The asset management industry in Kuwait to hit USD 140 billion by 2010 according to Markaz study

The local investment industry in Kuwait owes a lot to Kuwait Investment Authority (KIA) for the leading role played by it to foster the growth and development of the industry.

The entire process started in the year 1995, when KIA decided to merge Kuwait Investment Co (KIC) with Kuwait Foreign Trading Contracting & Investment Co (KFTCIC) to form a better capitalized investment company.

KIA followed this step by formulating the first local investment fund and authorizing KIC to manage the same. It provided the new fund with a good basket of local shares. As a further step, it privatized Securities House Company and Securities Group Company in 1996.

Due to these efforts, the number of investment funds rose to 20 by 2000from 8 in 1990. At a total capital of KD 664 million, KIA share stood at KD 224 million or 38.25%.

Such an institutional support could not have come at a more appropriate time, as subsequently Kuwait market enjoyed stellar performance with strong liquidity. The market also benefited through strong oil prices and low interest rates.

Investment assets (fiduciary) managed by nearly 75 investment companies in Kuwait touched KD 21.3 Bn (USD 75 Bn) during May 2007. It is nearly 73% of total bank assets.

Markaz research expects this figure to touch KD 40 Bn by 2010, based on our forecast. Surprisingly, the bulk of this amount is in portfolio investments of clients (53%) with only about 8% in investment funds (mutual funds).

Technically, investment companies are into a host of other things like lending money to clients, managing foreign equity funds, managing bonds/Sukuks, managing custody assets etc. However, as figures clearly reflect, the majority of the focus is on local Kuwait equity market and predominant form of management continues to be managed accounts (discretionary, non-discretionary and custody accounts).

Markaz analysis reveals the tremendous growth of Islamic (Sharia' compliant) investment companies and their products. From a modest 19% share in 2001, Islamic investment companies total assets now account for 58% of total assets of conventional investment companies.

Even though investment funds (mutual funds) constitute a small segment of the total money management, they form the process and mechanism for client portfolio management activity and hence the performance and perspectives on this can be safely extrapolated into the larger spectrum of portfolio management as well.

Markaz analysis of conventional local equity funds and Islamic funds finds that a few funds consistently add value beyond benchmark returns. Given the size of the industry, the research finds that investment companies did not score too well on parameters like information disclosure, benchmark diversity, lack of product diversity, industry fragmentation, portfolio concentration, lack of institutionalization of the market, and evolving regulatory structures.

Kuwait investment industry has grown significantly in the past and this growth is expected to sustain and improve. This growth has also been accompanied by strong performance with many money managers significantly outperforming the benchmark and thus providing value. The strong risk-adjusted performance of Kuwait's market is bound to attract investment interest from on-shore as well as off-shore, especially GCC investors.

However, the industry's economic representation is still low relative to some developed countries or even some GCC countries. The institutional representation of the market is meager and this probably explains the benchmark diversity, poor product diversity and poor information disclosure.

Kuwait represents one of the GCC markets with the least restriction on foreign ownership. With the expected growth in the economy, liquidity and attendant opportunities this is bound to attract interest from foreign investors, especially institutional investors. However, these investors are sophisticated in nature and would require high standards of information disclosure and transparency.

In order to sustain a potential USD 140 billion industry, it is time to proactively address key issues confronting the industry. One key area would be re-activating government's privatization efforts in order to bring more investment assets into the market.

Supported by independent regulations and improving adoption of international best practices, Kuwait investment management industry can easily set the standard for the region and aspire to attract significant foreign investment.