kuwait asset management industry

Kuwait Financial Centre S.A.K “Markaz” R E S E A R C H

September 2007

A Potential USD 140 Bn Industry Review of Asset Management Industry in Kuwait

A. Executive Summary Investment assets (fiduciary) managed by nearly 75 investment companies in Kuwait touched KD 21.3 Bn (USD 75 Bn) during May 2007 (Figure – 1). It is nearly 73% of total bank assets. We expect this figure to touch KD 40 Bn by 2010, based on our forecast. Surprisingly bulk of this amount is in portfolio investment of clients (53%) with only about 8% in investment funds (mutual funds). Technically investment companies are into host of other things like lending money to clients, managing foreign equity funds, managing bonds/Sukuks, managing custody assets etc. However, as figures reflect clearly the majority of focus is on local Kuwait equity market and predominant form of management continues to be managed accounts (discretionary, non-discretionary and custody accounts). Our analysis reveals the tremendous growth of Islamic (Sharia’ compliant) Investment companies and their products. From a modest 19% share in 2001, Islamic Investment companies total assets now account for 58% of total assets of conventional investment companies. Even though investment funds (mutual funds) constitute a small segment of the total money management, they form the process and mechanism for client portfolio management activity and hence performance and perspectives on this can be safely extrapolated into the larger spectrum of portfolio management as well. In our analysis of –conventional local equity funds and –Islamic funds, we find that very few funds consistently add value beyond benchmark returns. Given the size of the industry, we find that investment companies did not score too well on parameters like information disclosure, standardization of reporting, professional best practices, etc. Figure: 1 – Break-up of Investment Company Assets (May 2007) Source: Central Bank of Kuwait

September 2007 Research Highlights: Examining the status of Kuwait investment industry, both managed accounts and mutual funds. The report also highlights the role played by KIA. Markaz Research is available on Bloomberg. Type “MRKZ” <Go> M.R. Raghu CFA, FRM Head of Research +965 224 8280 [email protected] Amrith Mukkamala Research Analyst [email protected] Kuwait Financial Centre S.A.K. “Markaz” P.O. Box 23444, Safat 13095, Kuwait Tel: +965 224 8000 Fax: +965 242 5828 www.markaz.com

Kuwait Investment Companies Assets (Fiduciary)

Kd. 21.28 Bn

Portfolio Investment Kd 17.05 Bn

Investment Funds

Kd 3.10 bn

Foreign FundsKd 0.49 Bn

Shares Local Kd 11.72 Bn

Shares ForeignKd 1.25 Bn

Investment Fund Units

Local

Other – Local Kd 1.39 Bn

Shares LocalKd 1.67 Bn

Investment Fund Units

Local

Custody Assets Kd 0.38 Bn

Commitments-Guarantees-

Collateral

Others Kd 1.55 bn

Others Kd 0. 70 bn

R E S E A R C H September 2007

Kuwait Financial Centre S.A.K. “Markaz” 2

B. Industry Growth- Role of KIA The local investment industry in Kuwait owes a lot to Kuwait Investment Authority (KIA) for the leading role played by it to foster the growth and development of the industry. The entire process started in the year 1995, when KIA decided to merge Kuwait Investment Co (KIC) with Kuwait Foreign Trading Contracting & Investment Co (KFTCIC) to form a better capitalized investment company. KIA followed this step by formulating the first local investment fund and authorizing KIC to manage the same. It provided the new fund with a good basket of local shares at a 10% discount to the market. As a further step, it privatized Securities House Co and Securities Group Co in 1996. Due to these efforts, the number of investment funds rose from 8 in 1990 to 20 by 2000. At a total capital of KD 664 million, KIA share stood at KD 224 m or 38.25%. According to KIA, the objective of this initiative is to put new investment tools in the market and enable local investment companies compete in building and marketing these funds. KIA was also aiming to institutionalize the market in the process through encourage small investors to embrace these funds. KIA believed that small investors will be direct beneficiary of professional fund management expertise of local investment companies. The initiative also had other broad objectives like improving local economy. KIA went about the process in a methodical manner stipulating terms and conditions and instituting sound mechanism. KIA contributed to these funds in one of the following three ways:

1. Cash (not to exceed 20% of the fund capital or KD 10m per fund) 2. Stocks and Real Estate (not to exceed 50% of fund capital or KD 25 million per fund) & 3. A combination of both

KIA mandated that the investment companies eligible to participate in this process should be a local company with good track record in terms of its past results and experience in managing local equity funds and supervised by the Central Bank. KIA also laid out terms and conditions for the fund managers, some of which are highlighted below:

Fund should reveal their top 5 holdings Fund managers cannot invest more than 15% of their fund in one

company (to achieve enough diversification) The fund cannot invest more than 20% of the fund capital in a

related (holding) company (to avoid corporate governance issues) Fund investments in banks and companies cannot have voting rights Fund managers cannot buy stocks on margins Fund managers cannot deal with real estate and commodities Fund managers cannot borrow or lend using the fund as the vehicle

Such an institutional support could not have come at a more appropriate time, as subsequently Kuwait market enjoyed stellar performance with strong liquidity. The market also benefited through strong oil prices and low interest rates.

KIA played a leading role in fostering the growth of the industry KIA laid down rules for investment companies. Those companies which adhered to these rules were eligible for participation in investment made by KIA.



