MUTUAL FUNDS PROMISING RETURNS

With increased liquidity in the market and Muscat Securities Market returning good growth, mutual funds in Oman are increasingly becoming a favourite investment instrument, especially among the small investors. Jessica Brookes takes a look at their growth and why they are a better bet compared to direct investment


Recently, there was a mad rush among investors to apply for Voltamp Energy’s initial public offering (IPO), the first one to hit the market this year. The market expects a similar response to Sohar Power IPO that is expected to open for subscription in July. With MSM 30, the key index on the Muscat Stock Market appreciating as high as 79.36 per cent in the 52-weeks period ending 30 June 2008, investors are flocking to the stock market in anticipation of multiplying their money in quick time. But if you are not a very well informed investor, you may not be able to get the best returns on your investment. That’s where mutual funds come into the picture to maximise your returns on investment with a comparatively lesser degree of risk compared to direct investments.

Market Performance
Though mutual funds have existed in Oman for almost a decade-and-half, they have become more popular in the last three years with MSM 30 appreciating by more than 105 per cent. What makes mutual funds popular is that many of them have returned better appreciation compared to the average MSM 30 growth. In fact, most of the mutual funds in Oman strive to outperform the

MSM 30 index.
As per rough estimates, the total fund size is expected to be above RO100 million. The market is quite small compared to other GCC states but it is evolving steadily.

The market is dominated by Al Amal Fund JIA and Majan Capital Fund JIA (managed by Fincorp), Muscat Fund and Oryx Fund (BankMuscat), The First Mazoon Fund (Gulf Baader Capital Markets), and Vision Emerging Oman Fund and Vision Emerging GCC Fund (Vision Investment Services). Most of the funds invest primarily on MSM but also pick up stocks in the regional and global bourses. There are a few dedicated funds as well that focus on GCC markets only.

Talking about the performance of Al Amal Fund JIA, Dinakar Rao, EVP and Head-Asset Management, Fincorp said, “The fund currently has a size of over RO9 million and growing. The fund came into being in March 2005 and it returned 12.5 per cent for the period between March-December 2005. It gave 15 per cent in 2006 and 61.2 per cent in 2007. And this year (so far), we have returned 34.30 per cent. Since inception, its NAV has gone up by 182.33 per cent.”


Fincorp’s other fund, Majan Capital Fund JIA, has returned 32.3 per cent this year so far and in 2007, it gave an appreciation of 43.8 per cent.


BankMuscat’s Ali Said Ali, Assistant General Manager-Asset Management and Private Banking informed, “Our GCC focused fund, Oryx Fund, has given return of 274.5 per cent during last five years and was up by 45.3 per cent in 2007 and is up 14.1 per cent till May 2008. Similarly, our Oman focused Muscat Fund has achieved 441.5 per cent over the last five years and is up 29.4 per cent in 2008.”

On the First Mazoon Fund JIA, Sankar Kailasam, VP-Asset Management, Gulf Baader Capital Markets said, “The fund has given a return of 479.6 per cent in the last five years vis-à-vis 407.05 per cent achieved by MSM 30 Index.”

Hussain Al Lawati, Vice President-Asset Management, Vision Investment Service said, “We launched Vision Emerging Oman Fund in August last year and it is up by almost 73 per cent since then. Our Vision Emerging GCC Fund was launched in May 2005 and has given a return of over 107 per cent in the last three years, despite the fact that the MSCI GCC Index is down by 4 per cent. Based on an independent report from the Kuwait Financial Centre S.A.K ‘Markaz’, our GCC Fund has been the best performing fund in the region in comparison to its peers for two consecutive years 2006 and 2007.”

Look at the table Mutual Funds Performance Tracker for a more detailed comparison of the leading mutual funds operating in Oman.

Changing Dynamics
The amendments to the Capital Market Law in the recent years have made the capital market in Oman more transparent and well-regulated. This has led to increased investments on the stock market. The average daily volume has risen from 9 million in 2007 to 17 million in 2008. More liquidity in the market has attracted the fence sitters as well.

These developments have had a positive impact on the mutual fund market. Most of the fund managers have reported an increase in the number of investors and the fund sizes have grown substantially. Most of the closed funds have become ‘open’ to generate more subscriptions for the funds. The fund managers have also floated new products focused on real estate and global markets. Says Ali, “Recently, we closed our first Real Estate Fund focused on the integrated tourism projects sector in Oman with great success. It is too early to speculate on the launch of the number of sector specific funds as the market is quite small but definitely more and more of them will come in the future. Maybe we could see the introduction of Oman based sector specific funds covering entire GCC market in the coming years.”

