THE PHENOMENAL GROWTH OF MUTUAL FUNDS

During the last couple of years, the industry has made a remarkable and phenomenal growth

By HARIS ZAMIR
June 05 - 11, 2006

The idea of pooling money together for investing purposes started in Europe in the mid-1800s.

The first pooled fund in US was created in 1893 for a small community. On March 21st, 1924 the first official mutual fund was born in Massachusetts. Soon after the stock market crash of 1929 and great depression of 1930s, mutual fund industry was regulated by SEC to safeguard the interest of investor.

Today with more than 70 years of regulated market well above fifty thousands mutual funds are operating around the globe.

National Investment (Unit) Trust (NIT), a public sector product, first open-end mutual fund in Pakistan was inaugurated in 1962; followed by the establishment of Investment Corporation in Pakistan (ICP) in 1966, which subsequently offered a series of closed-end mutual funds.

Thirty five years down the road first private mutual fund was launched by ABAMCO, a JS Group Asset Management Company, under the name of Unit Trust of Pakistan (UTP) in 1997.

There is no stopping since then; changing political and economic conditions in last five years have become very conducive for financial industry to grow. Today there are 19 open-end and 22 closed-end funds are operating under different fund managers. Apart from NIT all the funds are operating under the supervision of private asset management companies.

During the last couple of years, the industry has made a remarkable and phenomenal growth not only in its size and category (open-end funds and close-end funds) but also in product diversification and market penetration due to sprouts mutual funds on its horizon.

As of now, there are 28 (twenty-eight) asset management companies in Pakistan out of which 27 (twenty-seven) are registered with Mutual Funds Association of Pakistan (MUFAP). The member companies (27) of MUFAP are managing 46 (forty six) funds, 20 (twenty) in closed end sector and 26 (twenty six) in the open end sector with total net assets under management respectively at Rs. 47.263 billion and Rs. 120.666 billion totaling Rs. 167.929 billion as of 30-04-2006.

As on June 30, 2005, the net assets of the industry stood at Rs. 124.764 billion with shares of closed-end and open-end funds respectively at Rs. 39.548 billion and Rs. 85.216 billion. This shows the growth in the net assets by Rs. 43.165 billion during the ten months ended on April 30, 2006 of the current financial year.

New and innovative products are being designed and offered in the market for both corporate and individual investors. Among the new products so far offered also include Shariah Compliant Products, Sector specific products etc. Further, more new products derived from variable and fixed income securities are proactively being developed to suit investors' risk and return profile, their cash flow needs etc. The new products to be offered in the near future include Pension Funds, Real Estate Funds, Infrastructure Funds etc.

It is heartening to note that private sector has now come to play an important role in the market. Due to their active participation and introduction of reforms from time to time, the mutual funds industry during the past one-decade particularly after FY-02 has recorded tremendous and significant growth in its net assets.

The total net assets as on June 30, 2002 were Rs. 25 billion which have increased to Rs. 167.929 billion as on 30-04-2006 as stated above showing the growth in Net Assets by about 575%. The industry has gained this popularity due to its improved and disciplined behavior, governmental support, development of specialized innovative products, and enabling and investment friendly environment.

However, there is a long way to go as the current size of the industry at Rs.167.929 billion (US$ 2.79 billion equivalent) is much lower than the comparative figures in the region. Looking at the market size in the region it shows (India: US$ 44.33 billion; China: US$ 58.13 billion, Taiwan: US$ 59.76; Japan: US$ 468 billion; Korea: US$ 198.80 billion as on December 30, 2005) let alone those of the global mutual funds industry.

All stakeholders including MUFAP are therefore striving hard and making serious and sincere efforts to utilize the resources available at their disposal to get maximum out of the untapped potential of the industry to achieve its size at least comparable with its counterparts in the region.

"We are looking at assets of around 500 billion rupees over the next five years," said Nasim Beg, chief executive of Arif Habib Investments, which manages seven different funds. "There are over 40 mutual funds at this time, and more are coming and will keep coming," said Beg, whose firm controls a market share of nearly 11 percent. Analysts say the low-interest rate conditions that have prevailed in Pakistan in recent years have made bank deposits and state-run National Saving Schemes (NSS) less attractive, convincing investors to look for other options. Spotting the demand, major financial houses and leading banks have set up asset management companies. "The entry of big players and commercial banks will provide the much-needed retail push to the industry," said Zaheeruddin Khalid, head of research and product development at Al Meezan Investment Management. "The contribution of the stock market rise is there, but the increase in retail customer base is very important for the long-term viability of the industry," he said.