C. Industry Projection

Table 1: Investment Companies -Kuwait (Million Dinars)

No of Companies

Investment Companies-Assets Grand Total Total Bank

Assets Share Total Bank Deposits Share

C I C I A B A/B C A/C

2001 26 11 3,356 654 4,010 15,064 27% 9,361 43%

2002 27 11 3,465 880 4,345 17,063 25% 9,863 44%

2003 28 13 4,236 1,291 5,527 18,813 29% 10,541 52%

2004 28 14 4,872 1,488 6,360 19,144 33% 11,966 53%

2005 33 23 6,678 2,750 9,428 21,611 44% 13,503 70%

2006 40 30 8,258 4,736 12,994 26,989 48% 16,698 78% CAGR (2001-2006)

20% 49% 27% 12% 12%

2007 (May) 40 34 9,008 5,295 14,303 30,730 47% 18,385 78%

2007F 9,703 5,920 15,623 29,688 18,368 85%

2008F 11,401 6,956 18,357 32,657 56% 20,205 91%

2009F 13,396 8,695 22,091 35,922 61% 22,225 99%

2010F 15,741 10,869 26,610 39,515 67% 24,448 109%Growth Rate Assumed for Forecast

17.5% 25% 10% 10%

Source: Central Bank of Kuwait

Note: F - Refers to forecast by Markaz Research; C: Conventional; I: Islamic

Investment companies’ assets constitute nearly 50% of total bank assets (2006) thus reflecting itself to be an important component of the economy (Table -1). Investment companies’ assets grew at a compounded annual growth rate (CAGR) of 27% for the period 2001-2006, thanks to Islamic segment that witnessed a growth of nearly 50% p.a. This compares well to banking assets that grew at 12% p.a. during the same period of analysis. From a modest share of 16% in 2001, the current share for Islamic assets stands at 37% share of the total investment company’s assets. Going forward, we expect conventional investment companies assets to grow by 17.5%, while Islamic investment companies assets to grow by 25%. We believe these estimates are conservative relative to historical growth rates. If we assume banking assets to grow at 10% p.a., by 2010 investment company’s assets would be nearly 70% of banking assets. When benchmarked with banking deposits, investment company’s assets could even surpass that of banking deposits by 2010. Fiduciary assets managed by investment companies averaged about 150% of their balance sheet assets during the last three years (Table 2). Applying this criteria, we estimate investment companies fiduciary assets to reach KD 40 billion (USD 140 bn) by 2010. Portfolio investments will constitute the bulk (54%) with investment funds having an 8% share.

Investment industry is estimated to touch KD 40 billion in size by 2010. The share of Islamic assets stands at 37% of the total investment companies assets.



Table 2: Contra Account (Fiduciary Assets) (Million Dinars)

Local Shares

Portfolio Investments

Local Investment

Funds

Other Local Investments Others Total

Fiduciary Assets/Balance Sheet Assets

2005 8,113 1,404 1,286 4,742 15,545 165%

2006 9,545 1,197 1,589 5,318 17,649 136%

2007 (May) 11,729 1,673 1,393 6,494 21,289 149%

2008 14,811 2,173 2,186 8,365 27,536 150%

2009 17,824 2,615 2,631 10,067 33,137 150%

2010 21,470 3,150 3,169 12,126 39,914 150% Source: Central Bank of Kuwait. Note: Shaded region represents Markaz forecast.

D. Issues Confronting the Investment Industry 1. Information disclosure The depth of information in a funds fact sheet and on the website of the Asset management company (AMC) is critical to arrive at an investment decision. There are some crucial gaps in information disclosure practices in the case of Kuwait Equity funds in comparison to best practices followed in the BRIC region and in the US. (Table - 3 ) (Detailed compilation in Appendix - 2). Of these gaps, the most important is that of the absence of Fund size information. It is noticed that out of the 22 funds analyzed in Kuwait, only 13 funds provide Fund size information either on their website or on their fact sheets. Also, majority of the funds do not report top five holdings and their percentage to the total asset size. This information is vital so as to understand the level of change in the portfolio composition due to active stock selection.

Table – 3: Information Disclosure Snap Shot

Parameters Analyzed- Number of Funds for which Data/Information is Not Available Number of

Funds Analyzed

Fund Size on the company website/ Fund

Fact Sheet

Risk Adjusted Returns

Both Top 5 Holdings & Percentages

Fund Manager

Commentary

Fund Manager Details

22 13 14 20 12 16

2. Fragmentation There are 75 Investment companies in Kuwait which manage KD 21.3 Bn in Investment Assets (Fiduciary) yielding KD 0.28 Bn per Investment company. This, considered along with the size of the market at KD 52.9 Bn (market capitalization) shows the extent of fragmentation in the industry. Due to this, we believe that consolidation is imperative in order to synergize the operational structure and face competition. 3. Benchmark Diversity Kuwait Equity funds have equivalent number of benchmarks as the number of funds! This assumes importance if we take into consideration the varied amount of risk and return the benchmarks have exhibited in the past. This introduces difficulty in performance measurement. Benchmark construction, maintenance and dissemination are a specialized job best done by agencies equipped and trained for the same. This will promote ease of performance comparison and lend credibility to the industry from foreign investor’s perspective.

Disclosure of the fund size is not a commonly followed practice in Kuwait. There are 75 investment companies in Kuwait managing Kd 21.3 Bn.



The reason for benchmark diversity is due to lack of independent benchmark providers and more importantly in the case of Kuwait the lack of pressure from Institutional investors on the investment companies to adhere to a set of standardized benchmark. Elsewhere in the world (West notably) Institutional investors, especially pension funds play an active role in coaxing the fund managers into adopting well-respected benchmarks. 4. Product Diversity Kuwait investment funds lack product diversity as most of the products offered by these companies can be termed as “Plain vanilla” country funds. Sector funds, Style and value funds, Size based funds – Small cap, Mid Cap and Large cap funds, thematic funds and quantitative strategy based funds are virtually non-existent in the Kuwait market even though the Kuwait stock exchange boasts of more than 180 companies listed on its bourses, which is far higher than the other markets in the GCC region. The lack of innovation can be due to lesser penetration of research (Quantitative & Strategic) in the region on mid cap and small cap companies. 5. Portfolio Concentration Our analysis reveals that most of the funds piggy-back on a few large stocks (Table-4). Research coverage on these few stocks also seem to be strong making this approach viable. However, fund managers need to expand their fishing net to identify other potentially under-valued stocks through on-ground research.

