Invesco Middle East Asset Management Study2013This document is for Professional Clients only and is not for consumer use
01Invesco Middle East Asset Management Study 2013Nick TolchardWelcome to the latest in Invesco’s series of Middle East AssetManagement Studies. This is our fourth annual report and wehave sought to provide a unique insight into this dynamic region.We have again worked with independent strategy consultantsNMG who since the start of 2013 interviewed over 120 investmentprofessionals across the Gulf Cooperation Council (GCC), acrossa number of different market segments.This year we continue to explorethe differences between SovereignWealth Fund (SWF) proﬁles, asidentiﬁed in the model we originallydeveloped in 2011. We have soughtto compare and contrast investmentand development SWFs, examininginvestment preferences and assetallocations. Continuing our focus inthe institutional space we discuss theemergence of the GCC state pensionfund market, a vital segment for theasset management industry.Last year we touched on the regionaland international drivers of sovereignand private capital ﬂow in the GCCand this year we take this a stepfurther by examining private capitalﬂow within each GCC market. Withinthe family ofﬁce segment we havecontinued to examine the relationshipbetween personal and corporateassets while considering the suitabilityof different family ofﬁce models. Froma retail market perspective we haveagain looked at the different expatriatesegments and identiﬁed signiﬁcantchanges in investment time horizons.I hope this report provides you withvaluable insight into the objectives andpreferences of investors in a rapidlygrowing and evolving region. Pleasecontact me if you would like to discussany points in more detail.imeams.comVisit the studywebpage to viewmore content onthis year’s themes,access previousreports andshare your viewsthrough the onlinefeedback form@InvescoMEYou can also enterinto the debatewith us on twitterNick TolchardHead of Invesco Middle Eastnick.firstname.lastname@example.orgT +971 4425 0950
02 Invesco Middle East Asset Management Study 2013Summary of key themes1 Sovereign Wealth Fund proﬁlesThe difference between developmentand investment SWFs and the growthof new private equity models.2 State pension funds in the GCCThe emergence and growth of the statepension fund industry driven by localdemographics and the Arab Spring.3 UHNW investors, family ofﬁcesand family businessesA preference for light-touch single-family of ces with increasing autonomyfrom the family business.4 Private capital ﬂow between theGCC and international marketsThe UAE is the most successful GCCcountry at attracting capital fromMENA and South-South trade.5 Expatriate investor segmentsand preferencesAn increase in expatriate timehorizons driven by length of stayor home-market bias.03Invesco Middle East Asset Management Study 2013
04 Invesco Middle East Asset Management Study 20131 Sovereign Wealth Fund proﬁlesThe difference between developmentand investment SWFs and the growthof new private equity models.SWFs are sovereign investors without deﬁned liabilities.In 2011 we developed a framework classifying SWFs intofour proﬁles (development agencies, policy supporters,diversiﬁcation vehicles and asset managers) to explain SWFinvestment preferences (ﬁgure 1). In 2012 we highlightedthe increase in government spending and explored thegrowth of SWFs focused on local development objectives.This year we will investigate the differences in risk appetite,investment preferences and asset allocations betweeninvestment and development SWFs.Grouping SWFs in the GCC is challenging but there isa clear distinction between investment and developmentSWFs. We deﬁne investment SWFs as funds with nodevelopment objectives. As a result, a SWF withdevelopment and investment objectives or developmentobjectives only for certain investments would still classifyas a development (rather than investment) SWF. Therationale for segmenting these SWFs is supported byparticipant feedback on risk appetite (measured as targetreturn per annum) in ﬁgure 2 and investment preferencesin ﬁgure 3. Apart from time horizons which are relativelylong term at 6–8 years for both types of SWF, all otherinvestment attributes are very different.Initially the difference in target return looks counter-intuitive: why should 100% investment-focused SWFshave on average an 8% target return p.a. compared to14% for funds with additional development objectives?Sovereign WealthFundsSecondary objective ProﬁleDevelopmentSWFsInvestmentSWFsLocalinvestmentsInternationalinvestmentsPortfoliodiversiﬁcationPure risk/returnDevelopmentagenciesPolicysupportersDiversiﬁcationvehiclesAssetmanagersPrimary objectiveFig. 1 Investment and development SWFs within Invesco’s SWF framework05Invesco Middle East Asset Management Study 2013Sample size: Development (4), Investment (7). s/h: shareholder.Strong (5)Strong (1)PassiveActivePreserveGrowthFunds Passive s/h GeographicThematicSlightSlightNeutralSecurities Active s/hFig. 3 Key investment preferences for investmentand development SWFs, 2013Sample size: Development (4), Investment (7).8InvestmentAverage target return p.a. (%)14Development6.9InvestmentDevelopment 7.5Average time horizon p.a. (years)Fig. 2 Time horizon and target return forinvestment and development SWFs, 2013The answer links to investment strategy. Investment SWFs are future generationfunds seeking to preserve and grow their country’s assets by investing ina diversiﬁed portfolio. Such a portfolio typically includes a signiﬁcant portionof passive investments and seeks risk-weighted returns across asset classesconsistent with the 8% average target return p.a. cited by investment SWFs.These traits are supported in ﬁgure 3 by a balanced approach between passiveand active investments and between growth and preservation objectives. Thepreference for passive shareholder management is particularly important inmarkets like the US where SWFs are exempt from income tax provided they arenot deemed to be engaging in commercial activity via controlling stakes.Development SWFs must balance investment returns with developmentcriteria such as employment, contribution to GDP, skills and intellectualproperty. But to deliver on these development objectives SWFs typically adopta private equity style model which seeks growth over capital preservationand actively participates as a shareholder in investments (ﬁgure 3). This theoryis supported by feedback from development SWFs in our study, suggestinga third of new assets, on an unweighted basis, were allocated to private equityin the last 12 months. Clearly this type of model has a higher risk/return proﬁleand thus an average target return of 14% p.a. is plausible once you work backfrom a 15–20% internal rate of return for a traditional, more leveraged privateequity house with no development objectives.DevelopmentInvestment“Our analysis of totaland new SWF assetplacements in our studysuggests that privateequity is a key themenot just for developmentSWFs but also forinvestment SWFs.”
