DUBAI: Equity funds investing in the Middle East and North Africa (MENA) are sitting on high cash piles, signaling a lack of conviction and absence of viable opportunities in a region touted as the next big emerging play.
Research suggests MENA funds are holding as much as a quarter of their assets in cash against a more usual global average of 2 to 5 percent, suggesting the bullish tone of many managers is not backed by their allocations.
Some say they are being constrained by a lack of more sophisticated market strategies and techniques.
"At the moment there is very little one can do apart from buying and holding," said Shehzad Janab, head of asset management at Daman Investments, which runs four funds and whose parent manages about $1.47 billion in assets. "I can’t short-sell and when you look at over-the-counter derivative markets, given the inherent volatility in our markets coupled with the lack of sellers, means pricing tends to be prohibitive. We need more asset classes."
A recent report by rating agency Standard & Poor’s found cash allocations of fund managers in the region are mostly above the 10 percent mark and in some cases are as much as 25 percent.
Stock markets in the MENA region, especially in the Gulf, have been hard hit by Dubai’s debt woes, as well as a sluggish global economic recovery and regional outflows.
While other emerging markets such as the BRIC (Brazil, Russia, India and China) countries witnessed strong inflows after the crisis, MENA markets are not part of benchmark series such as MSCI and as a result are shunned by many institutional investors.
Africa exposure
"Markets have been buffeted by international concerns," Eric Swats, head of asset management at Dubai-based Rasmala Investments said in a Reuters Insider interview.
About 10 percent of the investment firm’s assets are in cash, says Swats, who sees a recovery in the markets and fund inflows by the fourth quarter.
Global fund managers, including the likes of Credit Suisse, T Rowe Price, Franklin Templeton and Barings flocked to the region trying to establish an early foothold in fast-growing economies.
But Gulf Arab markets have significantly underperformed emerging markets like India and China in the last couple of years. The MSCI Arabia index returned about 17 percent to investors in 2009, compared with about 70 percent for the MSCI Emerging Markets index.
In 2010 too, Gulf markets are underperforming big emerging markets such as India and Brazil, resulting in no significant institutional investments to fund managers. A lot of managers are playing a wait and see approach, hoping markets recover in the later part of the year.
For the longer term, most MENA managers remain bullish and see bright prospects ahead for the equity fund industry, which had $2 billion in assets as of end-July.
"The industry is still at a nascent stage and you will see more international names coming to the region," said Rami Sidani, head of investments at Schroders in Dubai who says his $250 million fund is fully invested in the region.
In the meantime some MENA funds appear to have discovered a formula for extracting returns in this tough environment by boosting exposure to Africa.
Africa regional funds recorded net inflows of more than $480 million in the first half of the year, according to fund tracker EPFR Global, an indication of investor appetite for the poorest continent.
The top performing MENA fund according to Lipper is the Bellevue BB African Opportunities fund, which has returned about 30 percent in the 12 months to end-July. The fund has a relatively high cash position of 9 percent.
Yet MENA funds have seen low inflows so far this year and redemptions from existing investors are putting fund managers in a difficult position and pressuring them to set aside more cash.
Even though valuations in the region seem attractive, managers are waiting for institutional money to flow in before they start deploying their own funds.
"When your valuation models are telling you to buy but redemptions are forcing you to sell, it’s a very difficult spot to be in," Daman’s Janab said. "It’s the classic curse for all investment managers." –Additional reporting by Joel Dimmock in London and Moira Sidoti in Dubai
