MUTUAL FUNDS INDUSTRY OFFERS ATTRACTIVE RISK ADJUSTED RETURNS
Exclusive: Abdul Aziz Anis, CEO heading Alfalah GHP Investment Management Ltd
June 05 - 11, 2006
Mr Abdul Aziz Anis has been associated with Pakistan's capital markets for last 12 years or so in various capacities. He started his career with Indosuez WI Carr Securities which at that time was one of the leading foreign brokers in the country. He worked in different capacities from research to local sales to foreign sales and then senior management. He has been associated with the Bank Alfalah Group for last 3 years or so. Currently, he is heading Alfalah GHP Investment Management Ltd (AGIM) which is a joint venture asset management and investment advisory company. The JV is between Bank Alfalah Ltd and GHP Financial Services of Switzerland.
PAGE: Could you please brief me about your products?
Mr Abdul Aziz Anis: We have launched our first open ended fund called the Alfalah GHP Value Fund (AGV) last year. This is an asset allocation fund that seeks to invest in both the equity and debt capital markets of the country. This Fund is unique in the sense that it can invest up to 80% in either equity or debt subject to management company view of where value lies. This enables the fund managers to derive the maximum value and hence the highest profitability for the benefit of the unit holders. Hence in a bull market the AGV Fund can potentially give solid stock market related returns while in a bear market the AGV Fund should give downside protection as the Fund assets are moved into less risky fixed income assets.
PAGE: It is believed that mutual funds have not been able to come up to mark? How would you comment? What could be the reasons for the lackluster performance of the mutual funds?
Mr Anis: The mutual funds industry has given attractive risk adjusted returns to unit holders in the last 3-4 years. These returns have been much higher than comparable returns in bank deposits etc that a normal investor has received. So the funds industry has delivered recently. Please keep in mind that the mutual funds industry is a relatively new industry; while some of the old established government run mutual fund players have been around for a long time, the industry in fact has only seen real growth in terms of new players and mass marketing campaigns in the last 3-4 years. Prior to this it was very quiet. Hence, the industry is relatively new but promises to show tremendous growth in the future. And one way that this growth will be ensured is if the industry delivers on its promises to generate adequate returns for investors. To this we remain confident that this will happen.
PAGE: By December 2004 the number of funds operating had jumped from just a handful to 33. There are over 40 mutual funds at present and more are coming and will keep coming. How many funds are expected to come by the end of this year?
Mr Anis: I do not have the exact figures that you want. But some estimates say that the mutual funds industry size will double in the next 4 years. This means that you will see many more asset management companies and new funds and products coming into the market in the next few years if this is to happen.
PAGE: It is being said that bulk of the growth in mutual funds has come from weighty investments made by a few giant financial institutions, not a smattering of savings from thousands of doctors, shop-keepers and barbers that is actually the stuff of mutual funds. Real growth will only be seen when it comes from retail growth How would you comment on it?
Mr Anis: I agree. Bulk of the funds currently raised by the industry are from large corporate and financial institutions. The real growth of the industry in the future will come from mass participation of retails investors. This is gradually happening as new players such as banks are coming into the industry and using their extensive branch distribution network to target the retail investor segment. Hence, while at present retail participation may be low but going forward in the future we foresee a big jump in retail investors who will access the capital markets through mutual funds.
PAGE: How far is it true that in our country, even the biggest private-sector funds have not been able to entice more than 5,000 individuals, less than 0.003 per cent of the population? Can you call it a glowing success?
Mr Anis: This may be the case for open end funds but in closed end funds I feel that there are more than 5000 shareholders (unit holders). As I said earlier, the industry has just opened up and already we are seeing massive investor awareness and growth. In any industry you take there is a learning curve and same is the case for the mutual funds industry. The last 3-4 years have been a good learning experience for almost all mutual fund companies who have now grown and matured. Going forward the same private sector funds are ideally poised to aggressively expand their franchises and tap the vast retail market. We are already seeing this happen. Thus, very soon you will see large private sector funds having a large number of unit holders, especially retail investors. It is just a matter of time now.
PAGE: It is said that the growth in the sector has come largely from closed-end funds which at 19, now exceed the 14 open-end funds in business. But experts say this is not necessarily an encouraging sign. Growth in closed-end is not natural growth because share issues are subscribed by institutions. Please comment in detail
Mr Anis: Both open and closed end funds serve a particular purpose and are suited to specific investors. Both serve a need otherwise they would not be there. Closed end funds served a useful purpose when the industry was new and was growing and needed funds for long term. The asset management companies at that time needed surety that the funds will be with them for the long term so that any investments in people, infrastructure and systems that they undertook could be earned back within reasonable time. Hence, closed end funds served a useful purpose then. Even now, closed end funds serve a purpose of allowing asset management companies to make long term investments (without the risk of redemptions) in assets that may potentially generate large profits in the future. Similarly, open end funds serve a useful purpose of always ensuring that the fund managers are on their toes and actively managing the funds investments otherwise poor performance may lead to redemptions from investors. Thus both open and closed end funds serve a purpose and investors should decide for themselves which best suits their needs and risk profile.
PAGE: One of the reasons that retail growth has eluded funds is perhaps in many cases non-existent marketing. People may have heard of the fund companies in the cities but they don't have brand recognition nationwide. Is there need of real marketing?
Mr Anis: Yes, there is a big need of marketing mutual funds all over the country. Added to this there is a big need of retail investor education and awareness to highlight the potential benefits and rewards of long term investing through mutual funds. This is something that is critical for the growth and survival of the industry and has to be taken up not only by market participants but also by the government and the concerned regulatory authorities.
PAGE: It has been observed that fund managers complain about the constraint of limited investment options. Collecting money is easy but then where to invest it is a question as real estate is not allowed, commodities are not allowed and there are no rules for private equity funds. What would you say about it?
Mr Anis: At present mutual funds are allowed to invest only in equities and debt / fixed income. New asset classes for investment will help in overall industry growth and are always welcome. Because of restricted investment classes it does become difficult at times to identify attractive investment assets but then again that is the real test of a good fund manger. However, going forward we expect new asset classes to open up for mutual funds such as real estate etc. Rules regarding real estate are currently at a very advanced stage of possible implementation. The commodity market is also ready but there are some policy decisions that need to be taken by the concerned authorities. Private equity is already happening in the country by select players who are not mutual funds.
PAGE: Fund managers have recommended to the Securities & Exchange Commission and the State Bank of Pakistan to allow the investment of 5 to 10 per cent of assets in foreign stock and bond markets to provide a wider array of investment options and asset diversification. Please comment.
Mr Anis: The SBP has already allowed mutual funds to invest upto 30% of their fund assets or USD 15mn, whichever is lower, in offshore investments subject to specific SECP approval of each investment. This is a very welcome development and should help the industry to further grow and attract more funds from investors. International investments will allow funds to diversify their investments and hence reduce overall portfolio risk and volatility which eventually should translate into higher risk adjusted returns for fund investors.
PAGE: It was declared last month that mutual fund assets in Pakistan have tripled in the last three years, and fund managers say the industry is set to grow further perhaps because of the booming stock market and rising demand for funds among retail investors. How would you comment?
Mr Anis: I agree. We also feel that the mutual funds industry is ready for massive growth and expansion in the next few years. The key factors that will fuel this growth are investor awareness and education, funds marketing and branding, extensive distribution network and new and better fund products that satisfy specific investor needs.