06 Invesco Middle East Asset Management Study 2013In our study few development SWFs were able to clearly deﬁne theirassessment criteria for investing. Some ﬁrms said that the same hurdlerate applied irrespective of the development outcome, others explainedthat decisions were made on a case-by-case basis. Both models werecited as sub-optimal by participants: the ﬁxed hurdle rate model failedto prioritise investments with highly favourable development outcomes,while the case-by-case model made it difﬁcult for internal teams to identifythe right opportunities to take to the investment committee. A numberof development SWFs in the GCC were interested in international casestudies and cited South-East Asian funds as leaders at balancingdevelopment and investment objectives.Our analysis of total and new SWF asset placements in our study suggeststhat private equity is a key theme not just for development SWFs but alsofor investment SWFs. Figure 4 shows that average private equity allocationsfor investment SWFs have gradually increased from 5% in 2011 to 13%in this year’s study. A number of investment SWFs cited international investorswith higher allocations to alternatives to support their increasing exposures.Examples included sovereign pension funds in Europe and endowment fundsin the US. Diversiﬁcation was cited as a key driver for increasing private equityallocations, although many noted that alternatives had turned out to be morecorrelated to equities than the industry had hoped prior to the ﬁnancial crisis.Discussion on increasing private equity exposure was often combined witha move to new models for private equity investment. There are three high-levelmodels: 1) investment into private equity funds 2) co-investment alongsideprivate equity funds and 3) direct investment as a standalone private equityoperation. Nearly all SWFs started out investing into funds but many havemoved (or are considering a move) to co-investment or direct models.Co-investment is the logical next step for an SWF of material size lookingto increase its exposure or reduce costs or liquidity risk. Meanwhile, directoperations are attractive to those who feel they can compete with privateequity ﬁrms or want to access particular strategies not aligned to the largeprivate equity houses. Each model has its challenges: co-investment requiresquick decision-making which is often difﬁcult within existing committeestructures and decision-making processes, while direct operations requirea signiﬁcant investment in capability.13%20139%20125%2011Average 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 SWFs1 Sovereign Wealth Fund proﬁles8%Amount by whichaverage privateequity allocationsfor investmentSWFs haveincreased from2011–201307Invesco Middle East Asset Management Study 2013Nearly all SWFsstarted outinvesting intofunds but manyhave moved (orare consideringa move) toco-investmentor direct modelsDirectinvestmentCo-investmentPrivate equityfund“Why should 100%investment-focusedSWFs have on averagean 8% target return p.a.compared to 14% forfunds with additionaldevelopment objectives?”One outcome of the shift to new models is increasingpressure on the economics of private equity houses. In thepast private equity ﬁrms were able to offer co-investmentas an additional beneﬁt on top of investments in thefund, but increasingly co-investors are seen as criticalto deal-making and many SWFs are now able to co-investwithout investing in standard funds. While there doesnot appear to be consensus across the GCC SWF industryon the preferred model, the current split maps well tothe development and investment segmentation. Mostinvestment SWFs prefer co-investment because pure returnobjectives are aligned with other private equity investors,while most development SWFs prefer direct operationsto deliver on their development objectives which are rarelyshared by co-investors.
