MUTUAL FUND INDUSTRY IN PAKISTAN - POTENTIAL AND FUTURE PERSPECTIVES.

ZAHID HUSSAIN
May 12 - 18, 2008

In this age of growing competition when the world has become a global village, economic independence, pillared on sound economic indicators including robust and stout investment strength both in capital and financial markets, has become a prerequisite factor that helps in securing future economic growth for a country.

INVESTMENT IN MUTUAL FUNDS A SAFE MODE TO INVEST IN:

Whenever they intend to make a new investment, individual and corporate investors always look for a safe mode of investment, bearing minimum risk involvement. Individual and corporate investors now-a-days consider long term investment options through professional asset management companies. Globally, mutual funds are considered to be a secure mode of investment for small investors. Mutual funds today are characterized as one of the most popular investment options for investment in Pakistan. Since 2002, mutual fund industry in Pakistan has witnessed significant changes and growth. In 2002, there were only two companies; the National Investment Trust (NIT), which represents the public sector while the only other company operating in the private sector was ABAMCO, which was managing only one fund. Today the total number of Asset Management Companies is around 35 which are managing 85 different funds in Pakistan. The size of mutual fund industry is Rs. 387 billion. There are 67 Open End Funds with Net Assets Under Management amounting to Rs.334 Billion, whereas 18 Funds under Closed End Funds Asset Management amount to Rs. 53 billion.

PAKISTAN'S MUTUAL FUNDS INDUSTRY:

The mutual funds industry is growing rapidly in Pakistan and the number of new 1 companies along with the assets under management is on the rise. The mutual funds industry performed very well and witnessed an upward growth during the calendar year 2007 attaining the size of Rs.298.95 billion from Rs. 159.17 billion in the year 2006. While in February 2008, the Mutual Fund Industry accrued growth of 8.5% i.e Rs. 387 billion. The growth in the financial industry is rising and it is being envisaged that it is likely to touch the mark of Rs. 400 billion by the end of December 2008. The main reason behind this growth is the consistent implementation of fiscal policies which has boosted the investors" confidence both internally and externally. Increased international interest in our assets and capital markets is also being witnessed, owing to the same reason.

To keep investors" interest on the higher side and make the mutual funds industry more investor-friendly, increased education regarding this sector is inevitable and the need of the hour.

Currently mutual funds account for only 4.2 percent of the country's GDP as compared to above 13 percent for India and 85 percent for the USA. Mutual funds account for 16.5 percent of Pakistan's national savings. This sector holds great potential for future as this sector has witnessed exceptional growth during the last 4-5 years. The reasons for its accelerating popularity are mainly because of its improved and disciplined behavior, government support, development of new products and investor-friendly environment.

COMPOSITION OF MUTUAL FUNDS IN PAKISTANI MARKET AND NIT'S SHARE IN MUTUAL FUNDS' MARKET:

Mutual Funds industry in Pakistan has shown remarkable growth in recent years both in terms of number of funds as well as in Net Assets Under Management. The composition of mutual fund industry in Pakistan indicates that out of total, 45% of the market consists of equity funds including Islamic Equity Funds, 43% Income Funds, 3% Islamic Income Funds, 7% Balanced & Asset Allocation Funds, and 2% Others.

The local Open-End Equity Mutual Funds constitute about 2.8% of the total market capitalization of Karachi Stock Exchange in February 2008. The recorded size of the open-ended equity funds came to about Rs. 130.6 billion including National Investment Trust Limited (NIT). NIT being the oldest and the largest mutual fund institution constitutes about 79% of the open-ended equity funds. Excluding NIT, the total equity fund industry is Rs. 26.8Billion.

NIT is Pakistan's oldest Mutual Fund, constituted under the Trust Deed in November 1962 executed between NIT Limited as the Management Company and the National Bank of Pakistan as the Trustee. NIT is the largest open-end equity fund in Pakistan with investments in approximately 472 out of 652 listed companies as on March 31st 2008. Presently, NIT has over 52,000 Unit Holders who collectively hold 1.65 billion Units. It has the largest sales network comprising 19 branches and one institutional marketing group as well. Apart from these outlets NIT also sells its units through Financial Planners and authorized distributors i.e. HBL, Faysal bank, SCB, Atlas Fund, IGI, PRC, Alfalah Securities and Arab Emirates Investment Bank (Dubai) and over 100 authorized branches of various national and multinational banks spread all over the country.

The Net Asset Value (NAV) of the NIT fund as on 28th March 2008, Rs. 105 billion, constitutes 2.3% of the total market capitalization of the Karachi Stock Exchange, making NIT the largest Single Investor on the KSE. Furthermore, NIT has the track record of paying regular and handsome dividend since 1963. In recognition of NIT's Par excellence performance, Mutual Fund Association of Pakistan (MUFAP) conferred "Performance Excellence Award for 2003 and 2004 to NIT.

