Mutual funds set to turn the corner

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Every rebound in share prices is inevitably followed by a market crash.

Small investors nurse their wounds, collect some money left from savings, sell off some items of value and head back to the share bazaar in the hope that next time will be different and they will make a fortune in the fiercely bull market.

With no knowledge and research, they follow the common herd in buying stocks and act on rumours and pitch money in worthless or, as they say in the market dialect, kachra stocks. The outcome is the same: money lost, more tears and more fingers burnt.

Mutual funds managed by experts should be the right choice for such investors. But there is little awareness about them in the public. It is only lately that a greater number of small investors have come to entrust their money to asset managers. The mutual fund industry is growing. The latest report released by the Mutual Funds Association of Pakistan (Mufap) shows assets under management (AUM) of all funds amount to Rs884 billion.

Much to the chagrin of other market participants, the regulators have taken several steps to improve the lot of asset management companies in the past few years

The manager of one of the top four funds said that it was far too small. He observed that the number of investors in mutual funds in India is 90 million. “The population of our country is one-seventh of that. So there should be 14m mutual fund investors in Pakistan,” he said. He said the actual number was 300,000. The number has remained more or less the same for over a decade.

Mufap Chairman Dr Amjad Waheed told this writer the last three years were unkind to the stock market, but things were taking a turn for the better. Since the fortune of equity funds was linked with the performance of the market, they will be the beneficiary of share price escalation.

He said the industry lauded several measures taken by the Securities and Exchange Commission of Pakistan (SECP) Policy Board, the SECP chairman and commissioners to improve the industry conditions.

Dr Waheed also heads the second largest asset manager, NBP Fund Management Ltd, with Rs153bn under management. Al Meezan Investment Management Ltd, with AUM of Rs157bn, stands above the rest.

UBL Fund Managers Ltd, with Rs83bn AUM, is the next while National Investment Trust Ltd, which stood as the largest mutual fund for a long time is now the fourth largest asset manager with Rs79bn.

Incidentally, most small investors who may still be unaware of the growth of this industry recognise NIT as the trusted custodian of public money. Veterans recall NIT as the saviour of the market, which bailed it out of several market crashes and crises.

Besides the above four, there are more than a dozen funds with AUM ranging between Rs74bn (MCB-Arif Habib Savings and Investments Ltd) and Rs0.11bn (First Capital Investments Ltd).

Mutual funds cater to unit-holders’ individual needs. They could select from an array of funds. The AUM of top five categories of funds stand at: money market Rs241bn, equity Rs204bn, income Rs109bn, Shariah-compliant money market Rs80bn, Shariah-compliant equity Rs63bn and Shariah-compliant income Rs103bn.

The open-end funds allocate the highest sum to investment in bank deposits. At the end of September, 48pc of the industry’s total AUM were invested in cash in banks/bank deposits, followed by 26pc in equity, 11pc in sukuk/term finance certificates and 6pc in treasury bills and Pakistan Investment Bonds.

The total investment in equities by mutual funds is Rs204bn. The manager of a mid-sized fund said regulations required that mutual funds must appoint a fund manager where the size of its equity fund stood at Rs50bn or more to manage the sum. The open-end equity fund holdings in the top five scrips at the end of September was as follows: Mari Petroleum Rs12.3bn, Lucky Cement Rs9.8bn, Pakistan State Oil Rs9.2bn, Oil and Gas Development Company Rs7.8bn and Engro Rs7.3bn.

A chart prepared by Next Capital Securities showed that for mutual funds bought shares worth $15.4m since the start of the calendar year while the highest purchases valued at $185m were made by insurance companies. Foreign investors sold stocks worth $396m and the outflow continues unabated.

On some trading day, mutual funds account for the largest portion of net sales. Does all that represent a run on redemption by unit-holders? Abdul Azeem, head of research at Spectrum Securities reckoned that it was difficult to arrive at the exact figure of redemptions since the amount of sell-off by mutual funds comprised both redemptions as well as any change in stock prices.

Money managers say that much to the chagrin of the other market participants, the regulators have taken several steps to improve the lot of the mutual funds in the past few years. In June, the SECP revised the rate of annual fee at 0.02pc of net assets applicable to all categories of collective investment schemes. Mufap was pleased with the development as the fee was revised downwards from 0.08pc to bring it in line with other comparable markets. Later, the regulator also clarified that there was no restriction on mutual funds to participate in the sukuk issues.

Recently, the Pakistan Stock Exchange (PSX) listed four exchange-traded funds (ETFs) namely NIT Pakistan Gateway ETF, UBL Pakistan Enterprise ETF, Meezan Pakistan ETF and NBP Pakistan Growth ETF. ETFs have been described as an investment product, which combines the returns offered by the equity market with the diversity provided by a mutual fund.

The government has also barred institutional investors from parking money in National Savings Schemes since July 1. Money managers hoped that money would now flow to mutual funds.

Published in Dawn, The Business and Finance Weekly, October 19th, 2020