Table: 4 - Top holding - Kuwait Equity Funds

Top Stocks & Research Material

Number of occurrences in top five holdings May

05 - May 07

Number of Research Materials Available on Zawya May 05 -

May 07 KFH 12 19 MTC 12 25 NBK 9 26 Agility 5 19 Boubyan Petrochemical Co. 4 5 NMTC 4 23 Kuwait Investment Co. 3 8 Kuwait Projects Co. (Holding) 3 9 Source: Zawya, Includes - Intiation reports, Earnings previews, Earnings analysis, Event updates. Does not include - Industry reports

6. Institutionalization of the markets Institutionalization of the markets can be looked from two different angles.

the amount of funds managed by investments funds as a percentage of the size of the market and

the extent of participation by Sovereign Wealth Funds (SWF) in the local market.

On the extent of funds managed by investment funds as a percentage of the size of the market, Kuwait ranks low in comparison with the other GCC and BRIC countries. Investment fund assets constitute only about 3% of total market capitalization compared to 7% for Saudi Arabia, 12% for China and 48% for Brazil. On the other hand, the extent of participation by SWF’s is also in its nascent stages across the region. It is believed that SWF’s asset allocation is global in nature with meager “home bias” while SWF’s traditionally in US, Europe and Japan exhibit a high level of “home bias”. The corpus available for

Most of the large funds piggy-back on a few large stocks. Extent of participation of Sovereign Wealth Funds in the local market is in its nascent stages.



investment, the destination of investment and tracking the flow of this investment of the Sovereign wealth funds has been an exercise of informed guesstimate for a long time now. Kuwait Investment Authority (KIA) has taken the pioneering role in fostering the local investment industry, as explained earlier. 7. Regulatory Issues The regulatory scenario for investment funds and the stock markets continues to be at its infant stages (Read Markaz Published Report: “Leap or Lag” for a detailed discussion on issues regarding the stock market). In comparison to most of the developed markets the investment funds market in Kuwait lack a independent regulator and a Self Regulating Organization which govern take care of the interests of the investment fund industry. For instance, in countries like India, the Investment Fund Industry is regulated by the CMA, in this case the Securities and Exchange Board of India (SEBI) and the interests of the industry is taken care by the Association of Mutual Funds in India (AMFI). In the case of Kuwait, the industry is regulated by CBK and there is an absence of a SRO. Also, there is lack of clarity with respect to the tax status of foreign investors. (Table - 5)

Table: 5 - Regulations Governing Investment Funds in Kuwait 1 Oversight Authority Ministry of Commerce & Industry,

CBK 2 Minimum value of one

Investment Unit Kd 1

3 Minimum Capital to set up a Fund

Kd 5 Mn

4 Legal Entity of an Investment Fund

Distinct Independent Legal Entity from the company establishing such a Fund

5 Marketing of Foreign Mutual Funds

No Direct Marketing. To be marketed thru an Kuwaiti Shareholding Company

6 Fund Manager's Maximum Limit of Exposure in the fund

5% of the Fund's Capital

7 Maximum rate of Fund Manager fees

5% Annually

8 Mandatory disclosure of Financial position of the Fund

Quarterly

9 Financial Reports Mandatory Disclosure

Every Six Months

10 Minimum Educational/Experience of the Fund manager

Relevant University Degrees and Minimum of 3 Years of Work Experience

11 Corporate Income Tax - Incorporated in Kuwait, Wholly owned by Kuwaiti National

Nil

12 Corporate Income Tax - Foreign Companies

55% (Amiri Decree No: 3 of 1995), (There is wide speculation on whether this has been implemented)

Regulatory scenario for investment funds continues to at its infant stages. Kuwait’s Investment fund industry is regulated by CBK.



E. Performance of Local Equity Funds 1. Conventional Equity Funds Overview Our database included 15 conventional equity funds managed by 13 investment companies. All funds have a single-product status except for Markaz that has three products in its suite. Two of these investment companies (Shuaa Capital and Mashreqbank) are located outside Kuwait. Total assets under management stood at KD 1.46 Bn with Kuwait Financial Center S.A.K. (“Markaz”) emerging as the market leader with KD 391 Mn under 3 funds yielding a market share of 27%. This was followed by National Investment Company (NIC) at KD 275 Mn with a market share of 19%. The earliest fund dates back to Dec-99 by Markaz (Mumtaz). Size dispersion is noticed in the funds as the largest fund had an asset size of KD 275 mn while the smallest fund had assets of KD 12 Mn. Benchmark Diversity It is interesting to note that there are as many benchmarks in the segment as there are funds! (Table-6) However, KIC Index seems to be the most popular in terms of usage. The Kuwait Stock Exchange disseminates two indices i.e., price index and cap weighted index. The need for unified benchmark adoption is critical for performance comparison as there are differences in risk/return characteristics for these benchmarks (Figure-2). For our performance analysis, we have used KSE Price Index as it seems to be the most followed index in Kuwait.

Table 6: Conventional Equity Funds Fund Name Benchmark Al Ahli Kuwaiti Fund KIC Index Forsa KIC Index Midaf KIC Index Mumtaz KIC Index Burgan Equity Fund KSE Weighted Index Al Wataniya Investment Fund KSE Weighted Index Coast Investment Fund KSE Price Index Al-Shorooq Investment Fund Gulfinvest Index Tijari Investment Fund Global Kuwait Index Global Local Fund Global General Index Al-Raed Fund Not Available Al Rou'yah Fund KSE Weighted Index, KIC Index

The database includes 15 conventional equity funds managed by 13 investment companies. All funds have a single product status, except for Markaz that has three products dedicated to investing in the Kuwait Equity markets.