08 Invesco Middle East Asset Management Study 20132 State pension funds in the GCCThe emergence and growth of the statepension fund industry driven by localdemographics and the Arab Spring.09Invesco Middle East Asset Management Study 2013Outside the GCC, the insurance and pensions industry isfundamental to institutional asset management markets.In most western markets, this segment includes life andgeneral insurance proprietary books, trustee-baseddeﬁned beneﬁt and deﬁned contribution pension schemesand, under some deﬁnitions, a wholesale market withinstitutionally priced funds on retail or corporate wealthmanagement platforms. In the GCC these institutionalsegments are small relative to the size of total andcontestable SWF assets.For the large expatriate population in the GCC, theirretirement savings are unlikely to ever emerge as localinstitutional assets because most expatriates save viaunit-linked international life insurance products domiciledoutside of the GCC. Furthermore, few local corporates offerformal pension products. There are end of service gratuitiesfor expatriates in some GCC markets but most companiestend to meet these liabilities from working capital and donot formally save into an insured or trustee-based pensionproduct. Some insurers have developed group savingsproducts but most are international products with theinstitutional buyers of asset management services basedoutside of the GCC.“For the large expatriatepopulation in theGCC, their retirementsavings are unlikelyto ever emerge as localinstitutional assetsbecause most expatriatessave via unit-linkedinternational lifeinsurance productsdomiciled outsideof the GCC.”
11Invesco Middle East Asset Management Study 2013Source: 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+AgePopulation (units: Saudi millions/Omani thousands)2.01.51.00.50200150100500Fig. 6 Population breakdown for Saudi Arabia and OmanAverage 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).119161920132012201184Based on respondent feedback we estimate that pensionfunds now make up more than 15% of all new sovereignassets placed in the region. However, we have observedtop-down pressures to prioritise local over internationalinvestment (similar to those we discussed in detail lastyear for SWFs) and our analysis of new asset placementssuggests that local GCC allocations have increased from62% to 71% since 2011. While the trend towards localinvestment may be structural for SWFs, most pensionfunds expect international allocations to rebound in thefuture. As demographic, remuneration and internationaltrends evolve over the next few years it feels inevitablethat the GCC state pension fund industry will emerge asa crucial second institutional segment for the internationalasset management community.Fig.5 Year-on-year forecast growth in new assetsfor state pension funds and SWFs (%)15%Percentage of allnew sovereignassets which arepension fundsState pension fundsSWFsSaudi malesSaudi femalesOmani malesOmani females10 Invesco Middle East Asset Management Study 20132 State pension funds in the GCC The situation is different for GCC locals, a large proportionof whom work for government entities who offer attractivestate-administered pension schemes (for example apension fund in the GCC matches employee contributionsof 9% but guarantees a ﬁnal salary beneﬁt). Figure 5shows the expected year-on-year growth in assets fromstate pension funds compared to SWFs since 2011. Theaccelerated growth of state pension funds is driven by twofactors. The ﬁrst factor is demographics: GCC populationsare young so more individuals are entering employmentthan exiting (ﬁgure 6). The second is public sector wageinﬂation in the region which has been a continual trendfollowing the Arab Spring. We highlighted this themelast year as a negative for SWFs, as higher governmentexpenses reduce the available surplus for SWFs (supportedagain this year by the reduction in forecast growth forSWFs to just 4% – see ﬁgure 5). However, the same trendis positive for state pension funds with a 19% forecastgrowth rate this year, because rising public sector salariesdrive increases in government pension contributions.Figure 6 shows the population breakdown for Saudi Arabiaand Oman, the two largest GCC populations. Assuminga rigid working population age range of 18–60, we estimatethat 2.3 million Saudis will enter the workforce over thenext ﬁve years compared to 0.7 million leaving employment– a net inﬂow of 1.7 million or 10% of the current workingpopulation. This estimate is conservative for forecastingpension assets because only a portion of assets attributableto those over 60 will be paid out immediately.For demographic reasons, the investment priorities ofthe GCC pension funds are different to comparable fundsin more developed markets. GCC funds are relativelynew and most members are a long way from retirement,meaning liabilities are still a way into the future. Thereduced importance of liability management wassupported by our interviews; only ﬁve of the nine fundscited liability management as higher priority than pureinvestment returns. In theory demographics should enableGCC pension funds to take a longer term view and holda higher percentage of risk assets than developed marketfunds. However, we observed a number of fund-speciﬁcfactors which inﬂuenced investment strategy to suchan extent that it was hard to gain a consistent view onrisk asset exposure. There is one group of sophisticatedpension funds who have acquired expertise frominternational institutions and built in-house asset allocationmodels. Another group outsources a large portion ofdecision making (asset and implemented consulting)to international consultants; and the ﬁnal group is stillin the initial phases of development, either deﬁningbenchmarks or awaiting a decision over the consolidationof assets from different government employee schemes.“The reduced importance of liabilitymanagement was supported by ourinterviews only ve of the nine fundscited liability management as higherpriority than pure investment returns.”Number of Saudis entering and leavingthe workforce over the next ﬁve years2.3m 0.7m
