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Kuwait Top 15 Index

Date : 14/05/2012

Author:  M.R. Raghu & Humoud Al Sabah

Executive Summary

Kuwait Top 15 Index was introduced to mirror the performance of the market as a whole while making it easier for fund managers to track the index by reducing costs and liquidity concerns. The Kuwait 15 differs from the Kuwait weighted Index and the Price index since it only takes into consideration the top 15 companies according to liquidity and size rather than taking the whole universe which contains hard to invest companies due to minuscule size and low liquidity.
 
 
Selection Process
 

 
International accessibility
 
Kuwait 15 Index (K15) simplifies investment procedures for fund managers and foreign investors demanding exposure on the Kuwaiti market since the market is top heavy, it makes little sense for index trackers (I.E ETFs) to be fully invested in KSE weighted index and/ or Kuwait Price index in order to mimic the movement of the Index. The K15 index will simplify the process of Index investment; reduce transaction costs and liquidity risks while maintaining low tracking error (since fund managers will only invest in 15 companies rather than 105)
 
Non-Oil GDP contribution
 
One of the main reasons for choosing the KW15 index was “ to be a bellwether indicator of the Kuwait Economy1” we checked this hypothesis by looking at the non-oil GDP contribution of the top 3 contributors2; Financial institutions, Transport storage and Communication and to some extent whole Sale and retail trade. Our findings shows that currently the Kuwait 15 index represents 57% of Non-oil GDP thus it could be used as a “rough” indicator on economic conditions
 
 
Limitation
 
The current structure of K15 gives the optimal exposure on KSE market movement however; missed opportunities from investing in this index might arise including:
 
1) The index is currently over-exposed to the banking sector; hence it could not accurately gauge performance in other sectors.
2) Although effective in gauging market sentiment, active medium-cap style managers will have larger tracking error since mid-caps are nowhere near the top 15 index.
 
 
 

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