Recently, BLOM Invest has launched an investment fund, the BLOM Cedars Balanced Fund. The fund is an open-ended mutual fund with weekly subscriptions and redemptions. It is a balanced fund in that it combines two asset classes: Fixed income from bonds, which comprise 75% of the fund, and a maximum of 25% invested in stocks. The fund will invest only in Lebanese securities, both stocks and bonds. Executive talked to Michel Chikhani, head of Asset Management, and Bechara Bardawil, portfolio manager at BLOM invest to discuss this new entry into the family of Lebanese funds.
What is so unique about this fund?
Bardawil: It is unique in that it is the only all-Lebanese fund that actually has a component that invests in Lebanese equities. The previous funds in Lebanon all invested in fixed-income securities only. The idea behind the fund is to enable our retail customers to participate in the Lebanese capital markets with minimum capital, starting at $5,000. They would participate in this basket and take advantage of any recovery that these capital markets should enjoy in case the situation in Lebanon stabilizes and would enter into a phase of catch-up with the rest of the region. Basically, this is a way to boost the return they are getting on their deposits especially in the climate of declining interest rates on the US Dollar.
Chikhani: Features such as weekly redemption and subscription allow investors to move into the fund more frequently, and eventually, if they want to move out from the fund, they can. In terms of the process of management, the risk management is very different because you have two asset classes — one of them is equities and the way we deal with equities is very different from how we deal with fixed income.
There are three aspects that are immediately striking: The low buy-in rate, the focus on Lebanon and the weekly redemption. Can you expand on these three aspects?
Chikhani: Concerning the low buy-in rate there are a lot of people that have savings and who are depositors. These people are potential investors, but unfortunately no one is addressing them as such. These potential investors are not able to take advantage of any of the opportunities that an investment could bring, instead they are just putting their money in bank deposits. If you take into consideration any country where you have people with small amounts of money, they still have access to investment vehicles. We started with $5,000 because any amount less than that we don’t see as being an investment.
We have two tranches of units, which is another unique aspect of this fund — one of them capitalizes and another distributes. Currently, people know more about interest rates and the bond market but very few understand the stock market. If one looks at the stock market from the perspective of the BLOM Index then it was very rewarding to stay invested in the Lebanese stocks. We don’t have a lot of Lebanese stocks but their performance has been significant for any one wanting to invest in them. However, in order to approach these markets you need professional people in terms of investing and this is what BLOM Invest is offering in this fund.
Was a weekly redemption approach taken so investors could easily get in and out?
Chikhani: It is much more to get in than to get out, because if someone has money he does not wait until the end of the month to decide to enter into an investment. People don’t want to lose time waiting for an opportunity. If they believe they have to invest, they want to do it now and this fund will give them the opportunity. All are liquid investments and as this is an open ended mutual fund there is no need to place money on a monthly basis. The weekly redemption is also for those that want to get out. If someone wants to redeem units to the fund, most likely the client needs this money for something else, so why should he wait a month to get his money out?
What is the recommended amount of time that people should leave their money in for it to properly mature?
Chikhani: As long as it takes to realize the expected annualized return. Otherwise, we recommend two to three years, the optimal being three years. Also, it is important for this fund that, since it has opened a window to the equity side, it will accompany the investment universe of the equity for the next 15 years. So basically, if we have more stocks that are going to be listed on the Beirut Stock Exchange or Lebanese stocks that are going to be listed abroad, it is going to be able to give access to the development of the financial markets as well. It is not to be restricted to what is available today in the market only.
Now, the proportion of 25/75 is one that we think is the most conservative knowing that the universe of stocks is very limited and quite correlated. However, with time we may change this within the prospective of the fund, or launch other funds once the underlying proportion has changed. We give the investor the opportunity to invest in everything that is available through a balanced formula, which we believe is conservative. And over the long run, we continue to offer investment vehicles that portray the Lebanese market universes in terms of liquidity, availability and instruments.
Bardawil: Although a lot of high net-worth individuals were interested in this fund, the bulk of people that this fund is aimed at are not the type of investors who would invest overseas, say in the US, Europe or China. The people attracted to this fund, psychologically, like to be close to where their money is invested. They know Solidere and the major banks and are living the economic and political situation everyday. For them it makes sense to invest in their own country.
Chikhani: We are very keen for the investors to know exactly what they are investing in. We don’t want people to think that we are offering something that we are not. That is why we kept the proportion of fixed income at a high level to protect the capital, although we don’t think the stocks will fall to zero. We took the maximum the stocks are going to fall, which would be a theoretical zero, and made sure it was protected. Although many investors have a lot of money, they are not the main target of this fund. We think that the retail market needs to be more educated and the road is long. What we are doing is conservative, heavily controlled but at the same time not static and forward looking, and certainly it is for the benefit of our customers.
It is very interesting that you focus on the Lebanese market. Is it not a high risk and unstable environment to invest in currently?
Chikhani: There is still a very wide gap between interest rates, the differentials between what we can get inside Lebanon and outside. Investors in Lebanon are all invested indirectly in the same instruments that we are talking about. We are talking about the fund that invests in securities in which the underlying investment is $30 billion already held by Lebanese whether this is eurobonds, directly or indirectly through the banks, or it is the stock market. So we are not trying to find some illiquid markets that we want to be in. We think that there is a sufficient underlying state in the market, which is already held by Lebanese and or institutions in and outside Lebanon that can justify the launching of a fund with such instruments. Now concerning the instability, the Lebanese market has proven resilient and uncorrelated to other markets. The volatility of the market is quite controllable and very low. We have seen major events taking place in summer 2006 without too many incidents on the market. If we take into consideration the risk of the instruments that we are involved in, we take into consideration liquidity risk, or counter value risk, or default risk, each component, whether fixed income or equity, has a different risk. We believe that by investing with deposits on the one hand, through papers from the central bank and commercial banks, through papers issued from the Lebanese government and through equities that are not held by the Lebanese government we are offering a nice combination for investors, which is 40-50% invested inside the government debt. We are betting on the dynamics of Lebanese corporations and their momentum outside the country, namely Solidere, and the main banks as well as other companies that may step in. We have valued many banks and see that their PE ratio and price book ratio are much lower than at other banks in the region, and so they are at attractive prices despite the unstable political situation. All the companies on the Beirut Stock Exchange have the desire to expand internationally, so it makes sense to include them in the portfolio.
Thus, although the political situation is unclear, many other issues have been quite stable in the country, in terms of development of business and the international development of business. The valuation is still low and we believe that all these criteria mean that it makes sense for investors to step in. We believe that the assets in which we are investing today are under-priced. The question is not just “Why now?” It is a question of valuation in a certain point in time, how much we want to value our investments in stocks and equities. The whole environment gives us a very decent price to step in.
What rate of return do you expect?
Chikhani: We believe it to be a between 8% and 12% plus.
Bardawil: This is annualized over a period of three years.
Chikhani: The benchmark is to be able to exceed the deposit rate and to give something that will compensate for the inflation rate, while also keeping this investment liquid, which is why it has a weekly redemption. For us, 8-12% is a very decent return.
How has the fund been received so far?
Chikhani: The initial subscriptions have been more than expected and we are continuously receiving new ones.
Bardawil: There have also been very few redemptions, which means that people are not getting cold feet about this. Hopefully, our efforts, at BLOM, to instill in our retail customers the culture of long-term investment are succeeding.
Chikhani: But this is also because people know why they are investing as well. We have provided enough awareness in our branches and our staff to convey the message to our customers. And now we are moving broadly toward the market, but the product is not just dedicated to be sold in the Lebanon, but around the world.
