JEDDAH – Globally, fund management industry is going through a rough patch after the 2008 financial crisis. As markets exhibit higher volatility and with no easy fixes in sight to solve the problems of the developed world, fund managers are struggling to adapt and clients are increasingly turning restless. The situation in the GCC is no different. Companies continue to struggle in growing their assets under management (AUM) and making ends meet. According to a study by Kuwait Financial Center (Markaz) released Monday, the GCC asset management industry with roughly 100 companies, manage about $26.5 billion in assets in 328 funds at the end of 2011. Money market funds constitute the largest share in terms of AUM (53 percent), followed by equities (42 percent), fixed income (2 percent) and specialized funds (3 percent). On average, funds from almost all the categories generated alpha during the six year period. Kuwait Islamic funds, which generated negative alpha of -0.2 percent, were the only exception. Even though fund categories generated alpha on an average basis, alpha generated by individual funds witnessed a noticeable variation. Period following the financial crisis was tough for fund managers with only one category witnessing more than 50 percent of the funds outperforming. The medium-sized funds ($99-$10 million) seem to have outperformed other categories in terms of creating alpha, Markaz said. Large dividend yields, low level of institutionalization, information asymmetry, top heavy market structure, and underweighting small stocks are some of the reasons for outperformance by GCC fund managers, it pointed out. The study forecast that GCC fund managers will continue to outperform their benchmarks for the next few years. Better market infrastructure and regulations, Inflow of institutional money and MSCI upgrade to "emerging" status are some factors which can potentially make the search for alpha difficult. The study further said each study conducted, internationally, to ascertain if active managers outperform their passive counterparts, has its own set of conclusions and there will never be a definitive answer to the active versus passive management debate. Markaz added that Lubos Pastor of University of Chicago argues that the industry's alpha decreases as the size grows because alpha becomes more elusive as more money chases it. After a bad year, investors shift their alpha expectations downward and reduce investment in active funds but don't pull out all the money. Deloitte said in its "Global Asset Management Industry Outlook" that despite the challenges they face, most of the asset management executives surveyed indicate that their revenues will increase during the next three to five years. The asset management firms that grow will share several characteristics. First, continued growth, whether through acquisition or merger, new product introductions or expanded global distribution is an important focus as it significantly impacts future profitability. Second, firms that lose the trust of customers also tend to impede future growth in revenue and profitability. A firm-wide commitment to controlling operational risk and running a compliant organization can confirm that the firm's reputation remains intact. Finally, the need to anticipate the market's changing demographics suggests that asset managers should focus continued attention on advice and products tailored to the needs of an aging global population. – SG/QJM
