Asset management is a fledgling sector

Total assets under management (AUM) in the GCC are valued at approximately $85 billion (Dh312.2 billion). As a percentage of the regional economy, it is, relatively speaking, a very small amount. With such a low number, what are the growth prospects?

In understanding why the AUM is so low, it's important to understand that asset management is a very new industry in the GCC, unlike developed economies which have a 200 year head start. So comparing numbers across these two markets doesn't fairly reflect the growth potential.

There is also a cultural element. Investors in the GCC are not used to giving money to others to manage. They prefer to invest directly, whether in equities or real restate. There are multiple reasons for this: there is a distinct lack of trust in institutions as money managers, plus local investors believe more money can be made if investment is done directly. Add this all together and you have one explanation for the relatively weak culture of professional asset management.

The GCC has always been a net exporter of capital. This means that it was (and remains) a lucrative destination for international private bankers to visit and fly out with commitments to invest in US, European or Asian assets. This has stunted the growth of an indigenous asset management sector.

Dearth of variety

The absence of variety across regional funds has also been a key issue. Most of the locally managed mutual funds are either equity funds or bond funds. There are very few real estate, venture capital or private equity funds. There is also a deficit in the number of Sharia-compliant funds in a region where a large number of investors believe in investing according to religious principles.

The financial crisis hasn't helped either. Investors have lost heavily and have become very wary of markets and asset managers, with a strong preference for cash or cash-like instruments.

So, with many odds stacked against it, what is the outlook for the asset management industry in the GCC?

The region's greatest strength continues to come from global demand for its oil and gas reserves. This is expected to continue for the foreseeable future, meaning that our hydrocarbon-based GCC economies will continue to generate significant income which will need to be invested.

Regional financial hubs

The region has also been trying hard to promote local financial centres. Bahrain was always a financial hub. Dubai established the DIFC in 2003, followed by Qatar's QFC in 2008. The region now has a competitive financial marketplace and there is now competition between these three to attract fund managers.

The Arab Spring has caused some initial concerns for some investors, but otherwise the region continues to look confidently to future opportunities, driven by new growth in the region's economies which are rapidly recovering from the initial impact of the global financial crisis. Qatar, in particular, is smartly positioning itself not as a centre for everything and everyone but as a hub for asset management and insurance.

This growing confidence means that some of the money that would otherwise have gone to London, New York or Zurich, is starting to find its way into local markets.

The writer is a CFA charter holder and a member of CFA Emirates. He is the managing director of Genesis Institute, a financial training company.