Business | Investment

Fund managers share their winning ways

Selling discipline is crucial to making profits

  • By Gaurav Ghose, Financial Features Editor
  • Published: 21:00 February 10, 2013
  • Gulf News

DUBAI: For the three years before the end of 2012, regional fund managers had to navigate the vagaries of the markets amid the ravages of financial crisis and, later, what was and is still a slow and uncertain recovery. During the period some managers stood out among their peers. Last month, Mena Fund Manager, a publication of a UK-based media house focusing on fund management recognised the winners.

While there are sceptics who dismiss fund manager awards arguing past performance do not guarantee the future, they are not totally without value. In a crowded market, awards reassure investors that their funds performed well when compared to their peers. But it is equally important to focus on the fund’s long-term track record, more the three- to five-year records than just one year, showing how the manager has performed during the lows and highs of market.

Awards highlight the achievements of managers who shape the future of the investment industry, and investors should pay attention to these as one of the criteria to select their funds, according to Dan Dowding, senior executive office of Killik and Co., Mena and South Asia. Globally, well-known awards include Morningstar’s and Thomson Reuters’ Lipper.

“Investors are looking for funds that produce consistent performance and while one-year performance numbers are important, the fund and fund managers’ longer term track record is even more important,” Dowding said.

He advised investors to drill down, “to find out how he or she has performed during periods of market stress, not just how they have performed in a bull market.”

It is also important for investors to inquire about the length of time a fund manager has been running a portfolio because performance is not associated with different staff skills, said Tariq Qaqish, head of asset management at Dubai-based Al Mal Capital.

In the category of three-year performance of Gulf equity fund of the year, Saudi Arabia’s Jadwa GCC Equity Fund came out tops. Jadwa Saudi Equity Fund was the best performing in the Saudi equity fund of the year, both for one- and three-year performances. Since its inception in June 2007 until November 30, 2012, Jadwa’s GCC fund had a return of 72.35 per cent as against the benchmark S&P Saudi Shariah Index’s 23.63 per cent. The Saudi fund, also started in 2007, had a return since inception of 48.73 per cent as against its S&P GCC Shariah Composite Index’s return of negative 7.49 per cent.

In the Mena equity fund of the year, for both three-year and for 2012 performances, Mashreq’s Makaseb Arab Tigers Fund was adjudged the best. Al Mal UAE Equity Fund bagged the award for best performing UAE equity fund over the past three years.

Makaseb Arab Tigers Fund has outperformed its benchmark, which prior to September 30, 2010, it was MSCI Arabian Market Index which was replaced by S&P Arab Composite Large Midcap Index, by 48 per cent since inception in 2006. Al Mal UAE Equity Fund has outperformed S&P UAE Composite Index by 41 per cent since 2006.

The other funds to win in the equity category were HSBC Amanah Fund in the sector fund category for both three year and one year performances. HSBC’s Amanah GCC Equity Fund won for the GCC equity fund of the year.

Gulf News spoke to some of equity fund mangers whose funds have performed the best over the past three years about their investment approach and choices.

Gulf News spoke to some of equity fund managers whose funds have performed the best over the past three years about their investment approach, stock choices, and their advice for retail investors.

With the focus on diversification, the numbers vary on the optimal number of stocks in a particular portfolio: 17 stocks distributed among nine sectors in Al Mal equity fund, 21 in Mashreq’s Arab Tigers Fund, and between 20 and 30 stocks in case of the Gulf and Saudi funds managed by Jadwa Investment.

The rationale behind limiting the number of positions in the portfolio is two-fold, according to Reda Gomma, portfolio manager at Mashreq Asset Management, at Mashreq.

First, “all empirical studies indicate that a portfolio comprising of 20-25 companies offer maximum diversification, any further additions to number of positions tend to have marginal impact on reducing the overall portfolio risk,” Gomma said.

Second, a portfolio “restricted to 20 and 25 names ensures that adequate attention is paid to each investment in [it] in terms of business monitoring and re-assessment, [and] also the portfolio would focus only on the highest conviction ideas from the investable universe.”

All three managers follow a blend of top down and bottom up approach to determine their investment choices.

“We begin our investment process with a macro economic study of each country to access its attractiveness and then follow it up by a bottom up selection of stocks,” said Sarah Al Suhaimi, managing director and chief investment officer, asset management, Jadwa Investment, explaining the mixed approach.

“Our active management approach requires continuous screening of each market to look for suitable investments; whenever we find an investment that fits our risk/return profile we add it to our holdings.”

