Introduction

Private and confidential

Training on Investment Management

March 2011

Page 1
Agenda

► Investment Choices
► Investment Funds
− Overview
− Advantage
− Types
► Portfolio Management
− Overview
− Theories
− Types
− Process
− Allocation strategies
► Investment market in Kuwait

Page 2
Investment
Investment Choices
► Fixed-income investments
− Preferred stocks
− Savings Accounts
− Money Market Instruments
− Municipal bonds
− Corporate bonds
► Equity investments
− Common Stock
− American Depository Receipts
Page 3
► Investment funds
► Debt funds
► Equity funds
► Balanced funds
► Money market funds
► Direct real estate investments
► Special instruments
− Warrants and options
− Real Estate Investment Trusts
− Futures contracts
− Real assets like gold, diamonds, etc.
Investment Funds

► An Investment Fund is a trust

that pools investors funds and Investment Fund
invests them in financial assets Operations Flow Chart
as per its investment objective.
► The income earned through
these investments and the
capital appreciation realized are
shared by its unit holders in
proportion to the number of
units owned by them
► Objectives of Investment Funds
− Current income
− Long-term growth
− Growth and income
− Balanced

Page 4
Investment Funds

Advantages of Investment Funds

► Professional Management
► Diversification
► Convenient Administration By investing in the stock
► Return Potential market through Investment
funds, investors overcome the
► Low Costs
shortcomings faced regarding
► Liquidity inability to adequately
► Transparency diversify, manage and
efficiently trade their portfolios.
► Flexibility
► Choice of schemes
► Well regulated

Page 5
Investment Funds

► By Structure
Higher risk/higher
− Open Ended Schemes
return potential
− Close Ended Schemes
► By Investment Objectives
− Equity
− Growth Schemes (Focus on EPS growth)
Growth
− Value Schemes (Focus on price gain than EPS) Funds
− Income Schemes (Focus on regular dividends) Growth and
− Debt Income Funds
− Balance Schemes (Focus on balance between debt
and equity) Income Funds
− Debt (Focus on constant returns through high dividend
yield)
Money Market Funds
− Money Market (Focus on safe liquid assets)
► Special Schemes
− Index Schemes (Focus on index linked returns) Lower risk/lower
− Sector Specific Schemes (Focus on sector) return potential

Page 6
Investment Funds

► Islamic Funds
− Based on the principles of Sharia’ such as “Nature of Business” and other
guidelines set by the Sharia’ Board/Sharia’ Advisers.
► Conventional Funds
− No restrictions as to where they can invest
► Open Funds
− Continually create new units or redeem issued units on demand of investors
− The unit holders buy the units of the fund or may redeem them any time during the
scheme period at the prevailing Net Asset Value (NAV).
► Close Funds
− Fixed number of shares outstanding
− Do not redeem when investors want to sell; instead, shares can be purchased only
from another investor who is willing to sell
− Traded on exchanges and over-the-counter
− Redemption can take place only after the period of the scheme is over

Page 7
Investment Funds

► Fixed-Income / Debt Funds

− Invests in fixed income instruments such as debentures (bonds), bank deposits,
treasury bills, term finance certificates and government bonds, etc.
− Provides consistent current income with the preservation of capital
− Preferred by investors who want steady income and not willing to take much of risk.
► Equity Funds
− Invests mainly in shares of companies and undertake the risk of price movement at
the stock exchange.
− Their strength is the expected capital appreciation and windfall income through
capital gains.
► Fund of Funds
− These funds invest in other Investment funds
► Exchange-Traded / Index Funds
− Performance of shares in the fund tend to mirror the performance of the index.

Page 8
Investment Funds

► Income Fund
− Primarily seeks current income rather than growth of capital.
− Tends to invest in stocks and bonds that normally pay high dividends and interest.
► Balanced Fund
− Invests in both stocks (generally 50%-75%) and bonds (generally 25%-50%), with the primary
objectives of conserving principal, providing income as well as growth.
− Moderate risk element and relatively better return because of diversification.
► Money Market Fund
− Invests only in money markets instruments such as commercial papers and bills, treasury bills,
certificate of deposit and other instruments by government treasury.
− Generally safe and liquid but provide low return potential.
► Sector Fund
− Invests in shares of companies operating in specific sector or industry e.g. a pharma fund
would invest only in pharmaceutical companies.
− Enable investors to diversify holdings among many companies within an industry, a more
conservative approach than investing directly in one particular company.

