Harvard Fund & Middle East Peace - A correlation!

The 10 year annualized returns of this fund stands at 8.9%; compare this with an average 60/40 stock bond portfolio which invests in S&P 500 & Citi bonds, which would have given you in the same 10 year period an annualized return of 1.4%!!! The current AUM of the fund stands at approximately USD 28 Billlion; and by default the fund has access to some of the brightest economists, politicians and market makers in the world. We're talking about the Harvard Endowment Fund managed by the Harvard Management Company.

Their portfolio model as published on their website consists of 11% domestic equity (U.S), 11% in Foreign equity (which would be Europe etc.) and another 11% on Emerging Markets (ok, guys in Dubai and GCC can stop reading here). They don’t do frontier markets apparently, but they do have another 11% in PE which may interest you. All in all a very balanced portfolio mix.

The returns had always got me fascinated with the fund and I keenly watch out for any tit bit the Harvard Management Company throws out.

Last week’s news that Harvard Fund dumps all of its Israeli stocks, and the following hurriedly put together denial by the Harvard management and then the clarification by the portfolio manager who managed the Emerging markets component was all very badly managed. The Portfolio manager’s clarifications were actually hilarious, he apparently said that Israel was always in the emerging markets index and because of some index change, Israel moved to the develop markets scale in their systems and hence they dumped those stocks (you didn’t understand, well neither did I)

The elephants in the background

Let's take a step back and analyze the sequence of events. It was known that the latest round of direct Mid East peace talks would begin on Sept 2nd. I know ..I know..we’ve been there many a times and we may still end up being there in the next century with a Gay American president in the middle of the table.

This time around there’s one difference from the last 30 years of talks, there’s a black American man who's sane and not a Texan either, flying around in Air force 1 globally. Obama’s thinking might be this way – It may be easier to get a mid east peace treaty rather than get the sluggish American economy back on track, so am sure he’s going to give his best shot at it to win some votes (if not local at least global votes).

Israel clearly has a lot going against it in the past 12 months with one botched up after the other disasters. The Assassination of Al-Mabdouh in Dubai, The Aid Flotilla issue, the Lebanon border rocket firings etc have resulted in a global mood which is slowly moving towards ‘ bad bully boy needs a whipping and a cutting down to size’. This round of peace talks may result in substantial advantages for Palestine as a nation, which could result in Israeli stocks taking a tumbling nose dive.

- Is there someone at Harvard Management Company who is privy to the way the Mid East peace talks are planning to shape up.

- What other reason would be the correlation factor for these chain of events for buying into Turkish positions and selling off all its Israeli positions

Is this going to be the trigger for a rally in GCC markets with a wave of confidence sweeping across the region after the flat summer. From the best and brightest minds at Harvard who's given the world some outstanding returns, I'd say yes. Let’s wait and watch.

Sama Airlines - No longer flying 'high'

I've flown SAMA Airlines a couple of times, not by choice, more so because I didnt have any other option on that day. My 6'2 colleague who came with me for the meeting had an even more desperate look on his face, he was worried about the blood flow into his toes being cut off because of the amazing leg space available in the aircraft.

I may grumbled quite a few !#@#@%$#$ words that day on SAMA (though I was fully aware this was a low cost airline) but at no time had I wished that the airline to go bust. 3 years of average operations, one bad winter and a USD 266 Mn loss really does not count as good enough reasons for shutting down an airline, Do they? I always thought it was fashionable globally across the airline industry to make losses (and in some cases for decades over) until the stock prices becomes junk.


What is surprising is that this airline has/ had some serious backers in investors like Olayan Group, SISCO etc. Questions that remain unanswered at the time of blogging


i) Why had SAMA not listed after 2-3 years of operations?
ii) A low cost airline going should ideally not be going bust
iii) How did they rack up USD 266 Mn in losses, I mean this was a 6 aircraft airline
iv) Why didnt any PE investor/ investors come on board and give a lifeline or facelift


In Saudi Arabia, this is the third local Saudi airline after Saudia and NAS. What remains is NAS and Saudia. Are we to assume that in a country of 20 Mn+ population, there is a market size for local air travel which can be catered by two airlines? I dont believe it.


