Financial Services Industry: A Primer
Transcript of Financial Services Industry: A Primer
CONTENTS
Summary of market performance for the last quarter1
2
Outlook for various asset classes2
Derayah’s recommended asset allocation3
3
Returns
Apr 2010 – Jun 2010
-13.3%
-0.2%
-12.1%
0.1%
-9.1%
-10.4%
Developed equities1
Fixed income securities2
EM real estate3
Money market4
Emerging Equities5
Saudi Equities6
-10.9%
-0.7%
-12.2%
0.2%
-7.2%
-0.5%
Returns
Jan 2009 – Jun 2010
Representative Benchmarks for asset classes:
1. Developed equities – MSCI World equity index
2. Fixed income - JP Morgan Global aggregate bond index
3. Real estate – MSCI EM real estate index
4. Money market – NCB 1 month SAR interbank offer rate
5. Emerging equities – MSCI Emerging Markets equity index
6.Saudi equities – TASI (Tadawul All Share Index)
Source: Bloomberg
FOR THE YEAR, ALL ASSET CLASSES EXCEPT MONEY MARKET HAVE NEGATIVE
PERFORMANCE, WITH SUSTAINED HEADWINDS IMPACTING Q2 RETURNS
4
-10.4%
-24.7%
-7.5%
-13.1%
-9.7%
-9.5%
1.0%
-22.9%
-13.4%
-11.9%
-13.4%
-15.4%
US
(S&P 500)
UK (FTSE
100)
Japan
(Nikkei 225)
India
(BSE Sensex)
China
(Shanghai)
Brazil
(IBOV Index)
Saudi Arabia
(Tadawul)
UAE
(DFM 20)
Qatar
(DSM 20)
Kuwait
(KWSEIDX)
Bahrain
(BHSEASI)
Oman
(MSM 30)
Apr 2010 – Jun 2010 Jan 2010 – Jun 2010
De
ve
lop
ed
Em
erg
ing
GC
C
Percent returns
-0.5%
-23.9%
-0.9%
-6.6%
-4.2%
-4.9%
1.4%
-26.8%
-11.2%
-7.6%
-9.2%
-11.0%
Source: Bloomberg
GLOBALLY, EQUITY MARKETS HAVE PROVIDED NEGATIVE RETURNS, INDIA
BEING THE ONLY EXCEPTION
5
OVER THE LONG TERM, LOCAL EQUITIES (FOLLOWED BY EMERGING EQUITIES)
HAVE BEEN AT THE FOREFRONT OF CREATING INVESTOR WEALTH
Indexed returns of various asset classes for the last 21 years from earliest available date
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
(Compounded annual returns)
CAGR
Value of 100 invested in June 1989
8.81%
Emerging Equity1 8.57%
Local Equity2
6.95%Fixed Income3
3.61%Developed Equity4
2. 73%Money Market5
Real Estate6 -4.63%
Representative Benchmarks for asset classes:
1.Emerging equities – MSCI EM Equities Index
2. Local equities – Tadawul All Shares (TASI) Index
3. Fixed JP Morgan Global aggregate bond index
4 Developed Equity – MSCI World Index
5. Money market – NCB 1 month interbank offer rate
6. Real Estate – MSCI Emerging Market Real Estate Index
CONTENTS
Summary of market performance for the last quarter1
6
Outlook for various asset classes2
Derayah’s recommended asset allocation3
- GCC Equity
- Developed Equity
- Emerging Equity
- Emerging Real Estate
- Money Markets
- Fixed Income/ Sukuk
DERAYAH TACTICAL ASSET ALLOCATION
7
Fixed Income
(Sukuk)
Moderate Overweight
Developed
Equity
Moderate Overweight
++Emerging
Equity
Overweight
Money Markets Underweight
---
Regional
Real Estate
Moderate Underweight
--
Asset class Recommendation Comments
++
GCC
Equity
Moderate Overweight
++
+++
- GCC Equity
- Developed Equity
- Emerging Equity
- Emerging Real Estate
- Money Markets
- Fixed Income/Sukuk
CONTENTS
Summary of economic performance for the last quarter1
8
Outlook for various asset classes2
Derayah’s recommended asset allocation3
WE ARE MODERATELY OVERWEIGHT ON GCC EQUITIES MAINLY DUE TO POSITIVE
BIAS ON SAUDI ARABIA
9
Moderate Overweight
Investment RecommendationCurrent P/Es are lower than the long term average
for GCC markets
Current P/Es are lower than the long term average
for the TASI Index
Equities > GCC Equities
0
10
20
30
40
50
60
Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10
Average 19.6x
Current 18.1x
Source: Bloomberg
P/E (Price to Earnings) ratios are calculated on current price vs. earnings for the previous four quarters
• We believe the regional markets have been
severely impacted by the European debt
crisis, which we believe to be impacting
sentiment rather than fundamentals
• As a result, GCC markets look undervalued
based on current PE (but not a huge bargain)
• In addition, Earnings (the ‘E’ in PE) appear to
be on an upward trajectory.
