The Mutual Funds sector has been growing in size
and also attaining greater diversity of portfolio. The growth in
paid-up capital may look substantial but the size is still too small
as compared to international standard. The in-road made by the private
sector and transfer of management rights of ICP managed funds to
private sector has reduced the quantum of funds being managed by the
public sector. More and more funds are being listed and contributing
towards the growth of capital market.
A Mutual Funds is a pool of money set up for the
purpose of investing in financial instruments according to its
objective. It is a professionally managed investment company that
offers investors through the issuance of Certificates/Units an array
of benefits unique in the investment world. Typically there are two
categories open-end and closed-funds. Mutual funds generate income
from dividend received from its investment and capital gains.
Mutual Funds face two types of risks, system risk
and non-system risk. The system risk primarily constitutes the country
risk and market risk, which cannot be mitigated due to its very
nature. In some cross border mutual funds this risk is minimized but
cannot be eliminated completely. The non-system risk is the risk taken
on the capability of the Fund Management Company to sure diligent and
effective execution of a market-based investment strategy for
optimization of returns.
Until beginning of nineties, mutual funds were the
exclusive domain of public sector. NIT was floated in 1962 and ICP was
established in 1966. NIT remained the only open-end fund for more than
three decades. Over the years, ICP floated 26 closed-end funds only.
During 1991-96 period 12 funds were floated by the private sector but
all of them were closed-end funds. The regulators at that time did not
consider private sector competent enough to manage open-end funds.
However, the time has proved that it was an incorrect policy.
Over the last few years, as the market experienced
'over flowing liquidity' and interest rates declined. Particularly the
return on National Savings Schemes was curtailed to reduce the GoP's
debt servicing. This led to influx of savings to equities market at
tremendous volume. While a large number of investors may have made
large gains by investing in equities market, even larger number lost
the life-savings. Simply because they did not have the complete
insight of the market. The lack of knowledge is not exceptional to
Pakistan, it is more or less a universal phenomenon. What could be the
Globally mutual funds are considered an appropriate
investment vehicle for small investors. This is evident from the size
of mutual funds sector and the number of investors in such funds. One
of the indicators is percentage of bank deposits invested the funds.
In the USA, mutual funds are 125% of the bank deposits, it may be an
exception. In India the size is about 15% of the bank deposits. As
against this the level in Pakistan is as low as 5% of the bank
deposits. The only encouraging sign is that it has grown from 3% to
current level in last couple of years. There it can be said
conveniently that the sector enjoys enormous growth potential.
However, one of the concerns is, will the investors
face the similar situation that they faced in nineties. The immediate
and categorical reply of the fund managers is No. They say that both
the fund managers and the regulators have learnt a lot from past
mistakes and are acting very cautiously at present. In early nineties,
the regulators dished out licenses rather recklessly and also lacked
competence to monitor. As against this, at present Securities and
Exchange Commission of Pakistan (SECP) is autonomous body with
qualified and knowledgeable personnel. Licensing procedure is very
stringent and demands greater disclosure. Therefore, it is expected
that working of funds would be monitored more effectively.
Another indicator of realization of market
realities is the growing size of open-end funds. Some of the analysts
say that managers of open-end funds have to be more vigilant simply
because they have to announce unit price periodically, ranging from
daily to weekly basis. The unit sale/purchase price is based on net
asset value (NAV). Any reduction in NAV automatically reduces the unit
price. The fear of higher redemption, in case of substantial fall in
NAV, is always there.
Against this, there are more chances of price
manipulation of shares of closed-end funds. Investors get information
about the financial health of funds only when they received quarterly
reports. On top of this. if an investor wish to sell the shares he/she
gets a price which is based on demand and supply phenomenon. Whereas,
an investor in open-end fund can redeem the units more conveniently.
Similarly the fund managers are now following
better practices and acting more prudently in picking up equities for
investment. One of the indicators is that in nineties fund managers
bought scrips at earning multiple of as high as 22. Whereas, they are
cautious at 10 times multiple. The historic earning multiple in
Pakistan has been around the same level.
