A True Hope for Future

Nov 26 - Dec 02, 2007

Tara Uzra Dawood is a familiar name to us while talking about the Asset Management Industry. She is the CEO of Dawood Capital Management. Her sound judgments have made her a lady who is successful on many grounds. Her comments are here to share with our readers on the current changing scenario of the country on political grounds and its impact on the growing stock market and mutual funds investment.

PAGE: Tell us a bit about your organization and its standing in the economic sphere of Pakistan?

TUD: Dawood Capital Management Limited (DCM) began operations in 1993 as Pakistan Venture Capital Limited. In 1999, First Dawood Investment Bank (FDIB) took over the management of the company and by 2002, under the auspices of First Dawood Group and the Asian Development Bank, obtained its Asset Management and Investment Advisory licenses. The company immediately went on to launch its first fund, Dawood Money Market Fund, which is our flagship fund and has maintained a 5 star rating from PACRA since it was eligible. But there is more to this company than Asset Management, we are very aware that we are part of the First Dawood Group (FDG)and the Dawood family. FDG includes First Dawood Investment Bank (FDIB), BRR Guardian Modaraba (BRR), Dawood Islamic Bank (DIB), Dawood Equities Limited (DEL), WinPower, Dawood Family Takaful and of course DCM.

If you look at the companies that make up FDG, you will see leadership and innovation throughout. FDIB is one of the most active participants in the Pakistani capital markets: BRR is not just the largest Modaraba in terms of equity in Pakistan, but also the only one amongst Leasing and Modaraba companies that can offer building leases. There is still more to the group, in that we are in the process of starting a Wind Power generation plant, to provide eco-friendly sources of energy to Pakistan.

Looking beyond the group, the Dawood family has been present and has participated in Pakistan's economic development since independence. Just think of some of the family ventures such as Dawood Hercules, DAWLANCE, Dawood Yamaha, Descon, Dawood Lawrencepur. These are all names that Pakistanis have come to trust and depend upon through the years.

PAGE: Talking about the mutual fund investment, what qualities do you think your fund managers possess that can rule over other companies in the market and how much is the need of the trained fund managers in the current economic scenario?

TUD: When looking at the fund management, you would have to look at the "human" aspect and the organizational/fund structure together.

Taking the organizational structure, you have to bear in mind that we are the only Asset Management Company in Pakistan that attaches the family's name to their product, such as Dawood Money Market Fund, Dawood Islamic Fund, First Dawood Mutual Fund. This automatically makes us aware of our responsibility to be as risk-averse as possible as we don't want to have our name associated with a product which may damage our family credibility. This spurs us to provide a product that will safeguard the investors' interests. We ensure that our management fees remain one of the lowest in the industry, allowing us to pass on those benefits to our investors. The lower the fee ensures that the more money is given back to the client.

Additionally, our position in the market allows us to negotiate better rates for our investors. Coupled with this there is the old adage "the greatest asset any company can have is human resource". We have a very experienced team of senior management with the majority of them have over a decade's experience each with a good blend of domestic and international experience. DCM is also an ideal place for a fresh graduate to start their career with its well-rounded training programs, friendly environment and team spirit. We are also very aware of the value of our human resource, and out of the established companies we have one of the lowest staff turnover rates and we consider this "continuity" a major plus vis a vis other "established" Asset Management Companies. I believe this is another key component in our success, especially at a time when the industry as a whole is going through rapid expansion, and staff turnover rates at other companies are sky-rocketing. The management here has seen Pakistan go through good and troubled times, and can call upon that experience to adapt to a changing political or economic environment.

PAGE: How do you see the growing competition between the banking sector offering the same products as your firm does, what benefits a general investor gains while investing in DCM?

