Cover story: The key regional investment trends focusing on the wealth of the future

Gazing out of the glass on the 146th floor of the world’s tallest tower in Dubai, the Burj Khalifa, I had a reasonably clear panoramic view of the rapidly growing city with only remnants of the morning fog visible.

It is a vista that the executives working at AIX Investment Group – and their growing list of clients – enjoy on a daily basis, even as Dubai’s and the wider GCC’s investment landspace expands, despite the fog that has settled worldwide due to the pandemic.

The Covid-19 pandemic has impacted economies in various ways, with most industries struggling to adjust to the crisis. However, the investment landscape has managed to remain fairly buoyant, since the pandemic has fueled a greater need to preserve and grow wealth – both globally, as well as in the GCC region.

“Interestingly, the pandemic does not seem to have adversely affected the demand for investments in the region, but rather seems to have encouraged investors – both individual and institutional – to start assessing the security of their cashflows and to consider building more diverse investment portfolios,” says Fadi Dabbagh, board advisor at Dubai-based AIX Investment Group.

“We have certainly noticed a change in the types of opportunities investors are seeking, but not a reduction in their appetite for investment. On the contrary, the appetite for investment seems to have increased and the number of first-time investors that approached us looking to begin their journey towards financial independence was higher than ever before in 2020. Our data suggests several factors for this, and many of them seem to be direct results of the changes caused by the pandemic.”

Some of these include excess cash due to reduced lifestyle expenses – most regional countries enforced lockdowns that forced the closure of entertainment avenues; an increased feeling of instability and fear of revenue disruption – several workers faced salary cuts as well as work disruptions; as well the need for additional passive income.

Meanwhile the pandemic also bolstered the need for investors to further diversify their portfolios, as they look to protect their assets.

“One of the key lessons investors took from the economic uncertainty that 2020 brought is the importance of having multiple revenue streams and spreading assets across multiple uncorrelated classes. While previously we would find our investors trying to identify one of our investment vehicles as the one that most matches their needs and objectives, they are now inquiring about the possibility of splitting their funds across multiple of them. Our answer is always the same: ‘We strongly encourage you to do so’,” explains Khalid El-Mikhi, senior financial advisor at AIX Investment Group.

“In 2020, we witnessed countless businesses and industries that seemed to be on an unstoppable upward trajectory come to a screeching halt, and in many cases fail completely. This was perhaps the greatest reminder since the dot-com-bubble that allocating all of your resources into one asset class is most certainly unwise. At AIX Investment Group, we provide investors with a diverse set of investment opportunities and also seek optimal asset allocation and diversification within individual investment vehicles,” adds Dabbagh.

The shift towards diversification was already underway before the crisis. A survey by consultancy EY in January 2020 found that 23 per cent of wealth management clients in the Middle East were planning to move assets in the next three years, with 50 per cent having already moved their assets in the past three years.

Perfect portfolio?

If there is one standard response that you can get from any wealth manager or financial advisor, it is that there is no such thing as a “perfect portfolio”. But at the same time, most concur that diversification is key and that it is prudent to have assets spread across the risk spectrum while avoiding geographical and industry concentration.

“It is of paramount importance that any portfolio in today’s market conditions should be spread across multiple asset classes. While doing that, maintaining liquidity for a part of one’s portfolio is equally important. We recommend allocating a part of your portfolio into a safe fixed income product which secures a part of your portfolio with regular cash flows, while maintaining a more liquid portion working capital, which a client can always reach out to on a rainy day,” states El-Mikhi.

AIX Investment Group recommends that seasoned investors follow a 40-40-20 approach:

• 40 per cent of the portfolio is allocated in a fixed income product, generating steady cash flow with almost no risk involved.
• 40 per cent is distributed in a variable income product, that is completely liquid with a medium risk involved, accelerating the growth of the fund at a higher pace than the fixed income allocation.
• 20 per cent is allocated to a high-risk product, with a calculated risk approach, which makes up for the slower and steadier returns in the fixed income product.

“While return on investment remains a key driver of all investment decisions, we have noticed a dramatic shift in focus away from yields and more towards the safety and sustainability of revenue streams. As such, it is only natural for investment sentiment to have shifted towards the more risk-averse side, and our investors are counting on us to advise and counsel them through these changes,” adds Dabbagh.

AIX Investment Group, which was set up in Europe 13 years ago, has generated passive income for its clients ranging from 14 per cent to 40 per cent per annum.

“A core part of our strength as a business stems from the ‘financial transparency’ model we have built our operations on. The general principle is that the architecture of an operating model should be easy to understand, monitor and analyse. This must hold true for all stakeholders – and this is embedded within the core of our operating philosophy,” states Dabbagh.

Having a model that works is key in the region to retain and gain new clients. According to the EY survey, wealth management clients in the Middle East are equally likely to switch wealth asset management providers for any one of six reasons: Quality and reputation, products, advisory capabilities, personal attention, pricing, or technology.

The survey found that while investors may switch providers for reasons related to service capabilities, they are also looking for wealth managers that share similar values. In the region, 53 per cent placed more importance on digital savviness, 48 per cent said they wanted advisors who are proactive and attentive, and 45 per cent selected advisors who demonstrate sound judgement.

