Mutual funds now offer broader diversification

The mutual fund industry in the Gulf and the wider Middle East has seen major developments over the years, both in terms of the asset size as well as funds on offer.

Additionally, a number of asset management firms are launching new funds, domiciled either in one of the regional markets or any country globally and denominated in different currencies with different investment strategy.

But how to get the best from an investment in mutual funds, especially at a time when stock markets in the region are riding volatile waves and investors are shying away from stock markets?

As the regional stock markets bore the brunt of the global economic meltdown last year, the mutual funds industry too had to follow suit.

"The performance of mutual funds in the region did poorly compared to emerging markets. Most mutual funds underperformed the benchmark markets last year in the region. The MSCI GCC index rose by just 18 per cent. However, so far in 2010 the situation is slightly reversed as the GCC market is up by about six per cent, while emerging markets are slightly lower," said Paul Cooper, Managing Director, Sarasin-Alpen and Partners, Dubai.

It is important to understand, first, what exactly is a mutual fund. Generally speaking, mutual funds are a form of investment money collected from a large pool of investors (retail or institutional or both) and the fund manager invests this money in varying asset classes, namely, equity, debt or money markets, as per the fund's investment objective and strategy.

Hence, if an investor wants to invest in equity, debt and money markets instruments, mutual funds pop up as one of the most convenient ways to invest in these asset classes.

The Gulf offers good growth prospects, if not the best, for the mutual fund industry, believe analysts. "We have seen mutual funds grow by 200 per cent in the past 12 months in Russia, and in Brazil it grew 145 per cent in the past 12 months. But in the next 12 months it'll probably be the Far East that will see a higher growth in mutual funds sector than the Middle East, Russia and Brazil, in my view. This is because markets in the Middle East are on their knees due to the lack of liquidity. I believe the recovery will come very soon, perhaps in 18 months," said Steve Gregory, Managing Partner, Holborn Assets, Dubai.

Diversification

Whatever be the case, analysts believe mutual funds can turn out to be a good diversified investment strategy. "Mutual funds offer a broad diversification across the assets. Funds, especially those invested in the GCC, offer many attractions despite the challenging environment," said Cooper.

He said governments across the region are implementing an expansionary fiscal policy that is going to provide a major prop for the overall economic growth.

"Governments are spending more and this will support economic and corporate earnings growth in 2010 and beyond.

"Secondly, having underperformed global emerging markets by around 60 per cent last year, the Gulf markets are cheap in terms of earnings, dividends and price to book ratio," he said.

"With volatility prevailing in regional stock markets, there is no doubt investing in regional stock markets through mutual funds is one of the best options for retail investors, as investing in equities directly involves huge risks," said Kashif Arbab, Managing Director, Killik & Co (Middle East and Asia), Dubai.

Experts also believe mutual funds have come up as a good investment option in these challenging times.

"I have seen nothing but opportunity and it doesn't matter which mutual fund you bought in the 12 months, you made a profit. So these are very exciting times for mutual funds. There may be some volatility but even then no one is making any losses in mutual funds. We've actually started a bull run in mutual funds that's probably going to last for at least four to five years," says Gregory.

Experts also believe that the mutual fund industry in the UAE is poised to grow in the years to come.

"Currently there are only a few locally traded mutual funds within the UAE but this is likely to grow in the future to capitalise on strong demand," said Ishrat Kiyani, Head of Premier Banking and Wealth Management, the UAE, HSBC.

"The UAE continues to develop as a region, and in tandem with the local and international corporate world, is evolving too."

"Currently, there will be companies who are just in start up phase, which in years to come will be market leaders not only within the region but globally.

"Thus, in the future we hope to see more regional blue chip companies listing on local markets, which will then allow local and international fund groups develop a wider range of funds/products," he said.

Check list

Economic conditions are extremely dynamic and they affect each investment differently, said Omar Radwan, Chief Operating Officer, Asset Management, HC Securities and Investment.

He said the following are the ways to get the best from the investment in mutual funds.

- Find out your risk appetite.

- Find out your target return.

- Compare asset managers.

- Compare performance over a long period.

- Compare fees.

- Compare investment objectives.

- Diversify among the best funds found in each of the above tests.

- Actively monitor performance and your changing conditions and adjust your allocation accordingly. This exercise should be conducted at least annually.

- When in doubt always consult an expert.

Common mistakes investors make

When it comes to investing in mutual funds, investors tend to gloss over crucial points, said analysts.

"Funds that show spectacular one-year returns can be quite tempting. However, it's best not to base your investment decision on short-term performance results. When investing in mutual funds, you should have a long-term investment horizon, (generally defined as five years or more). In order to assess whether a fund is a good long-term investment, it's imperative to look at its past performance over a reasonably long period of time – say three, five, or even 10 years. Even then, past performance does not guarantee future performance. In addition to its return, you should always fully understand the funds objective," said Ishrat Kiyani, Head of Premier Banking and Wealth Management, the UAE, HSBC.

There is another common mistake investors make – getting carried away by emotions. "This could affect investment decisions. Elements of panic, fear and greed should not be part of the decision-making process. There are tonnes of potential mistakes the uninitiated will fall in. One of the most neglected rules of common sense is that the cost price of any investment has no effect on its future performance," said Omar Radwan, COO, Asset Management, HC Securities and Investment, based in Cairo.

Investors tend to follow a few well-known myths as well, said experts. "Some investors believe they only make money when subscribing to new funds as they only pay the par value. This is not true as open-ended funds continuously invest all their assets, including new net subscriptions, according to their investment policies. So profits are not restricted to new funds," said Radwan.

He said another myth is related to investors who compare unit prices of different funds to buy the cheapest.

"This is wrong as unit prices depend on the number of units available, which is not linked in anyway to the health of the investment. Investors should compare previous performance and future prospects of the asset class that the fund focuses on," he said.

"Firstly, seek out a qualified financial adviser, and then think about how much you can afford to invest along with a long-term goal. Secondly, stick to your plan. Never try to time the market, the adage still stands true today – it's not timing the market, it's time in the market," said Kiyani.

Buying a fund without due diligence and research into the fund manager and the risk profile can also turn out to be a big mistake.

"Funds having similar names and similar objectives can have radically different risk profile. So you shouldn't choose a fund just because you like its name or because it's managed by a large well-known company," said Cooper.

Follow Emirates 24|7 on Google News.