Regulation of collective investment schemes and a UAE Trust Law is needed to encourage the creation of more mutual funds in the UAE, attract overseas institutional investors, protect unit holders and support long-term market stability said Rashed Al Baloushi, Acting Director General of Abu Dhabi Securities Market (ADSM).
Speaking at the Abu Dhabi Conference today, Mr Al Baloushi recommended that Trust and Custody Laws be implemented in the UAE and that mutual fund regulations, including a code of ethics for fund managers, be incorporated in the Stocks and Commodities Authority law.
Collective investment schemes, such as mutual funds or unit trusts, are a way of pooling investments from investors. They are managed by professional fund managers and promote diversification by giving investors access to a wider range of securities, helping them to spread their risks. There are two types of collective investment scheme – open or closed-ended funds.
The UAE already has a number of open-ended funds, but has yet to establish any closed-ended funds. A closed-ended fund is managed more like a company. It has an Initial Public Offering (IPO), and a fixed amount of units which trade in the stock market like shares, according to market supply and demand.
“By giving investors the opportunity to invest through collective investment schemes we will work towards creating a more stable market” said Mr Al Baloushi. “But in order to do this, we need more regulations to encourage the establishment of both open and closed-ended funds, listing rules for mutual funds and a Trust law to protect unit holders and differentiate between the legal and beneficial owners.”
Mr Al Baloushi went on to talk about the difference between open and closed-ended and explained how closed-ended funds would contribute to reducing market volatility as they are not usually obliged to liquidate their positions to meet the demand for redemptions during a market correction phase.
“Although we already have a certain amount of regulation for the establishment of mutual funds in the UAE, it is not enough” explained Mr Al Baloushi. “We would also like to recommend that they are regulated by the Securities and Commodities Authority (SCA).”
“Furthermore, we need to encourage the establishment of closed-ended funds in the UAE. Under the current market conditions open-ended funds can sometimes cause market fluctuation when lots of people want to subscribe or redeem. This is not the case with closed-ended funds. Investors benefit both from being able to pool and diversify their investments, yet they have the option to exit through the market.
“Our market needs both open and closed-ended funds to mature and attract more foreign institutional investors.
“With effective regulation and subsequently an increase in the number of mutual funds in the market, Abu Dhabi has the potential to become the asset management hub of the Middle East”, concluded Mr Al Baloushi.
Since the end of 2001 the number of listed companies on ADSM has grown fourfold; there are now nearly six times as many brokerage firms; market capitalisation is 20 times higher; there are 50 times as many shareholders registered and ADSM is a model emiratisation employer with UAE nationals making up about 74% of the team head count.
