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Gaming Market in the Middle East - Part2: Key trends in the Middle East gaming market

Date : 04/03/2018
Author:  Marmore MENA Intelligence




As part of the gaming sector study in the GCC region we were able to find out some prominent trends in the GCC region that we have chronicled below. Some of the trends were not quite obvious before venturing into this blog. For example, piracy has been a primary reason behind the gaming culture in the region and even within the Middle East region there are significant differences in product distribution networks. Mobile gaming has been an important revenue generator in the region thanks to the high concentration of gaming whales in the region.

Censorship and strict rules does not diminish appeal of games
Some games were banned in the region on various grounds ranging from negative portrayal of the Middle East to usage of extreme violence. Games such as Battlefield 3, God of War, and Call of Duty 4: Modern Warfare and Grand Theft Auto (Series) have been banned but surprisingly their ban has only increased their popularity. These game titles have wide spread followers in the region despite the negative portrayal of the Middle East region, albeit in a highly fictionalized environment. The popularity of games such as Battlefield and Call of Duty 4: Modern Warfare seems to stem from their plot, which revolve around the military forces taking on the terrorists in the region. Youngsters from the region claim that the existence of such video games lends them a safe avenue for letting their frustration out on terrorists; some gamers equate this to a cathartic experience. Patchy enforcement of the ban owing to very little communication among the relevant bodies result in prohibited games being available through other channels.

The irony of piracy – Once here, now on the way out
While it might be easy to generalize the trends across the countries - the cultural, regional and economical differences have played a key role in the development of gaming culture within their borders. For example, in the UAE, malls have been the major contributor to the popularity of video games. Specialist video game parlors, hypermarkets and even bookstores boast of offering latest games and consoles to their patrons. Contrast this with Iran and Egypt, which still depend on distributor, wholesaler and retailer model. The differences however has not diminished the popularity of gaming culture; for instance, Iran boasts of 25 Mn online gamers among which 2.5Mn are expert gamers. Unfortunately, piracy still dominates in the PC games market in the country and the only way to make money from Iran is through sale of gaming consoles, accessories and other gaming hardware.

Despite its negative effects, piracy has played a big role in gaming becoming a favorite activity in the region. While solid number are difficult to come by, estimates point out that over 99% of the games for PS2 were pirated in the region. The problem of piracy was exacerbated by the lack of unified and global release dates, which also encouraged the grey market. CDs and DVDs of games were imported from the US and the Europe and were sold in the Middle East market at a premium price.

Piracy has died down recently due to three factors - distributors and sellers in the region have made conscious efforts to curb piracy, harder to pirate games on consoles such as Sony’s PS4 and the growth of mobile gaming. However, piracy’s role in popularizing the gaming culture in the region cannot be understated.

In recent times, there has been a visible shift towards mobile games and this is rapidly eating into the share of gaming consoles. An advantage that mobile games have over the consoles is the ability to monetize the usage in a more efficient manner through micro transactions. Mobile games usually use the freemium approach, a user has a waiting period when he crosses a particular level, and the user can either pay a small fee to play the next level immediately or wait for the cool off period to continue the next level. Micro transactions have been the order of the day, the basic game is provided for free but people have to spend more on getting sophisticated weaponry, level up quickly, boost their damage recovery etc. These games also come from controlled channels such as the Google Play Store or Apple’s App store, which are harder to pirate, as game servers are quick to recognize such attempts, and blocks them. Game developers also feel that selling the games as a piecemeal instead of a whole package bring constant stream of revenues.

Game development initiatives- from obscurity to mainstream
The development of gaming convention in the region points to some an important change in the region – Gaming industry is now being increasingly seen as a viable career instead of a favorite past time. Jordan’s Game Zanga holds contest for developing games within affixed time on an agreed theme, the prizes for these events range from cash prizes to lucrative contracts for game development. Over 300 developers in its recent iteration have attended this event organized by game development studio GameTako and over 50 games are created each year.

