RIYADH, 14 April 2003 — An annual review of the performance of mutual funds conducted by the Consulting Center for Finance and Investment (CCFI) last year has given Riyad Bank the No. 1 overall ranking, according to Mohammad A. Al-Dukheil, executive vice president of CCFI. The funds were ranked by CCFI on the performance of the fund for one year, three years and five years. The evaluation was on the basis of best returns for every percentage risk taken over three time horizons across 13 categories derived from the objectives of each fund.
Among the other highlights of the review, according to Al-Dukheil, were that stock funds targeting the international markets of the US, Europe, Japan and other Asian countries continued to lose through 2002. On the other hand, Saudi stock funds topped in all categories in terms of absolute returns. On absolute return basis, funds catering to local markets have provided lucrative average returns far outperforming other categories with returns of 20.39 percent, 48.08 percent and 46.51 percent respectively one-, three- and five-year periods.
Funds invested in the US stock markets suffered the most.
Balanced funds, according to the CCFI report, have fallen short of investor expectations. Over a shorter duration, they have registered losses averaging as much as 22 percent over three years. Al Wikri portfolio from Banque Saudi Fransi was the only fund that has yielded positive returns.
In the Bonds International category, six funds were evaluated. International Bond Fund from SAMBA headed the list on the basis of return/risk ratio over short-term, medium-term and long-term with more than 20 percent returns over the last five years. Four banks were listed in this category.
In terms of returns, Global Bond Fund from the stable of Banque Saudi Fransi yielded the maximum returns.
In the Money Market-International category, ten funds were evaluated. Of these, three were from the Saudi British Bank alone. US Dollars Liquidity Fund from SAMBA took the top spot mainly because of its low standard deviation. The category was characterized by low returns in 2002 with the highest returns from Sterling Money Market Fund of the Saudi British Bank.
In the Money Market Local, seven out of nine banks had representation with one fund each in this category. SR Trade Finance Fund from SAMBA was a top performer, claiming two top spots, while standing second in three-year ranking. All the funds in this category have provided consistent returns over times.
On risk-adjusted basis, Trade Finance International provided the best opportunities for investors, with the Saudi American Bank dominating the category. It picked up 11 points out of the maximum possible 18. Riyad Bank dominated three out of 13 categories with a tally of eight points in each of them.
The National Commercial Bank continued to manage the largest asset of SR23.6 billion followed by Riyad Bank and the Saudi British Bank. Riyad Bank held a lions share in terms of the number of participants of more than 70,000 followed by more than 52,500 participants in assets managed by NCB.
In terms of mutual funds ranking, Riyad Bank topped the CCFI 2002 ranking with 49 points, followed by the Saudi British Bank with 37 points and SAMBA with 35 points. At the shorter range, in one-year period, Riyad Bank dominated the top positions in four categories followed by three top positions by the Saudi American Bank, while Banque Saudi Fransi claimed two top slots. As for three investment horizon ranges in 13 categories, there were 39 top slots. Riyad Bank topped in 11 positions, while SAMBA led in seven positions followed by the Saudi British Bank in top five positions. At the bottom was Bank Al-Jazira with just six points. However, it figured at the top in Japanese stocks category over a one-year period.
In the Local Stocks-All category, all the investors got excellent returns in four out of five years since 1998. Riyad Equity Fund (1) from Riyad Bank topped the category over medium to long investment horizon and stood second in a one-year period.
Saudi Trading Equity Fund from Saudi Hollandi Bank topped the category (over three years) in the Shariah-compliant local stocks, while Riyad Equity Fund (2) from Riyad Bank topped in 2002 as well as the five-year period. The returns stood at 54 percent over five years.
In terms of international investments, North American Equity Fund from SAMBA registered the maximum loss last year closely followed by other funds. The losses averaged 23 percent in 2002. Nine funds in the European Stocks category lost an average 18 percent in 2002, 40.5 percent over three years and 11 percent over five years. The severe meltdown in stocks was exacerbated by lack of business spending in IT, telecom and media.
As for Stocks International-Japan, recovery continued to elude them as they touched 20-year lows recently. The funds lost 54 percent over three-year period from the beginning of 2000 to the end of 2002. Asian stock markets were mixed. The Asian Equity Index Fund from the Saudi British Bank yielded ten percent returns over five years. In Global stocks, there were 16 funds in that category. Riyad Bank and Banque Saudi Fransi had four funds in each category. Eleven funds were floated amid sliding global markets in the last five years.
