Kuwait Financial Centre S.A.

K “Markaz”
RESEARCH
September 2007

A Potential USD 140 Bn Industry

Review of Asset Management Industry in Kuwait

September 2007 A. Executive Summary

Research Highlights:
Examining the status of Kuwait
Investment assets (fiduciary) managed by nearly 75 investment companies in
investment industry, both
Kuwait touched KD 21.3 Bn (USD 75 Bn) during May 2007 (Figure – 1). It is
managed accounts and mutual
nearly 73% of total bank assets. We expect this figure to touch KD 40 Bn by
funds. The report also
2010, based on our forecast. Surprisingly bulk of this amount is in portfolio
highlights the role played by
investment of clients (53%) with only about 8% in investment funds (mutual
KIA.
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.
Markaz Research is
available on Bloomberg.
Even though investment funds (mutual funds) constitute a small segment of
Type “MRKZ” <Go>
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.
M.R. Raghu CFA, FRM
Head of Research
Figure: 1 – Break-up of Investment Company Assets (May 2007)
+965 224 8280
Kuwait Investment Companies Assets
rmandagolathur@markaz.com (Fiduciary)
Kd. 21.28 Bn
Amrith Mukkamala
Research Analyst Portfolio Investment Foreign Funds Custody Assets Commitments-
amukkamala@markaz.com Investment Funds Kd 0.49 Bn Kd 0.38 Bn Guarantees-
Kd 17.05 Bn Kd 3.10 bn Collateral
Shares Local Shares Local
Kd 11.72 Bn Kd 1.67 Bn

Shares Foreign Investment

Kuwait Financial Centre Kd 1.25 Bn Fund Units
S.A.K. “Markaz” Local
Investment Others
Fund Units Kd 0. 70 bn
P.O. Box 23444, Safat 13095, Local
Kuwait
Other – Local
Tel: +965 224 8000 Kd 1.39 Bn
Fax: +965 242 5828
www.markaz.com Others
Kd 1.55 bn

Source: Central Bank of Kuwait


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.
RESEARCH
September 2007
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:
ƒ Fund should reveal their top 5 holdings
ƒ Fund managers cannot invest more than 15% of their fund in one
company (to achieve enough diversification)
ƒ The fund cannot invest more than 20% of the fund capital in a
related (holding) company (to avoid corporate governance issues)
ƒ Fund investments in banks and companies cannot have voting rights
ƒ Fund managers cannot buy stocks on margins
ƒ Fund managers cannot deal with real estate and commodities
ƒ 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.
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C. Industry Projection

Table 1: Investment Companies -Kuwait

(Million Dinars)
No of Investment Total Bank Total Bank
Investment industry is Companies Companies-Assets
Grand Total
Assets
Share
Deposits
Share
estimated to touch KD 40
billion in size by 2010. 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- 20% 49% 27% 12% 12%
2006)
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 17.5% 25% 10% 10%
for
Forecast
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
The share of Islamic banking assets that grew at 12% p.a. during the same period of analysis.
assets stands at 37% of
the total investment From a modest share of 16% in 2001, the current share for Islamic assets
companies 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.

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September 2007

Table 2: Contra Account (Fiduciary Assets)

(Million Dinars)
Local Shares Local Fiduciary
Other Local
Disclosure of the fund size Portfolio Investment Others Total Assets/Balance
Investments
Investments Funds Sheet Assets
is not a commonly
followed practice in 2005 8,113 1,404 1,286 4,742 15,545 165%
Kuwait. 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 Fund Size on Risk Both Top 5 Fund Fund

Funds the company Adjusted Holdings & Manager Manager
Analyzed website/ Fund Returns Percentages Commentary Details
Fact Sheet
22 13 14 20 12 16

2. Fragmentation
There are 75 investment
companies in Kuwait There are 75 Investment companies in Kuwait which manage KD 21.3 Bn in
managing Kd 21.3 Bn. 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.

