Investing in turmoil


S&P Capital IQ Fund Research announced today that it has assigned a Silver fund grading to Mashreq Al Islami Income Fund, the first Shariah-compliant fixed-income fund in the MENA region to be graded by S&P Capital IQ.

 The UAE-domiciled product is run by Abdul Hussain, Mashreq Capital's experienced CIO of fixed income and group CEO. Mashreq Capital is part of Mashreq, a leading financial institution  in the UAE.
Hussain set up the fixed income business at the end of 2005 and was joined in April 2007 by Aliasgar Tambawala, who is back-up portfolio manager. They are supported by two analysts.
This strong track record achieved by the group's experienced fixed income manager working from a team-based and controlled process allows the fund to achieve an S&P Capital IQ Silver grading, says Randal Goldsmith, fund analyst at S&P Capital IQ.

The fund invests in a diversified portfolio of sukuk and other Shariah-compliant fixed income securities (around 15 holdings, which are each less than 20%) originating primarily from countries in the GCC and MENA, and may also have up to 20% in other emerging markets (primarily Asia, emerging Europe and Africa).
The fund has no formal benchmark as its investment universe is set by the Shariah board, which may not accept bonds regarded as sukuk by other boards. Therefore managing against an index can be problematic. However, the manager seeks a 5-7% annualised return over the life of the fund. Cumulatively from inception, the fund has returned 27.56%, which gives an annualised 8.97% return.
Abdul Kadir Hussain, CEO, Mashreq Capital, said, “Mashreq Al Islami is the first sukuk fund in the region to receive a grading by S&P. We are proud to achieve yet another milestone, which is a true reflection of our investment management capabilities even during tough market environment.

The grading would further contribute to our success. The fund has achieved excellence performance recording a return of 30.11% in last three years

Soren Billing

Arabian Business 

Regional stock exchanges have had a tumultuous year making it difficult for local investors to see where the value lies. But the region's emerging funds industry may have some of the answers.

Turmoil in the region's stock markets could spell boom time for the mutual fund sector.

Gulf stocks have suffered amid easing oil prices, global weakness in emerging markets and waning hopes of local currencies depegging.

A lot of investors got burnt and traumatized even. They have been conditioned, if you will, to find easier returns from real estate.

But fund managers are hoping the tumult will prompt more investors to diversify their portfolios, as the market matures.

Imran Ahmed, managing director of Mashreq Asset Management argues that the region's fund sector has been misunderstood by some.

"The Gulf's fund industry has developed in the last few years and these years have also been quite volatile for the regional equity markets," he says.

When Mashreq launched its Makaseb Emirates Equity Fund in February 2005, interest from retail investors was strong, but the stock market crash of 2006 put a damper on demand. "A lot of investors got burnt and traumatised, even," Ahmed says.

At the same time, property prices across the Gulf soared.

"Investors have been conditioned, if you will, to find easier returns from real estate during the time that the mutual funds industry has developed."

As a consequence, the mass market asset management industry in the GCC has remained small by international standards.

The UAE is estimated to currently have about $6.5bn of assets under management. By comparison, Singapore asset managers currently manage around $814bn of assets.

Most Gulf markets are young and investors have typically not been used to paying fees for professional money management, and many have felt that investing is something that is easily done by oneself.

"These are the type of ideas that float around during a bull market and then in a bear market, when investment managers do outperform their respective benchmarks, many investors discount that outperformance as they feel that the fund managers have lost money anyway," Ahmed says.

"There is an element of investor education that the industry and the financial sector have to undertake before the mass affluent and retail investors will really come into mutual funds in a big way."

Dr Nasser Saidi, chief economist at Dubai International Financial Centre Authority (DIFCA), points out that the limited number of listed companies also deterred investors in the region from looking to funds, and kept down the number of products available.

"You've got many new companies that have now come in, and therefore you can now have a mutual fund that is well diversified." The industry needs to educate the market about the benefits of diversification, he says.

"Once you go into 30 or 40 companies, you've lowered your risk by 40 percent or 50 percent," Saidi says.

A single GCC currency would reduce operating costs for investment managers and give the industry a boost.

In 2006, the GCC had an estimated $60-$65bn of assets under management. By 2010, that number could rise to $160bn, according to data from DIFC.

"What we would like to see happen is that the mutual fund industry starts creating products that are directed at the region itself," Saidi says.

Those products include real estate, infrastructure and Sharia-compliant funds. "If you take an individual investor who has $10,000, he'd probably be hard pressed to buy one position in one company," says Ahmed of Mashreq Capital.

"If he tries to invest in seven different countries and he evaluates companies in eleven different countries, which is what we do prior to making our final portfolio construction decision for the Makaseb Arab Tigers Fund, there is no way that he can do that."

In the US, assets in investment companies - mutual funds, exchange-traded funds, closed end funds and unit investment trusts - totalled $12.2 trillion in mid-2007.

Households held about 84 percent of those assets.

"I don't know if that will happen anytime soon in the UAE but there are going to be so many listed companies out there and so many different options that instead of spending time doing it themselves, more people are going to need someone to manage [their wealth] professionally," says Jalal Faruki, senior associate at Al Mal Capital Asset Management.

Still, it could take a while before the average man on the street starts buying into funds.

The minimum investment required by Gulf funds is high by international standards. A limited number of custodians add to the cost, which is likely to come down as the market gets more competitive.

"It's not just the fund managers themselves, there are a lot of things that go into the pricing of a fund, other than management fees," Faruki says.

Exchange and regulatory fees in the region are higher than in more mature markets, where turnover is higher.

Eventually, competition and economies of scale will bring down management fees, attracting more investors into the market, he says.

More sophisticated investors are already looking increasingly towards mutual funds as a means of reducing their risk in volatile Middle East markets.

"Since the beginning of the year, some of the top 10 performing markets in the world have been from this region. But at the same time you've had some of the worst performing markets," Faruki says.

"They've realised that if you invest across the region... it can actually take a lot of the risk out of your investment."

Looking ahead, challenges for the industry include a dearth of local talent and gaps in specialised skill sets, such as Islamic funds.

A regulatory framework that promotes and encourages the introduction of new products is also needed.

"One of the biggest issues on foreign investors' minds is that there really needs to be a clear-cut law of the land on how foreigners are treated and what they're allowed to do and what they're not allowed to do," Faruki says.

A single GCC currency would reduce operating costs for investment managers and give the industry a boost.

"There are conversions and transfer fees. All these costs have to be borne by the investor," Ahmed of Mashreq Capital says.

"One broker would be able to offer efficient pricing access to all the Gulf markets."

"Today, there are brokers that can offer that access, but very few, if any of them, can offer that access in a truly cost-efficient manner."

He adds that people sometimes forget the biggest and the most obvious driver of growth in the region's asset management industry.

"It's a young population so in the next 15-20 years, people will be accumulating savings."

"So the need to create genuine, professionally and efficiently managed savings products becomes even more critical. This is something that I think many people in the industry here miss."

"Without trying to belittle any of my competitors, because we're all in this together, we sometimes miss the forest for the trees."

"The big picture is that this is a region where demographics will drive the demand for investment products."

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