will investigate the differences in risk appetite, investment preferences and asset allocations between investment and development SWFs.

Grouping SWFs in the GCC is challenging but there is a clear distinction between investment and development SWFs. We define investment SWFs as funds with no development objectives. As a result, a SWF with development and investment objectives or development objectives only for certain investments would still classify as a development (rather than investment) SWF. The rationale for segmenting these SWFs is supported by participant feedback on risk appetite (measured as target return per annum) in figure 2 and investment preferences in figure 3. Apart from time horizons which are relatively long term at 6–8 years for both types of SWF, all other investment attributes are very different.

Initially the difference in target return looks counter-intuitive: why should 100% investment-focused SWFs have on average an 8% target return p.a. compared to 14% for funds with additional development objectives?

Sovereign Wealth Funds

Secondary objective Profile

Development SWFs

Investment SWFs

Localinvestments

Internationalinvestments

Portfoliodiversification

Pure risk/return

Developmentagencies

Policysupporters

Diversificationvehicles

Assetmanagers

Primary objective

Fig. 1 Investment and development SWFs within Invesco’s SWF framework


Sample size: Development (4), Investment (7). s/h: shareholder.

Strong (5)

Strong (1)

Passive

Active

Preserve

Growth

Funds Passive s/h Geographic

Thematic

Slight

Slight

Neutral

Securities Active s/h

Fig. 3 Key investment preferences for investment and development SWFs, 2013

Sample size: Development (4), Investment (7).

8Investment

Average target return p.a. (%)

14Development

6.9Investment

Development 7.5

Average time horizon p.a. (years)

Fig. 2 Time horizon and target return for investment and development SWFs, 2013

The answer links to investment strategy. Investment SWFs are future generation funds seeking to preserve and grow their country’s assets by investing in a diversified portfolio. Such a portfolio typically includes a significant portion of passive investments and seeks risk-weighted returns across asset classes consistent with the 8% average target return p.a. cited by investment SWFs. These traits are supported in figure 3 by a balanced approach between passive and active investments and between growth and preservation objectives. The preference for passive shareholder management is particularly important in markets like the US where SWFs are exempt from income tax provided they are not deemed to be engaging in commercial activity via controlling stakes.

Development SWFs must balance investment returns with development criteria such as employment, contribution to GDP, skills and intellectual property. But to deliver on these development objectives SWFs typically adopt a private equity style model which seeks growth over capital preservation and actively participates as a shareholder in investments (figure 3). This theory is supported by feedback from development SWFs in our study, suggesting a third of new assets, on an unweighted basis, were allocated to private equity in the last 12 months. Clearly this type of model has a higher risk/return profile and thus an average target return of 14% p.a. is plausible once you work back from a 15–20% internal rate of return for a traditional, more leveraged private equity house with no development objectives.

Development Investment

“ Our analysis of total and new SWF asset placements in our study suggests that private equity is a key theme not just for development SWFs but also for investment SWFs.”


In our study few development SWFs were able to clearly define their assessment criteria for investing. Some firms said that the same hurdle rate applied irrespective of the development outcome, others explained that decisions were made on a case-by-case basis. Both models were cited as sub-optimal by participants: the fixed hurdle rate model failed to prioritise investments with highly favourable development outcomes, while the case-by-case model made it difficult for internal teams to identify the right opportunities to take to the investment committee. A number of development SWFs in the GCC were interested in international case studies and cited South-East Asian funds as leaders at balancing development and investment objectives.

Our analysis of total and new SWF asset placements in our study suggests that private equity is a key theme not just for development SWFs but also for investment SWFs. Figure 4 shows that average private equity allocations for investment SWFs have gradually increased from 5% in 2011 to 13% in this year’s study. A number of investment SWFs cited international investors with higher allocations to alternatives to support their increasing exposures. Examples included sovereign pension funds in Europe and endowment funds in the US. Diversification was cited as a key driver for increasing private equity allocations, although many noted that alternatives had turned out to be more correlated to equities than the industry had hoped prior to the financial crisis.

