Russell Investments company plans Gulf index

A top fund management company is seeking to establish stock indexes in the region to tap institutional investors.

A trader monitors stocks at a Saudi Bank in Dammam October 26, 2008. Kuwait moved to prop up one of its banks and Saudi Arabia extended $2.7 billion in credit to needy citizens on Sunday as the global financial crisis spread to the Gulf Arab region, sending stocks into a tailspin. REUTERS/Stringer (SAUDI ARABIA)

A top US money manager is planning to create a region-wide index to rival New York's MSCI in the Gulf.

Russell Investments, a Washington company with about US$155 billion (Dh569.33bn) of assets under management, intends to build a pan-GCC index that could include the six Gulf countries on its emerging market benchmark.

The company, which advises on $2 trillion of assets, intends to create a benchmark that includes Saudi Arabia, whose market accounts for half of the entire market capitalisation and almost three quarters of the entire equity value traded on all GCC stock exchanges.

The MSCI Emerging Market Index, which is tracked by most global fund managers as part of their investment portfolio, classifies all of the Gulf markets as "frontier" apart from Saudi Arabia, which is not categorised.

The designation typically applies to less developed markets and often deters international and institutional investors from buying into such markets because they are considered more volatile.

MSCI's lack of classification for Saudi Arabia and its delay in including the UAE or Qatar in its emerging market index offers a "wheel of opportunity" for Russell Investments, said Pascal Duval, the company's executive managing director for Europe, the Middle East and Asia.

"MSCI, in the last 18 months, has had problems. The MSCI story is not a bad one [for Russell Investments]," said Mr Duval. "But we have to be fast and nimble."

He said it would be in a step in the right direction in reviving poor liquidity and low volumes that have blighted local markets since the onset of the property crash at the end of 2008.

Russell Indexes already accounts for more than $3.9tn in benchmarked assets. It was launched in 1984 to more accurately measure US markets and track investment manager behaviour.

But a move into the Mena region will help improve international recognition, liquidity and tap into an accelerating interest across the world in investing in regional funds, Mr Duval said.

"Institutional investors are not hot money; they will stay for three to five years," he said.

"Hot money" is the regular flow of cash between financial markets as investors try to get the best possible return on investments by moving from low interest rate yielding countries into those with higher interest rates.

Russell signed a deal with the Saudi Tadawul stock exchange in the third quarter of last year that allows the company to offer Russell Indexes on the Saudi market.

But it has not yet secured consent to include the kingdom along with its five GCC peers in a pan-Arab index.

"It will take a bit of time," Mr Duval said. "The Saudis are cautious about giving away control. They're worried about hot money and that is not good for the market."

He did not say when the index could be introduced.

Separately, the company plans to create a new set of regional funds that total up to $10bn in assets under management in the next five years as part of a joint venture with Rayan Asset Management based in Dubai.

Russell aims to open an office in Dubai within the first half of this year. It also expects to add $20bn of assets under management or under advisement in the next five years.

Elia Hadati, the chief executive of Rayan, confirmed the partnership was in negotiations with a regional bank to help create its asset management business, although Mr Hadati declined to name the bank.