However, some of the analysts say that the
probability of 'parking bad investment in mutual funds' is still a
serious concern. They say that most of the funds have been floated and
are being managed by brokerage houses. Therefore, probability of
parking bad investment in closed-end remains high.
They also say that some of the mutual funds also
take active part in day-trading. Since the market is bullish at
present they have sold out some of the investments made in the past to
achieve capital gains and diverted the funds to scrips offering growth
as well higher earnings potential. The concern is that some of these
scrips still face rather fragile economic fundamentals.
Whereas, the fund managers say, "We constantly
review our portfolio and make regular adjustments as we cannot remain
contended on a few scrips. We do follow dividend yield methodology but
we also take into account dividend payment ability of the companies
and payout track record. On top of every thing now the typical
portfolio of a fund is balanced. The portfolio normally comprise of
equities, debt instruments and some times also include investment in
Some of the analysts also say that most of the
funds do not have any contingency plan, in case of a fall out. This
expression is based on the perception that the KSE-100 index will
continue its upward movement. No one seems to be ready even to listen
that the index may plunge one day. However, one should always remember
an old say that any thing that goes up has to come down eventually.
In this regard it would be more appropriate to
mention the various rationale being put forward and let the investors
make informed decision. The first argument is that while the index has
attained the present level, the investment in quality scrips is still
justified on dividend yield parameter. The second argument is that a
number of scrips were being traded at a discount to their fair value
and the recent increase in their prices is based on the earnings
potential. The third argument is that with the decline in interest
rates, revival of the economy and increase in investment in new
ventures per capita income of an average person has led to greater
spending. The growth in profitability of companies belonging to FMCG
and services sectors substantiate greater spending. On top of this,
the GoP's policy of divestment of shares of state-owned entities and
listing of new companies are providing additional impetus. Therefore,
the equities market is expected to remain vibrant in the foreseeable
future. Only an external event can lead to free fall. In such a
scenario all the investors will be affected and mutual funds cannot
remain an exception.
New fund are being launched and funds under PICIC
and ABAMCO are being merged. The number of listed funds will be
reduced but listed capital is expected to increased. The growth of
sector can be gauged from the fact that in 1991 there were 23 listed
funds with an aggregate capital of Rs 678 million. The number
increased to 37 funds and quantum of listed capital exceeded Rs 6,805
million by September 30, 2003. Since then a number of funds have been
listed and the recent quantum of listed capital touches Rs 8,490
million. The size of listed capital will further grow as more funds
are in the pipeline.
Another encouraging sign is that the number of Sharia
compliant funds is on the increase. Meezan Islamic Fund was floated
recently and Arif Habib Investment has also signed an MoU with The
Bank of Khyber to float another Sharia compliant fund. A
Sharia compliant fund is a fund that does not invest in
shares of companies drawing bulk of their income from Riba-based
operations and/or undertake activities prohibited by Sharia.
It may look a little strange that commercial banks
are providing the largest percentage of seed-money and/or actively and
substantially participating in the Pre-IPOs of Sharia
compliant funds. It is true that there are very few opportunities
available to commercial banks for investing in Sharia
compliant instruments. Therefore, the deliberate strategy to move away
from Riba-based activity is a positive move towards
elimination of Riba from the economy.
It is expected that further privatization, trickle
down impact of macroecomic stability and revitalization of micro
economy would lead too surge in conversion of SMEs into large
corporations leading to higher market capitalization and the same
would be reflected in the mutual funds sector size as well.
Growth of mutual funds sector, like any other
sector of economy is the result of demand and supply. In general, the
same factors that influence the demand for mutual funds also shape
their supply. Other factors affecting the growth of mutual funds are
status of tax laws and regulatory set up.
Over the last five years, Indian mutual funds
sector has grown by more than 5%, which led to its current size of US$
22 billion. Out of these assets 59% were contributed by open-end
funds, 19% by open-end money market funds and the rest was constituted
by equity funds, balanced funds and government securities. Primary
driver of growth has been change in tax laws, establishment and
redefining of regulatory procedures.