Sulaiman Al-Abduljader, Vice President of Investment Services at Coast Investment and Devel...
Sulaiman Al-Abduljader, Vice President of Investment Services at Coast Investment and Development Company, talks to Emma Oakman about the potential on offer in the Middle East.
What is your current view of ETFs?
I love ETFs. As we reset our asset allocation post-2008, they will be one of our main investment vehicles for local and global markets.
Currently, we mainly invest indirectly through funds using ETFs as our global exposure is tilted towards private equity. Our only direct holding is the Lyxor ETF FTSE Coast Kuwait 40, which gives us broad exposure to the Kuwaiti market.
The Kuwaiti market has halved in value since oil peaked in June 2008 though. To what extent is investing in this market predominantly an oil play?
That is the initial perception, but the Kuwaiti market provides a diverse sector allocation. Petroleum only represents around 5% of the total market capitalisation. The rest is evenly split between banking, telecoms, logistics and financial services.
Secondly, Kuwait offers broad regional exposure. The $29bn telecom company, Zain, for example, operates in 22 counties spread across the Middle East and Africa. The $22bn Kuwait Finance House, with operations in Kuwait, Bahrain, Turkey and Malaysia, is one of the biggest Islamic finance players worldwide and is representative of Islamic banking globally.
This ETF therefore gives us exposure to leading international companies with substantial operations throughout the Middle East.
Simple asset allocation modelling also suggests holding Kuwait enhances the risk-return profile of global all-equity portfolios. It has a strong risk-adjusted return compared to other emerging markets including Bric countries.
There are, however, no locally listed ETFs covering the Gulf Cooperation Council (GCC) markets including Bahrain, Kuwait, Oman, Qatar and the United Arab Emirates.
This market presents a clear opportunity for ETF providers that has not yet been tapped.
Launching Middle Eastern ETFs has proven popular elsewhere recently though.
Ideally, we prefer local-currency investments to avoid exchange-rate volatility.
Middle Eastern exchanges are, however, going through dramatic transformations in order to import the systems and platforms for ETF trading and the necessary back-office requirements. We expect that will be complete in roughly 18 months.
ETFs are very much needed in the local market not only in terms of creating simple and low-cost exposure, but also to increase transparency and help prevent retail investors making decisions on individual equities based on rumour and speculation passed on by word of mouth.
This is a key factor behind current negative sentiment. People are not confident about local stocks because decisions are not based on any fundamental analysis. Buying broad indexes would reduce the impact of rumours because investors would hold very transparent securities, which are representative of the market, asset class or sector where the underlying constituents are clearly visible.
Beyond equities, we also sense an opportunity in fixed income. Developing appropriate indexes and ETFs would be ideal because of the lack of alternative investment options. ETFs would provide a very strong vehicle for investors to buy and sell efficiently at very low cost.
You mentioned issues with market transparency, which is always going to be a red flag for investors and product providers alike, suggesting it will take more than just infrastructure to generate a local ETF market.
Yes. It is not enough just to have a trading system without a competent regulatory framework for ETF managers to roll out funds efficiently. The UK's FSA, for example, has a consistent follow-up process for approving providers' product proposals. This clarity and predictability allows managers to decide their marketing and other operations.
This is a key aspect for the local market. If providers don't know when to expect feedback from the regulators, that would affect launch and marketing plans, which, in turn, would make an ETF manager nervous.
Reporting and the mechanisms behind custody, operations and disclosure also need to be laid out transparently and in detail in order for players to have a clear understanding of what is involved and what ETF managers need to do. Any vagueness would result in conflicts or dysfunction.
Education will also be critical.
Do you see commitment to developing these processes from those involved?
We do. Most exchanges prefer to take a slow, steady approach rather than rushing things and potentially having an accident shortly after launch. This could result in a more transparent and clear process, which is a worthwhile outcome.
Would importing the Ucits framework, with its established systems and products, be an option?
Theoretically, yes. A successful framework is always a good example to work from, but it needs to be customised towards local regulation and culture.
How important would Islamic principles be to the success of locally listed ETFs?
While this is not enforced, demand for Islamic products is higher so there is a general bias towards developing these vehicles.
The main question, however, is not whether they comply with Islamic finance principles, but whether they are effective and track a representative and liquid index. Being Islamic will not be a guarantee of success.
Islamic ETFs are on the increase internationally and it is only a matter of time before we see those funds listed locally and replicating the local region. Middle East exposure going through Islamic ETFs would offer investors good diversification opportunities.
Islamic ETFs replicating international markets, but listed locally, would also be an opportunity for providers. There would be quite a lot of demand from investors to get exposure to those international markets in a transparent way via an Islamic ETF.
How do you see yourself using local ETFs - tactically or as a core holding?
Generally, first-time investors go for broad market ETFs and then as they get more comfortable, use them more tactically.
From our perspective, we could be more tactical locally and regionally as we have a lot of experience of those markets. When it comes to global assets though, we would be more likely to use broad indexes.
The first products need to be more basic though and provide broad market exposure. Once the basics are in place it would be a natural step to look at exotic ETFs utilising simple, transparent structured products to offer a second tier of leveraged or short ETFs, for example.
Sulaiman Al-Abduljader oversees company and client portfolio investments totalling $3bn. He was responsible for creating the first index-linked retail capital-guaranteed fund in the Middle East, the first set of leveraged index portfolios and the first Kuwait ETF listed on the LSE offering foreign investors a flexible vehicle to gain exposure to the previously untapped region.
Risk to retail investors
Joined as head of strategy, multi asset, in June
Group income protection