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Friday, June 14, 2024

Time and Money

by Luzia Karim

© Al Habtoor Group

Over the past year, several investment funds have been launched by Arab and international banks throughout the Gulf and the Middle East. As the United Arab Emirates has no formal stock exchange, and any initial public offering (IPO) is only open to UAE nationals, investment funds are proving a suitable alternative for expatriates to invest their money in offshore funds.

“The liquidity is there. That is obvious from the amount of over subscription witnessed of any IPO,” said Bob Brunton, manager of investment services, Middle East at Standard Chartered Bank in Dubai.

“The public is becoming more educated, demanding more from their money and demanding more alternatives. People are becoming aware of what they can do with their money,” he said.

Investment funds, also known as mutual funds and unit trusts, spread investments under professional management by pooling resources and diversifying risks.

Some view the absence of an official stock market in the United Arab Emirates as a double-edged sword, listing advantages and disadvantages. It is the only Gulf state not to have an official stock exchange. The federal government announced that it would set up a stock exchange before the end of 1998 but many are sceptical as the deadline has been postponed several times.

“The biggest loss of money does not come from foreigners repatriating their money but from wealthy nationals within the Gulf, who place their money in private banks, usually in Switzerland or Luxembourg,” he said . Some companies are moving their base from the United Arab Emirates to neighbouring Oman in order to float their shares.

But others are quick to argue that the absence of a comprehensive stock exchange provides a safety net. “The Gulf has not experienced a crash or even a minor jolt and after seeing what has happened in some Asian countries, they are reluctant to rush in. Oman, which does have a trading floor, experienced a tremor of prices dropping but this is nowhere near the stock exchange crashes seen in Europe or America,” A diversified economy helps slow down a currency crisis and Gulf state revenues are still largely made from one sector - the oil industry.

“We are seeing an increasingly strong demand across the Middle East and Mediterranean countries,” said Martin Cambridge, Fidelity Investment's executive director on a recent trip to Dubai. They announced the launch of the Fidelity Triple Performance Plan to Middle Eastern and Mediterranean offshore investors seeking international diversification. The plan is a combination of three funds from the Luxembourg-based Fidelity Funds range whereby investors' subscriptions are automatically allocated to an International Fund on a 60 per cent basis, a European Smaller Companies Fund receives 20 per cent and an Asian Special Situations Fund receives 20 per cent.

Over the past two years, this combination of funds has delivered an annual growth of 15.72 per cent and each fund has outperformed its respective benchmark index since its launch, according to Cambridge. “This plan is designed to offer investors an internationally diversified product through one simple investment. It will appeal particularly to those investors who have already built up a domestic portfolio and are looking to broaden their spread of investments,” he said.

“This plan enables investors to access the potentially higher returns of international stock markets whilst balancing the risk. The European Smaller Companies and Asian Special Situations Funds utilize Fidelity's bottom-up stock picking approach to produce returns which have consistently out-performed their benchmark indices,” he added.

The International Fund is spread across various sectors, such as finance (22 per cent), consumer goods (21 per cent), services (21 per cent), capital (19 per cent) and others. In most investment funds, the average fund size holds about 40 stocks over which the investment is spread. Fidelity Investments has tied up with the Commercial Bank of Qatar, Emirates Merchant Bank in the United Arab Emirates and the National Bank of Oman in a bid to grab a share of the budding market.

Booming Gulf capital markets are attracting the mutual fund industry. Apart from local funds, British Bank of the Middle East launched a fund of Omani stocks with global investors. In Oman, both Omanis and non-Omanis can invest in investment funds traded on the Muscat Securities Market which invest in existing growth shares and other MSM quoted securities as well as overseas growth portfolios and in venture capital opportunities.

In the United States, one in four households invest in mutual funds while in the United Kingdom, the rate is one in six families. In emerging markets, this figure is much lower as the basic concept of saving money and tying it up in investment funds is not widespread for many reasons. In Asia, it remains to be seen what the consequences of the currency turmoil in some countries will have on the investment market.

“You have to match your investment and risks to your level of goals. If you need this money in less than five years, a low risk investment fund is more appropriate while for a period longer than five years, it is possible to go for a growth portfolio with higher returns,” he said. Studies in the US show that the biggest mistake that investors make is 'to play too safe'. Ideally, everybody wants a low risk high return investment fund which unfortunately does not exist.

The risk categories for investment funds are A (low), B and C (medium) and D (high). The A category can bring returns of between 12 and 14 per cent while D category can achieve over 30 per cent. Money is earned either through dividends and on interest in investments or by holding equity bonds or other securities that go up in value. These are called capital gains.

The Net Asset Value is the value of one share or unit of a mutual fund. The unit price rises or falls like shares on the market. Last autumn, Jordan-based Arab Bank announced the launch of its Nikkei-linked Capital Guaranteed Fund as well as plans to set up equity funds for Gulf markets.

“We are studying plans to launch funds in Gulf markets with local currencies. The funds could be restricted to one Gulf market or several together,” said Samer Saifi, bank head of private banking. Arab Bank stared focusing on the Gulf and Middle East one year ago with the launch of a multi million dollar fund.

The bank has taken a new initiative on the investment side and has decided to increase its range of products by forming a strategic business unit, under which investment advisers have been placed with 17 branches, two of whom are in Dubai and one in Abu Dhabi. But while there are some high net worth individuals, most banks and investment companies are targeting the middle range of people and above who can afford to invest $5,000 plus.

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