Arif Habib Investments

Nov 26 - Dec 02, 2007

Syed Ajaz Ahmed is a Senior Execitive Vice President, CFO and Head of Wealth Management in Arif Habib Investments. He is a member of Institute of Cost and Management Accountant of Pakistan, have more than thirty five years experience of working for local and foreign organizations including manufacturing industries, financial institutions and consultancy. He is working for Arif Habib Investments since its inception. Presently, he is holding position of Chief Executive of Pakistan Premier Fund and also a member of Board of Arif Habib Bank Limited, Arif Habib Securities Limited, Javedan Cement Limited and Al-Abbas Cement Limited. Given below is the various points of discussion that I had with him in an interview.


Our fund management team is headed by the Chief Investment Officer, who has considerable experience in the financial sector, primarily as a securities analyst, having worked closely with global and domestic fund managers and financial institutions. She is assisted by two fund managers for the debt and equity funds who are highly qualified in their respective areas and have extensive experience in the financial sector. All investment decisions are made by an Investment Committee, in which research, compliance and risk aspects of potential investment opportunities are discussed. All investments are made on fundamentals and in consideration with the growth potentials.

At AHIM, we have a well thought succession plan for a continuity. For this purpose we continuously train individuals to enable them to grow up the corporate ladder, in their area of expertise. Keeping this in view, and increasing number of funds under management, we have started to develop a second line of fund managers, who can eventually share in the responsibility of fund management as the company expands. We have designated sub-fund managers for each of the fund under our management.


Commercial banking sector in essence does not offer the same products to retail investors as compared to mutual funds. Banks normally lend money and earn interest as major part of their income. Whereas, mutual funds invest in various classes of assets and investment in equities is a major class of asset which is expected to give better return over a longer span of time. Only Income funds or pure money market funds offer a risk/return profile which can be compared to products offered by commercial banks. Average return on deposits offered by commercial banks is well below the money market rates which makes money market mutual funds much more attractive for investors. Partly, because money market funds invest in T-bills and other money market instruments, this makes these funds risk/return profile much better than that of ordinary deposit accounts of commercial banks. Income funds can also provide an alternative investment avenue to investors with a slightly different asset allocation than pure money market funds. In addition to investment in money market instruments, income funds invest in corporate bonds (TFCs) which make these funds returns higher than money market funds. Tax and liquidity benefits make money market and income funds a much more attractive investment vehicle than keeping savings in bank deposits. Moreover, these funds provide an inflation hedge to investors who don't want to erode their purchasing power for future. These attractive characteristics of income and money market funds have facilitated immensely towards increase in asset base in the recent past. Moreover, investor awareness has also increased which favors the industry.

In order to tap this growing industry, several banks have setup sister concern asset management companies which is likely to intensify competition, nevertheless, the sheer size of growth would still allow the mutual funds to increase their assets. Despite tremendous increase in the size of mutual fund industry in recent past, money market and Income funds are still in their infancy stage as compared to regional countries. This provides mutual fund industry with remarkable growth opportunities in future as stocks of financial assets grow with maturity of financial system.


Our funds, namely the fully-exposed stock funds, the Pakistan Premier Fund (PPF) and the Pakistan Stock Market Fund (PSM) have seen their returns fall as the market fell due to weakening investor sentiment, on the announcement of the emergency and the aftermath. However, PSM's and PPF's performance has been superior to both the KSE-100 and the KSE-30's performance. The KSE-100 fell 1.67% and the KSE-30 dropped 4.54%, since 30 June 2007 to date. In comparison, our Islamic Fund, the Pakistan International Element Islamic Fund (PIIF) rose 8.57%, our asset allocation fund, the Pakistan Capital Market Fund rose 6.82%, the PSM our largest equity fund was up 5.5% and our two closed-end funds the Premier Fund and the Pakistan Strategic Allocation Fund were up 5.82% and 5.7% respectively. AHIM funds have clearly outperformed the market.


While the imposition of emergency and the general political unrest has had an adverse impact on investor and business sentiment, foreign portfolio investments and Pakistan's sovereign credit ratings, it is important to note that fundamentally, our macro economy is still the same. We are still seeing interest in foreign direct investment, where the investors take a longer term view on Pakistan. We expect that once the political situation has calmed down, elections have been held and the emergency has been removed, we will once again see a revival in foreign inflows and business and investor confidence in the economy. All of the major political parties have made it clear that if they were to come to power, the economic policies and reform process that has been taking place under Musharaf's rule will continue, which is a very positive indicator of the economy once political stability emerges.


Fund managers are assessing the potential appreciation of the market, given the changing political environment and any developments on the corporate and economic front, their cash/liquidity positions and what valuations stocks are offering at the moment. People are investing given their different threshold levels of expected return they desire and the risk they are willing to take. On the other hand, risk-averse investors stay away from the market, when they feel uncomfortable.


Hereunder is given a chart showing growth in size of mutual fund industry since 2002, which clearly shows the tremendous growth in size of mutual fund industry.

The selection of mutual fund for investment is entirely depends on individual's circumstances i.e. income of investor, the age of investor, the risk apatite and other economic factors. From the chart given below it is evident that Pakistan Stock Market Fund (PSM) has performed better out of the funds we are offering. Investment in PSM is advisable for those investors who can spare their money for a longer span of time.





Pak Stock Market Fund



Pakistan Capital Market Fund



Pakistan International Element Islamic Fund




Pakistan Income Fund (Annualized)




Pakistan Premier Fund Limited



Pakistan Strategic Allocation Fund



Note : PIF since Inception CAGR
Return provided on the base of June 30 2007 NAV


Devaluation of the Rupee makes foreign investment in our economy less attractive. Foreign portfolio investment has taken a dip July to November 21 2007, falling to US$ 124 million this year, from US$ 200 million in the same period last year. While the total foreign portfolio investment represents only a small portion of the overall market size, it does have a sentiment value in the local market. A dampening of foreign portfolio investment has a similar dampening effect on the stock market. Mutual funds, however, have a long term perspective. Temporary shifts in market sentiment does not majorly influence mutual funds, since they focus more on value companies with strong fundamentals, yielding high returns over a longer term. Furthermore, mutual funds are now allowed to diversify up to 30% of their assets in capital markets outside Pakistan (with a cap of USD15m and subject to regulatory approval), which further helps dampen any major shift in local market.


We are hopeful of a bright future for Pakistan. Our macroeconomic fundamentals are strong; we have already attained strong growth for the past five consecutive years, at an average of 7% each year, and this is projected to continue in the 5%-7% range for another 5 years. Investment as a percentage of GDP is on the rise, and we are hoping that the savings rate also keeps up in order to have a high level of investment that is sustainable. This takes place naturally as the economy develops, people have more disposable income at hand and they are more inclined to save and invest. The mutual fund industry is a growing and upcoming one in Pakistan. Currently, our total assets are about 8% of bank deposits, but a shift towards mutual funds is fast taking place due to increased awareness of mutual funds and the strength of our capital markets.