What Kuwaiti Investors want.

What do Kuwaiti investors want

At the Institutional Investor conference in Kuwait, I chaired a discussion group where both institutional and private investors were able to describe their objective in the long-term and the short-term. They were able to share their assessment of Fund Managers and product providers locally and internationally.

Participants: The discussion group consisted of Institutional Investors like sovereign wealth groups, central banks, investments banks and private investors like family offices, family businesses and private bankers representing high net worth Individuals. There were also some local and international asset managers present.

Region: The high net worth investors and family offices stated that they are more cautious and not quite sure where to invest since the international market posts that the global financial crisis was perceived as unsafe due to fear of contagion and counter party risk affecting their investments in Europe and the USA. They decided it would make more sense to increase their investments within their local market and the MENA region. This has proved not to be a safe haven since the Arab Spring began early this year.

Sectors: They still have a preference for real estate, fixed income and equities. The institutional investors, which include corporates, sovereign wealth organisations and asset managers, stated that they have become more conservative. The sovereign wealth funds indicated they have more of an appetite for long-term investments. In terms of sectors they expressed an interest for private equity, direct investments, long only products and emerging market high yield debt. In the short-term they prefer fixed income products.

Products: The private and institutional investors both described hedge fund products as one product that they regard as useful for reducing tail risk and making their portfolios more efficient. On the other hand, they find hedge funds quite volatile and their strategy rather complicated. Many of the investors have significantly reduced their hedge fund allocation and prefer using managed accounts. As such, private bankers find it difficult to convince their family offices and family business clients about the value they receive from their hedge fund allocations.

Generally, they have lost confidence in hedge fund managers to deliver risk-adjusted returns. When they allocate capital to hedge fund managers they prefer to use managed accounts or, in some cases, they use UCITS funds on platforms they trust like DB Select or Merrill Lynch.

Risk: They require products to become more transparent, since the asset managers need to explain how they assess risk in a market that is volatile and uncertain. The want their asset managers and service providers to spend more time educating the investors in order to understand their process. Investors want the asset managers to quantify the risk they are taking from a financial perspective and weigh that against the returns they to generate. They primarily want to know how they can mitigate risks like deflation, inflation, liquidity and the possible weakening of the dollar. This can be mitigated by investing in consumable commodities that can offset base currency declines.

Fees: The investors also question the fee structure of many fund managers in that they charge management fees of 2% and performance fees of 20% in some cases. They question managers having high management fees or raising the watermark for performance fees.

Region: Most investors worry about the crisis in the Eurozone and feel that monetary policy problems could affect their international investments. The 2008 financial crisis showed them that a credit problem in one sector can spread to other sectors, thereby exposing a portfolio to price declines and reduced liquidity as investors flee those directly and indirectly impacted sectors. They would like to find investments in markets like China, India, Russia or Brazil. They would also like to reduce this risk by having substantial liquid reserves in very high quality short-term instruments that can be a source of capital if other assets become temporarily less liquid or valuable.

Opportunities: Some of the sophisticated investors perceive the lack of liquidity in the market as one that could bring opportunities to purchase good quality assets at a discount. A few of the investors with a higher risk appetite observed that disruptions depress prices or increase yields when markets are under economic or liquidity pressure. This provides opportunities for the investors whose portfolios have held up well and have the liquidity to invest during times of stress. They pointed out that investing in illiquid assets should include a premium potential to compensate for the liquidity risk.

Evaluation and Assessment: The institutional investors claimed that they use consultants outside the region to monitor and assess some of their investments. Since the global financial crisis these consultants have been assisting with due diligence as their compliance departments have become much stricter. Many institutional investors have developed their own in-house teams that have the expertise to carry out due diligence and assess investment opportunities, as they were let down by several consulting firms that recommended and approved some alternative products before the global financial crisis.

The private investors and family offices, on the other hand, do not use external consultants. They tend to use the private bankers within the region and in Europe. They choose products approved by their private banks platform. When asked about external products (not on the private banks platform) some explained that they have family offices or wealth managers based in Europe or the USA.

Hard Assets: Institutional and private investors both expressed an interest for "hard assets". They have made investments in natural resources from several parts of the world. They perceive this as a sector where demand will continue to increase and hedge against inflation. The natural resource sector also provides a steady income; they combine investing directly and using specialist natural resource funds. They prefer to invest in other opportunities, be those in base metals or oil & gas and they use ETF’s. They would use funds when they seek the expertise of managers in regions they are not very well acquainted with. They want products that can perform well in an inflationary environment, which will include industrial metals and energy related assets, productivity enhancing technology stocks, short-term bonds and non-US investments that may hedge against the dollar.

FRANCIS AKPATA
MANAGING DIRECTOR

MAJLIS PARTNERS