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QD view – if you can’t beat ’em, join ’em?

Within the investment companies sector there has been a fair bit happening this week, with another couple of new funds looking to launch – The Sustainable Farmland Trust and Independent Living REIT; Fundsmith Emerging Equities throwing in the towel; and some exciting portfolio developments for a couple of our clients – JLEN’s glasshouse investment and NextEnergy Solar’s new battery joint venture.

Elsewhere, Ukraine made impressive gains against Russian forces, recapturing a vast swathe of territory, raising hopes that Russia will be defeated and perhaps even undergo regime change. Nevertheless, while the oil price has been volatile and is off the high it reached on the outbreak of war, it remains well above pre-COVID levels. Gas prices are close to their all-time peak. For most of us, this is bad news. Inflation may have eased slightly in August on lower petrol prices, but remains elevated and higher energy costs are eating into disposable incomes.

However, the investment companies sector offers at least one way of benefiting from these high energy costs. For those on the other side of the equation – oil and gas producers outside of Russia – business is booming. We published a note on Gulf Investment Fund – Much more than just oil and gas – on 18 August 2022. This week, Gulf Investment Fund published its annual results – covering the 12 months ended 30 June 2022. Over that period, the fund saw its share price rise by 22% and its NAV increase by 15.4%. It also comes with an attractive dividend (4% of NAV each year). The chairman just gave it a big vote of confidence, buying $100,000 worth of stock.

The results statement highlights economic growth projections for the region. These illustrate a key part of the message of the note that, while today’s high hydrocarbon prices are great for governments’ balance sheets in the region, the real story is the efforts that they are making to diversify their economies beyond hydrocarbons as we all embrace the transition to a net zero carbon world. Non-oil GDP growth across the region is forecast to be 3.9% in 2022 and 3.6% in 2023, well ahead of forecast GDP growth rates in the US and Europe.

The Gulf States are a small but increasingly important part of the MSCI Emerging Markets Index. We are not going to pretend that the region does not have its problems – social, environmental and governance issues may be a deal breaker for some of you. However, the manager feels that countries in the region are looking to address these, and modest progress is being made. Hopefully, as things improve, more investors will be attracted to the region.

Gulf Investment Fund is the only investment company focused on the Gulf region – Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates. Relative to local benchmark indices, it has a bias to gas-rich Qatar and away from Saudi Arabia. It has a good track record of outperforming all of the relevant benchmarks, by a significant margin.

However, we think that one problem is that it is too small. A succession of tender offers has shrunk the fund in recent years, and the latest 100% tender offer was announced yesterday. Fortunately, the fund’s recent success seems to be resonating with investors, and the shares are now trading at a modest premium to net asset value. In the light of that, we hope that investors stick with the fund, and, in time, it is able to re-expand.

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