The lack of a stock market in the UAE means investors are increasingly
turning to investment funds to place their capital. Luiza Karim looks at how to make your money work for you.
Over the past year, several investment funds have been launched by Arab
and international banks throughout the Gulf and the Middle East. As the
United Arab Emirates has no formal stock exchange, and any initial
public offering (IPO) is only open to UAE nationals, investment funds
are proving a suitable alternative for expatriates to invest their money
in offshore funds.
“The liquidity is there. That is obvious from the amount of over
subscription witnessed of any IPO,” said Bob Brunton, manager of
investment services, Middle East at Standard Chartered Bank in Dubai.
“The public is becoming more educated, demanding more from their money
and demanding more alternatives. People are becoming aware of what they
can do with their money,” he said.
Investment funds, also known as mutual funds and unit trusts, spread
investments under professional management by pooling resources and
diversifying risks.
Some view the absence of an official stock market in the United Arab
Emirates as a double-edged sword, listing advantages and disadvantages.
It is the only Gulf state not to have an official stock exchange. The
federal government announced that it would set up a stock exchange
before the end of 1998 but many are sceptical as the deadline has been
postponed several times.
“The biggest loss of money does not come from foreigners repatriating
their money but from wealthy nationals within the Gulf, who place their
money in private banks, usually in Switzerland or Luxembourg,” he said .
Some companies are moving their base from the United Arab Emirates to
neighbouring Oman in order to float their shares.
But others are quick to argue that the absence of a comprehensive stock
exchange provides a safety net. “The Gulf has not experienced a crash or
even a minor jolt and after seeing what has happened in some Asian
countries, they are reluctant to rush in. Oman, which does have a
trading floor, experienced a tremor of prices dropping but this is
nowhere near the stock exchange crashes seen in Europe or America,”
A diversified economy helps slow down a currency crisis and Gulf state
revenues are still largely made from one sector - the oil industry.
“We are seeing an increasingly strong demand across the Middle East and
Mediterranean countries,” said Martin Cambridge, Fidelity Investment's
executive director on a recent trip to Dubai. They announced the launch
of the Fidelity Triple Performance Plan to Middle Eastern and
Mediterranean offshore investors seeking international diversification.
The plan is a combination of three funds from the Luxembourg-based
Fidelity Funds range whereby investors' subscriptions are automatically
allocated to an International Fund on a 60 per cent basis, a European
Smaller Companies Fund receives 20 per cent and an Asian Special
Situations Fund receives 20 per cent.
Over the past two years, this combination of funds has delivered an
annual growth of 15.72 per cent and each fund has outperformed its
respective benchmark index since its launch, according to Cambridge.
“This plan is designed to offer investors an internationally diversified
product through one simple investment. It will appeal particularly to
those investors who have already built up a domestic portfolio and are
looking to broaden their spread of investments,” he said.
“This plan enables investors to access the potentially higher returns of
international stock markets whilst balancing the risk. The European
Smaller Companies and Asian Special Situations Funds utilise Fidelity's
bottom-up stock picking approach to produce returns which have
consistently out-performed their benchmark indices,” he added.
The International Fund is spread across various sectors, such as finance
(22 per cent), consumer goods (21 per cent), services (21 per cent),
capital (19 per cent) and others. In most investment funds, the average
fund size holds about 40 stocks over which the investment is spread.
Fidelity Investments has tied up with the Commercial Bank of Qatar,
Emirates Merchant Bank in the United Arab Emirates and the National Bank
of Oman in a bid to grab a share of the budding market.
Booming Gulf capital markets are attracting the mutual fund industry.
Apart from local funds, British Bank of the Middle East launched a fund
of Omani stocks with global investors. In Oman, both Omanis and
non-Omanis can invest in investment funds traded on the Muscat
Securities Market which invest in existing growth shares and other MSM
quoted securities as well as overseas growth portfolios and in venture
capital opportunities.
In the United States, one in four households invest in mutual funds
while in the United Kingdom, the rate is one in six families. In
emerging markets, this figure is much lower as the basic concept of
saving money and tying it up in investment funds is not widespread for
many reasons. In Asia, it remains to be seen what the consequences of
the currency turmoil in some countries will have on the investment
market.
“You have to match your investment and risks to your level of goals. If
you need this money in less than five years, a low risk investment fund
is more appropriate while for a period longer than five years, it is
possible to go for a growth portfolio with higher returns,” he said.
Studies in the US show that the biggest mistake that investors make is
'to play too safe'. Ideally, everybody wants a low risk high return
investment fund which unfortunately does not exist.
The risk categories for investment funds are A (low), B and C (medium)
and D (high). The A category can bring returns of between 12 and 14 per
cent while D category can achieve over 30 per cent. Money is earned
either through dividends and on interest in investments or by holding
equity bonds or other securities that go up in value. These are called
capital gains.
The Net Asset Value is the value of one share or unit of a mutual fund.
The unit price rises or falls like shares on the market. Last autumn,
Jordan-based Arab Bank announced the launch of its Nikkei-linked Capital
Guaranteed Fund as well as plans to set up equity funds for Gulf
markets.
“We are studying plans to launch funds in Gulf markets with local
currencies. The funds could be restricted to one Gulf market or several
together,” said Samer Saifi, bank head of private banking. Arab Bank
stared focusing on the Gulf and Middle East one year ago with the launch
of a multi million dollar fund.
The bank has taken a new initiative on the investment side and has
decided to increase its range of products by forming a strategic
business unit, under which investment advisers have been placed with 17
branches, two of whom are in Dubai and one in Abu Dhabi. But while there
are some high net worth individuals, most banks and investment companies
are targeting the middle range of people and above who can afford to
invest $5,000 plus.