Development of a vibrant mutual funds industry is
essential for a country like Pakistan, where the savings rates and
number of equity investors is low as compared to other countries in
the region. The mutual funds industry acquires more importance as
small investors are investing in equities market. Since such funds are
usually managed by professionals and have diversified portfolio, the
investors in funds get comparatively better on investment. However, it
has been noticed that the size of mutual funds in Pakistan has
remained stagnant over the last five years.
Mutual funds were introduced in Pakistan in 1962
with the public offering of National Investment Trust (NIT) units. NIT
is an open-end mutual fund, still operating in the public sector.
Investment Corporation of Pakistan (ICP) was established in 1966,
which subsequently offered a series of closed-end mutual funds,
totaling twenty-six. Management rights of all the 26 ICP funds have
been transferred to the private sector. Now ABAMCO and PICIC manage 12
and 14 of the ICP funds. Presently, 7 open-end and 35 closed-end funds
are being managed by the private sector.
A closer look into the history of mutual fund
industry, spread over 40 years, reveals some interesting facts. The
first ever open-end fund, NIT, was established in 1962 in the public
sector and remained the only such fund in the country for over 30
years. They kept NIT a virtual monopoly for decades. To guarantee
growth in its portfolio, offer of 25% shares of every public limited
company to NIT was made mandatory. While this practice helped in
building NIT's portfolio, it also led to certain 'dead investments'.
Then came the establishment of ICP, again in the
public sector, with the additional mandate to manage closed-end funds.
Over the years ICP floated 26 funds, including SEMF. The portfolio of
SEMF comprised of shares of state-owned enterprises listed at local
In 1971, the government cleared the way for entry
of private sector in the closed-end segment but denied the right to
float open-end fund. It is understood that the regulators were not
convinced that private sector could manage an open-end fund. However,
the events that took place in seventies did not incite the private
sector to venture into mutual fund management. Only one fund was
floated in the eighties.
Within a short span of six years (1991-96) private
sector floated 12 closed-end mutual funds. Keeping in view the
receptivity of the concept of mutual funds the government notified the
amended rules for efficient management of funds. However, most the
mutual funds floated by the private sector posted huge losses in the
initial years. ICP and NIT also experienced substantial erosion in
profitability but the shock was of lesser intensity.
The subdued performance and slow growth of mutual
funds sector can be attributed to a number of factors.
However, the biggest blame of the poor performance
of mutual funds managed by the private sector goes to the regulators.
According to a sector expert, "The regulators made the biggest
blunder by allowing private sector to establish closed-end mutual
Another problem affecting the profitability of most
of the private sector managed funds was that these were floated at the
time prices of most of the scrips was very high and bulk of the
investment in equities. As the market suffered from prolonged bearish
spell, value of portfolio eroded and heavy provisions had to be made
against diminution value of investment.
Since most of the mutual funds were floated by
brokerage houses, almost all of them indulged in day trading rather
than selecting scrips based on economic fundamentals for investment.
The most unfortunate part of the story is that most of the brokerage
house 'parked' their bad investment in the mutual funds. All these
activities added to the losses of private sector mutual fund and no
investor was ready to invest in shares of closed-end mutual funds.
Most probably, the largest number of companies was
floated during the bullish period of nineties. A large number of these
companies were established either by the 'rent seekers' or the
projects were not economically viable but mutual funds picked up the
shares without examining economic fundamentals affecting profitability
of these companies. As corporate earnings plunged did the mutual
On top of every thing, dollarization of Pakistan's
economy and offer of very high rate of return on government securities
provided opportunities to earn risk-free and hassle-free return.
Therefore, people preferred to invest either in dollars or government
securities rather than initiating/managing any business.
With the revival of economy, end of dollarization
and substantial decline in interest rates, corporate earnings have
improved. Earnings of mutual funds have also improved due to higher
dividend income as well as capital gains. This is evident from the
dividend pay out by NIT and new fund managers foe ICP funds (PICIC and