Volatile times bring out the best virtues of proper financial planning. That’s why to ensure that an investment pays off, one must get smart advice on products that meet an investor’s needs, paired with sound guidance in overall portfolio allocation and backed by thorough contextual research. But before committing to a relationship with a top finance house in volatile times – which appears a permanent condition in Lebanon for now – the investor is increasingly asking for information on what the experts are thinking. Around the world, brokerage firms and asset management experts indulge those requests by producing – carefully non-committal, of course – investment advice columns, market outlooks, and research highlights. So that being the case, why would the larger share of capable investment counselors in Beirut respond to an inquiry into the general direction of their advice over the coming six to 12 months with “I refuse to answer that question”?
Well, first because there is no one-size-fits-all piece of investment advice. To draw up a real portfolio one needs to tailor it to the situation of the client, the experts contend.
Not only the income situation but also personal need, age, gender, family situation, occupation, market knowledge, risk aversion and perception of local risk all must be taken into the equation, said the chairman of Financial Funds Advisors, Jean Riachi. “It is a very complex analysis that needs to be done on every person.”
This would explain why good investment advice can contribute as much to a person’s financial peace of mind as a bespoke suit can do for his appearance. It also reveals how client psychology is at least as important to financial services as economic occurrences are. Two individuals with the exact same profile on income and personal situation, in theory, should have the same portfolio. But, if one is experienced in investing in mutual funds while the other isn’t, “in reality, they should not have the same portfolio because their risk perception is not the same. If someone has never invested, he is likely to panic at the first drop and people get out of mutual funds if they are disappointed during a very short period – even though we tell them at the beginning that they should have a long-term approach,” Riachi said.
That speaks volumes about how young the relationship between the Lebanese and modern investment tools really is. In the past decade of a newly materialized post-war investor landscape in the country, financial institutions had to juggle the universal expectations and disappointments of their clients in context of a situation where these, often inexperienced, clients had to deal with either distant markets or very immature local investment environments.
Maturing investor confidence
For the financial firms, this evolution thus involved their share of conflict experiences, where disgruntled clients showed their mastery in the rituals of blaming others. But while it appears still common practice among local financial firms to guide overenthusiastic or excessively self-confident clients discreetly into the direction they should move without letting them feel that they are being nudged along, the brokers and traders also agree that the maturity of Lebanese investors has increased substantially.
It is refreshing then, that a few experts would volunteer some general advice for investor directional thinking over the coming six to 12 months. Arab Finance Investment House general manager Jamil Jaroudi, taking the perspective of SHARI’A-compliant advice, suggested that a good portfolio for investments in Lebanon could allocate 20% to 30% to productive real estate, 20% to 30% to liquid assets, 20% to Mourabaha trade finance paper and 20% to industry or agro-industry. In line with the assessments by international ratings agencies, one could not advise clients to keep all their money in Lebanon, offered the head of capital markets at Fidus, Nicolas Sawan. “A conservative client could keep 20% of his bonds in Lebanon and the remainder in investment-grade bonds,” he said.
In geographic allocation, a conservative investor today should not keep more than 50% of his total wealth in Lebanon, whereas an aggressive one could go up to 80%, Sawan suggested, and in asset allocation, fixed income and funds could account for 40% to 50% of a sound portfolio, equity markets 40% and the rest in cash. US markets, still appearing bullish in the longer term, could open some opportunities for traders, with some volatility towards the end of the year. Capital-guaranteed funds should benefit from the rising interest rate environment allowing fund managers to achieve higher returns in coming months, and for gold, the Fidus manager sees a bullish cycle operating, with an upward outlook in the longer term. His highest bet is on oil prices. The price of $70 per barrel is, he predicts, meaning investors favoring the taking of risks in the futures market could buy oil futures. According to Sawan, the best performing fund at Fidus was the Societé Générale International SICAW Fund. Managed by SoGen asset management, it achieved increases of 42% in 2003 and 6% this year. The broadest consensus the Beirut financial experts share in their outlook on the local market seems to be that tourism related and other productive real estate investments are a definite buy recommendation in Lebanon either through funds or direct project participation, while the equity and securities market at the Beirut Stock Exchange for many is a ‘not yet’ – which is actually better than the essential doubts some traders voiced on the BSE’s role two or three years ago. In this context, one important hopeful sign for greater public sector readiness to support the growth of the BSE is last month’s decision to list two of the eurobonds. Experts hailed the first-time listing of sovereign bonds on the exchange as a move towards making the BSE a more interesting place.
Nonetheless, the trading of securities still may have a ways to go before it can attract all potential issuers of funds on the local market. The Middle East Capital Group, which was a strong driver in listing banks on the BSE in the 90s, today would not in principle reject the idea of listing funds on the BSE. “Why not?” the firm’s new CEO, Walid Mousallam, told EXECUTIVE in his first interview with a Lebanese publication. But for the time being, he is not considering it, as MECG is currently able to structure their funds in the way they want and which makes sense for the firm. “We don’t see the need and we don’t see the benefits,” he said. “It would help the BSE but you don’t do these things unless you see the benefits of doing them. Taking such steps needs more market rationale.”
For Bank of Beirut, the sole private sector issuer to list funds on the BSE in the past two years, the rationale exists and has already worked, said Najib Semaan, Bank of Beirut assistant general manager in charge of treasury. “The BSE should be activated for listing more funds, bonds, and securities markets instruments. We have several funds listed on the BSE,” he explained. “In the past, we priced them by ourselves but there is always a bias if you price your own products, even as we always had the net asset value under control of an external auditor. For this reason, we took most of our fixed-income funds to the BSE.”
Lebanese investors hungry to be active participants in financial markets will continue to think and access in international terms. As controlled optimism about the local market potential is an increasing note of consensus among Beirut’s financial experts, local investors may, however, also benefit surprisingly from thinking domestic openings in the coming six to 12 months.
SUCCESS OF FUND RESULTS IN REPLICATIONBank of Beirut is so satisfied with the performance of its funds that it will issue another fund before the end of the year. The bank revealed to Executive that it is in the final stages of preparing the launch of Beirut Income Fund II, which will succeed the dollar-denominated Beirut Income Fund. “This is the first time that we replicate a fund due to success,” said Michel Chikhani, head of the BoB asset management department. After diagnosing a market need for better-managed local investment products, Bank of Beirut started in 1997 to work on developing their asset management and devoted two years of effort to preparing for client activities. When the bank introduced their first Beirut Income Fund in December 2000, initial investor appetite came from some 200 persons. As BoB developed their funds portfolio, which today spans four listed and three unlisted funds, this participation increased over the last four years to over 3,000 investors, 70% of which are resident or expatriate Lebanese.
The funds are based on a range of securities including Lebanese eurobonds and Treasury Bills, Certificate of Deposits, income securities by domestic banks, time deposits and fixed income instruments. Four out of the seven investment funds managed by Bank of Beirut are listed on the BSE, namely the Beirut Lira Fund, Beirut Interbank Fund, Beirut Golden Income Fund, and Beirut Global Income Fund. BoB collaborated with First National Bank in the creation of two of its funds.
According to Chikhani, Bank of Beirut approaches the subject of investment funds under the maxim of working to diminish risk associated with underlying assets while allowing for increased liquidity and securing improved returns for investors. Since most investors are oriented heavily toward the short term, the bank sees no obstacle to its funds business in the fact that current legislation limits funds to five years in duration.
“On average, our dollar and Lebanese Lira denominated funds have outperformed deposit rates by 3% to 4% and outperformed underlying assets by 1.5% to 2% on an annual basis from their launch,” Chikani said.