Cash may not be king in Bahrain, but it enjoys an exalted status within the Kingdom’s Social Insurance Organisation (SIO).
“Today, cash is the most comfortable asset class to be in. I’d rather earn 1 per cent than lose any money,” remarks Sheikh Mohammed Isa Al Khalifa, chief executive officer of the SIO, the entity responsible for investing the combined BHD3.5bn (€7bn) assets of the country’s public and private sector pension funds.
Cash accounts for 50 per cent of total assets under management, although it is planned to reduce this holding to 30 per cent. When it is satisfied that the markets have “settled down”, the SIO will shift 20 per cent of its cash into international fixed income and publicly-quoted equities.
“The first quarter results we have seen are quite encouraging, even though the markets did not react as well as we thought they would. That’s why we are going on trips to visit the external managers that are running our portfolios to understand where the markets are and hopefully to start allocating new money in the second half of 2009,” says Sheikh Mohammed.
He believes the downturn presents a great opportunity to invest at good prices in established companies with strong balance sheets in the US and Europe.
“We are looking for high value that has not been priced to date and we think that as soon as the market turns around we will see good returns. In the GCC [Gulf Cooperation Council], we are encouraged by the numbers being reported by companies that are achieving market expectations.
“Growth is continuing in the region. We have seen a lot of interest from American and European mutual funds investing in the region, which gives us a lot of encouragement to maintain, if not increase our GCC portfolio.”
That GCC exposure already accounts for 80 per cent of total investments and is concentrated mainly in cash in the Bahraini banking sector. The SIO is a major investor in local financial institutions such as Bank of Bahrain and Kuwait, and organisations such as the Bahrain Tourism Company and the Bahrain Hotels Company and local telecommunications company, Batelco.
Keeping money in bank deposits, says Sheikh Mohammed, has protected the portfolio from the volatility seen in international markets.
“We are on the boards of some of the financial institutions and so we know the inside story and we are happy with what is happening in Bahrain.”
Of the remaining 20 per cent invested internationally, 75 per cent is invested in the public equity markets of the US, Europe and Japan. The chief attractions are market liquidity and the ‘solid growth’ seen from large multinational companies. To date, little has been allocated to emerging markets due to high levels of volatility. The Indian and Chinese equity markets are viewed as established markets offering good investment opportunities.
While fixed income investments currently represent only a small portion of total assets, the SIO aims to build up a sizeable bond portfolio, containing both conventional and sukuk (sharia-compliant bond) issues.
Bahrain has been one of the leading markets for the origination of sukuk issues since 2001, when the Bahrain Monetary Agency, the forerunner to the Central Bank of Bahrain, issued the first sukuk bonds.
Sheikh Mohammed hails the sukuk as a “natural product” for matching the medium and long-term liabilities of the pension assets the SIO oversees. And while the organisation is not legally obliged to invest in a sharia-compliant manner, he maintains the approach is appealing.
“A lot of the leverage that was associated with non-sharia-compliant companies had a negative impact on the financial performance of those companies,” he says.
Alternative investments account for 10 per cent of total portfolio assets, spread between funds-of-hedge funds, private equity and venture capital.
Hedge fund investing, says Sheikh Mohammed, has proved beneficial when compared with the volatility of the SIO’s public equity holdings.
“We were down about 23 per cent in funds-of-hedge funds last year, compared with a decline of more than 40 per cent in some of our equity portfolios. And overall hedge fund returns have exceeded cash returns.”
The SIO has also been active in the private equity arena through the establishment of new ventures, mainly in the Bahraini tourism sector as well as some local housing developments. It aims to develop medium to low income housing in partnership with private sector concerns.
In addition, the organisation has teamed up with local financial institutions that are active in the international markets to co-invest in selected private equity projects. The organisation has also targeted venture capital investments in ‘centres of excellence’ close to major US universities such as Boston and San Francisco to take advantage of new technologies being developed. Such higher risk investments constitute about 5 per cent of total assets.
