MUTUAL FUND INVESTMENT AND ITS GROWTH PROSPECTS
Mutual fund industry has grown impressively during recent years in Pakistan, however it is still young as compared to other countries in the region.
June 05 - 11, 2006
There are very few companies that are known as asset management companies that are providing the advisory services to their clients on various dimensions of capital market. One of them is Dawood Capital Management Limited. We got the chance to talk to Tara Uzra Dawood, the CEO of DCM Limited. T.U. Dawood is a graduate oh Harvard Law School, she is a vibrant and young lady who have strived to come to a position where she is today. For her Success is achieving one's goals and making a positive difference in the world. Let us see what she says about the current situation of mutual fund investment in Pakistan.
PAGE: First tell me a little about yourself and how do you get into the mutual fund business?
Tara Uzra Dawood: I am by profession a lawyer and a member of the New York bar, but when I graduated from Harvard Law School, Boston, USA, in 2000, I moved to Karachi and began working for Pakistan Venture Capital Ltd. (PVCL) as Executive Director.
PVCL was formed in 1990 and is the brainchild of Asian Development Bank, Manila (ADB). ADB continues to sponsor the company today, along with the First Dawood Group. At that time (2000/2001), it was too risky to invest in most new ventures and the company -- desirous of making profits -- concentrated on money market transactions to great success. Thus, in 2003, at the suggestion of ADB, PVCL was converted into an Asset Management Company (AMC), a nascent and up-and-coming industry in Pakistan. Its new name was Dawood Capital Management Ltd. (DCM) and DCM is currently not only the listed company in Pakistan but is the one with social consciousness as well because of the Asian Development Bank's sponsorship.
In April 2004, I became CEO of DCM.
PAGE: Does DCM deal with mutual funds?
TUD: An Asset Management Company is a provider of investment advisory and asset management services. We currently have an open end income fund Dawood Money Market Fund (DMMF). DMMF only invests in fixed-rate of return instruments and has been rated 5 star by PACRA which is the highest possible rating. We also have a closed end asset allocation fund First Dawood Mutual Fund (FDMF) that invests in both debt and equity instruments. We will soon be launching a shariah-compliant open-end fund Dawood Islamic Fund (DIF).
DMMF ESSENTIAL INFORMATION:
Net Asset Value
Rs. 109.3755 (par value was Rs. 100)
Return for Year to date
11.36% per annum
Type of Fund
The asset allocation of the Fund is as under:
DMMF continues to be a profit leader. In June 2004, the Fund paid a competitive dividend of 7% compared to a rest of money market industry average of 6.2% and in June 2005, DMMF gave back to its unit holders 9.7% compared to a rest of industry average of 8.5%!!! For the half-year ended December 31, 2005, Your Fund's return was 10.59% compared to a rest of the industry average of 9.37%.
PAGE: Mutual funds operate in three different segments i.e. stock, bonds and cash... how does it work and make money?
TUD: Well mutual funds as opposed to money market funds are usually equity or both equity and debt based. Mutual and money market funds are an incredible opportunity for investors to make money because the fund manager is dealing with large volumes of money and so can get better rates and opportunities than an individual would get for investment. Thus, individuals benefit greatly when investing in a fund. That being said, the quality of the fund manager is very important in determining the Fund's success.
PAGE: If I ask you about the current status of the mutual fund investment in Pakistan, what would you say?
TUD: It's still a nascent industry with an incredible opportunity and growth potential. Less than 1% of Pakistan GDP is currently invested in mutual funds compared to over 20% in India and over 100% in America. Open end mutual funds are the perfect alternative to bank accounts because for example in our DMMF, we are giving about 12% annualized return at the moment and you can access your money with approximately 3 day notice, compared to the 4.5% or so most bank accounts are giving on their current accounts.
PAGE: But literature on market efficiency suggest recommends passive investment as they suggest that paying money to so called investment professionals is a fool's game ... how do you respond to that?
TUD: Well, I don't know who has written it but I would suggest that before going to any investment advisor we strongly recommend that you research who that person is and their credibility. That being said I personally have been trained in Investment Advisory Core-Satellite Approach which has been written about and taught extensively in leading international business schools and journals. To our knowledge, DCM is the only group in Pakistan offering this particular approach which is capable of generating tremendous profits depending on original asset allocation and risk profile.
PAGE: How sound professional management should be to operate mutual funds?