Discussion on increasing private equity exposure was often combined with a move to new models for private equity investment. There are three high-level models: 1) investment into private equity funds 2) co-investment alongside private equity funds and 3) direct investment as a standalone private equity operation. Nearly all SWFs started out investing into funds but many have moved (or are considering a move) to co-investment or direct models. Co-investment is the logical next step for an SWF of material size looking to increase its exposure or reduce costs or liquidity risk. Meanwhile, direct operations are attractive to those who feel they can compete with private equity firms or want to access particular strategies not aligned to the large private equity houses. Each model has its challenges: co-investment requires quick decision-making which is often difficult within existing committee structures and decision-making processes, while direct operations require a significant investment in capability.

13%

2013

9%

2012

5%

2011

Average allocations across respondents, results not weighted by assets. Sample size: 2011 (4), 2012 (8), 2013 (7).

Fig. 4 Year-on-year private equity allocations for investment SWFs

1 Sovereign Wealth Fund profiles

8%Amount by which average private equity allocations for investment SWFs have increased from 2011–2013


Nearly all SWFs started out investing into funds but many have moved (or are considering a move) to co-investment or direct models

Direct investment

Co-investment

Private equityfund

“ Why should 100% investment-focused SWFs have on average an 8% target return p.a. compared to 14% for funds with additional development objectives?”

One outcome of the shift to new models is increasing pressure on the economics of private equity houses. In the past private equity firms were able to offer co-investment as an additional benefit on top of investments in the fund, but increasingly co-investors are seen as critical to deal-making and many SWFs are now able to co-invest without investing in standard funds. While there does not appear to be consensus across the GCC SWF industry on the preferred model, the current split maps well to the development and investment segmentation. Most investment SWFs prefer co-investment because pure return objectives are aligned with other private equity investors, while most development SWFs prefer direct operations to deliver on their development objectives which are rarely shared by co-investors.


2 State pension funds in the GCCThe emergence and growth of the state pension fund industry driven by local demographics and the Arab Spring.


Outside the GCC, the insurance and pensions industry is fundamental to institutional asset management markets. In most western markets, this segment includes life and general insurance proprietary books, trustee-based defined benefit and defined contribution pension schemes and, under some definitions, a wholesale market with institutionally priced funds on retail or corporate wealth management platforms. In the GCC these institutional segments are small relative to the size of total and contestable SWF assets.

For the large expatriate population in the GCC, their retirement savings are unlikely to ever emerge as local institutional assets because most expatriates save via unit-linked international life insurance products domiciled outside of the GCC. Furthermore, few local corporates offer formal pension products. There are end of service gratuities for expatriates in some GCC markets but most companies tend to meet these liabilities from working capital and do not formally save into an insured or trustee-based pension product. Some insurers have developed group savings products but most are international products with the institutional buyers of asset management services based outside of the GCC.

“ For the large expatriate population in the GCC, their retirement savings are unlikely to ever emerge as local institutional assets because most expatriates save via unit-linked international life insurance products domiciled outside of the GCC.”


Source: US census bureau, January 2013.

0–4 5–9 10–14 15–19 20–24 25–29 30–34 35–39 40–44 45–49 50–54 55–59 60–64 65–69 70–74 75–79 80+Age

Population (units: Saudi millions/Omani thousands)

2.0

1.5

1.0

0.5

0

200

150

100

50

0

Fig. 6 Population breakdown for Saudi Arabia and Oman

Average growth rate across respondents, results not weighted by assets. Sample size: State pension funds: 2011 (5), 2012 (8), 2013 (9); SWFs: 2011 (10 ), 2012 (11), 2013 (11).

119

16

19

201320122011

8

4

Based on respondent feedback we estimate that pension funds now make up more than 15% of all new sovereign assets placed in the region. However, we have observed top-down pressures to prioritise local over international investment (similar to those we discussed in detail last year for SWFs) and our analysis of new asset placements suggests that local GCC allocations have increased from 62% to 71% since 2011. While the trend towards local investment may be structural for SWFs, most pension funds expect international allocations to rebound in the future. As demographic, remuneration and international trends evolve over the next few years it feels inevitable that the GCC state pension fund industry will emerge as a crucial second institutional segment for the international asset management community.

