Excerpts from an exclusive interview with Dr. Amjad Waheed, CEO, National Fullerton Asset Management

SHABBIR H. KAZMI, Special Correspondent
Apr 02 - 08, 2007

NAFA is a non-banking finance company with a license to perform asset management services as per the NBFC Rules. The main sponsors of NAFA are National Bank of Pakistan, NIB Bank and Alexandra Fund Management (a member of Fullerton Fund Management Group, Singapore, which in-turn is a wholly owned subsidiary of Temasek Holdings, Singapore). NAFAís main area of business is investment management, more specifically floating and managing mutual funds and discretionary management of institutional portfolios.

PAGE: What is a Mutual fund?

DR. AMJAD WAHEED: A mutual fund is a pool where investors bring their money and then this pool of money is managed by professional fund managers. It is a very old concept. The first mutual fund company was established before the great depression on 1927 in the USA. The industry is well developed worldwide. In Pakistan the sector consisted comprised of two players, National Investment Trust (NIT) and Investment Corporation of Pakistan (ICP), both owned and controlled by the government. However, during last five years the private sector participation has resulted in exponential growth of the sector.

PAGE: Why should small investors invest in mutual funds?

DR. AMJAD: Mutual funds are very good vehicles for small investors. The benefits of investing in mutual funds are: 1) professional management, 2) better returns than conventional investment avenues like bank deposits, 3) diversification as the fund invests in various securities, 4) liquidity, investors can redeem whenever they want, 5) one window operation where the investors do not have to worry about stock option and splits etc. and 6) regular income stream like monthly plan. However while selecting a mutual fund investor needs to examine the sponsors, quality of management, its mission and values, investment process of the fund, risk management, quality rating of the fund, asset management company and also the track record and management of the fund.

PAGE: Which is the most suitable fund for small investors?

DR. AMJAD: A close-end fund is basically where the capital of the fund is closed. The fund starts at one time whoever wants to invest can only invest one time. However, if the investor wants to sell through stock exchange he can sell his units to other investors. In case of an open-end fund the fund size is open, the fund continues to grow and new investors continue to come in the fund. Whenever an investor needs to invest he/she gives the money directly to the asset management company and whenever he wants to redeem his money back he simply writes to the asset management company and gets his money back on the basis of whatever the latest unit price was.

PAGE: What is the size of open-end and closed-end funds?

DR. AMJAD: At present the size of mutual fund industry in Pakistan is around Rs 200 billion. There are two main funds which are closed-end, PICIC Fund which is around 20 billion and ABAMCO with 10-15 billion rupees. Most of the funds in the market are open-end. The open-end funds are growing faster than closed-end funds. One of the reasons is that closed-end fund trade at a discount to net asset value. So, people are referring an open-end fund which pays back the amount in 2-3 days.

PAGE: Is it possible to subdivide this under 1) equities fund, 2) fixed income fund, 3) balanced funds, 4) Islamic funds?

DR. AMJAD: There are now more options available. There are stock funds with high risk and high returns. There are fixed income funds for relatively low risk investors, who want return better than bank deposits and inflation. Then are balanced funds for medium risk investors and obviously there is a separate market for Islamic income funds and Islamic stock fund also available in the market. Going forward expect real estate fund, private equity fund, capital guarantee fund, pension fund will also be added to the options available to the investors.

PAGE: How the interest rate movements affect investment in mutual funds?

DR. AMJAD: Income funds are cash funds basically investing in bank deposits, CFS and TFCís which are linked to KIBOR. As the interest rate goes up the return on cash / income fund improves, as the interest goes down the return also goes down. Incase of stock fund there is no direct relationship with interest rate except for the fact there is the inverse relationship between interest rates and stock market. Whenever interest rates go up stock market tends to go down.

PAGE: Do the mutual funds compete directly with National Savings Schemes?

DR. AMJAD: Mutual funds now compete with National Saving Schemes because 1) returns in the mutual funds are better then saving schemes and 2) there is no penalty charged if an investor wants to get out unlike national saving schemes where there is heavy penalty charge for e.g. in defense saving certificate the return is 10% but if the investor stays for 10 years. If the investor gets out after one year the return is only 6%. Unlike that income funds give return of 10% per annum, no matter the investor goes out in 10 years or in one year.