Proprietary Investments

Overview

SICO’s Proprietary Investments division manages the Bank’s proprietary capital in accordance with clearly defined investment objectives and processes. The mandate also includes providing seed capital to support initiatives such as new product launches and investment ideas taken by SICO’s various business units. With capital preservation in mind, SICO’s prop book aims to generate sustainable returns by utilizing a well-diversified asset allocation strategy while ensuring that a major component of the investment return is driven by income-generating assets providing visibility and stable performance.

2020 Operational Review

Despite an unprecedented year that witnessed global market volatility on the back of the COVID-19 pandemic, SICO’s proprietary book still managed to contribute positively to SICO’s bottom line due to the conservative approach utilized by the investment team from the onset of 2020. Positive performance during the year was primarily driven by tactical asset allocation amid market volatility and economic uncertainty. In accordance with IFRS 9 standards, SICO’s 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 thirdparty managers, following multiple strategies that align the portfolio with its risk-return and diversification objectives.

During 2020, SICO increased the hedging of exposures using derivatives, mainly in global markets to limit the downside risks during volatile periods. Continued use of hedging strategies strategically positioned the team to hold on to their investments across equity and debt markets with tactical movements and reap the rewards of the upside during the recovery.

The FVOCI portfolio, which mainly includes regional and debt securities, was further diversified with the inclusion of REITs, and continued to perform as per the mandate. Given economic uncertainty and challenging operating conditions, visibility on dividend payouts by companies has been reduced, while yields across debt securities have tightened. Nevertheless, the portfolio continued to generate healthy income helping to achieve more stable and sustainable returns.

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

The department’s conservative investment strategy with active tactical allocation enabled the Bank to generate positive returns during this challenging and unprecedented year. Additionally, this approach allowed the Bank to hold on to its investments and benefit from the upside that came on the back of recovering markets. The proprietary book generated a net investment income of BD 2.3 million in 2020 compared to BD 4.32 million in 2019.

2021 Outlook

Asset classes have continued to perform well, driven by liquidity and low interest rates, however, this environment has led to overvaluation concerns. Accordingly, the department will seek to maintain a balanced investment approach for its portfolio to benefit from the ongoing rally, given the continuing low-rate environment. Nevertheless, the Bank will remain cautious of global and regional market developments and adjust its strategy accordingly to limit downside risks from potential market corrections in order to continue to generate sustainable returns across its diverse portfolios.