Fig.5 Year-on-year forecast growth in new assets for state pension funds and SWFs (%)

15%Percentage of all new sovereign assets which are pension funds

State pension funds SWFs

Saudi malesSaudi females

Omani malesOmani females


2 State pension funds in the GCC The situation is different for GCC locals, a large proportion of whom work for government entities who offer attractive state-administered pension schemes (for example a pension fund in the GCC matches employee contributions of 9% but guarantees a final salary benefit). Figure 5 shows the expected year-on-year growth in assets from state pension funds compared to SWFs since 2011. The accelerated growth of state pension funds is driven by two factors. The first factor is demographics: GCC populations are young so more individuals are entering employment than exiting (figure 6). The second is public sector wage inflation in the region which has been a continual trend following the Arab Spring. We highlighted this theme last year as a negative for SWFs, as higher government expenses reduce the available surplus for SWFs (supported again this year by the reduction in forecast growth for SWFs to just 4% – see figure 5). However, the same trend is positive for state pension funds with a 19% forecast growth rate this year, because rising public sector salaries drive increases in government pension contributions.

Figure 6 shows the population breakdown for Saudi Arabia and Oman, the two largest GCC populations. Assuming a rigid working population age range of 18–60, we estimate that 2.3 million Saudis will enter the workforce over the next five years compared to 0.7 million leaving employment – a net inflow of 1.7 million or 10% of the current working population. This estimate is conservative for forecasting pension assets because only a portion of assets attributable to those over 60 will be paid out immediately.

For demographic reasons, the investment priorities of the GCC pension funds are different to comparable funds in more developed markets. GCC funds are relatively new and most members are a long way from retirement, meaning liabilities are still a way into the future. The reduced importance of liability management was supported by our interviews; only five of the nine funds cited liability management as higher priority than pure investment returns. In theory demographics should enable GCC pension funds to take a longer term view and hold a higher percentage of risk assets than developed market funds. However, we observed a number of fund-specific factors which influenced investment strategy to such an extent that it was hard to gain a consistent view on risk asset exposure. There is one group of sophisticated pension funds who have acquired expertise from international institutions and built in-house asset allocation models. Another group outsources a large portion of decision making (asset and implemented consulting) to international consultants; and the final group is still in the initial phases of development, either defining benchmarks or awaiting a decision over the consolidation of assets from different government employee schemes.

“ The reduced importance of liability management was supported by our interviews only ve of the nine funds cited liability management as higher priority than pure investment returns.”

Number of Saudis entering and leaving the workforce over the next five years

2.3m 0.7m


3 UHNW investors, family offices and family businessesA preference for light-touch single-family of ces with increasing autonomy from the family business.

In our 2012 study we identified a shift from personal to corporate wealth amongst UHNW individuals in the GCC and highlighted that this trend was strongest amongst single-family offices1 (SFOs). This year we have examined the structure of family offices in more detail and reviewed the direction of capital flow between corporates and individuals.

Our first observation this year is that SFOs and multi-family offices1 (MFOs) are very different organisations, with different propositions, to their UHNW clients. Figure 7 examines the key services offered by SFOs and MFOs in the GCC. The graphic shows that 54% of SFOs cited investments (often M&A linked to the family business), 46% cited procurement and 31% cited relationship management, outsourcing nearly all personal advisory functions to third parties. In contrast, most MFOs focus on personal advisory services, with 83% citing fund selection and 67% citing asset allocation as a key service.

54%of SFOs cited investments as a key service

83%of MFOs cited fund selection as a key service


Percentages calculated based on number of respondents. Sample size: 2013 (19), MFO (6), SFO (13).