12 Invesco Middle East Asset Management Study 20133 UHNW investors, family ofﬁcesand family businessesA preference for light-touch single-family of ces with increasing autonomyfrom the family business.In our 2012 study we identiﬁed a shift from personalto corporate wealth amongst UHNW individuals inthe GCC and highlighted that this trend was strongestamongst single-family ofﬁces1(SFOs). This yearwe have examined the structure of family ofﬁcesin more detail and reviewed the direction of capitalﬂow 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. Figure7 examines the key services offered by SFOs and MFOsin the GCC. The graphic shows that 54% of SFOs citedinvestments (often M&A linked to the family business),46% cited procurement and 31% cited relationshipmanagement, outsourcing nearly all personal advisoryfunctions to third parties. In contrast, most MFOs focuson personal advisory services, with 83% citing fundselection and 67% citing asset allocation as a key service.54%of SFOs citedinvestments asa key service83%of MFOs citedfund selectionas a key service13Invesco Middle East Asset Management Study 2013Percentages calculated based on number of respondents. Sample size: 2013 (19), MFO (6), SFO (13).Asset allocationFund selectionProcurement servicesInvestments (M&A)Relationship managementSuccession planningCustodial servicesTax planning678346175431170000171731238Fig.7 Key services offered by single andmulti-family ofﬁces in the GCC, 2013 (%)More importantly, there is strong evidence to suggestthat SFOs are preferred to MFOs in the GCC. Analysisof respondents shows that SFOs dominate MFOs interms of ﬁrm numbers and UHNW assets under advice.Furthermore, we spoke to a couple of advisory ﬁrmswho initially set up as MFOs but subsequently evolvedinto specialist service providers to SFOs in areas such assuccession planning, governance and family architecturedue to difﬁculties in building UHNW relationships.Our ﬁndings suggest that the primary challenge forMFOs is the importance placed on control, trust andconﬁdentiality by UHNW families in the GCC. This hasforced MFOs to participate behind SFOs in the value chainand compete more directly with international private bankson investment services. However MFOs are losing out inboth parts of the chain: a light-touch SFO model run bya trusted employee is better placed than an MFO to offercontrol and conﬁdentiality while international privatebanks servicing a global UHNW customer base are betterplaced to offer scalable execution services. Furthermore,MFOs seek a holistic client relationship but even wherethey have had some success in the GCC, executives believethey only advise over a small share of total family assets.“The primary challengefor MFOs is theimportance placedon control, trust andcon dentiality byUHNW families inthe GCC. This has forcedMFOs to participatebehind SFOs in thevalue chain andcompete more directlywith internationalprivate banks oninvestment services.”Multi-family ofﬁcesSingle-family ofﬁces1Single-family ofﬁces(SFOs) are deﬁned asin-house units managingthe wealth of a singleUHNW family while multi-family ofﬁces (MFOs)are deﬁned as externaladvisory ﬁrms servicingmultiple UHNW families.
15Invesco Middle East Asset Management Study 2013In summary, personal and corporate assets of the UHNW in theregion remain conjoined. We have observed a reduction in demandsfrom the family business for personal assets in the last 12 monthsand some positive investment trends such as longer time horizonsand greater international exposure which are indicative of greaterautonomy. However, there have been few structural changes to thedecision-making processes which ultimately dictate the long-termrelationship between corporate and personal assets.Sample size: 2012 (30), 2013 (23).502012262013332012482013172012262013Flow to corporate Neutral Flow to personalFig. 8 Direction of capital ﬂow between corporateand 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& governanceFunding(for family business)Regulation& transparency0StockmarketreturnsOther65335519456740591519101920Fig. 9 Factors driving capital ﬂow between corporateand personal assets in the GCC, 2012–13 (%)20122013201233% net ﬂowto corporate20130% net neutralposition2In this theme we usethe term ‘corporate’ todescribe the corporateassets of the familybusiness in the GCC andthe term ‘personal’ todescribe the personalassets of an UHNWindividual. Family ofﬁceinvestment advice maybe restricted to personalwealth or stretch acrosspersonal and corporate(family business) assets.3MENA is deﬁned asMiddle East North Africaexcluding the GCC. Whilethis deﬁnition is nottechnically correct, itdoes reﬂect the deﬁnitionused by GCC participantsin the study.14 Invesco Middle East Asset Management Study 20133 UHNW investors, family ofﬁcesand family businessesThe biggest year-on-year change in the UHNW segmenthas been the reduction in capital ﬂow from personal tocorporate assets2. Last year, family ofﬁces in aggregateforecast a strong shift to corporate assets but this yearthe trend was neutral. Figure 8 highlights this signiﬁcantyear-on-year change from 33% (personal to corporate)to 0% on a net basis. Figure 9 suggests that the reductionin ﬂow from personal to corporate assets correlatesto reduced funding requirements by family businesses(with funding citations down from 59% to 40%). Thereduction in funding requirements is driven by improvedbusiness performance and cash ﬂow generation or greaterwillingness of banks to lend to family businesses in theGCC. Provided the regional economy continues to performand ﬁnance remains available, the results suggest thatpersonal assets managed by family ofﬁces can expectgreater autonomy from the family businesses in the future.Importantly, greater autonomy for UHNW personal assetsmanaged by family ofﬁces is also supported by two datapoints on investment preferences and allocations. First,average time horizons have increased for family ofﬁcesfrom less than three years in 2011 to nearly ﬁve years in2013. This increase is consistent with greater autonomybecause longer time horizons imply that there is reducedprobability that corporates will require personal assets forfunding. Second, international exposure (beyond MENA3)has increased consistently from 34% to 49% over threeyears. The increase in international exposure supportsthe autonomy theme because it is associated withdiversiﬁcation away from family business assets in GCCor MENA. However, few respondents cited any structuralchanges which would provide formal autonomy for thefamily ofﬁce.“Provided the regional economycontinues to perform and nanceremains available, the results suggestthat personal assets managed byfamily of ces can expect greaterautonomy from the family businessesin the future.”
