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INSTITUTE OF BUSINESS AND TECHNOLOGY
Potential of Mutual Fund Industries in Pakistan
Prepared By
Murad SulaimanBM/25175
Course Code : MKT-606
MBA (Banking and Finance)
FACULTY OFMANAGEMENT AND SOCIAL SCIENCES
FALL- 2010
Potential of Mutual Fund Industries in Pakistan
TABLE OF CONTENTS
ACKNOWLEDGEMENT 5
ABSTRACT 6
CHAPTER NO.1 INTRODUCTION
1.1 Introduction 8
1.2 Purporse of Study 8
1.3 Research Objectives 8
1.4 Research Methodology 9
CHAPTER NO. 2 LITERATURE REVIEW 10
CHAPTER NO.3 MUTUAL FUNDS
3.1 Introduction 13
3.2 Concept of Mutual Funds 13
3.3 Origin of Mutual Fund 14
3.4 Mutual Fund Organization 15
3.5 How a Fund is Created15
3.6 Structure of Mutual Funds 16
3.7 Types of Mutual Funds 16
3.8 Difference between Open & Close End Mutual Funds 21
3.9 Advantages and Disadvantages of Mutual Funds 21
CHAPTER NO.4 MUTUAL FUNDS IN PAKISTAN
4.1 Growth 25
4.2 Government Role in Mutual Funds 26
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4.3 Causes of Slow Growth of Mutual Funds 27
4.4 Reasons for Failure 29
4.5 Present Scenario 31
4.6 Past and Present 31
CHAPTER NO.5 PERFORMANCE OF MUTUAL FUNDS
5.1 An Overview 33
5.2 Growth in Asset Management Companies 34
5.3 Mutual Funds - A Comparison with other Investment Avenues 34
5.4 Future Prospects 35
CHAPTER NO.6 KEY PLAYERS IN THE MARKET
6.1 Key Players 36
6.2 Comparison of NIT with other Funds 40
6.3 Results Analysis 52
6.4 Government Policy 52
CHAPTER NO.7 COMPARISON WITH OTHER MARKETS
7.1 Worldwide Market – An Overview 54
7.2 Mutual Funds in South Asia 56
7.3 Mutual Funds in India & Pakistan – A Comparison 58
CHAPTER NO.8 PRESENT AND FUTURE CHALLENGES
8.1 Present 63
8.2 Future Challenges 64
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CHAPTER NO.9 CONCLUSION & RECOMMENDATIONS
9.1 Conclusion 66
9.2 Recommendations 68
BIBLIOGRAPHY 73
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ACKNOWLEDGEMENT
All praises for Almighty Allah whose uniqueness, Oneness and wholeness is
not challengeable. All respect for his Holy Prophet Hazrat Muhammad
(P.B.U.H) who enabled us to recognize our creator.
I am grateful and deeply indebted to Dr. Noor Ahmed Memon my teacher,
mentor and project advisor for his helpful insights, cooperation, support and
continuous encouragement throughout this project. Without his guidance I will not
be able to do this. He really is a person from whom I learnt a lot and who knows
how to motivate other person.
I would like to thank Atta Muhammad Ujjan Area Manager NAFA FUNDS for his
helpful insights and for sparing his precious time to help and guide me.
Many people have contributed in the completion of this project and I would like to
thank my fellow students Fahad Abbasi, Asad Mazhar, Mairaj Muhammad,
Noshad and Noor-U-Saba, whose support and guidance help me to complete
this project in time.
Last but not least I would like to thank my parents for always being there for me
when I need them.
Murad Sulaiman
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INSTITUTE OF BUSINESS AND
TECHNOLOGY
ABSTRACT SUBMITTED BY: Murad Sulaiman
DISCIPLINE: MBA (Banking & Finance)
TITLE OF PROJECT REPORT: Potential of Mutual Fund Industries in
Pakistan
MONTH OF SUBMISSION: November 2010
NAME OF PROJECT SUPERVISOR: Dr. Noor Ahmed Memon
ABSTRACT
This research work analyzes the developments of mutual fund industry in
Pakistan since its inception in 1962. It also covers the comparative study of the
public and private sector mutual funds, key players in this sector and their
performance. This research analyzed the growth of mutual funds in USA, South
Asian region and in India in comparison with Pakistan. The relevant policies that
are applicable to Pakistan and those that proved to be successful over time were
studied and finally recommended to Pakistan.
The existing market of mutual funds in Pakistan is not fully structured and at the
same time it lacks due attention to be given by common investor. It covers the
problems mutual fund industry faced since its inception in the country,
performance of existing Asset Management Companies, Barriers in the
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development of this industry since its inception and the challenges and
opportunities this industry is facing.
The research also covers that the growth of Mutual Fund industry in Pakistan is
faster than anticipated, due to injection of new equity funds and the re-direction
of Provident funds and gratuity funds from banks and NSS to the higher yielding
mutual funds. A wind of change is blowing across the mutual fund industry. The
future of the industry appears to be promising and is poised for growth. Mutual
Fund industry can thrive on a sustainable basis only if new innovative products
are continuously introduced in the industry.
Thus, to conclude, there are many opportunities for this sector in Pakistan. Some
steps have been taken but the pace of work is slow. More can be accomplished
through realizing its importance.
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1. INTRODUCTION
1.1 Introduction
Mutual fund is a mechanism of pooling together the savings of large number of investors
with an objective of attractive yield and appreciation in their value. In Pakistan mutual
funds have many barriers for its development towards capital market. The lack of official
rules and regulation and no proper check and balance upon them discourage many
investors to invest in mutual funds in Pakistan.
Over a period of time, Mutual Funds managers have developed a variety of investment
products but still in our country this sector is unable to categorize different customized
products that can cover investor’s needs accordingly.
The research has tried to identify the distinguishing features of open and closed ended
mutual funds. The analysis focuses on the market capitalization of mutual funds along
with their comparison with other sectors. The barriers to mutual funds in the Pakistani
funds market and its future outlook scenarios are also discussed in this research thesis.
1.2 Purpose of Study
The objective of the thesis is to study Mutual Fund market in Pakistan. It also
encompasses the new rules and regulations issued by SECP and its implementation in
Mutual Fund industry, so as to further analyze the post reforms scenario. Thesis analyze s
the market leaders NIT, Arif Habib and Jehangir Siddiqui Mutual Funds and other Asset
management companies in Pakistan. The research also covers:
Problems Mutual Fund industry faced since its inception in the country
Performance of existing Asset Management companies
Barriers in the development of Mutual Fund industry
Scope and Prospects of this industry in Pakistan
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1.3 Research Objectives
Scope of this research includes Mutual Fund market of Pakistan. It covers a comparative
study of the public sector Mutual Funds and private sector mutual funds by making brief
review of SECP rules and regulations. The research also discusses the barriers in the
development of Mutual Funds in Pakistan and makes recommendations for Mutual Funds
development in Pakistan.
1.4 Research Methodology
In order to conduct the research work a number of research methods are used which
includes intensive web search, interviews, and visits of mutual fund companies like
ABAMCO, Arif Habib Investments, United Asset Management Company etc. The
research also includes the critical issues hindering the growth of Mutual Fund Industry in
Pakistan.
For this purpose the following research methodologies are followed:
Primary data
o Questionnaires, Interviews
Secondary data
o Libraries, Articles, Research material, Internet, Financial Magazines
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2. LITERATURE REVIEW
Mutual Funds have attracted a lot of attention and kindled the interest of both
academic and practitioner communities. Compared to developed Market, very
few studies of Mutual Funds are done in Pakistan. The literature review reveals
the investor behavior studies. The researches on Mutual Fund have been
extremely skewed in term of geographical coverage, most focused to develop
countries like us.
Mary Rowland had written “The New Common sense Guide to Mutual
Funds”. It includes the guideline while investing in Mutual Fund. How should one
invest in Mutual Fund and what step should be taken in a situation by investor.
Mr. Talat Afza mentioned in his book Performance Evaluation of Pakistan
Mutual Funds that Extensive research has evaluated mutual fund performance
in different financial markets which led to mixed results, however, limited work
has been done to evaluate Pakistani mutual funds. The purpose to provide
guidelines to the managers of open-ended Pakistani mutual funds and benefit
small investors by pointing out the significant variables influencing the fund
performance. An effort has been made to measure the fund performance by
using Sharpe ratio with the help of pooled time-series and cross-sectional data
and focusing on different fund attributes such as fund size, expenses, age,
turnover, loads and liquidity.
Dr. Amjad Waheed, CEO, NBP Asset Management Company Limited in his
article Significant Impact On Fund Performance in The Lahore Journal of
Economics (Vol 2, No 2) mentioned that Pakistan experienced the reverberations
starting in 1988 of the changes that swept the Asian emerging markets. To
create an investment friendly environment the GoP adopted liberal economic
policies of deregulation, privatisation, opening of capital markets to foreigners,
liberalization of foreign exchange regulations and dismantling of investment
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control - policies that lead to a significant increase in direct and indirect foreign
investment in the country.
These changes resulted in a drastic increase in the financial assets of Pakistan
with stock market capitalization rising from Rs.l88 bn in 1991 to Rs.547 bn at
present, daily trading volume improving from 2 mn shares in 1991 to 50 mn
shares at present and number of listed companies rising from 542 in 1991 to 788
at present.
Despite the global trend of a significant increase in financial assets and the surge
in domestic market capitalisation, an average Pakistani investor is still skeptical
about entering the market. The reasons for this skepticism are:
Lack of information about capital markets.
Inherent risk involved in investing in stocks.
Therefore, it is crucial for an ordinary investor to understand the way in which to
overcome these drawbacks. An efficient and a risk adverse mode of doing this
are by investing in a mutual fund. A mutual fund is simply a group of stocks and
other financial assets managed by trained investment professionals. Such a fund
offers its shares to the public who in turn, become its owners. Typically, the fund
advisor uses investors' money to acquire stocks .and bonds within the legal
framework of the Corporate Law Authority.
Greg N. Gregoriou in his book Diversification and Portfolio Management of
Mutual Funds (Finance and Capital Markets Series) addresses the important
issue of diversification in an age where it is vital to reduce volatility on
investments. Properly applied portfolio management can lead to greater gains.
