2011 Invesco Middle East Asset Management Study

Transcription

2011
Invesco Middle East
Asset Management Study
This document is for Professional Clients only and is not for consumer use
Dear reader
This report captures key themes that have been identified following
our second Invesco Middle East Asset Management Study of investors
based in the Gulf Cooperation Council (GCC). Over the past 6 months
we have worked with independent strategy consultants NMG to
conduct an in-depth end-client study based on over 100 face-to-face
interviews conducted in the Middle East since the start of 2011.
Our objective has been to continue to understand the preferences of
institutional and retail investors, and this report focuses on the trends
driving end-investor behaviour across multiple market segments.
We have for the first time explored in detail a framework for Sovereign
Wealth Funds (SWF), aiming to understand the investment exposure
of sophisticated asset allocators. Additionally we have begun to
develop insight into the interlinked investment attitudes of GCC
corporate investors and Ultra High Net Worth (UHNW) families.
Further research into the retail investors across the region indicates
multiple areas of differentiation.
We have looked to build on our first study of last year, and provide
further insights into the developing asset management industry.
Our discussions have taken place during the start of a period of dramatic
events and change across the Middle East and we are grateful to
practitioners who have shared their thinking as events have unfolded.
Both regional and global events make this a rapidly evolving picture
and we hope our study provides a basis for long-term thinking, to
enable the investment industry to focus on the financial security of
clients, their families and communities across the Middle East.
Please contact me if you would like to discuss any points in more detail.
Nick Tolchard
Head of Invesco Middle East
Invesco Asset Management Limited
Summary of key themes
Theme 01
A new model for SWFs to dispel popular misconceptions
Each SWF appears to be different but allocating SWF profiles
and overlaying environmental factors helps to understand
their investment preferences
Theme 02
What makes GCC investors unique?
Beyond the sovereigns, GCC investor demand for control
and transparency manifests itself in short-time horizons and
a preference for tangible assets and direct investments
Theme 03
GCC corporates driven by non-conventional asset models
GCC corporates and UHNW investors are sizeable, inter-linked
segments whose investment philosophy is derived from the
investment outlook for the family business
Theme 04
Home-market bias in expatriate investment
Home-market origin shapes expatriate investment behaviours.
The degree of home-market bias in geographic allocations is
driven primarily by anti-selection factors
Theme 05
Influence of wealth and internationalisation on GCC
retail investors
Local retail investors from each GCC investor country sit on
different parts of the investment spectrum depending on their
wealth and level of internationalisation
Key Definitions
–‘Sovereign Wealth Fund’ (SWF) state-backed investment organisations with no
defined liabilities
–‘Sovereign Agency’ state-backed pension funds with defined liabilities and local/
regional development or investment agencies
–‘Institutional Insurer/Bank’ treasury departments of the major private sector
local insurers and banks, responsible for the investment of institutional assets
–‘Corporate’ investment divisions of local corporates, which are typically diversified family business groups operating across multiple sectors
01
–‘Family Offices’ personal advisers to one
or more local UHNW investors, typically each with more than US$25m investable assets
–‘Private Banks’ advisory arms of private
banks servicing high net worth (HNW) investors, typically with more than US$1m investable assets
–‘Retail Bank’ advisory divisions of retail banks servicing affluent investors, typically with
up to US$1m investable assets
–‘IFA’ independent financial advisers servicing affluent investors, typically with up to US$5m investable assets
Theme 01
A new model for SWFs to dispel popular misconceptions
Each SWF appears to be different but allocating SWF profiles
and overlaying environmental factors helps to understand
their investment preferences
“We expect the framework
to be applicable globally in
understanding the growing
SWF markets across Europe,
Africa and Asia as well as
in developing evolutionary
models which can map the
development of SWFs
and change in investment
preferences over time.”
Sovereign investors (‘sovereigns’) are government owned investment organisations. In the GCC
region, large commodity-driven government surpluses mean that sovereign organisations are
hugely influential both as part of the financial services industry (accounting for the vast majority
of total invested assets in the region according to our study) and as facilitators of economic growth,
development and diversification. At a high level, sovereigns are typically classified as either
‘sovereign wealth funds’ (SWFs) – state-back investment organisations with no defined liabilities;
or ‘sovereign agencies’ – local or regional development agencies or public pension funds with
defined long-term liabilities. However, it is increasingly evident that such categorisation is too
simplistic to capture differentials between organisations, while treatment on a case-by-case basis
abstains from drawing out important themes within a clearly related group of investors.
Theme 01
Figure 1a: Volatility of responses on
investment approach in GCC institutional
market segments (standard deviation)
Figure 1b: Volatility of responses on core investment preferences
in GCC institutional market segments (standard deviation)
Sovereigns
Other Institutional
Sovereigns
Other Institutional
1.4
1.2
1.2
1.0
1.0
0.8
0.8
0.6
0.6
0.4
0.4
0.2
0.2
Time
horizon
Risk
appetite
Note that ‘Other Institutional ‘ includes
Institutional Insurer/Bank and Corporate
segments and ‘Sovereign’ includes SWFs
and Sovereign Agencies; total sample = 38
Passive (1)
Active (5)
Preserve (1)
Growth (5)
Income (1)
Growth (5)
Funds (1)
Core (1)
Developed (1)
Securities (5) Alternatives (5) Emerging (5)
Standard deviations calculated as an average of underlying segments
The first observation from our sovereign interviews and analysis is that there are vast differences
between organisations – both between SWFs and sovereign agencies and between individual
members of each sub-segment. Figure 1 shows the variation of responses (measured as a standard
deviation from the mean) for time horizons, risk appetites and a range of investment preferences.
The figure demonstrates the volatility of investment attitudes within the sovereign segment,
particularly when selecting between preservation and growth strategies or investing in alternative
investments. For sovereign agencies it became clear that competing investment objectives drove
differences in investment approach and asset and geographical allocations. Figure 2 demonstrates
how the relative priority of state, liability management and pure return objectives vary across
sovereign agencies.