16 Invesco Middle East Asset Management Study 20134 Private capital ﬂow between theGCC and international marketsThe UAE is the most successful GCCcountry at attracting capital fromMENA and South-South trade.17Invesco Middle East Asset Management Study 2013Sample size: UAE (23), Saudi Arabia (16), Qatar (7), Kuwait (5), Oman (11), Bahrain (13).Saudi Arabia+2Qatar–3Oman–9Bahrain–10Kuwait–4UAE+12Fig. 10 Net respondent view of the directionof private capital ﬂow for each GCC marketStrong inﬂowSlight inﬂowSlight outﬂowStrong outﬂowLast year we reported that the GCC was attracting assetsfrom MENA but was in net outﬂow relative to internationalmarkets. This year we sought a more granular view ofprivate capital ﬂow by focusing respondents on their homeGCC market and its relationship with GCC neighbours andinternational markets. The results in ﬁgure 10 highlightthe importance of assessing each GCC market separately.For the UAE the net respondent view of capital ﬂow ispositive (the net score is +12 because 17 respondentsbelieve private capital is entering the UAE while only5 respondents believe private capital is leaving the UAE).For Saudi Arabia the net respondent view is slightlypositive (+2) but in the remaining GCC markets the netrespondent view is negative (albeit small base sizes),indicating that capital is leaving their home market. Thenet respondent view across the study was also negative(–12) indicating that, overall, participants expect privatecapital to be leaving the region.“These trends makethe emergence of theUAE (notably Dubai)as a net importer ofcapital a big story.”-12Net regionalrespondent view
19Invesco Middle East Asset Management Study 201311%Other MENA4%Lebanon7%Egypt3%Africa2%Asia4%Kuwait3%Bahrain1%Oman1%QatarUAE15%India10%Russia7%China2%SE Asia6%Pakistan13%SyriaOther MENA includesIran 4%Libya 3%Jordan 2%Tunisia 1%Turkey 0.6%Algeria 0.6%Developed marketsEmerging marketsGCCMENASample size: respondents based in the UAE (20).18 Invesco Middle East Asset Management Study 20134 Private capital ﬂow between theGCC and international markets4%UK3%Switzerland1%US3%Europe1,0691,1671791542011201120122012Dubai residentialproperty price index2Change in UAE bankdeposits (billions)1Sources:1UAE total bank deposits, Emirates newsagency. 2REIDIN.com Residential property priceindices (sales).Fig. 12 Growth of UAE bankdeposits (AED) and property pricesHighest % of capitalis coming fromemerging marketsIndia15%China7%Russia10%The fact that private capital leaves the region is nota surprise for two structural reasons. First, commoditywealth within a small local population leads to anabundance of expatriate workers in the region who investinternationally. Second, small economies with developingprivate investor regulation encourage wealthy locals toinvest offshore for diversiﬁcation beneﬁts. These trendsmake the emergence of the UAE (notably Dubai) as a netimporter of capital a big story. The story is particularlyimpressive when you look at the regions where capital iscoming from. In the past, leveraged capital (e.g. propertiesbought with mortgages) entered Dubai from developedmarkets. But the picture painted by respondents in 2013focused on non-leveraged capital (e.g. properties boughtwith cash) from regional and emerging markets.Figure 11 shows a diversiﬁed heat map of capital cominginto the UAE, with 15% from India, 10% from Russia,7% from China, 35% from MENA and only 13% fromacross all developed markets. While these percentagesare estimates, the direction of capital ﬂow is supportedby national statistics. Figure 12 shows a 9% net increasein bank deposits during 2012 and a 17% annualisedgrowth rate in UAE property prices over the same period,both indicators of increasing capital ﬂow.Fig. 11 Global heat map based on theparticipant’s view of the geographicsources of private capital entering the UAE17%Annualisedgrowth rate inUAE propertyprices9%Net increase inUAE bank deposits
20 Invesco Middle East Asset Management Study 20134 Private capital ﬂow between theGCC and international marketsLocal politicalstabilityLocalinvestmentopportunitiesLocalregulationLocaleconomyInternationalregulationInternationalpoliticsInternationaleconomyDiversiﬁcationPercentages 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 intothe UAE – see ﬁgure 13. The ﬁrst driver is local politicalstability compared to the MENA region primarily as aconsequence of the Arab Spring. This is not a new trend,but continuing regional instability (not just in Syria butalso in Egypt and other parts of North Africa) is inﬂuencingthe nature of the capital invested in the UAE. Interviewfeedback indicated that money in UAE bank accountsis being invested in more illiquid property assets; and