With capital markets becoming active players in the disintermediation process, there is a paradigm shift that is occurring in the Gulf Co-operation Council (GCC). Currently, fund raising is largely dominated by commercial bank lending.

There is no doubt that the asset management industry in the GCC, a key component of capital markets, offers a strong potential for growth. The growing number of new sukuk issues, IPOs and corporate restructurings are a barometer of the transformation that is gradually taking place.

The asset management industry offers investment and saving solutions across a variety of asset classes, at different levels of risk, across a range of geographies and industries. It is also a source for different types of savings vehicles, financial planning and asset preservation strategies, and inter-generational wealth transfer strategies.

In order for the asset management industry in the GCC to continue its growth, gather further momentum and earn its place as a genuine, sustainable source of investment solutions to investors, a rigorous, intensive and far-reaching initiative needs to be executed.

There are various factors that make the fund management sector across the GCC, a subset of the asset management industry very attractive to investors. With mutual fund penetration rates at very low levels across the GCC, there is tremendous opportunity for growth. Yet investors prefer to move with caution.

Some of the more important and pressing issues that need to be tackled include:

Lack of transparency: Although progress has been made in areas such as the regulatory and business environment, there is much work ahead. Lack of transparency and international standards of the regulatory regime serve as deterrents for investors.

Weak corporate reporting standards: On the part of listed companies, corporate disclosure needs to be increased. Disclosure must be accurate and timely for investors to make informed decisions. For example, regular analyst meetings should be held by companies to help investors better understand their results, corporate fundamentals, business plans and future outlook.

Need for performance presentation standards: There must be a common set of principles that must be adhered to by all participating fund management companies to allow investors to compare “apples to apples” across a series of similar investment funds (with common investment strategies and objectives). CFA Institute’s Global Investment Performance Standards (GIPS) are a set of standards that will encourage fund managers to calculate and report investment results in a consistent and comparable format for evaluation by investors.

Lack of institutional investors: An overwhelmingly large percentage of investors in the GCC equity markets is retail, with institutional investors contributing a very small piece. One major reason for this very low institutional participation rate is the lack of disclosure and transparency mentioned earlier.

Low percentage of free float and low FII participation: The largest market capitalisation stocks are in the financial, telecom and industrial sectors. Many of these are strong businesses that large investors want to get access to. However, as the largest shareholder is often the government, the actual free-float is low and makes it difficult for non-government institutional investors to access the market if they want a large allocation to the underlying stock.

Among other obstacles to growth of the fund management industry in the GCC include absence of relevant benchmarks for performance measurement, need for a regulatory framework that promotes and encourages introduction of new products and the absence of a robust risk management framework.

Some progress has been made over the last few years and the GCC is on the right track. There is agreement that corporate governance, disclosure and transparency are being addressed, although these still lag behind international standards. If GCC governments aspire for more international participants and greater confidence among local investors, corporate governance and transparency must assume greater importance in a region that offers immense potential.