Asset allocation

Fund selection

Procurement services

Investments (M&A)

Relationship management

Succession planning

Custodial services

Tax planning

67

83

4617

54

3117

0

0

0

0

17

17

31

23

8

Fig.7 Key services offered by single and multi-family offices in the GCC, 2013 (%)

More importantly, there is strong evidence to suggest that SFOs are preferred to MFOs in the GCC. Analysis of respondents shows that SFOs dominate MFOs in terms of firm numbers and UHNW assets under advice. Furthermore, we spoke to a couple of advisory firms who initially set up as MFOs but subsequently evolved into specialist service providers to SFOs in areas such as succession planning, governance and family architecture due to difficulties in building UHNW relationships.

Our findings suggest that the primary challenge for MFOs is the importance placed on control, trust and confidentiality by UHNW families in the GCC. This has forced MFOs to participate behind SFOs in the value chain and compete more directly with international private banks on investment services. However MFOs are losing out in both parts of the chain: a light-touch SFO model run by a trusted employee is better placed than an MFO to offer control and confidentiality while international private banks servicing a global UHNW customer base are better placed to offer scalable execution services. Furthermore, MFOs seek a holistic client relationship but even where they have had some success in the GCC, executives believe they only advise over a small share of total family assets.

“ The primary challenge for MFOs is the importance placed on control, trust and con dentiality by UHNW families in the GCC. This has forced MFOs to participate behind SFOs in the value chain and compete more directly with international private banks on investment services.”

Multi-family officesSingle-family offices

1 Single-family offices (SFOs) are defined as in-house units managing the wealth of a single UHNW family while multi-family offices (MFOs) are defined as external advisory firms servicing multiple UHNW families.


In summary, personal and corporate assets of the UHNW in the region remain conjoined. We have observed a reduction in demands from the family business for personal assets in the last 12 months and some positive investment trends such as longer time horizons and greater international exposure which are indicative of greater autonomy. However, there have been few structural changes to the decision-making processes which ultimately dictate the long-term relationship between corporate and personal assets.

Sample size: 2012 (30), 2013 (23).

5020

12

2620

13

3320

12

4820

13

1720

12

2620

13

Flow to corporate Neutral Flow to personal

Fig. 8 Direction of capital flow between corporate and personal assets in the GCC (%)

Other includes ‘political stability’, ‘new opportunities’ and ‘liquidity’. Percentages calculated based on number of respondents. Sample size: 2012 (27), 2013 (20).

Corporate returns (from family business)

Diversification (from family business)

Succession & governance

Funding (for family business)

Regulation & transparency

0

Stockmarket returns

Other

6533

5519

4567

4059

1519

1019

20

Fig. 9 Factors driving capital flow between corporate and personal assets in the GCC, 2012–13 (%)

20122013

201233% net flow to corporate

20130% net neutral position

2 In this theme we use the term ‘corporate’ to describe the corporate assets of the family business in the GCC and the term ‘personal’ to describe the personal assets of an UHNW individual. Family office investment advice may be restricted to personal wealth or stretch across personal and corporate (family business) assets.

3 MENA is defined as Middle East North Africa excluding the GCC. While this definition is not technically correct, it does reflect the definition used by GCC participants in the study.


3 UHNW investors, family offices and family businesses

The biggest year-on-year change in the UHNW segment has been the reduction in capital flow from personal to corporate assets2. Last year, family offices in aggregate forecast a strong shift to corporate assets but this year the trend was neutral. Figure 8 highlights this significant year-on-year change from 33% (personal to corporate) to 0% on a net basis. Figure 9 suggests that the reduction in flow from personal to corporate assets correlates to reduced funding requirements by family businesses (with funding citations down from 59% to 40%). The reduction in funding requirements is driven by improved business performance and cash flow generation or greater willingness of banks to lend to family businesses in the GCC. Provided the regional economy continues to perform and finance remains available, the results suggest that personal assets managed by family offices can expect greater autonomy from the family businesses in the future.

