TIPS TO COUNTER INVESTMENT FRAUDS

MOHAMMAD SHOAIB
Feb 23 - Mar 01, 2009

Recent financial crisis has resulted in losses for several individuals and institutions. However, it provides an experience from which we all can get several lessons and tips which we should take into consideration when investing in future.

CFA Institute offers certain tips on how to avoid Investment Fraud. We believe that these tips are extremely useful and hence would like to mention few of these tips here in light with their applicability to our local investors.

1. UNDERSTAND CLEARLY THE INVESTMENT STRATEGY

"Some investment opportunities appear alluring simply because they are described in impressive, complicated terms," said Stephen Horan, CFA, head of private wealth management content at CFA Institute. We at Al Meezan have clearly communicated our strategy of providing Shariah compliant returns to our investors and never wavered to this commitment. Due to this stance, we have been successful in our strategy and have shared our success with investors by giving dividends consistently for last 5 years.

2. MATCH INVESTMENT STRATEGY TO REPORTED PERFORMANCE

One of the biggest scams of the international capital market has been one by Bernard Madoff because the reported performance was consistently good and the investors did not pay heed to its investment strategy. We advise our investors to prudently analyze not just the strategy and the reported performance but also if the returns are properly and honestly calculated. We have seen that in the local scenario, banks have been misleading the people with claims of over 15% returns not taking into consideration the compounding factor. We, at Al Meezan, always try to present true and fair picture to our investors and for calculation of returns use standardized methodology.

3. THERE ARE NO SHORT CUTS TO SUCCESS

Legitimate investment professionals do not promise sure bets. Legitimate get rich- quick schemes simply do not exist. Investors should be highly cautious while investing in such schemes as the recent financial crisis has shown that even the biggest conglomerates are not totally safe. Investors are advised to take long term positions in mutual funds which promise consistent and ethically earned income over the period of time.

4. ASSESS THE OPERATIONAL RISK AND INFRASTRUCTURE

Any investment management operation should have a physical infrastructure for trading and administration. It is important that a firm have separate, independent operations for asset management, trading, and custody to provide checks and balances against fraud. Investors should look for asset management companies which have a proven track record of efficient management of funds.

5. ASK ABOUT INDEPENDENT AUDITS AND WHO PERFORMS THEM

"Investors should ask for audited financial statements of the organization," said Horan. "An auditor should be independent, reputable, and congruent with the size and scope of the investment operation." Al Meezan gets its financial statements audited by top reputed firm, A. F. Ferguson & Co.

6. ASSESS THE PERSONNEL

Ultimately, the reliability of any operation is predicated on the integrity and competence of its people. So find out who makes investment decisions and who implements the investment strategy. They should be separate people with relevant experience, education, and training. Look for recognized professional credentials, like the Chartered Financial Analyst (CFA) designation. Al Meezan has a team of qualified individuals who abide by the CFA Code of Conduct. We believe that all investment is made in people and not in funds or companies. So, select the right people to manage your money!

7. LIMIT YOUR EXPOSURE

"One of the surest ways to avoid the catastrophe associated with investment fraud is to limit the amount you invest," said Horan. "Diversification is one of the most fundamental and enduring investment principles. Investors often expose themselves to unnecessary risks by concentrating their funds in one or two securities. Investment in equity market through mutual funds would indeed be the ideal means to have a diversified portfolio. While making a selection of the fund to invest in, the above mentioned tips should be kept in mind so that hard earned money do not get lost by unethical practices by investment managers.

(Writer is the Chief Executive, Al Meezan Investments)