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Global Wealth ManaGeMent:
an opportunity unexplored
EvEN aS World markEtS gEt lESS FrIENdly, coNFlIctS mark thE rEgIoN aNd INvEStorS rEmaIN ovEr-cautIouS thE WEalthy gEt WEalthIEr. gloBally, WEalth clImBEd to a rEcord Qr443.35 trIllIoN ($121.8 trIllIoN), aBout Qr72.8 trIllIoN ($20 trIllIoN) aBovE WhErE It Stood tWo yEarS ago durINg thE dEpthS oF thE FINaNcIal crISIS accordINg to thE rEcENt rEport By BoStoN coNSultINg group (Bcg).
By sindhu n a i r
Kuwait, Qatar and UAE emerged as four of the top ten countries in the world with the highest density of ultra-wealthy households. The findings appear in BCG’s eleventh annual Global Wealth report titled Shaping a New Tomorrow: How to Capitalise on the Momentum of Change, which was released recently in the Middle East. Another interesting factor that was revealed in the report was the lack of a proper business model for wealth managers and private banks to focus on these high net worth individuals (HNWI). “Local wealth managers are currently orientating their wealth management offerings towards the mass affluent segment, but are missing out on the high net worth segment. Local Qatari banks should consider building business models – with the required skills, products, services – to be able to address these clients,” says Douglas Beal, Managing Director BCG Middle East. Qatar Today tries to find out what
is lacking in the wealth management domain and also gets insights from experts on global investment trends. High on wealth Low on risk According to the study, ultra-high-networth (UHNW) households, defined as those with more than $100 million in Assets under Management (AuM), were most highly concentrated in Saudi Arabia registering 18 per 100,000 households. This was followed by Switzerland (10), Hong Kong (9), Kuwait (8), Austria (8), Norway (7), Qatar (6), Denmark (5), Singapore (5) and the UAE (5). Making it to the top ten list in terms of the highest proportion of millionaire households were Qatar–8.9% , Kuwait–8.5% and UAE–2.6%. Singapore and Switzerland are the highest with Qatar taking the third position. Positive trends also emerged for Middle East and Africa overall, as AuM rose by 8.6% to hit $4.5 trillion in 2010 and with expectations to reach $6.7 trillion by 2015.
This was not the least surprising says Beal. “Given the demographics and overall wealth of these petroleum-rich countries we would expect a higher proportion of UHNW households than in other parts of the world. Growth in AuM also reflects the strong fundamentals of the region, driven by continuing strong petroleum prices.” “Nevertheless, the risk appetite of regional investors remains low, especially when compared to levels seen before the downturn. The asset allocation of GCC high net worth individuals remains overweight in cash and capital-protected products.” “During these times the global markets oscillate rapidly between risk taking and risk aversion, reflected not only in the demand and supply, and thus valuation of certain asset classes, but also in capital flows,” says Heinrich Weber, Head Geneva Branch and Desk-head Private Banking Middle East, Falcon Private Bank Ltd, a Swiss private bank specialised in wealth management for private clients, wealthy families and institutional investors. “During such periods wealth will be de-
20 Qatar today
tag thIS BaNk Not ES
“WEalth maNagErS Should FIrSt FocuS oN dEvElopINg thE rIght SErvIcE modEl. thIS Would INcludE ExpErIENcEd aNd SkIllEd rElatIoNShIp maNagErS, Who Would tEam up WIth WEalth plaNNErS aNd INvEStmENt advISorS to SErvE thEIr clIENtS.”
managing DirECtor, bCg
stroyed, and other wealth created. Shifts in power take place. The global markets will fluctuate strongly until many of the regional and economic conflicts are solved and clearer visibility of economic growth, inflation and monetary policies is attained.” “I would like to say that Qatar has a highly intelligent leadership who has built over the last two decades a pole of stability; a strategy, which shows its strengths exactly in times of tension. Therefore Qatar has done well so far and will also do well in the long run. This is also evident comparing the chart of the Qatar Exchange Index with other stock indices, regional and global. Even though, you would have to factor out econometric comparisons in certain correlation effects, I see no reason why Qatar’s stability would deteriorate in the foreseeable future. Thus, investing in Qatar is a very good long-term choice,” opinions Weber. “Such a market is obviously attractive for private banks and wealth managers,” he adds. Akshay Randeva, Director, Strategic Development at QFCA reflects the same sentiments of others when he says that HNWI need not look beyond the local markets when the GDP rates here are so promising. (See more on his views in our Insurance Special on Pg 24 ) But Guy Monson, Chief Investment Officer and Managing Partner at Bank Sarasin Alpen, has an entirely fresh perspective. He says wealthy Qataris have been happy to buy high yields in stocks in the local market but they have been afraid because of all the problems in the global stock market to buy global equity stocks. He says it’s time to change and go back to the old-fashioned investment method. (For his insights read interview on Pg 20)
World markets and trends World markets have also become less friendly for Middle Eastern investors as US regulators have increased scrutiny over all transactions in and out of the US markets. The higher demands of US supervision are considered to be intrusive for HNWIs who seek privacy and have decided to invest locally. These changes in regulatory stature in Western markets have altered the market dynamics of the
tHE bEst aDviCE rEgarDing invEstmEnts is to makE a plan, says wEbEr. “anD to tHink EvErytHing tHrougH, from a to Z. ask yoursElf: Do i nEED liQuiDity, How muCH anD wHEn? Do i HavE tHE nErvEs to HolD a position tHrougH nEgativE tErritory? arE my assEts EnougH DivErsifiED? How muCH risk am i willing to takE? Do i want to DElEgatE my invEstmEnt DECisions or not? How is my family or my otHEr businEss CorrElatED witH your portfolio? How soliD is my bank?”
