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					                                                                                      Kuwait Financial Centre “Markaz”
                                                                                                                                                                                                                               RESEARCH



                                 GCC Equity Funds
                                                                                                                          The Asset Allocation Challenge

September 2006                   According to various academic studies, asset allocation explains majority of
Research Highlights:             performance in investment management. The boom in the regional capital
Issues behind asset allocation   markets has invited many institutions to offer GC C equity funds. A cursor y
for GCC equity funds.            look at the asset allocation for various GCC equity funds points to the
                                 existence of “home bias”. However, overweight to Kuwait and
                                 underweight to Saudi Arabia was observed in many cases. Analysis of top
                                 holdings also suggests that portfolio managers tend to favor a few but
                                 heavy weight stocks. The current slide in the GCC stock markets has
                                 turned portfolio managers very cautious as observed by the high levels of
                                 cash. This paper examines issues behind asset allocation for GC C equity
                                 funds.

                                 GCC Equity Funds – Basic Profile
                                 As per our count, there were 20 funds dedicated to GCC region. Most of
                                 the floatation happened during the last one year (2006: 7; 2005: 5). Kuwait
                                 had the largest share (8 funds) followed by Saudi Arabia (6 funds) and
                                 Bahrain (3). Only 30% of funds were Sharia’ compliant. Almost all Saudi
                                 funds are Sharia’ compliant. Most of the funds do not provide information
                                 on fund size. Based on the limited information available, Al Bashaer GC C
                                 Equity Fund (Kuwait Finance and Investment Co, Kuwait) & AlAhli GC C
                                 Trading Equity Fund (National Commercial Bank, Saudi Arabia) tops the
                                 list with a fund size of USD 393 million & USD 375 million respectively.

                                 Asset Allocation (August 2006)
                                    100%

                                     90%

                                     80%

                                     70%

                                     60%
                                                                                                                                                                                                                                                                                                                   Bonds
                                     50%                                                                                                                                                                                                                                                                           Equities
                                                                                                                                                                                                                                                                                                                   Cash
                                     40%

                                     30%

                                     20%

                                     10%
Author
                                     0%
M.R. Raghu, CFA FRM
                                                                                                                                                                                                                                                                             Aafaq Invesment


                                                                                                                                                                                                                                                                                               Arab Gateway Fund
                                                                                                        AlBasha'er GCC




                                                                                                                                                             Markaz GCC Fund
                                           SICO Gulf Equity


                                                              Khaleej Equity Fund




                                                                                                                                                                                                 Global GCC Large




                                                                                                                                                                                                                                                           Riyad Gulf Fund
                                                                                                                         Arab Bank Mena


                                                                                                                                          AlAhli Gulf Fund




                                                                                                                                                                                                                                      AlAhli GCC Trading
                                                                                                                                                                               NBK Gulf Equity
                                                                                    TAIB GCC Bluechip




                                                                                                                                                                                                                    Vision Emerging
                                                                                                          Equity Fund




Senior Vice President-Research
                                                                                                                                                                                                                        GCC Fund


                                                                                                                                                                                                                                         Equity Fund
                                                                                                                                                                                                     Cap Fund
                                                                                                                                                                                   Fund




                                                                                                                                                                                                                                                                                  Funds
                                                                                                                              Fund
                                                Fund




+965 224 8000 ext. 1200
                                                                                          Fund




rmandagolathur@markaz.com


Kuwait Financial Centre
“Markaz”

Address: P.O.Box 23444, Safat
13095, Kuwait
Tel: +965 224 8000
Fax: +965 242 5828
www.markaz.com
                                                                                                                                                                                                                                                        RESEARCH
                                                                                                                                                                                                                                                        September 2006

Fund managers have high levels      Analysis of asset allocation pattern for 14 funds on which
of cash                             information was available revealed that fund managers have
                                    turned cautious as observed by high allocation to cash b y
                                    most of the funds. Given the lack of information about fund
                                    size, it was not possible to estimate the weighted average cash
                                    holding for the group, but should not be less than 15% in our
                                    estimate. Arab Bank Mena Fund tops the list with an allocation
                                    of 43% to cash, followed by NBK Gulf Equity Fund at 39%.
                                    Global GCC Large Cap Fund (Kuwait) is more or less fully
                                    invested with just 1% cash component in its portfolio. High
                                    allocation to cash reveals a consensus mind set about
                                    low/negative expected performance of GCC stock markets
                                    relative to cash.

