Not provisioning for WWF may cause capital erosion
Mutual funds’ negligence may result in increased risk exposure.
KARACHI:
Mutual funds are supposed to offer investors a combination of convenience, competitive returns and low risk. However the ongoing dispute over the Workers’ Welfare Fund (WWF) has opened up a debate on some practices followed by certain asset management companies (AMCs) that have increased risks borne by their investors.
In 2008, an amendment was made to the WWF Ordinance, based on which all mutual funds whose annual income exceeds Rs500,000 were made liable to pay a contribution to the WWF at the rate of two percent of their income. While AMCs have secured a legal opinion against the imposition of this charge, the issue remains unresolved. This has led to varied accounting practices by different AMCs, where some prudent firms are providing for the liability, while others are not.
Out of the 23 AMCs that manage open-end mutual funds in Pakistan, only 12 are providing for the WWF liability in all their funds. These AMCs are AKD, Alfalah, Askari, Atlas, Dawood, Faysal, Habib, HBL, Lakson, NIT, Pak Oman and PICIC. Their prudent approach not only protects investors from any unforeseen capital erosion, but investors also stand to gain if the WWF issue is settled in their favour and AMCs reverse the provisioning.
At the same time, funds that are not providing for the liability manage to post slightly higher returns even if the underlying investments in these funds are similar to those held by prudent funds. However, investors in all such funds stand to lose if the final resolution does not come in their favour, or even if these AMCs decide now to move to a more prudent approach and book retrospective provisioning for WWF. An example of the same was recently observed when one of the AMCs which had so far not provided for the WWF made an ad-hoc decision to book retrospective provisioning expense in all its funds, resulting in capital erosion for the eventual unit holders.
Such capital erosion becomes more pronounced for investors in money market mutual funds, who otherwise perceive the asset class to be highly risk-averse. Any unforeseen loss on their investment with AMCs not providing for WWF is likely to have a long lasting impact on their sentiments.
The writer is a CFA charter holder and graduate of LUMS with experience in the financial services industry
Published in The Express Tribune, June 5th, 2012.
Mutual funds are supposed to offer investors a combination of convenience, competitive returns and low risk. However the ongoing dispute over the Workers’ Welfare Fund (WWF) has opened up a debate on some practices followed by certain asset management companies (AMCs) that have increased risks borne by their investors.
In 2008, an amendment was made to the WWF Ordinance, based on which all mutual funds whose annual income exceeds Rs500,000 were made liable to pay a contribution to the WWF at the rate of two percent of their income. While AMCs have secured a legal opinion against the imposition of this charge, the issue remains unresolved. This has led to varied accounting practices by different AMCs, where some prudent firms are providing for the liability, while others are not.
Out of the 23 AMCs that manage open-end mutual funds in Pakistan, only 12 are providing for the WWF liability in all their funds. These AMCs are AKD, Alfalah, Askari, Atlas, Dawood, Faysal, Habib, HBL, Lakson, NIT, Pak Oman and PICIC. Their prudent approach not only protects investors from any unforeseen capital erosion, but investors also stand to gain if the WWF issue is settled in their favour and AMCs reverse the provisioning.
At the same time, funds that are not providing for the liability manage to post slightly higher returns even if the underlying investments in these funds are similar to those held by prudent funds. However, investors in all such funds stand to lose if the final resolution does not come in their favour, or even if these AMCs decide now to move to a more prudent approach and book retrospective provisioning for WWF. An example of the same was recently observed when one of the AMCs which had so far not provided for the WWF made an ad-hoc decision to book retrospective provisioning expense in all its funds, resulting in capital erosion for the eventual unit holders.
Such capital erosion becomes more pronounced for investors in money market mutual funds, who otherwise perceive the asset class to be highly risk-averse. Any unforeseen loss on their investment with AMCs not providing for WWF is likely to have a long lasting impact on their sentiments.
The writer is a CFA charter holder and graduate of LUMS with experience in the financial services industry
Published in The Express Tribune, June 5th, 2012.