“For sovereign agencies
it became clear that
competing investment
objectives drove
differences in investment
approach and asset and
geographical allocations.”
Figure 2: Key investment objectives in order of priority for Sovereign Agencies
State
Liability
Return
Tertiary objective
1
1
3
Secondary objective
5
Primary objective
5
2
Note that only Sovereign Agencies are included (excludes SWFs) total sample = 12
03
4
3
4
Theme 01
For SWFs, primary investment objectives were exclusively driven by the state. Yet it became clear
that there were many different underlying state objectives which also contributed to the high
volatility of investment preferences observed in Figure 1. Importantly we have been able to group
SWF objectives. Figure 3 outlines our suggested framework for categorising SWFs, which acts
as a baseline in understanding their investment attitudes and allocations. We define the four SWF
profiles as follows:
• ‘Development Agencies’: SWFs focused on local development projects and investments
• ‘Policy Supporters’: SWFs that use international investments to drive foreign or local
policy outcomes
• ‘Diversification Vehicles’: SWFs that invest internationally to diversify and preserve
wealth for future generations, typically referencing a global benchmark for asset and
geographic allocations
• ‘Asset Managers’: SWFs that are purely focused on risk-adjusted investment returns,
typically with broad scope to invest across assets and regions
In developing this approach, we would emphasise the importance of combining SWF interviews with external perspectives from a range of market participants, especially local institutional investors involved in consortium investments with SWFs.
This framework helps to explain SWF investment behaviours without resorting to treating each
SWF as an individual entity. It also helps to decipher organisational complexities by providing
a mechanism to classify different arms of a SWF in one country alongside multiple SWF organisations
in another. And while theoretically it is possible for SWFs to sit ‘in-between’ profiles, the practical
allocation of SWFs to profiles revealed that the majority fit nicely into a single category.
The table in Figure 4 details the key investment behaviours and supporting rationale for each
investor profile. The differences between SWFs are clear. While SWFs as a whole are long-term
investors, Policy Supporters and Asset Managers will consider much shorter term investments.
And while many in the industry see SWFs as low risk and conservative investors, only the
Diversification Vehicles (who are most vocal on their investment strategy) fall into this category.
Development Agencies and Policy Supporters are not cautious or low-risk but do have low target
returns because they are willing to consider even unprofitable investments. Asset Managers are
in fact aggressive investors who seek high returns and outperformance.
“The differences between SWFs
are clear. While SWFs as a whole
are long-term investors, Policy
Supporters and Asset Managers
will consider much shorter
term investments.”
04
Figure 3: Invesco framework for classifying SWF investor profiles
Sovereign
Wealth Funds
Primary objective
Primary objective
Development
Investment
Secondary objective
Secondary objective
Secondary objective
Secondary objective
Profile
Profile
Profile
Profile
Local
Development
Agencies
lnternational
Policy
Supporters
Diversification
Diversification
Vehicles
Pure risk/return
Asset
Managers
Figure 4: Key investment behaviours for each SWF profile
Development
Agencies
Policy
Supporters
Diversification
Vehicles
Asset
Managers
Time Horizon
Preference for long-term beyond
that of the private sector;
opportunistic fund for small
deals (typically >20% of total
assets)
Time Horizon
Medium to long-term depending
on investment; sizeable
opportunistic fund for large
deals (typically >30% of total
assets)
Time Horizon
Long-term investments; fully
invested up to 95% of fund
Time Horizon
Flexible – overall medium term
but mix of horizons; smaller
opportunistic fund (typically
<20% of total assets)
Risk Profile
Medium to high but willing
to accept low (negative)
target returns in order to
meet policy objectives
Risk Profile
High but willing to accept low
(negative) target returns in order
to meet policy objectives
Risk Profile
Balanced approach with target
returns of 6-8% over a rolling
5-10 year period
Risk Profile
High risk appetite with target
returns >8% (often double digit)
Product Structure
Predominantly direct
investments, frequently
a consortium of investors
Product Structure
Predominantly direct
investments
Product Structure
Preference for diversified
structures such as funds or
Exchange Traded Funds
Product Structure
Mainly direct investments but
use some externally managed
funds (notably hedge funds)
Asset Allocation
High exposure to Private Equity
(PE), strategic equity and
infrastructure investments
Asset Allocation
Trophy assets for profile building
and/or government-related
investment (e.g. Treasuries bills
or education)
Asset Allocation
Benchmark parameters in-line
with most sophisticated
non-liability investors, relatively
high exposure to alternatives
(~20%)
Asset Allocation
Flexible – no benchmark;
typically high exposure to local
PE and strategic equity and
global alternatives
Geographic Scope
Predominantly local (or regional
in certain cases)
Geographic Scope
Predominantly international
Geographic Scope
Benchmark parameters broadly
inline with MSCI world index
Geographic Scope
Flexible – preference for thematic
investment and typically
high local exposure leveraging
market insights
05
Theme 01
Figure 5 provides an illustrative graphic representation of investor preferences. No preference
has universal agreement across profiles. For example, most SWFs prefer direct investments but
Diversification Vehicles do not, and most SWFs are biased towards alternatives but Asset Managers
are impartial. The graphics also indicate the importance of the secondary objective in the
classification. There are similarities between Sovereign Development Agencies and Policy
Supporters, but the differences in time horizon as well as geographic scope justify separation
into two categories. The flexibility of Asset Managers over Diversification Vehicles also deserves
recognition. Diversification Vehicles are usually tied to long-term investments against set asset
and geographical benchmarks, while asset managers have much greater investment scope –
they can be more thematic in their approach and have the ability to be aggressively under or
overweight in a given asset class or region.