“As a company, we feel confident that we are on the right track. The infrastructure we have built was designed on setting a solid foundation and gradually scaling our operations to the next level of growth,” says Dabbagh.

“We have a resilient and balanced portfolio of products and a strong position in some of the world’s fastest growing markets. We will continue to find new opportunities to grow our business both domestically and internationally and establish alliances with globally recognised institutions.”

The company doubled in size last year and expanded its office space to include the 144th floor of Burj Khalifa.

“What we believe is most important is the continuous development of AIX Investment Group’s employees. With difficult financial times predicted, it is important for all members of the team to be skilled and experienced in handling all situations that may arise during their day-to-day work. We have been allocating a lot of time and effort towards education and training for all our employees to ensure their continued development,” adds Dabbagh.

The digital question

Another talking point within the market this year has been the digital currency bitcoin, which – following the recent announcement of a $1.5bn investment from Tesla – has seen its value cross $50,000 (an increase of over 50 per cent in 2021). Basically, $1 of bitcoin in July 2010 is worth around $800,000 today.

“This astronomical return paved the way for the over 8,000 digital assets available in international capital markets today with a total market cap exceeding $1 trillion. Which assets will continue to grow and develop more real-life use cases beyond speculation is a matter of constant debate. But there is one thing that seems certain – blockchain, the underlying technology powering digital assets that is designed to provide a decentralised ledger allowing for irreversible peer-to-peer transactions and immutable storage of data will be the next major disruptive technology, and that is what we are most excited about,” explains El-Mikhi.

“Blockchain has the potential to revolutionise the way people interact with each other and the way the integrity of financial and transactional networks is maintained. What is even more exciting is the development of programmable blockchain networks capable of implementing smart contracts, an area which has led to significant growth and advancement in decentralised finance (DeFi) among many other applications. We do not see this trend reversing, and we anticipate the continued growth of blockchain technology powering the global economy and our day-to-day interactions.”

Blockchain adoption in the region is on the rise, supported in large part by national strategies. The UAE government launched the Emirates Blockchain Strategy in 2018, which seeks to transform 50 per cent of government transactions to the blockchain platform by 2021. Dubai also has its own blockchain strategy, with the emirate aiming to become the world’s first city fully powered by blockchain. Saudi Arabia and Bahrain have also established blockchain strategies for the public and private sectors.

“We are now witnessing governments and major financial institutions developing their own blockchain networks for various uses such as the storage of personal information and legal documents, the tokenisation and transfer of assets through non-fungible tokens (NFTs), the development of transactions and payment systems which are decentralised and transparent, and even the storage of electronic proof of ownership – as is the case now with all title deeds issued by Dubai Land Department,” states El-Mikhi.

Looking ahead, he stresses that they remain bullish on fintech, digital assets, DeFi and cloud computing. There is also greater interest for forex trading in the region.

“There are many benefits to trading forex, which include high liquidity, trading volumes above $6 trillion daily, convenient trading hours (market is open 24/5), the ability to trade both directions – long and short; and the ability to trade on margin. We are in a region where currencies are pegged to the US dollar and we anticipate significant swings for USD in 2021 which will result in many opportunities for profit. The pandemic has also had a significantly adverse effect on global trade and as we continue to become accustomed to the new norm and the global economy continues to recover, the forex market will continue to grow and present opportunities for the creation of sustainable revenue streams,” explains Dabbagh.

The company also expects the investment growth in startups, growth industries, sustainable businesses, and safe-haven assets to continue.

“We do not claim knowledge of the future, but our team of expert analysts, traders, and blockchain specialists will continue monitoring alpha-generating opportunities on behalf of our investors wherever they may arise,” says Dabbagh.

An eye on the future

Similar to other sectors, the investment landscape is also facing significant disruption from technological innovation, with terms such as wealthtech and robo-advisors now common parlance. Globally, wealthtech secured more than $200m of global investment in the first half of 2020, according to a report by KPMG, with the figure expected to rise significantly in the future.

However, the investment industry has always been one that is highly relationship-focused and is based on trust between investors and those they entrust with the management of their funds, states Dabbagh.

“Our investment philosophy is built on a combination of data-driven analytics and our own judgement and experience in navigating complex financial markets. Of course, we rely on our proprietary algorithms and on the power of AI neural networks capable of constantly learning and improving – these are valuable tools that assist us in providing consistent returns to our investors through market turbulence. But they are only tools that allow us to better analyse historic trends, spot patterns, and better understand market volatility. We do not rely on these tools to perform trades for us or initiate positions. We have seen many examples where doing so has ended badly, and that is a risk we do not plan to expose our investors to,” he explains.

Meanwhile the industry is also being propelled forward by the younger generation of investors, who are seeking more technology-driven, high-return investments in a shorter span of time.

“With that in mind, as financial advisors we tend to adhere to their needs by focusing on more dynamic portfolios, but at the same time we tame their expectations and implement proper structure and allocation within their portfolios, helping them understand the balance between risk and reward and allowing them to build portfolios which will serve them well for years to come,” states El-Mikhi.

From digital assets to robo-advisors, the investment landscape is facing monumental changes in the way it operates. And similar to an investment portfolio, while there is no perfect formula for success, it is all about making the right call at the right time.