KIC Index

KSE Weighted Index

KSE Price Index 29

30

30

31

31

32

32

33

33

34

34

18.0 18.2 18.4 18.6 18.8 19.0 19.2 19.4

Annualised Risk % Jun 2004 - May 2007

Figure: 2 - Indices Performance (June 2004 - May 2007)

Inde

x R

etu

rns

% (

Jun

e 2

00

4 -

May

20

07

)

We have used three criterions to measure the performance of funds under this segment:

Medium-Term (3 years) risk adjusted performance Information Ratio (defined as alpha/tracking error) & Tracking Error (defined as standard deviation of alpha)

Please refer Appendix-1 for respective fund-wise figures. Medium-Term (3 years) Risk Adjusted Performance All funds enjoyed positive performance during the period of analysis (June 2004- May 2007) primarily due to bullish sentiment in the market. Out of 13 funds considered for analysis (enjoying a track record of 3 or more years), 7 funds beat the benchmark in terms of Sharpe ratio while others trailed (Figure-3). Markaz Fund for Excellent Yields (MUMTAZ) topped the performance chart on a risk adjusted basis with a Sharpe ratio of 1.76. The fund returned annualized performance of 43% with a risk of 23% while the KSE Price Index had an annualized return of 29% with a risk of 19%. Mumtaz was followed by Al Rou’yah Fund (managed by KMEFIC) with an annualized performance of 38% with a risk of 19% yielding a Sharpe ratio of 1.81. However, the size of the fund is not ascertainable.

KSE Weighted index provides the best risk adjusted returns. All funds enjoyed positive performance in the last three years (Jun 04 – May 07).



KSE Index Returns

Al Rou'yah Fund

KAMCO Investment Fund

Markaz Mumtaz Investment Fund

Markaz Investment and Development Fund

Markaz Forsa Financial Fund

Al Wataniya Investment Fund

Al-Raed FundGlobal Local Fund

Tijari Investment Fund

Coast Investment Fund

Burgan Equity Fund

Al-Shorooq Investment Fund

Al Ahli Kuwaiti Fund

17

22

27

32

37

42

47

15 18 21 24 27Annualised Risk % Jan

2002 - May 2007

Figure: 3 - Fund Performance (Jan 2002 - May 2007)

Equ

ity

Fun

d R

etu

rns

% (

Jun

e 2

00

4 -

May

20

07

)

Source: Fund fact sheets, Markaz Research

Information Ratio Information ratio assesses the stability of alpha (out performance). Positive information ratio indicates alpha (excess return over benchmark) and hence denotes value addition by the manager. Higher information ratio indicates not only alpha but also consistency of this alpha.

KAMCO Investment Fund

Al Wataniya Investment

Global Local

Markaz Mumtaz Investment

Al Ahli Kuwaiti

Al-Shorooq Investment

Tijari Investment

Coast InvestmentBurgan Equity

Markaz Forsa Financial

KIC Al-Raed Markaz Investment & Development

-4

-3

-2

-1

0

1

2

3

4

25 75 125 175 225 275

Info

rmat

ion

Rat

io %

AUM in Kd Mn

Figure 4: Fund Performance (June 2004 - May 2007)

HighLow

Low

High

Median Line

Source: Lipper, Fund Fact sheets, Markaz ResearchNote: 1. AUM of Al Wataniya Investment fund is as of Jun 07 and rest is May 07 2. Al Rou'yah Fund is not plotted on the graph due to lack of Fund size information

Only 7 out of 13 funds enjoyed positive information ratio. Markaz Fund for Excellent Yields (MUMTAZ) managed by Kuwait Financial Center S.A.K. (“Markaz”) tops the league table with an information ratio of 3.54 followed by Al Wataniya Investment Fund managed by National Investment Co with an information ratio of 2.57 (Figure – 4). Markaz Forsa Financial Fund had information ratio of -3.31. However, Forsa fund acts as the sole market maker for options in the Kuwait Stock Exchange, which restricts the fund’s ability to match index returns.

Markaz Mumtaz Investment Fund topped the performance chart on a risk adjusted basis with the highest Sharpe ratio (1.76). Only 7 out of 13 funds enjoyed positive information ratio.



Tracking Error Tracking Error measures how closely the portfolio follows the benchmark return, in this case KSE Price index. Lower tracking error signifies a passive fund management style and the reverse suggests an active fund management style. While higher tracking error may enable manager to generate alpha (excess return), it may also back fire if stock selection is poor. Our analysis of 13 funds revealed that tracking error ranged from a high of 4.67% (Kamco Investment Fund managed by Kamco)) to a low of 2.36% (Al-Raed Fund managed by Kuwait Investment Co). 8 funds had a tracking error of more than 3% indicating willingness to sway from the index in pursuit of alpha. (Appendix – 1)

Fees (Management and Performance) Average management fees charged by the conventional equity funds is at 1.50% with a range of 2 %( Highest) to 1% (lowest). Only 5 out of 15 funds have been observed to charge performance fees ranging from a high of 20% to a low of 10%. However, firms which have low management fees seem to make it up through performance fees. (Appendix 4) 2. Islamic Equity Funds Overview The number of Islamic funds available is lesser than the number of conventional funds. The database includes 7 Islamic equity funds managed by 6 investment companies. Only the National Investments company has two Islamic funds and the rest of the investment companies, which have presence in conventional funds either have one or none. The size dispersion exists in Islamic Funds too. The smallest fund has assets of KD 7 Mn (Al Huda Islamic Fund by Al Ahlia Investment Co) as compared to the largest with an asset size of KD 86 Mn (Al-Durra Islamic Fund by Global Investment House). The total AUM’s under Islamic funds in Kuwait, as of 2006, is at KD 300 Mn. (Appendix-1) The earliest Islamic fund investing in the Kuwait markets was launched after almost three years of launch of the first conventional fund. Benchmark Diversity The extent of benchmark diversity in the case of Islamic funds is higher than the conventional funds. To a certain extent, this can be attributed to the non-availability of an Islamic index from Kuwait Stock Exchange. This has led to most of the investment companies either following the Islamic Al-Madr Index or an index constructed on their own (Table 7).