Figure 5: Hypothesised investment preferences by SWF profile
(illustrative positioning not based on participant feedback)
Development Agencies
Policy Supporters
Diversification Vehicles
Asset Managers
Time Horizon
Short
Long
Risk Profile
Low
High
Product Structure
Direct
Funds
Asset Allocation
Traditional
Alternatives
Geographic Scope
Local
International
It is important to overlay both internal and external environmental factors to understand
investment allocations in more detail. Internal factors are typically structural, resulting in
irreversible adjustments to preferences. For example, the inclusion of a SWF within a central bank
is a good example of an internal parameter which drives a more conservative investment approach
than observed for wholly independent Diversification Vehicles. In contrast, environmental factors
drive short-term shifts in allocations and objectives. The recent uprisings in Egypt and other
Arab countries is a topical example of an external environmental factor which has driven greater
local/regional allocations (both via SWFs and direct from governments) and in certain cases could
justify a short-term reclassification from Diversification Vehicles to Development Agencies.
Figure 6 summarises a range of internal and external factors which should overlay SWF profiles.
“Diversification Vehicles are
usually tied to long-term
investments against set asset
and geographical benchmarks,
while asset managers have much greater investment scope.”
06
Theme 01
Figure 6: Internal and external factors influencing SWF investor profile allocations
1 SWF
Profile
2 Internal
Structure
3 External
Environment
4 SWF
Investor
• Size of Fund
• Parent/Governance structure
• Private sector influence
• Local investment preferences
• Local/regional instability
• Global oil price/OPEC strategy
• Global shocks/events
• Local supply side (asset availability)
“It is important to overlay both
internal and external environmental
factors to understand investment
allocations in more detail.”
The full range of applications for our SWF framework is beyond the scope of this report. However,
we hope it will quickly dispel some popular misconceptions regarding SWFs. First, SWFs are not all
Policy Supporters and second, Diversification Vehicles are not always more sophisticated than
other SWFs (there can be more and less sophisticated investors within each SWF profile). We expect
the framework to be applicable globally in understanding the growing SWF markets across Europe,
Africa and Asia as well as in developing evolutionary models which can map the development of
SWFs and change in investment preferences over time.
07
Theme 02
What makes GCC investors unique?
Beyond the sovereigns, GCC investor demand for control
and transparency manifests itself in short-time horizons and
a preference for tangible assets and direct investments
“The findings support our
conclusions last year that
GCC investors have short
time horizons.”
Theme 02
Given the breadth of this study, which includes multiple retail and institutional segments, it is hard
to draw parallels across all investors. However, we can define a local GCC investor category which
displays common traits. This group includes institutional insurers and banks, local corporates and
all local GCC retail interviews across distributor segments (i.e. all respondents except sovereigns
and retail expatriates).
The findings support our conclusions last year that GCC investors have short time horizons.
Figure 7 demonstrates that 83% of GCC investors and their distributors believe GCC investors have
short time horizons and shows the differential between the average GCC investor time horizon
and those of expatriates and sovereigns. The rationale for short-termism polarises respondents.
“83% of GCC investors and
their distributors believe
GCC investors have short
time horizons.”
Figure 7a: Evidence to support short time
horizons amongst GCC investors
Figure 7b: Evidence to support short time
horizons amongst GCC investors
Do you think GCC investors have short
time horizons?
Average investor time horizons (years)
Years
1
Yes, lack of investor experience
22%
2
Yes, cultural preference
23%
3
Yes, regional instability
11%
4
Yes, client mobility
16%
5
Yes, other
11%
6
No, GCC investors don’t have
short time horizons
17%
6.7
5.1
2.2
1
6
2
5
4
3
Sovereigns
Expatriate
GCC Investor
Note that all respondents are included
Total sample = 108; Sample split is
Sovereigns = 18
Expatriates = 34
GCC investors = 56
Note that all respondents are included except Sovereigns
total sample = 90
Many believe the trait is fundamentally cultural and cite Arabic trading roots. Yet a significant
proportion feels that a lack of investor experience drives short time horizons. Interestingly, detailed
discussion tended to focus more on market immaturity, particularly regarding local stockmarkets,
rather than investor education. This makes intuitive sense as local GCC stockmarkets are small,
illiquid and dominated by retail investors driving high volatility and, as a result, a short-term
investment approach.
In addition to culture and market structure, most discussions held after the Arab unrest spread to
Bahrain cited “regional instability” as the primary driver of short time horizons. Given such diversity
of responses, we feel justified in concluding that there are multiple factors driving short-term
GCC investor time horizons, some of which are structural and others which are more temporary
in nature.
09
Theme 02
“GCC investors also exhibit
unique and distinctive
asset preferences, of
which the most important
is their high exposure to
tangible assets.”
It is interesting to follow year-on-year trends in GCC investor time horizons to understand the
drivers in more detail. We note that 2011 appears to be an inflexion point for time horizons and
risk appetite; Figure 8 shows that on average last year investors continued to reduce time horizons
but looking forward investors expect their horizons to increase. Whether this trend is a structural
inflexion point (as experience increases and stockmarkets mature) or a temporary year-on-year
shift as the impact of the Global Financial Crisis (GFC) fades is unclear at this stage. We will continue
to monitor changes in time horizon and their drivers in future studies.
Figure 8: Change in time horizons and risk appetite (total market)
Significant increase
Significant decrease
Slight increase
Slight decrease
No change
Change in risk appetite
Change in time horizon
%
100
%
100
90
90
80
80
70
70
60
60
50
50
40
40
30
30
20
20
10
10
2012+
(future)
2010/2011
(previous year)
2012+
(future)
2010/2011
(previous year)
Note that all respondents are included; total sample = 108
GCC investors also exhibit unique and distinctive asset preferences, of which the most important is
their high exposure to tangible assets. 87% of GCC investors and their advisers agreed that GCC
investors had particularly high exposure to tangible assets and over a third attributed this to a
cultural preference (Figure 9). “Property gets sick but it never dies” was a commonly cited Arabic
phrase used to support this hypothesis. Analysis of property allocations by segment confirmed that
GCC investors are relatively overweight compared to other segments. However in this instance we
would give more weighting to investor feedback than allocations and caution the basis for
comparing asset allocations given segment differences, varying levels of transparency and
challenges in valuing property assets.
