After only a year since its inception, the AZ Fund Al Mal MENA Equity fund has surpassed the $55m mark, boding well in achieving its $250m AUM target.
The fund, which invests only in MENA equities, is a collaboration between UAE’s Al Mal Capital (AMC) and Italy’s Azimut Group.
It owes its outperformance to an investment process that is focused on targeting companies and sectors where the fund sees value and strong potential growth over a time horizon of three to five years.
AMC has been focused on MENA equities as it sees that the asset class is largely underserved and is misunderstood by the rest of the world.
‘We invest in companies where we have good visibility on its future cash flows and a good management team. Normally in turbulent times investments in low-quality names significantly underperforms the high-quality names. So, our initial positioning helped us navigate the early market repercussions,’ said AMC’s head of asset management.
‘We were able to rebalance our holdings that we felt would benefit from the COVID-19 pandemic while exiting names that we thought would suffer. This allowed us to outperform both when the market dropped and recovered,’ he added.
The sectors that El Haddad sees generating value and benefit from the pandemic are technology and select healthcare names. In the technology space, AMC identified fintech opportunities that would not only be resilient to the environment but also benefit from the e-commerce and online payments boom.
‘We selectively rotated within the healthcare sector and positioned ourselves more towards names likely to benefit such as Covid-19 pharma producers or companies benefitting from government spending as a result of the virus,’ El Haddad said.
He uses a bottom-up approach for this fund. Beginning with liquidity screening, AMC looks for favourable themes or macroeconomic trends before selecting the companies preferred.
Within the stock selection process, AMC likes companies that have an edge over its peers and builds its assumptions, before approaching the management team to finalize the base, worst and best-case scenarios.
In line with this process, the fund has positioned itself to capture trends across various sectors and themes accelerated by the pandemic.
The fund has included looking beyond financials, telecoms and materials sectors—which account for roughly 80% of the index across most of MENA.
Further, with around 30% exposure outside the GCC, the fund can avoid any excessive downside risks that could arise from cuts in government spending amid falling oil revenue and subsequent austerity measures.
Banks in the region are expected to continue feeling pressure not only due to poor quality NPLs, but also due to the low interest environment that puts further pressure on their spreads.
As a result, the fund is more focused on undeserved sectors namely education, healthcare, utilities, and consumer staples across the region, generally constituting a much smaller portion of MENA indices.
‘Equities will continue to deliver value and growth compared to fixed income products, as long as interest rates are close to zero,’ El Haddad said.
‘Risk adjusted returns favor a more bullish equity allocation. We also believe precious metals make an interesting case with a global monetary policy of negative interest rates.’
AMC has also adjusted its client approach focusing more on communication and transparency in its investment process and the names it holds.
El Haddad said that this tactic has been well-received as the firm managed to raise more cash having a higher level of trust from its investors.
He remains cautiously optimistic foreseeing a few macro issues. There is a high risk of a second wave and another lockdown across the region and the repercussions it would have on oil price and demand.
Going forward, the fund looks to leverage trends fueled by Covid-19 and find value through underserved sectors and turnaround plays.