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Middle East Fund Survey 2011

TABLE OF CONTENTS

[03] [03] [05] [07] [10] [14]

Foreword 1. Facts 2. Top Issues 3. Business Development

3.1 Long-term trends to guarantee success

4. Industry Challenges
4.1 Effects of political unrest

5. Industry Opportunities
5.1 Opportunities in each GCC country 5.2 Outsourcing opportunities

[20] [22]

6. Current Allocation and 2011 Outlook Conclusion

About MEED Insight

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Foreword
Results from this survey of GCC and Levant investors, fund companies and distributors reveal that the fund industry remains cautiously optimistic in spite of the rising uncertainties surrounding the region today. However, the ongoing geo-political unrest sweeping the region, if it is not reined in, provides a very strong undercurrent which could undermine such optimism. This is further complicated by the shortage of experienced finance professionals and the lack of historical and research data to guide industry players in formulating the right strategies. Most importantly, the overall negative market sentiment among investors, which easily outweighs the regions high liquidity arising from increasing oil and gold prices, remains a hindrance that must be overcome by the industry. Such cautious optimism, however, is not entirely unfounded. Opportunities include a largely untapped insurance market and the expected rise in popularity of Islamic insurance funds (Takaful), the expected boom in real estate and construction projects in Qatar, Saudi Arabia and Abu Dhabi, the renewed interest in commodities, and the adoption of more cohesive regulations governing the industry, among others. Most of the respondents (52 per cent) project better business performance in 2011 compared with 2010, and over 60 per cent plan to hire new staff during the year. Furthermore, 87 per cent of fund companies indicated that their companies will obtain net inflows in 2011. Over 30 per cent of respondents likewise indicated plans to increase allocations in all asset types particularly equities, real estate and cash. In general, the findings of this survey point to a more commercially active 2011 for the regions fund industry players, with a good probability that overall growth will be achieved if they undertake greater diversification in terms of their investment portfolio and market and products coverage. This will potentially lead to a recovery in market confidence over the coming years, barring any worsening or significant spilling over of the political unrest into key markets such as Saudi Arabia and the UAE.

1. Facts
A total of 111 investors, 25 fund companies and 34 distributors participated in Advent and MEED Insights 2011 Fund Survey. Of the respondents which disclosed their location, about 45 per cent are located in the UAE, 19 per cent in Saudi Arabia, and 7 per cent in Bahrain. The rest are from Egypt, Lebanon and other non-Mena countries. The majority of respondents have at least 50 employees, with some having several thousand.

This communication is provided by Advent Software, Inc. for informational purposes only and should not be construed as, and does not constitute, legal advice on any matter whatsoever discussed herein.

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Number of employees <5 5 to 49 50 to 249 250 or more

Share (%) 4 36 21 39

Source: MEED Insight survey, based on responses from 43 investors, 11 fund companies and 16 distributors

In keeping with the greater levels of corporate confidentiality in the region, few respondent investors and fund companies disclosed the value of assets under their management (AUM). Some three-quarters of investors stated managing assets valued at less than $250m, while 57 per cent of fund companies stated managing assets worth $250m or more.

Assets under management *

60% % of respondents 50% 40% 30% 20% 10% 0% <50 50 to 249 $m Investors Fund companies 250 to 999 1,000 or higher

*AUM as of December 2010 or January 2011, provided in local currency and converted into US dollars
Source: MEED Insight survey, based on responses from 12 investors and seven fund companies

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In which markets are you actively selling your funds today?

100

% of respondents

80 60 40 20 0

64

18 9 9

Mena

India

Asia, Europe and North America

Active markets

Africa and Russian Independent States

Source: MEED Insight survey, based on responses from 11 fund companies

The majority of the respondent fund companies that disclosed the markets where they sell their funds cited the Mena (Middle East and North Africa) region, primarily Saudi Arabia and the UAE. The rest indicated selling their funds to non-Mena geographies as well. More than a quarter of respondent investors said they manage all their funds internally, compared with over 70 per cent, which have between 15 and 99 per cent of their funds administered by external managers.
Percentage of funds managed internally < 20 per cent 20 to 50 51 to 99 100 Respondents (%) 14 18 41 27