From a country specific point of view, she said, Saudi and Qatar both have strong macroeconomic fundamentals with companies trading at cheap valuations.

“This was a major reason behind our high allocation to those countries in the recent past,” Al Suhaimi said.

The blended approach not just helps select high quality names but also ensures diversification.

Al Mal Capital’s top holdings, currently overweight on Emaar and National Bank of Abu Dhabi and underweight on DP World, according to Qaqish, meet their criteria in terms of asset quality, solid management with proven track record, and most importantly potential future growth.

“When we choose companies, we look at the fundamental base of the business,” Qaqish said. Al Mal digs into the quality of core earnings, cash flow, debt structure, and sustainability of growth; the business model; company management for consistency, focus and durability; margin and earnings developments; stock liquidity and relative valuation, he said.

Mashreq’s Arab Tigers Fund follows an approach that is 70 per cent bottom up and 30 per cent top down.

“We just use the macro when assessing the industry outlook. In fact the fund is more of a stock selection rather than anything else,” Gomma said.

Citing the allocation the fund made during the financial crisis, when sectors that were exposed to the external demand were likely to underperform due to unfavorable conditions in Europe and the United States, Gomma said they underweighted petrochemicals. In the meantime when Gulf countries adopted expansionary fiscal policy, Mashreq decided to overweight sectors that benefit from growing domestic demand.

“It happened that Saudi Arabia has a strong and sustainable retail sector and was extremely undervalued, given the expected growth,” Gomma said. “We selected our companies after a series of financial analysis and company visits; for Qatar it was purely a product of a stock selection process.”

All fund managers stressed the importance of a “selling discipline” when managing a portfolio.

“We may reduce or sell a stock if that stock has achieved its fundamentally determined target price or there is deterioration in fundamentals of a company; we may also exit an investment if we feel there are other better investment opportunities.”

Al Mal Capital acts when one of the following conditions occurs: deterioration in a company’s fundamentals; change in the focus of a company’s core business or other erratic behavior; and continuous and illogical drop in a company’s share price; ?? target price (TP) is met; we revisit our analysis for possible increase in TP. ??

Arab Tiger’s Fund sell discipline is based on their estimate of intrinsic value of a business and where it trades in the market, according to Gomma. 
 “If the market is offering to buy that business at a substantial premium to our estimate of its intrinsic value then the position is closed,” he added.

This is exactly what happened in case of their exiting Alinma Bank, said Gomma. They closed the position when the bank reached the targeted multiples, and there was no change in business environment.

The resulting cash, Gomma said, gets deployed in new business – selected from the investment universe – which offers the best risk and return (based on fair value estimates) for the portfolio.

“For Al Marai, for example, the risk reward became less appealing, [and] hence its position was cut,” he said.

Finally, on how often they revaluate their portfolio, the managers being what they are, that is active investors, with a belief in long term investment, do a periodic or ongoing assessment of their positions.

“Portfolio monitoring and rebalancing is continuous process that is triggered by price action, Corporate announcement, and change in government policy, said Gomma.

Qaqish’s philosophy aims to adhere to their allocation matrix and exercise periodic portfolio rebalancing by fine-tuning stock and sector weightings.

Tips for investors

Reda Gomma, portfolio manager, Mashreq Asset Management:

**Identify your investment horizon and focus on long term return

**Your asset allocation should be in line with your appetite for risk

**Maintain a well diversified portfolio that meet your investment needs

**Choose your investment manager carefully and focus on sustainability of return rather than momentum driven return.

Tariq Qaqish, head of asset management, Al Mal Capital:

**Stay diversified across sectors and asset classes

**Don’t invest momentous part of your assets that will keep you awake at night

**Don’t allow a trade to be an investment

**Don’t think you’re smarter than the Mr. Market

** Be humble and learn from your mistakes

Sarah Al Suhaimi, managing director and chief investment officer, Jadwa Investment:

**Base your investment decisions on sound fundamental factors.

**Invest in companies that you would not mind holding for long term.

** Don’t be greedy, be a disciplined seller.

Gulf News
Business Editor's choice
Quick Access

  1. Markets

  2. Economy

  3. Property

  4. Aviation

Business Top Stories

  1. DP World opens major container facility

  2. Shuttle bus service between Dubai airports

  3. Regulators to monitor over-the-counter swaps

  4. Consumers to ‘tap’ for everyday spending

  5. China auto show opens