Page 9
Investment Funds

Key Terms
► Net Asset Value (NAV)
Net Asset Value is the market value of the assets of the scheme minus its liabilities. The per unit NAV is the net
asset value of the scheme divided by the number of units outstanding on the Valuation Date.

Sale Price
Is the price you pay when you invest in a scheme. Also called Offer Price. It may include a sales load.

Repurchase Price
Is the price at which a close-ended scheme repurchases its units and it may include a back-end load. This is
also called Bid Price.

Redemption Price
Is the price at which open-ended schemes repurchase their units and close-ended schemes redeem their units
on maturity. Such prices are NAV related.

Sales Load
Is a charge collected by a scheme when it sells the units. Also called, ‘Front-end’ load. Schemes that do not
charge a load are called ‘No Load’ schemes.

Repurchase or ‘Back-end’Load
Is a charge collected by a scheme when it buys back the units from the unitholders.

Page 10
Portfolio Management
► Portfolio
− Investing in a group of assets instead of
a single asset
− investors should construct an
investment portfolio in accordance with
risk tolerance and investing objectives
► Portfolio Management
The art and science of making decisions
about investment mix and policy, matching
investments to objectives, asset allocation
for individuals and institutions, and
balancing risk against performance.
► Required Rates of Return
− Time value of money
− Expected rate of inflation
− Risk involved
Page 11
► Risk Aversion
− Assumption that investors will
choose the least risky alternative, all
else being equal
− They will not accept additional risk
unless they are compensated in the
form of higher return
► Portfolio Diversification
► Diversification to reduce risk of
portfolio
► Greater diversification benefits can
be achieved if
− Correlation between the assets is
lower
− More assets in portfolio
Portfolio Management

Portfolio Management Theories

► Risk Aversion
− Investors typically wish to maximize their return with the least amount of risk
possible. 
− Investors will choose the least risky alternative, all else being equal
− Investors will not accept additional risk unless they are compensated in the form of
higher return
► The Efficient Frontier
− Risk of a portfolio is affected by the risk of each investment in the portfolio relative
to its return, as well as each investment's correlation with the other investments in
the portfolio.
− A portfolio is considered efficient if it gives the investor a higher expected return
with the same or lower level of risk as compared to another investment.

Page 12
Portfolio Management

Types of Portfolio Management

► Passive equity portfolio management
− Long-term buy-and-hold strategy
− Usually track an index over time
− Designed to match market performance
− Manager is judged on how well they track the target index
► Active equity portfolio management
− Attempts to outperform a passive benchmark portfolio on a risk-adjusted basis
− Actively managing a fund's portfolio through investment decisions based on
research and decisions on individual holdings.

Page 13
Portfolio Management

Portfolio Management Process

1. Create a Policy Statement
− Policy statement contains the investor’s goals, acceptable risk levels and
constraints that guides all investment decisions for the portfolio
− Focus: Investor’s short-term and long-term needs, familiarity with capital market
history, and expectations
− Should be reviewed periodically

2. Develop an Investment Strategy

− Entails creating a strategy that combines the investor’s goals and objectives with
current financial market and economic conditions
− Focus: Current and project financial, economic, political, and social conditions
− Requires monitoring and updating

Page 14
Portfolio Management

Portfolio Management Process

3. Implement the Plan by Constructing the Portfolio
− Entails putting the investment strategy to work, investing in a portfolio that meets
the investor’s goals and constraint requirements
− Focus: Meet the investor’s needs at the minimum risk levels

4. Monitor and Update the Plan

− Both markets and investors’ needs change as time changes. As such, it is
important to monitor for these changes as they occur and to update the policy, plan
and portfolio to adjust for the changes that have occurred
− Focus: Monitor and update investor needs, environmental conditions, portfolio
performance