As is the trend in the regional market, the bulk of the funds comes from institutional investors and high net worth individuals but the number of small investors is also growing.
Apart from Omani nationals, the expatriate population, especially from Europe, Australia and India, are showing a lot of interest in making investments in mutual funds market in the Sultanate. Though they repatriate a substantial part of their savings to their home countries, the high returns offered by the Omani market in the last few years is making them divert a part of their investments to the Sultanate.

Though the fund managers refused to disclose their future offerings but in private most of them admitted that they are seriously considering launching lot more new products in Oman as well as the GCC market. Kailasam corroborated the trend as he said, “All players are in the process of innovating new products with the change in the situation.
This is a boon for investors who will have more choice. Mutual funds in Oman are also in the process of bringing access to various markets and asset classes closer to the Omani investors and also becoming the gateway for the foreign investors.”

Mutual funds vs Direct Investment
Though there are always pros and cons when we compare the investments in mutual funds and direct investments in stocks but unarguably it is universally accepted that mutual funds carry lower risk viz-a-viz direct investments. Globally, there are high growth high risk funds as well but Oman based funds are generally growth oriented low risk funds. As stated earlier, if you are not a very keen follower of stocks and the performance and potential of companies, you should avoid investing directly in stocks unless and until you are advised by your financial consultant to do so. You may not know which stock to pick and at what price to enter and exit to book adequate profits.

Another advantage of mutual funds is that they give a diversified portfolio with even low investments. Generally, a mutual fund has a basket of 30-40 stocks of different companies drawn from different sectors. In the basket, some stocks may do well and some may not but the overall gains will give decent returns to the investor most of the time. Whereas, in the case of stocks, if a stock goes up you book profit and if it goes down you book losses. Your interests are highly concentrated due to the limited number of stocks you hold.

If you are looking at rapid gains and getting swayed by the high returns given by mutual funds in the last 18 months, you should not look at mutual funds in a major way. With the exponential growth in the market in the recent past, the expectations of the investors have gone up very high. Most fund managers say that if a mutual fund is able to give an annual 15-25 per cent return, it should be considered as a good performance and anything above that level should be a considered as windfall profits.

Way Forward
The industry players believe that mutual fund market has tremendous potential for growth in Oman. But it can happen only if more and more people are attracted towards investment in mutual funds. Investors need to be educated to make them understand that mutual funds offer good investment opportunity.

Not many are aware of the handsome returns offered by mutual funds. There is also a need to further develop a savings culture in Oman. For small investors, a systematic investment planning (SIP) habit needs to be cultivated. For example, most of the mutual funds offer a minimum investment of RO100. A prudent small investor can invest RO100 every month to build a good asset base for himself in the medium to long term. This will give him good returns on his principal investment with low risk besides the option of making his assets liquid in case of an urgent need for funds. On the market expansion initiatives, Rao adds, “We have requested the Capital Market Authority (CMA) to look into the matter of reducing the face value of units to 100 baisas from RO1 in order to attract more investors into mutual funds. Along with reducing the value, if you fractionalise the units, like what you have in the international market, you give the person returns closest to the nearest three decimals and it will be more attractive to the investor.”

If the CMA allows that it will open the flood gates for mutual fund investment. When the CMA allowed the listed companies to split their shares from RO1 to 100 baisas, most of the companies opted for this and it led to record trading volumes on MSM.

According to a recent report by Kuwait Financial Centre (“Markaz”), the total assets managed by GCC mutual funds under “equity funds” amounts to $21.3 billion. Of this, Saudi Arabia leads with close to $10 billion worth of assets, followed by Kuwait with $6.3 billion. Like Oman, the mutual fund industry in the GCC is also expected to expand in the coming years. Research released by Zawya Mutual Funds Monitor predicts the growth in the GCC of this industry will reach $160 billion by 2010, with Saudi Arabia continuing to have the largest concentration of funds. At present, Saudi Arabia has more than 200 listed funds.



Note - Data is based on the inputs provided by the fund managers. This is a partial list of the mutual funds operating in Oman.
* The pefromance numbers and CAGR are for the period from Jan 2005 till 25th June 2008
** VEOF returns for the year 2007 are from 6 Aug till 31 Dec as the fund was launched in Aug 2007
*** VEGF returns for the year 2005 are from 2 June till 31 Dec as the fund was launched in June 2005
**** CAGR in the past 5 years – 41.2%

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