In addition to these events and convention, governments and private initiatives in the region are promoting the industry. The Saudi National Creative Initiative hosts an application and gaming week that aims at teaching design theories and how to transform an idea from concept to a complete live project. Turkey has a StartersHUB that organizes gaming convention each year in Istanbul. In Beirut, Arab Arcade organizes regular gaming sessions for gamers, developers, designers, artists to create new games within a certain period similar to Game Zanga.

Localization is starting to gain traction
The massively multiplier online (MMO) games were the first to embrace localization in the form of translating English text to Arabic. However, success of the first game MMO game, Travian came with heavy cost of increased advertisement spending. Sony was the first major developer to release “This is Football“ in Arabic for the PS2 platform. For some years, Sony was the only console producer with Arabic content. Despite the initial reluctance and the difficulties that they experienced in the region, global studios such as Valve and Ubisoft have invested handsomely in the region. Valve activated dedicated Middle Eastern servers live for games such as Dota 2, team Fortress 2 and Counter Strike: Global Offensive in 2014. Ubisoft has a game development center in the region and works closely with Tadreeb, the training arm of the Abu Dhabi government media company twofour54 providing training course in gaming. The growth of mobile games were a key reason behind the entry to Ubisoft into the market. Activision Blizzard another large game developer have made tried entering the Middle East market through a series of acquisitions by buying well-managed and profitable local companies.

One example of the locally developed game is Unearthed: Trail of Ibn Battuta, a multi-platform game that allows the players to retrace the steps of legendary Arab explorer in a contemporary setting. Another example of local content that has witnessed great levels of success is from Lebanese developer Game Cooks who have two hits – Birdy Nam Nam (1.7 Mn downloads) and Run for Peace (1.6Mn downloads).

Two broad trends are emerging when it comes to localization in the region - the international game developers will look into translating their international releases into Arabic, FIFA released a version in Arabic featuring local Arabic soccer stars. Another major trend is the emergence of regional developers who are expected to come out with more contents for the local region. Jordan’s Maysalward, Lebanon’s Wixel Studios are good examples of regional developers who on few occasions have tasted success internationally as well.

Smartphone adoption has been a major force behind the increasing gaming revenues
Saudi Arabia and the UAE are increasingly important for the game developers of the world; youthful demography of the region is only partially responsible for it. The appeal for major gaming studios is the spending power that this younger generation possess. Cash-rich governments, ample social benefits and zero personal income tax results in higher disposable income, which these people can spend on areas of their liking. With other entertainment options limited in these countries, mobile game developers are capitalizing on this.

This strategy seems to be paying off so far. Saudi Arabia has a population of 30Mn, but that population generates approximately USD 350 million per year in revenues for mobile games. Most of that comes from a class of mega spending men and women (commonly called “whales”) that do not care if a game is localized as long as it’s trendy. To summarize the magnitude of the spending - A whopping 42 percent of total Saudi gamers pay for in-app purchases. Two-thirds pay less than $10 per month, which is what most other markets also witness, but there stops the similarity. The rest of gaming distribution is where most of the revenues comes from. Among them 22 percent pay $10 to $50 and 11 percent pay $50 to $100 per month. The second most valuable category among them roughly make up four percent pay $100 to $500. The most valuable category of gamers form one percent pay up to $1000 per month and are fondly called “Killer Whales” by the game developers.

MENA (Middle East and North Africa) region surprisingly has turned into an important market for global game developers, publishers and distributors. However, despite all the prospects there are teething challenges that remain and that needs to be addressed.

This article is published in "Marmore Blog"

Tags:  East, Games, Gaming, in, Market, Middle

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Gaming Market in the Middle East - Part 1: A Cathartic Experience

Date : 01/03/2018
Author:  Marmore MENA Intelligence




Not many people would conjure up the image of the Middle East region when talking about video games and their growth in general. Wars and internal conflicts often overshadow the vibrant and growing market for video games in the region. Video game culture has been an offshoot of such conflicts – many youngsters find it a cathartic experience to win against the forces that have been responsible for wide spread conflicts in the region and admit that it is one of the most preferred form of entertainment for them.