I know I'm missing something in between the lines of this SAMA airlines going bust news...eish I couild pin it down...I have this feeling we'll be seeing SAMA airlines with a new name and new management come out in the market soon..what do you say?

Bahrain – Chugging along not-so-quietly

I was in a conference recently in Bahrain which basically prompted this post. It might be a bit presumptuous to make judgements about a country the moment you land at the airport, but I believe airports are really good barometers of culture. Take an example: If you’ve ever been to Zurich airport what do you see – impeccably pressed uniforms, straight lines, orderly queues, bank and insurance co. adverts and perfectly timed shuttles…almost giving out the message loud and clear ‘Welcome to Switzerland, we have banks, we are very clean, and our clean trains will help you reach our banks on time every time forever and ever’

Touchdown in Bahrain and the first things that always strikes me – Small but right sized airport (unlike the gargantuan wastes in some other cities), Blue worn out carpets, Super fast on-arrival visa processes for business men, 10 mins from city business district – clearly giving out the message ‘Welcome to Bahrain, If you’re here on business we’ll take good care of you, we may lack style and be a bit austere for your sensibilities, but we’ll make it up in our business friendliness’

And has it been rewarded? Ask me how. The Global financial industry seems to be going through a mid life crisis (what with the government beavers now doing your expense approvals), but Bahrain’s love affair with Financial Institutions has never wavered through all these times. Take a look at these stats which I managed to get from the CBB (Central Bank of Bahrain) website:

Size of Bahrain Financial Industry: The 18 Kms X 55 Kms Island of Bahrain has 406 financial institutions registered and regulated by the central bank of Bahrain. That includes 138 Banks (32 Retail Banks and 78 Wholesale Banks and rest being rep offices). It also has 45 Investment Companies registered there, Typically Holding companies, Family offices. Insurance Companies make another 169 (Out of which 39 locally incorporated) out of this whole list. Apart from this list of 406, you have another whooping 2736 Mutual Funds registered there (139 Local & 2597 Foreign Funds domiciled)

Bahrain & Regulations: What is an even bigger vote of confidence is if you go and check the number of funds which have registered in Bahrain in the last 5 months of Yr 2010. I stopped counting after 20, but if you want to count them you could go to this link . The reasons are pretty straight forward. The CBB Rule book has ‘ Exempt schemes’ which permits Hedge Funds, LBOs & other high risk funds to be registered with ease in Bahrain, with these words being treated by the global regulators as something just above slur words, I’d say Bahrain can expect quite a bit of windfall. This does not mean that Charles Ponzi can register his scheme in Bahrain; anyone who has lived in this region will agree with me that the CBB regulations are far ahead of the rest of the GCC pack.

There’s a lot going in favour of Bahrain and the Financial Industry

- Bahrain Institute of Banking & Finance – Ranks quite highly in terms of its courses offered and gives you good access to a pool of financial graduates for your operations
- Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) The Islamic Finance body which defines rules and regulations followed by most of Middle East Islamic Financial Institutions has its hub in Bahrain

Bahrain is not without some worrying black holes either:
- The Dubai imitated buildings of World Trade Centre and Bahrain Financial Harbour, and some other residential real estate companies into which a lot of local Islamic banks have huge exposures is a worry
- The population of the country is 1 Million. There’s no oil, there’s hardly any other manufacturing companies, its trading hub status has been lost and there’s too much dependence on the financial sector to maintain the economy.
- The Financial sector employs 14,000 people directly (about 60% local) and indirectly impacts another 100,000 (family, contracted labour etc.) which means over 10% of the population is dependent on the financial industry in some way or the other.

