An in-depth interview of T.U Dawood
SADAF AURANGZAIB, Senior Correspondent
Sep 03 - 09, 2007
Dawood Capital Management Limited (the company) was incorporated on September 18, 1990 as a public limited company in Pakistan. The company is registered as a Non-Banking Finance Company under the Non-Banking Finance (Establishment and Regulation) Rules, 2003. The company has further obtained the license to carry out investment advisory services and has been registered as an Investment Advisor under the Non ñ Banking Finance Companies (Established and Regulation) Rules, 203. The company floated an open end mutual fund 'Dawood Money Market Fund' and has also floated a close-end scheme 'First Dawood Mutual Fund'.
In May 2003, DCM floated its first open-end money market fund titled "Dawood Money Market Fund (DMMF)" with a record core capital of Rs. 300 million and at present the fund size has grown to over Rs. 2.5 billion and has been given a top 5-Star Rating by The Pakistan Credit Rating Agency (PACRA). Management floated its first closed-end balanced fund "First Dawood Mutual Fund (FDMF)" of Rs. 500 million in March 2005, which is currently valued at almost Rs. 650 million and has been given a 4-Star Rating by PACRA. Both DMMF and FDMF are listed on the Karachi Stock Exchange.
First Dawood Group works with an extensive research and development department that advises on market trends and economics conditions. Here are the views that the Chief Executive, T.U. Dawood shared with us on the capital market capitalization and its unpredictability factors.
PAGE: What have been the main reasons for the recent rise in the stock market prior to the current sell off that we have seen?
TUD: Market depth increased due to privatization; however, higher capitalization due to GDP ratio is always beneficial as it results in capital deepening within financial markets. Although the recent increase is partially due to growth in share prices and increase in capital mobilization due to listing of SOEs, increases in FDI (foreign direct investment) cannot be dismissed. The growth in the SACRA (Special Convertible Rupee Account) account, which is used for investment in the equity market, is pure evidence of this fact. However, SACRA needs to be declassified so that the exact details of fund managers can be provided to the investor community at large, which is being done in other countries all over developed world and other emerging markets such as India.
PAGE: How active has the government been in providing liquidity in the stock market? It is also said that the government was artificially pushing the stocks up by pumping in huge institutional funds. Do you agree that institutional support was at the back of rising stock values?
TUD: Institutional support derived from asset management companies which run mutual funds are buying stocks because of cheaper valuations that still exist on some counters. For example, oil and gas is still cheap. Further, it is the excess of liquidity in the market which is fueling the huge activity in the stock exchange and the macroeconomic fundamentals are also a catalyst in providing support to market capitalization.
PAGE: What are the main reasons for the current volatility? How have fund managers been coping with this?
TUD: Political instability, international equity market volatility and future uncertainties are all responsible for the volatilities that exist within our stock markets. However, some correction in the markets is also a healthy sign for the ultimate growth of the index because it creates more investment opportunities at dips. Buy at dip and sell at peak (the Warren Buffet strategy).
Experienced fund managers are prepared for such fluctuations and thus manage their risk accordingly. That is why it is so important to look at a fund's rating as well as the quality and experience of the management team. At times, volatility increases the overall risk premiums and makes emerging markets more attractive in comparison to the developed world. We should always look at the upside standard deviation of the market which instigates a higher sharp ratio and increases the risk appetite of the investor, particularly overseas foreigners. Downside standard deviation is considered to be a negative indicator, but upside standard deviation tells you about the profitability that may be explored by the investor. However, from a risk management perspective, you can always analyze the VAR (Value At Risk) of a market to study its volatility calibrations/trends. Value at risk may be defined as a maximum loss that may occur for a given confidence interval (probability) for a specified investment horizon.
PAGE: What impact are current politics having on the market?
TUD: We still believe the market will ultimately go up and is a strong investment option for long-term investors. If you speak to local brokers, most are comfortable with any political outcome, it is the uncertainty that is causing a bit of correction in the market, but the ultimate result will likely be acceptable to our markets.
PAGE: Foreign investors have added a tremendous amount of liquidity to the markets. How dependent is the market on these investors as opposed to local investors?
TUD: Our p.e. (price earning multiple) is possibly the most attractive among the emerging markets which is luring many overseas investors, who appreciate the potential of our market growth at these levels.
Pakistan is part of the global economy and foreign fluctuations will have an impact to a degree on the Pakistan markets, particularly since a number of "emerging market funds" have invested in the Pakistani market and with a watch on the political scene some managers have withdrawn their investments in Pakistan. In addition, as the mortgage crisis winds down and the losses are absorbed this indirectly affects Pakistan as money has to be withdrawn to support their own domestic situations. Thus, Pakistan is being hit twice. However, the reduction in our KSE Index is still in line with other major markets.
Most local investors understand that Pakistani stock markets have low R≤ (coefficient of determination) in comparison to other markets in this region and thus our markets are generally more domestic-driven.
We at DCM closely monitor international and domestic developments ñ political and financially ñ because we believe in the alpha-beta style of fund management which prepares for systemic risks.
PAGE: What regulatory steps has the SECP taken to ensure maximum transparency in the markets and to avoid a meltdown scenario as we witnessed several years ago?
TUD: The SECP is doing a terrific job of enabling our markets to grow. They have detailed and responsible corporate governance requirements as well as monitor advertising in the mutual fund industry, all of which protects investors. The SECP is also prioritizing the risk management of the Stock Exchanges.
However, the SECP could consider bringing some of our existing options in line with international standards, such as the following:
* Introducing exchange-traded derivatives such as options and futures with longer tenures. Some of the examples of options that are exchanged can be introduced to mitigate market risk are look-back options, Asian options, Bermudian options (with multiple strike rates), American options, European options, butterfly options, 'Cliquet/Ratchet' options (binary and digital options), barrier in and barrier out options, index tracker options, and so forth.
* On the futures counter, the SECP could introduce index tracker futures and other forms of cash-settled futures with low margin requirements based on modern Value At Risk calculations.
* Allowing portfolio managers to structure over-the-counter equity swaps to hedge against market downsides.
PAGE: Which funds have been badly affected ?
TUD: Any fund which is heavily invested in the stock market is affected by political and other uncertainties which affect the market and hurt investors. We at Dawood Capital Management Ltd. prepare for potential crises by developing appropriate risk identification measurement and management systems which is our integrated risk management process. Some of the traditional tools used to mitigate investment risk are stress-testing, scenario analysis, Value At Risk analysis.
PAGE: What solution or advice would you like to give to the investors to how to move in such market conditions?
TUD: The best advice for small investors and individuals is to go through the mutual fund vehicle instead of directly investing in stocks because they don't have the experience, the proper information or the ability/time to continually monitor the market. The mutual fund industry is being run by professionals who have on-time information and get better rates because they are dealing with larger volumes. They are risk managed with clear cut risk strategies.
However, the investor is advised to undertake appropriate mutual fund screening in light of ratings assigned to the latter by a credited ratings agency. A five-star rated fund like Dawood Money Market Fund does not invest in the stock market, yet has a four-year solid track record of providing lucrative and stable returns and thus is an ideal option for all investors, but especially at times such as these.