Source: MEED Insight survey, based on responses from 22 investors

2. Top Issues
The survey results indicate that capital inflow from both local and foreign sources, along with the political tensions and the burden of allocating more resources to risk management, are among the major issues that fund companies in the Middle East region are most concerned about in 2011. It should be noted that capital inflow issues among fund companies started rising shortly after the global financial crisis began in 2008. The political unrest which took hold in the first quarter of 2011 in key Mena markets only served to exacerbate the vulnerability of an industry that was in the early stages of recovery from one of the worst financial periods in recent history. Furthermore, nearly a quarter of the respondent fund companies cited a lack of market research as well as the weakness in the regions financial regulatory framework among their top issues.

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Top-of-mind issues among fund companies

Capital inflow (local) Risk management Political tensions in key Middle East countries Capital inflow (foreign) Market research Weak and non-transparent regulatory framework Distribution Compliance with regulatory framework Shortage of finance professionals Outsourcing back-office operations Proximity to customers outside home market

10

20

30

40

50

60

70

80

% of respondents
Source: MEED Insight survey, based on responses from 25 fund companies

Meanwhile, half of the respondent investors cited the growing political tensions in the region as a primary concern for 2011. A lower percentage (38 per cent) cited the overall economic outlook as a top concern, followed by 37 per cent which cited real estate or property. Meanwhile, about 36 per cent cited risk management and a weak regulatory framework, and between 28 and 33 per cent included oil price fluctuations and asset allocation in their list of top three most important issues in 2011. Respondents answers clearly indicate that macroeconomic and regulatory factors tend to overshadow operational or strategic factors such as risk management and asset allocation in their priorities for the remainder of the year. The level of market confidence, which is inevitably tied up to the perceptions of a countrys or a regions economic and political stability, overrides all other factors including, in the case of the Gulf Co-operation Council (GCC) states, higher oil and gold prices, cited a fund manager respondent at a Bahrain-based bank, whose investment portfolio is focused predominantly on the GCC. A similar trend is noted among fund distributors, with macroeconomic and regulatory concerns generally outweighing operational, research and capital inflow concerns. However, one unique concern stands out among some of the distributors, who highlighted long-term performance of fund companies as an issue. With a relatively young fund industry across the Middle East region, finding local fund companies with a good track-record can be challenging. The bigger fund distributors often opt for multinational fund companies that have a presence in the region and a long fund history elsewhere, in more developed markets.

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Top-of-mind issues among investors

Political tensions in key Middle East countries Overall economic outlook Real estate/property Risk management Weak and non-transparent regulatory framework Asset allocation Oil price fluctuations Shortage of qualified finance professionals Alternative asset classes Management of external managers

10

20

30

40

50

60

70

80

% of respondents

Source: MEED Insight survey, based on responses from 111 investors

Top-of-mind issues among fund distributors

Political tension in key Middle East countries Overall economic outlook Compliance with local and international regulatory framework Weak and non-transparent regulatory framework Market research Long-term performance of fund companies Capital inflow (local) Capital inflow (foreign) 0 10 20 30 40 50 60 70 80

% of respondents

Source: MEED Insight survey, based on responses from 34 fund distributors

3. Business Development
Generally, the respondents overall prognosis of their business development and growth in 2011 is positive, or better than in 2010. More than half of overall respondents indicated that this year will be better than last, while a minority (15 per cent) stated the opposite. The remainder indicated that 2011 will be neither better nor worse compared with the previous year. Of the three groups surveyed, the investors are generally less optimistic with one-fifth of them indicating that business in 2011 will be worse than in 2010. Furthermore, just under half said that this year will be better than the previous one. However, this ratio is still three percentage points lower when viewed against the overall average.

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How will your business develop in 2011 (compared with 2010)?*

How will your business develop in 2011 (compared with 2010)?