• Oil prices have been trading in the desired
band , thus providing crucial support to regional
equity markets
• Year to date, TASI have been the best
performer among GCC equity markets
• Institutional investors like GOSI have increased
their holdings in Saudi equities since December
2009
0
10
20
30
Apr-06 Feb-07 Dec-07 Oct-08 Aug-09 Jun-10
Average 18.1x
Current 17.0x
- GCC Equity
- Developed Equity
- Emerging Equity
- Emerging Real Estate
- Money market
- Fixed income/Sukuk
CONTENTS
Summary of economic performance for the last quarter1
10
Outlook for various asset classes2
Derayah’s recommended asset allocation3
GCC Equity
Developed
Equity
Emerging
Equity
Emerging
Real Estate
Money
Markets
US
Euro Zone
Developed
Asia
WE MAINTAIN MODERATE OVERWEIGHT FOR DEVELOPED EQUITIES
11
Developed equities comprises three major markets:
Developed
equity
++
--
++
++
Moderate overweight – Weaker Yen and strong growth
prospects favor the market
Moderate Underweight – Despite low P/Es economic
problems should keep investors away
Moderate Overweight – Positive EPS revision and
increasing risk appetite should help the market outperform
on a relative basis (esp. as Europe is expected to under
perform)
Fixed
Income/Sukuk
Equities > Developed Equities
Moderate overweight
WE MAINTAIN OUR MODERATE OVERWEIGHT ON US EQUITIES
12
Moderate Overweight
Investment RecommendationCurrent P/E for S&P 500 are lower than the long
term average
XX
Equities > Developed Equities > US
Source: Bloomberg
Source: Schroders
Barclays
BNP Paribas IM
Risk aversion, relatively strong economic growth
and combined monetary/fiscal support, added to
still very strong relative EPS upgrades should help
this market to further outperform
P/E (Price to Earnings) ratios are calculated on current price vs. earnings for the previous four quarters
The US stock market is trading on a plausible
2010 PE of less than 14X earnings, firmly below
what we see as the relevant long-term average,
with an implied risk premium well above normal0
10
20
30
40
Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09
Average 19.2x
Current 15.1x
-3
-2
-1
0
1
2
1965 1975 1985 1995 2005
Cash balances of US companies have shown
improvement
Source: Schroders
Percentage of GDP Current 1.6 (up from
1,3 in last quarter)
WE MAINTAIN OUR MODERATE UNDERWEIGHT ON DEVELOPED EUROPE EQUITIES AND
MODERATE OVERWEIGHT ON DEVELOPED ASIA
13
Investment RecommendationCurrent P/Es are lower than the long term average
P/E for European Union
Current P/Es are lower than the long term average
P/E for Japan’s Nikkei
Equities > Developed Equities > Euro Zone / Developed Asia
Source: Bloomberg
Source: Bloomberg
Recent policy moves have sown confusion and
the economic problems of the Eurozone remain
acute
Credit Suisse
Schroders
P/E (Price to Earnings) ratios are calculated on current price vs. earnings for the previous four quarters
Moderate underweight: Europe
Moderate overweight: Developed Asia
0
10
20
30
40
50
60
Jan-04 Apr-05 Jul-06 Oct-07 Jan-09 Apr-10
Average 22.1x
Current 15.2x
The macro backdrop has continued to improve
and we have upgraded our growth forecast for
Japan. However, Japanese equities have suffered
from the strength of the yen, although a weaker
currency could eventually spur equity gains.
Forward-looking metrics on the region’s corporate
earnings are also positive.