someArab expatriates, who planned a short stay in Dubai, arenow looking to stay for the medium term.The second driver is local investment opportunities,attracting assets and people from India, Russia, Chinaand other emerging markets popularly titled South-Southtrade4. The 43% inﬂow from emerging markets is moreindicative of UAE policy than the 35% from MENA linkedto the Arab Spring. Dubai was in the right place at theright time for the Arab Spring, but the emerging marketscapital ﬂow has been supported by proactive attemptsfrom the UAE government based in Abu Dhabi to buildrelationships and encourage investment. This re-balancingtowards emerging markets has been important to theDubai recovery and UAE growth while developed marketshave continued to struggle.Despite positive momentum on capital ﬂows and liquidity,these trends can change quickly. At the time of writingthe government had considered initiatives to calm theproperty market and a number of Dubai’s economicchallenges remain in the spotlight. Whether or not Dubaicontinues its recovery into this year and beyond is hardto predict but what is clear is that the UAE is winning therace in the region to attract international capital.Fig. 13 Key drivers of capital ﬂow into the UAE21Invesco Middle East Asset Management Study 201343%Inﬂow fromemerging markets35%Inﬂow from MENA13%Inﬂow fromdeveloped markets“Dubai was in the right place at theright time for the Arab Spring, butthe emerging market capital ow hasbeen supported by proactive attemptsfrom the UAE government based inAbu Dhabi to build relationships andencourage investment.”UAE capital ﬂow 4South-South trade isloosely deﬁned as theexchange of resourcesbetween governments,organisations andindividuals in emergingmarkets.
23Invesco Middle East Asset Management Study 2013Percentages based on number of citations. Sample size: Arab expat (11), NRI (21), Western expat (16).411153527 734342112514Arab expatNRIWestern expatPercentages based on number of citations. Sample size: Arab expat (9), NRI (27), Western expat (22).331619331630203523252175 57Job change RetirementLoss of jobFamily Visa expiryCost of living02 2Fig. 15b Reasons for leaving the GCC (%)Fig. 15a Estimated lengthof stay in the GCC (%)% of expatsstaying morethan ﬁve yearsin the GCCArab expatriate distributors explainedthat time horizon is correlated tolength of stay. Analysis of expatriatelength of stay for different expatriategroups in the GCC is shown in ﬁgure15a. Despite a recent inﬂux of Arabexpatriates following the ArabSpring, who you would expect to betransient by nature, only 11% planto leave the GCC within two years.Most distributors highlighted thatperceptions have recently changedand a larger percentage of Arabexpatriates now expect to remain inthe GCC (55% plan to stay for morethan ﬁve years).NRIs stay in the region longer thanany other expatriate group and fewrespondents cited a signiﬁcant year-on-year change in NRI length of stay.The level of volatility in length of stayfor different expatriate groups can beexplained by the reasons for leavingthe GCC in ﬁgure 15b. For NRIs themain reason for leaving the GCC isredundancy (loss of job) while forArab expatriates the most commonlycited reason is a change in family(or personal) circumstances. The jobmarket has been relatively stableover the last 12 months and, as aresult, there has been limited changein length of stay for NRIs. In contrast,the ongoing unrest in MENA continuesto impact personal circumstancesfor Arab expatriates and as a result,respondents cited changes in lengthof stay.5 to 20 years> 20 years< 2 years2 to 5 yearsArab expatNRIWestern expat55%Arab expats78%NRIs59%Western expats22 Invesco Middle East Asset Management Study 2013We have monitored investor time horizons since our ﬁrststudy of the region. In 2010 we highlighted the inherentshort-term nature of GCC local investors but we haverarely observed meaningful year-on-year changes withina speciﬁc customer segment. However, this year theaverage expatriate investor time horizon rebounded fromapproximately ﬁve years in 2012 to over six years in2013 (see ﬁgure 14) with increases in all major customersegments. Time horizons amongst western expatriatesrose by just over one year but the most signiﬁcant changeswere observed amongst Arab expatriates and Non-residentIndians (NRIs). We will explore the drivers of change forArab expatriates and NRIs in more detail.184.108.40.20601220132011Sample size: 2011 (34), 2012 (37), 2013 (41).Expats include Arab expats, NRIs and Western expats.Fig. 14 Change in time horizonsfor expats in the GCC (years)5 Expatriate investor segmentsand preferencesAn increase in expatriate timehorizons driven by length of stayor home-market bias.