TUD: It is an extremely big responsibility to manage anybody's or any corporation's finances. We at DCM do not take this responsibility lightly. We are confident that others in the industry are equally professional and committed to providing standard services but we can truly only comment on ourselves and we know that it is vital for us to give premier services and we are very dedicated to that pledge to our clients.
PAGE: How productive is the use of effective risk management in mutual funds?
TUD: Risk management is the most important aspect for any company to move forward, especially companies such as ours that our responsible for other people's funds.
PAGE: But the fluctuation in stock market, how does it influence the risk management?
TUD: Any situation with stocks always involves a higher level of risk than debt instruments. We advise individuals who wishes a low risk setting to invest in fixed-rate of return income funds such as DMMF that have a 5 star rating. DCM Investment Advisory Services offers five different kinds of risk profile baskets. We offer low risk, medium risk, high risk, volatile/unpredictable risk and shariah-compliant baskets. We also personalize baskets according to individual clients needs upon request.
PAGE: How strong should be the portfolio of the company to get the maximum returns?
TUD: As strong as it can be. Our portfolio is well diversified to give balanced and secured return to the unit holders.
PAGE: And how does that possible?
TUD: Well that's where our expertise comes in. It's our job to ensure that we invest in the wisest and savviest instrument because as professionals we have access to better return and opportunities than individuals usually have. That is the benefit and service we offer our clients.
PAGE: In the west there is this concept of index funds however it is not materialized here?
TUD: Our industry is still nascent in Pakistan. However there is already one index fund. More and more types of funds will be coming up in the next few years. Being a part of the mutual fund industry in Pakistan we have the opportunity to introduce a variety of opportunities into this market that have been experimented upon abroad and we can localize them for an individual market.
PAGE: Is the mutual fund investment guaranteed by the Pakistani government?
TUD: No, in fact there are disclaimers placed on everything stating clearly that there are risks involved. Investments are not guaranteed but what the government has done to help promote this industry. The SECP has laid down rules and regulations to manage mutual funds where they have restricted investment on a particular issue as well as on any one sector.
PAGE: What suggestions would you like to give to the investors when they are investing in certain firms?
TUD: Before making any investments, you should look into the consistency of performance, rating and quality of management of that particular firm and fund, as well as take into account your own risk appetite.
PAGE: And how it's possible to look into these things prior investing in any fund?
TUD: PACRA and JCR are two leading agencies who rate the asset management companies and their ratings. Ratings are mandatory by law for all funds and AMCs over 1 year old. This rating has to be disclosed so that's very important factor. Furthermore you should look at the group or the company or the people behind the company, you should look at the asset fund manager and you should look at the portfolio of investment. DCM also strongly recommends diversification of investments at all times to minimize risk.
PAGE: What is the probable size of the mutual fund in the market?
TUD: Currently, the industry is over Rs.100 Billion in size which is not nearly as large as it can be and will be.
PAGE: And how do you see the role of mutual funds in capital formation and how do you see the role of government in this regard?
TUD: The government policies governing mutual funds are totally organic. We have an incredible Securities & Exchange Commission (SECP) that regulates this body. They are very accessible, very much committed to providing a world class standard industry so they are continually providing rules and guidelines and structures to enable this industry to grow well at all times with also protecting the interest of investors too.
PAGE: What factors do affect the growth of mutual funds in terms of its performance?
TUD: Quality of fund management, market conditions, among other things.
PAGE: Mutual fund is a safe investment but general public has less interest in that, why is that so?
TUD: It is so important to remember that it is a very young industry. Further, our culture is such that a large segment of our population doesn't even invest in bank accounts so there is a huge education progress needed.
PAGE: How do you see the upcoming budget, would there be any incentives for this industry?
TUD: We will have to wait to see but we expect the budget to be in line with past budgets.
PAGE: How do you think DCM is different than other mutual fund investment advisories?
TUD: We are the only asset management company to our knowledge in the world to provide the investors with loyalty cards which is our way of thanking our loyal unit holders. We also committed to having a pro bono wing to our business that enables women and children to benefit from the financial sector. Thus, we have launched BABYFUNDTM children's trust funds and SHAADIFUNDTM jehaz funds, where we have waived our commission. We are currently in the progress of constructing our website www.fundbaby.com which is full of value added services for this market
In addition to our money market and our pro bono BABYFUNDTM and SHAADIFUNDTM, we are prioritizing the development of wealth management services and have introduced individual and corporate investment advisory services. Thus, DCM is expanding.
PAGE: How do you foresee the future of mutual fund investment?
TUD: Growing tremendously, the future is full of opportunities.