Investors (%) Better Same Worse 49% 31% 20% Fund companies (%) 65% 30% 4% Distributors (%) 56% 38% 6%

Worse 15% Same 33% Better 52%

Source: MEED Insight survey, based on responses from 111 investors, 25 fund companies and 34 fund distributors

*Overall average

The relative positive overall outlook among the survey participants comes on the heels of geo-political upheavals in several Mena countries such as Egypt, Tunisia, Syria, Kuwait, Bahrain and Oman. Citizen protests or threats of protests have sporadically hampered business activities in these countries during the first quarter of 2011. The geography where investors and fund companies are focusing their investment influenced their 2011 outlook to a large extent. Generally, companies that are focusing their activities towards Abu Dhabi, Qatar, Kuwait and Saudi Arabia tend to have the same or better forecast for their business in 2011. Investments made in global and emerging markets also underpin the positive outlook expressed by some investors. Growth in these regions is expected to compensate for the softness of their home markets. According to one respondent, the anticipation of a change in the predominantly parochial investment attitude among Middle East investors is another reason for optimism among respondents. Understandably, respondents that are in or focusing mainly on Egypt or Bahrain have a more pessimistic view of 2011. With demand and productivity slowing down significantly, and the movement of goods severely interrupted following the revolution, we cant afford to be optimistic, explains a financial analyst at an Egypt-based fund company. The ongoing unrest is not the only reason among those who said that 2011 will be a worse year than 2010. A Dubai-based investment company with major stakes in the real estate sector stressed that debts must be cleared in order to reverse the recession. Another, Bahrainbased investor explains that her view is based on the projected tight liquidity across Mena and throughout Europe. Even if the fundamentals [in Mena] improve this year, and it is likely that they will because of the demonstrated GDP growths, it will take time to improve market confidence now that it has been shaken. Restoring investor confidence is a primary issue that the Middle East region will have to deal with for the rest of the year. This sentiment is echoed by a fund company that focuses on property development, which said that even improved liquidity among regional and local banks will not necessarily translate into higher capital inflow. They [the banks] are not going to invest the cash; they will hang on to it or use it for retail loans, primarily because they need provisions for ongoing debt and to maintain sufficient funds

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for government spending. Generally, they will not be using cash to obtain equities. A leading international fund distributor with offices in Dubai foresees a worse year for his business. He says that delays in the launch of new funds, changes in regulations in some countries, and poor stock market performance, which are all directly and indirectly related to the recent geo-political unrest sweeping the Mena region, will ultimately result in a more difficult business environment in 2011. Do you plan to expand your staff?
Investors (%) Yes, 14 people Yes, 510 people Yes, more than 10 people No 34 11 11 43 Fund Distributors Companies (%) (%) 43 14 14 29 34 13 25 28 Overall (%) 35 12 15 38

Source: MEED Insight survey, based on responses from 111 investors, 25 fund companies and 34 fund distributors

Consistent with the relative optimism expressed by the survey participants, about 62 per cent indicated that they plan to hire new staff in 2011. A higher percentage of fund companies and distributors plan to expand their staff compared with investors, with a quarter of distributors indicating that they plan to hire more than 10 people in 2011. When it to comes to outsourcing the management of assets externally, there was very little difference between those that plan to and those that are still hesitant about doing so, indicating a more limited market potential for international companies wishing to play a more active role in the management of the regions funds. Do you plan to increase the share of assets managed externally? (% of investors)
Yes No 49 51

Source: MEED Insight survey, based on responses from 105 investors

3.1 Long-term trends to guarantee success

Investors provided a wide range of responses when asked about the long-term trends that are fundamental to their success going forward. These responses fall under two broad categoriesmacro-economic and operationswith regulatory and product-related trends emerging as third trend.

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Macro-economic Rise in oil and gold prices Innovation Opportunistic volatility Investment in infrastructure (energy, education, healthcare, consumer goods) Real estate expansion Robust industrial growth Return of investors World Cup in Qatar Funds from GCC moving to eastern hemisphere Funding of feasible commercial development

Operations Higher expectation of black swan events, and therefore greater emphasis on risk management and liquidity Outsourcing Cost savings Hiring competent staff Investment in training and development Optimisation of the revenue cycle management chain Thin and lean focus on core activities

Other (Regulatory and Product) Emerging country funds REITS Regulatory correction Diversification in investments Food commodities, power, energy

In addition, fund companies cited very specific factors that are crucial to their success. These include: Better educated finance professionals with Western market experience; Availability of debt; Market standardisation; New markets and new clients; Government incentives; and Development of new products Fund distributors, meanwhile, cited political and economic stability, focused and well-planned strategies to address new markets, economic growth in higher risk markets such as Yemen, Sudan and Libya, long-term partnerships with current clients, and reliable government decisions or measures as fundamental to future success.