Table: 7 Islamic Funds Benchmark Islamic Equity Funds Index Tijari Islamic Fund Al Madr Index Markaz Islamic Fund Al Madr Index Al-Durra Islamic Fund Global Islamic Index Al Huda Islamic Fund Gulfinvest Islamic Index Al Wasm Fund Not Available Al Darij Investment Fund Shariah Compliant Index Al Safwa Investment Fund Wataniya Islamic Index For our performance analysis, we have used Al-Madr Index in a bid to compare all the funds using a common benchmark. The risk and return

Our analysis of 13 funds revealed that tracking error ranged from a high of 4.67% to a low of 2.36%. The number of Islamic funds available is lesser than the number of conventional funds.



characteristics of Al-Madr Index in comparison to conventional indices (Figure -5) shows that the Islamic indices have underperformed the conventional index both in terms of risk and return.

KIC Index

KSE Weighted Index

Islamic Madr Index

KSE Price Index

28

29

30

31

32

33

34

18 19 20 21 22 23

Annualised Risk % Jun 2004 - May 2007

Figure 5: Indices Performance (June 2004 - May 2007)

Inde

x R

etur

ns

% (

Jun

e 20

04

- M

ay 2

007

)

Medium-Term (3 years) Risk Adjusted Performance All the five funds (for which three years data is available) have provided positive returns at varying amounts of risk (Figure – 6). Markaz Islamic Fund (Managed by Kuwait Financial Centre S.A.K.) has provided the highest three year annualized return of 39% with a risk lesser than the Islamic benchmark at 20%. The out performance of Markaz Islamic fund has been generated in spite of a low tracking error of 2.36% over the last three years. The low tracking error and the high alpha, has resulted in a significantly high information ratio. Markaz Islamic fund is followed closely by Al Durra Islamic Fund (managed by Global Investment House) with a three year annualized return of 36% carrying a risk of 19% and with a tracking error of 3.67%.

Islamic Madr Index Returns

Markaz Islamic Fund

Al Safwa Investment Fund

Al Darij Investment Fund

Al-Durra Islamic Fund

Al Huda Islamic Fund17

22

27

32

37

15 18 21 24Annualised Risk % Jan

2002 - May 2007

Figure: 6 - Fund Performance (Jan 2002 - May 2007)

Equ

ity

Fun

d R

etu

rns

% (

Jun

e 2

00

4 -

May

20

07

)

Source: Fund fact sheets, Markaz Research

Information Ratio 5 out of the 6 funds have a positive information ratio (Figure -7). Markaz Islamic fund has generated the highest information ratio of 4.31 followed by Al Darij Investment Fund (managed by National Investment Co) with an information ratio of 2.06.

Extent of benchmark diversity is higher in the case of Islamic funds as compared to conventional equity funds. The Islamic Al-Madr index has underperformed the conventional equity indices in the last three years (Jun 2004 – May 2007)



Al Safwa Investment

Al Darij Investment

Al-Huda Islamic

Markaz Islamic

Global Al-Durra Islamic

-5.00

-4.00

-3.00

-2.00

-1.00

0.00

1.00

2.00

3.00

4.00

5.00

6.00 16.00 26.00 36.00 46.00 56.00 66.00 76.00 86.00

Info

rmat

ion

R

atio

%

AUM in Kd Mn

Figure: 7 - Fund Performance (June 2004 - May 2007)

HighLow

Low

High

Median Line

Source: Lipper, Fund Fact sheets, Markaz Tracking Error The range of variation in tracking error is lower than conventional funds. Conventional funds have exhibited tracking error range of 2.36% - 4.67% and the tracking error range of Islamic funds is between 2.36% - 4%. The lowest tracking error is recorded by Markaz Islamic Fund (2.36%) and the highest by Al Safwa Investment Fund at 4% (managed by National Investments Co). (Appendix -1)

Fees (Management and Performance) The average management fees charged by the Islamic equity funds is lower than the conventional equity funds. The conventional equity funds charge an average management fee of 1.50% and the average Islamic funds management fee is at 1.32%. The management fees of the funds range from a low of 1% to a high of 1.75%. 4 out of 7 funds charge performance fees, of which three funds charge 20% and one fund charges 10%. (Appendix 4).

Makaz Islamic Fund has provided the best returns. Islamic funds enjoyed positive information ratio.



F. Conclusion Kuwait investment industry has grown significantly in the past and we expect this growth to sustain and improve. This growth has also been accompanied by strong performance with many money managers significantly outperforming the benchmark and thus providing value. The strong risk-adjusted performance of Kuwait market is bound to attract investment interest from on-shore as well as off-shore, especially GCC investors. However, the industry’s economic representation is still low relative to some developed countries or even some GCC countries. The institutional representation of the market is meager and this explains probably benchmark diversity, poor product diversity and poor information disclosure. Kuwait represents one of the GCC markets with least restriction on foreign ownership. With the expected growth in the economy, liquidity and attendant opportunities this is bound to attract interest from foreign investors, especially institutional investors. However, these investors are sophisticated in nature and would require high standards of information disclosure and transparency. In order to sustain a potentially USD 140 billion industry, it is time to proactively address key issues confronting the industry. One key area would be re-activating government’s privatization efforts in order to bring more investment assets into the market. Supported by independent regulations and improving adoption of international best practices, Kuwait investment management industry can easily set the standard for the region and aspire to attract significant foreign investment.


