Yield and growth at a discount from the world's richest country

For both groups, Qatar Investment Fund (QIF) is an interesting prospect. We tipped the fund as a 'buy' in October 2012 at $0.90 and it is now trading at $1.08, a 20 per cent gain. But there is potentially a lot more to come.

The fund's net asset value (NAV) returns have consistently outperformed its benchmark, the Qatar Exchange Index in the past five years. The managers point out that the Qatar Exchange is growing fast and will soon be elevated to Emerging Market - from Frontier Market - status by MSCI which could widen the number of potential investors for the fund, as it will be seen as slightly less risky.

Qatar has been one of the world’s fastest growing economies over the past decade, with real GDP growth averaging 16.2 per cent a year from 2005 to 2011. As the world's largest exporter of Liquefied natural gas in 2012, and the richest country in the world on a GDP per capita basis, Qatar is investing substantial revenues generated from its natural resources into local projects and infrastructure in order to support the creation of a diverse and sustainable domestic economy.

Although these stellar growth rates are expected to moderate somewhat going forward, as gas and condensate production capacity targets have been achieved, economic prospects remain strong, with the International Monetary Fund (IMF) forecasting further real GDP growth of 4.9 per cent in 2013 and 5.1 per cent in 2014, particularly underpinned by the strength of the non-hydrocarbon sector.

However, one interesting point is on dividends, which broadens the fund's appeal. In addition to the underlying growth story, the fund which is currently trading at $1.08 is forecast to pay a $0.03 dividend per ordinary share in January 2014.

Qatari companies only pay dividends once a year. However, Nick Wilson, chairman of QIF said: "The gulf region has a healthy regard for paying dividends, and Qatari companies in particular fully recognise that the owners of the business should be rewarded with a proper level of dividend yield. The Qatar stock market is forecast to yield a tasty 5.5 per cent in dividends in 2013, the highest in MENA. This compares to 3.1 per cent for the FTSE All-Share and 1.95 per cent for the S&P 500.

"Unlike some good dividend payers, its valuation is not demanding, trading on a price earnings ratio of 11.4x for 2013 (MENA as a region is trading on 12.7x)."

Since we tipped the fund a year ago, its total expense ratio has come down from 2.02 per cent to 1.83 per cent.

However, despite this and the many other positives, the shares are still trading at an 11.5 per cent discount to the underlying net asset value of the portfolio. The board views discount management as a priority and has made use of its buy back facility. It has announced that there will be further tender offers in the fourth quarters of 2013 and 2014.

At the end of September, QIF had 28 holdings: 18 in Qatar, six in UAE, three in Oman and one in Kuwait. Cash was 2.8 per cent of the portfolio.

This is a concentrated portfolio in a high risk country but for investors who have a high-risk appetite, the fund still looks like a good opportunity. Buy.

Source: Investors Chronicle and QIF

Source: Bloomberg, Qatar Insurance Company

Top 10 holdings (as at 30 September 2013)

Sector allocation (as at 30 September 2013)