Principal Risks and Mitigants of Investing in Investment Funds
The value of any investment in the Fund will fluctuate due to changes in the market value of the underlying investments. The Fund has identified the following risks for investing in equity and debt securities, and has also endeavored to highlight strategies which may mitigate these risks to an extent.
Risks specific to equity investments
a.) Equity/Market/Economy Related Risks: The value of investments may fluctuate in response to the activities of individual companies and general stock market and economic conditions, and stock prices may go up or down over short or even extended periods. Equities are more volatile - likely to go up or down in price, sometimes suddenly - and are riskier than some other forms of investment, such as short-term high-grade fixed income securities. The stock market has been subject to significant volatility recently which has increased the risks associated with investment in the Funds.
The Mitigant/Management Strategy: The fund shall invest in quality equity and equity related securities in order to reduce the equity/market/economy related risks. Use of comprehensive equity research capabilities enables the Investment manager to reduce such risks.
b.) Risk associated with dividend yield stocks: The Fund’s investments would be in companies having a track record of dividend payments. Performance of the Fund would depend on the ability of these companies to sustain dividends in future. The stocks of dividend yield companies may, at times, be relatively less liquid as compared to growth stocks, which may impact the price of the stock and hence, the performance of the Fund. There could be time periods when securities of this nature (high dividend yield stocks) would underperform relative to the general market. This could have an impact on the relative performance of the Fund over different time periods.
The Mitigant/Management Strategy: The fund shall be diversifying by investing into more than one dividend yield company from the GCC region and the selection of companies will vary in terms of fundamentals and liquidity factors. The Fund will always consider dividend history as an important factor for selection of high quality dividend yield stocks in GCC region. Also, the Fund will consider liquidity as an important factor in investment decision making (there can be no guarantee that this objective can be achieved at all times). This risk can be reduced by the Fund through weighting allocations towards highly liquid stocks.
c.) Political and/or Regulatory Risks: The Fund may be adversely affected by uncertainties such as political developments, changes in government policies, taxation, restrictions on investment and currency repatriation, and other developments in the laws and regulations of the countries in the Investment Universe.
The Mitigant/Management Strategy: Such risks are not predictable in nature. However, the Investment Manager will consider the above risk factors before arriving at an investment decision for the Fund.
d.) Exchange Rate Risk: With the exception of the Kuwaiti Dinar, all other GCC currencies including the Omani Rial are pegged to the U.S. Dollar. The Fund will be investing in securities denominated in GCC currencies and in U.S. Dollar denominated bonds.Hence, any change in the peg of these currencies against the U.S. Dollar would affect the return on investment.
The Mitigant/Management Strategy: Since, most of the currencies in the Investment Universe are pegged to US dollar, such risks are lower. The Investment Manager shall maintain constant vigil on any change in currency pegging in the Investment Universe and shall initiate steps to protect the interests of the Unitholders to the maximum extent possible.
e.) Concentration Risk: Concentration risks might increase depending on specific investment in certain companies or certain sectors in the Investment Universe in order to achieve the objectives of the Fund.
The Mitigant/Management Strategy: Concentration risk can be reduced by adopting diversification strategies. The Fund shall be investing in more than one sectors to reduce such risks. In addition to this,the Fund shall have maximum exposure limit of 10% (of NAV) for any single stock in the portfolio. The fund shall implement asset allocation strategy referred to in Page 13 of the Fund’s Prospectus. This reduces the concentration risks.
f.) Liquidity Risk: The Fund could be exposed to liquidity risk in case traded volumes of securities in which the Fund has invested, experience a decrease in dealings volumes,which in turn might make it difficult to provide liquidity when Unitholders request redemptions.
The Mitigant/Strategy: The Fund will consider liquidity as an important factor in investment decision making (there can be no guarantee that this objective can be achieved at all times). This risk can be reduced by the Fund through weighting allocations towards highly liquid markets/stocks.
Risks specific to Debt/Fixed Income Investments
The fund will limit its exposure to debt and/or fixed income instruments up to a maximum of 20% of NAV at any given time. Such risk on the Fund is expected to be limited to the extent of maximum exposure of 20%.Such risks are as follows:-
a.) Interest Rate Risk: Changes in interest rates may affect the Fund’s NAV as the prices of securities generally increase as interest rates decline and decrease as interest rates rise. Prices of long-term securities generally fluctuate more in response to interest rate changes than do short-term securities. There can be volatility leading to the possibility of price movements up or down in fixed income securities and thereby to possible movements in the NAV.
The Mitigants/Management Strategy: The Fund will endeavour to invest in a basket of debt and other fixed income instruments with varying maturity, based on market conditions (at the discretion of Investment Manager for defensive strategy under specific market conditions). Use of fixed income strategies would aim to reduce such risks to the Fund.
b.) Liquidity/Marketability Risk: This refers to the ease with which a security can be sold at or near to its valuation yield-to-maturity (YTM). The primary measure of liquidity risk is the spread between the bid price and the offer price quotation. Liquidity risk is not ruled out for GCC fixed income instruments.
The Mitigants/Management Strategy: The Fund will consider liquidity as an important factor in investment decision making (there can be no guarantee that this objective can be achieved at all times). While the liquidity risk for government securities and other short maturity bonds may be low, it may be high in case of medium to long maturity corporate bonds. Liquidity risk is a characteristic of GCC fixed income instruments. The fund will however, endeavor to minimize liquidity risk by investing in securities having a liquid market. Also, strong institutional capability of the Investment manager having relationship in the region is expected to reduce such risks.
c.) Credit Risk: Credit risk or default risk refers to the risk that an issuer of a fixed income security may default (i.e. will be unable to make timely principal and interest payments on the security). Because of this risk corporate debentures are sold at a yield above those offered on government securities, which are sovereign obligations and have a low probability of default. Normally, the value of a fixed income security will fluctuate depending upon the changes in the perceived level of credit risk as well as any actual event of default. The greater the credit risk,the greater the yield required for someone to be compensated for the increased risk.
The Mitigants/Management Strategy: The Fund shall consider credit risk as one of the most important factors to consider before investing into such securities. The Investment Manager’s capabilities in identifying issuer’s strength in repayment will be used to reduce such risks. In addition to the Investment Manager’s own assessment of the quality of the issuer, weightages on credit ratings shall be applied to reduce such risks.
d.) Reinvestment Risk: This risk refers to the interest rate levels at which cash flows received from the securities in the Fund are reinvested. The additional income from reinvestment is the “interest on interest” component. The risk is that the rate at which interim cash flows can be reinvested may be lower than that originally assumed.
The Mitigants/Management Strategy: Reinvestment risks will be limited to the extent of coupons received on debt instruments, which will be a small portion of the portfolio value.
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