The expert authors guide investors through international portfolio diversification,
make clear how to help improve the efficiency of their investments, and explain
how international diversification reduces the risk of an investment portfolio. This
key book educates investors about how international mutual finds enhance the
performance of their portfolio. The authors analyze which factors are most
essential to investors, and find that both financial factors and behavioral
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arguments must be considered. This book is a crucial tool for any investor
looking to improve the profit gain from their investment.
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3. MUTUAL FUNDS
3.1 Introduction
A Mutual Fund is an institution established with the intention of investing a pool of
funds in various types of Securities for the benefit of investors. A small investor is
unable to diversify his portfolio of funds simply because of high investment
required for diversification, so a Mutual Fund provides a means of diversification
of investment to small investors. Mutual Fund normally collects the funds from
small investors, and when sufficient funds are gathered then they are invested
into the Securities of different types thus diversifying the portfolio.
A management company manages Mutual Fund. The management company is a
bank of human resources, considered to be professionally qualified personnel. A
“Portfolio Manager”, whose responsibility is to invest in, and satisfies the desire
of the investors, manages the portfolio of mutual fund. While selecting the
securities for investment, these managers analyze economic conditions, industry
trends, Government regulations and their impact on the stocks, and forecasts for
the specific stocks to the project the future outcome generated by the companies.
As we all know that economic and business condition do not remain constant, so
these managers also revise their portfolio with the passage of time, as the
circumstances demand.
3.2 Concept of Mutual Funds
A Mutual Fund is a type of Investment Company that gathers assets from
investors and collectively invests those assets in stocks, bonds, or money market
instruments1.
Individuals and institutions invest in a Mutual Fund by purchasing shares issued
by the fund. It is through these sales of shares that a Mutual Fund raises the
cash used to invest in its portfolio of stocks, bonds, and other securities.
Through the collective investments of the Mutual Fund, each investor shares in
the returns from the fund’s portfolio while benefiting from professional investment
management, diversification, liquidity, and other benefits and services.
1 www.investopedia.com
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The concept of Mutual Fund is very simple, small investors invest their money
into a common pool or fund and hand over the investment decision to fund
manager/ portfolio manager. This is expected to have several advantages for the
small investors: no more searching for good buys or relying on the
neighborhood sub-broker for advice or even waiting anxiously for the allotment.
All this is taken care of by the cumulative bargaining power of the fund, which
has trained professionals managing it.
Every day, the fund manager/ portfolio manager counts up the value of all fund's
holding, figures out how many shares have been purchased by shareholders,
and then calculates Net Asset Value (NAV) of Mutual Fund, price of a single
share of the fund on that day. If investor wants to buy shares, he just has to send
the manager money, and they will issue new shares for him at the most recent
price.
3.3 Origin of Mutual Fund
Mutual Fund industry traces its roots to England in the mid-1800s. The
enactment of two British laws, the Joint Stock Companies Acts of 1862 and 1867,
permitted investors, for the first time, to share in the profits of an investment
enterprise, and limited investor liability to the amount of investment capital
devoted to the enterprise. Shortly thereafter, in 1868, the Foreign and Colonial
Government Trust formed in London. This trust resembled a mutual fund in basic
structure, providing “the investor of moderate means the same advantages as
the large capitalists ... by spreading the investment over a number of different
stocks2.”
This concept of offering the investment potential of financial markets to all
individuals spawned additional “investment companies” in Britain and Scotland
and, among other things, helped finance the development of the post-Civil War
U.S. economy. Most of the early British investment companies or trusts
resembled today’s closed-end funds by issuing a fixed number of shares to
groups of investors whose “pooled” assets were invested in various companies.
2 Mutual fund Fact book 2009, 44th Edition http://www.ici.org/stats/mf/2009_factbook.pdf
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The Scottish American Investment Trust, formed on February 1, 1873 by fund
pioneer Robert Fleming, was significant because it invested in the economic
potential of the United States, chiefly through American railroad bonds. Many
other trusts followed that not only targeted investment in America, but more
importantly, led to the introduction of the investment fund concept on U.S. shores
in the late 1800s and early 1900s.
3.4 Mutual Fund Organization
A Mutual Fund is organized either as a corporation or a business trust that sells
its shares to investors. Mutual Funds have officers and directors or trustees. In
this way, Mutual Funds are like any other type of company, such as IBM or
General Motors.
Unlike other companies, however, a Mutual Fund is typically externally managed:
it is not an operating company with employees in the traditional sense. Instead, a
fund relies upon third parties or service providers, either affiliated organizations
or independent contractors, to invest fund assets and carry out other business
activities.
3.5 How a Fund is created
Setting up a Mutual Fund is a complicated process performed by the fund’s
sponsor, typically the fund investment adviser, administrator, or principal
underwriter (also known as the distributor).
The fund sponsor has a variety of responsibilities. For example, it must assemble
the group of third parties needed to launch the fund, including the personnel
managing and operating the fund. The sponsor provides officers and affiliated
directors to oversee the fund, and recruits unaffiliated persons to serve as
independent directors. It must also register the fund under state law as either a
business trust or corporation.
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3.6 Structure of Mutual Funds
A mutual fund is usually either a corporation or a business trust (which is like a
corporation). Like any corporation, a mutual fund is owned by its shareholders.
The figure below shows the business structure of a typical Mutual Fund.
Figure 1: Structure of Mutual Funds
3.7 Types of Mutual Funds
There are two types of mutual funds, which are:
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Open-end mutual funds
Closed-end mutual funds
Open-End Mutual Fund
Open-end mutual funds are those where subscription and redemption of shares
are allowed on a continuous basis. Price at which the shares of open-end funds
offered for subscription and redemption is determined by NAV after adjusting for
any sales load or redemption fee. In Pakistan there exists Fourteen Open ended
mutual funds.
Public Sector: 01
Private Sector: 13
Closed-End Mutual Fund
Closed-end mutual funds are those where shares are initially offered to the public
and are then traded in the secondary market. The trading usually occurs at a
slight discount to the NAV. In Pakistan there exist Nineteen Close-end mutual
funds.
Mutual fund has different risks and rewards. In general, the higher the potential
returns, the higher the risk of loss. Although some funds are less risky than
others, all funds have some level of risk--it's never possible to diversify away all
risk. This is a fact for all investments.
Each fund has a predetermined investment objective that tailors the fund's
assets, regions of investments, and investment strategies. At the fundamental
level, there are three varieties of mutual funds:
1) Equity funds (stocks)
2) Fixed-income funds (bonds)
3) Money market funds
All mutual funds are variations of these three asset classes. For example, while
equity funds that invest in fast-growing companies are known as growth funds,
equity funds that invest only in companies of the same sector or region are
known as specialty funds.
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Figure 2: Risk and Reward potential for Types of Funds
Different types of mutual funds from the safest to more risky are explained in a
sequence.
Money Market Funds
Money Market consists of short-term debt instruments, mostly T-bills. This is a
safe place to park money. Investor won't get great returns, but at the same time
he won’t have to worry about losing your principal. A typical return is twice the
amount one would earn in a regular checking/savings account and a little less
than the average certificate of deposit (CD).
Bond/Income Funds
Income Funds are named appropriately: their purpose is to provide current
income on a steady basis. When referring to Mutual Funds, the terms "fixed-
income," "bond," and "income" are synonymous. These terms denote funds that
invest primarily in Government and corporate debt. While fund holdings may
appreciate in value, primary objective of these funds is to provide a steady cash
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flow to investors. As such, audience for these funds consists of conservative
investors and retirees.
Bond funds are likely to pay higher returns than certificates of deposit and money
market investments, but bond funds aren't without risk. Because there are many
different types of bonds, bond funds can vary dramatically depending on where
they invest. For example, a fund specializing in high-yield junk bonds is much
more risky than a fund that invests in government securities; also, nearly all bond
funds are subject to interest rate risk, which means that if rates go up the value of
fund goes down.
Balanced Funds
Objective of these funds is to provide a "balanced" mixture of safety, income, and
capital appreciation. The strategy of balanced funds is to invest in a combination
of fixed-income and equities. A typical balanced fund might have a weighting of
60% equity and 40% fixed-income. The weighting might also be restricted to a
specified maximum or minimum for each asset class.
Asset Allocation Fund
A similar type of fund is known as an asset allocation fund. Objectives are similar
to those of a balanced fund, but these kinds of funds typically do not have to hold
a specified percentage of any asset class. The portfolio manager is therefore
given freedom to switch the ratio of asset classes as economy moves through
the business cycle.
Stock/Equity Funds
Funds that invest in stock represent the largest category of Mutual Funds.
Generally, investment objective of this class of funds is long-term capital growth
with some income. There are, however, many different types of equity funds
because there are many different types of equities.
The idea is to classify funds based on both the size of the companies invested in
and the investment style of the manager. The term "value" refers to a style of
investing that looks for high quality companies that are out of favor with the
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market. These companies are characterized by low P/E ratios, price-to-book
ratios, and high dividend yields, etc. The opposite of value is growth, which refers
to companies that have had (and are expected to continue to have) strong
growth in earnings, sales, and cash flow, etc. A compromise between value and
growth is "blend," which simply refers to companies that are neither value nor
growth stocks and so are classified as being somewhere in the middle.
Global/International Funds
An international fund (or foreign fund) invests only outside the home country.
Global funds invest anywhere around the world, including the home country.
It's tough to classify these funds as either riskier or safer. On the one hand they
tend to be more volatile and have unique country and/or political risks. But, on
the flip side, they can, as part of a well-balanced portfolio, actually reduce risk by
increasing diversification. Although the world's economies are becoming more
inter-related, it is likely that another economy somewhere is outperforming the
economy of your home country.
Specialty Funds
This classification of mutual funds is more of an all-encompassing "etc. category"
that consists of funds that have proven to be popular but don't necessarily belong
to the categories we've described so far. This type of mutual fund forgoes broad
diversification to concentrate on a certain segment of the economy.
Sector funds are targeted at specific sectors of the economy such as financial,
technology, health, etc. Sector funds are extremely volatile. There is a greater
possibility of big gains, but you have to accept that your sector may tank.
Regional funds make it easier to focus on a specific area of the world. This may
mean focusing on a region (say Latin America) or an individual country (for
example, only Brazil). An advantage of these funds is that they make it easier to
buy stock in foreign countries, which is otherwise difficult and expensive. Just like
for sector funds, you have to accept the high risk of loss, which occurs if the
region goes into a bad recession.