TUD: The banking sector has been here before us and as such currently enjoys an edge over the industry in terms of comfort level that savers have with Banks. They are familiar with them. It does not mean that banks are able to offer the same products or benefits as DCM, because inherently the principal role of the Bank is to serve its shareholders while the principal role of the Mutual Fund is to serve its investors. It is no coincidence that the State Bank is constantly trying to get Banks to pass on the benefits to their savers/borrowers. Mutual Funds enjoy a huge advantage over the banking sector in terms of liquidity, tax efficiency, and historically, returns. There is the liquidity issue, with a bank if you want ready access to your money, you are most likely going to have a current account where you will receive a negligible or nil return. You forego that liquidity with a bank through a fixed deposit and if for some unforeseen reason you need the funds before the maturity, you will have to deal with a penalty. With DCM, you can have access to your funds in as little as 3 days, with no penalties. As an added bonus, DCM Funds, along with the mutual fund industry in general, allow the investor to enjoy a huge tax advantage, not only from the withholding tax aspect but also from the tax rebate point of view. Individual investors, who are tax payers, can claim a rebate from the Government on up to Rs. 300,000/- of an investment in a Mutual Fund, while there is nothing like this on offer by saving with a bank.

Finally there is the matter of returns. Here I will refer to our Money Market Fund as it is the closest product to a bank deposit. Banks can offer fixed return products, and to a certain degree that is their charm. Mutual Funds do not offer fixed return funds in Pakistan, but bear in mind that DMMF has outperformed its benchmark 6-month KIBOR every year of its existence. Bank savers will almost never get returns of KIBOR for their savings.

PAGE: Talking of the recent political disharmony in the country, how much it has influenced the performance of the funds?

TUD: Of course there has been an impact on the performance of the funds, but those funds which are invested in the stock market. DMMF has no direct exposure to the stock market, and has in fact seen its annualized return figure move higher during the period of "disharmony". Our shariah-compliant Fund DIF does have exposure to the stock market, but this is limited to a maximum of 20% of the fund, and in recent months owing to the political problems that were developing, we had reduced to a 10% holding. Further, all DIF scripts are approved by our Shariah Board.

PAGE: What is your view on the future outlook of your firm? How much the change of the government could hinder the impetus of the economic activity? Do we have strong institutions that can support the long term strategic assets of our economic activity?

TUD: DCM has been in the business of leadership since inception. We were the first Asset Management Company to be listed on the Karachi Stock Exchange (KSE) and we have all our funds listed on the KSE. DMMF was launched with a record core capital, and is consistently a market leader in the Income/Money Market fund industry. DIF is the first and only Islamic Asset Allocation Fund. We are the pioneers in introducing products tailored for women (LADIESFUND-) and children (BABYFUND- and CHILDFUND-). We shall continue with this vision of leadership and bring products to the market as they are required by investors.

A country's strength is increased with a strong economy and thus we are confident governments in power will support robust economic activity.

PAGE: How the fund managers are dealing with the volatile situation of the stocks these days? Are people still investing or are backing off due to the current political mayhem through out the country?

TUD: The fund management industry is going through huge changes at the moment where fundamental valuations, hedging expected losses through proper pricing and equity derivatives such as 1 month futures' are being used by fund managers.

In addition to this, more or less all ACM's have now started focusing on Risk Metrics to guide investment decision making processes at all levels. Value at risk models, stress testing of financial variables and scenario analysis are being used to measure market risks. "Therefore fund management industry is now becoming more of a science in Pakistan.

Currently the investment sentiment is to consolidate asset positions at advantageous prices and build long term investment horizons. Stocks with weaker fundamentals are being liquidated and replaced with other stable fixed income providing asset classes. "Therefore, the current political scenario may dampen the equity capital market upside for a short while, but nevertheless the future seems to be promising as long as there is no disruption in either economic growth rates and / or policy making at the highest level.

If you look at our product profile, the political impact on our funds is fairly well cushioned. Generally we have not seen a decline in investments because our investors have always benefited from their investments with us through difficult times and good times.

PAGE: Give us the statistics of the year end review of the performance of the portfolios and mutual funds and which is the best fund to invest in these days?

TUD: The Asset Management industry works on the Financial Year basis, so we are looking at the last financial year 2006-7. We had one open-end fund last year that could be compared with peers. By peers, I mean other 5 star or equivalent rated Income/Money Market Funds. We were the top performing 5-star fund in terms of performance and dividend. In fact, if we extend this comparison to all rated funds whether 5 star or not, we were the top performer out of all rated funds.

