RDR Capital 2Q17 portfolio update (+5.7% YTD, +22.6% since inception)

RDR Capital’s MENA portfolio is up 5.7% in the first six months of 2017 (1H17) and up 22.6% since inception (the portfolio was incepted on the 1st of October 2016). Our global portfolio is up 0.6% in 1H17 in GBP terms (up 6.3% in USD terms) and since inception (the portfolio was incepted on the 1st of January 2017).

The MENA portfolio rebounded during the second quarter of 2017

The Middle East and North Africa (MENA) portfolio rebounded during the second quarter of 2017, supported by a strong performance in Saudi shares on the back of a number of catalysts including a smooth transition in the succession process in Saudi Arabia, the potential of Saudi Arabia being added to the MSCI Emerging Markets index in June 2018, and the Saudi government’s reinstating of benefits to civil servants and military personnel. Saudi consumer shares including Almarai and Savola performed very well during the quarter as consumer confidence and business sentiment improved with the reversal of the pervious austerity measures. In addition, Samba and NCB performed well on the potential of the shares being included in the MSCI EM index next year. The banks were also supported by an easing in liquidity in the system and the potential of a boost in Net Interest Margins (NIMs) on the back of higher interest rates, in line with US interest rates.

Jarir’s share price was supported by strong 1Q17 results. Revenues grew by 20.3% YoY during the quarter, supported by both new store openings and like-for-like growth of old stores. We remain positive on the prospects of the well managed retailer.

In the banking sector, our investment in Alawwal Bank was boosted by the news that the bank and Saudi British Bank (SABB) have agreed to start talks about a merger that could create the kingdom’s third biggest bank with assets of c$78bn. Both banks are partially owned by British banks; RBS holds a 40% stake in Alawwal Bank and HSBC a 40% stake in SABB. In addition, Saudi’s Olayan family holds a 21.76% stake in Alawwal Bank and a 16.98% stake in SABB, while the Saudi government owns 10.5% of Alawwal Bank and 9.74% of SABB.

Emaar Properties was another strong performer during the quarter on the back of the company’s decision to list its real estate development arm on the Dubai Exchange. The funds raised from the listing are expected to be distributed to the company’s shareholders in the form of special dividends.

However, the MENA portfolio’s performance was dragged down by the geopolitical crisis in the gulf, which impacted negatively the valuation of our holdings in Qatar, namely Qatar Fuel and Qatar Electricity and Water, the worst two performers in the portfolio during the quarter.

There is also the added risk from a drop in the value of the Qatari riyal if the crisis persists. However, given the Qatari sovereign wealth fund’s $350bn in assets, which could be used to support the currency, this risk is low in the short term.

During 2Q17, we reduced our investment position in Almarai by half. Our decision to reduce the exposure is based entirely on current valuation levels, hence our decision to retain the other half of our exposure. The shares were up 81.8% since we initiated our position in October 2016. Almarai remains one of the best managed companies in Saudi Arabia and indeed in the MENA region, and it remains very well positioned for growth and for maintaining its market leading position.

We continue building our global portfolio

We continue building our global portfolio, with the cash balance reduced to 51.3% during the quarter from 69% at the end of 1Q17. The global portfolio benefitted from reduced political risk in Europe with the French elections now behind us.

However, the portfolio’s performance was dragged down by our position in Petrofac, which dropped significantly during the quarter as a result of an investigation by the UK Serious Fraud Office. In retrospect, we should have exited our position as soon as the news of the investigation was released, however our long history of investing in the shares of Petrofac and our knowledge of the company’s management have given us reason to pose. That said, our current position is small (c0.8% of the portfolio) and we continue to monitor these developments closely.

The global portfolio’s performance was also dragged down by our small long volatility and leveraged shorts positions, both representing c2% of the portfolio.

Final thoughts

We remain cautious on global markets mainly due to our view that valuations are stretched, especially in the US, and that value is hard to find. However, we remain patient and well prepared for any potential opportunities that might arise in the coming months.