4. Industry Challenges
Challenges faced by the young and nascent fund industry in the GCC and the broader Mena region are varied and significant. These include vulnerability to the global financial crisis and the subsequent property crash in Dubai, the shortage in finance professionals, and the lack of market data. A little over 20 per cent of the respondents acknowledged that the real estate crash in the UAE, particularly in Dubai, severely impacted their business. About one-third said the impact was manageable or moderate, while the rest indicated that the property meltdown had very little negative impact on their business.

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How did the property crash in the UAE, particularly in Dubai, impact your business?
Moderate impact, we had a balanced portfolio Huge impact, we had major property investments Minimum impact, we did not have a significant property investment 32% 21% 47%

0%

10%

20%

30%

40%

50%

Source: MEED Insight survey, based on responses from 90 investors and 22 fund companies

What changes did you introduce into your business following the 2009 economic crisis?
100% 80% 60% 40% 20% 0% Investors Reduced staff Reduced number of products Have not made any major changes
Source: MEED Insight survey, based on responses from 90 investors, 22 fund companies and 32 distributors

Fund companies

Distributors

Overall

Increased outsourcing General expansion

Survey participants response to the economic crisis also showed major variations. Half of the fund companies stated that they made no major changes to their business operations or strategies, while 40 per cent of investors said they had reduced their staff. A significant segment of distributors, on the other hand, cited increasing their use of outsourced services as a means to cope with the challenging business climate. Ironically, between 18 and 19 per cent across the three groups of respondents reported undergoing some sort of general expansion in spite of the crisis. Furthermore, a few respondents cited adopting other measures that include stronger risk controls and end-to-end cost optimisation as a means to address the crisis.

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Have you dedicated more resources to risk management following the economic crisis?
No 32%

Approximately 68 per cent of respondent fund companies indicated that they have allocated more resources to risk management following the crisis of 2008, although 10 per cent more (78 per cent) stated that their clients are now putting more emphasis on risk management. In fact, 88 per cent of investors and distributors stated that they have become more conscious and therefore put more emphasis on risk management following the crisis, whereas only 74 per cent think that the fund companies have indeed allocated more resources towards managing and controlling risks in the wake of the economic crisis. Meanwhile, the majority of the respondents indicated that the country where they operate in the Middle East region has a reliable regulatory framework to allow the fund industry to flourish. The remainder disagreed; and disagreement came from every country from the UAE to Egypt. For the most part those who indicated that the local regulatory measures are reliable and sufficient were largely influenced by the major improvements that have been put in place over the past few years. We are confident in the capability of the Dubai Financial Services Authority (DFSA), says a Western respondent. An independent court has been established by the Dubai International Financial Centre (DIFC) to provide comprehensive legal redress in civil and commercial matters within the DIFC. One respondent also explained that the recent crisis including the political and economic volatility in the region will serve to further strengthen the scope and implementation of laws governing the fund industry across the GCC and the wider Mena region. Most of those who presented a dissenting opinion to the question are influenced by their exposure and experience in more developed markets particularly in Europe. Areas of improvement particularly in terms of clarity of certain laws remain, and admittedly were still far from reaching the level of sophistication found in Western countries, explained one respondent.
How important as an issue is the lack of qualified investment professionals in the region? (%) Not important Important Very important 8 52 40 How important as an issue is the lack of qualified Islamic finance specialists in the region? (%) 19 45 35

Yes 68%

Source: MEED Insight survey, based on responses from 22 fund companies

Does the country where you operate offer reliable, transparent and enforceable regulatory framework for the funds industry to flourish?
No 31%

Yes 69%

Source: MEED Insight survey, based on responses from 91 investors, 22 fund companies and 31 distributors

Source: MEED Insight survey, based on responses from 91 investors, 22 fund companies and 31 distributors

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The shortage of finance professionals that interpret the various regulatory measures and ensure proper compliance is a related issue. Compliance with regulations goes hand in hand with the task of installing risk management and controls, and both tasks are made more difficult by the shortage of experienced [finance] professionals, says one fund company. The shortage of qualified and experienced manpower is an endemic issue in nearly every sector particularly in the GCC states, and more so in the fund management and distribution industries. Recruiting world class finance professionals is always a challenge but it is not a vacant market, added a manager at an Abu Dhabi-based fund company. We utilise international head-hunters to recruit the best talent.