To answer your question about the best fund to invest in, it really does depend on the investor. We at DCM are very aware that every investor has different objectives and as such we will advise them according to their needs. There are times when investors' objectives and risk appetites will not match, and we advise them on both fronts. Then there are investors who base their investments on their strongly held religious beliefs.

For conservative investors looking for preservation of capital and a regular income stream, we would recommend a 5 star rated income/money market fund. Since we have been one of best performers in this category, I would naturally advise the investor to consider DMMF. For the Islamic Investors, if the investor is conservative in their risk appetite vis a vis other Islamic Funds. I would suggest DIF as it has a limited equity exposure. If you are looking at Equity funds, where the risk/return element is higher, I would advise investors in mutual funds to look at them in the true sense, and make the distinction between volatility and risk. Invest long-term in Equity Funds as very often best benefits can be seen after several years of holding. We at DCM shall InshaAllah offer our investors this investment avenue as well in the near future with our soon to be launched Dawood Equity Fund.

PAGE: Do you have any charts to identify the growth pattern of the mutual funds industry?

TUD: Looking at the industry in terms of assets under management and the number of funds there has been a huge growth in the industry.

Assets under Management have risen very sharply, and the accelerated growth has come from 2003 onwards. This data is till the end of the financial year 2006-7, and so this article goes to press, the number will surely have crossed the 300 billion mark.

Looking at the number of funds now available, this is as follows. Bear in mind that the calendar year 2007 is not yet finished.

PAGE: How do you see the impact of the devaluation of the rupee on the performance of mutual funds? Does it have any negative affect and how best we can manage this situation?

TUD: Well here, I would say that we have had a relatively stable exchange rate against the Dollar for the last few years, but have seen the Rupee decline in value against other industrial nations. This has been more a case of the Dollar's decline and we have had the impact spill over to the Rupee.

Generally, Mutual Funds in Pakistan cater to domestic users and as such the impact is limited. As long as your fund is outperforming inflation and the purchasing power of your Rupee remains intact, there should be no problem in terms of your domestic lifestyle.

The potential problems for the industry arise when we market our funds to investors with overseas holdings. For example an ex-pat working in the Middle East or someone who can be classified as an Overseas Pakistani, they would be concerned about the possible devaluation of their Rupee holding. Again here I would counter this concern by saying, look at the interest rate differential. The Rupee is a High Yield currency, and enjoys an edge of about 5/6% per year over most of the "hard currencies" of the world (greater in the case of the Yen and Swiss Franc). The Rupee has always enjoyed this interest rate differential advantage, and this is a point that is often lost on people who are concerned about "devaluation".

From the point of view of getting Multi-National companies based in Pakistan to invest in Mutual Funds, most will happily invest knowing that their funds are earning them more here than back in their country of origin. There are a few of them who are specifically told not to invest in the domestic market, and that is a decision that can probably only be changed by visiting Atlanta or Istanbul or wherever the decisions are made.

PAGE: Lastly, how hopeful you are with the future of Pakistan that would be helpful towards your industry and towards the over all economic development?

TUD: I am very optimistic about the future of Pakistan in relation to the growth potential for the Mutual Fund industry, if you look at it in terms of the potential areas of growth.

First, our level of education is increasing as a Nation. This will lead to a greater ability to understand the benefits on offer from the industry. Secondly, this rise in education standards will lead to a rise in the middle income bracket. If you look at the countries with the most developed Mutual Funds industry, you will find a robust middle income bracket of investors. These are the potential investors who will spur on the growth of this industry here. Third, there is the current status of the industry. Assets Under Management in Pakistan just barely represent 5% of the funds that are currently in the Banking sector. If you look at most "developed" nations, this number is 70% plus, and in the case of the United States 150%! Just look at the growth potential here. You also have to look at this from a Gross Domestic Savings (GDS) as a percentage of Gross Domestic Product. Pakistan currently has a GDS which is below 20%, compared with most of our Asian neighbors where it runs between 30 and 50%. We have scope to improve here as well. We are traditionally not good savers, but as the level of education increases, the cost of living rises people begin to plan for the future.