Importantly, greater autonomy for UHNW personal assets managed by family offices is also supported by two data points on investment preferences and allocations. First, average time horizons have increased for family offices from less than three years in 2011 to nearly five years in 2013. This increase is consistent with greater autonomy because longer time horizons imply that there is reduced probability that corporates will require personal assets for funding. Second, international exposure (beyond MENA3) has increased consistently from 34% to 49% over three years. The increase in international exposure supports the autonomy theme because it is associated with diversification away from family business assets in GCC or MENA. However, few respondents cited any structural changes which would provide formal autonomy for the family office.

“ Provided the regional economy continues to perform and nance remains available, the results suggest that personal assets managed by family of ces can expect greater autonomy from the family businesses in the future.”


4 Private capital flow between the GCC and international marketsThe UAE is the most successful GCC country at attracting capital from MENA and South-South trade.


Sample size: UAE (23), Saudi Arabia (16), Qatar (7), Kuwait (5), Oman (11), Bahrain (13).

Saudi Arabia +2

Qatar –3

Oman –9

Bahrain –10

Kuwait –4

UAE +12

Fig. 10 Net respondent view of the direction of private capital flow for each GCC market

Strong inflowSlight inflowSlight outflowStrong outflow

Last year we reported that the GCC was attracting assets from MENA but was in net outflow relative to international markets. This year we sought a more granular view of private capital flow by focusing respondents on their home GCC market and its relationship with GCC neighbours and international markets. The results in figure 10 highlight the importance of assessing each GCC market separately. For the UAE the net respondent view of capital flow is positive (the net score is +12 because 17 respondents believe private capital is entering the UAE while only 5 respondents believe private capital is leaving the UAE). For Saudi Arabia the net respondent view is slightly positive (+2) but in the remaining GCC markets the net respondent view is negative (albeit small base sizes), indicating that capital is leaving their home market. The net respondent view across the study was also negative (–12) indicating that, overall, participants expect private capital to be leaving the region.

“ These trends make the emergence of the UAE (notably Dubai) as a net importer of capital a big story.”

-12Net regional respondent view


11%Other MENA

4%Lebanon

7%Egypt

3%Africa

2%Asia

4%Kuwait

3%Bahrain

1%Oman

1%Qatar

UAE

15%India

10% Russia

7%China

2%SE Asia

6%Pakistan

13%Syria

Other MENA includesIran 4%Libya 3%Jordan 2%Tunisia 1%Turkey 0.6%Algeria 0.6%

Developed marketsEmerging marketsGCCMENA

Sample size: respondents based in the UAE (20).



4%UK

3%Switzerland

1%US

3%Europe

1,06

9

1,16

7

179

154

2011

2011

2012

2012

Dubai residentialproperty price index2

Change in UAE bankdeposits (billions)1

Sources: 1UAE total bank deposits, Emirates newsagency. 2REIDIN.com Residential property priceindices (sales).

Fig. 12 Growth of UAE bank deposits (AED) and property prices

Highest % of capital is coming from emerging markets

India 15%

China 7%

Russia 10%

The fact that private capital leaves the region is not a surprise for two structural reasons. First, commodity wealth within a small local population leads to an abundance of expatriate workers in the region who invest internationally. Second, small economies with developing private investor regulation encourage wealthy locals to invest offshore for diversification benefits. These trends make the emergence of the UAE (notably Dubai) as a net importer of capital a big story. The story is particularly impressive when you look at the regions where capital is coming from. In the past, leveraged capital (e.g. properties bought with mortgages) entered Dubai from developed markets. But the picture painted by respondents in 2013 focused on non-leveraged capital (e.g. properties bought with cash) from regional and emerging markets.

Figure 11 shows a diversified heat map of capital coming into the UAE, with 15% from India, 10% from Russia, 7% from China, 35% from MENA and only 13% from across all developed markets. While these percentages are estimates, the direction of capital flow is supported by national statistics. Figure 12 shows a 9% net increase in bank deposits during 2012 and a 17% annualised growth rate in UAE property prices over the same period, both indicators of increasing capital flow.

Fig. 11 Global heat map based on the participant’s view of the geographic sources of private capital entering the UAE

17%Annualised growth rate in UAE property prices

9%Net increase in UAE bank deposits



Local politicalstability

Local investment opportunities

Local regulation

Local economy

International regulation

International politics

International economy

Diversification

Percentages based on number of citations. Sample size: respondents based in the UAE (21).

