The Invesco MSCI Saudi Arabia UCITS ETF (MSAU LN) has powered through the $2 billion AUM mark – a little over a year since its launch on the London Stock Exchange. The milestone has been reached on the back of strong inflows and healthy market performance.
Chris Mellor, Head of EMEA ETF Equity & Commodity Product Management, at Invesco.
Launched in mid-June 2018, the fund was the first ETF in Europe to provide pure-play exposure to the Saudi equity market.
Its underlying MSCI Saudi Arabia 20/35 Index comprises 30 large- and mid-cap stocks, representing approximately 85% of the free-float market capitalization in Saudi Arabia.
In order to ensure that the fund meets UCITS requirements for diversification, the weight of the largest constituent in the index is capped at 35%, while the weight of any other single entity is limited to 20%.
[pullquote]”Saudi Arabia is the largest economy in the Middle East and the world’s biggest petroleum exporter, but what makes the Kingdom most interesting might not be the Saudi of today but of the not-too-distant future.”
– Chris Mellor, Head of EMEA ETF Equity & Commodity Product Management, Invesco.[/pullquote]
The ETF tracks the index via synthetic (or swap-based) replication and comes with a management fee of 0.50% and a swap fee of 0.20%.
Chris Mellor, Head of EMEA ETF Equity & Commodity Product Management, at Invesco, commented, “As a country, Saudi Arabia is undergoing huge transformational change, with ambitious social and economic reforms. This comes at the same time as measures have been implemented that make it easier for foreign investors to gain exposure to the country’s capital markets, making Saudi increasingly relevant to global investors.
“Saudi Arabia is the largest economy in the Middle East and the world’s biggest petroleum exporter, but what makes the Kingdom most interesting might not be the Saudi of today but of the not-too-distant future.
“In addition to regulatory reforms encouraging foreign investments, the Vision 2030 programme of social and economic reforms is intended to diversify the Saudi economy away from such a heavy reliance on oil and government funding. Domestically, this includes increasing use of solar and other renewable energy sources, encouraging healthier lifestyles, modernizing the educational system, and increasing the number of Saudis in private employment.
“Internationally, they are trying to leverage the country’s unique geographical position between three continents and encouraging major domestic corporations to expand across borders and into global markets. And, of course, they also want to attract foreign investors and visitors.”
Index upgrade
Saudi Arabia’s economic and financial market reforms have led index providers MSCI and FTSE Russell to reclassify Saudi Arabia as an emerging market.
In June 2018, MSCI laid out its plan to include the Kingdom in its MSCI Emerging Markets Index in two phases, coinciding with the May 2019 Semi-Annual Index Review and the August 2019 Quarterly Index Review. The inclusion of the country into FTSE Russell’s emerging markets equity index, the FTSE Emerging Index, is due to be completed in March 2020.
Estimates from MSCI put the fully included weight of Saudi Arabian equities within the MSCI Emerging Markets Index around 2.6%. Invesco notes that with over $1.8 trillion tracking this index, this equates to a potential inflow for the country of around $50bn.
Some of this $50bn has clearly already made its way into Invesco’s fund. While it has been pulling in assets since inception, demand for the fund has skyrocketed in the past three months in line with MSCI’s inclusion process. Assets under management in the ETF have swelled from $360 million (25 April 2019) to almost $2.4bn (23 July 2019), with bumper net inflows of over $900m in both May and July MTD. (See charts below)
According to Mellor, a wide range of investors has shown interest in the ETF including institutional, private banking, and wealth management clients.
“The reality is that the MSCI and FTSE Russell inclusion process means that Saudi Arabia is a market that is hard to ignore,” said Mellor. “For instance, at an expected weight in the MSCI Emerging Market index of close to 3%, investors benchmarked to the MSCI Emerging Markets Index will need to manage their exposure to the market. A portfolio manager may not have strong views on individual Saudi stocks but using our ETF to get exposure to the market will mean they don’t end up significantly underweight.”
Oil proxy?
While some investors might think that the ETF mirrors the oil price, a look under the hood reveals a different story. The reality is that the Saudi equity market has a low level of correlation with oil prices, with the current one-year correlation of daily returns being just 0.13, close to its long-run average of 0.09. This is lower than many other markets such as the MSCI Emerging Markets Index which has a current correlation of 0.30 and a long-run average of 0.21.
Mellor said, “This initially surprising finding is explained by the low level of exposure to listed energy stocks in Saudi Arabia. The energy sector makes up less than 1% of the underlying MSCI Saudi Arabia 20/35 Index. This could change substantially with the potential for an IPO of Saudi Aramco. However, the index rules specify that the maximum weight of the largest stock in the index can be 35% which means that even post IPO the ETF would be likely to have a lower correlation with oil than something like the US energy sector index which has an average correlation of 0.50.”
The financials sector dominates the index, accounting for nearly half (48.2%) of the total index weight. Materials companies also play a significant role at 31.9%, with the next largest sector exposures being communication services (8.5%) and consumer staples (4.1%).
Assets under management (USD)
Net new assets (USD)
Rival funds
While Invesco was the first to market in Europe, rivals BlackRock and HSBC have also introduced Saudi Arabia ETFs. The iShares MSCI Saudi Arabia Capped UCITS ETF (IKSA LN) launched in mid-April 2019 and, similarly, has seen assets balloon in the past few months, with the assets under management now standing at over $1.5bn. The HSBC MSCI Saudi Arabia 20/35 Capped UCITS ETF (HMSA LN) launched at the beginning of May but has yet to gather any meaningful assets.