MUTUAL FUNDS - AN UNDERPERFORMING SECTOR

SHAMSUL GHANI
shams_ghani@hotmail.com

Feb 09 - 15, 2009

In the wake of the global financial meltdown, the sustaining power of our financial sector, particularly the banking sector, was much sung about. But the blow, our in-house destabilizing political forces have delivered to the system, remains unmatched in the history of this country. The representative stock market index shedding, of more than 10,000 points in around nine months' time, has thrown the entire economy into disarray. What is more unfortunate is the fact that the country has been pushed to the brink of disaster under the misleading pretext of democratic change. Thousands of families, whose heads had invested in the stock market, have been destroyed. The stories are not going to be brought to the book as the mayhem has been taken as a self-inflicted injury. Our society, in general, does not accept stock exchange activities as genuine investment activities. In most cases, such activities are tantamount to a sort of casino operations. This is a misleading concept. Stock exchange activities are part of the entire financial structure under which the country's economy operates. And it is the duty of the state to see to it that such an important institution is not destroyed by the foolish acts of street agitators and greedy politicians.

Severely dented market capitalization betrays the weakness of fundamentals. The financial sector, being the leading beneficiary of the equity prices upsurge era, has got battering in proportion to its size of market capitalization. Mutual Funds, the financial sector underdogs, have also got their share of bruises. The following comparative table has some stories to tell:

MARKET CAPITALIZATION
Million Rs.

DATE

KSE 100 INDEX MODARABAS LEASING COMPANIES COMMERCIAL BANKS INVESTMENT BANKS CLOSE-END MUTUAL FUNDS
April 15, 2008 15,538 7,271 6,685 1,481,658 280,248 36,408
Feb 03, 2009 5,385 4,024 4,526 402,054 61,799 11,293
Change (10,153) (3,247) (2,159) (1,079,604) (218,449) (25,115)
% Change (65) (45) (32) (73) (78) (69)

As against a 65 percent drop in KSE-100 index, the commercial and investment banks have recorded drops of 73 and 78 per cent respectively. Among the underdogs, leasing companies that recorded a drop of 32 per cent appear to be the least affected, followed by the Modarabas that recorded a drop of 45 per cent. Mutual funds, in sharing the damage, were quite close to the giants of the financial sector - commercial and investment banks. In one of this scribe's previous articles, it was mentioned, "The low profile close-end mutual funds recorded a 16 per cent fall in equity values. But modesty is not the best way to exist. The thrill of being dare-devil like the bad boys of the financial sector - the banks- is unmatched in universe." In this backdrop, it is certainly unfortunate that now the mutual funds stand battered as severely as 'the bad boys'.

MUTUAL FUNDSÍ DYNAMICS

The close-end mutual fund is a low-priced, regular income generating market where people can put their savings as hedge against inflation. This market, accounting for less than 0.7 per cent of the total market capitalization, has had great potential to grow, if it was managed by independent fund managers. Presently, around 75 open-end funds, 21 open-end pension funds and 24 close-end mutual funds are listed on Karachi Stock Exchange. Owing to their dynamics, close-end funds are more actively traded on the stock market.

Mutual Funds, besides being close-end / open-end, are also categorized by their earning capacity and inherent risk factors. Income Funds are expected to generate regular income for the investors with a reasonably low market risk. On the other hand, Equity Funds carry higher risk as they vie for higher returns and quick capital gains. Equity funds are also listed under the category of investment banks/companies/securities. The leaders under this category are, JS Global Capital Arif Habib Investment and First National Equities. Their Rs.10/- shares are being traded at Rs.122/-, Rs.72/- and Rs.46 respectively. The following table gives a view of the existing close-end mutual funds market.

FUND PAID UP
CAPITAL (RS)
IN MILLION
SHARE'S
FACE
VALUE
SHARE'S
MARKET
VALUE
Feb 03,2009
MARKET
CAPITALIZATION
RS. IN MILLION
Feb 03,2009
MANAGERS/
ADVISERS
Al-Meezan Mutual Fund 1,375.40 10 3.95 543.28 Almeezan Investments
Asian Stocks Fund 900.00 10 6.17 555.30 Asian Capital Management
Atlas Fund of Funds 525.00 10 2.20 115.50 Atlas Asset management
BMA Principal Guaranteed Fund 111.30 10 9.00 100.17 BMA Asset management
Dominion Stock Fund 50.00 10 2.30 11.50 Dominion Inv.
First Capital Mutual Fund 300.00 10 1.78 53.40 First Capital Investment
First Dawood Fund 580.75 10 2.99 173.64 Dawood Capital Management
Golden Arrow 760.49 5 2.21 336.14 AKD Investment management
Investec Mutual Fund 100.00 10 0.56 5.60 Investec Inv.
JS Growth Fund 3,180.05 10 2.54 807.73 Jehangir Siddiqui Investment
JS Value Fund 1,185.75 10 4.84 573.90 Jehangir Siddiqui Investment
Meezan Balanced Fund 1,200.00 10 5.11 613.20 Almeezan Investments
NAMCO Balanced Fund 1,000.00 10 8.45 845.00 National Asset Management
PICIC Energy Fund 1,000.00 10 2.56 256.00 PICIC Asset Management
PICIC Growth Fund 2,835.00 10 8.14 2,307.69 PICIC Asset Management
PICIC Investment Fund 2,841.25 10 2.75 781.34 PICIC Asset Management
Pak Oman Advantage Fund 1,000.00 10 4.52 452.00 Pak Oman Asset Management
Pakistan Premier Fund 1,698.05 10 2.63 446.59 Arif Habib Investment
Pakistan S. A Fund 3,000.00 10 1.99 597.00 Arif Habib Investment
Safeway Mutual Fund 544.50 10 13.00 707.85 Safeway Management
We Balanced Fund 200.00 10 10.00 200.00 We Investment Management
Tristar Mutual Fund 50.00 10 2.05 10.25 Tristar Inv.
UTP Large Capital Fund 3,295.50 10 2.39 787.62 JS Investments
Prudential Stocks Fund 60.00 10 2.00 12.00 Prudential Fund Management
Total 27,793.04     11,292.72  

The close-end mutual funds have undergone a cumulative equity value erosion of 59 per cent. Almost all existing mutual funds are owned / managed by commercial / investment banks, industrial giants or the big wigs of the stock exchange. The stock big wigs have set up their own commercial / investment banks. The focus of the managers of mutual funds is primarily on the group core business instead of the mutual funds. This segment of financial sector badly needs independent managers to make it grow to its potential.