Shehab Gargash

On the annual basis, after the downturn of 2006, Dubai general index recovered well and gained 43.7% to reach 5931.95 points at the end of 2007. After a disappointing first half of 2008, how confident are you that the market will remain bullish for the rest of the year?

I think the negative performance of the Dubai market in the first half of 2008 was very unexpected by investors. But I think it is not representative of the general mood in the market. I think we see all the fundamentals in place for a positive run in the stock market: the companies are performing well, interest rates are low, the market is flush with liquidity. I think in general we’ve got very positive signals for the market. I really wouldn’t be surprised from the minus 7% that we are for 2008 in Dubai; I would not be surprised that we end the year in the positive double digits.

During the conference you mentioned lack of transparency the market has seen from some of the companies here in Dubai. Has that been having an effect on the market? Can you explain your thoughts and what in your opinion should be done?

It’s important to put into perspective that these are new markets, and even our regulatory group is about 8 years old; our regulator is 8 years old only. So, a lot has taken place, and we’re in much better shape than we were before. I think we’ve always asked for the regulator to come on board and step up to the plate. To a degree they have, and continue to be doing so. It’s very important now to see the public companies step up to their plate and, as public companies they do have a role to play. For these public companies, it’s very important that they realize and recognize that they are part of a bigger system, and that the benefit of being a public company lies within the flourishing of the market as a whole. We hope to see better disclosure, timely disclosure, up-to-date information to the investors, a deeper level of information for the investors, better reporting; and all of these are very important.

You said “our funds remain strong in their overall performance. Daman’s Second Emirates Fund and Daman Islamic fund have both been able to outperform their industries in the period of high volatility.” In this context, can you brief us about your fund portfolio and about your short-term, mid-term, and long-term strategy?

Well, I’ll go back in history, because our first product was the Daman UAE value fund, as our first product back in 2001. It was a 5-year, closed-ended fund, and we were very successful with that fund. We achieved 270% growth rate in its 5 years. We have actively launched open-ended funds over the past, over a year, and our Daman Second Emirates Fund which was launched about 15 months ago is up about 98% in that period. The Daman Islamic Fund, which was launched exactly a year ago, is up 12% during that period, all in a very volatile period in the UAE market; so I think we are very pleased with our performance. I think these 2 funds have achieved good results in a very volatile period, and I think that has validated our proposition that the UAE markets are very fit for achieving the type of results you want. It’s also very important that throughout our first fund and then our other funds, we have not missed a single quarterly dividend, cash dividend that we have paid out to our investors, even in moments when the markets have gone through very, very dramatic corrections, such as 2006. I think we have been able to validate that there is a long-term proposition in these markets, and that they are emerging markets in terms of returns. But the risk portion profile of these markets is a sounder proposition.

You mentioned during the conference, that the big news is the coming of institutional investors. Can you give us an example of where they will come from? What are you expecting?

This is a phenomenon we started seeing a couple of years ago, maybe last year. For the first time we’ve seen them en masse in the UAE market. I think the UAE market has entered a new phase that is not reversible, which is now visible, as an emerging market to the international institutional investor. Going forward, the institutional investors will understand this market better, will become more permanent fixtures of this market, and we will see more of them coming into this market. Today we’ve got perhaps more aggressive hedge funds coming in, tomorrow you will have more everyday funds coming in. That will add definitely a level of stability into the markets.

As a private company you are not obliged to disclose financial but could you roughly chart out the growth and financial performance of Daman?

Well, we don’t publish our financials; we are a privately-held company. We are a private joint stock company based and regulated in the UAE. We also have a presence in the DIFC. We have approximately 5 billion dirhams under management, so about one and a half billion dollars. We’re not big, we’re very focused; we consider our region to be the GCC plus Iraq. We’ve got an active presence in Iraq, as well, and we are just specialists focused on what we do. We have 3 general lines of business: a retail brokerage business, an asset-management business, funds-structuring and asset management business, and the third is development capital, which includes some venture capital, which includes some opportunistic investments.

You mentioned your core business. However, we know that you have been diversifying and also venturing into other sectors like real estate and other things. Can you explain and give a bit more background on that?