                                    However, strong rebound of GC C market towards the
                                    third/fourth quarter of 2006 may prove perilous to funds that
Geographic Allocation               are high on cash at the moment.
(August 2006)                       100%
                                     90%
                                     80%
                                     70%
                                     60%
                                     50%
                                     40%
                                     30%
                                     20%
                                     10%
                                     0%




                                                                                                                                                                                                                                                                                                                                                                Arab Gateway Fund




                                                                                                                                                                                                                                                                                                                                                                                        Market Cap
                                                                                                                                                                                                            Markaz GCC Fund




                                                                                                                                                                                                                                                                                                                                     Aafaq Invesment Funds
                                           SICO Gulf Equity Fund

                                                                   Khaleej Equity Fund




                                                                                                                  AlBasha'er GCC Equity Fund

                                                                                                                                               Arab Bank Mena Fund




                                                                                                                                                                                                                                                                                                                   Riyad Gulf Fund
                                                                                                                                                                                         AlAhli Gulf Fund
                                                                                                                                                                     Gulf Premier Fund




                                                                                                                                                                                                                                                                                 AlAhli GCC Trading Equity Fund
                                                                                         TAIB GCC Bluechip Fund




                                                                                                                                                                                                                              NBK Gulf Equity Fund

                                                                                                                                                                                                                                                      Vision Emerging GCC Fund




                                                                                                         Saudi Arabia                                                        Kuwait                                UAE                               Qatar                                                        Oman                                       Bahrain



                                    A study of 14 funds on which information on asset allocation
                                    was available revealed preference to Kuwait over other GC C
                                    markets. 11 out of the 14 funds had highest allocation to
                                    Kuwait in their asset allocation. Higher allocation to Kuwait
                                    (over weight) is not consistent with the distribution as per
                                    market cap weight, where Kuwait weights 16%. However,
                                    over weight implies two things i.e., that relative to other
                                    markets Kuwait is not over heated and trades at reasonable
                                    valuation and going forward Kuwait offers better expected
                                    returns than other markets.
Kuwait enjoying overweight
status. Saudi Arabia underweight.   The study also reveals significant lack of preference by fund
                                    managers for Saudi stocks. Only two out of 14 funds studied,
                                    had the highest exposure to Saudi Arabia. Seven funds had
                                    0% allocation to Saudi Arabia including Riyad Gulf Fund by
                                    Riyad Bank, Saudi Arabia. While Saudi Arabia accounts for a
                                    lion’s share (53%) in terms of market capitalization, the current
                                    under weighting of fund managers may imply higher
                                    valuations and therefore lack of attractiveness going forward.



                                                                                         Kuwait Financial Centre “Markaz”                                                                                                                                                                                                                                                           2
                                                                                 RESEARCH
                                                                                 September 2006

                                     In other words, implied expected return may be lower for
                                     Saudi Arabia.
UAE allocation in line with market   Allocation to UAE was more or less in line with its share in
cap weight                           terms of market capitalization (20%). 3 funds were seen to
                                     have taken the highest bet on UAE. While two of these three
                                     are domiciled in UAE (Shuaa and NBD), the other fund that
                                     has the highest allocation to UAE was Riyad Gulf Fund by
                                     Riyad Bank (39%). Surprisingly, TAIB’s GCC Blue Chip Fund
                                     did not have any allocation to UAE.

                                     Most of the funds have adopted an overweight posture
                                     towards Qatar relative to its market cap weight (8%). Only one
                                     fund had nil allocation to Qatar (Aafaq Investment Fund,
                                     NBD). TAIB’s GCC Blue Chip Equity Fund tops the list of
                                     Qatar’s allocation at 23% followed by AlBashar GC C Equity
                                     Fund of KFIC at 21%.

Oman and Bahrain enjoying            The second smallest market in the region at 2% of market
higher allocation                    capitalization (Bahrain) enjoyed overweight allocation status
                                     from 11 funds with 4 of those significantly over weighting.
                                     TAIB’s GCC Blue Chip Fund tops the list with 12% allocation to
                                     Bahrain.

                                     Oman, with a market cap weighting of just 1%, has attracted
                                     attention from fund managers as can be seen through
                                     substantial overweighting by almost all the fund managers.
                                     Vision Emerging GCC fund tops the allocation at 28% followed
                                     by TAIB GCC Blue Chip Fund at 27%. SICO also reflects
                                     considerable optimism in Oman as reflected by 18% allocation
                                     through SIC O Gulf Equity Fund and 17% allocation by Khaleej
                                     Equity Fund. Al Bashar Equity Fund (KFIC) is the only fund in
                                     the basket with nil allocation to Oman.

                                     In a nutshell, the geographic allocation pattern of GCC fund
                                     managers at the moment reflects considerable underweight to
                                     Saudi Arabia and overweight to Kuwait, Bahrain, Qatar and
                                     Oman.

                                     Is this pattern of thinking a call on how these markets are
                                     expected to deliver performance going forward?

