On the back of increased risk appetite that led to a strong stock market rally in the first three months of 2012, Gulf equity funds, led by Saudi Arabia and the UAE, performed notably well during the period, according to Lipper, a Thomson Reuters unit.
The positive feeling about the market in the first quarter, however, did not fully compensate the negative sentiment in the first quarter of 2011. Overall, according to the latest data obtained by Gulf News, funds flows in the first quarter totalled $877.3 million (Dh3.22 billion), only half of the outflows of $1,685.9 million during the same period last year.
This year's relatively strong start can be seen in the average performance gain of 11.02 per cent against a negative return of 1.72 per cent in the first quarter of 2011. Equity funds, in particular, averaged a gain of 11.64 per cent, in stark contrast to a decline of 1.85 per cent, during the same period in 2011. All categories experienced double-digit performances, except for Equity Kuwait funds.
The fund sector allocations along with higher exposure to Dubai index as against Abu Dhabi have been the main combination behind the outstanding performance of Al Mal UAE Equity Fund since the beginning of 2012, says Tariq Qaqish, manager of the fund, which topped the UAE funds list for the quarter, beating the S&P GCC Index (see table).
"Moreover, our overweight positions in the telecom sector and capital goods sector in addition to our underweight positions in the banking sector contributed to the strong performance," he says. "Our cautious outlook on the banking sector due to its limited potential growth attributed to the Fund's performance. We had an overweight position in Arabtec, where we reduced our exposure on levels we believed the stock was fundamentally overvalued."
Qaqish added: "Although the fund did not participate in the rally of small stock company, we have achieved superior performance to our unit holders."
Best performing
With regard to Falcom IPO, the best performing fund in Saudi Arabia with a return of more than 40 per cent, Detlef Glow, head of Lipper Europe, Middle East and Africa, told Gulf News: "It is noteworthy that the best performing fund within the table does not only [make] profits from international IPOs. The fund also invests in IPOs from companies within the Mena region and Saudi Arabia and can stay invested up to two years after the initial public offering."
However in Saudi Arabia, banks and petrochemicals did not rise as much as sectors such as telecommunications, insurance and property.
"Funds which are heavy in those two segments would still have performed well but not as well as others," says Raghu Mandagolathur, senior vice president, research, at Kuwait Financial Centre (Markaz).
In the UAE, the big story was property, which rose by about 40 per cent. The investment sector was up 43 per cent.
Shakeel Sarwar, head of asset management at investment bank Securities and Investment Co. (SICO), Bahrain, whose flagship fund is GCC-focussed Khaleej Equity Fund, is cautious in his reading of the strong first-quarter performance of Saudi and UAE funds.
"Most of the Saudi Funds are index-like funds and are run by managers with a speculative mindset," he says. "In good times they do well but in bad times they do very bad."
Fund managers who are focused on the region and have underperformed their respective benchmarks did so because of the nature of the rally which was driven by speculation and low quality stocks, says Sarwar. SICO's Khaleej Equity Fund has returned 11.4 per cent for the year compared to 14.7 per cent in the S&P GCC index. "Due to our conservative, purely fundamental approach to investing, we completely avoided the speculative stocks which led the GCC markets' rally in the first quarter," Sarwar said. "We are confident that our disciplined investment process would enable us to outperform the benchmark in the long run."
Cash as king
The uncertainties fund managers have been faced with during the past few years is a reason for some of the funds failing to beat the market benchmark, says Dunny Moonesawmy, an independent financial analyst based in Paris.
"Cash has been king [in] strategies to cushion the market downturn. As market rebounded, it is normal that funds do not capture the market entirely. Take Al Alhi Saudi Trading Equity as an example where 61 per cent of the portfolio was invested in money market products in October 2011," he says. Given that the index gained only six per cent and banks were up a mere two per cent, Kuwait funds didn't do well, says Mandagolathur. The large and mid cap stocks, which make up the bulk of the fund holdings, were up just 0.14 per cent and 2.7 per cent while small and micro caps gained 10 and 21 per cent respectively.
Bond funds underperformed equity funds and, as expected, money market funds fared poorly. Bond funds increased 1.98 per cent in the first quarter as against 0.67 per cent during the same period last year. Emerging market bonds performed better than Dollar or Euro bonds, given the prevailing low interest rates.
As for money market funds, Sarwar says, while these are ideal for downside protection, they miss out when equity markets do well, and that's what has happened this time.
With markets returning to reality and uncertainties related to global growth emerging again, coupled with new worries over decreasing economic growth in China and recession in the UK, the outlook going forward is sober. "The next two quarters will be challenging and markets in the Gulf should continue to suffer, even though at a lesser extent," Moonesawmy says. "I expect the Gulf market to remain flat as they are strongly linked to the financial and the real estate sectors, which are still convalescing."
While it is difficult to forecast the growth of his UAE Equity fund for the rest of the year, Qaqish believes it could be go up another 10 to 15 per cent. And that's based on the UAE market valuations, which he says "looks appealing as corporate earnings are expected to grow by 20 per cent and trading at eight times price to earnings-ratio in 2013."