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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
Most of the large funds investors, especially pension funds play an active role in coaxing the fund
piggy-back on a few large managers into adopting well-respected benchmarks.
stocks.
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

Number of Number of Research
occurrences in top Materials Available
five holdings May on Zawya May 05 -
Top Stocks & Research Material 05 - May 07 May 07
KFH 12 19
MTC 12 25
NBK 9 26
Agility 5 19
Extent of participation of
Sovereign Wealth Funds in Boubyan Petrochemical Co. 4 5
the local market is in its NMTC 4 23
nascent stages. 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.
ƒ the amount of funds managed by investments funds as a percentage
of the size of the market and
ƒ 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

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September 2007

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
Regulatory scenario for explained earlier.
investment funds
continues to at its infant
7. Regulatory Issues
stages.
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
2 Minimum value of one
Investment Unit
3 Minimum Capital to set up a
Fund
4 Legal Entity of an Investment
Fund
5 Marketing of Foreign Mutual
Funds
6 Fund Manager's Maximum Limit
Kuwait’s Investment fund of Exposure in the fund
industry is regulated by 7 Maximum rate of Fund Manager
CBK. fees
8 Mandatory disclosure of Financial
position of the Fund
9 Financial Reports Mandatory
Disclosure
10 Minimum Educational/Experience
of the Fund manager
11 Corporate Income Tax -
Incorporated in Kuwait, Wholly
owned by Kuwaiti National
12 Corporate Income Tax - Foreign
Companies
Ministry of Commerce & Industry,
CBK
Kd 1
Kd 5 Mn
Distinct Independent Legal Entity
from the company establishing such
a Fund
No Direct Marketing. To be
marketed thru an Kuwaiti
Shareholding Company
5% of the Fund's Capital
5% Annually
Quarterly
Every Six Months
Relevant University Degrees and
Minimum of 3 Years of Work
Experience
Nil
55% (Amiri Decree No: 3 of 1995),
(There is wide speculation on
whether this has been implemented)

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E. Performance of Local Equity Funds

1. Conventional Equity Funds

The database includes 15 Overview

conventional equity funds Our database included 15 conventional equity funds managed by 13
managed by 13 investment investment companies. All funds have a single-product status except for
companies. 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

All funds have a single
product status, except for
Markaz that has three
products dedicated to
investing in the Kuwait
Equity markets.
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

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

34

Index Returns % (June 2004 - May 2007)

34 KSE Weighted Index

33

33
KSE Weighted index
32
provides the best risk
adjusted returns. 32

31

31 KIC Index

30

30
KSE Price Index
29
18.0 18.2 18.4 18.6 18.8 19.0 19.2 19.4
Annualised Risk % Jun
2004 - May 2007

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

this segment:

ƒ Medium-Term (3 years) risk adjusted performance

ƒ Information Ratio (defined as alpha/tracking error) &
ƒ 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 in the last
three years (Jun 04 – May
07).
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.

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47
Figure: 3 - Fund Performance (Jan 2002 - May 2007)

Equity Fund Returns % (June 2004 - May 2007)

Markaz Mumtaz
42 Investment Fund

Markaz Mumtaz Al Rou'yah Fund

Investment Fund topped 37
the performance chart on Al Wataniya Investment
Markaz Investment and
Fund Al Ahli Kuwaiti Fund
a risk adjusted basis with Development Fund
32 Al-Raed Fund
the highest Sharpe ratio Global Local Fund
(1.76). Burgan Equity Fund KSE Index Returns
Al-Shorooq Investment
27 Coast Investment Fund
Fund
KAMCO Investment Fund
22

Markaz Forsa Financial Tijari Investment Fund

Fund
17
15 18 21 24 27
Source: Fund fact sheets, Markaz Research Annualised Risk % Jan
2002 - May 2007

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.

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

Markaz Mumtaz Investment

3
High
Al Wataniya Investment
2

KIC Al-Raed Markaz Investment &

Al Ahli Kuwaiti Development
Information

1
Ratio %

Global Local
0 Burgan Equity
Coast Investment
Al-Shorooq Investment
-1
KAMCO Investment Fund

-2
Tijari Investment
Low
-3
Median Line
Markaz Forsa Financial
Only 7 out of 13 funds -4
enjoyed positive 25 75 125 175 225 275
information ratio. Low AUM in Kd Mn High
Source: Lipper, Fund Fact sheets, Markaz Research
Note: 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.

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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
Our analysis of 13 funds (excess return), it may also back fire if stock selection is poor.
revealed that tracking
error ranged from a high
of 4.67% to a low of Our analysis of 13 funds revealed that tracking error ranged from a high of
2.36%. 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 number of Islamic the conventional funds. To a certain extent, this can be attributed to the non-
funds available is lesser availability of an Islamic index from Kuwait Stock Exchange. This has led to
than the number of most of the investment companies either following the Islamic Al-Madr Index
conventional funds. 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

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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.

