One of the Largest Asset Managers in MENA with $11.5bn (AUM) Discusses Strategy and Investments

Interview with Faisal M. Sarkhou, CEO of KAMCO

Why should people invest with a quality asset manager as opposed to investing their own funds?

I think the financial crisis of 2008 and subsequent events, the cycles that have hit our regional markets etc. have clearly shown that investors need guidance. That comes in the form of understanding what investments are, how to invest and where to invest.

The biggest issue you see in this region i.e. Kuwait, the Gulf and even the MENA region is that the biggest focus has been in equity and real estate. In the space of investment, equity and real estate are an integral part but are not everything. In our part of the world, in the gulf specifically, we have a very low tax environment, high disposable incomes and people are used to spending that disposable income.

Savings and investing in the long term has not taken traction as it has done in other regions. The biggest challenge that the region faces is to introduce new breadth and depth in the market, allowing for more opportunities for investors to invest in instruments and invest in their future and their children’s´ future rather than using traditional savings and deposits.

When you have limited taxation and limited obligations in that sense, people tend to not look at the planning as they should. However with an inflationary environment in the world, the cost of everything is going up. We are a net importer of goods; as such there are inflationary pressures on these goods, and so with time you start to see that your wealth needs to grow.

Even if you talk about industries such as education and healthcare, the costs are rising; hence investors, consumers, nationals and expats living in this region need to be able to accommodate for future higher expenditure.

In addition you have the demographic side of Kuwait and the region; we have young populations that need jobs and services in terms of housing, education, healthcare etc. For those to grow, the public sector will have to play its part as it has done, but the private sector increasingly needs to play its part in that. When the private sector has an increased role it means you will have more investible type securities that are associated with those growing sectors.

Of course everybody is talking about the oil price which can have an adverse effect on Kuwait, what is the investment outlook for Kuwait and the MENA region? How confident are you that you can produce these yields?

If you look at the equity side that reflects the changing moods, you have to look at things in the long term, medium term and short term. If you look at the long term picture you see that oil prices only started increasing around 2008 or 2009. Before that, they were below what they are today. The equity market in the region had strong growth from 2001 until the global financial crisis in 2008.

What we saw at that time was that the oil prices were not as influential as they are today. In the past, post financial crisis, oil prices went up to above a hundred dollar levels and equity markets had a generally volatile period between 2010 and 2013.

However in 2013 we saw almost all markets in the region grow by double digit numbers especially in the gulf.

Kuwait was maybe one of the markets that was seeing growth below double digits at 8.5%.

Thus we were coming off a good year in 2013 with oil prices being high; there was a lot of planning for government expenditure in Kuwait and in the region.

We entered 2014 and the first quarter went similarly to 2013 and then there were a number of global and regional events that caused a slowdown in the growth of the equity markets. The slowdown started to become more apparent in the second half of the year. In 2014 the summer period was generally quieter, Ramadan was in that period, and the markets slowed down in the third quarter. At that time, oil prices started to fall.

In December 2014 we had five months of oil prices going down significantly; what that has done is highlight some of the weaknesses in the markets in the region. When I say weaknesses, we talk about depth and breadth of the equity markets and a retail dominated market. With the retail sector being of a shorter term nature and with a fear factor incorporated into its decision making, when the market sees the oil prices falling you see people exiting these markets fearing that the oil markets are going down. Thus those markets struggled at the end of 2014 but we expect such fear and such downturns to be gone in 2015.

First of all oil prices should stabilise; with that you will get people going from negative sentiment to positive sentiment. You will have earnings announced for companies that will reflect growth. In Kuwait, the companies have had until the third quarter of 2014 around 2.8% growth. We expect that 2015 will bring growth and earnings in the double digit range in the region. That will show quarter on quarter and will give more confidence to investors.

This is with stability prerequisites of course and assuming that the government expenditure plans in the region and Kuwait move ahead and that the geopolitical situation stabilises. This will cause investor confidence to move from negative to positive, companies will increase performance and there will be double digit growth in nascent markets across the board. Some sectors that will benefit because of expected infrastructure spending will be the banking and financial sector, the insurance sector, the defence sector, health care and education.

Some sectors that had good performance in 2013 and 2014 were more related to consumers because we have had stronger purchasing power in our populations and that has resulted in more expenditure there but now infrastructure spending will start to have its impact during 2015.

We are positive, especially about the second half of 2015.

For the first half of 2015 we are hoping for the stabilisation of the markets and a return to growth and for the second half of the year we hope to see more growth.

Do you think this upcoming recession will be v shaped or u shaped? Because what we are ultimately seeing is the global slowdown with crisis in the emerging markets which can spread to global contagion.

