The story of NIT
By SHABBIR H. KAZMI
Jul 17 - 23, 2000
The explicit commitment of the GoP and the efforts to reduce interest rates has been the biggest paradigm shift in the financial sector in the country. Government bonds and National Savings Schemes rates have fallen by more than 6 per cent over a short period of fifteen months since April 1998. Therefore, people who used to keep their small savings with banks are looking for alternative venues for investment. Stock funds has the potential to fulfil the needs of such people.
Stock funds have historically been a great source of financial growth even though the shares of most successful companies may experience periodic decline in value. National Investment Trust (NIT) is a stock fund in the country which has an enviable history and track record. Even though NIT unit price has witnessed a decline, in the recent past, it has been paying modest dividend regularly. NIT makes investing simple, accessible and affordable. The advantage of investing in NIT units offer professional management, diversification, liquidity, convenience and ease of record keeping.
The bearish sentiments in equities market, since May, has been a source of concern. However, it is expected that NIT performance for the full year will not be affected in any substantial manner. For the year 1999-2000, NIT has paid 55 paisa per Unit interim dividend. Many financial analysts believe that the final dividend will be substantial. To discuss the performance of NIT during 1999-2000 and prospects for 2000-2001 PAGE interviewed its Chairman, Istaqbal Mehdi.
NIT mainly invests in listed equities. It suffered from low unit price in the past due to persistent bearish sentiments prevailing in equities market. However, during these years efforts were made for internal restructuring. NIT nominees played an active and effective role on the boards of directors of those companies wherever the Fund had made substantial investment," said Mehdi.
The return from investment in stock market comprise of two components 1) capital gain/loss resulting from appreciation/drop in stock price and 2) dividend paid by companies to their shareholders. NIT projects a 19 per cent return to investors investing in the stock market either directly or by investing in NIT Units for the long-term (more than 5 years).
At present the one-year T-Bill rate is only 7 per cent as compared to 14 per cent two years ago while they also touched a peak of 17 per cent at one time. The freezing of foreign currency accounts (FCAs) and end of swap deposits with SBP has changed the entire business model for a large number of players in the banking industry. This has an adverse impact on return being paid to depositors. Over the last 26 years the average return on bank deposits has been 9 per cent, on National Savings Schemes 14 per cent and on the stock market 16 per cent. This has been despite the fact that the stock market in Pakistan has shown very poor performance over the last five years.
"Investment anywhere is not a problem for large investors. However, small investors are concerned about the security of their investment and also need regular income. But more importantly an option for redemption as and when they want. We at NIT offer all these facilities. Since our own investment portfolio is very large and diversified, the impact of surges is minimized. That is the reason we were able to accept all the requests for redemption even during the worst period. Though, the Unit price had gone down, we maintained our tradition of paying dividend to Unitholders at a time when most of the listed companies preferred to skip dividend," added Mehdi.
"With interest rates low, thin spreads have further narrowed, and lack of demand for funds from industry has made portfolio formation a difficult job. We have been traditionally investing in equities. But there was hardly any new public offer during last couple of years. Therefore, we had limited venues for investment. With persistent bearish sentiment prevailing in equities market the chances of making capital gains were minimum. However, as and when an opportunity came up we never missed it. One such example is sale of Shell Pakistan shares to its parent company. We made a very good deal which improved NITs cashflow and also enabled it to pay 55 paisa interim dividend to Unitholders," was the jubilant expression of the chairman.
Pakistan like most developing markets, only has a limited stocks available for investment. Though, the total number of listed companies is more than 750 the active and good performing stocks can be counted on ten fingers. Besides, the GoP policies often turn a profitable company into a loss making entity. Therefore, a fund manager like NIT has to undertake extensive research/analyses at the macro and micro level. This facility was missing or was at a very low level in the past. However, at present NITs research is superb.
"It was also realized that NIT nominees can play a major role in board meetings. We with the help of other financial institutions have been trying to bring nominees on the board of more companies. At present wherever more than 20 per cent equity is held by NIT at least one senior member is nominated. At times the number of NIT nominees may appear higher but it is only because other financial institutions prefer to keep NIT nominee on the front line. This kind of support is extended because other financial institutions often do not have the proper research and analyses facilities at their disposal. We also receive and share reports prepared by other brokerage houses," said Mehdi.