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

34

Index Returns % (June 2004 - May 2007)

Extent of benchmark KSE Weighted Index
diversity is higher in the 33
case of Islamic funds as
compared to conventional 32
equity funds.
31
KIC Index
30

KSE Price Index

29
Islamic Madr Index

28
18 19 20 21 22 23
Annualised Risk % Jun
2004 - May 2007

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%.
Figure: 6 - Fund Performance (Jan 2002 - May 2007)
Markaz Islamic Fund
Equity Fund Returns % (June 2004 - May 2007)

37
Al-Durra Islamic Fund

Al Darij Investment Fund

32
Al Safwa Investment Fund

Islamic Madr Index

Returns
The Islamic Al-Madr index 27
has underperformed the
conventional equity indices
in the last three years (Jun
22
2004 – May 2007)

Al Huda Islamic Fund

17
15 18 21 24
Source: Fund fact sheets, Markaz Research Annualised Risk % Jan
2002 - May 2007

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.

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

5.00
Markaz Islamic
4.00

High3.00

Makaz Islamic Fund has Al Darij Investment

2.00
Global Al-Durra Islamic
provided the best returns.

Information
1.00

Ratio %
Al Safwa Investment
0.00

-1.00

-2.00

-3.00 Al-Huda Islamic

Low Median Line
-4.00

-5.00
6.00 16.00 26.00 36.00 46.00 56.00 66.00 76.00 86.00
Low AUM in Kd Mn
High
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
Islamic funds enjoyed management fee is at 1.32%. The management fees of the funds range from
positive information ratio.
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).

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 RESEARCH
September 2007

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.

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 Kuwait Financial Centre S.A.K “Markaz”
RESEARCH
September 2007

Appendix 1: Performance Analytics

Date of AUM Tracking Error
Non-Islamic Funds Inception (Kd Mn) Return (%) Risk (%) Information Ratio Sharpe Ratio (%)
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

Date of AUM Tracking Error

Islamic Funds Inception (Kd Mn) Return (%) Risk (%) Information Ratio Sharpe Ratio (%)
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
 Kuwait Financial Centre S.A.K “Markaz”
RESEARCH
September 2007

Appendix 2: Information Disclosure

Fund Size -
Available on the Short,
company Medium and Historical Fund
website/Fund Risk Adjusted Top 5 Holdings & Long term Fund Fact Fund Manager Manager Inception
fact sheet Returns Percentages Benchmark performance sheet Adjusted NAV's Commentary Details date & Fees
Available, Percentages
Al Ahli Kuwaiti Fund Available Not Available not available KIC Index Available Available Not Available Available Not Available Available
Gulfinvest Islamic
Al Huda Islamic Fund Not Available Not Available Not Available 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
Available
Available, Percentages
Tijari Investment Fund Not Available Not Available not available Global Kuwait Index 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
KSE Weighted Index,
Al Rou'yah Fund Not Available Not Available Not Available 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
Available, Percentages Shariah Compliant
Al Darij Investment Fund Available Not Available not available Index Available Available Not Available Not Available Not Available Available
Available, Percentages Wataniya Islamic
Al Safwa Investment Fund Available Not Available not available Index Available Available Not Available Not Available Not Available Available
Available, Percentages
Al Wataniya Investment Fund Available Not Available not available KSE Weighted Index Available Available Not Available Not Available Not Available Available
Available, Percentages
Markaz Forsa Financial Fund Available Available not available KIC Index Available Not Available No Adjustments Available Available Available
Markaz Investment and Available, Percentages
Development Fund Available Available not available KIC Index Available Not Available No Adjustments Available Available Available
Available, Percentages
Markaz Islamic Fund Available Available not available Al Madr Index Available Not Available No Adjustments Available Available Available
Markaz Fund for Excellent Available, Percentages
Yields (Mumtaz) Available Available 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
 RESEARCH
September 2007

Appendix 3: AUM Trends

Islamic & Conventional Trends
Figure - 2: AUM Trend - Kuwait Local Equity Funds
Non Islamic Funds Islamic Funds
162
166 147
179 172 145 149
167 159 149 148 146
163

1104
932 931 914 916
1009
928 928 939 962 973 1027
885

Source: Lipper,
Source: Lipper, Zawya
Zawya classification,
classification, Markaz Research
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

443
413 AUM Break-up by Asset Management Company - 2007
Kuwait Local Equity Funds
AUM in Kd Mn

222

114 104 102 100

88 83 71
12 9 N.A N.A
Al Ahlia Investment company
Kuwait Investment company

Commercial Bank of Kuwait

Burgan Bank

Financial Investment Company

Kuwait Financial Centre

National Investments company

Al Ahli Bank of Kuwait

Global Investment House

Mashreqbank
KIPCO

SHUAA Capital
Kuwait Finance and Investment
Coast Investment Fund

Kuwait and Middle East

Company

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

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.