Home Bias                            Do funds suffer from Home Bias? Home bias is simply defined
                                     as preponderance to overweight home country in the asset
                                     allocation simply because of domicile reason.
                                     One of the most stylized facts in international finance is that
                                     fund managers/investors overweight domestic securities in
                                     their portfolio investment. Many studies document such home
                                     bias (French and Poterba 1991, Tesar and Werner 1998, &
                                     Ahearne, Greaver and Warnock 2004). The issue of home bias
                                     has been puzzling researchers for at least 30 years (Stulz 2005).

                                     Studies suggest that information advantage of local investors
                                     over foreign investors can partially explain the home bias. It is
                                     believed that local analysts provide more accurate earnings
                                     forecasts as they are on the spot. Also, analyst’s local
                                     advantage is more pronounced in a less transparent
                                     environment.



                                                   Kuwait Financial Centre “Markaz”                      3
                                                                                                                                                                                 RESEARCH
                                                                                                                                                                                 September 2006



                                                                                                                             Home Bias
                                                                               Allocation                                                                                                                                       Market
Instances of home bias observed
                                                                                to Home                                                                                                                                          Cap
in Kuwait, Saudi Arabia and Oman   Fund Name                       Domicile      country                                                                                                                                        Weight
                                   AlBasha'er GCC Equity Fund       Kuwait         40%                                                                                                                                           16%
                                   Arab Bank Mena Fund              Kuwait         43%                                                                                                                                           16%
                                   AlAhli Gulf Fund                 Kuwait         45%                                                                                                                                           16%
                                   Markaz GCC Fund                  Kuwait         51%                                                                                                                                           16%
                                   Global GCC Large Cap Fund        Kuwait         36%                                                                                                                                           16%
                                   NBK Gulf Equity Fund             Kuwait         31%                                                                                                                                           16%
                                   Vision Emerging GCC Fund          Oman          32%                                                                                                                                            1%
                                   AlAhli GCC Trading Equity Fund Saudi Arabia     55%                                                                                                                                           53%
                                   Aafaq Invesment Funds              UAE          44%                                                                                                                                           20%
                                   Arab Gateway Fund                  UAE          35%                                                                                                                                           20%


                                   In the case of GCC funds, 10 funds had highest allocation to
                                   their home country implying home bias. 6 of these funds are
                                   domiciled in Kuwait. However, instances from Oman, Saudi
                                   Arabia and UAE also pointed to the existence of home bias.

                                   While this analysis may point to home bias, there were also five
                                   funds domiciled outside Kuwait but with highest allocation to
                                   Kuwait. Hence, overweighting of Kuwait by Kuwait-based
                                   funds may be viewed as a genuine assessment of attractiveness
                                   of Kuwait market valuations than existence of home bias.

                                   Only one fund (Al Ahli GCC Trading Equity Fund) had high
                                   allocation to Saudi Arabia, but the allocation is in line with
                                   market cap weight of Saudi Arabia. Vision Emerging GC C
                                   Fund from Oman clearly demonstrates home bias relative to
                                   market cap weight.
Stock Selection
                                                                                                                     Top Holdings (August 06)

                                                  8
                                                            7                  7                 7
                                                  7

                                                  6
                                                                                                                  5               5               5
                                                  5
                                    No of funds




                                                                                                                                                                      4
                                                  4
                                                                                                                                                                                        3                 3                 3             3
                                                  3

                                                  2


                                                  1

                                                  0
                                                                                                                                              Industries Qatar



                                                                                                                                                                 Raysut Cement
                                                                         Emaar Properties




                                                                                                             PWC Logistics



                                                                                                                             Kuwait Finance




                                                                                                                                                                                                    Global Investment



                                                                                                                                                                                                                        Burgan Bank



                                                                                                                                                                                                                                      Bank Muscat
                                                      National Bank of




                                                                                            Mobile Telecom




                                                                                                                                                                                  Commercial Bank




                                                                                                                                                                                                     House (Kuwait)
                                                                                             Co (Kuwait)




                                                                                                                                                                                                                          (Kuwait)



                                                                                                                                                                                                                                        (Oman)
                                                                                                               (Kuwait)




                                                                                                                                                                    (Oman)



                                                                                                                                                                                     of Kuwait
                                                                                                                                House
                                                           Kuwait



                                                                             (UAE)




Market heavy weights from
Kuwait enjoying widespread         11 funds out of the list provided information on top holdings
allocation                         (top 5 holdings or top 10 holdings as the case may be). With
                                   Kuwait dominating geographic allocation, many Kuwaiti
                                   companies can be spotted among the top holdings of GCC
                                   equity funds. National Bank of Kuwait , Emaar Properties
                                   (UAE) & MTC( Kuwait) are clearly favorites among fund
                                   managers as 7 out 11 funds had exposure to these companies.