Popularity of video games was driven in the region in large parts by Sony; its PlayStation platform has been instrumental in establishing the popularity of video games in the region. Teenagers and youngsters, especially from the GCC region, took their affection for games to higher levels with the introduction of Sony’s Playstation2 (PS2) in the year 2000. The popularity of the platform is still unfazed, it remains as the bestselling console in the Middle East region clocking overall sales of 5.2million units followed by the play station portable (PSP) at 1.5million units.

Another factor that has fuelled the growth of gaming culture has been the regional government’s censorship policies and strict religious views; both of these restrict the content that would be available through conventional channels such as TV, movies and theatre. Some of these restrictions have been in place to curb the growing Western influences in the region. While video games are also subjected to the same censorship rules, the implementation remains sketchy as there are conflicts related to the implementation of the ban. Certain video game titles are banned or censored if they are too visibly violating the region’s sensitivities towards religion, politics, geo-politics etc. Some of the gaming titles that were banned includes - Battlefield III, God of War, and Call of Duty 4: Modern Warfare and Grand Theft Auto (Series)

Youngsters in the GCC region also have higher purchasing power owing to generous government policies. As a result, lot of them have access to the latest technological gadgets including, mobile phones, tablets, gaming consoles and other high-end gaming accessories. They also spend more time on mediums like YouTube and Facebook and are constantly exposed to the latest news and developments surrounding games released in the Western markets. Studying Saudi Arabia’s YouTube viewership patterns provides taste of the regional preferences in these alternative channels. Saudi Arabia is the leader in the region for most video playbacks followed by Egypt, Morocco and finally UAE. There are 167 million video views every day only from the MENA region; Saudi Arabia alone generates 90 Million daily views making it one of the most lucrative markets for YouTube. The heightened viewership from Middle East results in free-flow of ideas on latest fashion trends, gaming lifestyle and western pop culture. Comic con festivals, a staple among the western movies, comics and gaming aficionados came to Dubai in 2012; a sign of large-scale convergence of tastes and preferences among the younger generation.

What is the size of the Middle East video game market?
Currently, there are over 587million online gamers in the Middle East region and the amount of time spent online is definitely starting to affect the gaming sector’s revenues from the region. Globally the video games market is a huge business, with estimated revenues of USD 109billion as of 2017 growing by 7.8% YoY. Middle East region alone accounts for 3.2% of that market generating close to USD 4bn in revenues and growing by 25% on a YoY basis. Turkey, Saudi Arabia, Iran and UAE are the top four countries generating revenues to the tune of USD 774million, USD 647mn, USD 431mn and USD 281mn respectively.

Middle East Gaming Market – By revenues (USD Mn)






Source: Newzoo

Revenue growth from MENA region is well ahead of markets such as Latin America (13.9%) and APAC (Asia Pacific, 9.2%); it also contrasts with larger markets where growth is stagnating - such as North America (just 4%) and Western Europe (4.8%). Most of growth has been fuelled by the Egypt, the UAE and Saudi Arabia. Growth, especially in Egypt and Saudi Arabia, is largely fuelled by the growth in smartphones. Both these countries have some of the highest smartphone penetration in the world at 80.6% and 65.2% respectively. With such high penetration levels, this region itself has put itself on the radars’ of most game developers.

Government and private initiatives fuelling video-game development ecosystem
A cultural ecosystem surrounding gaming development is emerging in the Middle East, which is helping the growth of gaming in the region. Conventions, comic-cons and eSports are now common across the Middle East and they have been very instrumental in promoting the gaming culture in the region. Localization initiatives have also helped the market largely. Big gaming studios such as Sony, Valve and Ubisoft have been the most notable ones to have significant presence in the region.

