MEEZAN ISLAMIC FUND - LARGEST OPEN-END EQUITY FUND IN PRIVATE SECTOR
Exclusive with Mohammad Shoaib,CEO Al Meezan Investment Management Ltd
Feb 19 - 25, 2007
PAGE: Tell us about Al-Meezan Investment and what investment management really means?
MS: I have been associated with this company for the last 11 years. Al-Meezan Investment Management was set up in 1995 as a joint venture between Pak-Kuwait Investment Company, NIT and Jardine Fleming. The share holding structure has changed over the years; right now it is a subsidiary of Meezan Bank. Meezan Bank has got 65% shareholding in the company, 30% shareholding is with the Pak Kuwait Investment Company and 5% with the employees of the company. This is the company which is basically involved in the asset management business which is basically a very specialized field where the objective is to advise people on how to manage their money and how to make investment on behalf of it. What we are doing is we have got different types of investment products for the people which are all Islamic and Shariah compliant products and these are in the form of different mutual funds. At present, we have got four different mutual funds which we are offering to the investors.
PAGE: Over the years many companies have ventured into the business of mutual funds, how do you see the overall investment climate in this regard?
MS: If we look at the corporate side and the industrial side, we find that over the last few years, in about five to six years there has been a tremendous economic growth and boom in the country. And we have recorded very high rates of GDP growth which have been from 6% to more than 8%. This has also been reflected in the value of the different assets which are available in the market including the stock market. This economic growth has also been reflected in the performance of the companies which are listed on stock exchange so we find that the companies have recorded more than 20 to 30% growth every year. Now because of that the shares which are available in the stock market have also become very attractive. People have made a lot of money by investing in the stock market and mutual funds are basically specialized investment vehicles whereby an investor is not required to go and decide about where to invest money and he is not required to make his own decision rather the investment is delegated to a professional team of fund managers and they manage the investments so persons who have delegated this function to the mutual funds managers by placing their money in the mutual funds have been the major beneficiaries of this bull run in the market. What we do is that we do a 10-year analysis on how people have made money and approximately the average rate of return which people have made through the investment in the stock market that is about 23 to 24% per annum which is the highest return that has been available on the investment asset in Pakistan.
PAGE: Now coming to the function of your company as your products are Shariah-compliant so how do you manage your average rate of return. Does the rate of return is dictated by the stock market trend or is it sustaining over a period of time?
MS: We have different investment products. Some products are based only on stock market. What we do is we invite people for our different funds and we create a pool of funds like someone would contribute ten thousand rupees, somebody would contribute a million or five million rupees, we then pool all this money together and make investments on behalf of the investors. We charge our annual fee for our services then whatever profit which is available beyond that fee that basically belongs and goes to the investors. It is not like a banking product where a bank takes deposit and then invests the money and then passes on some of the profit to the investor. What we do is that we pass on everything to the investors except for our fee. We just retain our fee; the rest of the money goes to the investors. We are offering two types of funds — open-end and close-end.
PAGE: Do you have any fixed service charges or they vary over a period of time?
MS: We are basically regulated by the Securities and Exchange Commission of Pakistan so there is a prescribed fee, the maximum level of fee prescribed by the SECP is 3% so we can't charge more than 3% from the investors in a given year. For some of our funds we are charging 3%, there are other funds where we are charging 2%. In case of funds which invest in income instrument we are charging even 1% so there are different levels but the maximum we can charge is 3% so even if the investor makes 50% return, we will charge only 3%. It is not that out of 50%, we will keep 20% and pass on 30% to them.
PAGE: Coming back to the portfolios of your company, do you think that having been initially trained by the Jardine Fleming has somehow enhanced the portfolios of your company and how your portfolios grew over the time?
MS: Initially the management team was trained by Jardine Fleming but it has been a long time ago and obviously the financial markets have recorded tremendous change over the years; new financial concepts as well as new financial products have come to surface and the investment policy has also changed. We only invest in Shariah-compliant Investment so what we have tried to do is to keep our management team up to date on what is happening in the financial world and we promote them to go for further education and because of that they have been able to maintain their professional expertise in different media. We promote all our research and investment management team to participate in the CFA exam. CFA is Chartered Financial Analyst exam which is conducted from USA. It is globally known as the best designation in the investment management business. We promote our employees to participate in that exam as a continuing education and because of that our team has not only got the expertise in the areas of Shariah matters but also in the area of finance and portfolios management.
PAGE: If I ask you about the size of investment of your company, what would you say and how would you make its comparison with the overall investment structure?