Dubai, Abu Dhabi, Kuwait, Doha, Riyadh and Jeddah are all biting at the heels to grab a pie out of Bahrain. The growth that the Financial Industry has seen in the past 3 years may no longer be seen in Bahrain, but one thing is for sure – Austere, Mouldy, Out-of-fashion, business friendly Bahrain will continue to be the place where those who want to do some serious money management will continue to maintain as a regional hub. You think not? Take a look:

Zurich Insurance opens operations in Bahrain AND Who hired in Middle East in May 2010

‘aquila non capit muscas’ , the Latin phrase loosely translated into English means ‘an eagle doesn’t catch flies/ an eagle is not interested in catching flies’ –

Take a Bow, Bahrain :)

Building Abu Dhabi 2.0

At Abu Dhabi I had a chance meeting a few ‘so called’ real estate industry experts on UAE (loosely translated they were a bunch of expats who had landed in UAE on a sortie to make a quick buck). They were explaining how they were helping build a new Abu Dhabi and how they were going to do some great things in this country. They supposedly knew every building facing the cornice by name and every building that was coming up in Saadiyat Island.

After listening for about 30 minutes of this non stop banter, I decided to pull my favourite test on real estate experts here. I casually weaved in a question into the conversation, when the discussion was on Abu Dhabi. I asked ‘What do you guys think about the Qasr Al-Hosn, the building looks great now, don’t you think?’.Blank stares, the ‘Qasr who?’ and the ‘Qasr What’ was all I got back; and they ignored me and the conversation went on.

A smart Emirati banker had once told me, at the heights of the real estate boom, he used to put this question, just to test the knowledge of some real estate industry experts who came to him with ‘plans extraordinaire’ and he rarely found anyone not stumbling on it.

Qasr Al Hosn, the white fort in Abu Dhabi is the oldest stone building in the city of Abu Dhabi. At a time when everyone still referred to the city as Abu zaby, the fort had come up. I must be honest, I don’t know more about the building, you can search out the rest of the historical significance of the building, but what matters is if someone does not know the history of buildings in Abu Dhabi, and has never heard about the Qasr Al Hosn (because of its significance as the first stone building in Abu Dhabi), he may as well not be the guy with whom you place your buck/ brick, however smart he may be.

The context of telling this story is not to explain that I know about the building, it is to share with you that, I think there are too many people in Abu Dhabi nowadays who seem to be vending their ‘plans extraordinaire’ schemes in Abu Dhabi, I wish Abu Dhabi would take a breath between the quick strides it is taking as part of its transformation.

The Abu Dhabi 2030 blue print which was the centre piece of city scape is extraordinary. In today’s bleak times globally, it looked like a honey pot to me. Take a look at these numbers which would go into building the new Abu Dhab

- USD 200 Billion to be spent between 2008 & 2013 in infrastructure development in the state of Abu Dhabi, with 40% coming from Govt and the rest through a private sector-public partnerships. That’s USD 80 billion of contracts to be won in 5 years, now wonder the honey pot had attracted crooks, amateurs and experts alike.

- From a Louvre to the Guggenheim, SaadiyatIsland (the USD 28 Billion development) will house an extraordinary vision which is designed to attract 1.5 Million visitors

- A 130+ Km Metro line is planned to come up and bids were invited last year and is expected to start by 2015. A 75 km line in Dubai was built at a cost of a Billion dollars upwards recently, Abu Dhabi’s plans are double that of Dubai.

And why should Abu Dhabi not dream, it has all the right to dream big:

- Abu Dhabi accounts for 94% of the proven oil reserves of UAE. The proven oil resources of UAE are at 98 Billion barrels, and at the expected yearly production rate, they would last for a century.

- Vision Abu Dhabi 2030 is planned based on a budget of oil at USD 47 per barrel, which was further revised to USD 40 per barrel. At the time of writing this blog oil was hovering at the 80’s mark.

