Accelerating Development

The sector is being challenged by changes wrought by market forces, growing sophistication, increasing competitive pressure and significant emerging trends, but asset managers in the region expect increased flows in the near future with AUM driven by strong retail markets

The outbreak and spread of the pandemic over the last two years planted multiple seeds of disruption which are setting a dynamic new horizon of growth for the asset management industry in the coming decade. Boston Consulting Group said in May that the asset management industry continued its unprecedented growth trajectory in 2021, with global assets under management (AuM) rising by 12% to $112 trillion, significantly above the 20-year growth average of 7%.

AuM in the Middle East, which increased by 52% since the end of 2019, has been rising consistently and analysts expect them to expand further driven by soaring energy prices and a spectacular rebound in the property market.

“Middle East-based managers had seen a contraction in AUM in 2015 and 2016 following the oil price slump that started in 2014,” alternative assets industry data and analytics firm Preqin said in May adding that AuM in the region has rebounded over the last years increasing with the share of assets taken by the largest two markets Saudi Arabia and the UAE recording improvements.

The global asset management industry is evolving and the market within the Middle East region is no exception. The changes in demographics, technology, environment and social behaviors have set the ground for rapid transformation in the asset management industry.

“The pandemic has been a watershed event for the wealth industry, accelerating dramatic changes in investor attitudes, behaviors and expectations,” said ThoughtLab.

A study that was conducted by Moody’s in September 2021 showed that asset managers in Gulf countries expected increased inflows over the next 12 months amid growing demand for Islamic and environmental, social and governance (ESG)-compliant investments. The industry is being confronted with the challenge of transforming itself through a combination of market forces and megatrends.

The asset management industry continued its unprecedented growth trajectory in 2021, with global assets under management rising by 12% to $112 trillion, significantly above the 20year growth average of 7%

– Boston Consulting Group

An enabling environment

Traditionally viewed as a source of capital, the Middle East is now being seen as a region with promising investment opportunities. The asset management industry continued its unprecedented growth trajectory in 2021, with AuM in the Middle East rising by 16% to $1.2 trillion significantly above the 10-year growth average, Boston Consulting Group said in May.

Growth in AuM in the region is being driven by strong performance in retail markets. Over the past two years, retail investors have increasingly become one of the most important investor segments, outpacing institutional AuM as a source of capital growth, at 9% of total AuM.

The Middle East financial services sector is ripe for mergers. Regional governments are supportive of consolidations because robust banking systems able to finance new industries are seen as key to boosting the dynamism of the private sector and accelerating growth.

Saudi Arabia completed the tie-up between National Commercial Bank and Samba Financial Group into Saudi National Bank (SNB) in April 2021. The merger led to the creation of SNB Capital, the biggest asset management firm in the Middle East region with $81.8 billion in assets under management at the end of Q1 2022.

UAE-based SHUAA Capital merged with Abu Dhabi Financial Group in August 2019. The merged entity, SHUAA Capital, registered $13.1 billion in assets under management in 2021. The asset management firm’s special purpose acquisition company (SPAC) was listed in New York in April 2022. The $100 million SPAC or blank-check firms will focus on identifying and merging with technology or tech-enabled financial services business in the Middle East.

A survey by Oliver Wyman showed that consolidation appetite in the GCC region is high, reflecting the asset management

sector’s growing sophistication as well as mounting competitive pressure.

The Robo-advisory market in the Middle East and Africa will grow at an overall compound annual growth rate (CAGR) of 55.9% to $3.8 billion by 2023

– Kenneth Research Sustainable Investing

The burgeoning demand for net-zero compliance by investors is driving some asset management firms to develop sustainable investing strategies as public attention toward the global sustainability agenda is also rising.

BNP Paribas said that clients have become increasingly demanding in the complex world of asset management, driven by younger investors such as NextGen and Gen Z clients. The increasingly growing demand for sustainable investing from investors is evident in the pledges by institutions and increased flow into sustainable mutual funds and exchangetraded funds (ETFs).