MS: In terms of size of the mutual fund industry, I would say that it is roughly about 170 billion rupees now. If you look at the Islamic segment (the Shariah-compliant funds), the size of the market is about 12 billion rupees. At present our assets under management are about 9 billion rupees. We are about 75% of the Islamic mutual fund. In terms of the total industry we are about 5% which is a small number but as you know it is the Islamic mutual fund industry which is a new concept and is in developing stage nonetheless we have made a good progress over the last couple of years and we expect that we will be able to continue with that pace.
PAGE: Did the concept of Shariah complaint investment was already there when Meezan Bank was launched or was it the concept that originated afterwards?
MS: This initiative was taken simultaneously and when the concept of Meezan basically came up in 1995, we simultaneously started working on both the bank and the asset management company. As far as the bank is concerned as you know that the regulatory approvals take longer time as compared to setting up an asset management company so it took us more time to get the license for the bank so the bank was actually set up sometime around 1997-1998, whereas the asset management company was set up on 1996 so unlike others, we simultaneously identified that these are two different lines of business and we need to have two separate companies for that so we started with one concept of a bank and another concept of the asset management company.
PAGE: When you joined hands with Al-Meezan group, how difficult was the task?
MS: Well, this company was set up with Pak Kuwait Investment Company and I was previously working with Pak-Kuwait Investment Company and I was given the challenge to set up this asset management company in 1995. At that point of time, the awareness about the mutual funds in Pakistan was very low. People only knew about NIT and ICP because there was no mutual fund in the private sector so it was a well uphill task but by the Grace of Allah we have been able to accept this challenge and now the Meezan name is pretty much known throughout the country. It has got 62 branches and our mutual funds are also being sold through all these branches. People have a fair level of awareness about the concept of mutual fund now, however, I still feel that there is a lot of potential for growth in the asset management business.
In terms of the size of the mutual fund industry, people compare the size of the mutual fund industry with the size of the banking industry. If you look at Pakistan the total assets under management of mutual funds are only 5% of the overall size of the bank deposits. In case of India it is about 12%. In case of USA, the size of mutual fund industry is bigger than the banking industry and its about 120% of the banking industry so I think we have a long way to go because right now people are not so much aware of the mutual fund so they keep the money with the banks and they end up getting a lower rate of return. The banks have got a different concept, a bank does not pass on the entire profit to you whereas in case of mutual fund we charge only a limited amount of fee and then the entire benefit is passed on to the investors.
PAGE: Does it also depend on the fluctuation of the market as your company must have countered the losses of stocks too... do you then pass on those losses to the investors?
MS: Basically profit or loss belongs to the investor. There are different types of investment products. All the mutual funds are not totally dependent on the stock market. We offer different funds like Meezan Islamic Fund which is totally dependent on stock market, similarly we have Meezan Mutual Fund which is a close end fund and is also totally dependent on stock market but then we have two other funds as well. The third fund is Meezan Balance Fund and this fund is 50% dependent on the stock market, the rest 50% is invested in more secure investment which are also Shariah compliant so the volatility and the fluctuation is lower in the case of Meezan Balance Fund. Now we have introduced Meezan Islamic Income Fund which was launched in early January this year. This has been a tremendous success and this product is not directly dependent on stock market so the fluctuation in the value is not dependent on the stock exchange. We invest all our money in more stable investment where the risk of volatility is very low.
PAGE: In which of your funds the investment is highest?
MS: All our funds are Islamic funds. Right now our biggest fund is Meezan Islamic Fund.
PAGE: Do you think people are capable to bear the highs and lows of stock market which is quite tentative and what negative impact does it cause to the mutual fund investment?
MS: Basically the concept of investment in stock market is to invest for a long term. You shouldn't be investing for a short period of time and this is what we advise all our investors as well that if you are making an investment in the stock market then you should think about an investment of at least three years. If you feel that your money is available with you for investment for six months then please don't touch the stock market and don't invest in the mutual fund that is dependent on stock market. Then you should go for Meezan Income Fund where there is no fluctuation as such. Actually what happens is that stock market being very volatile, in the short term it is very difficult to predict the market. It is like an institution for example if you want to start a project, obviously you don't start making profits from day one. You start making money over a period of time so when we make our investment decisions and evaluate different companies for investment, we also look at the long term return potential of that company. It may happen that we may get a good return in one year but sometimes when the market is not performing, it may take longer. So if you are investing for a longer period of time, then the risk of loss is very low.
PAGE: Do you think we have enough potential to manage this kind of growth in the mutual funds in terms of the professional management skill?
