Fund managers glad 2015 is over

Banks’ investments in mutual funds decrease, Al Meezan now focuses on getting more retail investors

KARACHI:

If you were a fund manager in 2015, there is a fair chance you weren’t that thrilled on New Year’s Eve.

You’re likely to have disappointed your investors by posting a single-digit return after at least three consecutive years of mind-blowing performance with returns sometimes exceeding 50% annually.



Moreover, growth in the assets under management (AUM) of your company is likely to have slowed down last year, resulting in less-than-anticipated money to jiggle around with during the next 12 months.

According to the Mutual Funds Association of Pakistan (MUFAP), total assets of open-end funds amounted to Rs464.2 billion at the end of October – the latest month for which the industry-wide AUM position is available on the MUFAP website. Compared to the beginning of 2015, AUM grew only about 8.2% in the first 10 months of the year.

Year in review

Given the volatility in the stock market in November and December because of the brokers’ dispute with the regulator and continuous foreign selling, it is safe to assume that the year-on-year increase in the industry-wide AUM in 2015 was substantially lower than the long-term average. MUFAP data shows AUM of open-end funds increased at an average rate of almost 18% per year between 2006 and 2014.



So why are the assets of mutual funds – money that retail and institutional clients give to asset management companies to invest – not growing as fast as they did once?

Speaking to The Express Tribune, Al Meezan Investment Management CEO Muhammad Shoaib said the slowdown in AUM growth is reflective of a fundamental change that is sweeping across the mutual funds industry these days.

“Banks were a major investor until recently. They would invest heavily in mutual funds operated by their subsidiaries as well as those managed by other asset management companies. But that trend seems to be over now,” Shoaib said.

The change in the banks’ policy has nothing to do with the performance of the mutual funds industry though. The banking sector is taking investments out of mutual funds mainly because they do not offer it tax arbitrage anymore.



The government introduced changes in tax rates that banks pay on different sources of income in the last budget. Instead of tax rates ranging from 10% to 25% on different sources like dividends and mutual funds, banks are now required to pay a uniform tax rate of 35% on all sources of banking incomes.



This means banks can longer profit from the gap in tax rates applicable to income originating from different sources.

Similarly, other corporate entities would also invest with asset management companies mainly because income from mutual funds was taxable at 10% as opposed to 32% in case they invested directly in fixed income instruments.

“That tax arbitrage is now gone, prompting an outflow of funds from the asset management industry,” Shoaib said. “My estimate is that the investments pulled out by banks and companies in the last year and a half range between Rs125 billion and Rs150 billion,” said Shoaib, whose company manages nearly Rs70 billion in mutual funds and separately managed accounts (SMAs).

Al Meezan’s year

With a market share of 13.9%, Al Meezan was the largest asset management company following government-owned National Investment Trust (NIT) that controlled a 16.7% share at the end of November 2015.



The AUM share of MCB-Arif Habib Investments, UBL Fund Managers and NBP Fullerton Asset Management (NAFA) at the end of November last year was 11.8%, 11% and 9.5%, respectively. Each of the rest of 16 asset management companies controlled less than 7% share in industry-wide AUM.

MUFAP data confirms that the share of banks and financial institutions has indeed gone down in the assets of mutual funds industry. From 28% on July 31, 2014, the share of AUM belonging to banks and financial institutions decreased to 20% by the end of October last year.

And who filled the banks’ shoes once they decided to curtail their investments in mutual funds? Retail investors, retirement funds and provident funds.

The share of individual investors went up from 24% to 33% over the 15-month period while retirement funds also increased their share from 10% to 14%.

One thing is clear from the latest statistics: banks are no more willing to provide the mutual funds industry with a lifeline.

It is now up to asset management companies to up their game and bring as many retail clients as possible to keep growing the industry size.

“The share of retail investors in Al Meezan’s AUM is 58%, significantly higher than the industry-wide average. Our focus is increasingly on getting more and more retail investors,” Shoaib said.

The writer is a staff correspondent

Published in The Express Tribune, January 4^th, 2016.

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