Mena’s alternative space leaves a lot to be desired, with few players willing to step up and take a risk on a largely untapped segment. But Saudi Arabia’s Ajeej Capital is doing just that, bringing a hedge fund mentality into a long-only space, with mixed results.
The gamble appeared to pay off for the company when it saw the AUM of its sole product, the Ajeej MENA Fund, hit $250-300m just prior to the 2008 global financial crisis. But the crisis took its toll, and like many others, the fund has struggled to regain ground. “The reality is we are still under water from when we launched the fund, by about 11%,” says CIO Fouad Dajani. “What happened for us was that we had limited liquidity on many of our positions and we got hit really hard in September and October 2008. “We were always a conviction manager and we did not trade ourselves out as we should have during those periods. We have tried to learn from that and combine our slow-twitch muscle of ascertaining intrinsic value and faster-twitch muscle of saying ‘these are the global indicators, these are indicators of how the markets are looking’ to help ourselves to be more agile relative to what we were before.”
Now Dajani and Ajeej’s CEO, Tarek Sakka, are anticipating renewed investor interest in the Mena market, with long-term investors such as US endowments and sovereign wealth funds (SWFs) taking another look at the region. Ajeej plans to capitalise on this sentiment by maintaining the alternative, long-term investment strategy which it has followed since inception, hoping it will bring the fund’s current AUM (of between $60m and $80m) back to pre-crisis levels.
“Obviously the general view on the Mena opportunity now is quite negative globally,” says Sakka. “The market took a beating in 2008 and it never really recovered in the same way that the rest of the world did. That’s why all of a sudden we are seeing a substantial turnaround of investor interest in Mena. It’s mainly because of the dislocations that are out there.”
However, Dajani admits that there is still a certain “fear factor” in the market, caused by a seemingly never-ending stream of economic and geo-political crises over the past five years. “We haven’t had a break,” he adds. The fund’s returns have certainly reflected variable market conditions. Since Dajani and Sakka began their strategy in 2003, annualised returns have been in the range of 40%, but this figure has dropped in the post-2008 environment. “We need to be realistic about it,” says Sakka. “From this juncture we may be able to get such returns for a year or two but from a long-term perspective what we target is in excess of 20-25%.”
Market focus
“Running a single market fund is extremely challenging,” says Dajani. “It’s not the single market but it’s the domain of being only in Mena in a very challenging period over the last three years.” Tarek Sakka and Fouad Dajani have been investing in the Mena market since the mid-1990s and previously managed a multi-billion dollar regional portfolio for the Olayan Group.
As the name would suggest, the Ajeej MENA Fund invests exclusively in the Mena region. At present, it is more than 60% invested in the Saudi market, with around 25% in Qatar and approximately 10% in the UAE. “We’re based in Saudi, but our coverage is Mena, and our base in Saudi isn’t so much driven by the fact that it’s the largest market and the most important market, but rather that we have grown up here and spent a great deal of our professional life in Riyadh,” explains Dajani.
Both Sakka and Dajani are bullish on the UAE and Qatar as investment destinations, but the fund’s bottom-up approach means that volatility is more likely to come from its chosen positions, rather than general market performance.“It’s so much to do with the underlying portfolio and how our top five positions do,” says Dajani. “Because we’re so concentrated, our top five holdings can be anywhere from 40-65% of the fund, so our returns are very much dependant on the movement of these stocks.” As a result, the fund performed particularly well in March and April, while the majority of Mena’s funds struggled to stay out of negative territory. But Dajani is pragmatic about performance highs and lows.
“We are very static, we’re not a high-velocity fund,” he says. “I think that the last few years have been very different to what we had been accustomed to. Our story is very much just starting to be recognised by the market, so we don’t get excited when we have a good month; we get excited by what our potential portfolio can reap.”
High-stakes strategy
As a single market manager in a largely frontier space, the pressure is on Sakka and Dajani’s investment strategy to deliver. Their managed account strategy has been in place since 2003, four years before the Ajeej MENA Fund was officially launched. “Our strategy is driven by following a conviction approach to fundamental investing in the region,” says Dajani. “We are very much geared to determining and understanding the relative and absolute intrinsic values of the Mena region.”
Sakka describes this as a “long-term perspective” and as such, the pair are primarily targeting institutional investors in the shape of US endowments and sovereign wealth funds that mimic this strategy. “Our most compelling type of investor is US endowments because they are sophisticated in terms of having the experience and knowledge of emerging market investing and they are long-term investors, which fits with the strategy that we have,” says Sakka. “It’s very important who you actually get on board as investors, because having certain types of investors may hurt a lot of others as well. So we try to be selective.” While the fund suffered in the wake of the 2008 crisis, it managed to largely avoid the 2006 market crash due to its bearish stance on the GCC and Saudi. According to Sakka, Ajeej stayed out of these markets due to worries over accelerating levels of consumerism.
In lieu of more sophisticated hedging options, the fund managers have opted to maintain significant cash positions in times of high risk, going as high as 85% in 2006. At the height of the Mena geopolitical crisis in March, the managers moved 40% of the portfolio into cash.
“We are very much an alternative investor, but that is defined more by our conviction approach, concentrated portfolio and benign activism rather than our ability to go short,” says Dajani. “Our philosophy is to be investing behind companies, not to bet against them, so we don’t expect to be attributing returns from the short side. Moreover, inventory is a problem in Mena: if you’re looking to short in Mena when things are going badly, you’re not going to find the inventory, so typically cash is the best form of a hedge.”
Dajani adds that he does not expect shorting to become a reality in Saudi Arabia in the near future, although there have been renewed talks for some form of legitimate short selling in both Bahrain and the UAE recently. But conservative financial guidelines are unlikely to hinder Ajeej’s ambitions. “We strongly believe in the strategy that we have,” says Sakka. “I believe that holding on for the long term will be extremely valuable for us as an independent asset manager.” In the long term, the managers hope to see the AUM of their flagship fund rebuilt to pre-2008 levels, and Dajani suggests they may be looking to grow their investment team to reach this end. However, both managers rule out further fund launches in the near future.
“We are not a supermarket of products,” says Sakka. “We are a very niche player but we have a strategy we believe in and we believe there are enough investors out there that would like this strategy. We continue to be a very focused alternative manager. “We want to bring to the region an independent alternative money venture that aspires to have the level of professionalism and calibre and standards of the best of breeds on a global basis. Obviously this is a very challenging time, but I personally am very proud of what we have achieved and the reputation that we have developed over the years.”
