Changes in a fund’s investment strategy – while uncommon – are not completely unheard of, although abandoning a strategy can sometimes cause concern among existing investors.
Last December, the Qatar Investment Fund took such a decision by changing its investment strategy and name (to Gulf Investment Fund) after more than a decade since launching in 2007.
In the 10 years since launch in July 2007, the $96.6m closed-end Qatar Investment Fund had delivered a total return of 80.56 per cent, just behind the broader MSCI Emerging Markets index that the country joined in 2014.
Performance of fund over first 10yrs
Source: FE Trustnet
However, less than six months after this milestone the Qatar-focused fund suffered a double-digit loss.
In June 2017 Qatar was cut off from other Gulf Cooperation Council (GCC) countries, which were joined by another regional heavyweight Egypt.
A land, sea and air blockade was imposed by its GCC peers, calling for Qatar to end its relationship with Iran and shut down news channel al-Jazeera among other demands. This led to significant falls in Qatari equities.
In a move that had been first discussed in the previous March – and after two consecutive calendar years of losses – proposals were put forward in October to broaden the fund’s geographical remit with a new strategy.
At an extraordinary general meeting in December, shareholders backed the board’s new strategy to shift away from a single country focus to a broad regional strategy.
Having previously focused solely on the natural gas-rich Qatar, the new strategy – rebranded as Gulf Investment Fund – removed the 15 per cent cap on investment in other GCC countries.
“When we were the Qatar Investment Fund there were 43 listed companies, of which under 25 were investable, which was a bit of a narrow universe,” said Nicholas Wilson, chairman of the fund.
As such, Wilson said outperforming the index was “hard work” for the investment adviser Qatar Insurance Company.
“We’ve now got 700 quoted shares across the region, of which 170 are investable,” said Wilson. “We have a much broader choice of companies and a much broader choice of internal economics because each one of those countries is interesting.”
He said the broader remit allows the top-down fund to invest in more macroeconomic themes seen across the region.
Due to significant infrastructure investment plans a number of opportunities have emerged, as Qatar prepares for 2022 World Cup, Dubai its Expo 2020 and Saudi Arabia presses forward with several new cities and the opening up of the country to tourism.
The GIF chair also highlighted the region’s “expansionary budgets”, which have been boosted as the oil price rises from the lows of recent years.
Markets in the region are also becoming more established, said Wilson, with reforms aimed at improving corporate governance and increasing foreign ownership levels.
As such, the United Arab Emirates (UAE) and Qatar were promoted to emerging market status in 2014; Saudi Arabia is also set to be admitted to the MSCI Emerging Markets index from 2019.
Performance of single country indices over 5yrs
Source: FE Trustnet
Promotion to major benchmarks such as the MSCI Emerging Markets index fuels passive inflows from international investors, raising domestic share prices.
Additionally, Wilson said valuations in the region remain compelling, trading at low price-to-earnings (P/E) multiples with attractive dividends.
The Gulf Investment Fund portfolio also reflects the managers’ bullish views on the region, with several banks among the top holdings, including Commercial Bank of Qatar, Qatar National Bank and Saudi Arabia’s Al Rajhi Bank.
“We will be overweight financials,” said Wilson. “Financials are the best way to bet on an expanding economy. At the end of March we were 48 per cent in financials across the regions, utilities [another key theme] was about 10 per cent.“
While 2017 proved to be a challenging year for the fund with a loss of 14.83 per cent (its third consecutive year of losses), the new investment strategy appears to have got off to a strong start in 2018 so far.
The closed-end fund managed under the new strategy has delivered a total return of 19.94 per cent compared with a 10.32 per cent return for the benchmark S&P GCC Composite index (as at 14 June 2018).
Indeed, WIlson said that the change in strategy has been well-received by existing investors and broadened its appeal to potential backers also.
“It was tough in the early days after the siege [of Qatar] was instated but growth is getting back on track and I suppose the only headwinds in the region are geopolitical but then they have always been,” said Wilson.
Yet, while Gulf Investment Fund trades under a new name it retains a strong exposure to the country is was launched to invest in.
Qatar remains the largest single country exposure at 45.5 per cent of the portfolio – down from around 85 per cent under the previous strategy – although the fund also has a significant amount invested in Saudi Arabia at 36.9 per cent.
Indeed, while the managers take a top-down approach to investing, Wilson said it is not a tracker fund highlighting the difference between the portfolio weightings and those of the benchmark.
However, its Qatari position represents a substantial overweight relative to the benchmark where it counts for just 10.5 per cent. Conversely, Saudi Arabia is the largest country in the benchmark – and the largest economy – with a weighting of 60.3 per cent.
Other underweight country positions include UAE (5.4 per cent) and Kuwait (5 per cent). Oman and Bahrain are zero-weighted in the portfolio despite representing 1.8 per cent and 2.3 per of the index respectively.
Performance of fund since launch
Source: FE Trustnet
Since launch in 2007, the three FE Crown-rated fund has delivered a total return of 95.46 per cent. It has a yield of 2.9 per cent, is not geared and is currently trading at a discount to net asset value (NAV) of 11.9 per cent. It has ongoing charges of 1.70 per cent, according to the Association of Investment Companies.