INCOME FUNDS RESISTIBILITY TO MARKET DOWNTURN

TARIQ AHMED SAEEDI - tariqsaeedi@hotmail.com
Feb 09 - 15, 2009

Income fund has always been a favorite vehicle of investment in capital and securities market because of its characteristic of low volatility in cash flow all over the world. Despite its restricted return on equity position maintained by shareholders, it is considered safe in not only Pakistan but also world over by investors who want to have sturdy and risk free cash flow against security investment. The fund gives back dividends on shareholders' money invested in bonds, preferred stocks, and other government assets and does not indulge in unpredictable and capricious movement of shares value in stock exchanges.

Following recent disruptive conditions of stock markets that experienced freefall of indices in and outside Pakistan and which in effect propelled stock funds under a threat of contagious ailment, the importance of income fund seems to be getting momentum. At least in Pakistan income fund remains most preferred instrument of holding equity position by investors as out of total 104 funds 21 income funds were issued by different asset management companies (AMCs) by mid of December. These were open-end funds that implied redemption and free sale authority to holder. It is worthwhile to note that total close-end funds were equal in number and one AMC alone brought into inception one income close-end fund by the month end.

In contrast, various AMCs issued 76 open-end funds including income fund, asset allocation, bond, money market, Islamic income, etc. In general, analogy of close-end fund to stock and its sale and purchase in stock market is outclassed by minimal investment required, less risky open-end fund. Therefore, the issuance of income fund was highest in numbers than any other comparable categories of open, close, and pension funds.

Cloud of doom has started encircling around stock markets after knell belled about financial jitters in international bourses. Having its own vicissitudes, stock exchanges in Pakistan, however, started loosing balance when desperate selling leading to historical collapse of stock value points marginalized trading. Money market instruments bagged a leeway to make its position strong in effect. In high interest rate, yields on bonds became substitute of earning healthy return on investment for investment banks (asset managers). Thus, at present income fund has opportunity to permeate.

With around 28 assets management companies on board, mutual fund industry of Pakistan consists of over 104 open and close end funds varying in figures time to time. It is impossible to say that when this industry will touch the assets management volume the leading nation of mutual funds management is presently handling. However, paradigm shift in securities investment markets is indicating a nearby breakthrough in the industrial outlook. Worldwide mutual fund industry has gained weight worth $200 trillion and assets under management of this industry are increasing day by day, although net assets value of funds are facing downward spiral owing to financial crisis. As said, funds under great influence of sliding market demands are really bearing the brunt. Close-end fund is prime casualty and market dynamics take toll from typical funds traded in stock markets.

In Pakistan, assets under management of asset management companies are posing an upward trend over a period. Professional money management and risk diversification are two main hallmarks of mutual funds. Public interest is developing due to profit security ensured by both of these. Although not substantially, total net assets of mutual funds jumped to Rs. 269.22 billion by the end of first quarter of this fiscal year from approximately Rs. 150 billion in end 2006. The share of income funds was highest Rs. 73.08 billion in total assets followed by equity fund Rs. 69.31 billion. Similarly, in open-end Islamic funds categories Islamic income took lead by managing Rs. 9.35 billion assets. By December end, total assets under management depicted value of Rs. 134.70 billion. Out of total Rs. 98.66 billion assets under management of open-end funds, again income fund held the large piece of Rs. 42.40 billion.

Jul-Sep, 2008 statistics released by the mutual funds association of Pakistan revealed leading assets manager in terms of magnitude of assets under management was National Investment Trust that managed Rs. 56.78 billion assets followed by JS Investments with Rs. 32.31 billion. UBL Fund Managers and National Fullerton Asset Management were handling almost identical volume of assets for the quarter with Rs. 27.87 billion and Rs. 27.68 billion respectively. In the trail, MCB Asset Management managed Rs. 17.65 billion assets, Arif Habib Investment Management Rs. 15.14 billion, Al Meezan Investment Management Rs. 12.83 billion, PICIC Asset Management Rs. 12.11 billion, KASB Funds Rs. 10.22 billion, Askari Investment Management Rs.7.02 billion, Faysal Asset Management Rs. 6.94 billion, HBL Asset Management Rs. 6.57 billion, Atlas Asset Management Rs. 6.05 billion, AKD Investment Management Rs. 4.97 billion, Dawood Capital Management Rs. 3.66 billion, BMA Asset Management Rs. 3.40 billion AMZ Asset Management Rs. 3.34 billion, Pak Oman Asset Management Rs. 2.90 billion IGI Funds Rs. 2.81 billion, Habib Asset Management Rs. 1.96 billion, ABL Asset Management Rs. 1.72 billion, Crosby Asset Management Rs. 1.54 billion, National Asset Management Rs. 1.10 billion, and Noman Abid Investment Management Rs. 1.06 billion.

Payouts in percentage of face value of open-end income fund were in the scale of 0.90% and 3.46% while they were in between 2.54% and 3.27% on face value of Islamic income. In close-end categories, only one AMC posted 10% payouts on face value of balanced fund. Redemption takes place both in open-end and pension funds. While in pension-end fund categories total redemption amount was little over Rs. 1 million of cumulative Rs. 76.40 billion, it was Rs. 35.55 billion only in case of income fund leaping more than quadruple times when compared to aggregate paybacks of Rs. 7.14 billion of five Islamic funds.