Despite challenges faced globally, the Middle East’s Assets Under Management (AuM) grew by a whopping US$100 billion in 2022 to reach US$1.3 trillion, according to BCG's latest annual Asset Management Report, which investigated the factors shaping the asset management industry.
The region outperformed both Europe and the US, but not Asia, perhaps unsurprising given the Middle East is home to some of the world's largest sovereign wealth funds.
But while AuM in the Middle East performed "relatively better" than in Europe or the US in 2022, the report warns that growth is no longer guaranteed and urges organisations in the region to be proactive in recouping historic profit growth – prior to 2022.
The fact is – 2022 was the one of the worst years for global investor returns since the financial crisis of 2008.
"In an environment where growth is no longer guaranteed, where fees are being compressed, and where passive investing is increasingly popular, the Middle East's asset management industry is facing a crucial turning point," says Farouk El Hosni, Principal at BCG.
Transformation is necessary if organisations want to recoup historic profits
Farouk urges leaders to "re-examine their organisations' strategies" to take their fair share in the market growth and accelerate profit contributions. “Organisations should evaluate and optimise costs across the full value chain, and really focus on what makes them stand out. Going forward, the only choice is change.”
Since 2006, 90% of revenue growth came from market performance, and in an environment where this is no longer guaranteed, transformation is the only option.
The report signals that while markets are expected to recover, central banks all over the world are no longer engineering sustained market appreciation. In fact, their goals for the short term are exactly the reverse, as they look to slow growth to combat inflation – something that is guaranteed to have an impact, especially on equity markets.
For the Middle East region, however, the growth potential is far more positive "driven by continued higher oil income and comparatively positive equity market developments", the report finds.
BCG predicts that given the existing pressures and market expectations, if global asset managers stay the course, their annual profit growth will be around half the industry average of recent years (5% versus 10%).
To return to historical levels, asset managers will need to cut costs by 20% overall and shift their revenue mix to generate at least 30% of their revenue from higher-margin products.
So, what should be top the leadership agenda in asset management over the next few year? BCG points to three key themes:
- Profitability Asset managers should transform their approach to profitability – by understanding the expenses and drivers in each function and using multiple initiatives to optimise costs, rather than just slash expenses
- Personalisation: Asset managers should harness the technologies that make highly personalised client experiences and products possible. BCG points to new technologies in boosting personalisation efficiency and effectiveness in the sales and marketing process, potentially leading to an increase in sales conversions of about 20% relative to traditional approaches.
- Private Markets Companies should pursue high-growth alternative investments and the private market opportunities. Those aiming to enter the alternative market can do so through four primary pathways – including building in-house, buying multiple firms and using an affiliate or boutique structure, buying an alternative firm and operating it independently, or establishing partnerships.
"This is especially applicable for Middle Eastern asset managers given the high preference of regional investors for private assets and the lack of other alternative investment instruments," BCG says.
Alternative investments as growing option for Middle Eastern sovereign wealth funds
Preqin's just-released Sovereign Wealth Funds 2023 report backs this up, and shows that alternative assets will continue to have a place in the portfolios of sovereign wealth funds if they provide diversification benefits and good risk-adjusted returns.
"With their abundant financial resources and increasingly sophisticated investment teams, sovereign wealth funds have the kind of capital that can give them access to top-performing funds," the report states.
The sheer amount of fresh capital managed by Middle East-based sovereign wealth funds far exceeds the needs and capacity of their domestic capital markets, and so their appetite for alternative assets has risen. Preqin analysis of Middle East-based sovereign wealth fund data shows that the average allocations to alternatives have doubled YoY at the end of 2022, rising from 22% of total assets at the end of 2021 to 44%.
While some of this is driven by the very high allocation levels of some of smaller sovereign wealth funds regionally, this trend reflects their ongoing pursuit of non-traditional assets to boost returns. Percentage allocations are also likely to be boosted by falls in the valuations of public equities and bonds in 2022, according to the latest data.
The increase shows the flexibility that these Middle Eastern sovereign wealth funds have when making investment decisions, as they often have fewer short and medium-term liabilities than other types of institutional investors.
Harsha Narayan, Managing Editor at Preqin, says: “Sovereign wealth funds have continued to build sophisticated in-house teams and are increasingly able to act more like a fund manager when deploying capital. They leverage talent, technology, and partnerships, with fund managers and investors to invest in various alternative asset classes, and they are growing more competent to conduct direct or co-investment deals.”
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