                                                                                     Kuwait Financial Centre “Markaz”                                                                                                                       4
                                                                                                    RESEARCH
                                                                                                    September 2006

                                     Kuwait Finance House (Kuwait), PWC Logistics (Kuwait) and
                                     Industries Qatar (Qatar) also top the popularity chart with 5
                                     funds having them in their top holdings. Popular stocks also
                                     dominate their respective markets implying that fund managers
                                     prefer to replicate market structure than take contrarian bets.
                                     This also implies preference towards large-cap than mid-cap
                                     and small-cap.

                                                       GCC Stock Market Performance (Jan 2001-Aug 2006)
Market Performance &                                                              UAE
                                                                  Saudi          (NBAD                      MSCI
Asset Allocation                                                 Arabia Kuwait General Qatar Bahrain Oman Emerging
                                                                 (TASI) (KWSE) Index) (QSI) (BHSE) (MSI)    Mkts
                                           1
                                     Return (%)                       32         42        33        38     14     18      19
                                         2
                                     Risk (%)                         36         27        37        41     15     18      26
                                     Beginning Index Value             1          1         1         1      1      1       1
                                     Ending Index Value               4.9       7.2        5.0       6.3    2.1    2.5    2.6
                                                  3
                                     Sharpe Ratio                    0.29      0.47       0.28      0.31   0.18   0.22   0.19
                                     Highest Monthly Return (%)       17         20        32        30      9     18      14
                                     Lowest Monthly Return (%)        -24       -14        -17       -18     -9     -8    -15
                                     Maximum Decline (%) 4            -44       -21        -41       -39    -14    -24    -32

                                     1 Annualized as measured by Geometric Mean
                                     2 As measured by Standard Deviation
                                     3 Defined as excess return/standard deviation; Risk-free rate 6%
                                     4 Measures fall from the peak



                                     The above study on asset allocation should be viewed in the
GCC stock markets outperformed
                                     context of GCC Stock Market Performance. A study of market
emerging markets during the last
                                     performance during the last 5 years shows that most of the
5 years.
                                     GCC stock markets outperformed the MSCI emerging market
                                     index on a risk-adjusted basis (except Bahrain). Kuwait
                                     experienced the best risk-adjusted performance as reflected by
                                     high Sharpe ratio (0.47) compared to other GCC stock markets
                                     as well as MSCI emerging market. While Qatar experienced the
                                     highest risk (41%) in terms of standard deviation, it offered
                                     adequate compensation for that risk through an annualized
                                     return of 38%. Kuwait’s superior performance is also reflected
                                     through a study of ending index value being the highest for
                                     Kuwait (7.2) compared to 2.6 for emerging markets or 6.3 for
                                     Qatar.

                                     GCC stock markets have also shown considerable volatility as
Kuwait is the best market in terms
                                     measured by highest and lowest monthly return pattern. While
of risk-adjusted performance.
                                     UAE provided the maximum upside in terms of highest monthly
                                     return (32%), Bahrain was much muted with highest monthly
                                     return of 9%. On the downside, Saudi Arabia topped with
                                     lowest monthly return of -24% while Oman provided succor at
                                     just -8%. The fall from the peak index value was the highest
                                     for Saudi Arabia at 44% followed by UAE at 41% and Qatar
                                     (39%). The above risk-return performance probably explains
                                     the preponderance of fund managers towards overweighting
                                     to Kuwait.




                                                         Kuwait Financial Centre “Markaz”                                5
                                                                                          RESEARCH
                                                                                          September 2006

                                                         Performance (Year to Date)-As of August 2006
GCC Equity Fund Performance                                                                   Y-T-D               Allocation
                                                                                             Return  Allocation    to Saudi
                                 Fund Name                     Institution                     (%)   to Kuwait      Arabia
                                 Vision Emerging GCC Fund Vision Investment Services Co         0.29    45%           0%
                                 Arab Bank Mena Fund           Atlas Investment Group          -6.21    43%           0%
                                 Aafaq Invesment Funds         National Bank of Dubai          -8.72    48%           0%
                                 NBK Gulf Equity Fund          National Bank of Kuwait         -8.88    31%          10%
                                 Khaleej Equity Fund           Securities & Investment Company-15.03    39%           0%
                                 Markaz GCC Fund               Kuwait Financial Center        -16.53    51%          12%
                                 TAIB GCC Bluechip Fund        TAIB Securities                -16.64    39%           0%
                                 Arab Gateway Fund             Shuaa Capital                  -16.89    17%          15%
                                 Global GCC Large Cap Fund Global Investment House            -18.54    36%          19%
                                 AlAhli Gulf Fund              AlAhli Bank of Kuwait          -20.16    45%          15%
                                 Tijari Gulf Equity Fund       Commercial Bank of Kuwait       -22.6     NA           NA
                                 Gulf Premier Fund             Gulf Investment Corporation    -26.65    22%          52%
                                 AlRajhi GCC Equity Fund       Al-Rajhi Bank                  -27.02    45%          40%
                                 GCC Equity Fund               Saudi Investment Bank          -27.24     NA           NA
                                                               The
                                 AlAhli GCC Trading Equity Fund National Commercial Bank -28.04         21%          55%


                                 Performance during the current year (2006) was negative for
                                 most of the funds. Only one fund (Vision) emerged in the
                                 positive territory for the year. A study of performance also
                                 indicates that top performers benefited through higher
                                 allocation to Kuwait and lower allocation to Saudi Arabia and
                                 vice versa.