0
10
20
30
40
50
60
Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10
Current 15.2x
Average 20.7x
- GCC Equity
- Developed Equity
- Emerging Equity
- Emerging Real Estate
- Money Markets
- Fixed Income/Sukuk
CONTENTS
Summary of economic performance for the last quarter1
14
Outlook for various asset classes2
Derayah’s recommended asset allocation3
Fixed
Income/Sukuk
GCC Equity
Developed
Equity
Emerging
Equity
Emerging
Real Estate
Money
Markets
Emerging
Europe
Latin
America
WE RECOMMEND OVERWEIGHT ON EMERGING EQUITIES
15
Emerging
equity
+++
Emerging
Asia
+++
+++
+++
Overweight
Overweight - Russia is experiencing broad based
recovery
Overweight – China and India have sound economic
fundamentals and offer good value
Overweight
Equities > Emerging Equity
WE RECOMMEND AN OVERWEIGHT ON EMERGING MARKET EQUITIES
16
Moderate Overweight
Investment RecommendationCurrent P/Es are lower than the long term average
for Emerging markets
Equities > Emerging Equity
Source: Bloomberg
MSCI Emerging Markets Equity Index
We maintain our overweight emerging markets for
the following reasons:
1) Emerging markets offer comparable 2010
earnings growth at a discount
2) Long term superior fundamentals of emerging
markets remain well in place
3) Emerging markets are no longer a pure play
on global growth but a region having its own
set of qualities and opportunities. This is not
fully reflected yet in investors’ portfolios
ING
JP Morgan
z
Overweight markets that are more remote from
the epicenter of the crisis, such as US industry
groups with little euro exposure, and India and
Mexico in EM.
MSCI EM Trailing Return on Equity (ROE) is 33%
higher compared to MSCI World
Source: Bloomberg
Source: Morgan Stanley
P/E (Price to Earnings) ratios are calculated on current price vs. earnings for the previous four quarters
0
10
20
30
Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10
Average 15.8x
Current 14.6x
0.00
3.00
6.00
9.00
12.00
15.00
18.00
1992 1995 1998 2001 2004 2007 2010
MSCI EM – 13.6
MSCI World – 10.2
- GCC Equity
- Developed Equity
- Emerging Equity
- Emerging Real Estate
- Money Markets
- Fixed Income/Sukuk
CONTENTS
Summary of economic performance for the last quarter1
17
Outlook for various asset classes2
Derayah’s recommended asset allocation3
0
2
4
6
8
10
12
May-08 Nov-08 May-09 Nov-09
WE RECOMMEND MODERATE UNDERWEIGHT ON REGIONAL REAL ESTATE
18
Moderate underweight
Investment RecommendationLand transaction values in Riyadh have declined
in early 2010
Real Estate > Regional Real Estate
Source: BSF survey
• Based on our AAI* based evaluation (refer to
Derayah Real Estate report), residential real
estate in regional markets including cities like
Riyadh, Dammam and Cairo offer better value
for money compared to their global peers
• However, sluggish business climate and
oversupply in commercial real estate continue to
a toll on office rental rates in many regions (in
spite of recovery in the residential markets)
• Consequently, the price for plots of land for
commercial development in most regional
markets is still falling
• While residential property prices show signs of
selective strengthening, rental yields continue to
be unattractive in most markets
Mar-10
SAR billion
AAI* -Area Afforded by Average Income (Derayah metric for measuring return potential of Residential Real Estate Investment)
- GCC Equity
- Developed Equity
- Emerging Equity
- Emerging Real Estate
- Money Markets
- Fixed Income/Sukuk
CONTENTS
Summary of economic performance for the last quarter1
19
Outlook for various asset classes2
Derayah’s recommended asset allocation3
WE HAVE A BEARISH OUTLOOK FOR MONEY MARKETS
20
Underweight
Investment RecommendationMoney market returns for SIBOR and USD LIBOR
Money Market
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
Jan-02 Apr-04 Jul-06 Oct-08
Source: Bloomberg
1 month USD LIBOR
1 month SIBOR
On a six-month view we still expect global equities
to outperform other assets – particularly cash
Barclays
We continue to play a long assets/short cash type
