Sunday, Sep 20, 2015

Dubai: In a reversal of trend, a number of established sovereign investors are considering a shift back to external active management from efforts to build internal asset management capabilities, said Invesco’s Middle East Asset Management Study.

The study showed that the fall in the oil price is expected to reduce funding and increase the withdrawal risk of Middle East sovereign investors with a significant majority (67 per cent) of regional sovereign investors fearing a funding squeeze due to the sustained fall in oil prices.

Currently Middle East sovereigns have a range of different positions on asset management. While some sovereigns are considering a move back to external active management, others remain committed to internal management and a third category continues to be almost exclusively committed to external management.

Many Middle East sovereigns are keen on internal management for private equity in contrast to international markets where most sovereign investors are comfortable outsourcing private equity to external managers.

Middle East sovereigns have been investing to develop internal private equity capability but increasingly these initiatives have been facing performance challenges.

“It is too early to identify a move from internal to external private equity in the Middle East and most respondents in the Middle East explained that internal versus external is not a black and white decision for private equity. Rather than a full strategic review they expect changes to how sovereigns collaborate with third parties at different points in the investment process,” said Nick Tolchard, head of Invesco Middle East.

The Invesco study also showed that compared to the mainline regional sovereign investors, the second-tier institutional investors face fewer strategic challenges. These investors include smaller but fast-growing state pension funds and local private sector insurance companies. State pension funds are growing as scheme membership rises and benefits improve. Local insurance companies are benefiting from growing insurance penetration in the region and from an improving competitive position relative to international insurance companies.

Many of these institutional investors have positive outlook on future funding. Of second-tier institutions, 83 per cent expect new funding to increase in contrast to mixed views from Middle East sovereigns following the decline in the oil price.

Second, these investors have higher home market bias given the location of their liabilities and regulatory constraints on asset allocation, so they continue to benefit from high yields in local Middle East fixed income. Third, low international allocations also reduce currency exposure, which is a key challenge for Middle East sovereigns.

Many of the positives for second-tier institutions may reduce over time. Yields may fall or defaults may rise on Middle East fixed income. There may also start to be supply issues for domestic fixed income depending on the speed at which the local markets develop. Furthermore, increasing new funding means increasing liabilities and it will be more important for defined benefit funds to understand the profile of their liabilities over time.

By Babu Das Augustine Banking Editor

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