And National Investment Trust
Jul 17 - 23, 2000
When one chooses to save and invest, one is faced with a variety of
different investment options. The most common among those are gold, US$, real estate, bank
deposits, government saving schemes and shares. Most investors have a perception of the
risk / return characteristics of these investments. However, very few know the actual
performance of different modes of investment.
Historical comparison of different investments
NIT has conducted some empirical research to compare the performance of
some main sources of investment (see chart). Based on this, if an investor had invested
Rs. 100 in a bank deposit in July 1974 he would currently have Rs. 932, an average return
of 8.98% per annum over the last 26 years. Had the same Rs. 100 been invested in Defence
Saving Certificates it would currently be worth Rs. 2,947, signifying an average return of
13.92% per annum. Had the same Rs. 100 been invested in the stock market, it would
currently be worth Rs. 5,150, an average annual return of 16.40%. This would be after
adjusting for the highs and lows that the stock market has experienced over the past 26
years, where at one point in 1994 the investment value had reached a peak of Rs. 8,744.
Similarly, a commodity costing Rs. 100 in July 1974 would currently cost Rs. 1,027 showing
that inflation has risen at an average rate of 9.39%. Thus we see that although the stock
market has exhibited greater volatility and risk in the short-term, it is definitely a
better investment over the longer-term. But still, a very small percentage of the total
population invests in the stock market.
The main reason why people do not invest in the stock market is that
they may not have sufficient knowledge of shares investing specifically how to
decide which companies to invest in and also when to enter the market and when to exit.
This is where a mutual fund comes in to the picture.
A mutual fund is basically a pool of investments whereby a group of
investors pool together their savings and give it to the Fund to invest and manage. Mutual
funds invest on behalf of the investor and charge a small fee for this service, much in
the same way as a broker would charge commission from an investor when buying or selling
shares for him. Unfortunately, the mutual fund concept has not really caught on in
Pakistan. In the USA 50% of the families are invested in a mutual fund. Compare this to
Pakistan where less than 1% of families are invested in mutual funds. Mutual funds offer
the following advantages to investors.
A major problem that the average investor faces is that he is usually
not aware of the latest valuation techniques that are available, which would enable him to
make an informed decision. He is also not aware of the various financial aspects that need
to be investigated before the decision to invest in a stock is made. Usually he makes a
decision based on sentiments in the market rather than fundamentals of the company. A
mutual fund has a group of professionals who use valuation techniques to determine
The second major hurdle that the investor often faces is that he does
not have the amount needed to diversify his investment in shares. Studies have shown that
a portfolio of 30-40 stocks is the ideal portfolio to be fairly diversified. That is the
point where firm-specific risk gets reduced to a minimum, and only the market risk (risk
which affects all stocks equally) matters. Diversification helps since all stocks do not
always move in the same direction. While some stocks would increase in value, others would
decrease. Thus the loss in one would be cancelled out by the gains on the other. For an
average investor saving and investing say Rs. 5,000/- it is not possible to purchase 30 -
40 shares. Therefore the best approach is investing via a mutual fund.
A major inconvenience that investors face when they choose to enter the
stock market is of record-keeping. Companies often declare cash dividends, bonus shares,
rights shares, book closures, etc. for which a good deal of correspondence has to be done
between the investor and the company. This not only requires time and effort on the part
of the investor, but also puts a strain on his resources i.e. costs associated with the
correspondence. Although companies mostly report annual earnings, the year-end may differ
e.g. sugar and textile companies usually have a September year-end, whereas
pharmaceuticals and commercial banks usually have a December year-end. Manufacturing
concerns, leasing companies and modarabas have traditionally kept June as their year-end.
Thus, an investor with a well-diversified portfolio would be faced with multiple problems
when the issues of correspondence, dividends, meetings, etc. of the companies within his
portfolio come up. Mutual funds offer an average investor a one-window solution to
investing in the stock market or other financial instruments.
To summarise, mutual funds offer a solution to various problems that
investors face and in turn charge a service fee.
Open and closed end mutual funds
There are basically two types of mutual funds. Open-ended mutual funds
and Close-ended mutual funds.