MS: This is actually a big issue in mutual fund industry at this point in time because what we have found is that suddenly all the big institutions are jumping into asset management business, all the big banks are participating, now a number of brokers have set up the asset management companies. There is a lack of professional skill at this moment because we don't have so many experienced professionals available in the market so this is one area which may hamper the growth of this industry as if we are not able to produce sufficient number of qualified professionals then obviously the performance of these mutual funds will be negatively affected.
PAGE: Do you give professional training to your staff for the said purpose?
MS: There are two types of training required in case of our company. One is the awareness and understanding of the Islamic concepts of finance to understand as to which products are Shariah compliant and what are the different types of options available in Islamic financing and the second kind of training which is required is the understanding of the investment management. As far as the training about Islamic finance is concerned, what we do is we have an arrangement with Meezan Bank where most of our employees go and attend different running programs organized by Meezan Bank for in-house staff. From that perspective they get good training. For the understanding of the investment process and the international best practices in asset management, we promote our employees to do CFA which is a self study program. We have also adopted the asset management code of conduct of CFA institute which basically prescribes the best practices in investment management. It is globally known as the best course for asset management companies.
PAGE: How strong do you think your portfolios are in terms of the institutional and individual side?
MS: There are two aspects. One is the quality of the portfolios where we make our investment and when we make our investment we make sure that we generally invest in very well established companies, who have a good record of paying dividends as well. That has really helped us in the years when the market was down. Even then we were able to get good return for the investors in the form of the dividends so we make sure that we only go into blue chip companies and that has really helped us. These companies don't crash when the market crashes. One example is the March 2005 crises, what we did is we made a comparison between all the mutual funds which were operating at that time, we found that when the market crashed, the net asset value of all the funds went down but the minimum decline was recorded in the net asset value of Meezan Islamic Fund so when the market went down, we were the least affected funds and when it recovered subsequent to June 2005 in terms of recovery we were among the best. It actually gives more comfort to the investors. Today Meezan Islamic Fund is about 4 billion rupees in size and is the largest open end equity fund in the private sector. This has been possible because of the confidence that investors have owing to our performance, less volatility and attractive returns.
PAGE: Does your company also deal with the long term project financing?
MS: This is a separate area. It comes under the banking side. It is done by the Meezan Bank and we don't do it, so our main mandate is to take money from people, invest on their behalf and then give them good returns.
PAGE: What is the difference of spread between commercial banking and investment banking and how is it affecting the overall scenario of the investment in general?
MS: What is happening that because of the rising interest rate scenario, the rate of return on the deposit which has been offered by the banks is increasing. Obviously when the rate of return is increasing then people are less likely to invest in mutual funds especially in the stock market related mutual funds because they feel that if they can get a decent rate of return from the banks then they are not likely to go for a more risky asset, however, one important thing that needs to be understood is the inflation rate as well. When the inflation is increasing, right now it is b/w 9-10%, and then effectively the real rate of return is zero because you don't get return at all. This is one concept that people need to understand, they should not look at the absolute rate of return but to the real rate of return which is minus the inflation. If you invest through mutual fund or in stock market there is likelihood that you will be able to beat inflation and meet real rate of return.
PAGE: Do you think investment banks are replacing DFIs?
MS: If you look at the scope of DFI's which was booming few years back, most of the DFIs were in public sector. Unfortunately, there has been mismanagement at the very high level and because of that we have seen these companies dying down. We have NDFC and Bankers Equity which used to have the very renowned companies; unfortunately because of the mismanagement they lost all their money and the depositors' money too.
Now what is happening is that we have got investment banks which have come up in the private sector and they are more prudent than companies in the public sector. However, investment banks are not doing very good mainly because the commercial banks are doing not only the commercial banking operations but they are also allowed to do investment banking and they got the license to participate in all kinds of activities like commercial banking, venture capital, Islamic banking, investment banking and leasing etc. Investment banks' scope is very limited and they are not able to compete with the commercial banks.
PAGE: Any message to the prospective customers?
MS: As a message I would like to say two things to the investors that when they make an investment decision and decide about which asset management company to choose, there are few key things they should look at:
(1) Rating of the company as it reflects the quality of the management of the company.
(2) Rating of different funds which are managed by the company.
(3) Track record of that company as to how long that company is in the market and who the individuals who are managing this money are. As it's mainly an element of trust, it is very important to look at the management and the sponsors of that company.
These are the various things which one has to look at when making decision about the asset management company.
As far as my advice on investment is concerned, my recommendation would be that the investors should not be looking at the short term returns; they should be focusing on the long term return. There are times when you can make money in the short run but in the long run you are less likely to lose money. You have to be patient and have to make your investment for a longer period of time and if you use the professional expertise of the mutual funds, then the chances are that your returns will be higher.