As the spectre of higher interest rates begins to worry fund managers, National Bank of Abu Dhabi has joined the ranks of asset managers looking for low-risk ways to generate fixed income from financial instruments other than bonds.
NBAD, the biggest UAE bank by market value, already offers its high net worth clients with at least US$10 million to spare discretionary trade finance portfolios, but is looking to start a trade finance fund this year, domiciled either in the Cayman Islands, Luxembourg or the UAE, said Mark Watts, the head of NBAD’s asset management group.
Late last year, the European Islamic Investment Bank (EIIB) and Dubai-based Rasmala together started a Sharia-compliant trade finance fund domiciled in the Cayman Islands that is targeting a 4 per cent rate of return. It is expecting that investors this year will pour $100m into the niche fund that offers an asset class that is otherwise difficult to tap.
Like the EIIB-Rasmala venture, NBAD is also targeting a return of 4 per cent annually, Mr Watts said.
Trade finance is a form of intermediation for exporters and importers whereby banks or other financial institutions offer guarantees of payment including so-called letters of credit.
“It’s a great asset class,” said Mr Watts, who oversees about $2.2 billion of assets in mostly equities and bonds. “The beauty of it is that you get a good Libor [London interbank offered rate] based return, so there’s no fear of interest rate rises and losing your money.
“Trade finance is a multitrillion-dollar market. Before the banks had a stranglehold on it rather than asset management. But because banks are retrenching slightly because of their balance sheet, because of Basel III [capital requirements], some of these deals are not as attractive for them.”
Together with NBAD’s existing tailor-made trade finance solutions and the planned fund, investments in this business are expected to grow to $1bn within three years at the asset management division, said Mr Watts, a fixed-income specialist who joined NBAD in 2010 at a time when the US Federal Reserve was cutting rates and investors sought more exposure to bonds.
But now that interest rates are set to rise at some point in the near future, fixed income managers are seeking to extract sustainable yields from other asset classes, analysts say.
They are in agreement that it is a good bet to diversify fixed-income portfolios with trade finance, especially at a time when uncertainty hangs over interest rates and the decades-long bull market in bonds looks like it is coming to an end.
Analysts also say that fund managers are in a good position to get into the trade finance business because of Basel III industry regulations that are aimed at reining in the amount banks can both borrow and lend, creating opportunities for them to fund such transactions.
“It would provide a nice diversifying asset class and I am sure that there’s going to be investors interested in that,” said David Mikhail, a Middle East banking analyst at Cairo-based investment bank Beltone Financial. “Whether it’s retail or institutions that want exposure to that asset class, it’s good way to do it because the fixed costs of originating a deal like that are prohibitive to any investment exposure to the business. It’s an interesting idea. Four percent is pretty good at the moment. That’s in line with some of the corporate bonds we’re seeing in the GCC, and above sovereign yields.”
“Trade finance is not a big part of the business of banks in the region but it is something that continues to command the attention of management, because as regional oil exporters become less reliant on hydrocarbons, trade finance will be a good long term business to be in.”
Such funds, however, are geared towards sophisticated investors who can lock up big ticket investments for at least 90 days, the time it typically takes for trade finance operations. And they are likely to continue to be offered exclusively to institutions and high net worth individuals.
“We’re basically giving money to an exporter on day one, taking ownership of the product in between, waiting 90 days for it to reach its other port and getting the money back from the importer,” said Mr Watts. “Generally the weighted average life is about 90 days. This is why it’s slightly unusual and only open really to institutions and larger clients.”