Strategies

Saudi Equity Strategy

Strategy Inception

January 2009

Asset Class

Emerging Markets Equity

Quick Facts

Benchmark

Tadawul All Share Index (TASI)

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Overview

Overview
Investment Approach
Investment Process
Portfolio Managers
Insights

Overview

The Saudi Equity Strategy seeks long-term capital appreciation by investing in Saudi Arabia listed equities and initial public offerings (IPOs). To achieve this objective, the Strategy combines a top-down sector allocation based on macroeconomic analysis with bottom-up stock selection and disciplined risk management.

Differentiators

The Morgan Stanley franchise

The team leverages the resources of Morgan Stanley, including research, trading and risk management platforms, to conduct in-depth research and rigorous analysis, and to evaluate industry and business fundamentals.

Top-down and bottom-up analysis

The team believes its integration of top-down sector allocation with bottom-up stock selection creates a portfolio of quality companies ideally positioned to benefit from economic growth and structural reform in Saudi Arabia.

A locally based investment team

The Saudi based investment team consists of three investment professionals. The team has a deep understanding of the local market and culture.

Investment Approach

The Riyadh-based team believes that fundamentals-driven, stock-specific investing when carried out within the context of broad Saudi Arabian macroeconomic themes can be successful in creating investment value for investors. Furthermore, the current investor mix between retail and institutional investors creates intrinsic price anomalies that can be a potential source of additional returns. The team believes that short-term pricing opportunities also exist as a result of a strong pipeline of under-researched, under-priced IPOs.

The team believes it can best exploit these anomalies by applying a top-down sector allocation and bottom-up stock selection approach. The team’s research process focuses primarily on key growth drivers, price and earnings dynamics, quality of management and its disclosure policies.

The team seeks companies it believes have strong prospects for earnings growth, are out-of-favour with the market or are undervalued, due to lack of research or misunderstanding by the market about a company’s assets or prospects for future growth. The team focuses on companies which possess strong growth prospects (minimum 10 to 15% EPS growth) and sufficient levels of liquidity, and are willing to pay a reasonable premium for higher growth and good quality management.

Investment Process

Quantitative Screening

The team screens a universe of approximately 145 stocks using valuation metrics, earnings growth, return on investment, and liquidity. The result is roughly 90 investment candidates on which the team conducts in-depth proprietary fundamental analysis.

Fundamental Analysis

The team applies a combination of top-down macroeconomic analysis and bottom-up fundamental analysis to the investment candidates identified by the initial quantitative screening process.

Top-down perspective

The team uses in-house and external economic and industry specific research to focus their analysis on specific sectors and stocks which they believe will benefit from economic conditions, themes and industry trends both in Saudi Arabia and globally.

Stock level

The team seeks companies that possess strong cash-flow generation and high return on invested capital. The team evaluates management quality/business focus; balance sheet strength; the business model; product competitiveness and the growth drivers of the business. Limited sell-side research makes the team’s proprietary research—which includes analytical and forecast work as well as on-site visits and management interviews—paramount.

Risk management

An integral part of the investment process, conducted at stock, sector and portfolio levels. At the stock level, the team focuses on developing a comprehensive understanding of company’s fundamentals to minimise exposure to high risk or speculative stocks. At a sector level, the team monitors sector and industry allocations, with benchmark deviations confined to a defined range. At a portfolio level, tracking error is closely monitored.

Portfolio Managers

Team Insights

RISK CONSIDERATIONS

There is no assurance that a portfolio will achieve its investment objective. Portfolios are subject to market risk, which is the possibility that the market values of securities owned by the portfolio will decline. Market values can change daily due to economic and other events (e.g., natural disasters, health crises, terrorism, conflicts, and social unrest) that affect markets, countries, companies, or governments. It is difficult to predict the timing, duration, and potential adverse effects (e.g., portfolio liquidity) of events. Accordingly, you can lose money investing in this strategy. Please be aware that this strategy may be subject to certain additional risks. In general, equities securities’ values also fluctuate in response to activities specific to a company. Investments in foreign markets entail special risks such as currency, political, economic, market and liquidity risks. The risks of investing in emerging market countries are greater than the risks generally associated with investments in foreign developed countries. Stocks of small- and medium-capitalization companies entail special risks, such as limited product lines, markets, and financial resources, and greater market volatility than securities of larger, more-established companies. Derivative instruments can be illiquid, may disproportionately increase losses and may have a potentially large negative impact on the portfolio’s performance. Illiquid securities may be more difficult to sell and value than publicly traded securities (liquidity risk). Non-diversified portfolios often invest in a more limited number of issuers. As such, changes in the financial condition or market value of a single issuer may cause greater volatility.

This communication is only intended for and will be only distributed to persons resident in jurisdictions where such distribution or availability would not be contrary to local laws or regulations.

There is no guarantee that any investment strategy will work under all market conditions, and each investor should evaluate their ability to invest for the long-term, especially during periods of downturn in the market. Past performance is no guarantee of future results.

A separately managed account may not be appropriate for all investors. Separate accounts managed according to the Strategy include a number of securities and will not necessarily track the performance of any index. Please consider the investment objectives, risks and fees of the Strategy carefully before investing. A minimum asset level is required. For important information about the investment manager, please refer to Form ADV Part 2.

Any views and opinions provided are those of the portfolio management team and are subject to change at any time due to market or economic conditions and may not necessarily come to pass. Furthermore, the views will not be updated or otherwise revised to reflect information that subsequently becomes available or circumstances existing, or changes occurring. The views expressed do not reflect the opinions of all portfolio managers at Morgan Stanley Investment Management (MSIM) or the views of the firm as a whole, and may not be reflected in all the strategies and products that the Firm offers.

DEFINITIONS

Tracking error is the standard deviation of the difference between the portfolio and the benchmark returns.

This material is a general communication, which is not impartial and all information provided has been prepared solely for informational and educational purposes and does not constitute an offer or a recommendation to buy or sell any particular security or to adopt any specific investment strategy. The information herein has not been based on a consideration of any individual investor circumstances and is not investment advice, nor should it be construed in any way as tax, accounting, legal or regulatory advice. To that end, investors should seek independent legal and financial advice, including advice as to tax consequences, before making any investment decision.

OTHER CONSIDERATIONS

The Tadawul All Share Index is disseminated by the Saudi Stock Market. Volume in the index excludes small trades (trades with value less than Saudi Arabian Riyal 15000).

The indexes are unmanaged and do not include any expenses, fees, or sales charges. It is not possible to invest directly in an index. Any index referred to herein is the intellectual property (including registered trademarks) of the applicable licensor. Any product based on an index is in no way sponsored, endorsed, sold, or promoted by the applicable licensor and it shall not have any liability with respect thereto.

The information presented represents how the portfolio management team generally implements its investment process under normal market conditions.

Morgan Stanley Investment Management is the asset management division of Morgan Stanley.