10%

8%

2%

4%

33%

29%

12%

2%

Participants identified two main drivers of capital flow into the UAE – see figure 13. The first driver is local political stability compared to the MENA region primarily as a consequence of the Arab Spring. This is not a new trend, but continuing regional instability (not just in Syria but also in Egypt and other parts of North Africa) is influencing the nature of the capital invested in the UAE. Interview feedback indicated that money in UAE bank accounts is being invested in more illiquid property assets; and some Arab expatriates, who planned a short stay in Dubai, are now looking to stay for the medium term.

The second driver is local investment opportunities, attracting assets and people from India, Russia, China and other emerging markets popularly titled South-South trade4. The 43% inflow from emerging markets is more indicative of UAE policy than the 35% from MENA linked to the Arab Spring. Dubai was in the right place at the right time for the Arab Spring, but the emerging markets capital flow has been supported by proactive attempts from the UAE government based in Abu Dhabi to build relationships and encourage investment. This re-balancing towards emerging markets has been important to the Dubai recovery and UAE growth while developed markets have continued to struggle.

Despite positive momentum on capital flows and liquidity, these trends can change quickly. At the time of writing the government had considered initiatives to calm the property market and a number of Dubai’s economic challenges remain in the spotlight. Whether or not Dubai continues its recovery into this year and beyond is hard to predict but what is clear is that the UAE is winning the race in the region to attract international capital.

Fig. 13 Key drivers of capital flow into the UAE


43%Inflow from emerging markets

35%Inflow from MENA

13% Inflow from developed markets

“ Dubai was in the right place at the right time for the Arab Spring, but the emerging market capital ow has been supported by proactive attempts from the UAE government based in Abu Dhabi to build relationships and encourage investment.”

UAE capital flow 4 South-South trade is loosely defined as the exchange of resources between governments, organisations and individuals in emerging markets.


Percentages based on number of citations. Sample size: Arab expat (11), NRI (21), Western expat (16).

41

11

53

527 7

34

34

21

125

14Arab expatNRIWestern expat

Percentages based on number of citations. Sample size: Arab expat (9), NRI (27), Western expat (22).

33

1619

33

16

30

20

35

2325

21

75 5

7

Job change RetirementLoss of jobFamily Visa expiryCost of living

02 2

Fig. 15b Reasons for leaving the GCC (%)

Fig. 15a Estimated length of stay in the GCC (%)

% of expats staying more than five years in the GCC

Arab expatriate distributors explained that time horizon is correlated to length of stay. Analysis of expatriate length of stay for different expatriate groups in the GCC is shown in figure 15a. Despite a recent influx of Arab expatriates following the Arab Spring, who you would expect to be transient by nature, only 11% plan to leave the GCC within two years. Most distributors highlighted that perceptions have recently changed and a larger percentage of Arab expatriates now expect to remain in the GCC (55% plan to stay for more than five years).

NRIs stay in the region longer than any other expatriate group and few respondents cited a significant year-on-year change in NRI length of stay. The level of volatility in length of stay for different expatriate groups can be explained by the reasons for leaving the GCC in figure 15b. For NRIs the main reason for leaving the GCC is redundancy (loss of job) while for Arab expatriates the most commonly cited reason is a change in family (or personal) circumstances. The job market has been relatively stable over the last 12 months and, as a result, there has been limited change in length of stay for NRIs. In contrast, the ongoing unrest in MENA continues to impact personal circumstances for Arab expatriates and as a result, respondents cited changes in length of stay.

5 to 20 years> 20 years

< 2 years2 to 5 years

Arab expatNRIWestern expat

55%Arab expats

78% NRIs

59% Western expats


We have monitored investor time horizons since our first study of the region. In 2010 we highlighted the inherent short-term nature of GCC local investors but we have rarely observed meaningful year-on-year changes within a specific customer segment. However, this year the average expatriate investor time horizon rebounded from approximately five years in 2012 to over six years in 2013 (see figure 14) with increases in all major customer segments. Time horizons amongst western expatriates rose by just over one year but the most significant changes were observed amongst Arab expatriates and Non-resident Indians (NRIs). We will explore the drivers of change for Arab expatriates and NRIs in more detail. 5.