region creating new opportunities for wealth managers in the country or of the region. Weber says, “After 9/11 all sorts of controls were increased. Additional factors, which influence the decrease in friendliness, are certainly misunderstandings between the US and the ME and also the desire to control information. Unfortunately, I can only see that the trend to monitor and control capital flows in and out of the US increasing.” Monson feels differently. He feels that
the regional unrest gives Qatari investors even more reason to go global for a greater exposure to international markets. The BCG report also had an interesting finding about offshore wealth, defined as wealth accumulated in a country where the investor has no legal residence or tax domicile, which echoed similar sentiments. According to the report the amount of offshore wealth, increased to $7.8 trillion in 2010 up from $7.5 trillion in 2009. But the proportion of offshore wealth slipped to 6.4% in 2010 from 6.9% in 2009. This was a result of strong asset growth in countries where offshore wealth is less popular, like China, as well as stringent regulations in North America and Europe which prompted clients to move their wealth back onshore, thus lowering the net increase in offshore assets said the report. The Middle East presents a unique set of challenges for wealth managers. Products are not particularly innovative yet, although banks in the region are doing their best to cater for their customers. BCG report puts the picture in perspective. It says that though Swiss system is well positioned to capture the wealth from ME and Africa and also Latin America owing to its long-standing reputation, as an off-shore centre it is under immense pressure. This is because about half of its AuM comes from Western Europe that is increasing its watch of cross-border banking. Follow the rules What then is the right model for the wealth managers or existing banks to gain access to these HNWI? Weber feels that a global wealth manager has to study the Qatari market very closely.
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Ba N k N ot ES
eye the nifty-fiftieS aGain
guy moNSoN rEcommENdS that INvEStorS takE a Back to FuNdamENtalS approach aNd takE thE claSSIcS INvEStmENt valuES oF caSh FloW, dIvIdENd aNd BalaNcE ShEEt StrENgthS.
uy Monson, Chief Investment Officer and Managing Partner at Bank Sarasin Alpen is no rookie. With an experience of over 27 years with the Bank, he is an investment expert managing close to $20 billion of ‘primarily’ global equities which he looks after for foundations, charities, institutions and individuals. He was in the country to tell Qatari investors of the opportunities that are available in global equity incomes. The classic blue-chips which used to be called the ‘Nifty-Fifty’ of the 70s offer a unique combination of unprecedented balance sheet strength and liquid assets, according to Monson. “The liquid assets for the average big American companies is the highest in 50 years today, making this global large cap equity, the best bet ever for any investor,” he says. “American companies have never had more cash; they have $2.5 trillion of liquid assets. At the same time, the profit margins of these companies after the disaster of the Lehman years have rebounded to the highest levels ever recorded.” Now at the moment, Qatari investors are looking for yield in local corporate bonds, to an extent in cash deposits, and also to the local Qatari equity markets as the yield there is quite high. In this scenario, Monson wants his investors to look at another opportunity that is not to be missed which is the global large-cap equities. “There has been a flood of money into two special income sources, one is high yield bonds and second in the emerging market debt funds. I think it is time now
to look at the risks, particularly in the bond market. Everywhere you look in the world, government bonds are not even protecting you from the inflation. But for the global equity companies, the dividends are rising faster than income. The dividends from IBM have grown 25% every year for the last five years, for WalMart it has grown 16%, for pharmaceutical giant Novartis it is 13%, Intel, 12% (every year). These growth rates are faster than inflation. When you buy a bond, the yield is fixed but when you buy equity you get dividend growth.” “I am here to advice that this is a ‘modern classic style’ of investment which is safe. I think we now have a global ‘Nifty-Fifty’ with companies not just from US.” But having said that the Nifty-Fifty companies are global, Monson observes that most companies are from the West not the East. He talks about the rising inflation in the rest of the world which makes them less attractive. “While the growth rates of companies in Brazil, India and China are exciting; their companies are not cheap anymore. They are facing rising labour costs, rising
food and energy costs, rising currencies. Also the corporate governance there is not too good.” There is never a better opportunity for cautious Qatari investors to buy into some of the best companies of the world, some old and boring assets like consumer, healthcare, telecoms and old currencies, he says. “It has never been cheaper to buy the best.” And a lesson he has learnt from his over two decade long stint in the investment market, “Better to be early than late....”
