Capital protected funds: Investor confidence high because downside is covered

UBL Funds CEO says more CPPI-based funds to be introduced.

KARACHI: War is a threat to the established order. Yet most capital market professionals have welcomed the full-size military operation in the hope of a long-lasting resolution to the problem of terrorism.

“The security situation has been the single biggest concern for not only local investors, but also their foreign counterparts,” said UBL Funds CEO Mir Muhammad Ali in an interview with The Express Tribune.

“The major shift in the government’s strategy to root out extremism and militancy is going to have a positive impact on capital markets,” said Ali, who has led the asset management subsidiary of United Bank since 2005.

With the assets under management of Rs53.5 billion, his company is among the top five players of the country’s mutual funds industry with an approximate market share of 13%.



While the Karachi Stock Exchange’s benchmark index has grown 49%, 49% and 27% in the last three years respectively, Ali points out that the new investments – especially foreign direct investment (FDI) – have remained subdued over the same period mainly due to terrorism. In the absence of new investments, it will be difficult for capital markets to grow sustainably in the long run, he said.

From a peak of $5.2 billion in 2007-08, FDI dropped to $1.6 billion in 2013-14.

“Gains in the stock market are always driven by corporate earnings, which have been growing because our economy is mainly cash-based. The informal economy is fuelling a lot of demand in sectors like consumer and agriculture that have remained largely unaffected by terrorism,” he said, noting that eliminating terrorism is essential for bringing new investments in advanced industries.

Last year has been particularly good for UBL Funds, Ali noted, with the company’s assets under management growing by as much as 50%. It currently runs 22 equity, income and money market funds in both conventional and Islamic realms.

Introducing something new

What sets UBL Funds apart from other big asset management companies is its relative success in introducing the concept of capital-protected mutual funds in Pakistan. These mutual funds operate on the Constant Proportion Portfolio Insurance (CPPI) basis, which allows full exposure to equities but ensures that investors’ principal amount remains protected even in the case of a stock market crash.

After setting a floor on the rupee value of an investor’s portfolio, a fund manager uses risky and riskless asset classes to maximise exposure to equities in a bullish market and minimise it in a bearish one.

UBL Funds has launched eight different capital protected funds since 2012, which helped the company raise up to Rs12 billion. “Investors’ confidence is significantly high in such funds because the downside is covered,” said Ali.

The first of its principal protected funds matured in February 2014 after completing its two-year life and earned a compound annualised return of 27.8% per annum.

Following UBL Funds, other large asset management companies, including Al Meezan Investment Management, NBP Fullerton Asset Management and MCB-Arif Habib Savings and Investments, have also launched capital-protected funds.

Ali said he is going to introduce more CPPI-based funds in 2015 and onwards. As opposed to a typical equity fund, Ali said investors are more confident in putting their money in a capital-protected fund. “Investors are attracted to new funds more than they are attracted to existing ones, which is strange. Maybe their perception is that the new fund will be better than the existing one,” he said.

Speaking about stock market prospects in the current year, he said the expectation of higher GDP growth will lead to improved top-lines for businesses.

“Mutual funds investment becomes attractive when fixed income rates are low, thus affecting the equity market positively,” said Ali while referring to the expected cut in the key interest rate during 2015.

Published in The Express Tribune, January 8^th, 2015.

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