Socially responsible funds (or ethical funds) invest only in companies that meet
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the criteria of certain guidelines or beliefs. Most socially responsible funds don't
invest in industries such as tobacco, alcoholic beverages, weapons, or nuclear
power. The idea is to get a competitive performance while still maintaining a
healthy conscience.
Index Funds
This type of mutual fund replicates the performance of a broad market index such
as the S&P 500 or KSE 100 index. An investor in an index fund figures that most
managers can't beat the market. An index fund merely replicates the market
return and benefits investors in the form of low fees.
3.8 Difference between Open & Close End Mutual Funds
S.No Description Open-end Close-end
1 Size of Capital No upper limit Fixed
2 Unit Prices Based on NAV Based on Market Value
3 Can be purchased from
Its own branches /
authorized distribution
channels
Stock Market
4Redemption
responsibility
Its management is
legally bound to
repurchase its units
from customer
Its management has no
responsibility to repurchase
its units from customer
5Listing at stock
exchangeMay or may not be Compulsory
3.9 Advantages and Disadvantages of Mutual Funds
I. Advantages of Mutual Funds
Mutual Funds make saving and investing simple, accessible, and affordable. The
advantages of Mutual Funds include professional management, diversification,
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variety, liquidity, affordability, convenience, and ease of recordkeeping—as well
as strict government regulation and full disclosure.
II. Professional Management Even under the best of market conditions, it takes an astute, experienced
investor to choose investments correctly, and a further commitment of time to
continually monitor those investments.
With Mutual Funds, experienced professionals manage a portfolio of securities
for you full-time, and decide which securities to buy and sell based on extensive
research. A fund is usually managed by an individual or a team choosing
investments that best match the fund’s objectives. As economic conditions
change, the managers often adjust the mix of the fund’s investments to ensure it
continues to meet the fund’s objectives.
a. Diversification
Successful investors know that diversifying their investments can help
reduce the adverse impact of a single investment. Mutual funds introduce
diversification to investment portfolio automatically by holding a wide
variety of securities. Moreover, since investors pool their assets with those
of other investors, a mutual fund allows them to obtain a more diversified
portfolio than investors would probably be able to comfortably manage on
their own—and at a fraction of the cost. Mutual Funds substantially lower
the investment risk of small investors through diversification in which funds
are spread out into various sectors, companies, securities as well as
entirely different markets. It is always the objectives of a fund manager to
maximize a funds return for a given level of risk; however the dangers of
"over-diversification" are always prevalent which would inevitably lead to a
reduced return on the portfolio.
b. Variety
Within the broad categories of stock, bond, and money market funds,
investors can choose among a variety of investment approaches. Mutual
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Funds are providing small investor access to the whole market, which
individually, would be difficult to achieve.
c. Low Costs
Mutual Funds usually hold dozens or even hundreds of securities like
stocks and bonds. The primary way you pay for this service is through a
fee that is based on the total value of your account. Because fund industry
consists of hundreds of competing firms and thousands of funds, the
actual level of fees can vary. But for most investors, mutual funds provide
professional management and diversification at a fraction of the cost of
making such investments independently.
d. Liquidity
Liquidity is the ability to readily access investor’s money in an investment.
Mutual fund shares are liquid investments that can be sold on any
business day. Mutual funds are required by law to buy, or redeem, shares
each business day.
Mutual Funds mobilize the saving of small investors and channel them into
lucrative investment opportunities. As a result, mutual funds add liquidity
to the market. The price per share at which you can redeem shares is
known as the fund’s Net Asset Value (NAV). NAV is the current market
value of all the fund’s assets, minus liabilities, divided by the total number
of outstanding shares.
e. Convenience
Investors can purchase or sell fund shares directly from a fund or through
a broker, financial planner, bank or insurance agent, by mail, over the
telephone, and increasingly by personal computer. Investor’s can also
arrange for automatic reinvestment or periodic distribution of the dividends
and capital gains paid by the fund. Funds may offer a wide variety of other
services, including monthly or quarterly account statements, tax
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information, and 24-hour phone and computer access to fund and account
information.
f. Protecting Investors
Not only are mutual funds subject to exacting internal standards, they are
also highly regulated by the Federal government through the Securities
and Exchange Commission (SEC) of the country. The investors save a
great deal in transaction cost given that he has access to a large number
of securities by purchasing a single share of mutual fund. Investors can
pick and choose a mutual fund to match his particular needs.
III. Disadvantages of Mutual Funds
As such there is no major disadvantage attached to the Mutual Funds. However,
the possible disadvantages could be:
a. Economic and Business Conditions:
As the business and economic conditions do not remain constant, Mutual
Fund may face some difficulties in future.
Especially if the manager does not shuffle the investment portfolio with the
passage of time, or some other major unforeseen disaster/event changes
the investment scenario.
b. Portfolio Managed by Managers:
Portfolio of a mutual fund is managed by portfolio managers due to which,
the investors have no say in the affairs of a mutual fund.
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4. MUTUAL FUNDS IN PAKISTAN
4.1 Growth
Mutual Funds were introduced in Pakistan in 1962, with the public offering of
National Investment (Unit) Trust (NIT) which is an open-end mutual fund in the
public sector. This was followed by the establishment of the Investment
Corporation of Pakistan (ICP) in 1966, which subsequently offered a series of
Closed-End Mutual Funds.
a. 1960’s Public Sector Funds Launched
Mutual funds were introduced in Pakistan in 1962, with the public offering of
National Investment Trust (NIT) that is an open-ended mutual fund in the public
sector. NIT remained the only open-ended mutual fund in the country for over 30
years. The Government kept it a virtual monopoly for decades. To guarantee
growth in its portfolio, offer of 25% of every public limited company to NIT was
made mandatory (withdrawn in 1995).
This was followed by the establishment of the Investment Corporation of
Pakistan (ICP) in February 1966, again in public sector, with the additional
mandate to manage closed-end funds. ICP floated 26 funds.
b. 1970-80’s Private Sector Allowed Entry
In 1971, the government cleared the way for entry of private sector in the closed-
end segment but denied the right to float open-ended funds due to the
apprehensions of the regulators that the private sector will not be able to manage
prudently.
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c. 1990’s The Industry Takes Off
Private sector participation in the mutual funds started in early 1990s with setting
up of the first open-ended fund by ABAMCO Limited. However, due to the
prolonged recession of later 1990s, the private sector was also unable to make
any major contribution to the overall performance of the fund industry.
Eleven more closed-end funds were launched during 1994-1996, which was
considered as the bullish period of nineties. The KSE100 Index was at 2,600 in
March 1994, a time during which the market had opened itself to foreign portfolio
investors and capital controls had been relaxed. There was a massive inflow of
foreign liquidity.
The first private sector open-ended fund was launched in 1996. Private sector
fund managers formed the Mutual Funds Association of Pakistan (MUFAP),
which was formed for self regulatory purposes.
4.2 Government Role of Mutual Fund
Until very recently, Mutual Funds were regulated by:
1. Investment Companies and Investment Advisors' Rules, 1971.
(govern closed-end mutual funds)
2. Asset Management Companies Rules, 1994. (govern open-ended
mutual funds)
These rules however were only for private sector operated mutual funds and
were not applicable to NIT and ICP mutual funds.
Now these funds will be governed by The Non Banking Finance Companies
(NBFC) Rules, 2007.
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Potential of Mutual Fund Industries in Pakistan
Investment advisors (in case of closed end fund) / Asset Management Company
(for open end schemes) will be regulated by the Securities and Exchange
Commission of Pakistan (SECP).
Investment Advisor of a closed end scheme will have to hold a minimum of 10%
shares of the closed end fund (up to a maximum of 20%). The Investment
Advisor can charge a maximum of 3% p.a. of NAV as management fee in the first
five years of the fund’s existence. Thereafter, a fee of 2% of NAV can be charged
for managing the funds.
4.3 Causes of Slow Growth of Mutual Funds
Mutual funds have not, until recently, received adequate attention from the
government.
Citing reasons for slow growth of mutual funds in Pakistan were:
Poor Govt. policies
Lack of awareness
Controlled public sector
High interest rates
Low literacy and low savings
Absence of proper marketing
For most part in the past, private sector mutual funds did bad, due to their poor
entry points. They accumulated expensive portfolios just at the end of the stock
boom of 1993. Moreover, in most of the private sector mutual funds, professional
expertise in equity research and portfolio management was generally lacking,
resulting in low quality portfolio compositions. These funds were known to have
taken huge stakes in such laggards as the textile, spinning and modaraba
sectors.
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Another reason is that people of Pakistan are not quite aware of the concept of
mutual fund except for the people living in metropolitan cities like Karachi,
Lahore, Islamabad and others but the rest of the country is not much aware of
the functions and availability of mutual funds.
Mutual fund industry was prevented from playing a full role in the capital market
by constraints such as tax anomalies, a predominance of the public sector and
regulatory weaknesses3.
Inadequate surveillance by SECP, and weak implementation of policy reforms
also hinder the growth of mutual fund industry since its inception.
One of the biggest reasons for the slow growth of Mutual Funds in Pakistan is on
the part of asset management companies to work out the best way of distribution.
Most of the bigger fund management companies hooked up with banks to sell
their products but were unable to make much headway since banker’s feared
attrition in their own deposits.
The other reason is that non-existent marketing made these funds a failure as
Mutual Funds don’t have any brand recognition nationwide. The management of
Mutual Funds failed to recognize that to increase the sales of these Funds in
Pakistan what needed the most is marketing not the performance alone.
Despite plans to step up on marketing, funds also faced a problem of severely
limited supply of investment professionals.
Then, fund managers also faced constraint of limited investment options. The
Fund managers said that collecting money is easy but then where to invest it is
very difficult in Pakistani market as Real estate is not allowed, commodities are
not allowed and there are no rules for private equity funds.
3 ADP loans to Pakistan to Reform Capital markethttp://www.adp.org/Documents/News/1997/nr1997116.asp
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Although the government is working on new laws and permissions but fund
managers say that the pace of the work is slow.
Another reason because of which individual investors are reluctant to put their
money in Mutual Funds is the frauds that different cooperative societies did in the
past. Like in the early 1990s the Alliance Motors and other sponsors of phony
finance companies which received very large funds from the people promising to
multiply them and then vanished.