4.1 Effects of political unrest

Most of the surveyed companies indicated that they are currently reviewing the impact of the recent political and economic regime changes in strategic Mena markets into their future strategy. A mere 11 per cent indicated that they are not making any changes while three times as many respondents said that these changes require substantial change in their market focus. Among the most common fears expressed by respondents is the potential inflationary impact and general instability that a change or a vacuum in political leadership could create, as well as the inevitable reduction in capital inflow resulting from negative investor sentiment. Conversely, about 30 per cent of the respondents indicated that these changes could pave the way for more lasting and profitable benefits, foremost of which is the eventual flourishing of private investment as a result of a more democratic and transparent conduct of business.

What are the short- to long-term effects of the political regime changes to the GCC fund industry?
40% 35% 30% 25% 20% 15% 10% 5% 0% 37% 33% 30%

Changes could trigger inflationary scenarios that hinder investment growth

Significant reduction in capital inflow

A more democratic regime is good for private investment

Source: MEED Insight survey, based on responses from 22 fund companies and 32 distributors

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5. Industry Opportunities
Notwithstanding the multiple and mounting challenges confronting the Mena regions fund industry, opportunities still await market players. In terms of factors that are expected to drive growth throughout 2011, fund distributors are relying primarily on new client segments, while fund companies are eyeing new products to deliver much needed growth. Fund distributors are watching institutional investors such as insurance companies to have a more actively managed portfolio in the future. They are also expecting asset managers and mutual fund companies to become more engaged in local markets. New products would certainly include Islamic insurance (Takaful), which offer considerable opportunities. Said one Abu Dhabi based fund company: There is a huge insurance market in the Arab world, and we have barely scratched the surface. On the other hand, new markets could include the emerging, less risky markets like those in Africa, according to an Egyptian fund company. There is a really interesting story on these underdeveloped but rapidly growing countries in Africa that will attract investors. One company must diversify if it wants to grow, cited a respondent fund distributor based in Dubai. This respondent is focusing on the traditional emerging markets (Brazil, Russia, India and China) as well as on the new emerging markets in the Far East (Vietnam, Cambodia, Taiwan and Thailand) and in Africa. A diversification in markets reduces the risk of overexposure in a single market, while at the same time allowing a diversification in products or sectors. Two other factors, namely new markets and flows from existing clients to existing products, are expected to further drive the industrys growth at varying degrees throughout 2011.
Main growth drivers in 2011
Flows from existing clients to existing products New client segments

New products

New markets

0%

10%

20%

30%

40%

% of respondents Average Distributors Fund companies

Source: MEED Insight survey, based on responses from 23 fund companies and 33 distributors

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Based on the survey, there exists a wide gap between the asset classes in which investors plan to make most of their new investments in 2011, and which asset classes fund distributors expect to attract the most inflow. Some 45 per cent of the respondent investors indicated that they will make most of their new investments into long-only equity in emerging markets. A slightly smaller percentage said they plan on targeting most of their new investments into property and fixed income in emerging markets, while only a quarter indicated that they will be making the most investment into sharia-compliant hedge funds. A minority (8 per cent) said they will be making the most new investments into other types of assets, which range from Europeanespecially Swiss stock and currency marketsfood and medical-related assets, goldrelated products, green energy windmills, to options, futures and derivatives. Into which asset classes will you make the most new investments in 2011?
Asset class Long-only equity (emerging markets) Property Fixed income (emerging markets) Fixed income (developed markets) Hedge funds (sharia-compliant) Hedge funds (non-sharia-compliant) Long-only equity (developed markets) Other* Investors (%) 45 40 34 28 25 19 19 8

*Specified asset classes are: European (Swiss) stock and currency markets, food and medical, gold, green energy, options, futures and derivatives
Source: MEED Insight survey, based on responses from 96 investors

What asset classes will see the most inflow in 2011?

