Proprietary Investments

Overview

The Proprietary Investments Division’s primary focus is on managing the Bank’s proprietary capital based on clearly defined investment objectives and processes. The mandate also includes supporting initiatives taken by SICO’s business units by providing necessary seed capital to support new product launches and investment ideas. Focusing on capital preservation, the investment objective is to generate sustainable returns following a well-diversified asset allocation while ensuring that a major component of the investment return is driven by income-generating assets providing visibility and stable performance.

2019 Operational Review

The proprietary book contributed positively to SICO’s bottom line in 2019. In accordance with IFRS 9 standards, the investment portfolio comprises three components: fair value through profit or loss (FVTPL), fair value through other comprehensive income (FVOCI), and amortized cost (AC).

Under the FVTPL portfolio, SICO invests across asset classes (equity, fixed income, and alternative assets), both directly as well as through third-party managers, following multiple strategies that align the portfolio with its risk-return and diversification objectives.

During 2019, active management of equity and debt exposures enhanced returns, while partial hedging of exposures using derivatives, mainly in global markets, limited downside risks during periods of excessive volatility. The focus has been to limit the downside risk of the overall portfolio while taking active exposures to both equity and debt markets.

The FVOCI portfolio, which includes mainly regional equity and debt securities, continued to make a positive contribution to overall returns driven by an income strategy that focuses on medium-term, income- generating financial assets. Inclusion of more traded real estate instruments enhanced portfolio income while also providing capital appreciation due to their attractive entry points.

SICO’s high-yielding amortized cost portfolio is mainly composed of exposure to the local sovereign bond market.

The proprietary book’s prudent strategy enabled the Bank to generate positive and sustainable returns, generating a net investment income of BD 4.315 million in 2019, compared to BD 3.050 million during the previous year.

2020 Outlook

After a strong performance in 2019, capital markets and risky assets are expected to witness higher levels of volatility during 2020 given elevated valuation levels, geopolitical concerns, US elections, and global trade concerns. In line with the stated mandate, the portfolio will continue to be steered towards more defensive, high-quality investments to generate stable and visible income to match the Bank’s risk appetite while meeting both return and diversification objectives.