Gaming events
The last few years has seen a boom of gaming and pop culture events around the Middle East. The events keep getting bigger and more lavish each time, attracting popular artists and celebrities from gaming, movies and TV shows, and are also becoming a hub for some of the biggest eSports tournaments in the region. In recent times, the region has hosted three major events – GAMES Middle East, Dubai World Game Expo and IGN convention Abu Dhabi

GAMES Middle East
GAMES is an alliance between Sony PlayStation Middle East, Microsoft Gulf, Red Entertainment and Pluto Games that provides fans and gamers access to upcoming games and technology, while hosting various tournaments, events and eSports competitions. It's the E3 (Electronic Entertainment Expo) of the Middle East.

Dubai World Game Expo
Dubai World Game Expo (DWGE) is a platform for meeting with interactive entertainment developers, publishers, distributors, service providers, platform providers, localization providers, payment providers, multimedia, telecom operators, investors, government officials, and retailers in the MENA region. DWGE serves as an ideal venue to introduce a wide variety of video games, online games, mobile games, edutainment & infotainment software, game related hardware, and next-generation platforms.

IGN Convention Abu Dhabi
IGN convention is the region’s biggest film, video games, technology, and comic’s convention that features game enthusiasts and international celebrities. Fans will also get to interact with regional artists in Q&A sessions. This is all in addition to comic book and film events, including a cosplay competition, gaming announcements, discussion panels on movies and games, trivia quizzes, comic book stalls and a video game tournament.

In part two of the series, we would look at the key trends that are emerging in the Middle East region.

This article is published in "Marmore Blog"

Tags:  East, Games, Gaming, in, Market, Middle

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Financial Risk Management - Challenges before Businesses

Date : 10/12/2017
Author:  Marmore MENA Intelligence




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Those who cannot remember the past are condemned to repeat it-George Santayana...
 
There is not one year that passes by without any crisis. Some are big and tectonic in nature (like the Global financial crisis in 2008) while others have a limited but powerful impact like Asian Financial crisis. When macro crisis hits the economy, it is natural that companies risk management systems are tested to the core. However, a company’s risk management architecture can also be tested without a macro crisis background. This can be simply due to weak risk management systems and processes in the company. History is replete with several company specific examples of financial risk management crisis starting from Bankers Trust derivatives sales scandal in 1994 to LTCM hedge fund failure in 1998 to Libor fixing scandal in 2012. Sometimes the lines can be blurred between a general disaster and a company failure. For eg., 2011 Fukushima and nuclear accident can be viewed as market disaster, while it can also be viewed as  risk management failure of Tokyo Electric Power Co.
 
As finance professionals and CEO’s, most of us are trained to focus on performance and results. However, extracting performance and showing results is also concomitant with assuming risk. Return and Risk are two sides of the same coin. If we do not have our eyes on risk, we will not be able to distinguish between risks that one can take on a regular basis, risks that one can take occasionally and risks that one should avoid altogether. Without the ability to discriminate in this fashion, focus purely on performance and results either can be short term or can produce side effects that can sink the whole ship.
 
From a business enterprise point of view, the higher the risk in a proposition the higher the return. However, while the return comes from the core business environment, risks can emanate from various sources. A company can face “financial risks” like market risks (interest rates, exchange rates, and stock prices), credit risk and liquidity risk. It does not stop here. The company also faces “non-financial” risks, which can be hard to quantify. Some examples of this would be operations, accounting, taxes, legal, regulations, and finally model risks. A company stands in the middle between these financial and non-financial risks. Therefore, the main challenge for a financial risk manager is to recognize, measure and manage these risks. Depending on the business in consideration, certain risks may be closer to heart than others may. For eg., a multinational agri business that procures raw materials from different countries and sells the final product in various countries will have currency risk at the heart of its operations. Since the operations are global, it will encounter commodity price risk, foreign exchange risk, equity market risk, and interest rate risk not to mention credit risk ( as its customers tend to purchase on credit) and operational risk where weather related risk can play havoc . Another challenge is to factor risk resulting from environment, social and governance factors what are famously termed as ESG risks.
 