of allocation
BNP Paribas IM
Percentage
- GCC Equity
- Developed Equity
- Emerging Equity
- Emerging Real Estate
- Money Markets
- Fixed Income/Sukuk
CONTENTS
Summary of economic performance for the last quarter1
21
Outlook for various asset classes2
Derayah’s recommended asset allocation3
GCC Equity
Developed
Equity
Emerging
Equity
Emerging
Real Estate
Money
Markets
Government
Debt
Investment
Grade
Corporate
High Yield
Corporate
WE RECOMMEND A MODERATE OVERWEIGHT FOR FIXED INCOME
22
Fixed income comprises three different sub-classes:
--
++
Fixed Income/
Sukuk
Overweight- High cash levels and high spreads will fuel
outperformance for HY bonds
Moderate Overweight – Valuations look attractive
considering spreads are still wide
Moderate underweight- Riskier assets preferred over
government bonds
Moderate overweight
++Fixed
Income/Sukuk
Fixed Income
+++
WE MAINTAIN OUR MODERATE UNDERWEIGHT FOR GOVERNMENT BONDS/SUKUK
23
Moderate underweight
Investment RecommendationSpreads between 10-year and 2-year US
Treasuries
10 –year US Treasury yields should rise towards
average levels
Fixed Income > Government Debt
JP Morgan
-50
0
50
100
150
200
250
300
Dec-89 Dec-95 Dec-01 Dec-07
Average 107 bps
Current 236bpsbps
Credit Suisse
Over the next 1-2 months, however, a relatively
resilient economic and profit outlook should
push riskier assets up on average, and
government bonds down
Bonds relative to the benchmark could soon fall
below the long-term average and resume their
underperformance
0
1
2
3
4
5
6
7
8
Jan-98 May-01 Sep-04 Jan-08
Average 4.56 %
Percent
Current 2.97%
0.0
4.0
8.0
12.0
16.0
20.0
Feb-09 May-09 Aug-09 Nov-09 Feb-10 May-10
WE RECOMMEND AN OVERWEIGHT FOR HIGH YIELD AND UPGRADE INVESTMENT GRADE
BONDS/SUKUK TO MODERATE OVERWEIGHT FROM NEUTRAL
24
Source: Bloomberg
Percentage
Moderate Overweight :Invest Grade
Overweight : High Yield
Investment RecommendationSpreads between Investment grade and High yield
bonds still above pre-recession levels
GCC Sukuk yields have dropped significantly
since early 2009
* Equal weighted basket of local and foreign currency Investment grade Sukuk, average maturity 3 years
Fixed Income > Corporate Investment Grade
Current 4.12%
In 3Q we are significantly overweight high yield and
emerging market bonds, more modestly overweight
equities and investment grade bonds and
underweight government bonds
Merrill Lynch
• From a valuation perspective, IG spreads are
looking more attractive given spread widening in
recent months
• Interest rates are expected to stay low for some
time. This suggests that IG should remain
attractive relative to cash given the strong search
for yield amongst investors.
Schroders
Percentage
0.0
4.0
8.0
12.0
16.0
20.0
Oct-02 Oct-04 Oct-06 Oct-08
Source: HSBC-DIFX Sukuk index
Max 17.2%
Current 5.0%
CONTENTS
Summary of economic performance for the last quarter1
25
Outlook for various asset classes2
Derayah’s recommended asset allocation3
26
DERAYAH ‘S RECOMMENDATIONS COVER 5 STRATEGIC PORTFOLIOS FOR
DIFFERENT RISK/RETURN PROFILES
Description & Suitability
Minimum Risk
1• Intended to preserve capital and
accept minimum risk
• Suitable for Investors who need
their money in a short time (less
than 1 year) or are negatively
impacted by any loss in value
• Aims to preserve capital while
accepting some risk for higher
returns
• Suitable for investors with 1-2 year
investment horizons or those who
value lower risk with lower return
Conservative
• Globally Diversified portfolio with a
tilt towards safety
• Suitable for investors who want To
balance risk and return and have
uncertain liquidity needs, ideally
with horizon of 2-3 years.
• Positioned to earn more returns with
higher risk
• Suitable for investors who are
comfortable with higher volatility,
and/or with a longer term focus (3-5
years)
• High risk portfolio to generate high
returns over the longer term
• Suitable for investors who have a
long investment horizon (>5 years)
and/or are willing to bear high risk
of loss to achieve higher returns.