I think once the impact of this global slowdown is stabilised, once people understand where they are, you will see that this is a region that has excess liquidity. Especially on the gulf, these are countries that have had years of selling natural resources, years of accumulated liquidity and very low debt levels, so surpluses and liquidity are significant.

Planning and execution is key, with planning of government expenditure you will see a trickledown effect to a lot of the private sector businesses as they grow. Economies are looking to diversify in the region, they are looking to grow and there is a young demographic. This combination of factors means that once there is stability and an understanding of where we are in terms of recession or downturn, growth will be back on track again.

Tell us about the CMA that was introduced in 2011. What has been the evolution and impact on the market? Are you fully happy with their performance up to date?

I think the introduction of the Kuwaiti CMA was a very important factor in the drive for Kuwait to become a strong regional financial centre. Kuwait has a deep and wealthy track record. A bit more than 30% of the listed entities in the Gulf are from Kuwait.

If you look at the market cap of those entities they constitute around 10%.

The liquidity of the market is around 3%. That reflects the challenges of the market. The challenges are the result of the significant growth of companies that have IPOed in the market. With limited regulations we had a number of issues with some of these companies and with instruments that were in the market. The CMA has started to implement a significant role in a number of areas.

If you look at their policies since introduction, increasing corporate governance was key, as well as introducing significant measures for anti-money laundering, regulating securities, and developing tools for introducing more sophistication in the market. We still have a simple market that needs more sophistication. I would say that the significant initiatives that the CMA has undertaken are in making this market closer to changing from a frontier market to an emerging market.

That is very important. We see that the CMA has taken an initial time to develop its own procedures, policies and approach and now we are starting to see the results of their policies, such as licenses for companies that they regulate for instance the investment companies, regulating of new securities, introduction of more sophistication of the markets etc. For example in December 2014 they introduced guidance on preferred stock issuances.

We are increasingly seeing their activities.
The challenge for the CMA is to be more of a supervisory entity than a direct engagement entity and to shorten the cycle of getting transactions done because the time value aspect for a lot of corporates is very important. We are happy that the CMA is there; we are positive about their impact. There have been some teething issues but I think one by one they are being resolved.

What are your predictions for 2015 and 2016?

I think we shall see that the stabilisation of oil will be an important event of 2015. Again, I think we shall see global growth stabilisation or an adjustment to the new cycle. Also government execution of infrastructure spending will be a key event, at least in Kuwait and hopefully in other parts of the region.

Let’s talk about your funds and the new products that you will introduce into the market. There is a lot of financial innovation; can you explain some of this please? What do you intend to do in the future?

KAMCO´s strategy evolved over its 15 year history. In the past few years a key element of that development was to focus more on creating managed funds that span the region. In that regard we made a dedicated internal effort to focus on developing products that meet the new economic environment, post financial crisis. We felt that there needs to be a focus on simplicity of products, a focus on clarity of where the products will invest, and a focus on how we can bring opportunities to our growing client base and to investors that we seek to have as clients.

With all that put into effect, and with the markets having sufficient liquidity, because you know that post financial crisis many people were fearful and kept a lot of what they had in deposit form, we are now focusing on creating products that help investors look at investing more directly than they used to. We want to help investors understand fee structures that compensate their advisors based on performance rather than on size.

We are focusing on investment opportunities that are tangible and clear. For instance we introduced an innovative real estate fund seeking opportunities in the MENA region on a selective basis with strong internal guidance on how we do this. Income yielding real estate is something that is very popular as a direct investment and we are bringing that direct investment more into a managed fund structure. Fixed income space is also another area that we have focused on.

We launched the fundraising for our new MENA fixed income fund. We have experience in that field; we used to have a Kuwait fixed income fund which was very successful and closed its cycle 3 years ago. Now we are launching our MENA focused fixed income fund. With this, again we have a simple but innovative approach of providing products to our clients.

Fixed income does not have an official market in the region, it is an OTC type product here however post financial crisis you see that issuers of fixed income are blue-chip corporates, and blue-chip private sector entities, government entities or government supported entities that are also of high standards. The instrument is relatively safe; we are allowing investors to invest in these instruments through a fund structure.

We see an increase in those instruments whether in the conventional side of bonds or the Islamic side of sukuk and that increase is basically as governments and entities proceed in their expenditure plans and we hope through our fund to be acquiring such instruments and selling them down to investors who are our client base.

Why should people invest in Kuwait, the GCC and in the MENA region with you when they have global opportunities for investing in real estate in Hong Kong which will yield 6.5% dividends, or they could invest in Russia for example which is very lucrative etc.? Why would you advise anyone to invest in the Middle East which for many is seen as an unstable region?