Even the Taj Book Company, printers of the Holy Quran and other religious
books, joined in this race and received very large funds. People who placed their
money at its disposal thought the printers of holy books would not cheat them.
But the management of the Taj Book Company indulged in excessive
speculation.
In the Punjab it was the cooperative societies alone which went for such
speculation and swindling of funds.
These fraudulent activities by some of the private sector companies make the
individual investors reluctant to put their money in private sector companies thus
preferred government savings schemes.
4.4 Reasons for Failure
The Annual Report 2008 of the Securities and Exchange Commission of
Pakistan (SECP) noted that the mutual funds industry, in its initial years had
failed to take off in the initial years due to4
Frequent changes in the economic policies
High rates on alternative investments such as NSS
Limited Investment Options
Profusion of risk free Government Securities
Lack of awareness of collective investment schemes
4 Dilawar Hussain, Small investors route to equity investment: Mutual Funds, 22nd August, 2009 Http://www.dawn.com/2009/08/22/ebr9.htm
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Low savings rate, profusion of risk-free investment options in the
government securities
4.5 Present Scenario
An interesting observation about Mutual funds in Pakistan is that in both bull and
the bear market, these tend to run ahead of other stocks. Like in the recent stock
market crash in March 2009 when there was a 33% drop in the stock market one
of the leading Mutual Funds i.e. of Arif Habib dropped by only 14%.
In the last two years, the Mutual Funds sector has more than tripled in size to
Rs112 billion in assets under management (as of December 31, 2009) and the
number of funds operating has jumped from just a handful to 33 with many more
in the pipeline.
The bulk of this growth has come from weighty investments made by a few giant
financial institutions, not a smattering of savings from thousands of doctors,
shop-keepers and barbers that is actually the stuff of mutual funds. Performance
of mutual funds industry during financial year 2008 had shown significant
improvement over the previous years.
In Pakistan, even the biggest private-sector funds have not been able to entice
more than 5,000 individuals, less than 0.003 per cent of the population so this
couldn’t be called a great success. In fact it is only in the last two years that
mutual funds have wrested control of a place of honor in the financial sector of
Pakistan.
The past three years have seen the revival of the mutual fund industry in
Pakistan. The net assets of the industry have improved from Rs.25 billion in 2001
to Rs.124 billion as of March 31, 2010
According to the April 2010 market report by the stock brokerage firm, Taurus
Securities, the mutual funds listed on the Karachi Stock Exchange were trading
on price-to-earnings ratio of attractive 3 times, which was the lowest among the
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34 sectors on the KSE. This was in spite of the fact that mutual funds produced
return on equity (ROE) of 51.85 per cent, which was the highest except for the
food & personal care sector's ROE at 64.92 per cent. The listed capital of all
closed-end funds combined stood at Rs12, 376 million with the aggregate market
capitalization at Rs18 billion.
Besides the equity investment, in recent years, several kinds of funds have
sprouted, such as income funds, growth funds; Islamic funds and money market
funds. All these funds offer the small saver variety of choice to invest according
to his inclination.
4.6 Present and Past
In Pakistan, even the biggest private-sector funds have not been able to entice
more than 5,000 individuals, less than 0.003 per cent of the population. In fact it
is only in the last two years that mutual funds have wrested control of a place of
honor in the financial sector.
Until the nineties, the sector was made up of just two state-run asset
management companies, NIT and ICP. At the time, a series of closed-end funds
were established but most languished below par value, a result of poor
management and a slack stock market. It was only in 1996 that the sector began
to creep back to life with the establishment of ABAMCO, an asset management
company in the private sector. Since then, NIT also underwent extensive reform
by bringing on investment professionals and switching to a system of market-
based quotations.
The mutual fund industry in Pakistan has taken off at a dramatically rapid pace
and the growth potential is enormous.
The MD of Flow stated that the growth of mutual fund industry in Pakistan was
faster than anticipated, due to injection of new equity and the re-direction of
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Provident Funds and gratuity funds from banks and NSS to the higher yielding
mutual funds.
A foundation for the setting up of Institute of Corporate Governance was laid,
when regulators and representatives of major bodies of the private sector agreed
on establishment of such an institute. The proposed institute would be named,
"The Pakistan Institute of Corporate Governance (PICG)5.
5 A statement released by the Securities and Exchange Corporation of Pakistan (SECP)
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5. PERFORMANCE OF MUTUAL FUNDS
5.1 An Overview
Mutual fund industry in our country is still in its growing stages, with only $1.9bn
funds under management. This is only 2 per cent of FY10E GDP. Several mutual
funds were launched last year, and many are still planning to come online.
Various opportunities for investors with a variety of appetites are being made
available. Specific industry risk mutual funds and fixed income mutual funds are
also coming up in the market, providing a set of alternatives to choose from.
Investment in TFCs have also been exempted withholding tax up to the amount
Rs150, 000 which will help attract a little interest towards the TFC market in our
country.
Mutual Funds have registered a remarkable growth in FY09 and their share in
total assets has increased to 22.6 percent, as compared to 14.1 percent in FY07.
This was primarily due to the low interest rates and exceptional performance of
the capital markets in the country. It is quite evident from their performance that
mutual funds are gaining ground as a lucrative investment option by investors.
Performance of NIT- An Example
At one time, the NIT unit price had gone down as low as 6 rupees whereas
presently it’s about 42 rupees and during this period, NIT has declared very
handsome dividends as well. So, during this period the equity investor has
benefited substantially well and that has encouraged the individuals and
institutions to put their money into equity.
The raising of financial resources through equity is very important for the
industrial progress of the country. Pakistan requires more and more investment
in the fund industry for making rapid progress which is the only solution to many
of its problems.
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5.2 Growth in Asset Management Companies
A positive trend as the number of asset management companies has grown from
6 in the year 1994 to 18 in the year 2009 thus showing a 200% increase.
5.3 Mutual Funds - A Comparison with other Investment Avenues
Mutual funds have been able to attract growing number of investors. Compared
to other investment avenues, such as in currency, bank deposits and the slipping
returns on national saving schemes (NSS), small investors have been tempted to
dabble in stocks. Growing number of investors appear to be putting their trust
and money in mutual funds. An indicator that suggests the increasing interest of
investors in the sector is the average daily turnover of closed-end mutual fund,
which had reached 3.1 million shares in 2008, from 1.8 million shares in 2006.
The choice for investors in mutual funds is now widening. There are closed-end
mutual funds, open-ended mutual funds, as well as money market and Islamic
funds. The entry of Crosby Dragon Fund-the first multinational-managed foreign
fund in Pakistan's financial markets early this year has provided new dimensions
to the industry. Chairman Securities and Exchange Commission of Pakistan
Tariq Hassan says that the entry of Crosby Dragon Fund has marked a new
beginning in the development of mutual fund industry in Pakistan.
In both bull and the bear market, mutual funds in Pakistan tend to run ahead of
other stocks. That happened post the 12 per cent drop in the KSE-100 index,
after it had peaked to 4,604 points on September 12, last year. Between
February and September 2008, the market capitalization of the KSE rose by 89
per cent, but that of the mutual fund sector, paced ahead by surging 118 per
cent. And after touching the magical figure of trillion rupees in market
capitalization, when it slipped back by 22 per cent till November 22, the market
capitalization of mutual funds took to their heals faster to the south and lost 42
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per cent6! It is difficult to conclude whether that reflects good or bad upon the
management's of mutual funds in the country.
5.4 Future Prospects
Over the course of next five years it is believed that further privatization, trickle
down impact of macroeconomic stability and revitalization of micro economy
would lead to surge in conversion of efficient SMEs into large corporations
leading to higher market capitalization and the same would be reflected in the
mutual funds sector size as well. In view of the expected GDP growth we expect
further price improvement in the listed stocks from their existing levels. Moreover,
global trend of reliance on mutual funds as an active investment option is also
emerging in the country and that will also add to the expected growth in this
sector. It is believed that over the next five years the total size of Pakistan mutual
funds sector would reach at least PKR 250 billion
6 Dilawar Hussain, Mutual funds getting popular, DAWN/Business, 02 February, 2010 http://www.dawn.com/business
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6. KEY PLAYERS IN THE MARKET
6.1 Key Players
At present a number of closed-end as well as open-end mutual funds are
operating in Pakistan. Among the oldest are NIT and the various funds managed
by Investment Corporation of Pakistan (ICP). The largest number of listed mutual
funds is managed by the ICP. There are some closed-end mutual funds
operating in private sector whereas NIT and ICP operate in public sector. As of
March 31, 2009 there are 35 mutual funds in Pakistan, fourteen open-ended and
21 closed-ended.
Out of these the leading Asset Management Companies includes Arif Habib,
Jahangir Siddiqui's ABAMCO, Dawood's PVCL, Crosby Dragon of Hong Kong
and also the government-sponsored NIT.
a. National Investment Trust
NITL was incorporated as an unquoted public limited company in 1962. The
principal activity of the company is to manage NIT, an open end mutual fund. The
fund is the largest open end mutual fund in Pakistan, with investments in
approximately 435 of the 659 listed Pakistani Companies as at March 31, 2008.
NIT's portfolio has over 96% percent correlation with the Karachi Stock Exchange
All Share Index and is as such the nearest proxy to an Index Fund in Pakistan.
Value of net funds under management is approximately Rs.67 billion (MAR 09).
Gross assets under management are Rs.70 billion approx. The fund has a 97%
weighting in equities and 3% weighting in fixed income securities. NITL’s
objective is to provide its Unit-holders with a balance between their regular
income needs and long term capital appreciation7.
NITL has approximately 53,000 unit holders and 19 branches across Pakistan.
Distribution channels include NBP, SCB, HBL and AEIB (U.A.E) branches.
7 http://www.nit.com.pk
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NIT is Pakistan’s oldest and largest open-ended mutual fund with over 58 per
cent market share of the mutual fund industry with investments in about 500 out
of total 659 Pakistani companies listed in KSE. By Feb 15, 2009 Presently NIT
has over 53,500 unit holders, who collectively hold 1.54 billion NIT units.
Performance of NIT
NIT has emerged as a leader, and out performed the KSE 100 Index on total
return, which is reflected by the financials at the end of June 20098.