% of respondents
50% 40% 30% 20% 10% 0%
Hedge funds (sharia-compliant) Fixed income (emerging markets) Fixed income (developed markets) Long-only equity (developed markets) Long-only equity (emerging markets) Property Hedge funds (nonsharia-compliant) 46% 39% 33% 33% 30% 18% 9%

Source: MEED Insight survey, based on responses from 33 fund distributors

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On the contrary, nearly half of the respondent fund distributors (46 per cent) expect sharia-compliant hedge funds to see the most inflow among all types of asset classes in 2011. Another 39 per cent see the most inflow towards long-only equity in developed markets. Moreover, non-sharia compliant hedge funds and property or real estate are expected to attract less inflow throughout the year, although a variation in outlook is noted depending on the focused geography. The difference in the preferred assets by investors and the fund distributors projected best performing asset classes in terms of net inflow is most likely due to the diversification efforts of resident (Middle East) investors in terms of new markets. Furthermore, the fund distributors predisposition to expect long-only equities and sharia-compliant hedge funds to attract the most net inflow in 2011 can be attributed to the absence of active secondary markets and local currency dominated bonds in the Middle East, according to one respondent who is involved in securities services. And although less risky asset classes such as long-only equities are a good investment vehicle for any company looking for growth opportunities, diversification will be the key in attaining decent returns in future. The commodity sector ranging from oil and energy to agriculture and food apparently offers excellent opportunities. One respondent explained that: The shift in the manner in which we create food... it now takes 7kg of grain to produce 1kg of meat... and all the related changes in the food consumption patterns across the globe mean that engaging the commodities sector, particularly in agriculture, in emerging markets will be profitable in future. However, the fact that there are nearly three times as many investors than distributors that participated in the survey indicates that investor behaviour will likely exert a stronger influence than that of the distributors over the manner in which capital investments will be distributed throughout 2011 between the specified asset classes.
Which types of products are you planning to launch?
50% 40% 30% 20% 10% 0%
Fixed income (emerging) Fixed income (developed) Property Other (private equity, ETF, multi-asset classes) Hedge funds (shariacompliant) Hedge funds (nonsharia-compliant) Long-only equity (developed) Long-only equity (emerging)

% of respondents

38% 29% 29% 24% 19% 19%

14%

10%

Source: MEED Insight survey, based on responses from 21 fund companies

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Approximately 86 per cent of respondent fund companies also expressed plans to expand their product range during the course of the year. About 38 per cent are considering introducing fixed-income products in emerging markets, 29 per cent would introduce fixedincome products in developed markets as well as new property products, whereas about a quarter said they plan to introduce other types of products including exchange traded funds (ETFs), private equity or multi-asset class products. The relative attractiveness of the property segment, in spite of the massive volume of stalled, delayed or cancelled construction projects in the emirate of Dubai, hinges on the expected boom in property projects in selected areas within the region, particularly in Abu Dhabi and Saudi Arabia. In the bigger scheme of things, Dubai [property market] is just a small slice of the pie. The property market will remain attractive for the rest of Mena and globally, explained one fund company. And while ETFs are considered to offer a bright opportunity by a few fund companies, some distributors are not as excited about them simply because they are new and relatively untested. A new product like an ETF always takes time to gain the right investor sentiment, explains one distributor. It should be noted that the Middle East ETFs that currently exist are listed and traded overseas. In addition, half of the respondent fund companies had stated that the retail segment would offer the most opportunities throughout 2011, while only 36 and 14 per cent cited institutional and wholesale clients, respectively. This means that fund companies generally expect institutional investors such as sovereign wealth funds or government pension funds to remain relatively risk-averse throughout 2011. Even commercial banks will remain reluctant to invest in high-risk markets to protect their liquidity, explained one respondent. Hence, the retail segment comprising individuals who purchase stocks or equities through the banks will remain the most interesting segment for 2011.

What client segment will offer most opportunities in 2011?