10
Theme 02
It is also interesting to note variation in drivers for tangible investment by region. Where the
property market has fallen (such as Dubai or Oman) cultural drivers were highlighted, while in
bullish property markets (such as Qatar and Saudi Arabia) future and historical returns were
mentioned as important factors behind tangible exposure. Furthermore, while property was the
primary tangible asset, many referred to a broader range of tangible assets including luxury goods
(e.g. art) and precious metals (predominantly gold).
Figure 9a: Evidence to support tangible
asset allocations amongst GCC investors
Figure 9b: Evidence to support tangible
asset allocations amongst GCC investors
Do you think GCC investors have particularly
high exposure to tangible assets?
Average investor exposure to property
1
Yes, lack of investor experience
16%
2
Yes, cultural preference
36%
3
Yes, historical performance
13%
4
Yes, future prospects as an asset class 13%
5
Yes, risk appetite
2%
6
Yes, other
7%
7
No, GCC investors don’t have
higher tangible allocations
14.8%
9.5%
7.5%
13%
1
7
6
5
2
4
3
Sovereigns
Expatriate
Sovereigns = 18
Expatriates = 34
GCC Investors = 56
Note that all respondents are included except Sovereigns
total sample = 90
“87% of GCC investors and their
advisers agreed that GCC
investors had particularly high
exposure to tangible assets
and over a third attributed this
to a cultural preference.”
11
GCC Investor
Theme 02
GCC investors also have unique ‘access’ preferences. Put simply, GCC investors access their
investments directly rather than using more diversified ‘fund’ structures. This preference is in stark
contrast to the preference for fund structures in the retail expatriate segment (a segment which can
also be used a reasonable proxy for the wider international retail investor community). Figure 10
shows that GCC investors allocate 62% of their investable assets to direct investments while only
11% of expatriate assets use direct structures.
“GCC investors allocate 62%
of their investable assets to
direct investments while only
11% of expatriate assets use
direct structures.”
“Explaining this trend is more
challenging than identifying
the trend and inevitably a range
of factors are involved. Some
investors pointed to market
timing – most funds launched
in 2007 had a limited track
record prior to the GFC and
market crash.”
Explaining this trend is more challenging than identifying the trend and inevitably a range of factors
are involved. Some investors pointed to market timing – most funds launched in 2007 had a limited
track record prior to the GFC and market crash. Other investors felt it was based on a more
objective forward-looking basis, describing local investment in direct shares as offering “dividend
yields of 4-5% plus capital upside” and as a result as significantly more attractive (on a risk/return
basis) than local funds.
12
Theme 02
“In summary, there
is strong evidence
to support short time
horizons and GCC
investor preference
for tangible and
direct investments.”
In summary, there is strong evidence to support short time horizons and GCC investor preference
for tangible and direct investments. We would take this further and hypothesise that these
investment traits are not isolated but inter-linked and backed by broader cultural preferences for
transparency and control (words frequently cited by participants in the study). This is important
because it helps to forecast broader investment preferences to specific proposition attitudes
(such as pricing structures and servicing media) as well as to understand market evolution and
the dynamic between structural and temporary preferences.
Figure 10: GCC investor and expatriate
allocations to all direct investments
and direct securities
Direct Investments
Direct Securities
62%
33%
11%
2%
Expatriate
GCC investor
Sovereigns = 18
Expatriates = 34
GCC investors = 56
13
Theme 03
GCC corporates driven by non-conventional asset models
GCC corporates and UHNW investors are sizeable, inter-linked
segments whose investment philosophy is derived from the
investment outlook for the family business
“Like many emerging
(non-Western) markets,
the GCC private sector
is characterised by
large family-owned
conglomerates.”
Theme 03
“Corporate target
returns are on average
approximately 14%
and are calculated
with reference to
current and forecast
returns on their core
business’ assets.”
Like many emerging (non-Western) markets, the GCC private sector is characterised by large
family-owned conglomerates. Distinguishing corporate ‘investments’ from core business activities
in these diversified, multi-industry businesses is not easy. Our definitions have been informed by
participant views – portfolios of funds or securities are nearly always classified as investment, while
strategic equity, real estate and private equity investments are classified on a case-by-case basis.
This is often driven more by internal structure and reporting lines than by an objective view of
overlap with core business activities.
Figure 11: GCC corporate and family office share
by investable assets
Corporate (Family Group)
Family office (UHNW)
39%
24%
19%
11%
3%
1%
Market
share
Share
(ex-sovereigns)
Contestable share
(ex-sovereigns)
Note that contestable assets are life wrappers and direct mutual or
hedge funds; respondent sample split is Corporate = 12, Family office = 16
Separating corporate assets from personal wealth is also challenging, particularly against
a backdrop of the much cited belief that the family business itself acts as ‘self insurance’. We note
that family offices across the region view the separation of corporate and personal wealth as a key
part of their service (with Saudi offices described as regional leaders in this field). For the purposes
of this report, we have adopted a relative broad definition of family office assets which includes all
advisable personal assets even where certain assets are held in corporate accounts.
In total the corporate/UHNW market is material in size, accounting for 50% of non-sovereign
GCC investment assets in our study (i.e. approximately 50% of the retail and second-tier
institutional GCC market). Importantly, the corporate and family office (UHNW) segments remain
sizeable on a contestable asset basis, only reducing by 7% from 50% to 43% of the non-sovereign
fund placements; and we note that more than half of these contestable assets come from corporate
investments (see Figure 11). While a number of high profile corporates (notably in Kuwait) have
scaled back their investment operations, the segment is likely to remain important, particularly for
the local asset management industry.