The total return on funds for NIT is at 109 per cent while KSE 100 Index
result in over 90 per cent
NIT has achieved year on year appreciation of 89% in its per unit NAV, on
top of 16% dividend yield for the year
The year-end per unit NAV of Rs 20.58 plus per unit dividend of Rs 1.75
paid by the Trust, translates into a total return of 109% as compared to per
unit NAV of Rs 9.89 as at June 30th, 2008
These results have been the best in eight years. The other important facet of
NIT is the investor base, which reflects the participation from all social strata of
the society. This performance has been made possible by a team of dedicated
professionals and prudent portfolio management policies.
NIT is Pakistan’s oldest and largest open-ended mutual fund with over 58
percent market share of Mutual Fund industry with Investments in about 500 out
of total 659 Pakistani companies listed in KSE. The value of the Fund invested in
the Market by NIT at current price is Rs 65 billion that makes it single largest
institutional investor in KSE. Presently NIT has over 53,500 unit holders, who
collectively hold 1.54 billion NIT units.
NIT, for the financial year ending June 30, 2009 has declared the highest
dividend of Rs 3.30 per unit9, which would require a payout of Rs. 4.2 billion to
unit holders. The highest sales of Rs 11 billion, huge redemption of Rs 9 billion
without any delay and hassle and disbursement of over 97 percent of its profits
against the requirement of 90 percent under law, reflected effectiveness of 8 http://www.jang.com.pk/thenews/feb2009-daily/04-02-2009/business/b2.htm9 Pakistan Observer - Newspaper online edition - July 03, 2008.htm
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management and boards of directors. Such impressive results from a public
sector fund are of a great significance.
b. Arif Habib Investments
Arif Habib Investment Management Limited is an asset management and
investment advisory company. It started its business in March 2007, with a
launch of two open end mutual funds (unit trusts), namely the Pakistan Stock
Market Fund (PSM) and the Pakistan Income Fund (PIF), having a core capital of
Rs. 250 million each. A third open end fund was added in November 2007, when
the company formed a strategic alliance with Metropolitan Bank to launch the
Metro Bank – Pakistan Sovereign Fund (MSF), with a core capital of Rs. 250
million. After the successful launch of three open end funds, Arif Habib
Investments acquired the management rights for the closed end KASB Premier
fund, renamed as Pakistan Premier fund, in December 2006. The year 2008
proved to be a phenomenal growth year for the funds under its management,
with record performance in terms of asset growth and yields. Arif Habib
investments started the year 2009 with a launch of a new closed end fund, the
Pakistan Capital Fund (PCM) worth Rs1, 500 million. Overall, the company is
presently managing funds in excess of Rs. 6.7 billion10 in three open-end and two
closed end mutual funds.
Performance of Arif Habib Investments
Pakistan Income Fund (PIF) of the Arif Habib Investments (AHI) has yielded a
total return of 13.71% in one year11. The funds have a strong correlation with
KSE 100 Index however out performing it for the most part.
10 Annual Report June 200911 http://news@accountancy.com.pk> Arif Habib Investments yields 13.7% return
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Figure 10: Performance of PSM vs. KSE 100 Index
c. ABAMCO LIMITED
ABAMCO Limited is the first and the largest asset management company in
Pakistan’s private sector. The Company was formed in 1995 as a joint venture
between the International Finance Corporation (a member of the World Bank
Group), AMVESCAP, the largest fund manager in Europe, and Jahangir Siddiqui
& Co. It currently manages approximately Rs 17 billion in investments on behalf
of hundreds of institutions and thousands of individuals12.
ABAMCO has a proven history of pioneering in the investment industry. In 1997,
ABAMCO's flagship fund, UTP, was the first private sector open end mutual fund
to be launched in Pakistan. Since inception, UTP has had an average annualized
return of approximately 25 percent. Launched in 2007, UTP-Islamic Fund was
the first Shariah-compliant mutual fund in the country and has posted returns of
approximately 23 percent annually since inception13.
12 http://www.js.com.pk13 http://www.js.com.pk
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Performance of ABAMCO
ABAMCO Composite Fund was a unique fund in Pakistan's closed end fund
history. Launched in May, 2009, it had the largest ever paid up capital of Rs 3
billion and received the largest amount of foreign institutional investment, $5
million from IFC. Based on its market value, this fund has declared an interim
dividend in excess of 18 percent on annualized basis in February 2008.
ABAMCO Limited announced a staggering sum of Rs1.02 billion in cash
dividends for certificate holders in its closed-end mutual funds. This is the highest
dividend pay out by any private sector mutual funds in Pakistan14.
6.2 Comparison of NIT with other Funds
The Graph shows investment comparison on total return basis among various
funds i.e. UTP, NIT, PSM, PIF, KSE 100 Index and T-Bills. The best performer
among all is NIT, which also shows a correlation with KSE 100 Index and PSM.
Although funds like PSM claim that they outperformed KSE 100 index but actual
data shows a different picture. The performance of PIF is a bit similar to that of T-
Bills rate. The UTP fund, which is oldest in private sector, is showing a poor
performance.
The performance of these funds can only become up to the mark if fair value of
financial instruments is properly calculated, all risks like market risk, interest rate
risk, credit risk, liquidity risk etc. should be identified, monitored and properly
managed. Professional fund management staff and proper checks and balances
by SECP are required.
14 Stated by ABAMCO chairman, Air Cdr.(Rtd) Munawar Siddiqui, 15th February, 2009, www.dailytimes.com.pk
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% Change since 11/03/02 Balanced Funds: % Change since
11/03/2007
Annualized Returns
31 Aug, 2009
PSM 385.49 %
NIT 362.61 % Balanced Portfolio 185.91 % PIF 11.41 %
KSE 315.34 % UTP 128.14 % T-Bills 2.47 %
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Change since July 2008 to 31 Aug 2009 Annualized Return since July 2008 to 31
Aug 2009
PSM 164.93 % PSM 75.47 %
NIT 122.69 % NIT 55.54 %
UTP 45.73 % UTP 21.51 %
KSE - 100 126.14 % KSE -100 57.60 %
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The above graph15 gives a very clear picture of investment comparison between
NIT and KSE 100 Index and it is very clear that NIT has out performed KSE 100
index since 2008 and has maintained its best performance against all other fund
managed companies. Some other funds also claim to out perform KSE 100 Index
because of their proactive measures but the real picture is not that. Some asset
management companies take undue advantage of customer less knowledge and
unawareness about the performance of stock market so the need is to make
people fully aware about their investment decision and strict monitoring of the
actual performance of their funds.
15 Graph provided by Zahirrudin khan, Area Supervisor, Arif Habib Investment Management Limited.
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Analysis of Funds through Ratio’s
In order to analyze how different Mutual Funds are performing in Pakistan as
compared to the market index a thorough study of their performance is required.
For this purpose different calculations are done for the funds that are trading at
the discount to their NAVs and are rated “safe investment16” by SC Securities.
Total Return for a period of 8 months 22.859
Standard deviation of KSE 100 Index 8.244
CLOSE END MUTUAL FUNDS
Pakistan Premier Fund
Total Return for a period of 8 months (TRp) 14.172
Standard deviation of Pakistan Premier fund (SDp) 5.330
Beta of Portfolio (βp) 0.3193
Correlation 0.533
Risk Free Rate of Return (RF) 8%
RVAR (Sharpe's Measure) (TRp-RF)/SDp 1.133
RVOL (Treynor Measure) (TRp-RF)/βp 22.457
Jenesen's Alpha α (Rp-RF)-[βp(Rm-RF)] 2.432
16 http://www.scsecurities.net
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PPF KSE 100 Index
Monthly Returns Monthly Returns
3.7445 7.4938
5.2718 20.2640
-9.1639 -6.5432
-2.9197 -5.4792
3.8872 0.3885
5.4516 5.1334
7.0808 -3.8270
-2.18074.4286
Figure 11: Correlation between KSE 100 Index & PPF
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Pakistan Capital Market Fund
PAKISTAN CAPITAL MARKET FUNDMonths Opening Closing % Return
Jan 3/1/2009 9.2 31/01/09 9.8 4.882
Feb 1/2/2009 9.8 28/02/09 11.95 9.648
Mar 1/3/2009 11.95 31/03/09 8.85 -16.573
Apr 1/4/2009 8.85 29/04/09 11.40 14.736
May 2/5/2009 11.40 31/09/09 11.00 -3.509
Jun 1/6/2009 11.00 30/06/09 11.95 7.636
Jul 1/7/2009 11.95 29/07/09 12.70 5.276
Aug 1/8/2009 12.70 26/08/09 13.10 3.150
Total Return 28.247
Standard deviation of PCM fund 9.238
Beta of Portfolio 0.3766
Correlation 0.389
Risk Free Rate of Return RF 8%
RVAR (Sharpe's Measure) (TRp-RF)/SDp 2.075
RVOL (Treynor Measure) (TRp-RF)/βp 55.421
Jenesen's Alpha α (Rp-RF)-[βp(Rm-RF)] 14.65
PCM KSE 100 INDEX
Monthly Returns Monthly Returns4.882 7.494
9.648 20.264
-16.573 -6.543
14.736 -5.479
-3.509 0.389
7.636 5.133
5.276 -3.827
3.150 4.429
Figure 12: Correlation between PCM & KSE 100 Index
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OPEN END MUTUAL FUNDS
Pakistan Stock Market Fund
KSE 100 INDEX
Months Opening Closing % Return
Jul-03 1/7/2008 3432.55 31/07/2008 3,933.37 13.590
Aug-03 1/8/2008 4,018.61 29/08/2008 4,461.47 9.993
Sep-03 1/9/2008 4,523.52 30/09/2008 4,026.34 -9.969
Oct-03 1/10/2008 4,066.82 31/10/2008 3,781.03 -6.090
Nov-03 3/11/2008 3,793.82 25/11/2008 4,067.29 6.235
Dec-03 2/12/2008 4,308.45 31/12/2008 4,473.85 3.911
Jan-04 1/1/2009 4,473.57 30/01/2009 4,841.59 7.227
Feb-04 6/2/2009 4,887.68 27/02/2009 4,838.59 -1.004
Mar-04 3/3/2009 4,852.46 31/03/2009 5,105.87 4.243
Apr-04 1/4/2009 5,141.03 30/04/2009 5,430.72 4.635
May-04 4/5/2009 5,524.54 31/09/2009 5,497.49 -0.490
