Contrary to global trend, equity funds less attractive in Pakistan

Corporate sector – the major player – taps money market funds for liquidity needs.

KARACHI:

In a country whose primary stock market’s benchmark index is currently hovering at a record high after posting return of 49% in the last calendar year, one would expect that stock investments would be the most popular investment avenue in the country.

After all, the share of equity funds in the $26.8 trillion global mutual funds industry was 40% at the end of the last quarter of 2012, which is substantially higher than the asset share of fixed income funds (26%), balanced/mixed funds (12%) or money market funds (18%), according to the International Investments Funds Association (IIFA) – a global representative body of mutual funds.

However, as opposed to the global trend where equity funds attract far more investment than fixed income, balanced and money market funds, the asset share of equity funds in Pakistan’s mutual funds industry was only 18.7% at the end of fiscal year 2012, according to the Mutual Funds Association of Pakistan (MUFAP).

In contrast, money market funds and fixed income funds had far higher asset shares of 39.5% and 23%, respectively.

So why do Pakistani investors act differently than their counterparts in the rest of the world?

Liquidity requirements

“One reason is that the investor base in Pakistan is primarily corporate. The corporate sector generally uses money market funds for its short-term liquidity needs,” MUFAP CEO Mashmooma Zehra Majeed told The Express Tribune in an interview.

“Generally, individuals’ focus is on long-term savings, but only 17% of our investors are individuals. On the other hand, the corporate sector focuses more on liquidity and less on long-term investments,” she added.

Internationally, the number of mutual funds stood at 73,243 at the end of the fourth quarter of 2012, the latest period for which data is available. Going by the type of funds, the data shows 38% of them were equity funds, 23% were balanced/mixed funds, 18% were fixed income funds and 4% were money market funds.

In contrast, out of 244 open- and close-end mutual funds active in Pakistan at the end of fiscal year 2012, 34 were equity funds, which translate into a share of 13.9%. The share of fixed income and money market funds was 15.9% and 8.6%, respectively.

Low risk, high return

Speaking to The Express Tribune, Arif Habib Investments CEO Yasir Qadri said fixed income funds are more popular these days. “Stock funds used to be popular in Pakistan before the stock market crash five years ago. After the crash, money market funds became a favourite of investors. But income funds have been getting popular for the last six months,” he said.

A credit crunch followed the stock market crash, which particularly affected portfolios of fund managers who had invested in corporate bonds or term finance certificates (TFCs), Qadri said.

“That’s basically the money that you had lent to companies. When these companies came under pressure, many of them missed coupon payments. So fund managers had to create provisions for that,” he said, adding some of those companies have now been revived and started making payments.

“Risk exposure is relatively low because the risk is already provided for, and hence the returns of fixed income funds have improved of late,” he added.

Published in The Express Tribune, April 28^th, 2013.

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