15
Theme 03
Analysis of risk appetite and time horizons in Figure 12 reveals that corporates and UHNW family
office clients have aggressive investment approaches. Target returns are high and time horizons
are short, particularly when compared to other GCC investor segments. Corporate target returns
are on average approximately 14% and are calculated with reference to current and forecast
returns on their core business’ assets. Family office clients also have target returns linked to
business investment returns; advisers explain that individuals are willing to accept belowcorporate returns on their personal assets (2% lower across our study) in return for greater
security or diversification.
Figure 12: Relative time horizons and target returns for GCC investor segments
Relative Target Return
High
5%
Corporate
Aggressive
3%
Family office
1%
Balanced
Private Bank
Sovereign Agency
SWF
Retail Bank
-2%
-4%
IFA
Conservative
Institutional I&B
-6%
Low
Short
-4.0
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
Long
4.0
Relative Time Horizon (years)
Note that averages are calculated as the weighted mid-point between time horizon and target return categories
and x/y axis figures are relative to the mean time horizon and target return respectively
Respondent sample split is SWF = 6, Sovereign Agency = 11, Institutional Insurer/Bank = 8, Corporate = 12,
Family office = 16, Private Bank = 16, Retail Bank = 22, IFA = 16
Understanding the perceived future returns of the core business versus the external market returns
and local versus international returns is fundamental to understanding allocations between the core
business, corporate investment and family offices. As the relative attractiveness of external versus
internal investment returns increases, businesses are more willing to invest in non-core activities
(provided they are generating surplus cash and profits). The dynamics of asset transfers between
corporates and individuals is more complex. As wealth is passed on to the next generation (usually
second generation in most GCC markets), the breakup of estates typically results in a higher
proportion of wealth being allocated to personal accounts. And personal wealth is more likely to
be managed by family offices and subsequently placed offshore with private banks than corporate
assets which are often invested direct with local asset managers or securities firms.
“Target returns are high and time
horizons are short, particularly
when compared to other GCC
investor segments.”
16
Theme 03
“A reduction in preference
for active management
and growth versus
income can also be
attributed to the slightly
more conservative
approach of individual
investors and their
diversification needs.”
However, this long-term trend from corporate to individual was offset during the GFC by high
borrowing costs (and tougher lending criteria) for most family businesses. In fact the GFC shone
a bright light on the corporate and governance structures of GCC businesses and many banks
demanded much greater transparency or personal guarantees as part of their new lending criteria.
This forced owners to reinvest their personal wealth into the business in the short-term. But longer
term, as borrowing costs normalise but lending criteria remain less flexible, we do expect an
accelerated shift from corporate to individual. Recent unrest in the Middle East North Africa
(MENA) region (where a number of corporates have operations) has only added to the demand
for transparency and the need to separate corporate and personal assets.
Figure 13: Core Investment Preferences for Family Office and Corporate Segments
Corporate
Family office
5
4
3
2
1
Active (5)
Passive (1)
Growth (5)
Preserve (1)
Growth (5)
Income (1)
Securities (5) Alternatives (5) Emerging (5)
Funds (1)
Core (1)
Developed (1)
3 = neutral, 2 or 4 = slight preference, 1 or 5 = strong preference
Respondent sample split is Corporate = 12, Family office = 16
In line with the analysis of risk appetite, there are similarities between corporate and UHNW
investor preferences. Figure 13 shows broad correlation between the two segments but a clear
shift towards preservation for the UHNW clients of family offices. A reduction in preference
for active management and growth versus income can also be attributed to the slightly more
conservative approach of individual investors and their diversification needs.
“Importantly the Corporate and
Family Office (UHNW) segments
remain important on a contestable
asset basis.”
17
Differences in preference are demonstrated more starkly when looking at actual allocations by
segment in Figure 14. Corporate assets are almost exclusively concentrated in property, shares,
private equity and cash while over 15% of family office investment is allocated to a combination
of commodities, bonds and hedge funds. Family offices also exhibit greater asset diversification by
region with over 40% of assets allocated internationally and with these international assets strongly
correlated to the geographic weighting of the MSCI world index. We also expect this figure to be
understated as many participants did not have line-of-sight (or were reluctant to disclose) certain
offshore asset placements. In contrast, corporates allocate over 85% of investment assets locally
to the GCC. And where international investments are made, geographic focus appears to be
weighted by market proximity, with sizeable investment in the surrounding MENA region followed
by selected investments in Europe and India.
Theme 03
Figure 14: Asset allocation and geographic exposure for family office and corporate segments
Other
Property
Commodity
PE
Hedge
Cash
Local Bond
Global Bond
Local Equity
Global Equity
Other
Emerging Asia
India
China
Developed Asia
Emerging Europe
Western Europe
Latin America
North America
MENA
GCC
Average investor asset allocation
Average investor geographical exposure
Detail of average investor
geographical exposure
%
100
%
100
%
100
90
90
80
80
70
70
60
60
50
50
40
40
30
30
20
20
10
10
Family
office
Corporate
90
80
70
60
50
Family
office
Corporate
Family
office
Corporate
Note that figures are average allocations across all respondents and they are not weighted by respondent assets
Respondent sample split is Corporate = 12, Family office = 16; infrastructure investment is included within property
“Corporate assets are almost
exclusively concentrated in
property, shares, private equity
and cash while over 15% of
family office investment is
allocated to a combination
of commodities, bonds and
hedge funds.”
18
Theme 03
In conclusion the current market structure should encourage the investment community to treat
the corporate and family office (UHNW) segments as a single asset pool while understanding
the levers which drive inter-segment allocations. As inter-generational wealth transfers take
place, family offices expect the personal market to grow and investment attitudes of their clients
to increasingly diverge from the group business. But these changes will take lifetimes, and as
observed during the GFC, structural shifts can easily be overridden by more pressing short
term trends.