Institutional Wholesale Retail 0% 10% 20% 30% 40% 14% 50% 50% 60% 36%

% of respondents
Source: MEED Insight survey, based on responses from 22 fund companies

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For about a third of respondents, the GCC equities market offers good opportunities in 2011, or at least better opportunities than the previous year, in spite of the ongoing political unrest within the region. A quarter of the respondents expressed the opposite view, with investors again holding out a more cautious stance compared with the fund companies and distributors.

How do you view the opportunities in GCC equities markets in 2011 compared with 2010?
50% % of respondents 40% 30% 20% 10% 0% Investors Fund companies Better Same Distributors Worse Overall
33% 38% 29% 18% 19% 45% 36% 34% 47% 35% 40% 25%

Source: MEED Insight survey, based on responses from 90 investors, 22 fund companies and 32 distributors

Furthermore, there is no widespread plan among fund companies to merge products into one domicile as of the survey period, with only 13 per cent saying they have already decided to do so.
Do you perceive net inflows into the industry in 2011?

Do you plan to merge/move your products to one domicile in 2011?

Yes, we have decided 13%

No 14%

We are currently reviewing this 44%

No 43%

Yes 86%

Source: MEED Insight survey, based on responses from 23 fund companies

Source: MEED Insight survey, based on responses from 23 fund companies and 33 distributors

As for net inflows, 86 per cent of respondent fund companies and distributors stated that they see positive net inflows towards the industry in 2011. This finding strongly ties in with the fund companies response on whether their firms will manage to attract net inflows during the year, with 87 per cent of them responding positively.

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5.1 Opportunities in each GCC country

According to respondents, Qatar offers the most opportunities for their business compared with the other of the GCC states. Its successful bid to host the 2022 Fifa World Cup, strong leadership and ambitious infrastructure and development plans, coupled with the near absence of political or sectarian conflicts within the state, all contribute to making Qatar a stable investment destination. Country rankings in terms of opportunities for the fund industry
Country Qatar Saudi Arabia UAE Kuwait Oman Bahrain Ranking (1 lowest; 6 highest) 4.07 3.99 3.98 3.37 3.06 2.40

Source: MEED Insight survey, based on responses from 90 investors, 22 fund companies and 31 distributors

Saudi Arabia and the UAE are perceived to offer similar levels of opportunities, with Kuwait and Oman trailing behind. Bahrain had expectedly fallen behind its neighbours not least due to the recent dilemma confronting its political leaders. The recent protests had exposed the island kingdoms volatility, which could undermine the business-friendly image which it has tried to build over the years as evidenced by the quick and early success, and now the uncertain future of, the Bahrain Financial Harbour (BFH).

5.2 Outsourcing opportunities

While outsourcing has its share of ardent supporters in terms of streamlining cost and enhancing operational efficiency, about 42 per cent of the overall respondents still do not outsource any business functions. Of those who do outsource, the majority cited outsourcing back office and IT functions, 43 per cent outsourced marketing functions, while the rest reported outsourcing training and development, compliance, as well as manpower or recruitment services. The following table shows the areas where respondents see the most potential for outsourcing in future:

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Investors

Fund companies

Distributors

Sales Finance Training and development Everything except face-to-face customer interaction Logistics Telemarketing Payroll and HR Call centres

Compliance Back office Market research Marketing IT

HR Research IT Non-core functions Distribution and wholesale

6. Current Allocation and 2011 Outlook

A huge majority of respondent investors and distributors estimate that they are either underweight or neutral in equities, and 74% plan on maintaining or increasing their allocation in 2011. Moreover, at 38 per cent, there are more respondents who plan to put more capital into equities than in other asset classes such as bonds or cash. In other words, 2011 generally looks set to be a good year for the regions equities market. This outlook tallies consistently with an earlier finding in this survey, where about 35 per cent of respondents indicated seeing better opportunities in the GCC equities market in 2011 vis-a-vis 2010.
Equities
Overweight Underweight Neutral

Equities allocation direction

Increasing our allocation Maintaining our allocation Decreasing our allocation

13% 46% 41%

26% 36% 38%

Source: MEED Insight survey, based on responses from 84 investors and 29 distributors

The bonds market, based on respondents expected allocation direction , will see less action than the equities market. About 46 per cent stated that they will maintain their bond assets, and 32 per cent said they intend to increase their investment in bonds.