Abu Dhabi deserves a renovation; the city really is stretched in several ways. Does it need so much infrastructure investments is none of my business, but as a friend of the nation, I hope for the benefit of all of us that the great men who rule this nation are not swayed by those who do not even know the Qasr Al-Hosn!

Here's to the future of Abu Dhabi 2.0

Islamic RMBS is heading our way now…

The headlines that grabbed my attention was ‘Deutsche Bank and Saudi Investors launch Shariah mortgage Financing company targeting Saudi Arabia’. DB and retail home loans and that too of a Shariah compliant variety was a bit of a surprise. I told a colleague of mine ‘…the brand does not necessarily have top of the mind recall in the mortgage industry…’ Before I could finish he said ‘..but remember they have some fabulous expertise in packaging mortgages off as nifty products and selling them back to us in those halcyon days.’

What I found hilarious was that the moment this was said, my eyes hit upon the huge quote by the Managing Director and Global Head of Residential Mortgage Backed Securities Lending and Trading at DB. He said ‘We are pleased…..Islamic Home Finance is going to boom!..DB will be partnering with local big big biiig Saudi family…. etc’. ..ok I got it! So more than the CEO and COO of the Finance company, we had the MD of RMBS who was drolling all over the press release.

To make the press release more balanced DB had pulled out some moth eaten complex research saying ‘the total outstanding home finance provided by the private sector in Saudi Arabia aggregates to less than 1% of GDP compared with well over 50% in most developed countries, and approximately 6% in Kuwait and 7% in the UAE’. Ok, so now I get it, that’s why you guys started a home finance company in Saudi. Darn!

I mean it is so obviously evident that DB is only interested in the securitization part of this whole game and has no interest whatsoever in the loan business

Inherently by launching it in Saudi Arabia, a few things are taken care :
- Credit Risk: Surely would be low in these loans. Credit scorecard validation algos would be a fairly easy to set up and unless your name is George Bush, most of you who have the right name will get a loan. (and if you or me get this loan and default, you don’t want me to tell you the gory details of what can happen if you don’t pay your Shariah compliant loans off in Saudi Arabia…do you?)
- Pricing: Residential prices are pretty sensible in Saudi Arabia (the last time I asked an estate agent for a nice duplex in Riyadh, he told me I was searching for it in the wrong country, he said the whole middle east quota got completed in a 3 sq km stretch in Dubai)
- Early Redemption risk: The super rich taking to the novelty of the home loan concept for their new pad on the hand bag shaped building in Riyadh, may just forget about the loan linked to their bank account. I mean who will bother changing from a variable rate loan to a lower fixed rate loan in the future etc. so don’t fret on your prepayment risk and interest rate risk on your MBS

So overall we’re all set up nice and cozy on this whole Shariah complaint loan thingy being launched by BD.

So what are the plans for 2012: Shariah compliant securitization, Shariah compliant Residential mortgage backed securities, Shariah compliant collateralized mortgage obligation with a guarantee against home owner default risk with full faith and guarantee from one of the richest families in Saudi Arabia.

...and if anything goes wrong, DB has only put in USD 44 Million of initial capital into this experiment

Small change for creating a new world order in the Kingdom and the world of Islamic Investment management

Exchange Traded Funds (ETFs) – Middle East's Flavour of the month

National Bank of Abu Dhabi lists its ETF on ADX on 25th March– First in the region screamed the headlines. Back in Riyadh there were some grumbles at Falcom Financial Services for losing out on the ‘first’ tag because of a technicality that they listed their ETF on 28th March. So now UAE and Saudi Arabia join the elite club of 36 countries where there are ETFs listed in their exchanges.

