Mutual funds industry stagnating due to low incentives

While the size of the sector has grown, the number of players remains static.

KARACHI:

One of the principles of economic theory teaches that a growing sector of the economy should attract new players. However, despite annualised growth of over 32% in the net assets of open-end mutual funds in Pakistan during the last three years, the number of asset management companies (AMCs) operating in the country has remained flat.

While the net assets of open-end mutual funds increased 32.3% per annum, from Rs153 billion in 2009 to Rs354.3 billion in 2011, the number of AMCs operating in the country has been constant at 27 in the same period. The latest AMC to become a member of the Mutual Funds Association of Pakistan (MUFAP) was Primus Investments, which was set up in March 2012.

“International players are not interested in coming to Pakistan, and most local groups and banks have already set up their AMCs. In fact, we should now expect some consolidation in some of the lower-end mutual funds,” MUFAP CEO Mashmooma Zehra Majeed said while speaking to The Express Tribune in an interview.

One of the reasons for the absence of new players in the country’s mutual funds industry, according to Majeed, is the low operational profits of AMCs. “Operational profits of many AMCs are actually negative. The highest operational profit that any AMC is making in Pakistan is around 0.5%,” she pointed out.

Need for incentives

Between 2003 and 2012, net assets of individuals in open-end funds increased at an annualised rate of 28.2% to Rs58.5 billion; but the number of individual investors’ accounts has risen at a significantly lower rate of 9.9% annually to 130,042 in the same period. “That means that existing investors have brought in bigger amounts. The capacity of AMCs to invest in marketing is limited because of their low operational profitability,” she said, referring to reasons why more investors have not sought this channel more actively.

“AMCs have not spent much on popularising mutual funds. There are very few AMCs that are actively marketing. In particular, very few AMCs are focusing on retail investors, as their emphasis is mostly on corporate clients,” Majeed says.

Majeed suggests that the government should give AMCs incentives to expand their retail presence in second- and third-tier cities of the country by extending tax breaks.

Citing the example of the United States, where retail investors can write cheques that draw from their investments in money market funds, Majeed said the same practice should be adopted in Pakistan. “Money market funds can become an alternative to banks while boosting the size of the mutual funds industry. The State Bank and the Securities and Exchange Commission of Pakistan should allow the practice,” she said.

Anomalies

Calling for a removal of anomalies in the laws governing the sector, Majeed pointed out that investments in the National Investment Trust Limited – a government-owned AMC – are exempt from zakat deductions, while the tax remains applicable on private-sector mutual funds. Similarly, voluntary pension schemes (VPS), which were introduced in 2005, were taxed at the retirement stage until as recently as last year. However, the 2012-13 budget ended that practice, bringing VPS at par with other comparable products. Perhaps this is the reason that VPS never achieved the kind of popularity that AMCs and regulators expected in the beginning: after seven years of their introduction, the number of VPS participants in June 2012 was only 2,812.

Published in The Express Tribune, April 21^st, 2013.

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