Once we capture relevant risks, the next challenge is to quantify or measure them. Fortunately, several readymade tools are available to use in this sphere for a financial risk manager. The most commonly practiced is the Value at Risk (VaR) that estimates the minimum loss that a party would expect with a given probability over a specified period. Hence, the key issues here are to estimate appropriate time periods, confidence intervals and methodologies. There are advanced tools as well in the form of Monte Carlo Simulation that estimates VaR by generating random scenarios and can handle complex relationships among risks. For the credit risks, probability of default and recovery rate will be key measures. The agri business example given earlier will have this risk measure for its buyers who buy the product mostly on credit.
 
The third key challenge after identifying and measuring is to manage the risks. For e.g., once a firm wide VaR is computed and segregated business area wise, the next question to ask is how much risk can the company take? The answer to this important question will tell us if we are properly covered or exposed. Technically, this is termed as “risk budgeting” which enables us to answer questions like “where do we want to take risk” and therefore which unit can be allocated more bandwidth to assume more risks. In the absence of risk budgeting, all business segments can take equivalent risks disproportionate to their contribution to business goals. In most cases, credit risks are managed by limiting exposure to a party and by marking to market the trading positions. It is also possible to manage this risk through collateral. Some companies have also used Special Purpose Vehicles (SPV’s) that have higher credit ratings than the companies that own them.
 
A related aspect of “risk budgeting” is capital allocation. Risk management has become a key tool for allocating capital across various business units of a risk-taking enterprise. The capital allocation process is a blend of quantitative mathematical process using statistical programs embedded with qualitative decision-making process.
 
Managing risks also involves hedging risks through derivatives and other instruments. Corporates normally work closely with the treasury department of banks that provide such customized solutions to clients to hedge risks. However, there are steep costs involved in hedging and will constitute insurance premiums that should be constantly paid. The financial risk manager should eventually take the call on managing the risks through hedging or through other business tools explained above.
 
In conclusion, it is well know that there is no return without risk and rewards certainly go where risks are taken. However, there is a difference between taking known risks and taking unknown risks. It is important to know what we do not know (known unknowns). Risk should be discussed openly so that it can be fully understood and therefore better managed. While many firms do think about risks, few firms show discipline and consistency in terms of a rigorous approach. A good FRM process will ensure there is consistency and disciple in in identifying, measuring and managing risks. Presently two professional organizations are dedicated to imparting education and skills in the area of risk management globally. They are Global Association of Risk Professionals (GARP) and Professional Risk Managers International Association (PRMIA). Companies should encourage CFO’s to acquire these certifications so that best practices can be introduced and followed in the area of risk management.
 
Last but not the least, financial risk management can easily deduce to a mathematical and statistical process. However, it should be understood that people, not mathematical models, manage risks. Financial risk management, though has rigorous quantitative processes developed over time, has also a good element of common sense embedded. It is better to be approximately right than to be precisely wrong!

 

 

 


 

Tags:  Financial, FRM, Market, Risk

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What are we paying for? - Why investors are fond of the US tech stocks

Date : 01/08/2017
Author:  Marmore MENA Intelligence

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‘FAANG’ stocks, as they are fondly referred, have been the epicentre of the US stock market in the recent past. Technology stocks account for 25.6% of S&P 500, making it the largest sector constituent. Tech stocks fuelled the rally in the US markets in 2017. Apple, Google, Netflix, Facebook and Microsoft with a weightage of 11.1% in S&P 500 index contributed a 34.5% share in the rally of the index in 2017 (YTD).

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Trading at a premium would be an understatement to refer to FAANG stocks as they trade at stratospheric valuations (price to earnings ratio). Analysing all possibilities, we could for sure say one thing, what is driving the valuation is the frenzied investor behaviour of paying too much today for earnings that are likely to accrue in the distant future. So, what are we paying for? – Investor irrationality.

History tells us that investors have similar investment patterns in the past when it comes to US tech stocks. This kind of overexcited investing in tech stocks was the root cause of the catastrophic collapse of the stock markets after the dotcom bubble in 1999. Technology itself seemed to be an impressive business plan for the investors those days. Hence, these tech companies also spent more money on marketing their company to investors. However, markets turned to reality sooner, leading to the crash right at the start of the millennium. Poor financial management, lack of profit generating activities and no vision for the future business pushed investors to realize that tech companies can no longer be their exquisite investments. Many tech firms delisted, closed their offices and some even went bankrupt. In 1999, there were more than 200 companies that filed for an IPO in NASDAQ and vanished after the markets crashed in 2001.