                                    GCC Equity Funds Performance (June 2003-August 2006)
                                                             TAIB
Vision Emerging GCC Fund
                                                             GCC      Gulf    Arab     MSCI
topped the YTD list while Arab                             Bluechip Premier Gateway Emerging
Gateway Fund topped long-term                                Fund     Fund    Fund   Mkts TR
performance chart.                      1
                                 Return (%)                  14.28    32.84    32.4    35.65
                                 Risk2 (%)                   17.35    29.93   19.71    23.58
                                 Beginning Index Value         1        1       1        1
                                 Ending Index Value         1.5432   2.5164  2.4897    2.694
                                 Sharpe Ratio3              0.1651    0.327  0.4547   0.4381
                                 Highest Monthly Return (%) 18.59     19.88   11.32    11.23
                                 Lowest Monthly Return (%) -6.52      -12.1     -9    -10.45
                                 Maximum Decline (%)4       -24.93   -33.91  -26.13   -11.17

                                 1   Annualized as measured by Geometric Mean
                                 2   As measured by Standard Deviation
                                 3   Defined as excess return/standard deviation; Risk-free rate 6%
                                 4   Measures fall from the peak

                                 While there were 20 funds in the category, only three funds
                                 have track record of 3 or more years. Hence, only these funds
                                 were considered for long-term performance evaluation. Arab
                                 Gateway Fund (Shuaa) topped the performance list in terms of
                                 Sharpe Ratio. However, emerging market index provided very
                                 similar returns during this time period. While the performance
                                 of Gulf Premier Fund was in line with Arab Gateway Fund, it
                                 exhibited more risk and hence lower Sharpe Ratio.




                                                   Kuwait Financial Centre “Markaz”                                   6
                                                                                                                  RESEARCH
                                                                                                                  September 2006

                                                                                       GCC Stock Markets Summary
   GCC Stock Market Valuation
                                                                         Market        No of                                                  Div
                                                                                 1           2                         3          3
                                                           Sep-06           Cap     companies Av.Mar.Cap      Volume       Value     P/E P/B Yield
                                                        Units           USD Billion            USD Billion   USD Million USD Million           %
                                                        Saudi Arabia         451         81        6            1932       43588      36  8  0.96
                                                        UAE                  170         93        2            3078        5298      18 3.1 1.63
                                                        Kuwait               133        165       0.8            717        1094      13 2.3 4.31
                                                        Bahrain               17         42       0.4              6           8      11 2.2 5.98
                                                        Oman                  12        131       0.1             32          61      12 1.7 3.23
                                                        Qatar                 68         36        2              34         307      18  3  1.45
                                                        Total                850        548        2
                                                        1.As of 13/09/2006
                                                        2.Excluding cross-listings
                                                        3.For the week ending 13/09/2006
                                                        Source: GulfBase.com


                                                        Saudi Arabia is clearly the most expensive GCC stock market as
                                                        implied by the highest P/E and P/B ratios and the lowest
  Saudi Arabia continues to be                          dividend yield. It however is the largest market in the GCC in
  the most expensive market                             terms of market cap and also is the most liquid market as
                                                        reflected by volume and value traded statistics.

                                                        Bahrain & Oman offers the best deal from a valuation
                                                        perspective (Low P/E, Low P/B and high Dividend yield). But
                                                        Bahrain & Oman are severely constrained by their small size as
                                                        reflected by average market cap. They are also constrained by
                                                        the levels of liquidity.

                                                        Qatar and UAE are relatively expensive when benchmarked
  Qatar and UAE look expensive                          with Bahrain and Oman but offers broader market breadth
  relative to Bahrain and Oman.                         with higher levels of market capitalization and company size.
                                                        Kuwait presents attractive valuation (Low P/E, Low P/B & high
                                                        Dividend Yield), relative to Saudi Arabia, UAE and Qatar. The
                                                        liquidity for Kuwait ranks third after Saudi Arabia and UAE.
                                                        The superior risk-adjusted performance of Kuwait during the
                                                        last five years coupled with reasonable valuation may explain
                                                        the asset allocation to a great extent.

