Gulf fund managers are likely to find a reduced appetite among foreign institutional investors as they assess the impact of the Dubai World debt restructuring on regional markets, a top ratings agency said yesterday. But despite these concerns, most fund managers surveyed by Standard & Poor's remained upbeat about the fundamentals of the regional companies in which they have invested.
"The news [about Dubai World] came as a surprise to just about everyone," said Roberto Demartini, the lead analyst at S&P Fund Services, which rates 14 regional funds in the region. He said most analysts perceived the investor mood as a "crisis of confidence". Mr Demartini cited Mujib Moosa, the manager of Markaz Gulf Fund, who said the events would keep some investors from putting their money to work in this region. "Mr Moosa himself has had to do some hand-holding recently, in particular with international investors," he wrote.
S&P conducted its survey among the 14 fund managers in November and December. All funds are managed in the Gulf and invest only in the MENA region. Dubai World asked its creditors on November 25 for a standstill on its loan repayments. The conglomerate, which has US$22 billion (Dh80.8bn) of debt, is locked in talks with its creditors as they try to hammer out a standstill agreement as a prelude to a broader restructuring. Despite the impact of the debt restructuring on institutional investor sentiment, most fund managers expected markets to rise, S&P said.
Dubai stocks have fallen 7.8 per cent so far this year, while Abu Dhabi shares have lost about 1.4 per cent. "Most funds were fully invested after a period of holding larger cash reserves, and most managers were selectively going back into the UAE," said Mr Demartini. "A common view was that with the oil price at $70 a barrel the economies in the region were poised for some stability and growth."
Still, some equity analysts say the sell-off, notably of UAE stocks following the Dubai World announcement, has left the shares with upside potential. They also argue that the so-called frontier markets - the index provider MSCI Barra considers all GCC countries frontier markets - still have some catching up to do, possibly in the second half of the year. Many funds based in the Gulf have been gearing up to broaden their investor base to include more institutional investors.
"The events [surrounding Dubai World] are leading to a bit of both; they will either delay the launch of new funds or force asset management groups to realistically assess the situation and scale back their hopes for new inflows into their funds," said Mr Demartini. "It is very much the next step for the regional funds to go after the investors in the West and Asia to broaden their investor base."
Most regional funds are largely held by GCC investors, with a mix of wealthy individuals, some family offices and institutions. Family offices are private companies that manage investments and trusts for a single wealthy family. The asset management arm of The National Investor (TNI), a financial services company in the UAE, is preparing to launch a fourth fund that would be specifically geared to institutional investors, notably in Europe.
"We want to reduce the cyclicality and volatility of our revenues," said Walid Hayeck, who heads the asset management unit at TNI. "The aim is to generate more recurring revenues." Most regional funds are heavily skewed towards local retail investors and high-net-worth individuals. TNI wants to have 80 per cent institutional investors and 70 per cent of funds coming in from abroad. At present, TNI has two Bermuda-based funds and one based in Abu Dhabi, which are mainly geared towards Middle East and UAE blue chips.