“As inter-generational wealth
transfers take place, family
offices expect the personal
market to grow and investment
attitudes of their clients to
increasingly diverge from the
group business.”
“(GCC) investment traits are not
isolated but inter-linked and
backed by broader cultural
preferences for transparency
and control.”
19
Theme 04
Home-market bias in expatriate investment
Home-market origin shapes expatriate investment behaviours.
The degree of home-market bias in geographic allocations is
driven primarily by anti-selection factors
“Expatriates are an
extremely important
part of the GCC retail
investment market.”
Theme 04
“It shows that NRIs have
the highest home-market
bias at 31% followed by
Arab expats at 27% and
Western expats at 22%;
all of which are below the
55% home-market bias in
the local GCC segment.”
It is commonly stated that expatriates are an extremely important part of the GCC retail investment
market both in terms of population and retail investable assets. This study seeks to provide further
detail on expatriate investment preferences and their underlying drivers. Expatriates are typically
classified into NRIs (Non-Resident Indians but including all sub-continent nationalities) and Western
expats. However Arab expats (defined as MENA expats across the GCC but excluding GCC locals)
are increasing in importance, particularly for those with a pan-GCC retail perspective which includes
Kuwait and Saudi Arabia.
Figure 15: Home-market bias in GCC expatriate segments
Home market allocation
Home market bias
57%
44%
55%
41%
31%
31%
27%
22%
Western expat
NRI
Arab expat
GCC local
Note that home-market bias is calculated by subtracting the average investor allocation
by non-home-market investors from the home-market investor allocation
Respondent sample split is Western expat = 15, NRI = 13, Arab expat = 6, GCC local = 36
The segmentation by home-market region rather than in-market country is logical (a Briton in Qatar
will be more aligned to a Briton in Dubai than an NRI in Qatar). Our analysis supports this approach
as the stand-out common theme across expatriates is home-market bias in their geographical asset
allocations. Home market bias is defined as the ‘excess’ allocations to home-markets (i.e. after the
removal of non-home-market investor allocations to a particular home-market). Figure 15 supports
our hypothesis that expat investors are overweight in their home-market but underweight
compared to genuine local investors. It shows that NRIs have the highest home-market bias at
31% followed by Arab expats at 27% and Western expats at 22%; all of which are below the 55%
home-market bias in the local GCC segment.
21
Theme 04
Our discussions pointed to a wide range of factors which drive the level of home-market bias
for expatriates:
• Ease & simplicity: of making incremental investments to existing assets such as properties, pensions or existing share dealing accounts
• Investor affinity: desire to invest in your home market because of cultural ties or market knowledge (often with an expectation of outperformance)
• Portfolio hedging: designed to mitigate currency or asset inflation risks for dependents
or expats planning to return home
• Customer wealth: as higher wealth levels increase the percentage of discretionary assets
which can alter geographic allocations
• In-market bias: the availability and attractiveness of local investment opportunities which
would create a conflicting investment bias
• Anti-selection factors: which would encourage investors not to invest in home-markets such
as the impact of political risk, potential tax liabilities or the availability (supply) of investments
Clearly the relative importance and weighting of these factors should determine the overall size
of the home-market bias in an expat segment. Some factors such as in-market bias are low priority
for GCC expats, particularly in markets like Saudi Arabia with restrictions on local stockmarkets
and local property investments. Similarly, “ease & simplicity” and “portfolio hedging” were cited
most for the Western expat segment which has the smallest home-market bias, implying that other
factors are more important.
“Investor affinity” was commonly cited as the primary driver for NRIs with many wealthy GCC-based
Indians owning investment properties and regularly trading local stockmarket portfolios in India.
But on balance we suggest that it is anti-selection factors which drive differentiation between expat
groups. Western expats (especially from the UK) saw the risk of failing to qualify as non-resident
and incurring a tax liability as a key anti-selection factor which discourage investments back into
their home-market. Meanwhile, certain Arabic expats (and NRPs – Non-Resident Pakistanis) saw
home-country risk as the reason for below average allocations.
“Western expats (especially from
the UK) saw the risk of failing
to qualify as non-resident and
incurring a tax liability as a key
anti-selection factor which
discourage investments back
into their home-market.”
22
Theme 04
“NRIs with high exposure
to an emerging market
like India also have the
highest appetite for risk
with target returns
approximately 4% higher
than other segments.”
The home-market theme also extends beyond geographic exposure. In fact we suggest it provides
the rationale for differences in investment preferences such as risk profiles and target returns.
NRIs with high exposure to an emerging market like India also have the highest appetite for risk
with target returns approximately 3% higher than other expatriate segments (see Figure 16).
And even where there are similarities within groups, the drivers appear to be different. For example,
long investment horizons are driven by demand for personal savings for property and retirement
in the Western expat segment but by the desire to provide for the family, especially the next
generation, in the NRI segment.
Figure 16: Time horizon and target return (risk appetite) for
GCC expatriate segments
Avg time horizon (years)
Avg target return (%)
11%
11%
8%
6.7 7%
5.7
2.8
Western expat
NRI
Arab expat
2.2
GCC local
Note that averages are calculated as the weighted mid-point between time horizon and
target return categories
Respondent sample split is Western expat = 15, NRI = 13, Arab expat = 6, GCC local = 36
We expect home-market origin to increase in importance in the GCC as commodity-driven
economic growth in the region encourages further immigration (despite increasingly advantageous
employment laws for locals). The implications of this trend can be observed by the increasingly
home-market focused distributors. Most already overlay individual home-market segmentations
on top of customer wealth when designing sales structures and product marketing. Many are now
looking beyond the traditional expat grouping, tailoring propositions to Canadians, British and
Australians and separating NRPs from NRIs.
