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Feb 03 2011

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Saudi Arabia: Asset managers

Pension funds

The state-run General Organisation for Social Insurance (GOSI) and the Public Pension Agency (PPA) are the country’s two primary pension funds. Both use the Saudi Arabian Monetary Agency (SAMA—the central bank) to manage their investment portfolios. Though portions of their funds are invested in local companies (both listed and nonlisted) and foreign equities, the largest share is invested in government bonds.

Partly as a consequence of the lack of financing available from other banks and investors, GOSI is one of the largest purchasers of shares in local companies, and a major player in the equities market. The PPA also invests in local companies, although in September 2010 it was sharply criticised by the Shura Council (the Saudi Arabian legislature), which complained that PPA investment of around SR300bn had only earned SR16bn in returns and warned that there was a SR14bn deficit in retirees’ pensions.

GOSI, on the government’s initiative, established a new public investment fund in March 2009 called Hesana. According to the Saudi Press Agency, it will invest in real estate, services and commercial projects, as well as local, regional and international stockmarkets. However, no information regarding GOSI investments was available as of February 2011. Hesana’s mandate to invest in international stockmarkets signals the government’s interest in taking advantage of low global asset valuations. Unlike some of its Gulf peers, the Saudi government has traditionally taken a very conservative approach to managing its foreign assets. SAMA has been responsible for making the vast majority of overseas state investment, usually in the form of low-risk US government bonds.

Mutual funds and asset-management firms

The largest mutual funds—also known as investment funds in Saudi Arabia—are managed by the commercial banks under the supervision of the Saudi Arabian Monetary Agency (SAMA—the central bank). Previously, only the commercial banks managed these funds, but the increasing sophistication and openness of the Saudi market has meant that foreign and smaller boutique investment houses are also now operating funds. Investment funds have experienced rapid growth since they were first introduced in 1979. Assets totalled SR98.3bn at the end of the third quarter of 2010, according to the latest figures published by SAMA , an increase from SR89.5bn at end-2009. By the end of the third quarter of 2010, 244 investment funds had been incorporated within the kingdom.

Saudi mutual funds historically invested heavily in international stocks and bonds, but this changed in 2001 when Saudi investors began looking for safer markets as the domestic market became more sophisticated and offered better returns. According to SAMA , at end-September 2010 Saudi investment funds had invested 80% of their assets at home. In contrast, less than 50% of funds were invested at home in early January 2001. In terms of portfolio allocations, Saudi investors and investment funds have been typically risk averse and invested most of their assets in low-risk money-market instruments. This has been compounded following the extensive period of stockmarket volatility since the 2008-09 financial crisis. By end-September 2010 only 21% of investment-fund assets were in domestic equities, down from 32% at end-2009. SAMA figures show that the majority of investment-fund assets are placed in domestic money-market instruments.

The number of subscribers to investment funds has been on a downward trend in recent years. The number of subscribers fell to 331,285 by end-September 2010, based on SAMA’s most recent figures, from 356,331 at the end of 2009 and 374,975 at end-2008.

The growth and returns of mutual funds in Saudi Arabia have led to portfolio managers finding market niches. Al Rajhi Financial Services (ARFS), for instance, launched Al Jawhara Ladies Fund in 2001. The explosive growth in the diversity of funds in Saudi Arabia since the opening of its financial sector through the Capital Market Law in 2003 and joining the World Trade Organisation in 2005, however, has not necessarily led to substantive distinctions in investment planning. The portfolio composition of Al Jawhara, for example, is not substantively distinct from other standard equity funds offered by ARFS.

All the major commercial and investment banks offer asset-management services outside their investment funds. However, as banks have started consolidating niche roles within the banking system, National Commercial Bank (NCB) has emerged as one of the most important players. The most significant nonbank financial institution offering asset-management services is Rana Investment Company, but dozens of small and local private firms have emerged to offer asset-management services. Established in 1986, Rana also provides its services to the surrounding Gulf states. The growth of foreign investment banks and brokerages since 2005 also has provided greater competition and services in the asset-management sector, and a number of large and boutique asset-management firms have emerged, including Saudi Swiss Securities (Switzerland) and Hermes KSA (France).

Venture-capital and private-equity firms

Since first-round capital is traditionally sourced from family and associates, the venture-capital sector is at an early stage of development in Saudi Arabia, as it is across much of the Middle East. However, the growth of the Saudi banking sector and financial services is pushing new investments in venture capital. Venture Capital Bank, a Bahrain-based Islamic investment bank, has significant Saudi equity ownership and is involved in a number of venture-capital projects inside the kingdom.

Prior to the creation of the Saudi Arabian General Investment Authority (SAGIA), the nearest approximation to a venture-capital firm was the Saudi Industrial Investment Group (SIIG)—a firm originally owned by a number of leading Saudi businessmen and now a public company. As its name suggests, SIIG focuses on industrial projects, most of which are large scale. In September 2007 SIIG announced the creation of a new petrochemical company at a cost of SR18bn in a joint venture with Chevron-Phillips (US). The project is on target for production in 2011. SIIG announced a net profit of SR403m in 2010, a rise of almost 32% from the SR306m profit it recorded in 2009.

The state-run Saudi Industrial Development Fund also provides venture capital, but focuses mainly on large industrial ventures. It is too constrained by government development objectives to constitute a venture-capital firm in the usual sense.