Solid performance in UAE’s stock markets produced strong gains for regionally domiciled equity funds during the first seven months of the year. This also reflected positively on mixed assets funds that have heavy allocations to equities, according to data released by Lipper, a unit of Thomson Reuters that tracks mutual funds performance.
Majority of the region’s fixed income funds—as was the case with global onesc underperformed between January and July after they suffered in the months of May and June in the aftermath of the US Federal Reserve’s sudden announcement of monetary tightening to start later this year. Against the US Federal Reserve’s close to zero interest rate, regional money market funds have been among the best globally.
According to Detlef Glow, head of Lipper Research, Europe, Middle East and Africa(EMEA), in the global universe of equity funds, eight of the 10 best performing ones for the first six months of 2013 belong to the UAE Equity scheme.
Similarly, in the Mixed Assets category, eight of the 10 leading funds globally for the same period are domiciled within the GCC. In the universe of money market funds, seven of the 10 with the highest returns follow an Islamic approach and remarkably, all 10 funds with the best returns are GCC domiciled.
Leading the list in the equity category was MSCI UAE index tracker Invest AD’s fund, with a 63.01 per cent increase between January 1 and July 31, followed by Shuaa Capital’s Emirates Gateway Fund, which has exposure to UAE equities and rose 58.75 per cent.
The National Investor’s (TNI) UAE Blue Chip came in third, followed by Union National Bank’s Al Itihad Fund, an open ended fund that focuses on UAE and GCC stocks. Abu Dhabi Commercial Bank’s (ADCB) passive fund MSCI UAE Fund and National Bank of Abu Dhabi’s UAE Growth Fund round off the top six equity funds.
Funds that target UAE stocks, mainly banking and real estate, were among the foremost performers. With UAE stock markets’ returns among the best in the world this year, UAE focused equity funds doing well was not surprising. Strong earnings numbers coupled with the positive momentum aided by the upgradation of UAE index into MSCI Emerging Market Index resulted in key benchmark indices (Dubai’s DFMGI, Abu Dhabi’s ADX) returning 40.7% and 36.9% in the first half of 2013.
“During this time period our fund beat not only all UAE equity strategies but all regional equity strategies, because the UAE market outperformed other regional markets,” said David Sanders, chief investment officer of Abu-Dhabi based Invest AD Asset Management.
The success of Invest AD’s Index tracker fund brings back the debate on passive versus active funds. As for the UAE equity strategies in the first half of 2013, Sanders says active managers did not add value in stock selection, thus underperforming the market, which was up on a broad basis. Typically, he adds, some active managers will beat the index while others will underperform.
Raghu Mandagolathur, senior vice president-research at Markaz, also known as Kuwait Financial Centre, refers to their research “Alpha Abound” that suggested that it is quite easy to add alpha (additional return) in the GCC markets.
In general, he said, the emerging and frontier markets’ ability to generate alpha is high due to market inefficiencies.
“Hence the lack of popularity of passive funds here and in our asset management research report as well, we find that passive funds are miniscule compared to active funds,” said Mandagolathur.
While the active versus passive debate is an ongoing one among asset managers, investors, and plan sponsors, in reality, Sanders believes there is no clear “winner”.
“Rather, utilizing a combination of both passive and active strategies makes sense in a portfolio for most long-term investors.
“Passive investing can provide overall (Beta) exposure to a region or asset class while active investing can provide additional return (alpha), assuming the investor has skill in selecting active managers,” he says.
Shuaa Capital’s Emirates Gateway Fund, an active fund which has gained 99.24% over the last 3 years until August 13, is a blend of both value and growth.
“Some of the names which have figured prominently in the fund over the last few quarters have included Emaar Properties, Du, First Gulf Bank (FGB) and Aramex,” said Amer Khan, director at Shuaa Asset Management. “Lately our positions in Emirates NBD, Agthia and Union National Bank have also performed very well. From an allocation perspective, we are long-term investors.”
Tactical allocation and cash management aside, Khan added that they wouldn’t rotate away completely “unless something changes our fundamental investment thesis, the stock rises to hit our target price or we identify another opportunity with higher potential gains.
“A recent example of our disciplined booking of gains as the stock hit our target price was DU.
For an active equity fund such as NBAD’s UAE Growth Fund, the focus has been on value and growth stocks, with an eye on interest rate environment and inflation with the aim of identifying and adding sectors and stocks that would benefit, and reduce those that would be negatively impacted.
“We had a mix of growth and defensive stocks particularly companies with strong cash flow, good visibility of earning, attractive valuation, good quality management,” said Musa Haddad, fund manager.
“Within growth stocks, we prefer companies with clear visibility of future growth and strong balance sheet to support future expansion plans Buy-and hold strategy will be used for stocks that reflect the strongest sectors in the economy.”
The fund’s latest stock picks include NBAD, Emaar Properties, ADCB and FGB.