Aggressive
5
Higher Risk
4
2
* Compounded Annualized Growth Rate based on Historical Data from 1985 to 2009.
Moderate Risk3
Best
Year*
Worst
year*
Comp. Ann.
Return*
Target
volatility*
Probability of
loss in any year*
5.02%
(2007)
1.07%
(2009)
3.23% 1% 0
13.41%
(2007)
-3.76%
(2009)
6.23% 5% 7.0%
24.67%
(2007)
-18.02%
(2009)
7.82% 10% 13.3%
37.0%
(2007)
-33.64%
(2009)
7.97% 15% 32.0%
47.1%
(2007)
-45.62%
(2009)
7.41% 20% 36.0%
86% 83%
12% 13%
0.15
1.72
-0.1
1.99
-0.5
0
0.5
1
1.5
2
2.5
27
Murabaha
Previous
Recommendation
Current
Recommendation
Minimum risk portfolio
Sukuk
1%1%
Developed Equity
Emerging Equity
1 Benchmark Derayah Recommendations
Return of Portfolio, %
2% 2%
Total Q3-09 to Q2-10Q2-10
Performance comparisonValue of 100 SAR invested at inception
98.5
99
99.5
100
100.5
101
101.5
102
102.5 101.99
101.72
Performance Comparison includes Fund Selection
Q2-10Q1-10Q4-09Q3-09
92
94
96
98
100
102
104
106
108
110
112
114
28
Conservative portfolio
14% 12%
66%67%
8% 8%
2%1%
2%3%
8% 9%
Sukuk
GCC Equity
Developed Equity
Murabaha
Emerging Equity
Emerging Real Estate
Previous
Recommendation
Current
Recommendation
2
-2.19
4.1
-2.44
8.4
-4
-2
0
2
4
6
8
10
Total Q3-09 to Q2-10
Q2-10
104.1
108.4
Return of Portfolio, %
Performance comparisonValue of 100 SAR invested at inception
Benchmark Derayah Recommendations
Performance Comparison includes Fund Selection
Q2-10Q1-10Q4-09Q3-09
85
90
95
100
105
110
115
120
57% 54%
14%14%
5%5%
8% 9%
16% 17%
29
Moderate Risk portfolio
Sukuk
GCC Equity
Developed Equity
Emerging Equity
Emerging Real Estate
Previous
RecommendationCurrent
Recommendation
3
-5.5
6.2
-4.6
10.65
-8
-6
-4
-2
0
2
4
6
8
10
12
Total Q3-09 to Q2-10
Q2-10
110.65
106.2
Benchmark Derayah Recommendations
Return of Portfolio, %
Performance comparisonValue of 100 SAR invested at inception
Performance Comparison includes Fund Selection
Q2-10Q1-10Q4-09Q3-09
90
95
100
105
110
115
120
-8.7
6.74
-6.7
10.74
-10
-5
0
5
10
15
30
Higher Risk portfolio
31% 33%
20% 20%
9%3%
15%18%
24% 26%
Sukuk
GCC Equity
Developed Equity
Emerging Equity
Emerging Real Estate
Previous
RecommendationCurrent
Recommendation
4
Total Q3-09 to Q2-10
Q2-10
106.74
110.74
Benchmark Derayah Recommendations
Return of Portfolio, %
Performance comparisonValue of 100 SAR invested at inception
Performance Comparison includes Fund Selection
Q2-10Q1-10Q4-09Q3-09
90
95
100
105
110
115
120
125
31
Aggressive portfolio
GCC Equity
Developed Equity
Sukuk
Emerging Equity
Emerging Real Estate
12% 12%
25% 25%
12%7%
21%23%
30% 33%
Previous
RecommendationCurrent
Recommendation
5
-11
6.7
-8.2
12.7
-15
-10
-5
0
5
10
15
Total Q3-09 to Q2-10
Q2-10
112.7
106.7
Benchmark Derayah Recommendations
Return of Portfolio, %
Performance comparisonValue of 100 SAR invested at inception
Performance Comparison includes Fund Selection
Q2-10Q1-10Q4-09Q3-09
DERAYAH’S RECOMMENDED MUTUAL FUNDS IN EACH INVESTMENT CATEGORY
32
Developed Equity
HSBC Emerging Markets Equity Fund
NCB Capital GCC Equity Fund
ANBI Mubarak Global Equity Fund
Murabaha
ANB Invest SAR Murabaha Fund
Al Rajhi Capital Commodity Mudarabah Fund SAR
Sukuk
Jadwa Investment Global Sukuk Fund
Real Estate
Samba Capital Real Estate Fund
Source: Tadawul, Derayah Research
Emerging Equity
Regional Equity