Al-Dukheil said CCFI segregated the performance over three time periods — one year, three years and five years. With 13 categories and three ranks, 117 slots were up for grabs. There were only three participants in the five-year period for three categories — Trade Finance Local, Stocks International Japan and Stocks International Asia.
Snehdeep Fulzele, financial consultant at CCFI, said the mutual funds industry in the Kingdom has attracted mainly the affluent class with average investment per head as high as SR294,000. He pointed out that despite around two decades of existence, the industry was unable to tap the small savings of the common man into the main stream. If the industry grows, they get a direct hit on huge demand deposits of SR150 billion toward the end of 2002. These demand deposits are cost-free for the banks and help increase their spreads.
Pointing out that mutual funds worldwide cater to the requirements of small investors, Al-Dukheil observed that a noteworthy aspect of the Saudi mutual funds market was the total absence of small investors in this capital market segment. As on Sept. 30 last year, he explained, a total of SR49.95 billion had been invested in mutual funds by some 170,000 investors.
He said the money supply in the Kingdom shot up by 15.22 percent last year. The real estate market experienced a boom with land prices moving up substantially. The outstanding performance by the local markets with lucrative returns during three consecutive years from 1999 to 2001 had its impact as part of these funds were channeled into mutual funds.
The report points out that there has been an annual inflow of almost SR5 billion into the mutual funds market, representing an increase of 11 percent. Justifiably, investments targeted at local markets accounted for more than 68 percent of the total assets under management as on Sept. 30 last year.
It points out that the mutual funds market in the Kingdom is still in a nascent stage, although there is a huge potential for growth. The total number of funds counts below 150, with the invested amount adding up to $13.32 billion (SR50 billion), while demand deposits stood at $40.57 billion at the end of January 2003.
By contrast, the mutual funds market in the US surged from $2 billion in 1949 to $6.5 trillion at the outset of 2003. This represents a compounded annual growth rate of 16 percent that is more than double the nominal economic growth of seven percent. The bank deposits, M2 portion of money supply, stood at $4.95 trillion. Thus bank deposits were lower than the mutual funds market spread over 8,300 funds. The mutual funds market accounted for around 131 percent of bank deposits.
The review notes that with bank deposits as a base, Saudi mutual funds could grow to $90.44 billion i.e. 6.8 times its current size.
To this end, the CCFI report stresses the need for providing a platform for small investors. It also seeks to help investors take informed decisions. The idea is to increase competition in a market characterized by limited players and also to map out a strategy for unleashing the full potential of the mutual funds market in the Kingdom.
The report states that since foreign nationals are not allowed to invest in local securities, they can invest only in mutual funds. Few, however, are aware of this. The lack of awareness and other hurdles that have stifled the growth of mutual funds are discussed separately in the report. CCFI envisages a thriving mutual funds market in future, one which will attract surplus funds from all over the region.
In spelling out its vision, CCFI states that the US nominal GDP is $10.45 trillion as compared to Saudi nominal GDP of $185 billion. The US mutual fund industry is about 62 percent of GDP, while the Saudi mutual funds size is seven percent of GDP. On a proportionate basis the industry could grow to $115 billion, or 8.7 times its current size.
The report states that the Saudi mutual funds industry has failed to attract liquid funds in the market and as yet does not represent a viable alternative for low-risk investors. The small investor could be brought in the market through a proper set-up that would raise investor awareness and safeguard his interests. It points out that there is a lack of transparency among mutual funds. The fund managers deny even historical information about their funds. The past data on industry-wide exposure, top ten holdings, told assets must be audited and announced on a quarterly basis.
The report recommends that since a wealth of investment talent is available in the Kingdom, private investment companies with proven expertise may be encouraged to set up mutual funds. It must be mandatory for mutual funds to declare audited NAVs at the end of every quarter.
Regarding the methodology used in evaluating the performance of the mutual funds, it explains that each fund was characterized in terms of its objective and policy. A cumulative data of weekly NAV (net asset value) for the last five years was taken from CCFI Mutual Fund Database. The returns were calculated on three time horizons one year, three years and five years.
