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July 16 - 22, 2001

Mohammad Shoaib, born in 1965, completed his MBA from Institute of Business Administration (IBA) in 1988. He is a professional banker as well as a CFA. At present, he is the Chief Executive Officer at Al Meezan Investment Management. He is also a visiting faculty member at IBA. Prior to joining Al Meezan he was Senior Vice President at Pakistan Kuwait Investment Company. He had started his career from Pangrio Sugar Mills.

PAGE: While India has been able to exploit potential of mutual funds, why the experience in Pakistan is not the same?

Mohammad Shoaib: One of the basic reasons for the growth of mutual fund industry in India is that there is a lot of retail interest in the stock market. Hence people from all over India are investors in the Indian equities market. Only Unit Trust of India (the counterpart of NIT in Pakistan) has got 43 million investor accounts compared to 66,000 unit holders of NIT. I feel that a strong macro economy has led to continuous inflow of money from both domestic and institutional (local and foreign) investors into the stock market. The Indian stock market has provided returns to the investors that commensurate with the level of risk over extended periods of time. On the other hand, the performance of our market has been quite dismal during the last 7 years. The weak economy has adversely affected the profitability of the listed companies, which have also suffered because of abrupt changes in economic policies. Another barrier to flow of retail money to the stock markets in Pakistan is the high level of returns offered on government securities. These securities, being backed by the government, are considered virtually risk free and they used to offer returns as high as 18% per annum.

NIT used to have over 100,000 unit holders in the past with net inflow of funds almost every year. Because of the managed pricing of units which was not based on Net Asset Value (NAV) per unit, NIT used to provide a regular stream of dividend income to its unit holders. This essentially led to development of a mindset for the investors to expect a regular flow of income from mutual funds. When NIT moved to NAV based pricing for the units, it was quite obvious that it could not maintain regular dividend payments and a stable return to the unit holders. Not only the retail investors, but the pension and provident funds who had substantial holdings of NIT units in their portfolio got the shock of their lives when returns from NIT units turned volatile. On top of it, the market also turned bearish during that period, further eroding the value of NIT units. Hence unit holders who always considered mutual funds as a stable source of regular income, started developing a disliking for mutual funds.

PAGE: Why performance of private sector mutual funds has not been as good as that of mutual funds operating in the public sector?

Shoaib: There is a misperception that private sector mutual funds have not performed well in comparison to public sector funds. It is necessary to compare apples with apples to make a fair comparison. About 12 closed end mutual funds have been floated by the private sector since 1993. Similarly 5 closed end mutual funds have been floated by the ICP (a public sector institution) during the same period (21st to 25th ICP Funds). If we look at the NAVs of all these funds as on June 30, 2000 (the last published annual accounts), we find that none of these ICP funds has NAV of over Rs.10 which is the par value and issue price of the shares. In comparison, out of 13 private sector funds, 4 had NAV of over Rs.10 per share, whereas five funds had NAV below Rs.5. So I would say that some of the private sector funds have done better than public sector funds and the remaining are at par with public sector funds.

PAGE: What are the reasons responsible for pushing investors away from equities market?

Shoaib: Capital Asset Pricing Model suggests that there is a direct relationship between risk and return over long periods of time. Thus equities, being more risky, should theoretically offer higher return in the long run. Due to a number of factors, the stock prices in our markets are generally far below their intrinsic values. One of the key reasons for that is the lack of corporate governance and quality of audit by some of the auditing firms. As a result, minority shareholders are deprived of their due share in the profitability of the listed companies.

PAGE: Why venture capital funds are not common in Pakistan?

Shoaib: Venture capital industry is still in its infancy in our country. Because of the high level of risk associated with venture capital, the main source of funding for such projects is private equity. It is only recently that a legal infrastructure has been developed in our country for venture capital investments. It would therefore take some time before specialized venture capital funds will be set up in Pakistan.

PAGE: What is your proposed investment strategy for retail investors?

Shoaib: I would recommend that retail investors should avoid investing directly in the stock market, as it is not possible for them to efficiently manage and diversify their investments. At the same time, they should not be solely dependent on the brokers' advice for their investment. For the small investors, I would advise that they should invest through mutual funds as they get the benefits of diversification and professional management. However, before choosing the mutual fund, they should carefully look at the investment policy of the fund, track record of the portfolio manager of the fund and its past performance. For high net worth individuals and institutional investors like provident and pension funds, I would suggest that they should hire the services of a professional fund manager to manage their investments. There should be a consultative process between the investor and the fund manager to determine the investment policy for the investor in terms of his risk tolerance, return requirements and time horizon for investment. The investment policy so determined should guide the investment decisions taken by the fund manager on behalf of the client.