Jun-08 1/6/2009 5,453.74 30/06/2009 5,280.96 -3.168
Total Return of KSE 100 Index for 1 year 33.152
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MonthsMonthly Returns
of PSM
Jul-08 15.4
Aug-08 13.68
Sep-08 -3.33
Oct-08 -4.45
Nov-08 6.39
Dec-08 7.89
Jan-09 5.46
Feb-09 -1.95
Mar-09 5
Apr-09 4.99
May-09 1.18
Jun-09 -2.25
Total Returns (yearly including dividend) 62.26
Standard deviation of PSM 6.097
Beta of Portfolio 0.8199
Correlation 0.945
Risk Free Rate of Return RF 8%
RVAR (Sharpe's Measure) (TRp-RF)/SDp 6.646
RVOL (Treynor Measure) (TRp-RF)/βp 65.180
Jenesen's Alpha α (Rp-RF)-[βp(Rm-RF)] 33.368
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Correalation Between PSM & KSE 100 INDEX
-20
-10
0
10
20
30
40
1 2 3 4 5 6 7 8 9 10 11 12
Months
Mon
thly
Ret
urns KSE 100 INDEX
Monthly ReturnsPSM MonthlyReturns
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PSM KSE 100 INDEXMonthly Returns Monthly Returns
15.4 13.590
13.68 9.993
-3.33 -9.969
-4.45 -6.090
6.39 6.235
7.89 3.911
5.46 7.227
-1.95 -1.004
5 4.243
4.99 4.635
1.18 -0.490
-2.25 -3.168
Potential of Mutual Fund Industries in Pakistan
ABAMCO Stock Fund
KSE 100 INDEXMonths Opening Closing % Return
Jan 3/1/2009 6220.28 31/01/09 6747.62 7.494Feb 1/2/2009 6868.29 28/02/09 8261.28 20.264Mar 1/3/2009 8403.49 31/03/09 7,770.52 -6.543Apr 1/4/2009 7,595.87 29/04/09 7,103.65 -5.479May 2/5/2009 6,833.60 31/09/09 6,860.15 0.389Jun 1/6/2009 7,020.37 30/06/09 7,450.96 5.133Jul 1/7/2009 7,463.60 29/07/09 7,177.93 -3.827Aug 1/8/2009 7,194.10 26/08/09 7,584.69 4.429
Total Return 22.859
Standard deviation of KSE 100 Index 8.244
ABAMCO STOCK FUND
Months Opening Closing % Return
Jan 3/1/2009 11.8 31/01/09 12 1.695
Feb 1/2/2009 12 28/02/09 13.2 9.000
Mar 1/3/2009 13.2 31/03/09 11.50 -12.879
Apr 1/4/2009 11.50 29/04/09 8.50 -16.391
May 2/5/2009 8.50 31/09/09 8.75 2.632
Jun 1/6/2009 8.75 30/06/09 8.95 2.091
Jul 1/7/2009 8.95 29/07/09 11.25 13.065
Aug 1/8/2009 11.25 26/08/09 9.40 -6.556
Total Return -7.383
Standard deviation of ABAMCO stock fund 9.699
Beta of Portfolio 0.5462
Correlation 0.5393
Risk Free Rate of Return RF 8%
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RVAR (Sharpe's Measure) (TRp-RF)/SDp -1.531
RVOL (Treynor Measure) (TRp-RF)/βp -28.996
Jenesen's Alpha α ((Rp-RF)-(βp(Rm-RF))) -23.498
ABAMCO Stock Fund KSE 100 Index
Monthly Returns Monthly Returns
1.6949 7.4938
9.0000 20.2640
-12.8788 -6.5432
-16.3913 -5.4792
2.6316 0.3885
2.0913 5.1334
13.0653 -3.8270
-6.5556 4.4286
Correlation Betw een KSE 100 Index & ABAMCO Stock Fund
-30.0000-20.0000-10.0000
0.000010.000020.000030.000040.0000
1 2 3 4 5 6 7 8
Months from Jan-05 to Aug-05
Mon
thly
Ret
urns
KSE 100 IndexMonthly Returns
ABAMCO StockFund MonthlyReturns
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Table 7: Calculations of Beta, RVAR, RVOL & Jensen’s Alpha
Mutual FundStd.
DeviationBeta RVAR RVOL
Jensen’s
Alpha
ABAMCO Stock Fund 9.699 0.5462 -1.531 -28.996 -23.498
Pakistan Premier Fund 5.330 0.3193 1.133 22.457 2.432
Pakistan Capital Market
Fund9.238 0.3766 2.075 55.421 14.65
Pakistan Stock Market
Fund6.097 0.8199 6.646 65.180 33.368
6.3 Results Analysis
As we know that Beta is a relative measure of systematic risk. Here betas are
calculated using monthly returns of stocks. Thus beta shows how risky the stock
is as compared to market. All the above four funds are taking less risk than the
market as their beta comes out less than one.
Sharpe’s Measure (RVAR) is calculated to measure the excess return per unit of
standard deviation. The higher the RVAR and RVOL, the better the portfolio
performance is. Therefore in this case Pakistan Stock Market Fund is best
performing stock among all as its RVAR is 6.646 and Treynor Measure (RVOL) is
65.18 which are much higher than the rest. ABAMCO Stock Fund is the worst
performing stock for this time period.
Also the Jensen’s Alpha of Pakistan Stock Market Fund is significantly positive;
this is evidence of its superior performance as compared to ABAMCO Stock
Fund which is significantly negative.
6.4 Government Policy
From this we can conclude that in Pakistan the Mutual Funds are not taking more
risk. These funds only take risk less than the market risk thus obviously they will
show less returns. This means these funds are not following the theory of more
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risk, more returns. As these funds provide only limited amount of returns to their
investors thus these are not gaining success in the eyes of millions of individual
investors in the country.
The need is to start a wide range of funds for different kinds of investors with
different kind of investment objectives. This way full benefit out of professional
management can be taken. The asset management companies should introduce
funds that are for risk taker investor and thus the management should take more
calculated risk than the market and try to outperform the market returns by its
professional and forecasted expertise.
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7. COMPARISON WITH OTHER MARKETS
7.1 Worldwide Market – An Overview
Over the past few decades, there has been explosion of the mutual fund industry
both in the U.S. and elsewhere. This industry is considered as the most
successful financial innovations in the past decade.
The Mutual fund industry in aggregate holds assets worth $11.7 trillion or 13.8%
of primary securities globally. In some countries, the industry is over a century
old, but in others, it is a more recent innovation.
The fund industries in Luxembourg and Ireland are at the top by holding assets
that are 484% and 82% of their country’s primary assets
At the end of 2008, the worldwide mutual fund industry held $13.0 trillion in
assets. This includes $ 6.4 trillion in the US fund market, and 5.5 trillion in 38
other reporting nations. The countries with the largest fraction of the industry
were the U.S. (60 percent), Luxembourg (5.5 percent), France (5.1 percent), Italy
(3.1 percent) and Japan (2.9 percent).
Figure 15: Worldwide share of mutual fund industry
Share of MF Industry Worldwide
US60%France
6%
Italy3%
J apan3%
Luxembourg7%
Other Countries21%
The mutual fund industry shows signs of continued growth. Over the period from
1996 to 2008, the ratio of fund industry size to GDP increased by 6.9 percentage
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points on average (median = 4.1 percentage points). Not all countries’ fund
industries have grown at the same rate, with the slowest growth over this period
being -0.9 percentage points (Japan) and the fastest being 25.6 percentage
points (South Korea).
57 percent of worldwide mutual fund assets, or $7.0 trillion, are held in nations in
the Americas, with U.S. assets composing 93 percent of the total for the region.
Approximately $555 billion are held by mutual fund markets in Argentina, Brazil,
Canada, Chile, Costa Rica, and Mexico. Europe, if considered as one unified
market, would represent $3.6 trillion, or 33 percent of the total worldwide mutual
fund assets as of year-end 2007. France and Luxembourg, with fund assets of
$1.1 trillion each, constituted the second and third largest mutual fund markets in
the world and the largest in Europe. Investors in the Asia/Pacific and Africa
regions held 10 percent of worldwide mutual fund assets. Australia and Japan,
with fund assets of $518 billion and $349 billion, respectively, were the largest
Asia/Pacific and Africa mutual fund markets and among the top 10 markets
worldwide.
Figure 16: Composition of world wide mutual fund assets
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7.2 Mutual Funds in South Asia
As far as growth of mutual funds in South Asia is concerned there are only two
countries in the region which contribute almost more than 80% of the economic
activity of the region. Over the last five years Indian mutual funds sector has
grown by more than 5% which lead to its current size of USD 22 bn. Out of these
assets 59% were contributed by open-end bond funds, 19% by open-end money
market funds the rest is constituted by equity funds, balanced funds and
government securities.
Mutual Fund Industry in India
The last decade witnessed the maturity of India's financial markets. Since 1991,
every governments of India took major steps in reforming financial sector of the
country.
Assets under management by mutual funds in India have increased from Rs. 250
million to approx. Rs. 1,531 Billion.
Future of Mutual Fund Industry in India
The corpus of Indian mutual fund industry had reached Rs1,50,537 crore in
December 2009, it still had a long way to go as it is still behind the bank deposit
figure of Rs16,22,579 crore. American mutual fund industry’s corpus stood at
three times that of bank deposits and therefore the Indian mutual fund industry
had a long way to go.
The total assets of all scheduled commercial banks by end-DEC 2010 is
estimated at Rs 40,90,000 crore. Banks assets are expected to grow at an
annual composite rate of growth of 13.4% during rest of the decade. In short
term, mutual fund assets could fluctuate but over the period we could see big
jump in industry assets.
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Mutual fund assets have grown with an annual growth rate of 9% over the last 5
years. Going by current annual growth rate, mutual fund assets would be
doubled by year 2010 but considering the growing appetite of retail investors for
investments & booming Indian economy, Indian industry could see bigger jump in
mutual fund assets.
Lessons Learnt from Indian Mf Industry
Indian Mutual Fund industry is developing at a fast pace because of the good
practices and applications of rules and regulations along with the strict imposition
of code of corporate governance. Thus Pakistan MF industry should also look
into the actions, which Indian industry has taken to make the industry grow in
Pakistan. Following are few segments on which India is paying special focus:
India is paying special focus on the participation of retail segment in the
MF industry. They are trying to make mutual fund a part of asset allocation
of common man, so as to achieve the true sense and purpose of mutual
funds.
