MUTUAL FUNDS

S.KAMAL HAYDER KAZMI,
(feedback@pgeconomist.com)
Research Analyst
, PAGE
Dec 19 - 25, 2011

Mutual funds captured the public's attention in the 1980s and '90s when mutual fund investment hit record highs and investors saw incredible returns. However, the idea of pooling assets for investment purposes has been around for a long time.

This investment vehicle has evolved from its beginnings in the Netherlands in the 18th century to its present status as a growing, international industry with fund holdings accounting for trillions of dollars in the United States alone.

The 1970s saw the rise of the no-load fund. This new way of doing business had an enormous impact on the way mutual funds were sold and would make a major contribution to the industry's success.

With the 1980s and '90s came bull market mania and previously obscure fund managers became superstars. The mutual fund industry's top gunslingers became household names and money was poured into the retail investment industry at a stunning pace.

More recently, the burst of the tech bubble and a spate of scandals involving big names in the industry took much of the shine off of the industry's reputation. Shady dealings at major fund companies demonstrated that mutual funds aren't always benign investments managed by folks who have their shareholders' best interests in mind.

Despite the 2003 mutual fund scandals and the global financial crisis of 2008-09, the story of the mutual fund is far from over. In fact, the industry is still growing. In the U.S. alone, there are more than 10,000 mutual funds, and if one accounts for all share classes of similar funds, fund holdings are measured in the trillions of dollars. Despite the launch of separate accounts, exchange-traded funds and other competing products, the mutual fund industry remains healthy and fund ownership continues to grow.

In Pakistan, mutual funds ascended with an increased thrust as evidenced by a surge in total assets of over 10 per cent to Rs 275 billion during July- March 2010-11 as against 4.4 per cent growth for 2009-10.

As of March 31, 2011, the number of mutual funds stood at 137 compared to 116 in January 2010. The uptrend in the mutual funds industry is primarily because of soaring investor confidence in the backdrop of positive stock market movement and improving debt market.

More recently, over the last seven months of the current calendar year 2011, the money market funds category witnessed significant rise of 81 per cent, followed by Islamic income funds up by 47 per cent, which together have spearheaded the overall industry growth.

For all of the last financial year, the money market funds witnessed a spectacular rise of 141 per cent. The industry witnessed growth of a substantial 12.5 per cent (CAGR) in the preceding five years (FY06-11) and it appeared to be gathering unit holders' confidence and funds.

Open-ended funds shot up 4.3 per cent in July 2011 over the earlier month with the total funds in the category rising to Rs234 billion.

Close-end funds remained in negative territory. The decline was, however, a meager 0.8 per cent over June to close at Rs25billion.

Further, during the seven months of Jan-July 2011, the mutual fund industry witnessed growth of 16.1 per cent over the sum of Rs223 billion in the corresponding period of 2010. The growth of the industry was well supported by two categories: money market and Islamic income funds.

In July, the money market funds showed increase of 17 per cent over the earlier month to reach Rs90 billion, while the Islamic funds rose by four per cent to Rs22 billion.

On the other hand, the income funds, which declined by 16 per cent in financial year 2011, witnessed appreciation of three per cent in the month of July, while the sector declined by 5.3 per cent in the seven months, settling at Rs40billion.

SNAPSHOT OF KEY FINANCIALS AS OF MARCH 31, 2011
(IN MILLION RUPEES)

INDICATORS LEASING COMPANIES INVESTMENT BANKS MODARABAS
Total Assets 34,528 25,745 25,797
Total Liabilities 29,603 20,867 13,668
Total Equity 4,821 4,794 12,128
Total Deposits 4,477 6,108 2,697

The income funds category posted average annualized return of 12.7 per cent in July, far better than the previous month's return of 6.4 per cent amid upward price revision of the TFC/Sukuk. After exclusion of a typical return of 89.1 per cent return on Namco income fund (NIF), the category is still managing to earn return of nine per cent on annualized basis.

During seven months, the category produced return of 10.7 per cent per annum. The money market funds category earned average annualized return of 11.2 per cent in the same time with the July return at 12.2 per cent per annum, in line with the previous month's 12.2 per cent.

The main reason was the higher return earned by the category as the managers of money market funds were shifting their investments towards 6-month papers in anticipation of SBP stance towards loosening monetary cycle, which would be beneficial to the long dated papers.

PROFILE OF KARACHI STOCK EXCHANGE

INDICATORS 2010-11 (JUL-MAR)
Number of Listed Companies 638
Fund Mobilized (Rs billion) 14.8
Listed Capital (Rs billion) 920.1
Turnover of Shares (billion) 21.2
Average Daily Turnover of Shares (million) 114.2
Aggregate Market Capitalization (Rs billion) 3147.6

The equity related funds categories mirrored the dull sentiments at the stock market. In July, the KSE-100 index receded by 2.5 per cent while the equity funds category showed a decline of 7.5 per cent to close at Rs48 billion.

During seven months of the current year, 3.4 per cent funds were pulled back from the sector.

The equity funds category earned negative return of 0.6 per cent in July as against the benchmark KSE-100 index negative return of 2.5 per cent.

In the seven months of the ongoing year, the equity funds category earned return of 2.7 per cent as against the KSE-100 index return of 1.4 per cent and KSE-30 index negative return of minus 0.2 per cent.