                                                        GCC Stock markets suffer from concentration issues in terms of
                                                        representation of top companies in the total market
                                                        capitalization. At a GCC level, the top 5 companies constitute
                    Saudi Arabia
                                                        nearly a third of the market. This may present fund managers
                           % to total                   with diversification problems as significant diversification away
                           M.Cap         P/E* P/B       from this pattern will imply high tracking error risk.
Sabic                            20%      18.57 5.17
Al-Rajhi Bank                    12%      29.87 12.55
                                                        Saudi Arabia: Top 5 companies in Saudi Arabia represent
Saudi Telecom                    12%      15.21 5.94
Samba                             5%      17.57 6.47
                                                        nearly 54% of the total market. Most of these heavy weights
Saudi Electricity                 5%      55.65 1.77    seem to suffer from high valuation except probably for Saudi
Total                          54%       35.90 8.04     Telecom (STC). Even after the recent strong correction in the
* Historical                                            Saudi market, the top companies’ valuation appears to be
                        UAE                             stretched. Saudi Electricity Co with a P/E ratio of 55 clearly
                                                        influences the overall valuation for the market at 36. Al-Rajhi
                            % to total                  Bank trades at nearly 13 times its book value.
                            M.Cap        P/E*   P/B
Etisalat                          15%     18.24 4.87    UAE: UAE’s top 5 companies represent 45% of the total
Emaar Properties                  14%     16.72 3.30    market. The sharp correction in the UAE market during 2006
National Bank of Abudhabi          5%     13.97 4.20
                                                        has considerably softened the valuation with the average price
Dubai Islamic Bank                 5%     25.79 5.37
Emirates Bank International        5%     16.41 4.12
                                                        to book ratio at 3 compared to 8 for Saudi Arabia. Dubai
Total                           45%      17.66 3.08     Islamic Bank appears to be the expensive among the lot with a
* Historical                                            P/E ratio of 26.




                                                                          Kuwait Financial Centre “Markaz”                                 7
                                                                                                       RESEARCH
                                                                                                       September 2006
                         Kuwait
                             % to total                   Kuwait: Concentration problem for Kuwait seems to be far less
                             M.Cap        P/E* P/B        than other markets with top 5 companies accounting for only
  National Bank of Kuwait          11%     17.04 5.31     34% of total market. Heavy weights pose higher valuation than
  Mobile Telecommunication         10%     15.37 2.98
  Kuwait Finance House              7%     19.10 4.13
                                                          the market average, implying fund managers should fish at
  The Public Warehousing Company    4%     10.14 2.55     mid-cap and small-cap segments. PWC Logistics offers value at
  Gulf Bank of Kuwait               3%     14.52 4.17     a P/E of 10 and P/B of 2.5.
  Total                          34%      12.75 2.34
  * Historical
                         Qatar
                               % to total
                                                          Qatar: Qatar tops the league in terms of concentration with the
                               M.Cap      P/E*      P/B   top 5 companies accounting for a staggering 57% of the total
  Industries Qatar                18%      13.82   4.95   market. This provides limited flexibility for stock selection with
  Qatar National Bank             15%      18.69   4.49   the total market boosting of only 36 companies. The fourth
  Qatar Telecom                   10%      17.49   5.88   largest company in Qatar (Al-Rayyan Bank) is a recently listed
  Al-Rayyan Bank                   7%       NA      NA
                                                          new company with no valuation track record.
  Commercial Bank of Qatar         6%      18.28   3.03
  Total                          57%      18.38    3.03
  * Historical
                         Oman                             Oman: While Oman has 131 companies listed, top 5 companies
                                                          account for 56% of the market presenting stock selection
                               % to total
                                                          issues. The top companies suffer from higher valuation than
                               M.Cap      P/E*      P/B
  Oman Telecommunications         19%      13.00   4.07   the market average, implying opportunities at mid-cap and
  Bank Muscat                     18%      17.93   3.16   small-cap segments. However, this may be constrained by
  National Bank of Oman            9%      18.21   2.58   liquidity issues.
  Oman International Bank          6%      13.11   2.74
  Raysut Cement                    4%      16.28   3.89
  Total                          56%      12.08    1.67
                                                          Bahrain: Top 5 companies account for 57% of the total market
  * Historical
                    Bahrain                               with only 42 companies listed and sparsely traded.
                             % to total
                             M.Cap      P/E*      P/B
Ahli United Bank                17%      14.77   2.06
AlBaraka Banking Group          12%       NA      NA
Investcorp                      11%      14.37   1.77
Gulf Finance House              10%      8.68    2.91
Batelco                          7%      13.44   3.48
Total                          57%      10.91    2.20
* Historical



                                                                    Optimized Portfolio Allocations
The optimized portfolio
                                                                                       Low Medium                  High
                                                                                       Risk   Risk                 Risk
                                                          Saudi Arabia (TASI)            4       6                   4
                                                          Kuwait (KWSE )                28      44                  56
                                                          UAE (NBAD General Index)       6       9                  12
                                                          Qatar (QSI)                   10      12                  17
                                                          Bahrain (BHSE)                26      10                   3
                                                          Oman (MSI)                    27      20                   8
                                                                                       100     100                 100
                                                          Expected Monthly Return      1.62   1.78                 1.91
                                                          Standard Deviation (Monthly) 3.57   4.03                 4.47

