MUTUAL FUNDS - LIVING IN THE SHADOW OF BANKS

AN OVERVIEW OF MUTUAL FUNDS MARKET 2007

SHAMSUL GHANI
0345 3133210
shams_ghani@hotmail.com

Jan 07 - 13, 2008

The dynamics of mutual funds are enshrined in the use of pooled money by the fund managers for investment in shares, bonds and other securities to earn return for the subscribing investors. Mutual funds are divided in two categories on the basis of redemption conditions and capital limits of the issue. Open End Funds are redeemable at the will of investors and can be purchased either directly from the Fund or through stock market operations. The total capital issue can vary in line with the redemption calls. The other type namely Close End Funds can be purchased only through stock exchange. The total capital issue is not altered by daily sale and purchase transactions in the stock market. It can only be increased through a bonus issue. Presently, 33 open end and 24 close end funds are listed on Karachi Stock Exchange. By their dynamics, close end funds are more actively traded in the stock market. The market capitalization of close end funds was Rs.35,578 million as of December 24, 2007. This accounts for only 0.8 per cent of the total market capitalization. The share of commercial and investment banks in the total market capitalization stands at 33 per cent. This demonstrates the extent and scope of mutual funds in the stock market operations.

Mutual funds are also divided by their earning capability and inherent risk factors. Income Funds are expected to generate regular income for the investors with a reasonably low market risk. On the basis of market price, PICIC Growth Fund tops the close end funds" list whose Rs.10/- share is being traded at Rs.30/-. Most of the close end funds are income funds.

On the other hand, Equity Funds carry higher risk as they vie for higher returns and quick capital gains. Equity funds are mostly listed under the category of investment banks/companies/securities. The leaders under this category are, Arif Habib Limited, Arif Habib Securities Limited, Jehangir Siddiqui & Co, JS Global Capital, J.O.V & Co. Their Rs.10/- shares are trading at Rs.243/-, Rs.180/-, Rs.854/-, Rs.424/- and Rs.171/- respectively.

PUBLIC TO PRIVATE SECTOR JOURNEY OF MUTUAL FUNDS

Investment Corporation of Pakistan, established in 1966, was a state controlled institution - the core objective being the strengthening of capital market of the country. ICP floated more than 20 mutual funds thereby providing individual and corporate investors an avenue to place their funds in the equity market through the expertise of ICP mangers. The Corporation performed well till late eighties when it decided to enter the arena of project financing. The incidence of non performing loans made heavy dents in ICP's liquidity position and in the process seriously threatened its viability. Following the presidential orders to close down, ICP finally winded up in December 2006. All of the mutual funds floated by ICP during its tenure were sold out in different lots. The leading purchasers of these funds were PICIC and ABAMCO. SME Fund, one of the most prestigious funds of ICP was listed on stock exchange with its new name PICIC Growth Fund. Despite the huge losses suffered in project financing, ICP has an enviable history of dividend pay outs and growth of investors" wealth. The existing mutual funds market has no comparison to the ICP mutual funds" golden history. In the present bull market scenario, many of the ICP mutual funds would have been the top performers.

UNDER THE SHADOWS OF COMMERCIAL / INVESTMENT BANKS

The following table gives a view of the existing close end mutual funds market.

TABLE-1

FUND

PAID UP CAPITAL RS. IN MILLION

SHARE'S FACE VALUE

SHARE'S MKT. VALUE

MARKET CAPITALIZATION RS. IN MILLION

DIVIDEND PAY OUT2007

Al-Meezan Mutual Fund

1,375.40

10

13.05

1,794.90

25%15%(B)

Asian Stocks Fund

900.00

10

6.20

558.00

5%

Atlas Fund of Funds

525.00

10

9.00

472.50

16%

BMA Principal Guaranteed Fund

106.00

10

9.00

95.40

6%(B)

BSJS Balanced Fund

1,185.75

10

14.8

1,754.91

25%

Dominion Stock Fund

50.00

10

3.4.0

17.00

-

First Capital Mutual Fund

300.00

10

9.00

270.00

10%

First Dawood Mutual Fund

580.75

10

8.55

496.54

10%

Golden Arrow

675.99

5

7.15

966.67

15%10%(B)

Investic Mutual Fund

100.00

10

2.35

23.50

-

Meezan Balanced Fund

1,200.00

10

9.00

1,080.00

15%

NAMCO Balanced Fund

1,000.00

10

8.25

825.00

10%

PICIC Energy Fund

1,000.00

10

8.15

815.00

7.50%

PICIC Growth Fund

2,835.00

10

30.10

8,533.35

62.50%

PICIC Investment Fund

2,841.25

10

14.10

4,006.16

37.50%

Pak Oman Advantage Fund

1,000.00

10

8.10.

810.00

2.15%

Pakistan Premier Fund

1,698.05

10

12.75

2,165.01

25%15%(B)

Pakistan Strategic Alloc. Fund

3,000.00

10

9.65

2,895.00

25%

Safeway Mutual Fund

544.50

10

11.3

615.29

20%

Tristar Mutual Fund

50.00

10

2.15

10.75

Nil

UTP Large Capital Fund

3,295.50

10

8.90

2,933.00

20%

UTP Growth Fund

3,180.05

10

13.35

4,245.37

32.75%

UTP Balanced Fund

200.00

10

9.00

180.00

10.50%

Prudential Stocks Fund

60.00

10

2.50

15.00

Nil

Total

27,703.24

   

35,578.34

 

It will be observed that while the dividend pay out position is, in general, satisfactory, the over all capital appreciation position leaves much to be desired particularly in the face of a soaring index.