It was a coincidence that I was sitting with an executive of one of these firms, when the regulator faxed across the ETF approval to their office. There were whoops of joy, shoulder pats and a general sense of achievement across the office. A few days after that eventful day, I got a call from a fund house asking me how the heck will they manage to generate an iNAV( Intraday NAV) for the ETF. (We figured out how they could do that in quick time, but that is too boring for an average reader to know)

In a region where 9 out of 10 fund houses have no clue on how to generate an NAV every day, and will never manage to generate one even if they wanted, managing an ETF’s iNAV ( Intraday NAV) will be a steep learning curve. This got me thinking on how infantile ETFs are to the region and may be one of the reasons why every fund house CXO I bump into nowadays wants to launch its own ETF yesterday.

It is also a strange correlation, that as I write this blog today, the European ETF industry celebrates its 10th anniversary this exact week. It also needs a mention that the European ETFs which are only 10 years old have been outpacing the AUM growth over their American cousins who started off way back in 1993.

I knew about the existence of ETFs (Exchange Traded Funds) as an investment class, but when a certain private banker shared an ETF handbook with me about 6 months back, I never expected him to give me a 200+ page A4 sized book listing all the global ETFs in the industry for reading (Barclays Global Investors Handbook, though I think the name of the hand book for 2010 may have got changed to BlackRock in 2010).

As per Barclays Global Investors/ BlackRock latest compiled data (As of December 2009)

- Global Exchange Traded Funds (ETFs) assets under management total a whooping $1 trillion (US$1,032 Bn) at the end of December 2009 – 45.2% above US$ 710.9 Bn at the end of 2008, according to the latest figures from BlackRock published today in its ETF Landscape Year End 2009 preview report.

- The global ETF industry had 1,939 ETFs with 3,775 listings from 109 providers on 40 exchanges around the world at the end of December 2009.

- Over the past decade the compound annual growth rate for ETF assets globally was 56.3% (I rechecked it.., there’s no typo mistake here),it was 58.1% in the United States, 53.1% in Canada and 90.5% in Europe

- As of December 2009 – Exposure type of these 1939 ETFs could be broadly divided into Equity ETFs– 1,545 ; Fixed Income ETFs – 279 ; Commodities ETFs – 62 ; Currency ETFs – 14, Mixed ETFs – 37 and 2 Alternative ETFS (If you’re interested in the actual document with further break up of this info, drop me a message or leave a comment on this blog post with your mail ID and I shall mail you the link to get access to this detailed document)

Here we are sitting in a market place where you and I have over 1900+ ETFs to choose from. From a simple equity ETF to a mind boggling Alternative ETF (I have no idea how this ETF is being run), there are so many options available.

Though there are so many types and variants available, My personal reading on ETFs is highly bullish for the Middle East region

- Shariah Compliant ETFs :Malaysia may have taken the leads on Sukuks before the Middle East region, but clearly the Shariah Compliant ETFs wave is eomthing that Middle East can claim as its own. There are some amazing Shariah investment managers in this region, they could take the reins from some lip service Islamic ETFs available in the European market. Clearly, there is a potential to launch Islamic ETFs in the market and the product would have quite a few takers.

- Institution focussed Mutual Fund market: Mutual Funds market space in GCC is still very institutional focussed and has still not become retail’esque. ETFs are perfect fit for such a largely institution dominated mutual fund market.

- Regulations on ETFs: Unlike the European market space which has kept ETFs out of regulatory red tape, the American Regulatory industry regulated ETFs quite well. (which is also why you find a huge amount of complex ETF products in Europe against Americas). From the way things look regulators in the Middle East don’t want to leave ETFs outside their regulatory purview, which is very good for a nascent and developing ETF Market space.

If you have managed to read through this blog post till this line, here’s one more for the road… ‘What the caterpillar (Mutual Fund) calls an end of the world, the master calls a butterfly…(ETF)'

A warm welcome to the world of Middle East ETFs

Why don't you shut down a few branches, Mr.UAE Banker!

