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Fund managers seek benchmark switch post MSCI’s Saudi ban

Passive managers seen shifting mainly to S&P indices * Institutional clients demand benchmarking against index.

October 12, 2010 1:08 by



Asset managers in the Middle East and North Africa region are set to switch to Standard & Poor’s indices in the wake of MSCI’s move to drop Saudi Arabian stocks from its compilation after a dispute with the bourse, fund managers said on Tuesday.

The move by MSCI, which came into effect on Sept. 30, will leave passive managers, who measure their performance against a recognised index, in need of a new benchmark.

MSCI, a widely tracked and influential index provider, said in July it would drop all indices with Saudi stocks after failed negotiations with Tadawul , the kingdom’s bourse, over the licensing of information.

“S&P not only has a lot of choices but it is also very cheap. Remember, these indices do come at a cost and that matters,” said one fund manager with a prominent international bank who did not want to be named.

“To be honest, I have not seen any fund managers who have come out and said I will stick to MSCI despite them not including Saudi,” he added.

MSCI officials were not immediately available for comment. A spokesman for the Saudi bourse declined to comment.

Saudi Arabia is the largest stock market in the Gulf Arab region and fund managers have been scrambling to get an exposure in the market, considered more diverse than most other Gulf markets, where banks and real estate companies dominate the index.

Foreign institutions are not allowed to buy directly in Saudi Arabia and access the market through instruments known as participatory notes. The Tadawul index has gained over 4 percent so far this year after rising 27 percent in 2009.

WINNERS AND LOSERS

A shift to a different benchmark may prompt investors to buy into stocks which may have a high allocation in the new index and sell stocks whose weighting may go down, following the path of passive managers who base their portfolio on a given index.

“Given the limited size of passive managers in the region, one should not expect big pop ups like in the developed world,” said Shehzad Janab, head of advisory and asset management at Daman Investments in Dubai.

In a research note, Credit Suisse said Saudi lender Samba Financial Group will be the winner, while petrochemicals giant Saudi Basic Industries Corp (SABIC) would be hit most from a “re-balancing” of portfolios to a new index.

The investment bank said it expected most fund managers in the region to move to S&P’s Pan Arab Composite or S&P Pan Arab Composite LargeMidCap index following the MSCI ban.

It said Samba would be among the top ten stocks in the re-constituted index and would have a 2.6 percent weighting, where as it was not part of the MSCI Arabian markets index. The brokerage expects SABIC’s weight falling by 50 percent to only 5.6 percent in the S&P Pan Arab Composite Index.

“If you start getting institutional clients demanding a benchmark, you’ve got to switch, and the most represented is the S&P,” Daman’s Janab said.

(Reporting by Dinesh Nair, Editing by Louise Heavens)



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