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Analysts who have either given a strong buy/buy recommendation for Amazon estimate that 92% of the price paid is for earnings that would be reaped after 2020(The Economist). In a decade, it is estimated that Amazon would trade at a PE of 10x. Amazon’s customer base is expected to reach 788 mn by 2025 generating a revenue of USD 3 trillion (almost the size of India’s GDP). Amazon’s valuations can be only justified by the exponential growth in its revenue, never with the earnings the company has made in the past nor with that anticipated for the future. Technology is an arena where ten years is too large a time horizon. 10 years before, products that were pioneers in use are no more existent today. With iPhone having being introduced, Apple was forced to kill its one master innovation, the iPod. Nobody thought of cloud hosting and the widespread use of internet two decades before. Technological breakthroughs generally disrupt the existing business models and can change the landscape of a sector/ companies that were till then operating quite successfully. This threatens the basis of estimating earnings for the future, especially in the longer term.

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Net income has never moved in line with the revenues of the company, rather stayed divergent for almost 25 years. The chart above conveys the business model of Amazon, their focus has been to drive down prices and gain market share, which they have quite successfully done in the past three decades. Investors still believe that Amazon is in its nascent stages, and it could turn around to make profits and generate returns for the shareholders. This can happen only if the utopian dream of creating a monopolistic retail and web services market comes true. What would happen if Amazon increases the price of its services when it feels there are no more competitors? This strategy of cannibalising market share by reducing price has never worked out in the long term. The prospect of future earnings cannot happen just by holding market share. For now, Silicon Valley majors seem to have lost ground of their unique proposition – ‘Innovation’, which was at the heart of their organizations when they were incubated.

Similar stories seem to appear on many walls of Silicon Valley. Google and Facebook depend on their advertising revenue to a larger extent. When there is another technological innovation threatening their business, these tech giants have engaged in acquisitions at unimaginable valuations. The large tech companies are unable to innovate new income generating activities in-house, and with a huge cash reserve they have all decided to look for inorganic growth. The classic example would be the acquisition of Whatsapp by Facebook after facing tough competition from Google. The private messenger service ‘Whatsapp’ was valued at USD 19 Bn and acquired by Facebook in 2014. Apple has acquired more than 20 companies in the last two years. It is a qualm if these firms could run for years like these, without innovating in house and focus on profit making activities. Technology has too many competitors to acquire and to enter into price wars.

Snapchat’s IPO listing defeats it all, where the loss making company offered no voting rights to investors and the prospectus stated that it has no intention of paying cash dividends for the foreseeable future. The prospectus states that the company expects operating losses to continue in the future and may never achieve or maintain profitability in the coming years. The company is yet valued at $18.5bn. This displays the passivity of investors towards tech investing, owing which US tech companies afford to lack corporate governance, claim to make losses, deny rights to shareholders, and yet attract investments.

Majors in the Silicon Valley, Apple, Microsoft and Google have been more attractive in terms of their valuations compared to companies such as Amazon, Netflix and Facebook. Product and service line diversification of Microsoft and Apple have generated consistent profits for these companies, unlike in case of the others. Not all tech stocks run similar risks and are not equally overvalued. However, a majority of them, especially those struggling to generate profits are stocks that thrive on the promise of glorious tomorrow.

All said and done, Amazon is just a classic case of fundamentally weak but an overvalued stock. The situation may not be indicating another bubble in the stock markets as in 1999, though nothing much has changed about the way investors have picked companies. In the long run, disconnect between the revenues and the ability to generate profits is a risk that many tech companies have embedded in their business models. Investors have unfortunately failed to take notice of the same.

Bottom line for investors – ‘Look for bottom line numbers before investing’.