A typical Pakistani family has four main long-term concerns: buying a house, funding higher education of children, arranging funds for marriage of children and supplementing income after retirement. It looks almost impossible to attain all these objectives if one has limited income. However, one has a hope which arises from the power of compounding. This can be achieved through regular saving and reinvesting over a long period and investing wisely in schemes where funds grow faster relative to bank deposits higher than the rate of inflation.
Mehdi said, "NIT can help people in materializing their dream of a better future. We have a scheme called Roshan Kal that helps people in achieving their goals. The scheme offer professional management, diversification and has the power of compounding to turn regular savings into a highly rewarding investment over the time."
There is always a difference in sale and repurchase price of NIT Units. A large number of investors do not understand the reason for this difference. Explaining it at a greater length Mehdi said, "There are three types of costs which an investor in NIT Units has to bear: Entry Charge, Operating expense and redemption charges, NIT adds a 4 per cent entrance fee when acquiring NIT Units. This 4 per cent is added to the NITs Net Asset Value to determine the Sales Price. Out of this 1 per cent represents transaction cost of acquiring fresh investments for the portfolio and 3 per cent towards distribution. The sale price is rounded up to the next 5 paisa. Operating expenses represent the costs of managing the fund. The Management Company (NIT) charges a 1 per cent management fee per annum based on the Net Asset Value (NAV) at the end of the financial year. Redemption charges amounting to half a per cent are deducted from the NAV when a Unitholder sells the Units. The repurchase price is rounded down to the next 5 paisa."
With the declining trend in return on deposits by banks as well as National Savings Schemes, many small investors are upset. However, the situation of uncertainty demands prudent thinking and rationale decision making. "I will not say that NIT offers the best opportunity. However, a stock fund has the largest potential of earnings. If I am also allowed to comment on the GoP policies, they are aimed at increasing GDP through higher value-addition. This cannot be done without fresh investment and BMR. It is also observed that many investors prefer to raise funds from the capital market rather than borrowing from financial institutions. Allow me to say that the recent issues of term finance certificate is a record. At present, even NIT has about one per cent investment in debt instruments. Therefore, in the coming months stock funds will enjoy tremendous earnings potential," said Mehdi.
"I am also very optimistic about the turnaround of the capital market. Although, I am very concerned about the recent crisis in capital market, I still believe that it was an extraordinarily feature. The Security and Exchange Commission of Pakistan and all the three stock exchanges were able to resolve the issue. The new exposure limit rules, for brokers, will help in avoiding such incidents in future. A little time is required to bring back the investors to the capital market. Though, the daily trading volume is very low, at present, the KSE-100 index has shown sustained improvement," added Mehdi.
"To exploit the renewed interest of investors in capital market, we intend to float another Fund by the end of this year. Shares of at least four companies have been offered for public subscription in last six months. We believe, that a large number of companies will be listed in next twelve months as well as some companies will issue term finance certificates amounting to over Rs 2 billion. Therefore, it is the right time for small investors to choose a fund manager like NIT which has a track record", concluded Mehdi.
NATIONAL INVESTMENT TRUST
NIT, established in 1962, manages the largest open-ended mutual fund in Pakistan. The investment criteria followed by the management is to provide its Unitholders with a balance between their regular income needs and long-term capital gains. It has invested in nearly 630 out of 780 listed companies. Nearly 99 per cent investment is in equities whereas balance one per cent is in debt instruments. Its net assets are valued around Rs 15 billion. The Fund management is the responsibility of a team of professionals acting within the guidelines laid down by the Investment Committee of NIT. The Board of Directors of NIT appoints the members of this committee. This concept safeguards the Fund from over-reliance on any one individual, enhances transparency and supports a more rigorous evaluation of investment decisions.
SHAREHOLDERS OF NIT
National Bank of Pakistan
Muslim Commercial Bank
Investment Corp. of Pakistan
Pakistan Insurance Corp.
Government of Pakistan
Adamjee Trust Foundation
Mian Tajammul Hussain
The above 12 institutions and individuals each have an 8.38 per cent equal shareholding
TOP TEN HOLDING
Pakistan State Oil
Sui Southern Gas Co.
Sui Northern Gas Pipeline
Rs. in Mn
Woollen & Textile
Synthetic & Rayon
Sugar & Allied
Fuel & Energy
Auto & Allied Engg.
Cable & Electric
Transport & Comm.
Chemical & Pharma.
Paper & Board
Vanaspati & Allied
Leather & Tann.
Food & Allied
Glass & Ceramics