The manager of one of the world's best-performing mutual funds, the Dubai-based Daman Fifth Fund, says there is still plenty of upside in Gulf Arab markets despite the plunge of oil prices.

Daman Fifth was ranked the top-performing alternative mutual fund in 2014 by the prestigious Preqin Global Hedge Fund report, with a net return of 232 per cent that year. It was second in the ranking for the three years through 2014 with an annualised return of 73 per cent.

The open-ended fund, run by Daman Investments of the United Arab Emirates, focuses on markets in the six-nation Gulf Cooperation Council - so its performance underlined the growing importance of the Gulf as a portfolio investment destination.

In the past three years, Daman Fifth rode a spectacular recovery of the Gulf's equity markets from the global financial crisis. The Dubai stock index more than doubled in 2013, making it the best-performing major market in the world.

Cheap oil has now knocked the Gulf markets back, hurting the finances of the governments whose spending propels economic growth. Daman Fifth has sought refuge in cash; 65 per cent of its assets were in cash at the end of February, according to a monthly statement.

But Shehzad Janab, head of asset management and advisory business at Daman Investments and manager of Daman Fifth, said he did not think low oil prices meant the GCC was in for a long period of poor market performance.

"If you look at valuations, there are plenty of opportunities. Most of the stocks in the region, with the exception of the Saudi petrochemical sector, do not depend on oil prices," Janab said in an interview.

He said equity valuations were now attractive, with Dubai's stock market trading at roughly 7.8 times projected 2015 earnings with a dividend yield of 5.7 per cent. "From a longer-term perspective, a lot of stocks are now on our value screen."

Janab argued that the UAE credit cycle was not close to peaking. Gross bank lending grew 8.0 per cent from a year earlier in December, but he expects growth eventually to hit double digits, though perhaps not to return to the 30 per cent-plus rates seen during the boom before the financial crisis.

Daman Fifth has raised its allocation to Saudi Arabian equities to 10 per cent, from 5 per cent at the end of February, on expectations that the Saudi government - like other major GCC governments - will draw on its huge fiscal reserves if necessary to continue spending on the economy.

The fund is focusing on Saudi stocks related to rising incomes and living standards, such as Al Tayyar Travel Group and Bupa Arabia for Cooperative Insurance. With a possible US interest hike looming, it currently has no significant money allocated to fixed income.

STRATEGY

Daman Fifth, which does not disclose its monetary size, caters mostly to rich individuals, family investment offices and institutional investors from within the Gulf.

It operates with some of the flexibility of a hedge fund, though it is not as leveraged as many hedge funds and the Gulf's plain vanilla financial markets, where currencies are pegged to the US dollar, short-selling is banned and few derivatives have been developed, rule out some strategies.

British-born Janab, who worked for over a decade at UBS, HSBC and Credit Agricole before joining Daman Investments in 2009, said his fund had succeeded partly because it aimed for absolute returns rather than benchmarking itself against indexes or other funds.

This is important in Gulf markets which are dominated by individual investors trading for the short term, and where even institutional investors such as insurers have relatively short-term horizons, he said.

Trading actively is also key because of the lack of hedging tools in the Gulf. "We have to use allocations between asset classes and cash as a form of hedging."

A third core strategy is a relentless focus on valuations, Janab said - important to avoid getting burned by wide swings in some of Dubai's most heavily traded stocks.

A planned initial public offer of shares by Daman Investments this year aims to help it expand its business.

Janab said the company would decide in a few weeks whether to sign up to the European Union's Undertakings for Collective Investment in Transferable Securities (UCITS), or Luxembourg's Specialised Investment Fund regulations under the EU's Alternative Investment Fund Managers Directive (AIFMD).

Such a move would help Daman market funds to European institutional investors. Further out, it will look at business with US institutional investors, Janab said. – Reuters