By virtue of hedging against interest rate risk from the beginning of the year, Bahrain-domiciled Mashreq’s Makaseb Income Fund (MIF) bucked the trend of underperformance and met with a successful return of 11.76 per cent. It beat both the index and its peers by a wide margin.
As of June, the fund’s average maturity stood at 8.5 years, while average yield was 5.9 per cent.
Until end of July, the other four in the top five include NBAD’s Cautious Income Fund, Gulf Investment Corporation (GIC) Gulf Bond, SAIB (Saudi Investment Bank) Sukuk Fund, AlAhli US Dollar Sukuk and Murabaha Fund and NBAD Sukuk Income Fund.
Makaseb Income Fund, which outperformed the benchmark (HSBC NASDAQ Dubai ME Investment Grade Index) last year by about eight per cent, continued its good run this year and outperformed the Index by three per cent in the first half of 2013, pointed out Mandagolathur.
“The fund has exposure to emerging and frontier markets, fixed and floating instruments, to the tune of about 80 per cent and well diversified in terms of sectoral allocation,” he adds.
The fund’s performance this year has been mainly driven two factors.
With a view that the longer end of the US Treasury curve (interest rate risk) is expected to widen and have a negative impact on prices of bonds, especially the 10-year and longer maturity buckets, Aliasgar Tambawala, Investment Manager, Fixed Income at Mashreq Capital DIFC Ltd, said “we began and have maintained a US Treasury short position to hedge interest rate risk since the beginning of the year and have opportunistically reduced duration in the portfolio.”
Secondly, Tambawala pointed out that the other main source of capital appreciation has been regional convertible bonds, which was used to express the view that regional equities would outperform fixed income returns in 2013.
“Therefore we built and maintained significant exposure to regional convertible bonds and that has helped us outperform the regional index and our peers,” he said.
In June, the fund reduced duration and raised cash in the fund (14.34% in cash as of June end) and have re-deployed that cash in names that are fundamentally sound but have underperformed the rest of the MENA markets in the selloff.
“The fund has hedged interest rate risk by selling Treasury futures and the portfolio is 24.55% hedged and we will continue to use futures to increase or decrease the hedge depending on what conditions prevail in the US Treasury bond market,” said Tambawala.
NBAD’s Cautious income Fund bore the brunt as have most of fixed income funds globally of the Federal Reserve’s sudden announcement of withdrawal of quantitative easing in May. May and June saw massive outflows in emerging market debt funds.
The Cautious Income Fund, with an exposure of government and government related and corporate debt in the UAE and larger Mena region, had a cumulative return of 2.67 per cent between January and July, according to Lipper.
However, Mark Watts, head of fixed income and chief investment officer at NBAD, wrote in the latest (July) fact sheet of the fund that “July has been supportive for fixed income markets following the strong correction we saw in May and June…Nevertheless, a reduction could be on the cards in 2013 post September meeting which we believe is largely priced in current US 10-year treasury yields of 2.60%.
“As we anticipated, the initial recovery has been sharp and across the board, containing both shorter but particularly longer duration bonds. Bahrain and Ruwais Power Company acted on this window of opportunity, launching 10-year and 23-year maturity bonds.”
The top three in this category for the first seven months, Lipper research shows, include NBAD’s UAE Distribution Fund (Mizaat) with a return of 25.32 per cent, Oman’s Vision Real Economy Fund’s 24.66 per cent and Saudi Arabia’s HSBC Multi Assets Growth Fund, which had a return of 15.33 per cent.
The NBAD’s UAE Distribution Fund is currently invested only in equity and real estate.
While the equity strategy for this Mixed Asset Fund is the same as NBAD’s UAE Growth Fund—a mixture of value and growth stocks—the real estate property exposure generates a rental income, says fund manager Zeki Muderrisoglu.
“The fund payout dividend of 2.50%, last paid in July of this year to its investors differentiates it from the NBAD UAE Growth Fund,” says Muderrisoglu. “The real estate is yielding around seven per cent in addition to the dividend from the equity exposure. This strategy remains the same and consistent.”
According to Lipper, 47 money market funds domiciled in the region had returns between 2.61 per cent and 0.04 per cent.
“Money market funds mostly perform in tandem with deposit returns, which is again determined by US Federal Reserve rate and with that rate currently at 0.25%, Money Market funds yielding 1% or above should be considered good,” said Mandagolathur.
“The performance of Islamic money market funds is better than conventional money market funds as they are asset based,” he added.
The best performing money market fund Saudi Investment Bank’s SAIB Murabaha with a return of 2.61 per cent until July end of this year invests in Islamic money market instruments in the form of murabaha trades.
“The money market pays very low rates in the developed countries and so, with regards to this, two per cent or more is a great return,” said Detlef.
SAIB Murabaha’s superlative performance was possible because of a weighted average maturity of their investments being less than six months and their exposures to currencies other than Saudi Riyal (SAR) was fully hedged, pointed out Mandagolathur.