The region has had instability for many years. Despite the geopolitical instability, you have to look at the fundamentals of the region. Firstly, you have a region that has a wealth of natural resources, you have countries that have significant surpluses thus financially speaking they are sound economies. Then you have demographical aspects; more than 50 to 60% of the populations are below the age of 25.

That presents an opportunity of growth for businesses, an opportunity of expenditure by the government and creates growth opportunities that will result in attractive investment opportunities when compared to other regions. When you look at the GDP growth of the region in the past year which was a year of significant perceived instability you will see that the region as a block has had one of the highest growth rates in the world.

That growth rate reflects the demographics, the strong financial strength, the opportunity of businesses to develop and a low interest rate environment, low tax rate environment that is increasingly friendly for doing business. We hope to attract FDI along with increased investment by the private and public sector in the region.

You would like to see a yield of 7 to 10% on investments, how can you deliver these sorts of returns on investment on a year to year basis?

At the end of the day, risk and returns come together. If you look the returns that have been seen in the region in equity for example, you will see that in 2013 most GCC capital markets achieved strong double digit returns. There are a number of benchmarks to look at and you will see that in 2013 they were strong. In 2014 they were very strong in the first half and very weak in the second half, so the net result is perhaps a low to high single digit growth return.

If you look at other sectors such as the real estate sector, a sector that has to accommodate for demographic growth and for business environment growth, you will see that real estate is achieving yields in some countries over double digits unleveraged and in other countries more than 6% unleveraged. Now they are limited based on regulations to local investors or GCC investors, however under fund structures we believe that this opens the door for investors to come under managed structures that are properly regulated.

Thus increased proper regulation and transparency of activities with the availability of investments give opportunities that are more attractive than those of other regions in the world.

You are facing very tough competition, you are competing against other asset managers and investment banks, there is completion in Kuwait and even from the GCC and worldwide. What is your main point of differentiation?

I think KAMCO has weathered the financial crisis in a strong way, showing its client base in the market that it was capable of managing the risks while creating returns for its investors. Thus a key element of KAMCO´s strength is its trustworthiness along with its innovation cycle that is being generated with its new products and services and also our focus on client care.

We are also one of the largest asset managers in the region; we manage over 3.5 billion KDs worth of assets under management (AUM).

All of which has been built over our 15 year history. With that depth of knowledge we work on creating products that meet our clients´ needs ahead of our competition.

We are increasingly taking the position of thought leaders in our market, making the market more sophisticated and introducing products that meet the demands of our client base and the market.

Do you also believe in the concept of investing where the company is investing? If you had a million dollars would you invest with KAMCO yourself?

Yes I would. We are strongly seeding the products that we are launching, indicating our commitment to them. To give an example, we invested in a GCC product out of Bahrain; we launched a GCC fund there where we put our money and basically we have managed it since April 2013. When you look at the GCC SMP composite returns now or as of December 2014, they are in single digit growth while our fund for the year is above 20%. We are building track records on our products. We are starting them with our seed money, with strategic client seed money and growing them, showing the performances exceeding the benchmarks and marketing them to the growing client base we have.

You also mentioned two funds that you are going to launch in the future. Can you tell us a bit about them?

We are looking at five to ten different concepts for new products. The ones that are closer to fruition include an international product where we are partnering with a reputable, international firm in equity, and another product in capital protection and guarantees.

Is there anything that you would like to add?

Our strategy in 2015 with our board and shareholders´ support is to continue to focus on our core activities of asset management and investment banking, to continue to fine tune our capital structure by reducing non-core investments and increasing core investments We are also aiming to reduce our leverage position in the company; focusing on our core activities we are growing our assets under management with more managed funds than we traditionally used to. We are enhancing our team internally so we are in hiring mode, strengthening our human resources and human capital capabilities with an aim to grow assets under management and investment banking transactions. Those are the core elements of our strategy for the coming year.

Tell us about your long term vision? How do you see yourselves in three years’ time?

A core vision for us is to be a leader in the region; we are a leader in our home market of Kuwait and so we want to achieve that position in other regional locations. We are taking a step by step approach; we are looking at opening an office in another GCC country in 2015 and possibly in North Africa also. That will be two new locations for KAMCO in 2015.

What makes you more competitive than others? Are you able to provide added value?

One of our competitive edges is that we have a team that blends local expertise, presence and knowledge with international standards. That is a result of 15 years of operations, strong governance and compliance and clarity in our objective to take care of our clients´ needs in the regions and countries that we operate in.