Open-ended mutual funds are different from close-ended mutual funds in
that they do not trade on the stock exchange. They also do not have a fixed investment
limit. If an investor wishes to buy units of an open-end mutual fund he will have to buy
them from the fund itself. The fund will sell him the units at a fixed price, which will
usually be the Net Asset Value (NAV) per unit plus a small commission fee. Similarly if
the investor wishes to redeem / sell his units he will have to sell them back to the fund
itself. Thus the size of an open-end mutual fund may increase or decrease on a daily basis
based on the number of investors buying into the fund or selling out of the fund. It would
need to expand its portfolio if sales of units of the fund are exceeding repurchases.
Similarly it would also need to sell off part of its portfolio if repurchase exceed sales
of units, in order to reimburse its investors.
Another major difference between open-end and close-end mutual funds is
that the Net Asset Value (NAV) per unit of the fund is calculated on a daily basis for
open-ended mutual funds. Thus the value assigned to a unit of the fund is the actual value
of the assets of the fund less the related liabilities distributed over the total number
of units outstanding at that point in time. When an investor is buying in to the fund he
is paying for the true value of assets of the fund. Similarly when an investor is buying
out of the fund he is getting the true value per unit based on the true value of the
assets of the fund. In the case of a close-end mutual fund, once the fund is floated its
size remains fixed (unless it issues bonus or rights shares). The shares are then traded
in the secondary market and the price is fixed by the bidders and sellers in the stock
market. So even though a close-end mutual fund share might have an intrinsic value of Rs.
13, it may be trading above or below that value, in the market. Thus the investor may not
get the true value of his investment. Almost all of the close-end mutual funds operating
in Pakistan trade at a discount to their Net Asset Value, in certain instances the
discount may be as high as 60% of the NAV.
National Investment Trust
National Investment Trust is an open-end mutual fund. Established in
1962, it currently has assets worth over Rs. 19 bn and almost 65,000 Unit-holders. It is
invested 98.5% in equities listed on the stock exchanges of Pakistan and the remaining
1.5% is invested in fixed income securities e.g. Term Finance Certificates, Modaraba
Over the past three years NIT has undergone structural changes in its
setup in order to enable it to identify better opportunities and take advantage of them.
NIT has 24 branches operating all over Pakistan, besides NIT Unit counters at various
branches of Nationalised Commercial Banks. NIT currently has 36 MBAs, 4 CAs, 2 Economists
and 1 doctorate in Finance working for it.
A major advantage of investing in NIT is that NIT has a strong Research
team that identifies various investment avenues using the appropriate techniques used for
equity valuation. These include tried-and-tested methods like the Discounted Cash Flow
Models and Economic Value Added Models.
Another major advantage is that because of the size of the transactions
that an institution like NIT enters in to with brokers, it can negotiate terms and
conditions for the amount of brokerage charged. Thus NIT would pay less brokerage simply
because of the fact that it deals on a much larger scale than a single investor would.
NIT also has a Corporate Governance section, which has to date managed
to build up over 300 representations on the Board of Directors of various investee
companies, which not only gives it a unique insight in to the workings of the companies
and in to what is happening in their particular sectors, but also allows NIT to keep some
checks on sponsor companies. This section also helps in negotiating at the time of block
trades. Over the last 2 years NIT has added Rs. 750 mn of value to its Unit-holders by
selling shares way above their prevailing market prices.
Since NIT has investments in 600 out of the 763 companies listed on the
Karachi Stock Exchange, it enjoys over 90% correlation with the KSE-All Share Index
(KSE-A). NIT has outperformed the stock market and most other mutual funds in the recent
past. For the period July 1, 1999 to March 31, 1999 the KSE-A rose by 78%, whereas NITs
NAV registered an increase of 92.44% (inclusive of interim dividend of Rs. 0.55 per unit).
This shows that NIT has beaten the KSE-A by a healthy margin of 14.44%. This is due to
timely decision making on the part of the management, which is aided by an adequately
informed and capable research team.
With the induction of professionals and measures taken to improve
internal corporate governance NIT is well geared to channel savings of Pakistanis in
shares of companies with good upside potential.