To channelize the savings from household sector, Indian market is
concentrating on the ‘B’ and ‘C’ class cities, which are growing at a rapid
pace. Today most of the mutual funds are concentrating on ‘A’ class cities
since the cost involved in acquisition of big investors is small. But they
should realize that stability in the fund would come with the presence of
small retail investors.
Mutual funds are trying to penetrate into rural population by taking the
clues from the Indian insurance industry whereby they have separate set
of products for the urban as well as rural sector. The products in the rural
sector are simple and less in number, which are easy for them to
understand.
Now a days number of bank-sponsored mutual funds are established in
India as such funds can enjoy the established faith by the people and thus
it does not have brand equity to build. Further, it gets a readymade
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clientele base of the bank to pitch the sales .It can also get the leads from
the existing clients.
Indian Mutual Funds are trying to remove special advantages, which a
foreign multinational mutual fund has over any other Indian mutual fund
through expertise, proven track record, faith and a global perspective.
SEBI is making special rules and regulations to implement these in their
true sense. It is also focusing on formal research and proper marketing of
innovative products.
Asset management companies have been pressing the market regulator
to allow them to invest in commodity futures, where volumes are picking
up. The industry is also looking forward to invest in equity and debt with
appropriate internal regulations and risk management measures in place.
7.3 Mutual Funds in India & Pakistan – A Comparison
The first mutual fund UTI was set up by the Government of India in 1964, under
the Unit Trust of India Act 1963 where as they were introduced in Pakistan in
1962, almost two years before they were introduced in India, with the public
offering of National Investment Trust (NIT) so Pakistan was ahead of India at that
time but because of lack of proper planning and absence of capital market
reforms it has left far behind Indian industry.
In India UTI mutual funds schemes were the only choices available to investors
until 1987 when public sector banks and insurance companies were permitted to
set up mutual funds. Though the 1988 year saw some new mutual fund
companies, but UTI remained in a monopoly position. Also in Pakistan NIT
remained the only open-ended mutual fund in the country for over 30 years.
The performance of mutual funds in India in the initial phase was not even closer
to satisfactory level. People rarely understood, and of course investing was out of
question. But yes, some 24 million shareholders were accustomed with
guaranteed high returns by the beginning of liberalization of the industry in 1992.
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This good record of UTI became marketing tool for new entrants. The
expectations of investors touched the sky in profitability factor.
In India the 1993 regulations set the stage for the entry of private sector mutual
funds, many of which were set up in collaboration with foreign partners,
contributing to more competition, improvements in product varieties and investor
services, and substantial growth of the industry over the past decade. Total
assets under management by mutual funds increased at an annualized rate of
12% from Rs360.5 billion in April 1992 to Rs1.08 trillion in August 2006.
Figure 21: Assets under management by Mutual Funds in India
360,500
1,080,000
0
200,000
400,000
600,000
800,000
1,000,000
1,200,000
Rs.
in M
illio
n
1992 2002
Years
Assets under management by Mutual Funds in India
In 1993, the Securities and Exchange Board of India (SEBI), the capital market
regulator, formulated the Mutual Funds Regulations, which for the first time
established a comprehensive regulatory framework to govern all mutual funds
except UTI. The regulations required the separation of the sponsor, trustee, and
asset management company (AMC) in a mutual fund, to bring about an arm’s
length relationship for proper checks and balances; introduced disclosure and
reporting requirements; standardized offer documents; and formulated
investment and other rules to govern mutual funds operations.
Private sector participation in the mutual funds started in early 1990s with setting
up of the first open-ended fund by ABAMCO Limited. However, due to the
prolonged recession of later 1990s, the private sector was also unable to make
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any major contribution to the overall performance of the fund industry. The
performance of the mutual fund industry has shown a significant improvement in
the last four years. The net assets went up by approximately 300% from Rs. 25
billion in FY2007 to Rs. 100 billion in FY2008.
Figure 22: Assets under management by Mutual Funds in Pakistan
Assets under management by Mutual Funds in Pakistan
25
10
0
0 20 40 60 80 100 120
2002
2004
Ye
ars
Rs. in Billion
Assets under management by Mutual Funds in Pakistan
The mutual fund industry in Pakistan started picking up steam only within the last
decade despite its 42 year old history. Out of many reasons behind its slow
growth is a lack of planning which has played a negative role since mutual funds
cannot flourish when capital market reforms have not taken place. But Indian
Government has made reforms for the development of capital market and also
implemented these successfully thus show a great rise in this industry.
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Figure 23: Total Assets under Management in India & Pakistan
2,500
1,080,000
0
200,000
400,000
600,000
800,000
1,000,000
1,200,000
Rs
in M
illion
Pakistan India
Total Assets under m anagem ent by Mutual Funds in 2002A Com parison betw een India & Pakistan
Pakistan
India
This graph shows how small the Pakistani mutual fund industry is as compared
to India although mutual funds were started almost at the same time in both
countries.
Although in FY 2009 net assets under management by mutual funds went up to
120 billion but these are still far behind against India’s Rs. 1.08 Trillion assets. A
total of 31 mutual funds boost of record net assets of $1.66 billion in Pakistan,
which is equal to 1.7 per cent of the GDP. But India's 33 mutual funds, offer more
than 400 schemes and their net assets totals $33 billion (4.9 per cent of the
GDP). A private sector local mutual fund market has developed rapidly but is still
dominated by an efficiently-run state-owned National Investment Trust.
REASONS BEHIND THE GROWTH OF MUTUAL FUNDS IN INDIA
Primary drivers behind this growth paradigm witnessed in India are:
Improvement in tax regulation
Establishment and rebalancing of regulatory procedures
Board reforms and lifting of government controls
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In India mutual funds have grown in number and size mainly due to the
keen interest of individual investors— who have realized the advantage on
investing in mutual funds.
Furthermore, capitalizing upon the advantages with reference to IT sector growth
also reflected in deepening and broadening of the financial markets.
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8. PRESENT AND FUTURE CHALLANGES
8.1 Present
Pakistan’s Mutual Fund industry holds a promising future because:
Low interest rate scenario prevailing in the country, investors are greatly
attracted towards equities especially current low returns on National Saving
Schemes (NSS) created an opportunity For Mutual Fund Industry to grow by
attracting more and more investors through better returns.
Mutual Fund industry got an opportunity for growth after Central Bank last
year barred banks to establish separate asset management subsidiaries and
allow them to invest more than 20 % of their equity directly in the Stock
Market.
Mutual funds are popular only in few big cities of the country and huge market
in smaller cities of the country is still untapped. So these funds have an
opportunity to attract those markets.
As recently SBP has given permission to mutual funds to invest abroad this
decision brings in new opportunities for growth of this sector now mutual
funds could initially look towards such countries as Sri Lanka, Bangladesh,
Thailand and Malaysia for making foreign investment there. Later on they can
even move in Chinese, Middle East and North African markets selectively17.
Thus can diversify the risk for their portfolio and can earn better returns. Now
these funds will not solely dependent upon performance of Pakistani market
and stock exchange but also on other foreign markets.
By investing abroad fund managers will be able to bring back returns earned
on it, to home thus paying taxes to the Government.
17 Stated by Nasim Beg, CEO of Arif Habib Investments
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Another opportunity for the mutual fund industry is to establish real estate
investment trusts (REITs). The benefit of REITs will be that property will
become earning assets and small investors would also be able to gain from
the real estate boom. Another benefit of REITs would be that a comparison
will be available between the performance of those mutual funds investing in
stock market and those investing in real estate (REITs). This way the boom in
real estate sector will provide benefit to the individual investors as well.
More recently, mutual funds were allowed exposure in new types of financial
instruments including derivatives and foreign securities, and expand their
activities into such businesses as pension funds, provident funds, and venture
capital funds management.
8.2 Future Challenges
Pakistan’s Mutual Fund industry is facing many challenges to reach on the
successful and prosperous position in the economy:
Since mutual funds are now allowed to make investment abroad a risk of
misuse of the facility that can have a drain on Pakistan’s foreign exchange
reserves, thus SBP has to put safeguards in place. For this purpose a proper
regulatory frame work needs to be developed to safeguard the vested
interests of the investor.
As mutual funds were allowed exposure in new types of financial instruments
thus, regulations and operating standards related to disclosure, valuation,
performance measurement as well as internal control, governance, and risk
management systems need to be expanded to take into account these new
activities. Further, the enforcement and investigative capabilities of the
regulator require strengthening to cope with the increasingly complex financial
transactions and expansion in the scope of mutual funds operations.
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There is a dire need for the reformation of regulatory framework. This will also
ensure more growth in investment. The Mutual fund reforms are essential for
the development of capital market. These should be brought under the
regulation of SECP18.
There is a need to strengthen the legal and judicial structure of the Securities
and Exchange Commission of Pakistan (SECP) aimed at restoring the
investors’ confidence in the capital market.
The challenge is to expand the accessibility to funds and timely monitoring of
these funds is necessary as well.
The level of corporate governance at the listed companies is required to
improve by SECP and it should be fully implemented and followed.
Regulations also need to be properly imposed to gain the confidence of
investors.
18 Habib ur Rehman, chairman and chief Executive ABAMCO
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9. CONCLUSION & RECOMMENDATIONS
9.1 Conclusion
The market is an ever-changing place – new concepts and products are being
introduced continuously. Some products are common in other markets but not as
yet in Pakistan. I have attempted to address the hurdles arises time to time in
mutual fund industry of Pakistan.
The number of mutual funds, their paid-up capital and number of investors in
mutual funds is too small in Pakistan as compared to other countries. This can be
attributed to a number of factors, worst being the GOP policies. NIT in Pakistan
and UTP in India were established around the same time. But the value of
portfolio of UTP India exceeds Rs. 44 million. The portfolio of NIT is too small
compared to that of its Indian counterpart. In Pakistan, even the biggest private-
sector funds have not been able to entice more than 5,000 individuals, less than
0.003 per cent of the population Even if one keeps the population of India and
Pakistan in Mind, the ratio is still dismal.
For Pakistan to attain and sustain economic growth similar to that of the newly
industrialized countries (NICs) and its ASEAN neighbors, it must it must improve
its ability to mobilize investment funds. This means that savings mobilization
should be enhanced.
Mutual funds, however, did not flourish in Pakistan the way it did in other
countries. The development of this industry was stunted because of the absence
of a proper legislative framework.
