“As far as we are aware we are among the top 10 asset managers in the region at the moment in terms of AUM and probably number one or two in the UAE,” says Deon Vernooy, senior executive officer of Emirates NBD (ENBD) Asset Management. This assertion is backed up by healthy

dividend distributions on its income range of funds (the average running yield of the Emirates Mena Fixed Income Fund, Emirates Mena High Income Fund and Emirates Global Sukuk Fund was 5.21%, 4.8% and 4.44% respectively across H1 2011) and mid-year net profits of AED2.2bn ($600m) by its parent company (up 43% from the same period last year). He has every reason to be confident.

Now the company is looking ahead and Vernooy reveals that at least one new fund will be launched by the end of the year, as well as an upcoming relaunch in partnership with a major global investment house. “We have an Islamic alternative strategies product that we have been running for a number of years,” he says. “We’ve tied up with MAN/ GLG to become underlying advisers on the product, which will provide a formal relationship between us to relaunch this product globally.”

The Emirates Islamic Alternative Strategies Fund is set to be relaunched in the fourth quarter of this year with a targeted asset base of around $50m, and Vernooy does not rule out similar partnerships in the future. “MAN/GLG will effectively be the investment adviser to the fund,” says Vernooy.

“The relationship may extend depending on the success of the current venture although nothing is planned at the moment.” Managing AUM of AED4.5bn, the asset manager has its sights on the global market, with expansion plans underway in Europe and Asia. The company’s office in Singapore has been active since the second half of last year and remains a business under development. ENBD Asset Management also has a base in London with the aim of taking its Mena-centric products into the UK and Europe and it has people on the ground in Saudi Arabia distributing its products.

“We feel we have a credible offering for the region now, and the next question we have to ask is: what else we want to do to position ourselves as a fund manager that can satisfy the wider requirements of our client base?” says Vernooy. “This will probably result in an expansion of our product capabilities beyond the Mena and global balanced products.”

Global strategy

ENBD’s asset management business began in the DIFC in 2007, having operated as a unit of its parent bank since 2004. It started out with three people, including Vernooy, growing to more than 50 employees at present.

The firm currently offers 13 public funds, including four global risk-profiled funds, and is Mena-focused, specialising in fixed income, equities and real estate. “Our fund strategy varies from product to product,” says Vernooy. “So with Mena equities we’ll take a view more from a bottom-up perspective, identify which companies we prefer to invest in and then overweight those stocks in our portfolios. On the fixed income side, we take more of a credit quality and duration approach.”

The funds are largely GCC-facing, with some exposure to Egypt, and Vernooy is passionate about the potential of Mena’s markets for international investors. However, political risk, lack of liquidity and sub-standard transparency levels have kept many big investors at bay over the past few years, and Vernooy acknowledges that the UAE markets still have some way to go before they catch the eye of institutions.

“I think the big challenge of the UAE markets is the lack of access,” he says. “We have too few companies listed in the market here. “We need more instruments to be developed around the markets,” he adds. “We have a complete lack of derivative instruments on these markets – we need the regulator to step up and create an environment where these instruments can become available.”

ESCA’s upcoming fund regulation and a potential MSCI reclassification to emerging market status could make the UAE a more attractive domicile, and Vernooy believes that a shift in investor attitudes is already apparent. “We’ve seen some very serious investors here in the last couple of months,” he says. “Some of the biggest global wealth funds and core institutional investors are asking how Mena fits into the overall broad portfolios.

“We think it stacks up because there is undoubtedly a diversification benefit of adding Mena exposure. They can see the valuations are rather cheap, that operationally we are quite strong, and the governance is in place, but then to take that final step they will also have to become comfortable that the potential returns are aligned with the risks that they will be taking.” But the truth is it is still a real challenge to attract investors from Europe or Asia, for ENBD and its competitors.

"Many investors indicate that it may make sense to add a Mena exposure to their global products but they seem to be hesitant at the moment to take the next step, to actually allocate,” says Vernooy. “Of course we need the potential investors in Europe, UK and Asia to develop a more positive view on the region, otherwise they will not invest in our products, so that’s part of our development work to speak to all these potential clients, giving them the full facts about our products and the region in general.”

Risk and reward

With its roots in the UAE and suite of GCC-facing products, ENBD is a Mena player through and through. As such, Vernooy is passionate about promoting the region as an attractive option for institutional investors, and hopes to see this view reflected in global rankings. “At the moment we are classified as ‘frontier markets’, which has something of a Wild West ring to it,” he says. “I don’t think it is a fair assessment of the markets here – we are more organised than the status of frontier markets would imply. From that perspective it would be quite important that we do get formal recognition for the regional markets; not only for the UAE but also for Qatar and hopefully for Saudi, which is the big market.

“The UAE and Qatar markets are just too small to really feature on the global radar screens, but if you lump them together with Saudi, it becomes a more meaningful proposition from a global investor perspective.”

But the risk element prevails. Political unrest is currently deterring investors and the Egyptian revolution continues to wreak havoc on the portfolios of Mena-facing managers. ENBD was not immune to the market fluctuations seen earlier this year, but a combination of insight and luck saw it avoid the worst of the trouble.

“The regional equity markets started the year quite strongly, but from the middle of January until the end of February, markets in the region declined by about 15%,” says Vernooy. “All our portfolios were pulled down, but because we had a material weight into the more stable parts – Saudi, UAE and Qatar – our portfolios performed quite well during that period.”

When the Egyptian revolution started to take off, Vernooy took the decision to increase the company’s cash holdings and as a result, managed to avoid some of the negative impact on ENDB’s portfolios. Towards the end of February, it started to increase its holdings again, as opportunities for potential rewards began to emerge.

“The best opportunities sometimes come up when everything looks completely bleak,” says Vernooy. “But then again it’s a question of ‘am I buying that particular investment at a price that compensates me for the risk I am taking?’.”

This is the question at the heart of ENBD’s business model: to identify risk and weigh it up against the potential reward. “It’s always the same approach; it doesn’t matter what we invest in, whether its equities, fixed income or real estate,” says Vernooy. “When things are so uncertain, as in some parts of the region right now, you want to buy at an attractive price to be able to get a fair compensation for your risk.“

ENBD’s ability to calculate risk and reward has seen it emerge relatively intact from the global financial crisis (albeit with a AED3.5bn loss in AUM) and step forward as an internationally-minded player with Mena firmly at its centre. The true challenge will be convincing investors that the rewards well outweigh the risk.