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Sun 1 Jul 2007 12:00 AM

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Capital gains

Dr Akram Yosri explains why flexibility is key to 3i Capital Group’s investment strategies, and warns that investors must take a global view if they are to prosper.

3i Capital Group may have recently established its Middle East base in Dubai, but it is looking much wider when it comes to its investments.

With its other offices in New York and Malaysia, the group aims to draw on its knowledge of different markets to deliver strong returns.

It recently launched Enmaa', the Dubai Growth Fund, a US$100m global Shariah compliant mutual fund registered in the British Virgin Islands that aims to achieve a 25% return on investment annually.

"Our fund is quite flexible compared to other funds here because you find most of them are quite focused on the region: either a Dubai fund, or a UAE fund, or a MENA fund," says Dr Akram Yosri, managing partner, 3i Capital Group. "The problem here is, in terms of risk mitigation, you find that when the industry or the market is down for whatever reason you get hurt. Tumultuous market conditions could impact performance of a fund quite a bit, but with a global mandate you have the opportunity to really hedge, to distribute your assets widely."

The fund looks for pre-IPO opportunities as well as undervalued public equities worldwide. "We identify values and when we find them we take a position in them," says Yosri. "Our objective now is to maximise the opportunity but at the same time mitigate the risk. You'll find that today's kind of investor is not willing to have the same kind of risk that he had in the past."

The fund does not focus on any particular industry sectors, giving it further freedom in its investment decisions. "We are flexible but we are comfortable with certain industries - we like the financial industry, but you don't see a lot of depth here. There is a very limited allocation of opportunities," says Yosri.

"We look for industries with sustainable growth. We like the predictability of the revenue stream, and we try to stay away from those industries with fluctuating revenue, that are subject to unexpected market conditions. We try to stay away from those, or when we take a position we take it for a short period of time, not on a long term basis."

The Enmaa' fund has already proved attractive to investors from the region, with the investor base no doubt broadened by its low minimum investment of US$1,000 and the decision to waive its 2.5% placement fee for female investors, as part of its arrangement with co-sponsor Dubai Business Women Council.

3i Capital Group tries to analyse the make-up of its investor base to find out who they are and why they are investing.

"We have the high net worth individual, but we also have the small investor that doesn't want to risk much yet likes our growth strategy," says Yosri. "People are not willing to take the kinds of risk they used to take in the past - they don't want to put all of their eggs in one basket. They don't want to take the risk of managing their own funds.

"Not every investor can be a successful portfolio manager. You have to detach yourself from the investment, you cannot be emotionally attached to it.

"If you see the correction that happened a year and a half ago in the GCC market, you see that most investors are more cautious than they were in the past. The irrational exuberance is no longer there. People aren't willing to take the risk. They know that they're better off staying with professionals that know how to manage money, and when to take a position and when to get out."

The fund has made a deliberate decision to appeal to retail investors, as well as the high net worth individuals traditionally targeted by funds.

"Everybody for the last 20 years has been going after the top 2% of the market, so to go after the other 98% you need to have a very strong, eloquent message," says Yosri. "For us, the growth potential is tremendous."

Part of its approach to attracting a new kind of investor is through product innovation. 3i Capital is working on launching an Islamic ETF (exchange traded fund) on Dubai Financial Market by the end of this year. It will also develop a real estate fund, based on the group's experience in investing in the sector in the UK.

"It's going to be hybrid, it's not going to focus on a single market," explains Yosri. "It's going to be spread quite nicely and expected return on it is going to be along the lines of 25% annually, if not more. This is going to be $100m, but it is likely to grow to $300m.

"We are very bullish on the Saudi market and we are in discussion with a number of Saudi institutions to partner with us on launching this fund. All the indicators we're getting so far are that we would need to scale it up higher, especially in the Saudi market - there is a tremendous opportunity there."
3i Capital is likely to capitalise on the Kingdom's young population and the growing demand for mid-priced housing. "That's a market that we're focusing on as we speak," says Yosri. "We're talking to a number of developers on partnering with us in launching this fund."

Yosri is aware that there is plenty of competition for investment from other Islamic instruments, which are growing in sophistication all the time. He supports the developing sophistication of the sector, even though some have criticised new Islamic finance products for stretching the limits of Shariah compliance.

"As the industry grows, there will be some hiccups," he says. "It's good to experiment with different products. I'm a firm believer in market dynamics. Let the market decide which products should survive and which products should go. If there is a demand for the product, it's going to survive on its own. If not, it's going to disappear."

Yosri is a clear believer in market forces - an opinion that extends to regulation. "I'm not a fan of regulation," Yosri admits. "The less regulation, the better. Let the market govern itself. Let the market dynamics decide what is good and what's not good. Let the industry grow on its own. Government should protect, but it should not really do anything more than that."

He points out that the disclosure requirements to which the group is subject can sometimes be a hindrance.

"We are an open book," says Yosri. "Everyone in the public knows what we do and who we are, and our track record. Disclosure is an issue and it hurts you a bit because it reveals to the competition more than you would like to reveal."

Hedge funds, of course, do not face such restrictions, but may find it harder to demonstrate that they are making healthy investment choices. The Enmaa' fund is able to use this to its advantage.

"If you consider the fact that we invest in not only publicly-traded companies but also private equity pre-IPO, isn't that what a hedge fund is?" asks Yosri. "But ours has the legitimacy that is lacking in hedge funds because it is a public fund, a public fund subject to rules and regulations. It's heavily regulated so we have a lot of credibility."

The group's investments are not only overseen by the regulator, but also by its Shariah advisor, Dr Daud Bakar of Dow Jones Indexes, and its special advisor HE Anwar Ibrahim, a former Finance Minister of Malaysia.

With a base in Malaysia and one in New York, the Dubai office is well-positioned to bring the benefits of their regional knowledge to Middle East investors. Yosri is in regular communication with the other offices, and believes that it is vital to maintain a global perspective in finance today.

"It's quite a challenge to communicate with our partners between three different continents, but that really reflects today's business," says Yosri.

"Especially in our space, you cannot have a local view because that would be the beginning of your demise as an institution. You just can't do it.

"You have to have a global view and you have to do your best. You have to accept this reality otherwise you should get out of this industry."

Fund focus: the Enmaa’ / Dubai growth fund in detail

Receiving bank:Emirates Islamic Bank

Custodian and administrator:HSBC Middle East

Managers:3i Capital Group to act as fund sponsor and The National Investor (TNI) to act as portfolio manager

Co-sponsor:Dubai Business Women Council (DBWC)

Special advisor:HE Anwar Ibrahim, Deputy Prime Minister of Malaysia (1993-98), Finance Minister of Malaysia (1988-98), Education Minister of Malaysia (1983-88)

Shariah advisor:Dr Daud Bakar, Dow Jones Islamic Indexes

Pricing:Share price is US$1 per share and minimum investment is $1,000

Management fee:2% of net asset value

Placement fee:2.5% (special waiver is given to certain organisations and groups)

Performance fee:20% of the annualised rate of return achieved by the fund over 10%

Net asset value:Calculation is based on the closing price of stocks in fund on a weekly basis

Exit / redemption:Friday of each week with a five-day notice. Exit fees are set at 1% for redemptions in the first two years

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