But the recent years have not only seen the revival of the mutual funds industry
in Pakistan but also the activity has shifted from the public sector to the private
sector with open-ended mutual funds having more attractiveness as compared to
closed end mutual funds.
Now the government and private sector has started giving attention to the
development of the industry. Foremost, the government is now developing a
legislative framework that allows an environment of prudent regulation, balanced
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with adequate flexibility, in order to encourage participants in the industry as well
as promote stability and security.
To bring in growth in the mutual fund industry the present government is paying
attention to the following factors19:
An effective monitoring and regulatory regime
Capital Market Reforms
Higher Corporate earnings
Reduction in interest rates
Entry of more players
A buoyant stock market
The government should also update the amount of minimum paid-up capital
required of investment companies. To encourage management companies to
offer different types of funds that would cater to various kinds of investors and
permitting them to switch from one fund to another at minimal cost, the bill should
allow lower capitalization requirements for subsequent funds managed by
existing management companies, which had already compiled with the minimum
paid-up capital.
In recent past, these funds have launched a number of new products such as
Balanced Funds, Equity Funds, Money Market Funds, and Islamic Funds. Other
innovative products are in the pipeline, which include Annuity Funds, Pension
Funds, Infrastructure Funds, Real Estate Funds, Capital Guarantee Funds,
Offshore Funds, etc.
Furthermore, mutual funds or open ended investment companies should be
allowed to increase their authorized capital stock without requiring them to
subscribe to the increase in authorized capital stock. This is because the whole
idea of mutual funds is to be able to sell the shares to many small investors.
19 10th Asia Oceania Regional Meeting, Manila Philippines, March 7-11,2009
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The present Government is giving full support to the Mutual Fund industry,
particularly the management of funds for the pensioners.
Real key to success for the mutual funds in Pakistan will be that how effectively
these funds market and distribute/sale itself to individual customers because this
is what lacks in the industry from the very beginning.
Moreover, global trend of reliance on mutual funds as an active investment
option is also emerging in the country and that will also add to the expected
growth in this sector. It is believed that over the next five years the total size of
Pakistan mutual funds sector would reach at least PKR 250 billion.
Development of a vibrant mutual funds industry is essential for a country like
Pakistan, where the savings rate and the number of equity investors is low as
compared to other countries in the region. Thus present situation and
Government policies are very favorable for the growth of this industry. If
Government will take more steps to improve this industry it will soon become a
lucrative market for investors. All the indicators are very positive and hopeful.
9.2 Recommendations
After analyzing the existing situation of mutual funds market in Pakistan I want to
present recommendations on Internal Factors as well as on External factors.
Internal Factors
1) Scrutiny of Fund managers
Credentials of fund managers need to be scrutinized to ensure smooth and
transparent flow and process of investment.
2) Reforms in Regulatory framework
There is a dire need for the reformation of regulatory framework. This will
also ensure more growth in investment. The Mutual fund reforms are
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essential for the development of capital market. These should be brought
under the regulation of SECP20.
3) Proper Marketing
The exposure of individuals to mutual funds should increase to other smaller
cities of Pakistan. Thus there is a need to have a trained manpower to do
the marketing for the Mutual Funds. To make the distribution network of
funds more broad the asset management companies can use third party
distributor to sell the funds.
4) Innovative Products
Mutual fund industry should come up with new innovative products to attract
the investors. The industry should also bring in the concept of specialized
funds and it should focus on the development, mobilization of income,
commodity, real estate, provident, pension and prudential funds. The mutual
fund companies should make different personalized products for investors
with different risk appetites and investment objectives. For Example if we
look globally we can see that very specialized funds can meet the specific
investor needs such as education, marriage, house mortgage funds etc.
5) Strengthen the structure of SECP
The Government of Pakistan should strengthen the legal and judicial
structure of the Securities and Exchange Commission of Pakistan (SECP)
aimed at restoring the investors’ confidence in the capital market.
6) Accountability of Directors
Directors of closed end funds made accountable. Effective monitoring of
these funds must be initiated. Analyzing the monthly statements of Profit
and Loss, investments in listed and unlisted securities and brokerage
commissions could be a good monitoring tool. Also auditors must be made
20 Habib ur Rehman, chairman and chief Executive ABAMCO
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separate for the fund and its manager. The will result in more transparent
function of the fund.
External Factors
1) Government policies
Government of Pakistan should allow establishment of more and more
open-end funds to ensure greater liquidity for the capital market. As it is
seen that companies now are prefer to mobilize funds through debt
instruments rather than borrowing from financial institutions.
2) Corporate Governance
SECP should improve the level of corporate governance at the listed
companies and should make sure that all these are fully implemented and
are followed. Regulations should be properly imposed. This step will help to
boost investor’s confidence in equities market and make this market more
efficient and attractive.
3) Breaking the monopoly
To encourage investments from the general public government’s national
savings schemes should be discouraged and banking sector monopoly of
deposit should go out. The private sector can replace the said instruments
by developing mutual funds.
4) Elimination of systematic Risk
Government must rationalize rate of interest and systematic risk must also
be eliminated from the stock market by virtue of reforms introduced by
SECP.
5) Education and Information
There must be proper arrangement for the education of investors. There
must be no hurdles in information flow. More access to information with
accuracy will ensure more success to investors.
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6) Accessibility and Timely monitoring
There must be expansion in accessibility to funds and timely monitoring of
these funds is necessary as well.
7) Teaming of Mutual funds and SECP
The problem is Mutual Funds and institutions have all teamed in a way that
they come together for buying of shares and leave market together, which
increases speculative activity in the market. Investors follow them and in the
process get affected. They sell in forms of groups. The Securities and
Exchange Commission should look into these factors.
8) Credit Rating
There must be proper credit rating of funds on the mandatory basis, as this
will make the funds perform much better as competition to get a good rating
will rise.
9) Strengthening the Role of Trustees and Fund Managers
Role of trustees and custodians must be strengthened. Qualified
professionals with proven track record must be allowed to function, as Fund
Managers. This will encourage more investment growth in Mutual Fund
industry.
10) General Public Awareness
General public needs to be made aware of the fact that investments in
mutual funds could be really lucrative as compared to normal bank accounts
and they need to broaden their horizons. A normal bank account in days of
extreme interest rates could pay maximum of around 10 percent but a
mutual fund like ABAMCO paid 30% in the year 2008. Hence the difference
is huge and people are missing out on handsome profits by just being afraid
of investments in the managed funds.
11) Banks could form Mutual Funds
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Many international banks like Citibank have their own mutual funds. In this
way banks could benefit in a huge way. Also people will trust it more
because of its established repute and brand name in the market. This way
banks can attract most of their customers to pool their money in their funds
and get handsome amount of money. Thus Government should encourage
credible banks to open their own asset management companies, as this will
increase investments from general public because of their confidence in the
bank.
12) Investing abroad
It should be ascertained that only those allowed, who have out-performed
the KSE index consistently for the last three years should be ensured that
only those should be allowed who have distributed all of their income
earned. That investment should be permitted in only shares not in options
and futures where the element of risk is higher. Investment should be
restricted to listed securities which have not suffered a loss for last three
years and investments can be made only in debt instruments which are of
investment grade i.e. BB rating.
Given the prevailing economic opportunities and investment scenario in Pakistan,
there is no reason why mutual funds cannot show improved performance and
stimulate this key sector of Pakistan’s economy.
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BIBLIOGRAPHY
BOOKS
A Guide to Understanding Mutual Funds published by investment
company institute (ICI) .How mutual fund works by Albert J. Fedman.
Russwilles, Chapter 2 page 34
ICP annual report 2009-2010
Investor Wonders Why He should Buy Mutual Funds by General News
Publication October 26 2008
Mutual Funds Management and Working by Indian author Lalit K
Bansal.
NIT annual report 2008
Research Publication by ICI (Investment Company Institute) Under
Section Research by Publication: “Mutual Fund Book 2008”
SECP Annual Report 2009
Source data provided by SECP, Interview with Mr Channa of
Specialized Company Division
The Morning Star Approach to Investing Wiring into Mutual Fund
Revolution by Andrew Leckey page 35.
ARTICLES
10th Asia Oceania regional meeting Makati Shangri-la hotel, Manila,
Philippines march 7 - 11, 2009
An interview with Furqan Ahmed, Associate, ABAMCO Limited, A
Jahangir Siddiqui Group Company
An interview with Mr. Ahmed Hassan, Area Supervisor, NAFAF
FUNDS Investments Management limited
Article by Azhar Mahmood, SECP drafts rules for real estate trusts:
The News- Jang Group; August 06, 2009
Article by Dilawar Hussain, Mutual funds getting popular: DAWN-
Business; 02 February, 2009
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Potential of Mutual Fund Industries in Pakistan
Article by Dilawar Hussain, Small investors route to equity investment:
Mutual Funds-DAWN-Business;22 August,2009
Article by Mohiuddin Aazim, Mutual Funds can invest abroad: DAWN-
Business; August 14, 2009
Article by Naween A. Mangi, Real estate investment trusts on the
cards: DAWN-Business; June 6, 2009
Article published in DAWN: Mutual funds net asset value up: DAWN-
Business; 25 April,2009
Dilawar Hussain, Mutual funds getting popular, DAWN/Business, 02
February, 2009 http://www.dawn.com/business
http://www.jang.com.pk/thenews/dec2009-daily/16-12-2009/business/
b18.htm
Mutual Fund Association of Pakistan (MUFAP) address to press – THE
DAWN 2008 issue – The investors guide.
News article published in dawn on 24th august 2009,”mutual fund
industry assured of tax benefits.”
WEB LINKS
http://www.nit.com.pk
http://www.scsecurities.net/market_report.asp
http://www.jang.com.pk/thenews/feb2009-daily/04-02-2009/business/
b2.htm
http://www.dawn.com/2009/08/14/ebr6.htm
http://finance.indiamart.com/india_business_information/
mutual_funds_performance.html
http://www.uamcl.com/download/article.pdf
http://www.privatisation.gov.pk/finance/NITL/nit.htm
http://www.arifhabib.com.pk/ahi_home.asp
http://www.sbp.org.pk/publications/FSA-2008/Contents.pdf
http://www.kse.com.pk/kse4/index.html
http://www.ubl.com.pk/investment/key.asp
Institute of Business and Technology Page 74