Q&A: SALIM SADRUDDIN MEHDI, HEAD OF CORPORATE UBL FUND MANAGERS

Jan 18 - 24, 2010

Page: Can you elaborate upon the money market fund that UBL Fund offers?

SSM: The fund is called UBL Liquidity Plus Fund (ULPF). It is an open end "Money Market Scheme" that seeks to provide its unit holders competitive returns from a portfolio of low risk, short duration assets while maintaining liquidity.

Some of the basic investment features are:

- to secure parking facility for short-term funds.
- to emphasis on capital preservation.
- same day redemption facility.
- maximum portfolio weighted average duration of only 90 days and maximum time to maturity of any asset of not more than 6 months.
- tax free returns (as per applicable tax law).
- no sales load.

Page: Can you tell us about the investment portfolio of ULPF and its prohibited securities making the fund highly liquid and less risky for investors?

SSM: The investment portfolio of ULPF comprises of high-grade, short-term money market instruments, primarily government securities such as treasury bills and bank deposits (AA Rated and above), thus making the fund highly liquid and less risky for investors.

PROHIBITED INVESTMENTS

1- Term Finance Certificates (TFCs) & any other Corporate Bond.
2- Continuous Funding System.
3- Spread Transactions
4- Bearer Securities
5- Securities on Margin
6- Commodity Contracts or Commodities
7- Equities
8- Any investment other than the authorized investments as defined in the Trust Deed & Offering Document of the Fund.

Page: What is the difference between an income scheme and a money market scheme?

SSM: The basic difference between an income scheme and money market scheme is the type, quality, and duration of asset which are held in the investment portfolio of the scheme.

As per the new categorization of open end collective investment schemes, investment avenues for money market schemes are restricted to government securities, cash and near cash instruments, treasury bills, money market placement deposits, certificate of deposits, certificate of musharakas, TDRs, commercial paper and reverse repo while restricting direct/indirect exposure to equities and weighted average duration of net assets to 90 days.

Whereas income schemes can invest in all of the above including TFC/Sukuk, CFS, spread transactions with weighted average time to maturity of the net assets not exceeding 4 years, there are some other details pertaining to quality of asset and ratings which can be obtained from the SECP circular No. 7 dated March 06, 2009.

Page: What are the benefits for corporate investor to invest in this fund?

SSM: Apart from being a highly liquid and low risk fund, ULPF offers cash management solution and tax free returns-unmatched by direct bank deposits-to its investors.

No doubt, cash management solutions offered by banks have excellent features that help corporate customers to manage its liquidity effectively. However, we feel that one area where ULPF can add value is the kind of returns it can provide.

ULPF enhances returns when bundled up with existing cash management system offering potentially higher daily returns on surplus cash than currently being offered by cash management master account in banks.

Let's say if a particular corporate customer is maintaining a cash management account with UBL Bank and would like to link it with ULPF than the cash management process flow goes like:

- Corporate funds are collected at various collection points of UBL bank branches.

- UBL branches transfer funds online to the UBL Master Account of that corporate.

- UBL will have standing instructions from the corporate to sweep surplus funds from Master Account into UBL Liquidity Plus Fund by day end/next morning.

- Upon redemption, the funds from ULPF is routed back using the Same Day Redemption facility either to master account or disbursed to the investor via their preferred mode of payment such as cheque or pay order.

Thus corporate would optimize on their liquidity management through ULPF which is a secure and liquid investment vehicle with tax free daily returns.

TAX FREE RETURNS

As per the tax law, capital gains generated through investments in listed securities in Pakistan are tax exempted. The difference in net asset value (NAV) of units purchased in a mutual fund and their subsequent redemption at a higher NAV is treated as capital gains. ULPF is a listed security therefore the capital gains derived from ULPF units are exempted of taxes as per the present tax law.

For any taxable corporate or institution, ULPF aims to provide more competitive after tax returns than any other alternative investments such as bank deposits. For example, if corporate places funds in a bank deposit at 13% per annum, an after tax yield of 8.45% will be obtained (assuming a tax rate of 35%).

The expected tax free yield on ULPF will be between 11% to 11.50% per annum. This is the net yield to investor which is net of all fees. This translates into additional net income of over 2.55% per annum.

Page: There is a unique feature called "Same Day Redemption" which is not available in any other mutual fund. Can you elaborate on it and how does it function?

SSM: You are absolutely right. It is indeed a unique feature and has been introduced for the first time in Pakistan by UBL Fund Managers through ULPF. The basic idea behind introducing this feature was to specifically benefit corporate treasury funds in order to eliminate the time lag between redeeming units and receiving the funds or cheque. Usually the redemption process is 2 to 3 days.

Even a day's hit of markup on corporate funds turns out to be a substantial amount. We wanted to eliminate this hit to corporate funds and provide unmatched cash management solution available to them in the market by any other asset management company. It works like redemption form duly completed should be received by UBL Funds before 9:30 am; for online payments funds are transferred into the account of the unit holder the same day before 4pm. The online payment facility is with selected banks only and at the discretion of UBL Funds; for payments through cheque or demand draft these instruments are made available to the investor latest by 4pm the same day.

Page: What are the risks associated with investing in this fund?

SSM: The new categorization of collective investment schemes have made it easier for investors to choose between high, medium, and low risk investment schemes. ULPF falls under the category of money market scheme and is absolutely low risk as can be seen from the investment avenues available and portfolio composition of the fund. The main risk associated with the ULPF is similar in nature to that an investor would face by directly investing in government securities.