INVESTMENT OPPORTUNITY ANALYSIS
Investors opting for mutual funds right now would reap the benefits of greater market premiums
By KHURRAM SHEHZAD, CFA
PICIC Asset Management Company Limited
Nov 08 - 14, 2004
This piece of paper is written with a view to address basic questions that keep coming in investors' mind that which investment opportunities provide them with maximum return along with minimum risk.
It is essential to understand the need for investments and its linkage with other economic indicators in the economic framework of a country. Raising the per capita income to alleviate poverty is one of the key objectives of any economic manager. Increment in per capita income is only possible through a higher economic growth rate which in turn is dependent upon higher investment rate and that is achieved via higher savings.
Before moving ahead it is essential to identify various investment options available in the market, which are as follows:
6% - 10%*
2.15% - 5%****
National Savings Scheme
Carry Over Transaction Market
9% - 18%
5% - 25%
* From 3-Year Tenor to 20-Year Tenor
**From 3-Year to 7-Year Tenor
***Weighted Average for maturities ranging from 3 Years to 10 Years
****For 6-Months to Over 5-Years Maturity
The abovementioned table clearly identifies Mutual Funds Sector as most well placed to answer the first query mentioned at the beginning of this piece of paper. Furthermore, it would help us to know that investments work as a bridge between savings and growth. In Pakistan, National Savings Scheme (NSS) and Bank Deposits have played this role for decades. In developed economies Mutual Funds Sectors are more than 100% of the Banking Sector deposits whereas in our economy they only constitute 4% of total banking sector deposits. Mutual Funds require certain key ingredients to thrive in the economic environment which are:
* Well developed robust regulatory environment
* Well developed and liquid securities markets
* High standards of corporate governance
* Implementation of standard ethics across the board
Previously these ingredients were lacking in our capital markets and along with higher NSS and Bank Deposits rates Mutual Funds sector could not grow. However, NSS and bank deposits rates have been recording continuous decline and Pakistani stock markets are performing well on the back of strong economic performance. This provides ample motivation for investment in stock markets.
For an individual investor it is difficult to obtain the requisite expertise and information to select the appropriate mix of stocks and time, the decisions accordingly to optimize returns and that's where the rationale for investing in Mutual Funds strengthens. Moreover, advantages like professional management, corporate information, lower transaction costs and Portfolio Diversification make the case for investing in Mutual Funds instead of undertaking stock investment on stand alone bases.
For any mutual fund the net asset value per share that is market value of total assets minus book value of total liabilities divided by the number of shares provides the real worth of the piece of paper held by the investor. Comparing this value against the market price provides the reference point for any investor. If a fund is trading at a discount (Commonly known as Discount to NAV) that means the stocks it is holding are being offered at lower than their market price thus making them cheaper to buy. The following example would help in explaining the phenomenon of investing in stock market via mutual funds.
If I were an investor and purchase ABC Stock at PKR 40.0 from the market average Return On Investment (ROI) i.e. Dividend Yield would be around 10%. However, if I purchase a certificate of a mutual fund (trading at 15% discount to NAV) which also holds ABC Stock then my purchase price would effectively be PKR 34 and Dividend Yield or ROI would be slightly less (on account of certain management fee) than 12% thus making the mutual fund share attractive for individual investors.
From a broader perspective mutual funds sector in USA is 113% of banking sector deposits, in India it is 20% whereas in our country it is 4%, thus offering immense potential for growth. Currently, there are seventeen (17) entities managing closed-end and open-end funds worth PKR 96 billion in the country, which we foresee to grow to PKR 250 billion by June 30, 2006.
We feel that investors opting for mutual funds right now would reap the benefits of greater market premiums due to higher market penetration at a later stage.