Page 15
Portfolio Management

Portfolio Management Phases

1. Security analysis
− Choose securities to be included in portfolio based on its risks and return objectives
− Identify under priced and over price securities using fundamental analysis, technical analysis
and efficient market hypothesis

2. Portfolio analysis
− Identify range of possible portfolios that can be created from securities

3. Portfolio selection
− Undertake analysis of their risk and return and find efficient portfolio that provides high
returns at given level of risk

4. Portfolio revision
− Monitor portfolio to keep it optimal and revise in light of developments in the market

5. Portfolio evaluation
− Evaluate portfolio on regular basis to indentify any weaknesses and improve deficiencies

Page 16
Portfolio Management
Asset Allocation Strategies
► Integrated asset allocation
− capital market conditions
− investor’s objectives and
constraints
► Strategic asset allocation
− constant-mix
► Tactical asset allocation
− mean reversion
− inherently contrarian
► Insured asset allocation
− constant proportion
Page 17
Selecting an asset allocation
strategy
► Perceptions of variability in
the client’s objectives and
constraints
► Perceived relationship
between the past and future
capital market conditions
► An investment strategy is
based on three decisions
► asset classes to consider
► weights to assign
► specific securities to
purchase
Portfolio Management

Asset Allocation Summary

► Policy statement determines types of
assets to include in portfolio
► Asset allocation determines portfolio
return more than stock selection
► Over long time periods, sizable
allocation to equity will improve results
► Risk of a strategy depends on the
investor’s goals and time horizon

Page 18
Private Equity Funds

Meaning
► Technically refers to any type of equity investment in an asset in which the equity is not
freely tradable on a public market.
− Less liquid
− Long Term in nature

Categories and Players

► Angel
− Early Stage: Seed, Start-up
► Professional Venture Capital
− Early Stage, Expansion, Later Stage
► Private Equity
− Later Stage, Buyout, Special Situations
► Hedge Funds
− All Stages

Page 19
Private Equity Funds

The Private Equity Market

Page 20
Investment market in Kuwait

Investment Funds
• Investment funds in the GCC region are characterized
• An evolving market,
• Limited number of investment opportunities,
• Lax regulations, and
• Limited asset class diversification

• A large variety of fund schemes are available with different investment styles and
objectives.

Page 21
Investment market in Kuwait

Investment Companies
• Kuwait’s investment sector comprise 98 investment (44 conventional and 54 Islamic)
companies and 112 investment funds (58 conventional and 54 Islamic); a large number
of investment companies are in asset management business; many Kuwaiti companies
also have funds that are registered outside Kuwait
• The investment sector was severely affected by the global financial crisis which led
most investment firms to face potential debt default, as many were highly dependent on
short term financing to fund their investment activities
• Given Kuwait’s status as a net exporter of capital, high budget surpluses thanks to high
oil prices, the country will continue to generate funds that will need to be invested.
However, with most of the asset management companies having lost their brand
equity, it will take time for them to be able to attract fresh funds under management,
especially from the retail market
• The underdeveloped capital markets and their lack of proper regulation in the region
are two major risks for the growth of the asset management sector
• This sector has seen little M&A / PE activity. Given that the assets under management
of most funds shrunk considerable since 2008 and with no new funds coming up, there
is little incentive for other players to buy asset management business from existing
players.

Page 22
Investment market in Kuwait

• As per Central Bank of Kuwait (“CBK”), there are 102 investment companies in Kuwait,
of which 56 are Islamic investment companies
• More than half of the listed investment companies (20 out of 39) are of medium size.

Investment
companies

Islamic Conventional
14 25

Large Medium Small Large Medium Small

3 5 6 2 15 8
(Incl. FIC) Incl. GIH)

The listed companies are classified based on the total assets as following:
• Large: Total assets > KD 500 million
• Medium: Total assets between KD 150-500 million
• Small: Total assets < KD 150 million

Page 23
Thank you