5

4.9

6.4

2012

2013

2011

Sample size: 2011 (34), 2012 (37), 2013 (41).Expats include Arab expats, NRIs and Western expats.

Fig. 14 Change in time horizons for expats in the GCC (years)

5 Expatriate investor segments and preferences An increase in expatriate time horizons driven by length of stay or home-market bias.


Average allocations across segments, results not weighted by FUA. Sample size: 2012 (15), 2013 (17).

20

11

7

42

20

22

143

529

2012 2013

5 Expatriate investor segments and preferences

In contrast to Arab expatriates, the increase in time horizon for NRIs is not driven by changes to their length of stay in the GCC. In fact the primary driver of increasing time horizons is changes in the attractiveness of investment opportunities in India versus the GCC. We explored this dynamic last year as part of our analysis on home-market bias5 and observed that the combination of exchange rates, deposit rates and regulation encouraged NRI investors to put more cash on deposit in India. Figure 16 shows the increase in NRI home-market bias by 6% from 2011 to 2012 and the corresponding reduction in NRI time horizon over the same period. However figure 16 also shows that home-market bias has reversed this year, reducing by 13% as the rupee has fallen against the dollar/dirham, and NRIs have invested more in dollar-denominated products in the GCC than in rupee-based deposits in India. Supporting evidence for this change is shown in figure 17, where NRI allocations to cash have fallen from 20% to 9% while allocations to life insurance products have increased from 42% to 52%. Life insurance savings products are contractual products which are more illiquid than cash, so a shift to life products is consistent with the year-on-year increase in NRI time horizons.

Average time horizon p.a. (years)

Sample size: 2011 (13), 2012 (15), 2013 (17).

Home-market (% of new assets)

5.7

3.5

5.9

31

37

24

2011

2012

2013

2011

2012

2013

Fig. 17 Change in NRI product allocations (%)

Fig. 16 Change in NRI time horizon and home-market bias

“ Increasing time horizons are important for the asset management community because clients who invest for longer periods typically take more risk and increase their exposure to higher risk assets.”

Direct investmentsMutual fundsStructured productsLife & pension productsCash


5 Home-market bias is defined as ‘excess’ investor allocations to home-markets i.e. after the removal of non-home-market investor allocations to a particular home-market.

Increasing time horizons are important for the asset management community because clients who invest for longer periods typically take more risk and increase their exposure to higher risk assets. Figure 18 supports this hypothesis, showing that risk appetite (as measured by target return) actually increased year-on-year when we interviewed participants in 2013 (+7% on a net basis). However, the increase in perceptions of risk appetite has not driven a measurable increase in new allocations to risk assets such as equities, alternatives or emerging markets. We will monitor whether risk appetite continues to increase next year (in line with the +10% forecast) and crucially whether this does actually drive greater exposure to higher risk assets.

Expats include Western expats, NRIs and Arab expats. Results exclude ‘no change’ responses. Sample size: 2012 study (37), 2013 study (41).

2014 (forecast)

Net score (%)

10

7

-14

-16

2013(actual)

2013(forecast)

2012 (actual)

12

15

24

35 19

8 3

20 2

20 2

Fig. 18 Change in risk appetite (measured as target return) for expats in the GCC

Slight decreaseSlight increaseSignificant increase

7%Actual 2013

-14% Forecast 2013

Fig. 21 Sample overview by retail end-investor segment

Fig. 20 Sample overview by investor location within the GCC

Invesco Middle East Asset Management Study 2013 27

Fig. 19 Sample overview by institutional end-investor and retail distributor segments

Sample size: 125.

33

UA

E

24

Saud

i Ara

bia

21

Om

an

19

Bahr

ain

Qat

ar

14 14

Kuw

ait

Sample size: 85.

