TESTING THE HEALTH OF STOCK MARKET
Prof. Dr. KHAWAJA AMJAD SAEED
Apr 02 - 08, 2007
The Author will contribute six series of articles relating to testing the health of shares listed on Karachi Stock Market (KSE). He has developed an eight point framework for judging the efficiency of stock market. To begin with, the focus is on financial sector. No name of the company has been mentioned. The analysis is with specific reference to each component of financial sector listed on Karachi Stock Exchange.
On Karachi Stock Exchange (KSE) there are six components of financial sector. These include: closed-end and open-end mutual funds, Modarbas, leasing companies, investment banks, commercial banks, and insurance. This piece will only examine the performance of listed mutual funds on KSE.
ANALYSIS OF MUTUAL FUNDS LISTED ON KARACHI STOCK MARKET
Scope: This analysis is restricted to mutual funds listed on Karachi Stock Exchange as on November 30, 2006. The raw data was picked up form Daily Quotations of Karachi Stock Exchange of the said date.
INDICATORS FOR ANALYSIS
For undertaking quantitative analysis, the following eight indicators have been used while comparing the closed end listed Mutual Funds and shares listed on KSE:
1. Number of listed closed -end-mutual funds & share in KSE
2. Paid-up capital
3. Par value
4. Historical growth
6. Market capitalization
7. GDP share
8. Par and below par value analysis
SALIENT FEATURES OF ANALYSIS
LISTED COMPANIES SHARE: Total number of listed companies on Karachi Stock Exchange was 652. Out of this, total number of listed close-end mutual funds was 21. It represents a share of 3%. This Guides us to conclude that potential is too big to tap. An aggressive Marketing effort is needed to increase the market share. Even compared to India, this share is too small. Private sector is encouraged to undertake steps to boost the market share.
PAID-UP CAPITAL: Total paid up capital of above listed companies was Rs. 518 billion. Out of this, the listed mutual funds represented Rs. 26 billion-showing a share of 5% only. Strategic initiatives are needed to steadily increase this share so that the prospective investors are beneficiaries arising out of the expected productive contribution of the professionals managing mutual funds.
PAR VALUE: Par Value analysis reveals that 5% of list mutual funds had Rs. 5 as Par Value. 95% had Par Value of Rs. 10. In today's time, these Par Values are too low. These need to be revised upward. Suggested amount of Par Value is Rs. 100.
HISTORICAL GROWTH: One can have an idea of growth of mutual funds listed on Karachi Stock Exchange from the following Box:
GROWTH OF MUTUAL FUNDS
Examining the above figures, managers of mutual funds are encouraged to accelerate the pace of increasing the number of mutual funds to be listed in future on Stock Market.
TURNOVER: A review of total KSE turnover during Jan-Oct 2006 (10 months) revealed that shares worth Rs. 56 billion were traded. The share of listed closed-end mutual funds was Rs. 0.88 billion-representing 1.57%. This indicator also shows how big is the potential to be tapped.
MARKET CAPITALIZATION: Total market capitalization of KSE was Rs. 2,952 billion against Rs. 32 billion relating to listed closed-end mutual funds. This represents 1.08%. A strategic plan to increase the share is the crying need of today.
GPD SHARE: Pakistan's GDP is $ 128 Billion listed KSE market capitalization was $ 49. However the share of listed closed-end mutual funds was 0.41%. A staggered plan to increase the share through strategic planning can be helpful.
PAR AND BELOW PAR VALUE ANALYSIS: One indicator of studying the health of mutual funds is to compare the par value with market value. This position is included in the following box:
PAR VALUE COMPARED TO MARKET VALUE
Par & above Par Value
Below Par Value
Sickness is quite clear as 62% of listed mutual funds are below par value on the KSE. It is a wake up call for underperformers.
CONCLUSIONS & RECOMMENDATIONS
Based on foregoing analysis, the following conclusions emerge and alongwith these, suggestions are offered for consideration of the stakeholders in general and managers of close-end mutual funds in particular:
1. Share of mutual funds be increased in the context of total listed shares on KSE.
2. The share of paid up capital in the total paid up share capital of KSE is too small and needs to be increased.
3. Par Value of share of mutual funds be increased to Rs. 100 as against the existing rates of Rs. 5 and Rs. 10.
4. The number of listed mutual funds needs to be substantially increased.
5. The volume of trading of listed mutual funds is too small and needs to be increased with an accelerated approach.
6. Based on foregoing aspects, market capitalization of listed mutual funds is too small and requires strategic initiative for its substantial increase.
7. If tangible steps are taken, contribution to GDP through mutual funds can be increased.
8. Sick listed mutual funds (62%) need a serious attention. Unless this issue is addressed, the investors will not have confidence in investing in listed mutual funds.