Investors’ Guide Acknowledgements Publisher & Editor-in-Chief Amir A. Ashary Editor Shakil H. Jafri Executive Editor Manzar Naqvi Assistant Editor Mujtaba Baig
Senior Research Analyst Aqeel Abdul Razzak Graphic Designer Adnan Hussain Cover Page Design M. Imran Sharif
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Contents Editorial Higher the pledges Long road to recovery Flood's effect on mutual funds Interview of CEO Al Meezan Investments Shutdowns in mutual fund industry Flood impact on banks Insurance against natural disasters Be aggressive for compliance Performance of Mutual Funds in July10 Funds in Focus in July '10 Performance of KSE100 in July 2010 World stocks in July '10 Levy of CGT MTS delayed, steam denied Shocking facts An audacious launch Sukuks widely eyed in west Commodity Mutual Funds Tough measures in hard times Social aspect of mutual funds Stocks or Real Estate May be your are hedging Become your own advisor Your age and portfolio Baseless BoI Before you regret News Social aspect of mutual funds (Urdu) Hedging (Urdu) Shocking facts (Urdu) Become your own advisor (Urdu) Is it too late (Urdu) Commodity mutual funds (Urdu) Stocks or Real Estate (Urdu) Your age and portfolio (Urdu) Islamic mutual funds (Urdu) Beyond consolidation (Urdu) KSE in July 2010 (Urdu) Mutual Funds in July 10 (Urdu)
September 2010
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Disclaimer
All reports and recommendations have been prepared for your information only. Summary and Analysis are not recommendation to buy or sell. This information should only be used by investors who are aware of the risk inherent in investments. The facts, information, data, indicators and charts presented have been obtained from sources believed to be reliable, but their accuracy and completeness cannot be guaranteed. The Financial Daily International and its employees are not responsible for any loss arising from use of these reports and informations.
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Investors’ Guide Editorial
Record is record
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f Governor of Balochistan Mr Aslam Raisani can say that a degree is degree either it is bogus or genuine then why can't be said that record is record either it is negative or positive. Government made a record recently when it ran its central bank without a full-fledged governor for more than three months that is a maximum length of time under SBP Act to work with an acting governor. Before this, SBP never had an acting governor for such a long time. After flood devastation now it can be defended that due to heavy engagements of government in flood relief activities such an administrative decision does not weigh more importance and status quo is upheld unless the crisis is over. But it has been only one month since we are facing flash floods and prior to this situation, two months lapsed and no decision could be made in this regard. Does it mean our country is professionally bankrupt? Absolutely not; if there is any bankruptcy it must be at the decisionmaking level. Positively, a summary was submitted by the SBP to the government in third week of August reminding the president and prime minister to appoint the full-time governor before Sept 1 and the deadline has already passed on. More surprising is the fact that our economic team successfully acquired a chunk of emergency loan, though not enough to fulfill entire rehabilitation needs, from World Bank and International Monetary Fund without having a permanent governor of central bank. Obviously some other guys might have dominated the entire negotiation process and did not let the multilateral donors to feel the absence of apex bank's chief. Earlier, it was widely being predicted that acting Governor Mr Yaseen Anwer would be regularised for the second top economic post of the country after that of finance minister. However, there are no signs of such move so far. In a quite recent development the name of veteran economist Shahid Kardar was also quoted as possible pick for this job. It is earnestly seen that an appointment would be made on this post very soon and the incumbent would be a competent person whosoever he or she is. Let's hope for the best and pray for the good.
Shakil H. Jafri editor@thefinancialdaily.com
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News Feature
Investors’ Guide
HIGHER THE PLEDGES, FASTER THE RECOVERY Adnan Hussain
C
ynicism stands valid to ask what if country was not facing flood while our economic team was negotiating with IMF in Washington under the capable leadership of Dr Hafeez Sheikh. Would the outcome have been same as it was aroused right now? Absolutely not; which means whatever lenient views of the donor were earned it was not because of negotiation skills of any czar but it is the unfortunate floodaffected people who indirectly helped Pakistan to take some more time to implement the reform agenda. Otherwise, our economic managers might be pleading weak case of economic reforms with several ifs and buts. The IMF Managing Director Dominique Strauss-Kahn promised recently to make $450 million emergency assistance to Pakistan this month after its approval by the IMF Board. However, he shrewdly implied that the response of donors to the flood devastation also depends on the government's ability to deliver in flood-hit areas. If analysed objectively, his words are enough to assess the global image of our leaders particularly when money matters involve. "Our dialogue with Pakistan on the current Stand-By Arrangement is progressing and the authorities have expressed their intention to implement measures for the completion of the fifth review of the programme later this year. We will stay in close contact as these efforts proceed. Completion of the fifth review will allow the Fund to disburse an additional $1.7 billion, bringing total IMF disbursements (including emergency assistance) to $2.2 billion in the second half of 2010," Strauss-Kahn said. Desired breather from IMF has virtually been received when director IMF for the Middle East and Central Asia Masood Ahmed said that given the disaster's impact, some of the parameters of the existing loan
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arrangement may need to be changed because the economic impact of flood is going to be significant. The hinted relaxation on existing loan facility was desperately needed by our economic managers because of poor implementation mechanism for reforms and now it has also been coupled with flood devastation which is enormous enough to convince any creditor for the deferral of conditionalities. The IMF and Pakistan also agreed to hold the fifth review of an existing $11.3 billion loan arrangement in October and IMF had agreed not to attach new performance criteria or benchmarks to the loan programme initially negotiated in 2008. Under a 2008 loan programme with the IMF, Pakistan pledged to implement tax and energy sector reforms, reduce inflation, curb budget deficit and give full autonomy to the State Bank. The IMF says it will continue to support Pakistan's economy under the $11.0 billion loan program that was initially agreed in November 2008.