September 2007 Appendix 1: Performance Analytics

Non-Islamic Funds Date of

Inception AUM

(Kd Mn) Return (%) Risk (%) Information Ratio Sharpe Ratio Tracking Error

(%) Fund Name Asset Management Company 1Yr 3 Yrs 5 Yr 1Yr 3 Yrs 5 Yr 1Yr 3 Yrs 5 Yr 1Yr 3 Yrs 5 Yr 1Yr 3 Yrs 5 Yr Al Wataniya Investment Fund National Investments company 1-Jul-01 275 42 35 33 17 19 18 14.24 2.57 -1.91 2.22 1.66 1.69 1.86 2.38 3.30 Markaz Investment and Development Fund Kuwait Financial Centre 1-Jul-01 228 31 33 33 16 19 21 5.84 1.37 -1.88 1.74 1.57 1.39 2.77 2.88 3.60 Al-Raed Fund Kuwait Investment company 1-Oct-01 222 25 32 31 18 19 20 3.34 1.36 -2.25 1.23 1.54 1.41 3.00 2.36 3.58 Markaz Forsa Financial Fund Kuwait Financial Centre 1-Jun-04 109 22 19 NA 16 19 NA 3.73 -3.31 NA 1.19 0.79 NA 1.93 3.16 NA Burgan Equity Fund Burgan Bank 1-Dec-01 104 36 28 24 12 16 14 7.60 -0.21 -3.94 2.79 1.56 1.45 2.72 4.04 3.84 Coast Investment Fund Coast Investment Fund 1-Feb-02 102 47 28 17 17 17 16 11.19 -0.32 -4.84 2.61 1.42 0.82 2.83 3.45 4.66 Tijari Investment Fund Commercial Bank of Kuwait 1-May-02 92 48 19 NA 20 23 NA 9.88 -2.17 NA 2.22 0.68 NA 3.34 4.57 NA KAMCO Investment Fund KAMCO 1-Apr-04 83 53 24 NA 18 18 NA 10.39 -1.15 NA 2.79 1.17 NA 3.63 4.67 NA Al-Shorooq Investment Fund Al Ahlia Investment company 1-Jul-01 81 31 27 26 18 20 22 6.55 -0.83 -3.91 1.47 1.19 1.00 2.37 2.47 3.56 Al Ahli Kuwaiti Fund Al Ahli Bank of Kuwait 1-Feb-03 71 49 34 NA 22 24 NA 10.90 1.01 NA 2.08 1.27 NA 3.07 4.49 NA Markaz Fund for Excellent Yields (Mumtaz) Kuwait Financial Centre 1-Dec-99 54 44 43 40 21 23 21 8.10 3.54 0.22 1.93 1.76 1.76 3.54 3.95 3.64 Global Local Fund Global Investment House 1-Jan-03 29 19 31 NA 17 25 NA 1.96 0.57 NA 0.93 1.10 NA 2.22 3.41 NA Kuwait Gateway Fund SHUAA Capital 1-Oct-05 12 49 NA NA 18 NA NA 9.42 NA NA 2.50 NA NA 3.55 NA NA Makaseb Kuwait Equity Fund Mashreqbank 1-Dec-06 NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA Al Rou'yah Fund KMEFIC 1-Jun-02 NA 41 38 NA 20 19 NA 6.54 2.35 NA 1.83 1.81 NA 3.92 3.91 NA KSE Index Returns 15 29 40 15 19 20 0.00 0.00 0.00 0.76 1.35 1.83 0.00 0.00 0.00 Total 1462

Islamic Funds Date of

Inception AUM

(Kd Mn) Return (%) Risk (%) Information Ratio Sharpe Ratio Tracking Error

(%) Fund Name Asset Management Company 1Yr 3 Yrs 5 Yr 1Yr 3 Yrs 5 Yr 1Yr 3 Yrs 5 Yr 1Yr 3 Yrs 5 Yr 1Yr 3 Yrs 5 Yr Al-Durra Islamic Fund Global Investment House 1-May-04 86 21 36 NA 19 19 NA -3.8 1.98 NA 0.95 1.75 NA 3.14 3.67 NA Al Darij Investment Fund National Investments Co 1-Jul-03 82 34 35 NA 16 19 NA 0.3 2.06 NA 1.84 1.67 NA 3.45 2.86 NA Al Safwa Investment Fund National Investments Co 1-Jun-02 56 21 31 27 15 16 16 -3.8 0.59 -0.5 1.17 1.71 1.47 3.27 4.00 3.27 Markaz Islamic Fund Kuwait Financial Centre 1-Oct-03 52 31 39 NA 20 20 NA -0.7 4.31 NA 1.39 1.75 NA 2.44 2.36 NA Al Wasm Fund Kuwait Finance and Investment Co 1-Jun-05 9 36 NA NA 20 NA NA 0.6 NA NA 1.63 NA NA 4.88 NA NA Tijari Islamic Fund Commercial Bank of Kuwait 1-Jul-06 8 NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA Al Huda Islamic Fund Al Ahlia Investment Co 1-Jun-02 7 12 18 NA 16 18 NA -6.0 -3.08 NA 0.53 0.80 NA 3.47 3.45 NA Islamic Madr Index Returns 33 29 29 23 22 21 0.0 0.00 0.0 1.29 1.13 1.23 0.00 0.00 0.00 Total 300 Note: NA applies to funds which do not have the required period of data in performance analytics, 2. Values are annualized, 3. Sorted according AUM size Source: Markaz Research, Lipper, Zawya The information and statistical data herein have been obtained from sources we believe to be reliable but in no way are warranted by us as to its accuracy or completeness. Markaz has no obligation to update, modify or amend this report or to otherwise notify a reader thereof in the event that any matter stated herein, or any opinion, projection, forecast or estimate set forth herein, changes or subsequently is deduced to be or becomes inaccurate


September 2007 Appendix 2: Information Disclosure

Fund Size - Available on the

company website/Fund

fact sheet Risk Adjusted

Returns Top 5 Holdings &

Percentages Benchmark

Short, Medium and Long term

performance

Historical Fund Fact

sheet Adjusted NAV's Fund Manager Commentary

Fund Manager Details

Inception date & Fees

Al Ahli Kuwaiti Fund Available Not Available Available, Percentages

not available KIC Index Available Available Not Available Available Not Available Available

Al Huda Islamic Fund Not Available Not Available Not Available Gulfinvest Islamic

Index Available Not Available Not Available Not Available Not Available Not Available Al-Shorooq Investment Fund Not Available Not Available Not Available Gulfinvest Index Available Not Available Not Available Not Available Not Available Not Available Burgan Equity Fund Not Available Not Available Available KSE Weighted Index Available Available Not Available Available Not Available Available Coast Investment Fund Not Available Available Available KSE Index Available Available No Adjustments Not Available Not Available Available