Optimization points to highest                            Based on the historical return, risk and correlation it is possible
allocation to Kuwait                                      to construct an efficient frontier and arrive at optimum
                                                          portfolios (Through the process of Mean-Variance Optimization
                                                          (MVO)). Optimum portfolios offer the best return for a stated
                                                          risk or lowest risk for a stated return. However, the exact
                                                          portfolio combination will be a function of risk appetite. We
                                                          provide suggested optimum combination for three states of
                                                          risk. The moderate risk scenario points to a 44% allocation to



                                                                        Kuwait Financial Centre “Markaz”                    8
                                                                             RESEARCH
                                                                             September 2006

                                  Kuwait followed by 20% to Oman. Saudi Arabia receives the
                                  least allocation at 6%.The results of MVO optimization seems to
                                  be largely in synchronization with overweight status of Kuwait
                                  by many fund managers. However, these allocations are highly
                                  sensitive to the inputs used. Historical performance trends need
                                  not continue into the future and hence the allocations can be
                                  greatly modified by analysts opinion on expected risk, return
                                  and correlation going forward.

                                  Conclusion
Higher allocation to Kuwait is    Asset allocation among GCC markets should ideally be a
justified given its relative      function of their relative weight, expected future performance
attractive valuation as well as   and liquidity. Fund managers that manage GCC equity fund
historical risk-adjusted          portfolio seems to overweight Kuwait and underweight Saudi
performance                       Arabia. This action appears justified given the historical risk-
                                  adjusted performance of Kuwait relative to other GCC markets
                                  and MSCI Emerging Market. This action is also justified
                                  through construction of optimum portfolios based on efficient
                                  frontier. Existence of home bias was observed in Kuwait and
                                  other markets. Given the current attractiveness of Kuwait
                                  among other GC C stock markets, this may actually help
                                  performance than deter. Allocation to Saudi Arabia may not
                                  increase significantly given the over valuation concerns (even
                                  after the recent correction). While Oman & Bahrain presents
                                  attractive valuation potential, they are limited in their size.
                                  Managers will therefore look for increasing opportunities in
                                  Kuwait, Qatar and UAE. While managers are generally positive
                                  about Kuwait, Oman and Bahrain concentration of stocks
                                  among large blue chip was observed. Relative to the overall
                                  market, blue chips appear expensive in many markets. Future
                                  out performance can come through stock selection among
                                  mid-cap and small-cap space. Asset managers are also sitting
                                  on significant cash reflecting their uncertain state of mind




                                                Kuwait Financial Centre “Markaz”                 9
                                                                                                                                   Statistical Appendix



                                                                                                                                                   GCC Equity Funds
                                                                                                                                                                                       Asset Allocation                    Geographic Allocation               Performance (%)
                                                                                                                                                   Fund Size
                                                                                                                                        Analysis     (USD         Sharia'                                     Saudi
                                                     Fund Name                         Institution          Country       Inception      Period     million)    Compliant       Cash      Equities    Bonds   Arabia   Kuwait   UAE   Qatar   Oman   Bahrain    YTD     2005
                                    1   SICO Gulf Equity Fund            Securities & Investment Company     Bahrain        Mar-06       Aug-06        NA           No            7%        93%         0%      0%      43%     23%   11%      16%     8%         NA      NA
                                    2   Khaleej Equity Fund              Securities & Investment Company     Bahrain        Mar-04       Aug-06        NA           No           21%        79%         0%      0%      39%     22%   11%      17%    11%      -15.03   56.77
                                    3   TAIB GCC Bluechip Fund           TAIB Securities                     Bahrain        Jun-03       Jul-06        NA           No           18%        82%         0%      0%      39%      0%   23%      27%    12%      -16.64   42.78
                                    4   AlBasha'er GCC Equity Fund       Kuwait Finance & Investment Co      Kuwait         Jan-06       Aug-06       393           Yes          18%        82%         0%     11%      40%     17%   21%       0%    12%         NA      NA
                                    5   Arab Bank Mena Fund              Atlas Investment Group              Kuwait         Sep-05       Aug-06        NA           No           43%        47%        10%      0%      43%     22%    4%       9%     0%       -6.21     NA
                                    6   Gulf Premier Fund                Gulf Investment Corporation         Kuwait         Apr-03       Aug-06       159           No            NA         NA         NA     52%      22%     10%   10%       2%     4%      -26.65    82.2
                                    7   AlAhli Gulf Fund                 AlAhli Bank of Kuwait               Kuwait         Nov-03       Aug-06        NA           No            5%        95%         0%     15%      45%     17%    6%      11%     6%      -20.16     NA
                                    8   Markaz GCC Fund                  Kuwait Financial Center             Kuwait         Jan-06       Aug-06        23           No            9%        91%         0%     12%      51%     14%   12%       5%     7%      -16.53     NA
                                    9   NBK Gulf Equity Fund             National Bank of Kuwait             Kuwait         Jun-05       Jul-06        NA           No           39%        61%         0%     10%      31%     10%   17%       9%     5%       -8.88     NA
                                   10   Tijari Gulf Equity Fund          Commercial Bank of Kuwait           Kuwait         Jan-06       Aug-06        NA           No            NA         NA         NA      NA       NA      NA    NA       NA     NA       -22.6     NA
                                   11   Global GCC Large Cap Fund        Global Investment House             Kuwait         Feb-05       Aug-06        NA           No            1%        99%         0%     19%      36%     18%   11%       9%     8%      -18.54     NA
                                   12   Vision Emerging GCC Fund         Vision Investment Services Co        Oman          May-05       Aug-06        NA           No           14%        86%         0%      0%      45%      5%    7%      32%     8%        0.29     NA
                                   13   AlAhli GCC Trading Equity Fund   The National Commercial Bank      Saudi Arabia     Oct-05       Aug-06       375           Yes           9%        91%         0%     55%      21%     12%    9%       1%     3%      -28.04     NA
                                   14   Riyad Gulf Fund                  Riyad Bank                        Saudi Arabia     Feb-06       Aug-06       195           Yes           7%        93%                 0%      33%     39%   18%       3%     6%         NA      NA
                                   15   Amanah GCC Equity Fund           Saudi British Bank                Saudi Arabia     Apr-06       Aug-06        42           Yes           NA         NA         NA      NA       NA      NA    NA       NA     NA         NA      NA




