Diversification key to hedge market risks: NBD

DUBAI — The market meltdown in the Gulf region during the past few months has resulted in huge losses for both individual and institutional investors. Even investors who had chosen to invest through funds too have burned their fingers.

By Babu Das Augustine

Published: Mon 29 May 2006, 11:26 AM

Last updated: Sat 4 Apr 2015, 3:47 PM

According to a study by Leslie Dharmasena and Amin El-Kholy of National Bank of Dubai (NBD), although the market suffered from the deep corrections in recent months, those investors and funds who maintained diversified portfolios are better off compared to the rest of the market.

“Diversification is a basic principle of minimising risks in investments. It should be taken into account at the very early stages of planning and launching a fund. This includes avoiding concentration in a small number of stocks or in a single country where there may be a limited choice of liquid stocks,” NBD analysts said.

Commenting on the current trends and future outlook of the regional markets, they said,“ It is now fashionable to be bearish and to speculate on how much further the markets will decline. While we realise that there may be further declines, we take a different view namely that the market is now full of investment opportunities provided the right strategy is applied in a professional context.”

Given the lack of catalysts, the market is expected to re-rate only after it completes its consolidation process. “While we view the on-going correction as an opportunity for investors to gradually re-enter the market as stock prices now more realistically reflect corporate fundamentals and fair values, we reiterate the need to build positions in quality companies with strong business models, sustainable earnings growth and defensive attributes. Now is an excellent time to invest in the markets provided you can be sure your money will be managed professionally by managers who can help you preserve your capital at times of crisis.”

The data on regional funds including NBD' own two funds reveals that NBD's funds, the Gulf Balanced Fund (NBD GBF) and MENA Fund (NBD MENA) have been the best performing regional funds amidst the market turbulance. “This was not the result of a single strategy or technique, but due to a dedicated and ongoing professional effort and planning which starts at the inception of an investment fund.”

The experience of NBD funds shows investing in a wider universe of stocks reduces the overall risk of investment and avoids concentration risk which appears to be increasingly apparent in certain domestic funds. In contrast, NBD claims that their funds' exposure to a single stock does not exceed 5 per cent.

The NBD GBF fund declined by 6.4 per cent during the period December 2005-April 2006 while similar funds managed by SICO, Global Investment House, GIC and Ahli Bank of Kuwait declined by 9.9 per cent, 11.8 per cent, 16.1 per cent and 38.9 per cent, respectively during the period. The wider diversification opportunity offered by the MENA region is reflected in the performance of the MENA funds, which typically include all Arab markets.

The NBD GBF declined by 3.4 per cent during April to close at an NAV of Dh14.77, outperforming the GIC Composite Index which declined by 18.4 per cent during the month. The NBD MENA Fund meanwhile declined by only 1.7 per cent during the period to close at an NAV of Dh9.43 significantly outperforming the Shuaa Capital Arab Index, which lost 15.7 per cent during April.

NBD fund strategists said that while the fund managers took exposure only in floating rate notes to minimise interest rate risk, they also took advantage of the strong growth prospects in the Turkish market by making a significant strategic allocation to Turkey.