MUTUAL FUNDS: SHIFTING PARADIGM
AMCS MUST FOCUS ON RAISING PUBLIC AWARENESS.
SHABBIR H. KAZMI
Dec 19 - 25, 2011
With the commencement of global economic slowdown in 2008, which also affected Pakistan, mutual fund industry has been trying to redefine its strategy to avoid massive redemption by offering good return to investors.
In this attempt, there has been major reshuffling from one type of fund to another type. The overall size of funds under management has witnessed erosion in value. However, the recent boost has come from the flotation of sovereign Ijarah Sukuk, leading to increase in asset under Shariah compliant funds particularly.
To begin with, it may be said that the overall size of asset under management of mutual sector industry is still a miniscule percentage of deposits maintained with commercial banks.
Though the basic purpose of creation of mutual funds is to mobilize small savings, a significant percentage of investment has been made by the commercial banks. Not only the seed money of most of the asset management companies (AMCs) has been provided by the commercial banks, they have also made significant investments in various types of funds.
In the past, there has been a loud talk to put some cap on the investment of commercial banks in equities but some quarters were also demanding increase in the limit. Therefore, the commercial banks found it easy to establish AMCs and keep on lending a supporting hand to the equities market.
It may not be wrong to say that the largest investment has been made in equities fund, followed by income funds. Assets under Shariah compliant funds are on the rise because of 1) growing preference for Shariah compliant funds and 2) flotation of sovereign Ijarah Sukuk.
The over all size of this Sukuk has already surpassed Rs240 billion mark and is likely to increase further with the growing appetite of funds of the government of Pakistan.
National investment trust (NIT) can be rightly termed the largest AMC of Pakistan. It was established in 1962 and is completing 50 years of successful operations in 2012. As of June 30, 2011, it had approximately Rs78 billion assets under management.
The family of funds is comprised of five funds, three equities funds and two fixed income funds. NIT's distribution network comprises of 22 branches, various authorized bank branches all over Pakistan and Arab Emirates Investment Bank in UAE. The company had been assigned an Asset Manager rating of 'AM2-' by JCR-VIS Credit Rating Company.
Over the years, NIT has been providing much needed liquidity to the equities market but also playing the role of last savior in times of crisis. Among all the asset management companies, it has the largest number of unit holders.
These investors have chosen NIT to protect their capital as well as to receive regular dividends. Therefore, NIT always takes a long-term view while making any investment and also abstains from indulging in day trading. Over the last few years, confidence of investors has further consolidated due to improvement in quality of assets under management as well as regular and substantial dividend payout.
The story of mutual funds in Pakistan is incomplete without recognizing the role being played by Al Meezan Investment Management, the largest AMC of the private sector, also enjoying the distinction that all of its funds are Shariah compliant.
It is estimated that the size of assets under its management have surpassed Rs30 billion. It may be of some interest for the investors that in the aftermath of 2008 financial crisis when some of the AMCs operating in Pakistan faced redemption pressure Al Meezan remained insulated to a large extent. Lately, the size of assets under its management has increased substantially because of investment in sovereign Ijarah Sukuk. It enjoys two distinctions 1) strong distribution network and 2) investment in quality assets.
Experts say that AMCs in Pakistan have not been able to cater to the needs of retail investors. Some of the funds have been focusing on institutional investors and large net worth investors.
This may help them in dealing with lesser number of investors but often face sudden spikes and surges when a few of these investors ask for redemption. Another observation is that some of the brokerage houses have established mutual funds only to park their bad investments.
The situation is not as bad as it used to be in the past but has certainly caused huge losses to small investors. There is still a need to strengthen regulatory mechanism to protect the investors.
It is often said that size of mutual fund industry has not grown really but both the regulators and players have not been playing their rule diligently.
In the past, when there were complaints against some AMCs both mutual funds association of Pakistan (MUFAP) and securities and exchange commission of Pakistan (SECP) tried to avoid penalizing erring AMCs and the employees. This has caused 'confidence crises'. The perception can be improved through greater interaction with the potential investors. Most of the funds still suffer from limited outreach and extensive awareness campaigns have to be undertaken to cater to the needs of diversified retail investors.
The investors have to be informed about benefits of investing in mutual funds. Since the pool of investment is usually big, AMCs have better knowledge of the changing dynamics of the market and decisions are made on credible information. Since most of the mutual funds fall in the category of 'open-end', funds release of net asset value (NAV) on daily basis allows the investor to keep an eye on the emerging trend and invest/redeem the investment at an appropriate time.