Kuwait Financial Centre “Markaz”
                                   16   AlDana GCC Equity Fund           Banque Saudi Fransi               Saudi Arabia     Apr-06       Aug-06        26           Yes           NA         NA         NA      NA       NA      NA    NA       NA     NA         NA      NA
                                   17   AlRajhi GCC Equity Fund          Al-Rajhi Bank                     Saudi Arabia     Oct-05       Jun-06       215           Yes           NA         NA         NA     40%      45%      2%    9%       4%     0%      -27.02     NA
                                   18   GCC Equity Fund                  Saudi Investment Bank             Saudi Arabia     Jul-04       Aug-06       127           No            NA         NA         NA      NA       NA      NA    NA       NA     NA      -27.24   88.11
                                   19   Aafaq Invesment Funds            National Bank of Dubai                UAE          Oct-04       Aug-06        NA           No           23%        43%        34%      0%      48%     44%    0%       8%     0%       -8.72    53.1
                                   20   Arab Gateway Fund                Shuaa Capital                         UAE          Dec-99       Aug-06        NA           No           10%        90%         0%     15%      17%     35%    7%       6%     0%      -16.89   54.41
                                                                                                                                Source: Markaz Database & Various publicly available sources
                                                                                                                                                                                                                                                                                 September 2006
                                                                                                                                                                                                                                                                                 RESEARCH




10
                                                                                                                RESEARCH
                                                                                                                September 2006




Disclaimer
This report has been prepared and issued by Kuwait Financial Centre S.A.K (Markaz), which is regulated by the Central Bank of Kuwait.
The report is intended to be circulated for general information only and should not to be construed as an offer to buy or sell or a
solicitation of an offer to buy or sell any financial instruments or to participate in any particular trading strategy in any jurisdiction.

The information and statistical data herein have been obtained from sources we believe to be reliable but in no way are warranted by
us as to its accuracy or completeness. Opinions, estimates and projections in this report constitute the current judgment of the author
as of the date of this report. They do not necessarily reflect the opinion of Markaz and are subject to change without notice. Markaz
has no obligation to update, modify or amend this report or to otherwise notify a reader thereof in the event that any matter stated
herein, or any opinion, projection, forecast or estimate set forth herein, changes or subsequently becomes inaccurate, or if research on
the subject company is withdrawn.

This report does not have regard to the specific investment objectives, financial situation and the particular needs of any specific
person who may receive this report. Investors should seek financial advice regarding the appropriateness of investing in any securities
or investment strategies discussed or recommended in this report and should understand that statements regarding future prospects
may not be realized. Investors should note that income from such securities, if any, may fluctuate and that each security’s price or
value may rise or fall. Accordingly, investors may receive back less than originally invested. Past performance is not necessarily a
guide to future performance.

Kuwait Financial Centre S.A.K (Markaz) does and seeks to do business, including investment banking deals, with companies covered in
its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the
objectivity of this report.



                                                                         Kuwait Financial Centre “Markaz”                               11

				
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