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 RESEARCH
September 2007

Appendix 4: Fees

Management Fees – Conventional Funds Performance Fees–Conventional Funds

Management Fees - Kuwait Conventional Equity Funds 2.00
20%
1.75 1.75 1.75 1.75 20% 20%
1.63
1.50 1.50 1.50 1.50 1.50 Performance Fees - Kuwait Conventional Funds
1.25 1.25
1.00 1.00
10%
% 10%

0% 0% 0% 0% 0% 0% 0% 0% 0% 0%
Tijari Investment Fund

Markaz Forsa Financial Fund

Al-Shorooq Investment Fund

Global Local Fund

Al Ahli Kuwaiti Fund

Al-Raed Fund

Al Rou'yah Fund

Markaz Investment and

KAMCO Investment Fund

Coast Investment Fund

Al Wataniya Investment Fund

Markaz Mumtaz

Kuwait Gateway Fund

Makaseb Kuwait Equity Fund

Burgan Equity Fund

Development Fund

Tijari Investment Fund

Markaz Forsa Financial Fund

Al-Shorooq Investment Fund

KAMCO Investment Fund

Makaseb Kuwait Equity Fund

Al Rou'yah Fund

Markaz Mumtaz

Coast Investment Fund

Al Wataniya Investment Fund

Al Ahli Kuwaiti Fund

Al-Raed Fund

Burgan Equity Fund

Kuwait Gateway Fund

Global Local Fund

Markaz Investment and
Development Fund
Source: Zawya, Markaz Research

Source: Zawya, Markaz Research

Management Fees – Islamic Funds Performance Fees–Islamic Funds

Management Fees - Kuwait Local Islamic Funds Performance Fees - Kuwait Local Islamic Funds
1.75%
20% 20% 20%
1.50% 1.50% 1.50%

1.00% 1.00% 1.00%

10%

0% 0% 0%
Tijari Islamic

Al-Durra Islamic

Al Wasm Fund
Markaz Islamic

Al Huda Islamic

Investment Fund

Investment Fund
Tijari Islamic
Markaz Islamic
Al Huda Islamic

Al-Durra Islamic

Al Wasm Fund
Investment Fund

Investment Fund

Fund

Al Safwa
Fund
Al Safwa

Al Darij
Fund
Al Darij

Fund
Fund

Fund
Fund

Fund

Source: Zawya, Markaz Research

Source: Zawya, Markaz Research

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.

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

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 RESEARCH
September 2007

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.

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

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 RESEARCH
September 2007

Markaz Published Researches

Sl No Title
GCC Equity Funds: The Asset
1 Sep - 2006
Allocation Challenge
2 GCC Leverage Risk: How real it is?
GCC for fundamentalists: A top-
3 Dec - 2006
down framework
Managing GCC Volatility: Strategies
4 Feb - 2007
and Tactics
Derivatives Market in GCC: Cutting
5 March 2007
a (very) long market short
To Leap or To Lag: Choices before
6 April 2007
GCC Regulators
7 Real Estate Report - Syria
8 GCC Asset Allocation
A Gulf Emerging Portfolio: And Why
9 June 2007
Not?
10 Markaz Volatility Indices (MVX)
11 Saudi Arabia Real Estate
Release Research Highlights
Date
Issues behind asset allocation for GCC equity funds.
The report examines the asset allocation pattern
among GCC equity fund managers.
Examining the risk behind increased exposure of the
GCC financial system to stock market. The report
considers four key variables: Size, Asset
Nov - 2006 Intermediation, Cross border activity and Capital
market representation. The report also analyses the
linkage between bank credit growth and interest rate
margin.
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.
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.
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.
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.
Examining the trends and developments concerning
April 2007 the real estate sector in the Arab
Republic of Syria.
Presenting asset allocation strategy for GCC stock
Since
market using an in-house proprietary model. The
May - 07
report also analyses the performance of GCC equity
(Monthly)
funds.
A Study on Saudi, Kuwait, and UAE for Portfolio
Enhancement.
Since
Launch of Volatility Indices for the six GCC markets,
July – 07
EM and S&P.
Monthly
Examining the trends and developments concerning
July 2007
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: info@markaz.com
Or
Visit our website: www.markaz.com

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

19