Mena FM (MFM): What is your new role going to involve?
Jim Leggate (JL): My role is to head up Russell Investments in the region. That will include both those organisations locally that are investing outside and that are investing back into the Mena region. It’s also for international investors that want to invest into the Mena region. We’ve had the indices for a number of years that cover the GCC ex-Saudi, and it’s just a matter of building up that index business. We are the only index provider to also be a multi manager, so we can also construct products and solutions for international investors and local investors in the Mena region.
MFM: Your multi-manager business has existing partnerships with Rayan Asset Management and Jadwa Investments. Do you have plans to expand on these or build new partnerships in the future?
JL: I think it’s a little early to say, but as a multi manager business we do multi manager, single manager and direct investments ourselves. In the multi manager business we need to be able to provide access to single country, regional products, etc, so we need to thoroughly investigate the managers that operate within those various areas. We’ve already had one research visit and several research follow ups and there are more visits due to happen. I think the most important thing is that we have to have a very good understanding through our fundamental constant qualitative research in terms of which are the most appropriate managers to create a product with.
MFM: When are your next visits taking place and how close are you to making an allocation to a Mena fund manager?
JL: One thing is to understand which managers we should use, but the other important thing is what kind of product investors are looking for. Is it single country? Is it regional? If it’s regional is it GCC, or the whole of the Middle East? And that would really depend on who the end investor is. So if it’s an international institutional investor based outside of the region, by creating a GCC Mena portfolio we might be adding additional off-benchmark risk because they don’t want to invest in Kuwait because it’s not emerging, for example. So, as well as researching the manager you’ve got to research the opportunity for the scale of this business and find out how you’re going to distribute such a product as well.
But I think it’s important to state that there is interest in the region from outside the region and there’s obviously a lot of interest within the region for regional investment opportunities. Whether that comes through single country multi-manager funds, a single manager of a single-country fund, that’s what we’re going through at the moment. It requires several visits - we’ve had the first one and I would expect more.
MFM: So what sort of investors are looking at Mena?
JL: It’s really the institutional investors that have allocations to emerging or frontier. In 2008 when the global financial crisis hit you saw a lot of redemptions in emerging or frontier space, but before that people were starting to take more risk because they wanted more diversification in their portfolios and so they were looking to the frontier and the lesser-known emerging markets that could add that diversification. That certainly was starting to return before what we are going through at the moment with the global market volatility. The diversification opportunity isn’t so relevant in these highly volatile times, but I think there is still interest in finding ways to diversify your equity and fixed income investment.
These investors would have long-term investment horizons. They are typically endowments, foundations and some of the larger pension funds that tend to have a long-term asset allocation to developed and emerging markets and frontier in the Middle East is an extension of their emerging market asset allocation.
MFM: Russell Indexes upgraded the UAE to emerging market status ahead of the MSCI. Was there any sense of competition there?
JL: No, the UAE upgrade actually happened last year by Russell Indexes. There are differences in the methodology between different index providers and our criteria were met such that the UAE was reclassified as emerging. So no, it wasn’t in competition with the MSCI.
MFM: Does Russell Indexes have any plans to upgrade any other Mena markets in the near future?
JL: There’s nothing that’s currently in the public domain and no further decisions have been taken, but this is part of a methodology when we monitor the countries and we classify whether they should be emerging, frontier or standalone.
MFM: If and when you cover Saudi Arabia on the index, would it go in as an emerging, frontier or standalone market?
JL: It would depend on how the access to the country’s cash equities market had changed and it depends on the index methodology for how you classify a country. But as it stands at the moment, it would not be a frontier, emerging or developed market because international investors cannot access the cash equity market. It would be standalone.
MFM: Which countries in the Mena region are you particularly bullish on at the moment?
JL: I think that when you look at what their on-benchmark and off-benchmark bets would be they tend to be more benchmark aware because they don’t want to take more risk. Certainly the UAE and Qatar have been talked about a number of times because those are the two markets that are currently on the threshold or have in fact got to emerging market status and that will automatically put it onto the radar of institutional investors that invest in emerging markets. Should those changes happen with other index providers then you’ll see institutional investors needing to take a much closer look at those places.
If you’re running a certain size institutional fund to invest in emerging markets, to actually get an allocation to a particular country you need to open custody accounts, brokerage accounts, etc in that local country. If a country is, say, 0.2% of an index they may say, ‘I can deal with that in terms of my overall risk and I’m just not going to invest because it cost me too much to invest in that particular country’. So I would say that the importance of the weight within a benchmark is important as well.
MFM: Russell has a Mena fund and a GCC fund coming up. Is there anything else in the pipelines?
JL: At the moment that’s a work in progress. Really, what we need to understand is not just who are the managers, how do we need to provide access to these particular markets, its what do investors want in a particular product. That’s what we need to understand fully before we launch these products. There’s lots of work going in manager research and in product strategy to understand what is best to launch.
It’s fair to say there are a lot of GCC funds and some of them are running some fairly low AUM. So does that mean they haven’t distributed internationally or does that mean that actually no one wants to invest in a regional fund, they want single country funds. That’s the bit you’ve got to work out because there’s no point in just adding to that list, you want to add to that list from somebody who’s really different, and very much required by institutional investors.
MFM: When do you expect to be launching your first Mena-specific product?
JL: Don’t expect anything in 2011 is the only thing I can say. It’s too early to tell.
MFM: Going forward, would Russell consider North Africa once things have calmed down?
JL: Absolutely. Where there’s opportunity Russell will go.
