KUWAIT AND SAUDI ARABIA: FACING LIMITS ON US EQUITY PURCHASES
Kuwait and Saudi Arabia art lacingn the amounts they can invest in US equities under current investment practices. US trust managen are finding il difficull lo maintain desired portfolio profiles for the two counines while conforming to the constraints placed on equity purchases. In reaction to the problem, Kuwait will begin to expand sharply the number of companies in which it invests, and the Saudis may soon be forced toimilar tack.
Investment Practices
Kuwait and Saudi Arabia purchase US equities through trust accounts managed by US financial institutions. The trust minagers make investment decisions basedoose set of guidelines designed to avoid public disclosure and to prevent investment in politically sensitive industries or those industries which the countries would consider religiously or culturally objectionable. Public disclosure is avoided by each country limiting investment In any one firm to lessercent of its outstanding stock. The SEC requires disclosure of ownership if holdings equal orercent.
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Magnitude of Investments
US equity investments by Saudi Arabia and Kuwait *re not large compared with the overall US equity market. Athe Kuwaitis -nd Saudis had2 billion andhun,he ratr of their purchases last year wasil ion per month-less than one percent of the volume of purchases on the major US stock exchanges. The size of their holdings totaled less than one percent of the value of outstanding stock ofirms on Forrunei list of the largest industrial, banking, life insurance, retailing, and transportation firms.
Crowing Headroom Problems
Despite the immense ait of the US equity market relative to Saudi and Kuwaiti purchases and holdings, trust managers for the two countries are already having difficulties placing new funds. The problems stemombination of (a) the limited number of stocks an Individual trust manager recommends at any one time, (b)ercent limit, and (c) the portfolio profile trust managers seek to maintain. Trust managers usually build portfolios with lessompanies. Most financial institutions will not be recommending more than that number of firms at any one time because ofnalysis, overall market size, and desired breakdown among major industries.
We examined some existing equity portfoUos built for pension and mutual :unds to tee If the quantity of Saudi and Kuwaiti funds in individual trust accounts could be Investedimilar manner without violating the guidelines. In the cases of the larger trust accounts owned by Kuwait and Saudi Arabia, an investment pattern similar to those in the sampled pension and mutual funds would have violatedercent ownership limit. Using one mutual fund portfolio as an example, the total amount of lunds which could be investedercent of each company in the portfolio were purchased would be S8 billion. By applying the profile used by the fund, however,1 billion could be purchased before violatingercent limit for at least one company. This Indicates that,inimum, trust managers already deviate from desired profit maximizing portfoUos to invest Saudi and Kuwaiti funds under the guidelines.
Reacting lo the Problem
The Kuwaitis and Saudisumber of options available. They could:
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limit new investment in USequilics.
exceederceni limit on some slock purchaser
investar greaterer o( US companies.
Ncithei country currently shows any inlcrest in slowing equity purchases in the US. and Kuwait recentlyecision toarter proportion ol its new US funds into equities. Neither country currently wants the publicityxposure of slock purchases in specific firms lhat would result if they brokeercent limit.
Kuwait iscoming to grips with the problem by openingmarket-weighted- investment account. The account will contain several hundred stocksrofilearket indicator such as the Standard and Poor's stock average. Companies fcl "sensitive"l not be specifically exempted from this portfolio. Using this approach. Kuwait presumably will forgo some profits to stay withinercent investment guideline.
Saudi Arabia has nol yel had to deal wilh the headroom nrobkm. The Saudis have less funds than the Kuwaitis in the US market and disperse their fundsarger number of trust accounts. At the current rate of investment, however, the Saudis may nave to face up to the problem within the next year or two. Saudi Arabia is as sensitive about financial publicity as Kuwait. For this reason, they too may oplarket-weigh led account!
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Original document.
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