24 Invesco Middle East Asset Management Study 2013Average allocations across segments, results not weighted by FUA. Sample size: 2012 (15), 2013 (17).201174220221435292012 20135 Expatriate investor segmentsand preferencesIn contrast to Arab expatriates, the increase in time horizon for NRIs is notdriven by changes to their length of stay in the GCC. In fact the primary driverof increasing time horizons is changes in the attractiveness of investmentopportunities in India versus the GCC. We explored this dynamic last year aspart of our analysis on home-market bias5and observed that the combinationof exchange rates, deposit rates and regulation encouraged NRI investors toput 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 NRItime 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 fallenagainst the dollar/dirham, and NRIs have invested more in dollar-denominatedproducts in the GCC than in rupee-based deposits in India. Supporting evidencefor this change is shown in ﬁgure 17, where NRI allocations to cash have fallenfrom 20% to 9% while allocations to life insurance products have increasedfrom 42% to 52%. Life insurance savings products are contractual productswhich are more illiquid than cash, so a shift to life products is consistent withthe 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)220.127.116.1113724201120122013201120122013Fig. 17 Change in NRI productallocations (%)Fig. 16 Change in NRI time horizon and home-market bias“Increasing time horizonsare important for theasset managementcommunity becauseclients who invest forlonger periods typicallytake more risk andincrease their exposureto higher risk assets.”Direct investmentsMutual fundsStructured productsLife & pension productsCash25Invesco Middle East Asset Management Study 20135Home-market biasis deﬁned as ‘excess’investor allocations tohome-markets i.e. afterthe removal of non-home-market investorallocations to a particularhome-market.Increasing time horizons are important for the assetmanagement community because clients who invest forlonger periods typically take more risk and increase theirexposure to higher risk assets. Figure 18 supports thishypothesis, showing that risk appetite (as measured bytarget return) actually increased year-on-year when weinterviewed participants in 2013 (+7% on a net basis).However, the increase in perceptions of risk appetite hasnot driven a measurable increase in new allocations torisk assets such as equities, alternatives or emergingmarkets. We will monitor whether risk appetite continuesto increase next year (in line with the +10% forecast)and crucially whether this does actually drive greaterexposure 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 (%)107-14-162013(actual)2013(forecast)2012(actual)12152435 198 320 220 2Fig. 18 Change in risk appetite (measuredas target return) for expats in the GCCSlight decreaseSlight increaseSigniﬁcant increase7%Actual 2013-14%Forecast 2013
Fig. 21 Sample overview by retail end-investor segmentFig. 20 Sample overview by investor location within the GCCInvesco Middle East Asset Management Study 2013 27Fig. 19 Sample overview by institutionalend-investor and retail distributor segmentsSample size: 125.33UAE24SaudiArabia21Oman19BahrainQatar14 14KuwaitSample size: 85.NRIWesternexpatSaudiOmaniBahrainiArabexpatQatariKuwaiti1716129 985 54Emirati*Family ofﬁces exhibit retail and institutional characteristics.SectorInstitutionalInstitutionalInstitutionalInstitutionalInstitutional / retail*RetailRetailRetailSample11991119212124125SegmentSWFSovereign agencyInstitutional insurer or bankCorporateFamily ofﬁcePrivate bankRetail bankIFATotal26 Invesco Middle East Asset Management Study 2013AppendixSample and methodologyThe ﬁeldwork for this study wasconducted by NMG’s StrategyConsulting practice. Invesco choseto engage a specialist independentﬁrm to ensure high-quality objectiveresults. Key components of themethodology include:—A focus on the key decision makersin investment ﬁrms by conductinginterviews with experienced,specialist strategy consultantsand offering market insights ratherthan ﬁnancial incentives—In-depth (typically 1 hour) face-to-face interviews using a structuredquestionnaire to ensure quantitativeas well as qualitative analyticsare collected—Analysis capturing investmentpreferences as well as actualinvestment allocations witha bias toward actual allocationsover stated preferences—Results interpreted by NMG’s strategyteam with relevant consultingexperience in the Middle East regionas well as globally in the assetmanagement sectorIn this report we focus on end-investoranalysis which forms the basis ofour discussions with all participantsin the study. For the institutionalsector, this meant primarily end-investor interviews with SWFs, statepension funds, private insurers andbanks, corporates and family ofﬁces.Supplementary interviews wereconducted with asset consultants andlocal asset management ﬁrms andallocated to the relevant end-investorinstitutional segment. For the retailsector, this meant primarily distributorinterviews with family ofﬁces, privatebanks, retail banks and IFAs, focusingon the end-investor allocationsand preferences. Supplementaryinterviews were conducted withretail life companies and local assetmanagers and allocated to therelevant distributor