GO LONG FOR EQUITY BUT SHORT FOR MONEY MARKET INVESTMENTS
MULAZIM ALI KHOKHAR
Feb 09 - 15, 2009
The mutual fund industry has lost about 40% of its fund sizes during 1st half of the financial year 2009 and the fund sizes have touched the 3 years low of Rs. 111.44 billion for all the open end funds in the market. The downturn still continues amid worsening economic conditions and blurred investment scenario.
The industry has been under fire since April 2008 with start of the blow to foreign direct investments and economy. Still the government officials are at loggers' heads to ease liquidity, bring financial stability and improve investor's confidence. Investors are still shaky due to unfriendly economic policies towards industries and especially manufacturing and related industries.
The stock exchanges have not stabilized and stock funds have dived 92% down from their previous peak of their assets under control. This has been a massive knock to mutual fund industry as the equity funds covered almost 40% of the total assets management in open end mutual fund.
WHY INVESTORS ARE SHAKY?
A novice investor feels security and safety in paying the Fund Managers who are considered to be well equipped in the investments field, and who in turn profited the investors. But as the difficult scenarios came along those fund managers' policies failed. Asset qualities of the investments deteriorated and gradually funds, which never did realize any loss, started showing off declining profit trends. The confidence of the novice investors who were already confused by hyper inflation, worsening law and order situation and economic down turn, now started accumulating and liquidating them to face and save for the worst conditions.
MAJOR FACTORS BEHIND SLUMP
The 1st half of the financial year was depressive for both equity markets and the mutual funds. Economy was already on bed rest, now was given more antibiotics like higher discount rate which has caused all the sectors of the economy to be on rest for a few months and maybe quarters.
Keeping in view the continuous decline in KSE, SECP on the request of MUFAP, issued a directive titled "Practical Difficulty in arriving at Fair Value of Equity Securities held by Mutual Funds" dated October 7th 2008. As per the directive, SECP suspended the pricing, issuance & redemption Open-end Equity & other Funds with direct exposure to equity securities with effect from October 08th, 2008 till third business day after the floor is removed from at the stock exchanges.
Conversely, the FY09 started with pleasant returns for income and related fund, as the current yield on TFCs, COI and CODs jumped high with hiking discount rates. This made returns on mutual fund initially going up and finally landing into a ditch. A ditch known as SECP directive revalued TFCs from 5 to 25% discounted values. The discounting had no basis and was done on no assumptions. Under this directive the industry accounted for millions of MTM losses in a day. This proved to be a heavy blow to investor confidence and the haste of the directive issuance proved to be hazardous for the industry on whole.
These disputes on TFC revaluation led MUFAP to work for and to reach any consensus on TFC fair valuation methods with SECP. Finally both have agreed on a set of methods to revalue the same. Now the asset quality decline can fairly be accounted for in TFC pricing, which will be disclosed fortnightly by MUFAP.
Both these issues, equity fund freezing and TFC revaluation, have distorted the market confidence, mutual fund profit ratings and performances. The situation is still blurred as SBP did not retract the policy rate which may further deteriorate the asset qualities and hence convert to higher MTM losses will be registered in mutual funds' accounts.
IS THERE ANY HOPE?
Yes, there are always some opportunities in every difficulty and the peak of the difficulty is the trigger to any such opportunity. We are passing through the peak of difficulty (the bottom of recessionary period) which will ultimately turn into opportunity for wise investors.
There are some opportunities in both equity and money market investments in the form of undervalued asset with good asset qualities and higher yield on short term securities with very low risk profile. The fund managers today are working on these issue and opportunities and have started exploring and exploiting them from the various facets of the economy.
The equity funds can benefit from the very attractive equity market values. If we buy now and hold for long term, then it will certainly benefit in manifolds. As the short term investment in equity market now is very risky, the equity & related funds may not pose striking profits but will be able to average out the risks with very outstanding profits in the long term, maybe in a year or two.
Words from wise: Equity investors should go long with their investments and equity will be the best choice and the fund maintaining less risk and high return yielding portfolio will render better returns in future.
The money market now is very risky for long term investments due to high volatility and higher interest rates. The short term investments are offering very lucrative yields with very low risk in the markets. They posses negligible default risk and interest rate risks and yield average returns comparable with long term investments. Although long term investments in the money market offer higher yield but due to their higher duration, default, and interest rate risks their asset quality is very low.
Words from wise: Money market fund managers should go short with their investments and go long when interest rates are expected to decline. I mean invest in COI, CODs and TDRs now for 3 to 6 months and before the end of the period invest in TFCs. Till then TFC valuation problems will be settled and their asset qualities will increase.