How is SEI positioned in terms of its business distribution in the region?
Jahangir Aka: Institutional business is a very strong part of what SEI does globally and in the UK, but is also pretty much 100% of everything we do in the Middle East, Africa and Asia. This covers family offices, governments, pension funds, endowments and sovereign funds. With the banks, we white label funds, which we call an institutional rather than distributional relationship.
One of the big pieces of new opportunity that we’re spending a lot of time on is end of service benefits, which are in place in the Middle East. This dates back to 1984, when provisions were made for expatriates, in lieu of pension contributions back home or wherever else it may be.
The government made labour law for a percentage of the annual salary, as a final salary scheme. So when you leave, if you’ve been there more than five years, you get 8.22% as a lump sum. If you’ve been there under five years, you get 5.75% of your final salary as a cash payout.
Historically, companies have bundled that in their working capital and paid that out of cash. What we’re trying to do, and others have tried to do it but unfortunately failed in the past, is to take some of the skills we have from our DB business globally, and some of the infrastructure we have from our DC business, and create a new proposition for the end of service benefit.
We’re helping corporates to fund that, separate the assets and provide protection to the employees because when a company goes bust, like many did in 2009, the employees who lose their job become creditors to the company.
This is there in lieu of their pension. It’s an important amount of money.
So the idea is that we create a protection wrapper around it.
In the case of a bankruptcy, effectively the trustees would pay off the beneficiaries, which are the employees and create a more structured element. SEI is the front runner in that space.
We ran an employment trends survey last year, and we have just repeated it again this year, with 142 corporates participating, compared to 90 last year, and a good spread of GCC local and multi-national companies.
It’s an area that a number of asset managers have looked at in the Middle East, but SEI is in a unique position because we are a fiduciary in our pension business.
We’ve taken this management capability, to allow us to do modelling work for the corporates using our in-house actuaries, investment management and asset allocation. It allows us to do investment implementation, and we leverage our admin and reporting capabilities to create a holistic end-to-end fiduciary management service for these kinds of schemes in the Middle East. That’s proving quite powerful. That has become our proxy for our distribution business.
What’s happening in terms of pension reforms in that region for expats?
JA: We spend time talking to the governments, they talk to us because it’s clearly a global skill of ours so we’re seen as a global expert in the pension space. Personally, my view is it’s actually quite a generous number.
Very clearly in law, everyone is eligible, there is no exception, and lots of the good employers will create enhancements of that arrangement. So they’ll say, ‘If you stay with me, by law I only have to pay you 5.75%, but if you stay with me three years, I’ll give you 8.22%'.
For example, Company A will pay 16.44% if the employee stays with them for more than five years, so it’s become a retention tool.
Some companies have used it very cleverly, for example by using the structure to create deferred bonuses. Remember, a lot of the companies are not listed, so we don’t have stock options. So the structure is being used by HR in a very innovative way.
The talent war has really picked up again in the past couple of years, as Dubai and the UAE generally have recovered. We’re seeing this in Qatar and Saudi Arabia as well.
The war for good talent is very aggressive, so holding on to good expats is a challenge. I don’t think the law needs a change, the implementation needs a change. The reality is that employers have used every trick in the book to cheat it, so it’s bad implementation that we’re trying to draw awareness to.
The employers who are doing it right, have no qualms with it. They think it’s very fair and so do the employees. I used to live and work in Singapore and I used to contribute to the Central Provident Fund structure. When I left, I could take my money out of CPF on a discount. Here, there’s no discount. You take it out and you go.
There, the only difference was, even if I went abroad, I could continue to contribute to it, whereas that structure doesn’t exist in the Middle East.
We have talked about the idea of potentially creating a CPF-like structure for Dubai, but it would have to be a UAE-wide initiative. What you may see happen is the government stepping out and creating a version of what we do, because we’ve been quite well-endorsed by them for the work that we’re doing.
They may create their own version and get someone like us to outsource a run-in for them. It’s more likely to happen that they create a centralised operator with a CPF-style structure in Singapore than they are of saying, ‘I’m going to change the law’. Because it’s the implementation that’s the weakness, not the law.
Which of SEI’s fund strategies is the most popular in the region?
JA: I’ve worked in Asia, Europe and in the Middle East across my career in equal proportions.
The term that I’ve learned over the past 17 years of working is that everyone’s different in the same way. I think that’s still true here.
People love to believe they’re different but on the whole, when you run strategies, whether it’s five or 184, as we do for one client, the bulk of AUM ends up being in balanced portfolios or thereabouts.
What about your presence in Saudi Arabia?
JA: In Saudi we work with local institutional clients as the feeder for white label funds. For example, the Arab National Bank is an organisation that we’ve had a partnership with since 2008 to manage all its non-Saudi funds. We run its Japanese and European equity strategies, and its global fixed-income strategies. It’s very logical. We have the scale, the expertise and the resources.
It is not an easy market to access and several organisations have tried and had a miserable time there. The only ones who still have those relationships still intact are SEI, Fidelity with Riyad Bank, and of course HSBC, which is very strong on the ground.
They’ve just announced they’re deregulating or opening up the stock market for foreign investment. That’s a very exciting development. Just to give you a sense of the scale, the market cap is about the size of Russia. So it’s a big market.
We’re expecting that to open up in the early part of next year, which will give a lot of visibility. It triples the market cap of GCC equity open to foreigners.
Strategically, we are focused on the GCC countries where 95% of our assets are concentrated, despite my job title saying Middle East. Our four priority markets are Saudi, UAE, Bahrain and Kuwait. Qatar and Oman are sort of tier two markets for us, and then opportunistically, we’ll look at other areas around the region.
We have very good representation through partners or through clients. That’s across our three segments, which we focus on in the region, which is sovereign wealth, pension funds, segment one. Endowment, family and corporate being segment two and the third one is the end of service benefit.
Who do you see as your main rivals in that region?
JA: Our biggest challenge is in-house chief investment officers, because a lot of the work we do is asset allocation and selecting managers. Our pitch to them is that we can help them become better at being manager-of-managers, which is what we do.
Why do we do it? We do it because we’re confident that we can get ahead of the game and we can keep innovating, and they can keep getting to learn from us.