and end-investorretail segment. Family ofﬁces wereincluded in both retail and institutionalsegments because they exhibit retailand institutional characteristics.Throughout the report, many of thethemes and insights are focused atthe segment level where objectivesare close enough to make meaningfulcomparatives. The institutional(end-investor) and retail (distributor)segments are displayed in ﬁgure19 and deﬁned below:—Sovereign Wealth Fund (SWF)(11): state-backed investmentorganisations with no deﬁnedliabilities—Sovereign pension fund (9):state-backed pension fundswith deﬁned liabilities—Institutional insurer/bank (9):treasury departments of themajor private sector local insurersand banks, responsible forthe investment of institutional assets—Corporate (11): investment divisionsof local corporates, which are typicallydiversiﬁed family business groupsoperating across multiple sectors—Family ofﬁces (19): personaladvisers to one or more local ultra-high net worth (UHNW) investors,typically with more than $25minvestable assets—Private banks (21): advisory armsof private banks servicing high networth (HNW) investors, typically withmore than $1m investable assets—Retail bank (21): advisory divisionsof retail banks servicing afﬂuentinvestors, typically with up to$1m investable assets—IFA (24): independent ﬁnancialadvisors servicing afﬂuentinvestors, typically with up to$5m investable assets.There are two other relevantsegmentations. Across the GCCwe tried to ensure each countrywas appropriately represented inthe sample (see ﬁgure 20). Andwithin the retail market, we soughta sample of each expatriate groupas well as the local investors in eachGCC market (see ﬁgure 21).
28 Invesco Middle East Asset Management Study 2013Issued in Austria by Invesco AssetManagement Österreich GmbH,Rotenturmstrasse 16–18, A-1010 Wien.Issued in Dubai by Invesco Asset ManagementLimited, PO Box 506599, Building 5,Level 6, The Gate Precinct, Dubai, UnitedArab Emirates. Regulated by the Dubai FinancialServices Authority.Issued in France by Invesco Asset Management,S.A. 18 rue de Londres, F–75009, Paris.Authorised and regulated by the Autorité desMarchés Financiers in France.Issued in the Isle of Man by Invesco Global AssetManagement Limited, George’s Quay House,43 Townsend Street, Dublin 2, Ireland. Regulatedin Ireland by the Central Bank of Ireland.Issued in Germany by Invesco AssetManagement Deutschland GmbH,An der Welle 5, 1st Floor D-60322 Frankfurtam Main. Authorised and regulated by theBundesanstalt für Finanzdienstleistungsaufsicht.Issued in Jersey and Guernsey byInvesco International Limited, 2nd Floor,Orviss House, 17a Queen Street, St Helier,Jersey JE2 4WD. Regulated by the JerseyFinancial Services Commission.Issued in the UK by Invesco Asset Management,30 Finsbury Square, London EC2A 1AG.Authorised and regulated by the FinancialConduct Authority.Issued in Switzerland by Invesco AssetManagement (Schweiz) AG, Stockerstrasse14, CH-8002 ZürichIssued in other Continental Europeancountries to the extent permitted by InvescoAsset Management, S.A. 18 rue de LondresF–75009 Paris. Authorised and regulated bythe Autorité des Marchés Financiers in France.This document is not an invitation to subscribeto an investment nor is it to be construed asInvestment advice. The information containedin this document may not have been preparedor tailored for any audience. It does not take intoaccount individual objectives, taxation positionor ﬁnancial needs. Nor does this constitutea recommendation of the suitability of anyinvestment strategy for a particular investor.While great care has been taken to ensure thatthe information contained herein is accurate,no responsibility can be accepted for any errors,mistakes or omissions or for any action takenin reliance thereon. You may only reproduce,circulate and use this document (or any partof it) with the consent of Invesco.52734/MP/030513Invesco Asset Management LimitedInvesco Asset Management Limited is part of a leadingindependent global investment management business,offering ﬁnancial institutions and investment professionalsaccess to global investment expertise. Invesco hasa strong track record across asset classes and strongproduct structuring capability to provide professionalinvestors with high-value solutions. In 2005, Invescodemonstrated its commitment to its GCC clients bysetting up a regional ofﬁce in the DIFC, UAE.NMGNMG is a specialist multi-national consultancy focusedon the insurance and investments industries, operatingacross strategy, actuarial and research consulting. Wehelp our clients answer complex problems that requirean external perspective or speciﬁc in-market expertise.Within the Middle East region NMG offers the followingpropositions:—Strategy Consulting: supporting ﬁnancial institutionswith ‘fork in the road’ decisions around where and howto compete. Recent GCC engagements have includedmarket entry, portfolio optimisation and mergers,acquisitions and alliances.—Strategic Insights Programmes: helping participantsto understand distributor requirements and improvecompetitive positioning. In the GCC we run Insightsprogrammes in the wealth, asset management,reinsurance and life insurance sectors.Tom Dunbartom.email@example.com+44 7827 158 031
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