Financial News| Deborah Fuhr:� Iran is unique in the Middle East as it offers investors both locally domiciled mutual funds and exchange-traded funds. Unlike even its developed-market neighbours, Iran also has mostly actively managed vehicles and has created a range to invest in the nation�s growing infrastructure initiative.


Most importantly, since January 2016, Iran has been open to European investors � but is there any indication it will become an important market for them?

In ETFGI�s recent report into emerging and frontier markets � into which category Iran falls � we found 1,034 ETFs with assets of $295 billion. Over the past three years, some 220 ETFs have been launched in these markets and the assets invested have increased by $27 billion, a 10% uptick.

Attractive population

Iran�s market cap of $90 billion ranks it fifth in the Middle East. For an investor, the country has an attractive population. Some 60% if its 80 million citizens are under the age of 30 and it is the second most populous country in the Middle East after Egypt, which has a weight of 0.3% in the MSCI, FTSE Russell and S&P Dow Jones�s Emerging Market benchmarks. Iran is considered �unclassified� by index providers due to sanctions and is, therefore, not included in general emerging or frontier market benchmarks.

Of the 59 emerging and frontier markets, only 29 have locally domiciled ETFs. Iran uniquely has both ETFs and mutual funds, although both are relatively new inventions. The first mutual fund was launched in 2007 and the first ETF was listed in August 2013.

The country�s mutual fund industry had 147 funds with $27.5 billion in assets at the end of July 2016. There are 48 fixed-income mutual funds which account for the vast majority of the assets, while $527 million is invested in 87 equity mutual funds. Some $59 million is invested in 12 hybrid funds.

Investment in these funds is so far predominantly domestic. According to the Tehran Stock Exchange, there are 2,792 institutional investors and 949,349 individual investors who own mutual funds. Retail ownership of mutual funds is very low.

At the end of October, there were 20 ETFs listed locally on the Tehran Stock Exchange and the over-the-counter Iran Fara Bourse, with assets of $341 million. Interestingly, the composition of the ETF offering in Iran is very different to the other 53 countries in developed, emerging and frontier markets that have ETFs. While there tends to be a small number of active ETFs in other countries, in Iran the majority � 18 out of 20 � are actively managed. The four fixed-income ETFs have assets of $235 billion or 69% of the industry total, while globally equity ETFs account for 74% of the assets.

Iran has three construction ETFs. They are unique and have been designed by the research and development office of the Tehran Stock Exchange to invest in a specific construction project.

More expensive

However, for all the market�s idiosyncrasies, Iranian ETFs are more expensive than those in neighbouring markets. The annual expenses for these listed funds range from 0.5% to 4%, which is much higher than the average asset-weighted global expense ratio of 0.27% for ETFs listed globally. The spreads paid when buying and selling ETFs also tend to be much higher than in other markets.

And for the moment, Iran remains an uncertain environment for many foreign investors. Legal, political and commercial risks are paramount, with the greatest being that US-suspended sanctions against Iran will remain on the books until so-called Transition Day and may be re-imposed quickly in what is called �snap back� .

This Transition Day has been targeted as October 18, 2023 when remaining sanctions against Iran will be dropped after the International Atomic Energy Agency confirms that Iranian nuclear activity is fully compliant. Until then, sanctions remain in place that prevent most US persons from doing business or investing in Iran.

However, the story is not the same for those within the European Union. For Europeans it is now possible to do business in, and invest in, Iran. On January 16, 2016, �Implementation Day� meant many sanctions targeting Iranian persons and companies were lifted as the IAEA announced Iran had fully complied with its obligations under the agreement to lift sanctions.

As a part of this sanction relief, the prohibitions upon financial transfers to and from Iran (including the requirements for prior notification and authorisation) were lifted in the EU. Consequently, transfers of funds between EU persons, entities or bodies, including EU financial and credit institutions, and Iranian people, entities or bodies (except those on a special list) are now permissible.

In the future, I expect that there will be ETFs domiciled in Europe and the US that will provide exposure to securities listed in Iran.