Well, we do have joint ventures in several areas. We have in corporate services; we do have in real estate. We have kicked off a couple years ago, along with HSBC, the Arabian Real Estate Investment Trust, that’s the first GCC focus REIT. So we do have, you are right, joint ventures of this nature. It’s not off our core business; it’s still within our core business, which really is focused on financial engineering. I think that’s a good way to put it. We always have some value-added input in whatever products we bring to market.

In terms of clients, what particular geographic areas are you targeting? Or who are your clients, what is their profile?

Just as most of our investments are in the region, also most of our clients are from the region. So, our profile of clients, we do not have any retail clients, except our brokerage side, our brokerage business retail, the rest of our clients tend to be from the region and tend to be either high net worth or institutional investors.

What are some of possible challenges Daman is facing or will face in the near future?

I think the biggest challenge is really picking the opportunities in a region that is brimming with opportunities. There is a lot happening, and you tend to look for something that will need least effort and get you the best returns. And that’s not always easy to do. It’s a good problem to have, but it is definitely a challenge. The second challenge is, of course, being seen as a company from the emerging market. You really have to step up and convince your counterpart that this is a well-structured, well-organized, responsible company, because the inclination for any investor to look at an emerging- market company, I think, these are ‘cowboy’ companies. Today most of the companies are not cowboy companies, we’re not in a speculative mode, we are not out to make a killing on one deal and then go away. We are here to stay, and we have had a very, very interesting 10 years behind us since we started. And I think, going forward, we look forward to increased institutionalization of our business.

In this context, how do you structure your brand recognition strategies to be known as a reputable company?

Well, through 2 things, I think. Number one is through our products. We tend to be known through our products. And, number two, through our performance. And the second one is difficult, because you’re never judged by your best performance, you’re judged by your last, your latest performance. And so we have to constantly come up with good-performing products. It’s also very important, because of our size, we are smaller than usual, we are more focused than usual; our products have to have a twist that is more appealing than usual. So we will not come up with a ‘vanilla’ product. There are other, bigger players that can do a better job at that. We have to come up and pick up the opportunities that have a certain angle to them that others may not want to take. So, we launched the first Iraqi private equity fund right before the Iraq war. We kicked off the first GCC REIT with HSBC. Today we’re launching our first speculator fund in the market. We were the first UAE mutual fund to pay a quarterly dividend. There’s always a value-added twist to our products that appeals to our clients.

It seems you are always on the top. How would you define your competitive advantage? What is the secret of your success?

I think the flexibility and nimbleness of the company. It is a company that can maneuver, and we’re small enough to be able to maneuver. We’re small enough to quickly translate the opportunity into a product, and I think that’s important.

Also, the fact that your competitors are related to the government; you have more independent structure. That also shows another angle for your business.

We are very proud of our independence in a region that does not have a lot of independent companies. And I think we protect that independence very vigorously and I think it adds value to the overall proposition. It also adds value to the government itself that an independent company can thrive just as well as a government-backed company in this environment.

This is a relatively volatile region, so how do you mitigate risk at Daman? What kind of strategies are you using?

Well, it is a volatile region, but it is our region, so we understand the risks better than, for example, someone coming from outside the region. For us, mitigating risks is about understanding them. You won’t cancel out the risk; you accept that in order to get better than usual returns, you are taking more than normal risk, higher than normal risk. You have to accept that and embrace it. Then the next thing you do is figure out how to slice out at that risk, in order to still get that better return while putting the risk under control. It’s not easy to do, there’s no formula, and you take it one step at a time. But we start off from an advantageous level, which is, understanding our region. This is a very complex region, and it’s a very unique region. But it is a region like other regions that have its complexities and uniqueness, and no better person to know those complexities than the people from the region. If you’re talking Europe, a European would know about Europe more than I would. If you’re talking about Arabia, I know about my region more that a European would. So that’s the equation there.

In this context, how does this region compare to the other financial centers, such as Singapore, London or New York?

I think we are well on our way; not there yet, but well on our way to becoming the next big story as far as financial service, as far as the financial sector is concerned. There’s still a lot of work to be done, and you don’t buy that respect of being a financial center, you earn it. I think it is several years ahead of us, but we’re certainly taking the correct steps in that direction. We are certainly bold enough to decide as a region, as a country, and as a city in Dubai, to make that a priority for us. And there’s no question today; Dubai is the center of the Middle East as far as finance is concerned, and that has happened very rapidly. But we are still not at the stage where we can say we are there with Tokyo, New York and Hong Kong and the likes. That is only built through years and years and years of correct policy and implementation. We are on our way there.