NIT FINANCIAL HIGHLIGHTS 2002-2007

Making saving and investment Simple, Accessible and Affordable has always been the foremost endeavour of NIT. NIT has so far launched one fund with the name of NI(U)T, commonly known as NIT units, as an Open End Equity Fund which has performed superbly since its inception.

NIT's unique attraction includes providing investors with a convenient access to Pakistan's growing equity markets. Moreover, small investors have the opportunity to invest in a well diversified, professionally-managed portfolio without the capital outlay needed to develop for them. The 5 years average pay-out of NIT's dividend has been 14% per annum. For the year ended 30th June 2007, NIT announced a record dividend of Rs. 6.20 per unit breaking its own record of Rs. 5.80 per unit for the preceding year 2006. While capital gain during the financial year 2007 stood at Rs. 16,818 million as compared to Rs. 6,805 million of the preceding year 2006.

Net Profit rose from Rs. 9,236 million accrued during the year 2006 to Rs. 19,900 million for the year 2007.

A brief detail of NIT financial highlights is mentioned in the table apparent below:

 

FY2007

FY2006

FY2005

FY2004

FY2003

FY2002

Dividend Income (Rs. In Mn)

3,082

3,457

3,320

2,487

2,368

1,890

Capital gain (Rs. In Mn)

16,818

6,805

2,664

1,979

972

541

Net Profit (Rs. In Mn)

19,900

9,236

5,683

4,309

2,878

1,925

Earning Per Unit (Rs.)

12.24

6.19

3.55

2.66

1.87

1.22

Dividend Per Unit (Rs.)

6.20

5.80

3.30

2.55

1.75

1.20

Net Assets (Rs in Bn)

101.00

64.3

61

49.5

31.6

17.4

Opening NAV (Rs.)

43.07

38.12

30.53

20.58

10.89

9.16

Closing NAV (Rs.)

62.38

43.07

38.12

30.53

20.58

10.89

Dividend Yields %

14.42%

15.02%

10.80%

12.39%

16.06%

13.10%

Total Return %

44.83%

28.01%

35.66%

60.74%

105.04%

31.99%

The graph on the left-hand side of this page clearly depicts the positive and vertical growth of NIT's performance in recent years. As apparent in the chart, capital gain has experienced continuous growth in an upward direction from Rs.541 million during FY2002 to Rs. 16818 million during the fiscal year 2007.

This clearly indicates that the Mutual fund industry is rapidly expanding despite a number of challenges and issues like lack of investors" awareness etc. Never-the-less the mutual funds operating in the country deserve appreciation for the excellent performance. However, Pakistan's mutual funds industry's size is not enough if we compare it with the market size of our neighbouring country, India, whose mutual funds industry size stands at five trillion Indian Rupees. One of the major challenges for mutual fund industry in Pakistan is its smaller size accompanied with variety of other reasons like lack of awareness and low investor confidence due to prevalent risk factor in this mode of sector.

FUTURE STANCE:

In recent past, after the demise of Benazir Bhutto on 27th December 2007 and the subsequent political crisis and turmoil, the KSE tilted for sometime but it bounced back once again, indicating the high shock absorbing capacity of KSE. This can be attributed to two factors, strong and robust economic fundamentals and attractive dividend yields. Corporate earnings are expected to remain high, since most of the mutual funds have large exposures in equities. Any improvement in corporate earnings is expected to have positive impact on them.

It would not be wrong to say that Pakistan's mutual funds industry is still in its preliminary stage as far as its size is concerned. Globally, the mutual funds industry stands at $25.82 trillion and has been exhibiting steady growth. However, in Pakistan despite tremendous increase in AUM i.e Assets Under Managements, primarily led by income funds, the mutual funds industry, relative to regional markets and as percentage of GDP and bank deposits remains small. Weak distribution network, heavy reliance on institutional investors, and lack of product innovation are some of the key factors hampering further growth.

To nurture the growth of this important sector, there is a need to improve the efficiency of already existing funds apart from introducing new funds and public awareness to invest in mutual funds.

NIT'S FUND SIZE AMONG EQUITY CATEGORY AND OPEN END FUNDS:

The total number of Funds among Equity Category is 30, with total Funds size of Rs. 149.2 Billion, NIT shares 70.39% i.e having Net Asset Value of Rs.105 Billion. In Open End Funds, NIT holds 31.43% of Open End Funds i.e. 27.15% of total industry, 2.96% of Banking Deposits and 1.98% of Gross Domestic Product.

The journey which NIT began back in 1962, aimed at nurturing the mutual funds industry of the country to provide stronger base to country's capital and equity markets, will continue with a greater zeal and willingness aided with the binding force of investors" confidence reposed in NIT in the coming days also.