The Middle East stock markets, particularly the Gulf markets, are ready for a sustainable rebound as strong macroeconomic fundamentals and attractive valuations are improving the investor sentiment and risk appetite, said Dr. Amin El Kholy, managing director of asset management for Arqaam Capital, in a recent interview with Gulf News.
Dr. El Kholy, who has been closely associated with the regional asset management business since 1996 as chief investment officer and head of asset management at Shuaa Asset Management and prior to that, as head of asset management at National Bank of Dubai, has seen the regional market dynamics as an active market participant. He spent the first 13 years of his career working in the UK at institutions such as HSBC and United Bank of Kuwait (UBK). This included being a founding member of the first equity funds to span All Arab markets at UBK London as well as being part of the team which launched The Arab Gateway Fund at Primecorp Investment Management.
Gulf News: The regional stocks have been languishing for the past few years, while the fixed income side of the asset management business gained traction. Do you see a shift in market dynamics in the near future?
Dr. Amin el Kholy: It is very true that the fixed income side of the asset management business has been in favour during the past few years. Now we are seeing a revival in investor interest in equity which we expect will continue. The main asset class in the region remains equities by virtue of the large number of listed stocks. Certainly fixed income is attractive and is growing in importance. As a fund manager our priority is not to lock on to any specific asset class but to be able to look at what would benefit the clients across investment opportunities in MENA. We looked at what was already available in the market in terms of offerings. We found that there is a lot of emphasis on relative return and found that it was not always done to high standards. We also noticed that most of the focus in the equity space across the MENA was on 80 to 90 stocks. Out of this 60 stocks were covered by more than one broker, fund managers filtered down this universe about 40 to 45 stocks after looking at various factors. The underlyings of most funds were from this universe which means, the qualitative difference among various offerings in the market were marginal.
How do you differentiate your strategy in your fund offerings?
One part of our approach was to look at the top 80 to 90 stocks differently with a different risk management approach and give clients exposure differently. That’s how we launched our Alpha Fund, a hedge fund. The fund invests in the same universe, but occasionally we take short exposure along with the significantly large long exposures. We also take exposure to the fixed income offerings of the same issuers, which are sometimes worked more favourable than equities. Managing an absolute return fund means managing risks effectively within a risk budget. We have set a maximum loss of 15 percent over a 12-month horizon. The name of the game here is to work within the risk budget and we measure it quantitatively. There is also a qualitative element to risk management when faced with volatile socio-political situations, as we did recently in the region.
We were proved right last year as we moved fast to protect our exposure in Egypt ahead of the popular revolution. We were writing about the potential risk in Egypt from 2010 and managed to get out of that market totally, before the events impacted our exposure.
The other angle we took was to look at the rest of the 1,500 equities listed in MENA and created the Value Fund to give the investor exposure to these undiscovered opportunities. This required us to build a significant research effort to identify the 20-30 most attractive stocks in that universe, which no other MENA fund gives access to.
With significantly higher yield offered on regional debt both in conventional and Islamic spheres, do you expect to see more fund launches in the fixed income area?
On the fixed income side there has been a big surge in popularity. One of the issues with these funds has been that these don’t grow to significant size and the management fees are not big. If the yields are really very high as in equities like 15 percent or more, then the fund manager has the option to charge, say for example 1.5 percent as a management fee. But if you are going to look at yields in the range of five to six percent, management fees will have to be significantly lower. Thus to make these funds viable, the manger should increase the risks they take or increase the size of the fund significantly or both. There are few MENA funds that are pure fixed income, because there haven’t been many issues other than some sovereigns or sovereign related entities. In the sukuk space it is a different story, but as an asset class pure MENA fixed income is still very limited in scope.
Do you have any plans for a fixed income fund?
Our Alpha fund has exposure to MENA fixed income. But we don’t have a dedicated fixed income fund yet. We are looking at something that makes sense for the investors. We might start with MENA underlyings, but the scope of exposure could be beyond MENA, possibly with the inclusion of emerging market fixed income. We do have the in-house expertise to do it. Clearly we don’t want to start doing global fixed income funds. But emerging markets is an area we have the expertise. But we are still early days of that discussion.
There are talks that the yields on regional debt issues are bound to shrink as the macro fundamentals of the regional economies improve along with improving risk appetite and growing investor demand for regional debt. Do you subscribe to this view?
It makes sense for the yields regional on debts to shrink going forward and a follow on from that will be more investments into the equities. Clearly as the yield differentials begin to shrink that eventually feeds into the equity side, I mean to say the same drive that causes shrinkage of regional yields will be the drive behind the equity re-rating.
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