GCC Equity Mutual Funds experienced Sharp Asset Contraction: Markaz Study


In a recently published monthly report by Kuwait Financial Centre "Markaz", which aims to analyze the performance of equity funds across the region, it is stated that, the GCC markets experienced a rollercoaster ride in 2008. The first half of the year was characterized by a boom in property markets and record high prices of oil as well as other commodities that fuelled concerns of high inflation. However, the second half was a contrast, with commodity prices cooling down and crude prices plummeting 70% from their highs of USD147 per barrel in July. Property prices also crashed as the global credit crisis engulfed the financial markets. Consequently, investor sentiment turned negative, fund managers began hording cash, and investors began redeeming. Consequently, assets under management (AUM) for GCC equity funds have experienced a severe contraction of 46% from April 2008. For country-specific funds, Bahrain funds the experienced sharpest contraction, where AUM’s have plunged 75% in the eight month period (April – December 2008), followed by the UAE, which saw a 62% decline in AUM. The country with the least contraction was Kuwait, where AUM declined 26.6% from USD 6.37 bn in April 2008 to USD 4.7 bn in December 2008. Conventional Funds AUM declined 46% from USD 13.7 bn in April 2008 to USD 7.4 bn in December while Islamic Funds AUM shrank 45.6% to USD 4.4 bn in December 2008. It comes as no surprise that fund performance suffered and any gains made during the first half of the year were subsequently reversed, causing all funds to end 2008 with losses, most of which were in the double digits.

Asset Allocation Trends– GCC Equity Funds (December 2008)

Within equities, exposure to Saudi Arabia and Qatar increased at the expense of Kuwait and UAE There was a slight increase in allocation to Saudi Arabia, from 33.5% in September to nearly 36% in December; the increase is more notable when viewed from April 2008 when allocation to Saudi was at 28.8%. Exposure to the Kuwait market fell markedly from 22.7% in September to 18.8% in December. The decreased confidence was even more apparent in the UAE, where allocation dropped from 26.6% in April 2008 to 15.7% in December.

Country Apr-08 Sep-08 Dec-08
Saudi Arabia 28.8% 33.5% 35.8%
Kuwait 16.8% 22.7% 18.8%
UAE 26.6% 21.3% 15.7%
Qatar 12.5% 13.7% 17.5%
Oman 4.0% 2.6% 4.6%
Bahrain 3.8% 3.1% 3.6%
Other Mena 7.7% 3.6% 3.5%
Source: Markaz Research

The ever-worsening turmoil in the global market sent fund managers into hibernation mode in December, where managers held 29% of their assets in cash. During the month, exposure to equity fell to 71% from 92% in September.

Saudi Arabia Equity Funds

Saudi Arabia’s Tadawul All-Share Index (TASI) was one of the worst performers among the GCC markets during 2008, shedding 56.5% from the start of the year. Saudi equity funds reduced their exposure to equities on account of increased market losses in the latter half of 2008. Managers held 3.5% of their assets in Cash and 96.5% in Equities. Exposure to equities was 98.4% in August of 2008.

Assets Under Management (AUM) for Saudi equity funds contracted by 55% to USD 4.35 bn from April 2008 levels.

Kuwait Equity Funds

The Kuwait Index in line with other GCC markets lost heavily during the year, declining 38%. After a positive first half, Kuwait lost ground in 2H08, with all sectoral indices taking a severe beating. The Kuwait Price Index lost 12.3% in December, representing the sixth consecutive monthly loss of 2008.

Among conventional funds (whose holdings were given), the top five equity holdings were Kuwait Finance House (KFH), National Bank of Kuwait (NBK), Mobile Telecommunications Co (ZAIN), Boubyan Petrochemicals, and National Industries Group (NIG) in that order. KFH continued as the most preferred equity with 9 funds holding the stock. NBK and Zain were held by 8 funds. The most preferred equities among Islamic funds were KFH, First Investment Company, Aref Investment Group, ZAIN, and Gulf Investment House in that order. KFH had 4 funds invested in it, followed by 2 funds for each of the remaining equities.

Kuwait equity funds decreased their exposure to equity from 92.8% in August to 82% in December, thereby significantly increasing the proportion of free cash held to 18%. Volatile market conditions led fund managers to hold assets in cash rather than invest in equities. 0.88% of assets were also held in bonds.

AUM’s declined by 27% from April 2008, representing the lowest decline among GCC equity funds.

Qatar Equity Funds

Qatar’s Doha Securities Market (DSM) declined 28.1% in 2008, due to weak investor sentiment caused by the credit crisis. The DSM witnessed a mixed year as stocks rallied in the first half of the year, but gave up all the gains and entered into negative territory during the second half.

Qatar funds reduced their exposure to equities to 75% and held 25% of assets in cash (on an asset weighted basis). AUM’s shrank by 56% from April 2008.

Other GCC Equity Funds

UAE Equity Funds - Stock markets in Dubai (DFM) and Abu Dhabi (ADX) effectively collapsed in 2008 as investors dumped stocks amid fears of a recession in the US and around the world. ADX and DFM ended the year with losses of 48% and 73%, respectively. On an asset weighted basis, fund managers held 15% of assets in cash and 85% in equities. AUM’s for UAE equity funds contracted by 62% from April 2008.

Oman Equity Funds - For 2008, the benchmark MSM-30 index declined 39.8% and closed at 5,441. For the year, the Banking & Investment, Industrial and Services & Insurance indices declined 46.2%, 46.9% and 28.5%, respectively. Fund managers remained heavily exposed to equities in December, holding 9% in cash (on an asset weighted basis). Fund AUM’s declined by 53% from April 2008 levels.

Bahrain Equity Funds - The MSCI Bahrain index lost 55.0% in 2008. Furthermore, Bahraini equity funds posted a weighted average loss of 6.6% YoY during December. However, the tracked funds significantly outperformed the MSCI Bahrain index. Bahrain fund AUM’s suffered the highest contraction, at 75%, from April 2008 levels.

About Markaz

Kuwait Financial Centre 'Markaz', with total assets under management of over KD1.2 billion as of September 30, 2008, was established in 1974 has become one of the leading asset management and investment banking institutions in the Arabian Gulf Region. Markaz was listed on the Kuwait Stock Exchange (KSE) in 1997; and was awarded a BBB+ corporate rating by Capital Intelligence Ltd.