Finance Minister Dr Hafeez Sheikh told a joint briefing with the IMF chief at the Fund's headquarters that "Pakistan remains committed to the reform efforts that will put public finances on a sustainable basis and lay the foundations for growth." He stressed the fact that that's really new resources and not recycling of an existing loan. The new resources are going to be disbursed probably in the coming weeks; probably before the end of September. And it is hoped that it will be helpful even if, of course, it's not enough, especially when it will be targeted to actions which have to do with the most vulnerable part of the population in Pakistan. A Pakistani delegation, led by Dr Hafeez Shaikh, met with IMF staff and management in Washington during the last week of August to discuss the disaster's implications for the country's budget and longer-term growth targets. Meanwhile, the President of World Bank Robert B Zoellick announced another $100 million in addition to already committed $900 million to finance immediate recovery needs and longer-term reconstruction. The additional $100 million, announced after Mr Zoellick's meeting with Dr Hafeez Sheikh, will be made available during the current fiscal year. "This disaster underscores Pakistan's fiscal vulnerability and dependence on foreign aid. Renewed commitment to governance and fiscal reforms will be important to mobilise domestic revenues and ensure that funds reach the poor people it is intended for," Mr Zoellick said. "We need to respond strongly to the crisis at hand, but we need to do it without losing sight of important economic reforms," said Mr Zoellick while emphasising the need to continue the reforms Pakistan negotiated with the World Bank Group two years ago. In Pakistan business community expressed its dismay on recent financing arrangements with
News Feature
Investors’ Guide multilateral donors for flood relief and termed them adding to the miseries of hapless Pakistanis who would have to ultimately repay this debt through taxes and duties. Many business leaders stressed the need of grants and moratorium on huge loans as the exchequer is not in a position to pay off loans crossed to over $54 billion over the years. Businessmen said this is not the time to further burden the nation with another loan as Pakistan is not in a apposition to pay off enormous loans, which have already piled up due to history's biggest natural catastrophe that has not only displaced over 25 million people but incurred monetary losses to the tune of billions of dollars. However, economists have rejected the proposal of seeking any kind of relaxation or moratorium from global donors because it would eventually downgrade country's sovereign rating which may stop Pakistan to approach international capital markets to raise
The hinted relaxation on existing loan facility was desperately needed by our economic managers because of poor implementation mechanism for reforms and now it has also been coupled with flood devastation which is enormous enough to convince any creditor for the deferral of conditionalities.
the funds. Secondly, after the flood crisis is over no one would realise the justified reason of moratorium but the main action would be remembered and referred in every such decision in future. Therefore, experts said that instead of seeking any amnesty from IMF or World Bank it is wiser to mobilise our own resources to take out country from prevailing crisis. During negotiation with both IMF and World Bank it was confirmed time and again that indirectly reservations were expressed on justified distribution and utilisation of international aid and even IMF chief linked the slow global response with less ability of local leadership to cope with flood crisis. This is an eye opener for our leadership especially those directly related to flood relief. In a press statement some days back Prime Minister Gilani ridiculed the transparency of aid disbursal through non-governmental organisations. However, when global lenders and donors insisted to dole out aid through other than official channels then he had to succumbed to their pressure and recently he hade to announce that eighty per cent aid would be disbursed through NGOs while rest by concerned government departments. It is indeed a blessing in disguise that main contributors in flood aid IMF and World Bank - have been tasked to assess the damages caused by worst natural calamity which would desist malice to wrongly portray the losses just to mint the inflows.