23
Theme 05
Influence of wealth and internationalisation on GCC
retail investors
Local retail investors from each GCC investor country sit on
different parts of the investment spectrum depending on their
wealth and level of internationalisation
“There are significant
differences between
GCC local investors.”
Theme 05
“The overall risk/return
profile is aggressive
(relatively high target
returns and short
term horizons).”
The large expatriate population in the GCC encourages the investment community to describe
citizens of each GCC market as a collective (‘locals’). Clearly there are cultural and historic ties.
There are also economic ties with the Gulf Cooperation Council (GCC) representing a unifying
economic agreement between member countries. However integration continues to lag the
European Union (EU) and, as the EU proves in any case, economic and political integration projects
do not lead to a convergence of investment behaviours or supply driven investment allocations.
This theme examines the appropriateness of the collective GCC retail investor classification.
Figure 17: Time horizon and target return (risk appetite) for high level GCC expatriate segments
Relative target return
14%
Qatari*
13%
Omani
Aggressive
12%
GCC local
Kuwaiti
11%
NRI
Saudi
10%
Balanced
Emirati
9%
Conservative
Bahraini
8%
Arab expat
Western expat
7%
0
1
2
3
4
5
6
7
Time horizon (years)
*Adjusted from 21% to fit on scale
Note that averages are calculated as the weighted mid-point between time horizon and target return categories
Respondent sample split is Western expat= 15, NRI = 13, Arab expat = 6, GCC local = 36;
GCC local split is Emirati = 8, Omani = 6, Qatari = 2, Saudi = 11, Bahraini = 6, Kuwaiti = 3
While GCC locals all have relative short time horizons (see theme 2 for more details), Figure 17
demonstrates that local investors in each GCC country have very different overall investor profiles.
The overall risk/return profile is aggressive (relatively high target returns and short-term horizons)
but Bahrainis in particular are conservative in nature and Emiratis and Saudis adopt a relatively
balanced approach.
These differences feed into investor exposure. Bahrainis prefer a greater proportion of funds (over
direct securities) and international (over local) investments; while Emiratis are along the spectrum
between Bahrainis and other GCC investors. There were two commonly cited drivers for differences
between GCC investors – “customer wealth levels” and “level of internationalization”.
25
Theme 05
In most cases participants felt that higher customer wealth levels enable investors to take a more
aggressive investment approach and asset allocation. Figure 18 plots target return against our
wealth index (based on GDP/capita and historic GDP/capita growth to capture investor wealth
perceptions not just current wealth levels). The graphic broadly supports the hypothesis with
Qataris and Bahrainis correctly positioned at each end of the spectrum. Given the sample size
and unsophisticated index composition we would caution against more detailed assertions at
individual market level.
Figure 18: The influence of customer wealth on GCC investor target returns
Target return
17%
Qatari
15%
13%
Omani
Kuwaiti
11%
Saudi
Emirati
Bahraini
9%
7%
30
40
50
60
70
80
Wealth Index % (GDP/capita, GDP/capita growth)
Note that target return averages are calculated as the weighted mid-point of categories and the wealth index
is the average of GDP/capita in 2009 and 5 year GDP/capital historic growth indices, (source = IMF)
Respondent sample split is Emirati = 8, Omani = 6, Qatari = 2, Saudi = 11, Bahraini = 6, Kuwaiti = 3
“In most cases participants felt
that higher customer wealth
levels enable investors to take
a more aggressive investment
approach and asset allocation.”
26
90
Theme 05
“The concept of
internationalisation implies that greater
international
awareness drives
greater geographic
exposure to
international markets.”
The concept of internationalisation implies that greater international awareness drives greater
geographic exposure to international markets. Figure 19 plots the percentage of international
assets against our internationalisation index (based on proportion of expatriates in each market
and the openness of each GCC market). Again the graphic is supportive of the hypothesis with
Emiratis and Saudis at opposite ends of the internationalisation spectrum.
Figure 19: The influence of internationalisation on GCC investor geographic exposure
International exposure (of portfolio)
90%
Bahraini
80%
70%
60%
Emirati
50%
40%
Kuwaiti
Qatari
30%
Saudi
20%
Omani
10%
30
40
50
60
70
80
90
100
110
Internationalisation Index (% Expats, Openness of Economy)
Note that international exposure is the % of international assets in an average portfolio; the internationalisation
index is the average of the percentage of expatriates (source = Wikipedia on 20 April 2011) and trade openness
(trade exports plus imports as a percentage of GDP) indices, (source = World Applied Sciences Journal 8 (7),
906-911, 2010) respondent sample split is Emirati = 8, Omani = 6, Qatari = 2, Saudi = 11, Bahraini = 6, Kuwaiti = 3
Bahrainis are clear outliers, overweight in international. This is in part due to weaknesses with
the index – for example the index fails to fully capture certain aspects of internationalisation
such as Bahrain’s role as the first financial hub in the region. But we would hypothesise that
non-internationalisation factors also play a part. We expect Bahraini investors appreciated local
political risk even before the Arab uprising spread to Bahrain itself. We would also point to lower
wealth levels and thus a greater need for diversification and preservation as potential driver of
overweight international exposures.
In summary there are significant differences between GCC local investors particularly in terms
of risk appetite and their corresponding asset and geographic exposures. Assuming GDP growth
continues to polarise wealth levels within the GCC, we would expect asset allocation differentials
to remain or increase. However if economic trade and integration increases in traditionally more
‘closed’ GCC markets, we would expect geographic differences to narrow in line with a convergence
in internationalisation indices.
27
Appendix
Sample & 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. NMG’s
methodology differentiates from traditional
market research in the following ways:
• 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 highly structured questionnaire to ensure quantitative as
well as qualitative analytics can be developed
• Analysis captures not only investment preferences but also actual investment allocations with a bias toward actual behaviours over stated preferences
• The results are interpreted by NMG’s strategy team with relevant consulting experience
in the Middle East region as well as globally
in the asset management sector
The study concentrates on the end-investor.