A comparative study of different segments of financial sector reveals that only 3 out of 28 commercial banks and only 4 out of 22 investment banks are trading below par. On the contrary, 15 out of 24 close end mutual funds are trading below par. The capital appreciation in the case of investment and commercial banks has been gigantic whereas the capital appreciation in the case of mutual funds has been negligible.

The following table shows the results of comparative study.

TABLE-2

COMPARATIVE CAPITAL APPRECIATION POSITION

SEGMENT OF FINANCIAL SECTOR

PAID UP CAPITAL RS. IN MILLION

MARKET CAPITALIZATION RS. IN MILLION

CAPITAL APPRECIATION RS. IN MILLION

CAPITAL APPRECIATION% INCREASE

Commercial Banks

187,728

1,509,085

1,321,357

704

Investment Banks

17,832

228,498

210,666

1,181

Close End Mutual Funds

27,643

35,878

8,235

30

The subdued performance of mutual funds can be attributed to the conglomeratic influence. Almost all existing mutual funds are owned / managed by commercial / investment banks, industrial giants or the big wigs of the stock exchange. The big wigs of the stock exchange have either already set up their commercial / investment banks or are in the process of doing so. The focus of the managers of mutual funds is primarily on the group core business. The related party transactions risk also takes its toll on mutual funds when losses incurred somewhere else are reflected in the books of mutual funds. Few years back, the investors of a balanced fund suffered hugely at the news of one of the group director's over trading adventure.

So, gone are the days when mutual funds, in the era of ICP, were managed by professional, independent and reliable managers. This all important segment of financial sector has now been left to live in the shadow of commercial and investment banks and that too under the patronage of conglomerates.

UNIFIED TRADING SYSTEM TO ENHANCE THE VALUE OF LSE & ISE

KANWAL SALEEM

LAHORE: Unified Trading System (UTS) would enhance the value of the Lahore Stock Exchange (LSE) and Islamabad Stock Exchange (ISE).

This was stated by former Chairman Lahore Stock Exchange (LSE) and South Asian Federation of Exchanges (SAFE) Group Capt. (Retd.) Mr. Naeem A. Khan (NAK) in an interview with the Pakistan and Gulf Economist (PAGE).

Mr. Naeem said, "by the implementation of UTS auction platform for LSE & ISE would become one and same for all shares trading.'' All LSE & ISE members would have easy access to the trading platform. All would be equal in all aspects.

PAGE-How do you see the introduction of Unified Trading System (UTS) at LSE & ISE?

NAK- There is no denying the fact that UTS is the most modern system. Its introduction at Lahore & Islamabad Stocks Exchanges would bring these exchanges at par with KSE, the premier exchange of the country. By the implementation of UTS, auction platform for LSE & ISE would become one and same for all shares trading. All LSE & ISE members would have easy access to the trading platform. All would be equal in all aspects. Trading would be fast, efficient and completely transparent. Trading would be real-time.

PAGE-What would be the benefits of Unified Trading Platform (UTP) to the stakeholders?

NAK- It would bring fruits for all participants including Investors, brokers and listed companies. Even the managements of exchanges & Government of Pakistan would also get benefit out of it. UTP would help investors to find best prices of shares. Because of availability of real-time data, best price discovery would be easy for investors. It would increase the volume of trade and hence liquidity would increase for both exchanges. Trading would become efficient for investors and other stakeholder. Volume of financing would also increase. An amount of Rs10 billion is available for LSE under CFS and about Rs.7-8 billion for ISE is available. Under UTS, Rs.17-18 billion would be available for the brokers working at UTP.

PAGE-Would it be an alternate to the demutualization of stock exchanges?

NAK- No. It would not be. It is different than demutualization and merger of stock exchanges. Government of Pakistan has categorically stated that process of demutualization would be completed. We are also bound by the conditions of Asian Development Bank funded Capital Market Reform Program .We have received 250 million for carrying these reforms in letter and spirit. Demutualization is a binding and hence merger of stock exchanges would be a reality sooner or later.

PAGE-What are your views about the performance of the market?

NAK- Market is performing on the bases of its real and sound parameters. Corporate sector performed well during 2007. Banking sector remained at the top of the list. Leasing to auto sector was the main reason behind its performance. Oil sector and mutual fund also performed well. During 2006 & 2007 a number of open and closed ended mutual funds were launched in the market. Good working relationship between apex regulator and market participants and understanding between them has given impetus to the market performance. At the beginning of 2007, positive results from numerous bodies and financial institutions gave good perception about the market and hence it remained bullish. Another reason for the better performance of the market was the under valuation of it. Market fundamentals were strong and entire market was under valued. There was ample room for improvement in the share prices and index. Foreign investors also took notice of the situation. They took serious notice of the situation of the market trends at the end of last year and participated strongly at the beginning of the 2007 and hence market performed well.

PAGE-How do you find ongoing market trends?

NAK- Market is still in good mood. It has added much to the index points during the last six to eight weeks and it is still moving ahead with the same zeal. Some sector wise corrections may be observed in the market but across the board, correction might come at the end of ongoing bull-run, unless something-significant negative happens at national or international level. Bull Run is likely to continue beyond 12000 and people may see last correction between 12350-12550 .After that situation Bull Run may continue until 13000 points or beyond.