Arif Habib's Beg said that while the economy was doing well, and listed companies producing good returns, mutual funds were eager for more investment options.

"Where there is a shortcoming is that not everyone wants to take exposure in investing in equities. There are people who would rather be invested in fixed-income securities," he said.

But with few companies issuing bonds and a lack of government bonds issuance over the last two years, mutual funds faced a dearth of debt-market options, he said.

The recent years have not only seen the revival of the mutual fund industry in Pakistan but also the activity shifting from the public sector to the private sector coupled with increase in the attractiveness of open-ended funds as compared to closed end funds.

"There is no precedence of such a massive growth in mutual fund industry, however, relevant to developed countries, the industry is still in its emerging stage and has a lot of room for growth", an analyst said.

Dr. Amjad Waheed, chief executive officer of National Fullerton Asset Management Ltd., said the government is expected to announce rules to set up pension and real estate trust funds in the country which would give further impetus to mutual fund industry in the country. "As the saving rates are low, the mutual fund is the best tool to give higher returns to individuals and retail investors". He said that returns should be higher than the inflation rate, depositors are getting as much as three percent while inflation rate is 9 percent. Our recently launched NAFA cash fund, which now running in a sixth week, investment has reached 4 billion rupees would return 10 percent to its investors.

"We are bidding for NIT and if won't get controlling stakes of the state-owned fund than the company plans to launch two open-ended funds- Stock Market and Balanced Fund by September this year", Amjad said.

The mutual fund industry is still young in Pakistan. It is far more developed in other countries. The problem with the mutual fund industry in Pakistan is that it has been restricted to institutional or high net worth investors. The retail market has not been touched and one of the main reasons for this that the banks have never initiated any steps to a launch a mutual fund. People think that mutual fund and stock market fund are same in nature. But we ant to change this perception so that they realize that in a mutual fund, the assets are not invested in stock market, making it much safer and risk free.

"Actually in a mutual fund, you are giving your money to proper professionals and therefore it is in good hands, all that the investor to have to do is to relax and earn their return", Dr. Amjad said.

Shahid Ghaffar, Chief Executive Officer, of HBL Asset Management said that mutual fund industry has grown at a faster pace in last couple of years in the country, which shows that fund managers have done a good job in enhancing the size of fund under management. However, in spite of growth in mutual fund industry over the last few years, the size of investor base as well as fund under management is very small. Our country's population is over 150 million and the number of unit holders is one tenth of one percent. It "needs lot of attention and a road map to lure this group, raising the size of the investors ". As per mutual fund association web site the number of unit holder is around 150,000 but we lacked data and there is possibility that several unit holders might be unit holders in more than one mutual funds, so the actual number of unit holders might be even much lower.

Ghaffar said those fund managers and the government both should actively pursue to encourage people from all walks of life to invest in mutual funds. He added that the size of our mutual fund is 6 percent of the total bank deposits and 2.5 percent of GDP. Giving comparison, the chief executive officer said that the size of Hong Kong mutual fund is 188 percent of the GDP, Singapore 68 percent, Malaysia 25 percent, Taiwan 23 percent and neighboring India is 7 percent.

"The main thrust of the government if encouraging more investors would be to sell as much shares through the stock market as possible particularly the state-run companies. The Government is still holding substantial shares of some public sector listed companies. The share prices of these companies are many time more that the first offering price at the time of listing.

Government should take advantage of the Bull Run in the market by offering shares of these companies like OGDC which was sold at 32 rupees a share and now it is trading around Rs. 135 per share, it made a high of recent bull run to around 165 a piece. Through offer for sale of public sector holding, the Government can raise fund and can also help increase depth in the market.

Ghaffar said that tax incentive allowed earlier, meaning difference between listed and non-listed say about 10 percent parity would surely encourage our local business houses to list their entities at the bourses.

According to an analyst the permission granted by SBP to local mutual funds to invest 30% of their assets abroad with a cap of US$ 15 million has enhanced the image of mutual funds among the investors.

Resultantly, the investors' confidence would be instrumental in encouraging large investments in the mutual fund sector. The fund managers would also be placed in a better position to offer attractive returns. The earnings from the investment portfolio are to be essentially developed on the basis of independent and prudent investment decisions after taking proper and due assessment of the markets abroad and various risks associated with them.

The mutual funds industry is at present looking at the retirement savings market in terms of options like the defined benefits to ensure a predetermined pension to a retiree or defined contribution schemes to determine the benefits for retiring persons depending upon the profitability of investments by the mutual funds. The government is keen to develop pension schemes and is encouraging mutual funds industry to come forward and develop such schemes.