For the institutional sector, this meant primarily
end-investor interviews supplemented
by selected interviews with asset consultants,
family offices and local asset management firms
(no international asset managers were included
in the study). For the retail sector, this meant
primarily distributor interviews (private banks,
retail banks and IFAs) supplemented by selected
retail life companies and local asset managers.
Importantly for interviews with firms servicing
investors, the interview was conducted with
reference to a particular investor category.
This enables end-investor analysis and simplifies
the sample into a manageable number of
investor segments. Table 20 provides a full list of
end-investor interviews by investor segment and
by sector (retail or institutional).
We note that the classification of family office
as retail or institutional can be misleading.
Family offices are part retail (assets are owned
by individual not corporate investors) and
part institutional (given their size and the
sophisticated nature of the investment process).
For end-investor analysis (in themes 4 and 5)
we have included family offices in the retail
sample bringing the sample to 70 interviews.
28
Throughout the report, many of the themes and
insights are focused at the segment level where
investor objectives (in the institutional segment)
and customer wealth levels (in the retail
segment) are close enough to make meaningful
comparatives. The segments are defined below:
• Sovereign Wealth Fund (SWF) (6): state-
backed investment organisations with no
defined liabilities
• Sovereign Agency (12): state-backed pension funds with defined liabilities
and local/regional development or investment agencies
• Institutional Insurer/Bank (8): treasury departments of the major private sector
local insurers and banks, responsible for
the investment of institutional assets
• Corporate (12): investment divisions of local corporates, which are typically diversified family business groups operating across multiple sectors
• Family Offices (16): personal advisers
to one or more local UHNW investors, typically each with more than US$25m investable assets
• Private Banks (16): advisory arms of private
banks servicing high net worth (HNW) investors, typically with more than US$1m investable assets
• Retail Bank (22): advisory divisions of retail banks servicing affluent investors, typically with up to US$1m investable assets
• IFA (16): independent financial advisers servicing affluent investors, typically with
up to US$5m investable assets
The retail segment can also be analysed by
end-investor. We identified 3 high level
categories based on expatriate grouping.
We also sub divided GCC locals into local
investors in each GCC market (see Figure 21).
We feel that intermediary interviews provide
more meaningful insights on detailed
investment attitudes and behaviours than
genuine end-investor interviews. However in
certain instances responses may not be fully
aligned; for example, time horizons were
sometimes estimated with respect to product
structures (savings plans for IFAs or structured
products for retail banks) which may not
reflect an end-client perspective of his overall
investment portfolio. We ensured good
representation across the whole GCC region
and feel that variation in country (see Figure 22)
and end-client samples are representative of
the region.
Figure 20: Sample overview by investor segment and investor sector
Investor Segment
Investor Sector
Sample
SWF
Institutional
6
Sovereign Agency
Institutional
12
Institutional Insurer/Bank
Institutional
8
Corporate
Institutional
12
Family Office
Institutional/Retail*
16
Private Bank
Retail
16
Retail Bank
Retail
22
IFA
Retail
16
Total
108
*Family offices exhibit retail and institutional characteristics
Figure 21: Sample overview by retail end-investor segment
Retail GCC investor
15
13
11
8
6
6
3
2
Emirati
Omani
6
Qatari
Saudi
Bahraini
Kuwaiti
Western
expat
NRI
Arab
expat
Note that total retail investor sample = 70 (sum of IFA, Retail Bank, Private Bank and Family office distributor segments); Retail GCC investor sample = 36 (sum of
Emirati, Omani, Qatari, Saudi, Bahraini and Kuwaiti segments), Retail expatriate sample = 34 (sum of Western expat, NRI and Arab expat)
Figure 22: Sample Overview by investor location within the GCC
31
22
16
15
12
UAE
Oman
Saudi
Arabia
Qatar
Bahrain
12
Kuwait
Note that total sample = 108
29
Invesco 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.
Contact: Nick Tolchard
[email protected]
+971 4 425 0950
NMG 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 with ‘fork in the road’ decisions around where and how to compete. Recent GCC engagements have included market entry, portfolio optimization and mergers, acquisitions and alliances.
• Strategic Insights Programmes: helping participants to improve their competitive positioning and business performance. In the GCC we run Insights programmes in the wealth, asset management, reinsurance and life insurance sectors.
Contact: Tom Dunbar
[email protected]
+44 7827 158 031
Further information
Further information is available using the contact details shown below:
Dubai
+971 4 425 0950
[email protected]
www.invesco.ae
Jersey, Guernsey, Isle of Man and the UK
+353 1439 8100
[email protected]
www.invescointernational.co.uk
Telephone calls may be recorded.
Dubai: Issued by Invesco Asset Management Limited which is regulated by the
Dubai Financial Services Authority. Invesco Asset Management Limited, PO Box
506599, Building 5, Level 6, The Gate Precinct, Dubai, United Arab Emirates.
Jersey and Guernsey: Issued in Jersey and Guernsey by Invesco International
Limited, 2nd Floor, Orviss House, 17a Queen Street, St Helier, Jersey,
JE2 4WD. Invesco International Limited is regulated by the Jersey
Financial Services Commission.
Isle of Man: Issued by Invesco Global Asset Management Limited,
George’s Quay House, 43 Townsend Street, Dublin 2, Ireland, which is regulated
in Ireland by the Central Bank of Ireland.
UK: This document is issued in the UK by Invesco Asset Management Limited,
30 Finsbury Square, London EC2A 1AG, authorised and regulated by the
Financial Services Authority.
International Development Division
Perpetual Park, Perpetual Park Drive, Henley-on-Thames,
Oxfordshire RG9 1HH, UK
47436/MP/120511
This document is for Professional Clients only and is not for consumer use

2011 Invesco Middle East Asset Management Study

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