 This article is published in "Marmore Blog"


Tags:  Investors, Market, Stock, Technology, US

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Home bias among GCC Funds - Preference for Domestic Stocks in Regional Funds

Date : 19/07/2017
Author:  Marmore MENA Intelligence





Home is where the heart is….
 
Strong bias in favour of domestic market stocks/securities among international equity funds in developed markets is well documented through various academic studies. For instance, U.S investors in international markets allocate nearly 70% per cent of their fund to domestic securities despite the fact that U.S equity market comprises only 60% per cent in the benchmark index (MSCI World). Though such behaviour is inefficient from a diversification standpoint; the phenomenon, dubbed as “home bias” is widely witnessed globally.
Institutional constraints such as barriers to invest across boundaries, limitations on repatriation of investment income, varying corporate governance standards, higher transaction costs and currency risk have been put forth as possible reasons. Interestingly, closer to home regional mutual funds in GCC markets suffer from home bias as well, despite the region being largely homogenous and frictional costs to invest across the region are largely non-existent.
 
The primary goal of a fund manager is to maximize returns while minimizing risk. However, the presence of varying country-level exposures among fund portfolios in achieving a common goal – to outperform the benchmark index (S&P GCC Composite Index for conventional equity funds and S&P GCC Composite Sharia Index for Islamic equity funds) – is puzzling, as this bias is a result of conscious and intentional move made by the fund manager. Indeed by overweighting domestic exposure the fund managers are adding on to the risk that they could have diversified away.
 
Possible explanation for such behaviour could be attributed to the perceived informational advantage of fund managers over their country stocks. Fund managers are more familiar with domestic stocks and thus have a higher degree of confidence in their ability to generate outperformance through active management. For instance, local fund managers could talk with employees, managers, and suppliers of the firm, they could obtain key information from local media, social events, and the close personal ties with senior management, all of which could provide them with better information than their regional peers and provide a distinct advantage. In part, home bias could also be an extension of “confirmation bias” as fund managers may simply feel more comfortable about their domestic investments when they keep hearing about them in local media. Country specific systemic risk factors such as political risk or poor corporate governance practices could also influence the fund manager allocations resulting in home bias.
 
An analysis of the GCC funds
In our analysis we observe that the level of home bias among GCC mutual funds (equity) is heterogeneous in nature. Funds in markets such as Saudi Arabia and Kuwait exhibit significant home bias (greater than 10% overweight to home market) while United Arab Emirates (UAE) funds have been observed to exhibit moderate home bias (greater than 5% but less than 10% overweight of home market). Funds based out of Qatar and Oman exhibit relatively minimal home bias. Based on our observation, Bahrain funds did not exhibit any home bias. In fact, GCC funds domiciled in Bahrain had underweighted their domestic country.


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Liquidity, Trade Costs & Home bias
In general, home bias, especially by Saudi Arabia and UAE fund managers could be justified due to their larger size and presence of multiple sectors. Greater size and diversified nature of their markets enable them to be relatively liquid in comparison with other markets in the region. Higher liquidity would also reduce direct transaction costs and market impact costs. On the other hand, fund managers based in Kuwait and Oman with home bias should reassess their portfolio allocation due to illiquid nature of their markets on account of relatively smaller market size and concentrated sector exposures.
 
Impact on Performance
All the funds considered in our study that exhibit home bias has underperformed their respective benchmark in the past 1year. Though GCC markets are largely inefficient and have greater scope for alpha generation through active management, the results suggest that excessive home bias could take a toll on the fund performance. Interestingly, the Qatar-based fund with least home bias had also underperformed the benchmark.

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Conclusion
As per our analysis, funds exhibiting home bias have underperformed the benchmark index. In light of this finding, fund managers of GCC funds should avoid the temptation of overweighting their country of domicile as they run the risk of being over-run by foreign funds that need not have home bias. Additionally, fund investors especially the institutional investors could have home bias as an additional parameter of analysis while selecting regional fund managers.

 This article is published in "Marmore Blog" 

Tags:  Capital, Funds, GCC, Market, Stock

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