Tijari Investment Fund Not Available Not Available Available, Percentages

not available Global Kuwait Index Available

Available No Adjustments Not Available Not Available Available

Tijari Islamic Fund Not Available Not Available Not Available Al Madr Index Available Available No Adjustments Not Available Not Available Available

Al-Durra Islamic Fund Not Available Available Not Available Global Islamic Index Available Available No Adjustments Not Available Not Available Available

Global Local Fund Not Available Available Not Available Global General Index Available Available No Adjustments Not Available Not Available Available

Al Rou'yah Fund Not Available Not Available Not Available KSE Weighted Index,

KIC Index Available Not Available Available Available Not Available Available

Al-Raed Fund Not Available Not Available Not Available Not Available Available Not Available Not Available Not Available Not Available Available

Al Darij Investment Fund Available Not Available Available, Percentages

not available Shariah Compliant

Index Available Available Not Available Not Available Not Available Available

Al Safwa Investment Fund Available Not Available Available, Percentages

not available Wataniya Islamic

Index Available Available Not Available Not Available Not Available Available

Al Wataniya Investment Fund Available Not Available Available, Percentages

not available KSE Weighted Index Available Available Not Available Not Available Not Available Available

Markaz Forsa Financial Fund Available Available Available, Percentages

not available KIC Index Available Not Available No Adjustments Available Available Available

Markaz Investment and Development Fund Available Available

Available, Percentages not available KIC Index Available Not Available No Adjustments Available Available Available

Markaz Islamic Fund Available Available Available, Percentages

not available Al Madr Index Available Not Available No Adjustments Available Available Available Markaz Fund for Excellent Yields (Mumtaz) Available Available

Available, Percentages not available KIC Index Available Not Available No Adjustments Available Available Available

Al Wasm Fund Not Available Not Available Not Available Not Available Not available Not Available No Adjustments Not Available Not Available Available Kuwait Gateway Fund Not Available Available Top three available SC Kuwait Index Available Avilable No Adjustments Available Available Available Makaseb Kuwait Equity Fund Not Available Not Available Top three available MSCI Kuwait Index Available Not Available No Adjustments Available Not Available Not Available KAMCO Investment Fund Available Not Available Not Available KAMCO TRW Available Not Available No Adjustments Available Available Available The information and statistical data herein have been obtained from sources we believe to be reliable but in no way are warranted by us as to its accuracy or completeness. Markaz has no obligation to update, modify or amend this report or to otherwise notify a reader thereof in the event that any matter stated herein, or any opinion, projection, forecast or estimate set forth herein, changes or subsequently is deduced to be or becomes inaccurate



Appendix 3: AUM Trends Islamic & Conventional Trends

932 931 885 914 9161009 928 928 939 962 973 1027 1104

172163 167 159

166149 148 146 145 149

147179

162Non Islamic Funds Islamic Funds

Figure - 2: AUM Trend - Kuwait Local Equity Funds

Source: Lipper, Zawya classification, Markaz Research Note: Funds of - Kuwait Financial Centre,National Investments company, Kuwait Investment company, Global Investment House, Burgan Bank, Coast Investment Fund, Commercial Bank of Kuwait, Al Ahlia Investment company, KIPCO, Al Ahli Bank of Kuwait, SHUAA Capital, Kuwait Finance and Investment Company - are taken into consideration. These are the companies for which comparables are available.

AUM Trends of Asset Management Companies

443413

222

114 104 102 100 88 83 71

12 9

Kuw

ait

Fina

ncia

l Cen

tre

Nat

iona

l Inv

estm

ents

com

pany

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ait

Inve

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ent

com

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Glo

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tmen

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ouse

Burg

an B

ank

Coas

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vest

men

t Fu

nd

Com

mer

cial

Ban

k of

Kuw

ait

Al A

hlia

Inv

estm

ent

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pany

KIPC

O

Al A

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ank

of K

uwai

t

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AA C

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l

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Fina

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and

Inve

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Com

pany M

ashr

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nk

Kuw

ait

and

Mid

dle

East

Fina

ncia

l Inv

estm

ent

Com

pany

N.A N.A

AU

M in

Kd

Mn

Source: Lipper, Zawya Classification, Company sources, Markaz research

AUM Break-up by Asset Management Company - 2007Kuwait Local Equity Funds

The information and statistical data herein have been obtained from sources we believe to be reliable but in no way are warranted by us as to its accuracy or completeness. Markaz has no obligation to update, modify or amend this report or to otherwise notify a reader thereof in the event that any matter stated herein, or any opinion, projection, forecast or estimate set forth herein, changes or subsequently is deduced to be or becomes inaccurate.

Source: Lipper, Zawya classification, Markaz Research



Appendix 4: Fees

Management Fees – Conventional Funds Performance Fees–Conventional Funds Management Fees - Kuwait Conventional Equity Funds 2.00