You also mentioned that there is increased inflow of liquidity into the market, and with high oil prices injecting even more liquidity into the market; the region is flushed with money, which in return pushes the inflation into new heights. In your opinion, how does the market cope with the inflation?

We are locked in on the inflation side, because it’s an inevitable consequence of the activity we are seeing here. The other issue with inflation is you don’t have completely independent fiscal policy. We’re very much tied to the US dollar, and the US dollar is tied to what the philosophy is on policy in the US. So, we are in for the ride on that front. But the inflationary pressures are certainly one of the big dangers in which we are today. It is becoming increasingly difficult to do business, and even to live in this part of the world, and that is something that needs to be addressed. There are no easy fixes for that, especially if you maintain the kind of growth that we are seeing today.

Where would you like to take the company in 5 years, as Dubai will eventually become one of the major hubs in the world?

I think it’s very important for us to focus on our projects going forward, and the projects that we started off small when we started them have grown, and going forward, we believe, will be growing. We will be seeing a few of these projects spun out of the company over the coming years, but the company will remain a fairly tightly-controlled, small, focused, private company. We are in the business of finding opportunities and translating those opportunities into products. The company itself isn’t necessarily one of those products.

Do you see yourselves being a global player in the future or would you like to stay more of a local company?

I don’t see ourselves evolving into being a global player because that will require us to acquire certain skill sets that others are better at. I think we would like to have better command of our ability in our markets. I think we will continue to be a believer in our market and continue to be a dynamic company that reacts and pro-acts according to what happens around us.

We’ve seen the US economy and trade between China and the US slowing down. What is the global economic outlook and how is it going to affect the markets?

I actually seek advice from others about that question, because I think it’s just such a complex question that there is no simple or easy answer for it. One thing is certain from our perspective, and that perspective is that of a regional company focused on our region. We notice that this region is becoming more attached; this region is becoming more a part of what happens globally, so we keep a sharper eye on what happens globally. But to answer your question, I wish I knew the answer to the question. The only thing I do know for a fact is that whatever happens globally affects us more, and will affect us more going forward than in the past.

Do you see, in the future, the US economic slowdown making its way into the UAE?

I think that the US economic slowdown is going to impact the UAE in a manner that is temporary in nature. US economic slowdowns are also temporary in nature; they may stay a year, they may stay 10 years, but eventually things turn around. There still is a lot of activity in this region, and when you look at what has happened in the UAE over the past period, we are beyond the possibility of retraction. If you do see some sort of slowdown, it is going to affect sectors of the economy, but we will evolve, and those pitfalls are going to spur new opportunities that others will take care of. So I’m fairly confident that we have an economic boom that has built up a base, a solid base that will withstand any pressure that we may see in the future.

What would be your final message for our foreign investors, coming from the US and Europe?

Yes. I think one important thing is you’ve got 2 types of foreign investors: those who do understand this market, or do know this market, and those who do not know this market. And most of the reluctance we’ve found from those who do not know this market. So the message is learn about it and ask others who have ventured into this market: it is a market that holds a lot of opportunity and holds a lot of possibilities. And even investors, foreign investors who’ve come into this market recently, have found their little niche in this market. So it looks more exotic and scarier than it really is.

The last question: Where do you see the biggest opportunities in the market?

The biggest opportunities in the market? Well, I think transformation opportunities, if I may explain that a bit. Let’s take real estate as an example, there’s been a lot of development and lots of buildings, etc., etc., coming up. Transformation opportunities is what happens to this real estate going forward; somebody has to manage it, somebody has to, you know, liquidize it, or monetize it. Somebody has to create value in it, somebody has to rezone it. So there are lots of opportunities in real estate that are not necessarily development-related, but are post-development-related. That’s one example. Another example is that stock market. It’s very easy to come in with a single buy order and buy shares, etc., but there’s still a lot of opportunity in structuring funds, in structuring derivatives and in creating other financial opportunities around it. You could say the same for other sectors, such as services, such as tourism, such as industry. What we are seeing is the evolution in from a frontier situation into a settled, thriving economy. And there are transformation opportunities across the field in many sectors.

Thank you very much for the interview.