The Dutch pension asset manager's Asia Pacific head of real estate says his team has just had one of its busiest years ever and that 2021 is looking similarly promising.
The Mena region includes, but is not limited to, Saudi Arabia, the United Arab Emirates, Kuwait, Qatar, Bahrain, Oman, Egypt, Jordan, and Morocco.
The fund will be managed by California-based Franklin Templeton, with Dubai-based Algebra Capital acting as sub-advisor. Franklin Templeton acquired a 25% stake in Algebra Capital, which is among the largest asset managers in the Mena region, in August 2007. Stephen Dover, international CIO of Franklin Global Advisers, will be the fundÆs lead portfolio manager. The fund will be benchmarked to the MSCI Arabia Index.
The Mena region is one of the new investment themes making the rounds of retail markets lately, after having already attracted pension funds, endowments, and hedge funds. The regionÆs biggest draw is its oil-rich countries, where surpluses from oil receipts have been feeding on economic growth and development for many years.
Ziad Makkawi, CEO of Algebra Capital, highlights the major points in favour of investing in the Middle East and North Africa: strong GDP growth led largely by high oil prices for now but expanding in sources; low correlation to other equity markets worldwide; more open capital markets; more initial public offerings; increasing demand for investments from investors outside the region; active infrastructure market; favourable demographics; potential for higher consumer spending; improving regulatory environment; attractive valuations; and undervalued currencies.
ôThis is an opportune time to consider the Mena region as a portfolio diversifier,ö says Makkawi, adding that the region represents one of the best ôfrontier market investment opportunitiesö at this time.
The opportunities are vast, says Algebra Capital managing director Daniel Smaller. There are 1,500 stocks in the Mena region, with a total market capitalisation of $1.4 trillion and a daily trading volume worth around $5-$7 billion.
The potential is huge, Smaller says, because as it stands, the Mena region makes up only 1.25%-1.5% of the MSCI Emerging Markets Index. Given the opportunity, it should make up around 10%-20% of that index, he says.
At present, Mena shares are trading at an average price-to-earnings ratio of around 12 times forecast earnings for 2008, with an estimated earnings-per-share growth of 23%-25%, Smaller says, prompting him to add that this region is ôthe next Bricö (referring to the Brazil, Russia, India, China markets). Algebra Capital is by no means suggesting that investors should abandon their investments in emerging markets such as China and India, which should still make up a significant part of investorsÆ portfolios.
ôWhat we are saying if for investors to invest in the Mena region in addition to Bric, not instead of,ö says Makkawi. ôChina and India are some of the largest markets in the world. Our case is to say donÆt ignore the Mena region.ö
Not all is positive on the Mena front, however. The region is considered a high risk investment, by some, because it is essentially an emerging market. Unlike developed markets, the flow of information in the Mena region is still relatively limited. The understanding of how the markets work is not as clear-cut compared with more open markets. What keeps Makkawi and his team awake at night are the geopolitical risks and inflation.
Algebra Capital makes use of a research-intensive, bottom-up and on-the-ground investment approach. It has around 40 investment professionals involved in the Mena region, including around 10 portfolio managers and analysts.
While the MSCI Arabia has around 200 constituent stocks, Algebra Capital considers and visits around 300 companies annually.
ôWe donÆt invest in a company unless we have visited them,ö Makkawi says, adding that the fund house invests across all market capitalisations.
This latest fund is expected to contain around 40 to 60 stocks, and will have a maximum exposure to a single country or sector of below 40%. The fund may also gain exposure to the markets through derivatives.
As of now, the new fundÆs proposed asset allocation is 30% for the UAE, 23% for Egypt, 17% for Qatar, 11% for Kuwait, 10% for Saudi Arabia, 5% for Bahrain, 3% for Oman, and 1% for the rest of the Mena region.
Due to restrictions on direct foreign investments, the new fund will gain exposure in Saudi Arabia by investing in locally registered equity funds, allocating no more than 10% of the portfolio in that market. Further exposure can be gained through other Saudi Arabia-related financial instruments.
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