NR

I

Wes

tern

exp

at

Saud

i

Om

ani

Bahr

aini

Ara

b ex

pat

Qat

ari

Kuw

aiti

1716129 98

5 54

Emir

ati

*Family offices exhibit retail and institutional characteristics.

Sector Institutional

Institutional

Institutional

Institutional

Institutional / retail*

Retail

Retail

Retail

Sample11

9

9

11

19

21

21

24

125

SegmentSWF

Sovereign agency

Institutional insurer or bank

Corporate

Family office

Private bank

Retail bank

IFA

Total


Appendix Sample and methodology

The fieldwork for this study was conducted by NMG’s Strategy Consulting practice. Invesco chose to engage a specialist independent firm to ensure high-quality objective results. Key components of the methodology include:— A focus on the key decision makers

in investment firms by conducting interviews with experienced, specialist strategy consultants and offering market insights rather than financial incentives

— In-depth (typically 1 hour) face-to-face interviews using a structured questionnaire to ensure quantitative as well as qualitative analytics are collected

— Analysis capturing investment preferences as well as actual investment allocations with a bias toward actual allocations over stated preferences

— Results interpreted by NMG’s strategy team with relevant consulting experience in the Middle East region as well as globally in the asset management sector

In this report we focus on end-investor analysis which forms the basis of our discussions with all participants in the study. For the institutional sector, this meant primarily end-investor interviews with SWFs, state pension funds, private insurers and banks, corporates and family offices. Supplementary interviews were conducted with asset consultants and local asset management firms and allocated to the relevant end-investor institutional segment. For the retail sector, this meant primarily distributor interviews with family offices, private banks, retail banks and IFAs, focusing on the end-investor allocations and preferences. Supplementary interviews were conducted with retail life companies and local asset managers and allocated to the relevant distributor and end-investor retail segment. Family offices were included in both retail and institutional segments because they exhibit retail and institutional characteristics.

Throughout the report, many of the themes and insights are focused at the segment level where objectives are close enough to make meaningful comparatives. The institutional (end-investor) and retail (distributor) segments are displayed in figure 19 and defined below:— Sovereign Wealth Fund (SWF)

(11): state-backed investment organisations with no defined liabilities

— Sovereign pension fund (9): state-backed pension funds with defined liabilities

— Institutional insurer/bank (9): treasury departments of the major private sector local insurers and banks, responsible for the investment of institutional assets

— Corporate (11): investment divisions of local corporates, which are typically diversified family business groups operating across multiple sectors

— Family offices (19): personal advisers to one or more local ultra-high net worth (UHNW) investors, typically with more than $25m investable assets

— Private banks (21): advisory arms of private banks servicing high net worth (HNW) investors, typically with more than $1m investable assets

— Retail bank (21): advisory divisions of retail banks servicing affluent investors, typically with up to $1m investable assets

— IFA (24): independent financial advisors servicing affluent investors, typically with up to $5m investable assets.

There are two other relevant segmentations. Across the GCC we tried to ensure each country was appropriately represented in the sample (see figure 20). And within the retail market, we sought a sample of each expatriate group as well as the local investors in each GCC market (see figure 21).


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Invesco Asset Management LimitedInvesco Asset Management Limited is part of a leading independent global investment management business, offering financial institutions and investment professionals access to global investment expertise. Invesco has a strong track record across asset classes and strong product structuring capability to provide professional investors with high-value solutions. In 2005, Invesco demonstrated its commitment to its GCC clients by setting up a regional office in the DIFC, UAE.

NMGNMG is a specialist multi-national consultancy focused on the insurance and investments industries, operating across strategy, actuarial and research consulting. We help our clients answer complex problems that require an external perspective or specific in-market expertise.

Within the Middle East region NMG offers the following propositions:— Strategy Consulting: supporting financial institutions

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— Strategic Insights Programmes: helping participants to understand distributor requirements and improve competitive positioning. In the GCC we run Insights programmes in the wealth, asset management, reinsurance and life insurance sectors.

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