The Saudi unit of Egypt's EFG-Hermes plans a fund to invest in listed Saudi Arabian sharia-compliant shares and initial public offers, hoping to benefit from the regulator's drive to increase institutional investment in the bourse.

Authorities will open the bourse to direct investment by qualified foreign institutions on June 15 as part of a strategic plan to raise institutions' share of activity in a market dominated by retail investors.

EFG-Hermes says nearly a third of its $3 billion of assets under management is in Saudi Arabia, with SR1 billion ($265 million) managed by its Saudi unit.

It obtained regulatory approval in May to launch the flexible, open-ended equity fund, named "Hasad". It is in the process of raising funds and expects to launch by end-June, said Majed Kabbara, director of asset management at EFG-Hermes Saudi Arabia.

"We are initially targeting a size of SR50 million but, with the huge interest in the Saudi market, we expect this size to exceed that of our conventional equity fund, which now stands at SR117 million."

The fund will invest in shares of listed firms that meet Standard and Poor's sharia compliance standards. These screen out companies involved in industries seen as un-Islamic, such as conventional banking and tobacco, and those with excessive leverage.

Kabbara said interest was growing in Saudi funds, especially IPO funds, partly because the Capital Market Authority was giving institutions bigger allocations.

In the past, IPOs were allocated 50-50 to institutions and retail investors, but in the three flotations this year, institutions were allocated 60 per cent.

"Every year, there will be an increase of 10 per cent, as the CMA seeks to allocate 100 per cent of IPO shares to institutional investors within five years - of this, funds will be allocated 90 per cent," Kabbara said.

The CMA is also encouraging funds to have very low minimum subscriptions in order to persuade retail investors to put more of their money in funds, he added.

Kabbara said EFG-Hermes Saudi Arabia's assets under management had risen to SR1 billion from SR680 million at end-2014, SR350 million at end-2013 and SR150 million at end-2012.

He predicted Saudi banking stocks would outperform in coming months, benefiting from rising US interest rates, which would trigger an increase in Saudi rates because of the riyal's peg to the dollar.

In addition, the Saudi government is expected to resume issuing debt to cover a budget deficit caused by low oil prices. Banks are expected to be a major investor, boosting their returns. - Reuters