“With $100 trillion to $150 trillion in global capital deployment required to reach net-zero goals by 2050, demand for sustainable investments represents an opportunity that will dominate the sector in both the short and long term,”

said Boston Consulting Group. Additional growth is expected to come from the rise of climate-tech unicorns and the private investment flows into decarbonisation that became widespread last year.

Conscious investing was slowly building momentum through the support of corporate social responsibility, but with COVID-19, the need for action on ESG topics by governments and corporations alike has never been higher. ESG is increasingly becoming an integral part of how the global financial services sector operates.

The pandemic also placed the Islamic finance industry back on ESG investors’ radar. S&P Global said that as regulators and policymakers around the world seek to establish a more sustainable, stakeholderfocused and socially responsible financial system for the future there are certain similarities between Islamic finance and sustainable finance.

Shariah-compliant financial instruments offer a framework that embodies the social and ethical values of ESG investing, offering asset managers the opportunity to adopt more sustainable and conscious investment strategies while tapping into the potential value of impact investing. Sustainable investing has come a long way and had over the years gained more interest amongst institutional investors.

The global push to achieve net-zero carbon emissions by 2050 is both mission critical for the planet and presents several opportunities for the asset management industry. Meanwhile, the hosting of the next two rounds of the United Nations climate summit, Conference of Parties (COP), by Egypt and the UAE in 2022 and 2023 respectively is a boon for the asset managers and it is expected to drive rapid social and economic changes in the region.

The fountain of growth

The profound shift in the asset management sector that was accelerated by the pandemic has overturned conventional wisdom about investors. ThoughtLab said that digital is no longer just the domain of the millennial retail market; it is now preferred by older and richer investors.

Asset management firms have remained largely on the sidelines in an industry where digitalisation has transformed much of the financial services and products. The industry is typically seen as embodying old-fashioned values and providing discrete, tailored service attributes that remain valuable parts of the business, but McKinsey said for many clients, these qualities are “no longer sufficient”.

The outbreak of the pandemic forced wealthy clients to accelerate their adoption of digital technologies and seems certain to lead to permanent changes in the behaviour of both firms and investors. “Asset managers are unlikely to be able to

serve modern clients effectively without a digitised operating model,” said McKinsey. Digitalisation in the asset and wealth management sector is being driven in part by changes among clients. Though the typical client in a developed market today is around the age of 65 years and is fairly comfortable with digital technology, shifting demographics, evolving client behaviours, the rise in new innovative technologies and emerging disruptive competition are all reshaping the industry. A coherent digital transformation plan will give asset management firms a head starts in leveraging stronger client relationships, reduced operating costs and enhanced risk management and regulatory compliance capabilities. “The changes are helping firms meet their regulatory obligations, boosting the productivity of relationship managers and lifting compressed margins,” McKinsey added.

Once a laggard in the adoption of technology, wealth management is accelerating digitalisation, deploying artificial intelligence (AI), Big Data, robotics and other technologies to enhance client’s experience and trust—which is central to private banking relationships.

The growth of “automated wealth managers” or Robo-advisors is revolutionising the asset and wealth management industry with unprecedented force. By leveraging algorithms to offer financial advice for a fraction of the price of a real-life client advisor, Robo-advisors

are growing at a rapid pace, doubling their assets under management every few months.

Kenneth Research projected that the Robo-advisory market in the Middle East and Africa will grow at an overall compound annual growth rate (CAGR) of 55.9% to $3.8 billion by 2023. Roboadvisory platforms in the region are quickly taking off, with several homegrown players having recently joined the onrush.

The shift to digitisation is inevitable and industry experts expect it to radically transform the industry in the coming decade. To succeed in MENA’s transformed and competitive market, wealth and asset management firms need to revise their strategies and switch from a productcentric to a customer-centric approach— one focused on personal requirements not the demographic.

Consolidation appetite in the GCC region is high, reflecting the asset management sector’s growing sophistication as well as mounting competitive pressure

– Oliver Wyman