CEO Middle East talks to Iyad Malas, head of Majid Al Futtaim Asset Management about why now is the time to set up a fund for investment in the MENA region.
CEO Middle East talks to Iyad Malas, head of Majid Al Futtaim Asset Management about why now is the time to set up a fund for investment in the MENA region.If you have been in this region for a while, you will have noticed a couple of things. There's the weather, of course, and then there's the wealth. Sure, the heat is gruelling, it's the price we all have to pay for a slice of the tax-free pie. We're none of us here for the scenery, after all. But how to get your hands on more of that pie? How to get real access to the region's wealth?
Iyad Malas, CEO of the Majid Al Futtaim Group wants to help you, although, it must be said, you must already be a man or a woman of considerable means to enlist his services. Malas manages his boss' cash - that's billionaire Majid Al Futtaim to you - by investing it, or placing slabs of it into the care of carefully chosen fund managers, around the world. Now he is prepared to let you throw your cash in with Al Futtaim's, into the pot earmarked for investment in the MENA region.
We wanted to set the fund up so that when investors come back we will be the team people want to put money with.
And if you believe, as many do, that the MENA region is less susceptible to the credit crunch than much of the rest of the world is, and that the growth story in this part of the world is likely to continue at some lick over the coming five years, then why not invest shoulder to shoulder with Al Futtaim?
Malas explains: "The fund is investing in the liquid equity markets in the region. So we wouldn't invest in property directly, although we might buy Emaar shares. When we look around, despite what has happened globally and the impact that it has had, the impact has been mostly felt in Dubai, not necessarily across the UAE, and definitely not on a regional basis. Saudi has kept up steady growth. Most of the world is going through a contraction, but this region is still going to grow at 2.5 percent. Oil prices have come back nicely. So the sustainability of growth in this region is very much going to continue.
"We see a lot of opportunities in Saudi. There, for example, on a medium term basis, the housing sector looks good. In Saudi, home ownership is only fifteen percent and the potential is tremendous. The government has enough revenue to support the necessary infrastructure. So you are talking about utilities - companies that are providing services for infrastructure. Qatar and Egypt look good too."
MAF's asset management team
The Majid Al Futtaim (MAF) MENA Asset Management fund has a team of eight, including Malas. Set up in 2002, originally with one portfolio manager, now the staff comprises two portfolio managers and five analysts. All of the team have been with MAF for over six years, which, Malas points out, is unusual in an industry famed for the merry-go-round nature of employment. Asset managing is a poacher's paradise, apparently.
"In 2008, what happened globally has shown that where you put your money, with whom you put your money, and how much you trust those people, has become even more important than it was before. When we look at the performance of our managers, relative to the performance of other managers in the region, they have outperformed them pretty much every year, and by a big margin. We have a great team," Malas says.
To place your money with Malas and company, you will need either $100,000, or $25m - which seems to be an enormous difference. Why the difference? Malas says it is about management fees, rather than trying to attract different types of investors. Go for the lower threshold, and you'll pay 1.5 percent in management fees. Cough up the $25m, and you'll only pay one percent. And what sort of returns can investors expect for their outlay? Malas seems surprised by the question.
"We are talking about long term investments. We don't really have a specific target. Obviously, anyone investing in equity will expect ten-twelve percent per annum. We have done that and better over the last few years. 2006 was a disaster, but our portfolio was up three percent when the market had crashed," he says.
Warming to his theme, he continues: "In 2006, valuations were completely unrealistic. In February that year, we completely liquidated our Saudi portfolio. In 2008, it was a lot more challenging. If you remember, the oil price was at an all time high in the summer, and growth, earnings... well, companies were growing at 30-40 percent. Valuation in that context seemed reasonable. Except everyone hit the wall at the same time. And so we've had major earnings drop. In 2008, on the MENA portfolio, we were down 40 percent, but the index was down 59 percent."
Much of Malas' conversation is littered with talk of "defensive plays", and "Dubai plays," and occasionally, the phrase beloved of money men the world over, "no brainers."
He explains that his team look for companies that their analysis tells them are underfunded, and then snaps up a share in them, ready to sell on as soon as the company's market valuation meets their own. An example: "There have been some bargains in Dubai. We have taken some positions, two or three months ago. We took a stake in Aramex - it's one of those with no leverage, good logistics - and it was more of a defensive play than a Dubai play.
"There are many other cases where you find good investments across the region. Another example: in Egypt, EFG Hermes - at some point the break up value of the company was... well, it was trading at 12 Egyptian pounds, and the value of two of its investments was, well, the cash was 7 Egyptian pounds, and the investments would have added up to 17 Egyptian pounds. So the market had a discount to real assets and valuing the company. We bought in. It was a no brainer."
When asked how much money the MAF MENA fund would like to raise by opening to external investors, Malas says he is not under pressure to raise a certain amount, after all, he is already managing a very substantial sum of money on behalf of the Majid Al Futtaim family. Which begs the question... then why bother opening up to external investors? Malas says there are two reasons.
"One is that there is a great business opportunity to develop an asset management business in the region. If you look at the mutual fund industry in this region compared to the mutual fund industry in the rest of the world, it is at a nascent stage here. You are talking about only eight percent of GDP in mutual funds. In the West it could be 60 to 70 percent. So long term, it is an interesting opportunity.
"Two, for our managers, it presents a good motivational challenge, and stops other people poaching them. It gives them a bigger pie to manage, and that is very important."
Savage inflation of protracted deflation?
The big question in the international financial markets today is whether the world is staring down the barrel of savage inflation, or protracted deflation. The large scale printing of money across the world, the inflation camp would argue, will imminently devalue money to such an extent that inflation can be the only possible outcome. Those who believe deflation lies ahead will tell you that huge numbers of redundancies, and people's desire not to spend their cash, will cause prices to come down. Who to believe?
Malas says: "We are worried on a global basis about inflation, but not until 2010, towards the end of the year. Inflation is going to be a concern because of all the money that is being printed in the US. The counter side to it is you're going to have excess capacity in industry, in labour markets, etcetera.
It is not going to be supply driven inflation. There will be unemployment. Inflation is normally caused by low supply, or a lot of demand. There is plenty of supply of labour, plenty of supply of commodities, plenty of supply of capacity within indices, therefore there is not going to be pressure for prices to be increased from a supply side. On the demand side, consumers have been hit big time, so consumers are not going to increase prices.
So it will only come from the monetary side, by the US printing a lot of money. And that is the only way they will eventually be able to pay their debt. They need to devalue the currency to be able then to pay the debt more cheaply. But that is not a phenomenon we will live with immediately. We have gone through deflation of some form, and I can't see a lot more deflation from here. But I don't see inflation immediately."
And in the meantime, then, while we wait to see which way the market will go, we should be investing in the MENA region. Malas smiles. "Well, we think this is a good time to set up the fund. People might not be investing today, but we wanted to set the fund up so that when investors come back we will be the team people want to put money with."
When they're ready to invest, so too will be Malas.