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Top performing funds of Pakistan

A vibrant and robust capital market has a pivotal role in the economic growth and development of a country. There is strong evidence that countries with large stock market capitalization to GDP ratio also have large long term mutual funds (including pension funds) assets to GDP ratio. A prerequisite to the growth of mutual funds industry is the level of domestic savings and access to supply of tradeable stocks and bonds. Pakistan has a robust capital market infrastructure and adequate regulatory frame work. Pakistan Stock Exchange is also amongst the best performing stock exchanges in the world. Still the capital market capitalization and mutual funds’ asset to GDP ratios are low. For growth of the capital markets, Pakistan needs to promote domestic savings; foreign investors can only supplement the growth. In Pakistan, the ratio of long term fund industry (i.e. excluding money market funds) assets to GDP was 1.11% in 2012. This ratio has improved to 1.44% in 2016. If we compare Pakistan Stock Market capitalization to GDP ratio in the same period it has improved from 17.55 percent to 25.64 percent.

In past two decades, mutual funds have shown strong growth. Several factors lead to growth in global mutual funds’ assets, which includes:

  • Greater household demand for diversified professionally managed investment product
  • Household sector has switched from direct investment to investment through mutual funds
  • Strong mutual funds and capital market regulations
  • Availability of deep and liquid capital markets
  • Efficient capital markets
  • Superior returns
  • Pass-through tax status that avoided double taxation
  • Tax deferral in many jurisdictions allowing for capital accumulation
  • Economic development
  • Defined contribution pension plans allowing participants to invest in mutual funds

A few decades ago, worldwide, buyers and sellers were mostly individual investors, such as wealthy businessmen, usually with long family histories to particular corporations. Over time, markets have become more ‘institutionalized’; buyers and sellers are largely institutions (e.g. pension funds, insurance companies, mutual funds, index funds, exchange-traded funds, hedge funds, investor groups, banks and various other financial institutions). The rise of the institutional investor has brought with it some improvements in market operations. There has been a gradual tendency for ‘fixed’ (and exorbitant) fees being reduced for all investors, partly from falling administration costs but also assisted by large institutions challenging brokers’ oligopolistic approach to setting standardized fees.

 

The mutual fund is a pool of resources filled with various small investors, and managed by professionals who try to use it in the most effective manner to get the highest possible results out of it by selecting the most suitable investments carefully. The investorsare primarily concerned with the management of their assets and it proves to be a tough task because it requires a careful selection of such securities which should turn out to be an optimal combination. Better performance of a fund is linked with the personal ability of the fund manager. Performance of a fund is viewed as the performance of a manager. A successful manager is the one who is able to beat the market on a regular basis. Fear of loss generally dominates the joy of gain. This fear is even larger for those who do not possess enough expertise in the management of assets. An individual finds it difficult to have someone who may look into his affairs efficiently. This purpose is best served with the emergence of mutual funds in Pakistan as a pioneer of mutual fund industry in South Asia.

The first mutual fund introduced in Pakistan was NIT units in 1962 and it was an open-ended issue, which was followed by ICP in 1966 which introduced different closed ended mutual fund schemes. Initially ICP units were nationally operated but they were privatized later on.

While Islamic funds grow as compared to their non-Islamic counterparts due to greater religious inclination, income funds were underperformers due to immature bond market and no fund manager is regarded as consistent performer or loser while stocks of large caps are selected among stock funds. Overall performance of equity mutual funds is better as compared to income funds. Within equity funds, broker backed funds are better, but in case of income funds, institutional owned funds are better performers. Equity fund managers possess significant market timing abilities and institutional equity funds were timed better as compared to broker backed funds.

By 2016, there were some 204 funds (183 open-ended, 4 closed-ended and 17 pension funds) whereas the number of asset management companies (AMCs) was 20. According to data compiled by Mutual Funds Association of Pakistan (MUFAP), mutual funds in-line with the market performance posting positive returns. The top performing fund in this category was National Investment Unit Trust. The fund has legacy positions in most of the stocks which drove the index upwards. The second best performing fund in this category was UBL Stock Advantage Fund. Mutual funds investing in Shariah-compliant equities fared relatively well as compared to the conventional funds in Q1FY2017. The best performing fund in this category was NAFA Islamic Stock Fund with a return of 1.21 percent. The runner up in this category was Meezan Energy Fund with a return of 0.84 percent.

Out of the 20 equity funds currently in operation, 11 of them meet the minimum fund size requirement of Rs1 billion. Out of these 11 funds only three (Lakson Equity Fund, NAFA Stock Fund and Atlas Stock Market Fund) were able to outperform the KSE-100 Index.

Pakistan has a lot of mutual funds that are in the Top 100 mutual funds of the world. In 2013, out of a total of 42 Asian equity funds, 15 were from Pakistan. Some of the funds in this category are AKD Opportunity Fund, NAFA Stock Fund, JS Islamic, Pension & Growth Fund, Atlas Pension & Stock Market Fund, ABL Stock Fund, UBL Principal Protected Fund and funds managed by Arif Habib Investments.

The writer is a Karachi based freelance columnist and is a banker by profession. He could be reached on Twitter @ReluctantAhsan

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