DERAYAH’S PROCESS OF FUND SELECTION HAS ENSURED THAT OUR PORTFOLIOS
HAVE OUTPERFORMED THE TASI SINCE INCEPTION IN Q3 2009
33
Period Return
Period Risk (Ann St Dev )
10.7%
18.4%
TASI SIBOR* Min Risk Conservative Moderate Higher Risk Aggressive
0.32%
0.005%
1.99%
0.6%
8.40%
4.1%
10.65%
6.2%
10.74%
8.3%
12.7%
9.9%
90
95
100
105
110
115
120
125
Indexed Performance (starting value 100) – Q3 2009 to Q2 2010
Aggressive
Min Risk
TASI
Conservative
Higher Risk
Moderate
*Benchmark – NCB Capital 1 month SIBOR Index
Return/Risk 3.31 2.05 1.72 1.30 1.280.52 N/A
AND HAVE ALSO HELPED US OUTPERFORM OUR PEERS ON A RISK ADJUSTED
BASIS*
34
Manager Fund Return Volatility Return/Risk
NCB Capital (Al Manarah)
Conservative 2.47% 5.11% 0.48
Balanced 4.89% 10.20% 0.48
Growth 8.73% 15.06% 0.58
HSBC KSA(Amanah)
Defensive 3.06% 7.12% 0.43
Balanced 6.02% 13.44% 0.45
Growth 9.56% 19.27% 0.50
SHC Al Yusr Aman 2.34% 3.13% 0.75
Mizan 4.45% 8.27% 0.54
Tamoh 5.87% 17.17% 0.34
Al Rajhi Capital Balanced Fund 1 4.40% 6.23% 0.71
Balanced Fund 2 11.03% 20.09% 0.55
ANBI Balanced 9.96% 19.41% 0.51
Jadwa Conservative 2.08% 4.57% 0.46
Balanced 8.06% 11.74% 0.69
Aggressive 15.63% 23.80% 0.66
Derayah Low Risk 7.40% 3.58% 2.07
Conservative 10.38% 6.08% 1.71
Aggressive 12.80% 10.02% 1.28
* Period under consideration – Q3’2009 to Q2’2010
We attribute our outperformance to:
Focus on diversification and efficient Asset allocation
Focus on selecting the most appropriate product for portfolio execution
Focus on tactical shifts to take advantage of temporary market dislocations
DERAYAH’S FRAMEWORK FOR PORTFOLIO STRUCTURING AND TACTICAL ASSET
ALLOCATION
36
1.Develop strategic
asset allocation
2.Synthesize tactical
asset allocation shifts
3.Recommend tactical
allocation to investors
• Derayah has developed
its proprietary framework
that creates an efficient
frontier including a
diversified set of asset
classes
• For various risk levels
the target portfolio is
designed to maximize
risk adjusted returns
based on historical and
expected future
performance of these
asset classes*
• Derayah collates analyst
expectations on
expected performance
of various asset classes
from a selected set of
global Asset
Management firms
• Derayah creates its own
consensus rating for
each asset class based
on its framework and
analyst expectations.
This rating is then used
to arrive at the tactical
shifts for the weights in
each asset class
included in the portfolios
• Tactical asset allocation
recommends that the
investors adjust their the
long term asset
allocation to take
advantage of
opportunities rising from
short term market
dislocations to generate
higher returns
• Derayah incorporates
the tactical adjustments
(Step 2) on the strategic
asset allocation (Step 1)
to design the portfolios
1. FOR THE STRATEGIC ASSET ALLOCATION, WE PERFORMED A MEAN-VARIANCE
OPTIMIZATION USING THE FOLLOWING INPUTS
37
Historical Correlations among various asset classes2
Historical Risk and return for various asset classes1
1Maximum available time period starting January 1970
Mean Variance Optimization – Developed by Harry Markowitz, Mean-variance optimization, is a quantitative asset allocation
technique which allows investors to use diversification to balance the risk and return in their portfolio.