In 1953, Stanley Miller, a graduate student of UCLA took two flasks, one containing a little water to represent the primeval ocean and the other holding a mix of methane, ammonia and hydrogen sulphide to represent the earth’s early atmosphere, connected them to rubber tubes and connected them with some electrical sparks to represent lightning. After a few days of passing electricity, the water turned a murky yellow and there was a healthy broth of amino acids, fatty acids and other organic compounds. Miller’s supervisor, Nobel Laurent Harold Urey was delighted and said ‘If God didn’t create life this way, he missed a good bet’. When this news went public, the press hailed this and made it sound as if, all that was now needed was to give the flasks a good shake and life would crawl out of it. Half a century has passed since then, and we are not yet anywhere close to creating life in a bottle.

So what is the intent of referring this story to all of you? I was reminded of this story and Stanley Miller’s experiment when I read two news paper articles yesterday on how the UAE Banking Industry is trying certain experiments to bring life into their balance sheets.

Without naming the financial Institutions (you could do your own research on that one, and I’ll save from getting sued), here they are:

- A certain financial institution in the capital of UAE opens its 100th branch in the region and had put out a full page ad proudly stating the same

- Another financial Institution again based out of the capital opens a 24 hour branch (no its not an ATM, its a full services branch) in an airport. How brilliantly convenient, the next time I go to the airport, I can apply for a home loan, a personal loan and cash a cheque.

The big million dollar question is that, do UAE Banks need another branch, and with another branch and its added operating expenses (salaries, electricity, real estate etc.), will it bring more life into their balance sheets.

I did a quick research and arrived at the following. The UAE has 24 full fledged commercial banks (locally incorporated banks), with 655 Branches across UAE (without including the two branches mentioned above as this data is as of 31-Mar-09). The UAE also has 28 foreign banks authorized to undertake commercial banking operations (these are not the DIFC licensed banks, these are CBUAE licensed ones) and they have 149 Branches in the country. This brings the total tally of branches in this country to 804 Branches.

What’s happening here!

Out of the population of UAE at 6 Million, there’s 1.75 Mn Indians, 1.25 Mn Pakistanis, 0.5 Mn Bangladeshis (Source: Zawya) and out of this 3.5 Million IPBs, 60% don’t necessarily take a car loan for buying a Ferrari or take a credit card for their weekly grocery shopping convenience (Oh come on, I’m not being racist here, I’m just being practical, so don’t give me that look and roll your eyes here). I divided a Banking capable population of 4 Million (out of 6 Mn) by the total number of branches in this country (remember 804 branches is on 31-Mar-09) and arrived at a figure of 1 branch for 4900 people in this country. Now the question was that the branch figures have only gone up in the last nine months and the population stats I have taken is definitely questionable.

What’s happening there!
I then looked at the per branch per person penetration in some of the wealthiest neighbourhoods in New York and compared it with our UAE and this is what I got. Even Upper West Side, Manhattan (1 Branch for 7100 people) and West Village Manhattan (1 branch for 5400 people), typical higher income neighbourhoods in the ex-financial nerve centre of the world had lesser bank per person penetration than what we have in the UAE!!!! Now you’re not trying to tell me that some CXO just figured out that this country needs more branch banking services than Residential NY. Are you?

Questions here!
- What do you think would be the per branch operating cost in the UAE
- What is the per branch per account holder penetration in the UAE
- What is the desired level of per person per branch penetration and profitability required
- At what per branch operating profitability do UAE Banks currently run
- Can they not outsource non core branch processes and make the branches more like outposts than 24 hr club lounges in airports
- Can UAE Banks start strategizing about centralizing business processes in one location and make their branches leaner

Opening a new branch in a over crowded market like UAE looks more like Stanley Miller’s empty idea from the 50s (of creating life out of glass flasks). Do our UAE banks really need more branches in the country or do they just need to shut down some branches, come up with creative branch banking strategies and make their balance sheets more sensible.

Mr.UAE Banker CXO, are you reading this and please correct me if I am wrong?

Disclaimer : All comments are purely personal