Fee cuts cause a gush of mutual fund investment
Lahore (Pakistan), Jan 13: The mutual fund industry currently holds Rs692 billion in assets under management (AUM). Shariah-compliant income and money market funds are growing at the fastest rate.
Spectrum Securities Head of Research Abdul Azeem observed: "In November 2019, money market funds posted a healthy return on the rising interest rate scenario while equity funds felt the heat of the meltdown in the stock market due to the economic slowdown".
Mutual Funds Association of Pakistan (Mufap) CEO Mashmooma Zehra Majeed told Dawn that one major reason for the slow growth of the mutual fund industry was the country's low savings and investment rates, which stood at around 15 per cent of GDP - lowest in the world.
She stressed that it was necessary to create awareness about the benefits of mutual funds and that plans were afoot to launch mass-scale campaigns through the media. Ms Majeed said investors could choose from a vast variety of funds, such as equity, money market and income funds and various Shariah-compliant funds.
"Investors put their money in funds keeping in view their short- and long-term goals," she said. The Mufap CEO lamented that at present the AUM of all mutual funds and voluntary pension schemes (VPSs) were just 2pc of Pakistan's GDP. Their volume has remained stagnant around that level for about a decade. The number of investors in mutual funds and VPSs is just 300,000. In contrast, the number of investors in the neighbouring country is a whopping 86.5 million with AUM accounting for 13pc of GDP.
Several fund managers blamed the industry's stunted growth on poor policy measures as mutual funds have traditionally remained low on the priority list of regulators.
The Securities and Exchange Commission of Pakistan (SECP) released a notification on June 28, which proposed the "revised rate of annual fee at 0.02pc of net assets applicable on all categories of collective investment schemes".
The previous average rate of annual fee was 0.08pc, which was much higher than the fee prevalent in other comparable markets.
Mufap is pleased with the development. A letter to the Policy Board of the SECP sent on Jan 9 thanked the regulators for initiating policy reforms in the sector. The high fee was believed to be one of the major impediments to the industry's growth. The fee was three times of what is charged by the Indian regulator.
Pakistan takes pride in having jumped 28 places on the World Bank's Ease of Doing Business Index 2020. The pullback in regulatory fees will, therefore, create ease in doing business for mutual funds.
The Mufap letter jointly signed by its chairperson Maheen Rahman and CEO Ms Majeed lists the salutary benefits that have resulted in the five months in which the new regulatory fee regime has been in operation. "The industry size has grown by 20pc to Rs692bn from Rs578bn; (the) retail investor's investment size has risen by 24pc to Rs248bn from Rs200bn; and the investment in money market and income funds has increased by 32pc and in equity funds by 7pc," it said.
Mufap said the association has already conveyed to the SECP that approximately one-third of the fee reduction (2bps) will be used to fund the awareness programme to promote mutual funds that will also contribute to the widening of capital market investor base.
Enquiries revealed that the reason Mufap had to put its weight behind the SECP Policy Board decision to reduce fees was that a couple of major stockbrokers were up in arms against the reduction. "Although unidentified, they seemed to be stealthily lobbying in Islamabad against the reduction in fees since they saw the expansion in the mutual fund industry as a threat to their business," a fund manager said.
Mutual funds had become a major stumbling block for speculators because their huge share in daily trade can thwart any irrational exuberance or volatility created in the market.
A senior executive at the SECP affirmed that the SECP Policy Board had not overstepped its authority. Section 21 (g) of the SECP Act, 1997 stipulated that it was one of the functions and powers of the board to "specify fees, penalties and other charges chargeable by the commission for carrying out the purposes of this Act".
This person, who asked not to be named, stated that members of the SECP Policy Board are actually ex officio members from the ministries of finance, commerce and law, State Bank and SECP along with persons of eminence from the private sector.
"It is possible that one or more members of the board may have exercised their democratic right to express a different view. But once the decision by the board was made, it was accepted by all in good cheer." The SECP official affirmed that the regulator was not likely to run into losses this year, belying the reports that the vested interests were spreading.
Source: The Dawn