Standard Deviation - A measure of the variability of a data set, or a probability distribution. A low standard deviation indicates that the
portfolio has low uncertainty i.e. returns tend to be very close to the mean, while high standard deviation indicates that the returns are
more uncertain and are spread out over a large range of values.
The output
from the
process is
multiple
optimized
portfolios
that are
suitable for
investors
with various
levels of
risk
tolerance
ASSET CLASS
MSCI
World
JPM Agg
Index
MSCI
EM/Real
Estate
SAR
Interbank
rates
MSCI
Emerging
Mkts
MSCI
GCC
Countries
MSCI World 1.00
JPM Agg Bond Index 0.13 1.00
MSCI EM/Real Estate 0.21 0.12 1.00
SAR Interbank rates -0.12 -0.13 0.05 1.00
MSCI Emerging Mkts 0.72 0.00 0.25 -0.11 1.00
MSCI GCC Countries 0.57 0.12 0.16 -0.08 0.58 1.00
MSCI
World
JPM Agg
Bond
Index
MSCI
EM/Real
Estate
SAR
Interbank
rates
MSCI
Emerging
Mkts
MSCI GCC
Countries
Historical Risk (St Deviation) 14.88% 3.65% 32.00% 0.46% 24.27% 30.03%
Historical Returns 6.38% 7.28% -4.61% 2.85% 10.65% -15.19%
ILLUSTRATION
1. COMPOSITION OF BENCHMARK PORTFOLIOS
38
Indices representing Asset Classes:
Murabaha - SAR Interbank Rates Index
Sukuk - JPMorgan Aggregate Bond Index
Real Estate - MSCI Emerging Markets Real Estate Index
Developed Equity - MSCI World Equity Index
Regional Equity - MSCI GCC Countries Index
Emerging Equity - MSCI Emerging Markets Equity Index
93%
27%
6%
56%
57%
31%
7%
2%
6%
11%
15%
1%
7%
14%
21%
27%
2%
8%
16%
22%
1%6%
15%22%
30%
Min Risk Low Risk Conservative Moderate Aggressive
Emerging
Equity
GCC Equity
Developed
Equity
Emerging
Real Estate
Fixed Income
Murabaha
2. WE COLLECTED AND SYNTHESIZED THE SHORT TERM TACTICAL SHIFTS OF
SEVERAL INVESTMENT STRATEGISTS
39Bullish(++++) Overweight(+++) Moderate Overweight (++) Slight Overweight (+) Neutral (.) Bearish (----) Underweight (---) Moderate Underweight (--) Slight Underweight(-)
Asset class
GCC equity
Developed equity + + - + + - +
US + + - + + - +
Europe + - . - - ++ -
Developed Asia . . . + + - +
Emerging equity . + ++ + ++ +++ .Emerging Asia . + ++ + ++ +++ .Emerging Europe . + + + + .Emerging Latin America . - + + + ++ .Fixed income + + +++ - ++ -- +
Government debt - . ++ - . --- .Investment grade corporate . - +++ +
High yield corporate +++ + ++ ++ +++ ++
Money markets --- -- -- ---
Regional real estate
ILLUSTRATION
40
3. WE THEN APPLIED THESE TACTICAL SHIFTS TO OUR STRATEGIC PORTFOLIOS
Minimum Risk
Low Risk
Conservative
Moderate
Aggressive
Strategic portfolios Tactical portfolios
Minimum Risk
Low Risk
Conservative
Moderate
Aggressive
Fixed Income(Sukuk)
Developed Equity +GCC Equity -
Money Markets --
Emerging Real estate .
EmergingEquity +
+
ILLUSTRATION
3. THE CHANGES IN ALLOCASTION ARE GUIDED BY THE QUANTITATIVE SHIFTS
BASED UPON THE FOLLOWING GRID
41
Change in Portfolio Asset Weights
++++ +50% Bullish
+++ +25% Overweight
++ +10% Moderate Overweight
+ +5% Slight Overweight
≈ 0 Neutral
- -5% Slight Underweight
- - -10% Moderate Underweight
- - - -25% Underweight
- - - - -50% Bearish
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