A reliable regulatory framework, abundant regional capital and good support infrastructure helped Bahrain deliver solid growth for its asset management sector last year.
At the end of 2016 total assets under management (AUM) in the country reached $18.4bn, a 2.7% increase on the previous year, according to the Central Bank of Bahrain (CBB). Steady growth since 2012, when AUM reached $13.2bn, can be attributed to the entrance of new investment firms and the introduction of innovative products and structures by existing firms, the CBB said.
As a share of GDP, total AUM rose from 43% in 2012 to 57% in 2015 – the most recent full-year data available from the central bank.
Even so, room for further growth in the segment remains, according to Najla Al Shirawi, CEO of SICO, a regional money manager with $1bn in AUM and a core focus on equities.
“Some regional pension funds have been allocating their money to bank deposits with very low yields and large companies have kept their indemnities internally instead of having them managed independently by professionals,” she told OBG. “All this business has the potential to be brought into the industry”.
The number of investment vehicles offered in the kingdom is on the rise. As of March, the CBB reports that Bahrain was home to 2610 authorised funds, of which 96% were local branches of foreign investment companies.
At the end of last year, the net asset value (NAV) of these funds totalled $7.55bn, up 6.6% on the previous year and nearly four times the figure in 2000.
A breakdown of the 2016 NAV figure shows that foreign firms made up 53% of the total. Measured another way, Islamic funds in the kingdom – whether domiciled in Bahrain or abroad – contributed $1.26bn, or 17% of the total.
Much of this growth can be attributed to Bahrain’s sound regulation and an openness to business and investment. The introduction in 2012 of the CBB Volume 7 Rulebook, for example, opened up the country to “alternative” investment funds such as real estate investment trusts and private investment undertakings.
Earlier guidelines issued in 2006 – the CBB Volume 4 Rulebook – had already made investment business licences available in three different categories: fully-fledged asset managers; agents and intermediaries; and investment advisory firms. As a result, the number of licensees has grown from 22 firms in 2006 to 55 as of March, according to the CBB.
With solid fundamentals in place, Bahrain’s asset management industry has strong potential for growth if some of its main challenges can be addressed.
Asset managers, for example, are becoming increasingly concerned about governance in investments such as pension schemes and insurance companies, calling for better oversight to guard against bad decision-making, according to Abdul Rahman Al Baker, executive director of financial institutions supervision at the CBB.
“One area for improvement is better corporate governance, which will enhance investor confidence and ensure that markets are fair and efficient,” he told OBG. “This can be done through a more targeted regulatory framework, with solutions tailored specifically to the needs of each type of investor.”
Another key factor reshaping the industry, both in Bahrain and globally, is technology. New distribution channels such as digital brokerage platforms are targeting a whole new class of tech-savvy investors, which can bring down intermediary costs by up to 30%, according to the CBB’s Al Baker.
The use of computer algorithms and artificial intelligence to analyse large amounts of market data – paired with what some investors see as inflated managerial fees – have seen a wave of capital shift from actively managed funds to passively managed ones, and spawned a whole new industry of index-tracking products, such as exchange-traded funds.
According to data provider EPFR, actively managed equity funds have seen net global outflows of about $523bn over the past 12 months, while passive ones have seen inflows of $434bn.
Nonetheless, Al Shirawi believes some time will pass before passive management has a significant impact in the region. “First we need a deep enough market, which in turn will allow for meaningful indices to be created,” she told OBG. “Once we have both, then passive funds will spread faster.”