MUTUAL FUNDS' ALIGNMENT WITH THE CAPITAL MARKET
May 17 - 23, 2010
Mutual funds market in Pakistan is primarily controlled by the major players of the financial sector. A single Asset Management Company (AMC), normally belonging to one of the major financial sector management groups, manages a number of funds.
AMC FUNDS MANAGED AMC FUNDS MANAGED AMC FUNDS MANAGED ABL A.M Ltd 2 Arif Habib Inv. 8 Dawood Cap. Inv 2 AKD Investment 3 Askari Inv. 2 Faysal A.M Ltd 3 Alfalah Invest. 5 Atlas A.M Ltd 4 Habib A.M Ltd 1 Al Meezan Inv. 4 BMA A.M Ltd 1 HBL A.M Ltd 3 AMZ A.M Ltd 2 Crosby A.M Ltd 2 IGI Funds Ltd 2 JS Investments 11 MCB A.M Ltd 3 National Fullerton 7 KASB Funds Ltd 4 National A.M Ltd 1 NIT Ltd 2 Noman Abid Inv. 1 Pak Oman A.M Ltd 4 UBL Fund Managers 6
Pakistan's financial sector is essentially banks-centric - the banking sector accounts for more than 80 percent of financial sector's market capitalisation. During the recent global financial crisis, the sector escaped the domino effect owing to its banking sector's strength. Unfortunately (or fortunately), this strength was acquired at the expense of bank depositors. The banks have been enjoying for the last 6-7 years spread as high as 7-10 percent. Keeping aside the question of morality, one can say that the banks nearly managed to survive the global onslaught by virtue of their illegitimate profits.
The lopsided structure of Pakistanís financial sector has created a number of anomalies that threaten a financial breakdown during the course of some high powered boom-bust cycles. Mutual funds, Modarabas, Leasing and Insurance all are under-grown sub-sectors. Mutual funds, however, have shown a better performance during the last few years in comparison to other sub-sectors. The growth recorded by the mutual funds market unfolds the potential of this nascent sector.
The uneven structure of the financial sector has given the banks a reason to cartelise and use their clout to their maximum advantage. Since mutual funds provide the common and low-profile investors a chance to actively participate in investment activities, the banks have chosen to target this potential market through increased management control over funds market. The list of asset management companies in the table reveals how this potential sector has been controlled by the big market players of the banking sector.
After SBP having shown its dubious ability to break the cartels of the banking sector, the role of SECP is now under the scanner. How it acts to the threat of banks using their clout to use the Funds vehicle to further their cartelisation goals at the expense of small investors remains to be seen. They should not be allowed to use the funds as Special Purpose Vehicles (SPV) for two-way transmission of earnings and liquidity.
When compared to other non-bank financial organizations such as modarabas and leasing companies, mutual funds are more logically aligned with the capital market. Their capitalisation moves according to the movement in the stock market indices. This was amply proved during the CY-09 when KSE-100 index, after breaking down 5000 level rebounded to 9000 level at the fag end of the year.
COMPARATIVE MARKET CAPITALISATION OF THE FINANCIAL SECTOR (RS IN BILLION)
MARKET CAPITALISATION DEC-09 (KSE-100=9184)
MARKET. CAPITALISATION DEC-08 (KSE-100=5865)
MARKET CAPITALISATION YOY % CHANGE
Close end mutual funds 16,316 1.9 10,810 51 Modarabas 4,132 0.5 4,175 (1) Leasing 5,610 0.7 5,375 4 Investment banks 67,585 8.0 95,210 (29) Commercial banks 675,729 80.4 424,527 59 Insurance companies 71,190 8.5 93,430 (24) Total 840,562 100.0 633,527 33 Increase in KSE -100 index during the calendar year 2009 was 57 per cent
It will be observed that yesteryears' emerging sub-sectors modaraba and leasing remained irresponsive to a hefty rise of 57 percent in KSE-100 index during the CY09. Commercial banks responded in unison by recording a 59 percent increase in market capitalisation. Mutual funds emerged as the most vibrant sub-sector by registering 51 percent increase in market capitalisation. Insurance and investment banks turned out to be the biggest disappointment - insurance, because of its chronic underdeveloped status and invest-banks because of a higher element of speculation in their shares' trading. In sum, it can be said that mutual funds stand well aligned with the capital market.
The number of mutual funds and their assets has grown phenomenally during the last 5-6 years. A few years back, the funds were simply classified as open-end or close-end funds. While that classification now stands expanded to stock funds, income funds, hybrid funds and specialty funds, the diverse investment strategies have introduced such new classifications as Islamic equity funds, Islamic money market funds, Capital protected funds, balanced funds, index tracker funds, etc. The guiding principle for the investors however remains: choose one according to your liquidity and risk/return appetite. MUFAP carries the following 100 different funds on its present member-list:
|Money market Funds||11|
|Asst Allocation Funds||5|
|Capital Protected Funds|
|Index Tracker Funds||2|
|Funds of Fund||1|
|Islamic Asset Allocation Funds||6|
|Islamic Income Funds||10|
|Islamic Money Market Fund||1|
|Islamic balanced Funds||1|
|Islamic equity Funds||3|
|Islamic cap. Protected Fund||1|