*Nifty Fifty was an informal term used to refer to 50 popular and the largest international cap stocks on the NYSE in the 60s and 70s that were widely regarded as solid buy and hold growth stocks. The fifty are credited with propelling the market of the early 70s. Most are still solid performers, though some of them are defunct now.
22 Qatar today
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“hIgh NEt Worth clIENtS NEEd SolutIoNS hoW to protEct, hoW to groW aNd hoW to paSS oN thEIr WEalth; thuS, BaNkErS havE to FocuS oN dElIvErINg SolutIoNS rEgardINg thoSE ISSuES. IF thEy caN dElIvEr, thEIr BuSINESS WIll groW.”
HEaD gEnEva branCH anD DEsk-HEaD privatE banking miDDlE East, falCon privatE bank ltD
“However, as Qatar has excellent banks operating here, the new-entrant has to be aware that he needs time to establish a reputation. And since the investment is considerable, the new entrant has to be certain that he can find experienced bankers who can deliver a superb service. “Qatar has by far not enough wealth management teams. A situation, which will not change quickly, given the global shortage of talented private bankers,” he says. “HNWI need solutions on how to protect, how to grow and how to pass on their wealth; thus, bankers have to focus on delivering solutions regarding those issues. Nothing more, nothing less. If they can deliver, their business will grow. Bankers should avoid pushing products and focusing on a quick commission he opinions. “Building a private banking business and a reputation as private banker needs time.” Beal feels that innovative products from experienced relationship managers will attract the right HNWI. “They should first focus on developing the right service model. This would include experienced and skilled relationship managers, who would team up with wealth planners and investment advisors to serve their clients. In addition, they need to create a full investment product set - both sourcing third party products but also developing innovative products that clients can only get through them.” Though Weber agrees that wealth mangers and banks in the region have to improve their game he is quick to defend the Swiss banking system. He says, “The Swiss private banking model, practiced over 250 years, consisting of protecting the wealth and privacy of the client is the ideal business model also for a bank or wealth manager in Qatar. The wealth managers until now, according to Monson had a challeng-
ing time protecting the capital. Now this will change, the wealth managers biggest worry will be protecting against inflation, predicts Monson. The young investor With much of the region’s population under 25, generational wealth management is a concern for older HNWI. Wealth managers are anticipating a demand for an increased exposure to international investments from the younger generation of HNWI inheritors. “Many young Qataris are getting a global exposure - they go to University in North America and Europe and spend vacations overseas. So, yes -it would make sense if their understanding of the world translates into a broader international exposure in their investments,” says Beal. “People invest where they feel comfortable. Because of the international exposure, through electronic media, and frequent travels, the next generation of Qataris will feel even more comfortable to invest abroad,” agrees Weber. “Based on this I foresee that the next generation of investors, the inheritors, will invest even more globally. They will not base their choices on preconceptions, but on hard analytical facts, thus looking for the best risk adjusted opportunity. They will consider the location of the investment according to risk ratings, not according to prejudice,” he continues. But Qataris already have a global approach to investing, which is clearly demonstrated by the Qatari sovereign funds or by several wellknown Qatari private investors, says Weber.The wealthy young generation poses an additional requirement of expertise and sound financial knowledge on the wealth managers. “The young investor will focus on
greater transparency, simpler products and also look at a global perspective and know more about new products like cloud computing, data managing and new forms of media. There will be an interest in the alternative energy, food technology. Large cap companies are diversifying and changing to include new technology and hence will again be favoured,” feels Monson. Trends The trends in the investment portfolio of these HNWI is currently in a “barbell” shaped investment profile - a lot of investment in cash, a lot in direct investments (real estate, local stocks, etc) - but less managed funds than in other regions according to Beal. “We see that there will be an increase in managed funds purchased by Middle Eastern investors, especially funds that invest primarily outside of the Middle East.” “HNWIs like something new, different, something they can’t get anywhere else. Nowadays, clients are looking for structured products that provide an upside, but limit the downside - this is important after the recent market downturn. Other products that HNWIs are interested in include access to Private Equity as well as participating in deals that a bank may be structuring using their corporate or investment arms,” he says. Weber feels that the preferred investments themes of the ME investors are commodities, agriculture, real estate, hospitality, healthcare, either direct or through vehicles, such as funds or stocks. The investments are getting increasingly geographically spread out, and the reason is the regional turmoil. “This trend will prevail for some years to come,” he feels
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