Interview with Haissam Arabi, Head of Asset Management, SHUAA Capital psc
SHUAA Asset Management (SAM) is the asset management division of SHUAA Capital psc. It offers a broad range of asset management services in conventional and Shariah-compliant forms, covering 12 countries in the Arab world. SAM currently manages six proprietary open-ended funds targeting the Arab region, which give regional and international investors access to the Arab stock markets under its coverage. It also manages six third-party investment funds sponsored by leading financial institutions in the Arab region and offers discretionary portfolio management services. Assets under management as at 31 March 2006 stood at AED6.12 billion (US$1.6 billion).
SHUAA Capital is a public shareholding company established and headquartered in Dubai, United Arab Emirates, and is licensed and regulated as a financial investment company by the UAE Central Bank. It was incorporated in 1979 and is one of the few companies having a dual listing on the Dubai Financial Market and the Kuwait Stock Exchange. Beginning in 2000, SHUAA Capital expanded its existing proprietary investment activities to encompass a broad range of financial services including asset and portfolio management; capital markets services including debt and equity underwriting, regional brokerage; investment banking advisory services; and private equity in the Arab region.
Research forms the cornerstone of SAM’s regional activity. SHUAA Capital has invested heavily in both human and technological resources, to build one of the most comprehensive databases covering publicly-listed companies in 12 Arab markets as well as corresponding macro-economic coverage.
With regards to the funds and fund manager, how is their approach different from others? There were approximately 80 new Islamic funds launched in 2006; how is this proposition superior to them?
SHUAA Capital and SAM are considered pioneers and innovators in the field of asset management in the Arab world. They were the first GCC institution to regard the Arab markets as a single asset class by providing individual and institutional clients access to all 12 Arab markets. They also have the longest track record for managing a MENA region fund with the same fund manager since March 2001. Thus, the following characteristics set SAM apart from other asset managers:
Skilled management team with experience in both bull and bear markets
Combination of western practices and regional expertise
Dynamic investment style that combines top-down macro driven approach with bottom-up picks, capturing main growth opportunities and turnaround stories
Strong investment process in place
Comprehensive inventory of financial statements and third-party research
In-house financial models database on 150 companies
Strong relations with company management in all GCC countries as fostered by ongoing company visits
Network of 50 brokers across the region providing instant information flow
Application of risk management and portfolio optimisation techniques
Apart from the superior management team, Arab Islamic Gateway Fund also has five of the top Shariah scholars mandated to monitor the fund’s investments and to provide peace of mind to investors from a wide variety of Islamic schools of thought.
How would you characterise the investment/management style that governs the various funds from SHUAA Capital? Does this apply to both your conventional funds as well as Shariah-compliant funds?
SAM follows a dynamic asset allocation and top-down macro driven approach – 80% – with leeway for bottom-up stock selection – 20%. The fund management investment style is a blend of value and growth strategies: two investment styles that often overlap when companies operate in a high-growth environment.
The company utilises fundamental analysis (including on-site company visits), liquidity checks, technical analysis (to help determine our entry and exit levels), broker and market feedback, and management team’s experience and systems as investment parameters, with a 12-18 month investment horizon and quarterly screening and revaluation.
Can you describe the key challenges and opportunities associated with investing in your markets of focus (Arab league countries) and how does your fund manage these?
The greatest challenge remains direct access to the region’s capital markets by foreigners, which is still relatively restricted, with up to 68% of market capitalisation in Kingdom of Saudi Arabia, the UAE and Kuwait being only available to regional investors (source: SHUAA Capital, January 2007). Mutual funds sponsored and managed by GCC institutions and targeting regional capital markets such as the funds sponsored by SHUAA Capital and managed by SAM are at present the best route for foreign investors to gain exposure to the region while remaining suitably diversified. The Arab Islamic Gateway Fund is one such fund.
Furthermore, despite developments made by all member jurisdictions of the GCC toward increased transparency and accountability, access to information relating to the financial health of companies targeted for investment remains somewhat of a challenge. Consequently, it is preferable for foreign investors to opt for investment schemes managed and sponsored by regional financial institutions which are themselves regulated by the relevant authorities and which have a proven track record in managing regional assets.
SAM is regulated, amongst others, by the UAE Central Bank, the Emirates Securities and Commodities Authority, the Dubai Financial Market and the Kuwait Stock Exchange. It utilises a proprietary database, which collates financial information on approximately 800 regional companies – built and maintained over the past six years through relationships cultivated with company senior management and investor relations departments. Looking only at published financials is most of the times, not sufficient to identify future sources of revenues or by the same token low quality of earnings. This is mostly evidenced when looking at turnaround stories whose value is still not reflected in the financials. The database gives SAM a competitive edge and first-mover advantage over competition. Information gathered from on-site visits not only provides invaluable visibility on companies’ operations, strengths or weaknesses but also helps determine with increased accuracy projections for top and bottom line growth and contribute to the quality of buy-side research put together by the SAM team of financial analysts.