1.00 1.00

1.25 1.25

1.50 1.50 1.50 1.50 1.501.63

1.75 1.75 1.75 1.75

Coas

t In

vest

men

t Fu

nd

Al W

atan

iya

Inve

stm

ent

Fund

Al-S

horo

oq I

nves

tmen

t Fu

nd

Glo

bal L

ocal

Fun

d

Al A

hli K

uwai

ti Fu

nd

Tija

ri In

vest

men

t Fu

nd

Al-R

aed

Fund

Mar

kaz

Mum

taz

Kuw

ait

Gat

eway

Fun

d

Mar

kaz

Fors

a Fi

nanc

ial F

und

Al R

ou'y

ah F

und

Burg

an E

quity

Fun

dM

arka

z In

vest

men

t an

dD

evel

opm

ent

Fund

KAM

CO I

nves

tmen

t Fu

nd

Mak

aseb

Kuw

ait

Equi

ty F

und

Source: Zawya, Markaz Research

%

Performance Fees - Kuwait Conventional Funds

0% 0% 0% 0% 0% 0% 0% 0% 0% 0%

10%

20%

10%

20% 20%

Al R

ou'y

ah F

und

Al-S

horo

oq I

nves

tmen

t Fu

nd

Al A

hli K

uwai

ti Fu

nd

Tija

ri In

vest

men

t Fu

nd

Al-R

aed

Fund

Mar

kaz

Mum

taz

Mar

kaz

Fors

a Fi

nanc

ial F

und

Burg

an E

quity

Fun

dM

arka

z In

vest

men

t an

dD

evel

opm

ent

Fund

KAM

CO I

nves

tmen

t Fu

nd

Kuw

ait

Gat

eway

Fun

d

Mak

aseb

Kuw

ait

Equi

ty F

und

Coas

t In

vest

men

t Fu

nd

Al W

atan

iya

Inve

stm

ent

Fund

Glo

bal L

ocal

Fun

d


Management Fees – Islamic Funds Performance Fees–Islamic Funds

Management Fees - Kuwait Local Islamic Funds

1.00% 1.00% 1.00%

1.50% 1.50% 1.50%

1.75%

Al D

arij

Inve

stm

ent

Fund

Al H

uda

Isla

mic

Fund

Al S

afw

aIn

vest

men

t Fu

nd

Al-D

urra

Isl

amic

Fund

Mar

kaz

Isla

mic

Fund

Tija

ri Is

lam

icFu

nd

Al W

asm

Fun

d


Performance Fees - Kuwait Local Islamic Funds

0% 0% 0%

10%

20% 20% 20%

Tija

ri Is

lam

icFu

nd

Mar

kaz

Isla

mic

Fund

Al-D

urra

Isl

amic

Fund

Al W

asm

Fun

d

Al H

uda

Isla

mic

Fund

Al D

arij

Inve

stm

ent

Fund

Al S

afw

aIn

vest

men

t Fu

nd


The information and statistical data herein have been obtained from sources we believe to be reliable but in no way are warranted by us as to its accuracy or completeness. Markaz has no obligation to update, modify or amend this report or to otherwise notify a reader thereof in the event that any matter stated herein, or any opinion, projection, forecast or estimate set forth herein, changes or subsequently is deduced to be or becomes inaccurate.



Disclaimer This report has been prepared and issued by Kuwait Financial Centre S.A.K (Markaz), which is regulated by the Central Bank of Kuwait. The report is intended to be circulated for general information only and should not to be construed as an offer to buy or sell or a solicitation of an offer to buy or sell any financial instruments or to participate in any particular trading strategy in any jurisdiction. The information and statistical data herein have been obtained from sources we believe to be reliable but in no way are warranted by us as to its accuracy or completeness. Opinions, estimates and projections in this report constitute the current judgment of the author as of the date of this report. They do not necessarily reflect the opinion of Markaz and are subject to change without notice. Markaz has no obligation to update, modify or amend this report or to otherwise notify a reader thereof in the event that any matter stated herein, or any opinion, projection, forecast or estimate set forth herein, changes or subsequently becomes inaccurate, or if research on the subject company is withdrawn. This report does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. Investors should seek financial advice regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. Investors should note that income from such securities, if any, may fluctuate and that each security’s price or value may rise or fall. Accordingly, investors may receive back less than originally invested. Past performance is not necessarily a guide to future performance. Kuwait Financial Centre S.A.K (Markaz) does and seeks to do business, including investment banking deals, with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report.



Markaz Published Researches Sl No Title Release

Date Research Highlights

1 GCC Equity Funds: The Asset Allocation Challenge Sep - 2006

Issues behind asset allocation for GCC equity funds. The report examines the asset allocation pattern among GCC equity fund managers.

2 GCC Leverage Risk: How real it is? Nov - 2006

Examining the risk behind increased exposure of the GCC financial system to stock market. The report considers four key variables: Size, Asset Intermediation, Cross border activity and Capital market representation. The report also analyses the linkage between bank credit growth and interest rate margin.

3 GCC for fundamentalists: A top-down framework Dec - 2006

Establishing a framework involving fundamental variables affecting GCC stock markets. The report examined nine important variables: economic factors, valuation attraction, economic liquidity, fund managers average, earnings growth potential, moving average, investor sentiment, geopolitical developments and market liquidity.

4 Managing GCC Volatility: Strategies and Tactics Feb - 2007

Devising risk-based portfolio strategy to benefit from the high-risk environment of the GCC stock markets. The report discusses four strategies: Relative vol, Contrarian, Technical and Options-based strategy.

5 Derivatives Market in GCC: Cutting a (very) long market short March 2007

Examining the need for introduction and growth of derivatives market in GCC. The report examines the limitations of GCC capital markets and how introduction of derivatives can overcome some of these limitations.

6 To Leap or To Lag: Choices before GCC Regulators April 2007

Examining the evolution and progress of GCC capital market structures relative to MENA and BRICS. The report benchmarks GCC capital market regulatory progress vis-à-vis Mena and BRIC countries and provides a road map.

7 Real Estate Report - Syria April 2007 Examining the trends and developments concerning the real estate sector in the Arab Republic of Syria.

8 GCC Asset Allocation Since

May - 07 (Monthly)

Presenting asset allocation strategy for GCC stock market using an in-house proprietary model. The report also analyses the performance of GCC equity funds.

9 A Gulf Emerging Portfolio: And Why Not? June 2007 A Study on Saudi, Kuwait, and UAE for Portfolio

Enhancement.

10 Markaz Volatility Indices (MVX) Since

July – 07 Monthly

Launch of Volatility Indices for the six GCC markets, EM and S&P.

11 Saudi Arabia Real Estate July 2007 Examining the trends and developments concerning the real estate sector in Saudi Arabia.

To obtain a copy, contact: Kuwait Financial Centre S.A.K. “Markaz” - Client Relations & Marketing Department Tel: +965 224 8000 Ext. 1804 Fax: +965 2414499 Postal Address: P.O. Box 23444, Safat, 13095, State of Kuwait Email: [email protected] Or Visit our website: www.markaz.com

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