As for the economic development question. There is a direct correlation between GDS and Economic Growth. It is not a surprise that the Asian countries where GDS is highest were often referred to as the "Tigers". South Korea, Taiwan, Hong Kong were all nations with GDS similar to us in the 1960s and 1970s and as their GDS grew, so did their standard of living. If we can get the savings habit, we will be contributing to our economic development.


* Bahrain based Albaraka Banking Group (ABG), considered to be the biggest Islamic banking group listed on the Bahrain Stock Exchange in terms of capitalization, announced that it continued to record strong growth in operating income and operations during the first nine months of 2007. Net profits increased by 94%, total assets by 25%, equity by 25% and total operating income by 34%, which increased to reach US$ 311 million for the first nine months of 2007 compared to US$ 232 million for the first nine months of 2006. Total assets increased to US$ 9.56 billion compared to US$ 7.63 billion reflecting an increase of 25%. Total financing and investments increased by 29% from to US$ 7.06 billion as at the end of September 2007. As a result of the strong improvement in profits, return on shareholders' equity and total assets improved significantly to reach 16% and 2.5% on an annualized basis respectively in September 2007, compared to 9% and 1% respectively in September 2006.

* ABG's Bahrain-based subsidiary, AlBaraka Islamic Bank (having 12 branches in Pakistan) has launched a new investment fund, Kotak Shariah Fund (KSF) or Kotak Indian Islamic Fund (KIIF), offered to the public through its branches in the Kingdom of Bahrain. KSF is managed by Kotak Mahindra (KM-UK), a subsidiary of Kotak Mahindra Bank (KMB) which has over US$5.2 billion worth of assets and employs more than 10,000 staff and had successful joint ventures with Goldman Sachs in the past in brokerage and investment banking business in India. President & Chief Executive of Albaraka Banking Group, Mr. Adnan Ahmed Yousif said he was"very proud of the opportunity to work hand in hand with one of the most renowned financial groups in India"

* Banque Albaraka D'Algerie, another subsidiary of ABG, achieved a substantial increase in its operations and net profits in the first nine months of 2007, thanks to a huge expansion in its financial resources and branch network as well as to the diversification of products and services it offers. Net profits were up by 31.18%, total assets by 30.37% and shareholders' equity by 28.46%.

Shaikh Saleh Abdulla Kamel, Chairman of Albaraka Banking Group, said that he was pleased with the results stressing that such results reflect the strong commitment of the Group to continue, after the success of the Group's private placement and IPO, to press ahead with the implementation of its ambitious plans to expand its operations and activities in its existing markets especially Egypt, Turkey, Pakistan and Algeria. Mr. Adnan Ahmed Yousif, President & Chief Executive of ABG, expressed optimism about the results of Albaraka Banking Group, explaining that the outstanding results achieved in the first nine months of 2007 were the fruit of the successful strategies that are being implemented by the Group in many areas and at different levels, including expanding into new markets such as Indonesia and Syria and very shortly certain Gulf States.

Albaraka Banking Group (ABG), listed on Bahrain and Dubai stock exchanges, rated by Standard & Poor's as BBB- with a short-term rating of A-3, offers retail, corporate and investment banking and treasury services strictly in accordance with the principles of the Shariah. The authorized capital of ABG is US$1.5 billion, total equity over US$ 1.5 billion and a wide geographical presence through subsidiary banking Units in 12 countries and more than 240 branches of Jordan Islamic Bank/ Jordan, Al Baraka Islamic Bank/ Bahrain, Al Baraka Islamic Bank/ Pakistan, Banque Al Baraka D'Algerie/ Algeria, Al Baraka Bank Sudan/Sudan, Al Baraka Bank Ltd/ South Africa, Al Baraka Bank Lebanon/Lebanon ,Bank Et-Tamweel Al- Tunisi Al Saudi/ Tunisia, The Egyptian Saudi Finance Bank/Egypt and Al Baraka Turk Participation Bank/Turkey, with Albaraka Bank Syria under establishment and operational Representative office in Indonesia.