Furthermore, all funds sponsored by SHUAA Capital and managed by SAM appoint third-party service providers as administrators and custodians, which make them less susceptible to issues surrounding transparency.
What are the investment proportions in the various countries (Morocco, Kuwait, UAE, etc)? How are these weights determined and how often are they reviewed?
The fund has strict investment guidelines and restrictions which are set out in the prospectus at the outset.
Amongst others, the investment guidelines and restrictions seek to achieve the necessary diversification by setting limits in the form of percentage of net asset value up to which the fund manager may invest in any one country, sector and stock. At the level of asset allocation, the fund manager as well as a third-party administrator monitor the fund book to ensure that its investment guidelines are maintained.
Arab Islamic Gateway Fund is actively managed and although it has an investment horizon of 12-18 months, each weighting or position could change regularly to comply with investment decisions taken during the investment committee meetings. General screening and revaluations happen on a quarterly basis at the minimum. In addition, the fund undergoes strict Shariah screening on a bi-yearly basis which sometimes requires changes to allocations in various stocks.
The fund’s mandate calls for a dual approach (bottom-up as well as top-down). From this analysis, how many individual positions do you seek to obtain and how often do you trade or turn over the fund?
We are active managers operating within an absolute return frame of mind. We have a dynamic asset allocation approach and our investment stock list comprises around 50 companies. We have a robust investment process in place and our proprietary database encompasses 800 companies in the region. After applying liquidity analysis and simple financial ratios, we arrive at approximately 150 to 200 eligible companies which are then further screened to comply with Shariah principles as set out in the prospectus and as interpreted by our Shariah advisor. Through regular visits we gain valuable insight into the companies’ operations and the information gathered allows us to forecast top and bottom line growth with high accuracy.
We are value-driven investors with an investment horizon of 12 to 18 months. Our regional mandates tend to have a turnover of around 120%. As a rule, we do not trade around our positions, but we are very active in switching from one market to the other as well as changing our theme focus according to our investment outlook. The number of positions varies according to our outlook on the market. As such, it could vary from 20 stocks to 35 in the case of the AIGF where the Islamic universe is smaller than the conventional.
What extreme market event would impact the value of the fund? What risk management tools do you have in place to monitor these?
GCC currencies are pegged to the dollar therefore a large fluctuation is not possible. GCC monetary authorities were studying the possibility of a revaluation against the dollar and Kuwait initiated this movement by allowing a 1% appreciation of the Kuwaiti dinar. Currently, regional currencies are around 27% undervalued according to our estimates. Therefore any appreciation, although unlikely at the moment, will benefit our investors as their funds are converted to local currencies.
Risk management practices are evolving rapidly throughout the GCC region.
From a financial standpoint, Arab Islamic Gateway Fund is audited annually but its performance is monitored continuously by the investment team to assess it in relation to its benchmark, and is reported monthly to the fund's investors. At the level of asset allocation, the fund manager as well as a third-party administrator monitor the fund book to ensure that its investment guidelines are maintained.
At the order execution level, a centralised trading desk is dedicated to execute all the orders during regional market hours while daily reconciliation of the trading book by the front and back office ensures full reconciliation at all times. All operations are supported by a front, middle and back office that cooperate yet have separate duties to minimise operational risks and to ensure compliance with guidelines.
The risk management measures discussed above are implemented within a firm-wide compliance framework supplemented by an internal audit function performed by external professionals. SHUAA Capital’s compliance manual also sets out rules and procedures relating to confidential information, personal account dealing and conflicts of interest. The compliance manual is updated regularly and available online to all employees. In addition, all employees receive periodic legal and compliance training.
Conventional finance would be a significant industry that is deemed not permissible in a Shariah-compliant portfolio. How does this impact the overall allocations of the fund vis-à-vis a conventional fund?
Naturally the investment universe for conventional mandates is larger. As such it gives the fund manager more flexibility and more ways for diversification. Nevertheless, due to the strong demand for Islamic products in the region, we are witnessing the rise of many Islamic companies in different sectors, the likes of banking, mortgage finance and even insurance. As such, investing in such companies gives the fund manager the needed exposure on the desired sectors.
How do you benchmark your fund’s performance? Is this done from a perspective of absolute returns or risk-adjusted returns?
As mentioned previously, all our funds are actively managed. We do not have any restrictions on divergance away from the index. Our funds are benchmarked against the SHUAA Capital and MSCI indices. Our target is to outperform market indices, along with achieving the optimal risk-adjusted return.