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Bonds
Overweight Underweight Neutral

Bonds allocation direction

Increasing our allocation Maintaining our allocation Decreasing our allocation

16% 32% 49% 35% 22% 46%

Source: MEED Insight survey, based on responses from 85 investors and 29 distributors

Real estate assets

Overweight Underweight Neutral

Real estate allocation direction

Increasing our allocation Maintaining our allocation Decreasing our allocation

24% 35%

35%

38%

41%

27%

Source: MEED Insight survey, based on responses from 85 investors

Percentage-wise, there were as many (38 per cent) respondents who indicated that they will increase their real estate allocation in 2011, as those in equities. This in spite of a significantly higher percentage of respondents (24 per cent) who indicated that they are overweight in terms of real estate assets. This proves that the property crash in Dubai did not significantly diminish the value of real estate and property assets among respondents altogether, and that real estate will remain the most attractive asset type next to cash, based on respondents expected behaviour for the year. The ratio of respondents that are overweight in cash (27 per cent) is higher than the ratio found in other asset classes (13 to 24 per cent). However, relative to other asset types, it also boasts the lowest percentage in terms of those who intend to decrease allocation during the year.
Cash
Overweight Underweight Neutral

Cash allocation direction

Increasing our allocation Maintaining our allocation Decreasing our allocation

27% 47% 45%

34%

26%

21%

Source: MEED Insight survey, based on responses from 83 investors and 28 distributors

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Sharia-compliant investments allocation direction

Maintaining our allocation 43%

Increasing our allocation 35%

Decreasing our allocation 22%

Source: MEED Insight survey, based on responses from 84 investors and 29 distributors

Finally, respondents planned allocation on sharia-compliant assets looks more likely to remain the same or increase during the year. Investors have displayed increasing interest in Sharia-compliant products over the past few years as more products become available in the market. A quarter of respondent investors have earlier indicated that they plan to make the most of their new investments for the year on sharia-compliant hedge funds.

Conclusion
The Middle East fund industry players are most concerned about the geo-political unrest confronting the Mena countries and its impact to the regions economic stability and outlook. These major issues are accompanied by a weakness, real or perceived, in the overall regulatory framework governing the fund industry in a number of individual markets. The inextricable relationship between the political and economic stability of a country and the confidence that it generates from investors is a major issue that must be addressed with urgency and care. While the unrest gave way to a regime change in some countries, leaders in other countries remain adamant. These leaders had displayed greater willingness to part with money in the form of investments on housing and other infrastructure projects than in increasing citizen participation in the political process. This could mean that the huge economic gains resulting from an increased government spending will generally outweigh the risks posed by citizen unrest, at least within the foreseeable future. The regions combined stock markets had already posted a strong recovery to the tune of $13bn by mid of April 2011 following major setbacks in the first two months of the year. The markets in Morocco, Tunisia, Oman, Kuwait, Bahrain and Egypt, however, still remain weak.

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As is the rule of thumb even in more stable business environments, diversification in products and markets is essential for both investors and fund companies going forward. An increased resource allocation on risk management, hiring of experienced and competent finance professionals, along with diligent market research, should also be on the top agenda of each industry player. Finally, it is essential for the industry players to keep an eye on the newly emerging markets in Africa and the Far East as well as on the BRICs, in addition to Qatar, Saudi Arabia and Abu Dhabi, and on product segments that are underdeveloped or previously underrated such as Islamic insurance and commodities.

About MEED Insight

MEED Insight is a bespoke research service brought to you by MEEDs top country and sector experts. It provides bespoke market research and data solutions to clients who have specific information requests to help them make more profitable business decisions. With access to a wealth of regional information ranging from broad macro-economic statistics to specific sector data, MEED Insight helps clients accurately and cost effectively forecast market growth and trends. MEED Insight has a particular focus on project-related market data thanks to its proprietary database of projects in the Middle East and North Africa (Mena) region, MEED Projects. Thanks also to the respected MEED name, MEED Insight consultants have considerable access to the market, enabling them to speak directly to clients, consultants and other companies. For sample reports and further details about MEED Insight, please visit www.meed.com/insight.

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