Meanwhile, our leaders should avoid issuing changing figures of losses like once our premier put the economic losses from deluge at close to $43 billion but the other day in National Assembly he revised his estimates to $10 billion. It would reflect our haste to finalise the losses' count and would definitely send a wrong signal to world because quantitative analysis of losses are not made in hurry. Pakistan has received aid commitments of $1014.23 million from various countries and institutions for the flood-affected people till September 2 which means only 10 per cent of total estimated losses have been covered that too by merely pledges while rest of 90 per cent would have to be covered through loans and this task is obviously enormous. The total losses, including those of infrastructure, crops, livestock, bridges, communication and private properties, are being differently portrayed by various agencies and government but there are no two opinions on the fact that their magnitude is astronomical. It is desperately needed that government should start recovery simultaneously by assessing damages on one side and on most crucial side by rallying maximum financial help from the global community. Thereafter, a well-coordinated phase of rehabilitation, reconstruction and recovery may be kicked off. But the most important element of this entire process advocates higher the pledges, faster the recovery.
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Overview
Investors’ Guide
Impact of flood on economy
Long road to recovery Shiraz Ahmed
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ne and a half month ago status quo was the biggest problem for the political economy where bad governance, rampant corruption, security concerns and fragile law and order situation had alerted the critics to come out and call upon the government to either rectify the deviation from right track or quit the power. Government was presuming itself the worst victim of criticism simultaneously by judiciary, media and split opposition. The fearsome issue then was Karachi violence and irksome was the unbridled inflation. All of a sudden a natural calamity has shrouded the one fifth part of the country. Initially it hit the upper part of the country and saner elements realised its protracted gravity from the day one because a person having modicum knowledge of topography does understand that sweet water flows downwards to fall into the sea or ocean. The deluge emanating from mountainous area of Swat crept to reach the Indus delta at Keti Bunder in a month's time wreaking havoc on crops, infrastructure, livestock and above all people living along the right and left banks of the river Indus. Entire global fraternity was on same page to declare this worst ever flood in hundred years severer than Tsunami of 2004, earth quake of 2005 and that of Haiti. United Nations in the very beginning tried to made world realise the high magnitude of the disaster and issued appeal for funds which proved to be a catalyst at the global front and international response began subsequently. Meanwhile, our callous political leadership could not avoid scoring politically and exchanged allegations on sincerity of each other. However, some concerned quarter started viewing the calamity at the backdrop of economic losses and then it was announced to involve global multilateral donors to assess the flood damages and this process is still continu-
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Pakistan's economy grew by 4.1 per cent during the last year and was expected to grow 4.5 per cent during the current fiscal. The damage caused by the floods will bring down the real GDP growth to 2.5 per cent for the FY11. This economic loss will translate into massive job losses and incomes of thousands of families. Consequently it may have serious social implications. ing till the filing of this report. According to initial assessments, the country has suffered Rs350 to Rs500 billion or $4-6 billion worth of damages of infrastructure, livestock and crops. Approximately $200 million would be required for recovery/relief efforts whereas repair cost of key damaged infrastructure could exceed $1 billion. Over 1,645
people have lost their lives while 2,479 are injured to-date. About 1,000 bridges and over 400 kilometers of long roads have been damaged, re-construction of which would cost Rs8 to 9 billion. One-fifth of our irrigation infrastructure, livestock and crops have been destroyed. Pepco has initially estimated an accumulated loss of Rs4 billion to its installations. In most of the areas grid stations, transformers and transmission lines have been damaged. Wapda and Pepco cumulative losses exceed Rs13 billion. The actual figures may be higher once the physical survey is carried out. Out of 968 health facilities assessed, over 517 have been damaged. 10,685 schools are damaged; federalised roads worth Rs6 billion and Railways worth Rs2.9 billion are damaged as well. The floods have inflicted damage to the economy, which may, by some estimates reach $10 billion. While affecting 30 per cent of all agriculture land and more than 10 per cent population of the country, crop destruction, livestock deaths, damaged homes and losses in terms of infrastructure i.e. roads, bridges, energy, irrigation and social structures are massive.
Overview
Investors’ Guide Pakistan's economy grew by 4.1 per cent during the last year and was expected to grow 4.5 per cent during the current fiscal. The damage caused by the floods will bring down the real GDP growth to 2.5 per cent for the FY11. This economic loss will translate into massive job losses and incomes of thousands of families. Consequently it may have serious social implications. Overall performance of agriculture, consequently, will be much lower this year and the year ahead. This loss will have a snowball effect on manufacturing, services and export sectors. Most families face a real risk of income and employment losses. Food security of the country is also under threat. The devastation is likely to affect revenue collection and increase expenditures, which will widen the budget deficit. It will also hit textile and sugar sector, which will in turn affect the balance of payments and external resource stability. Manufacturing may also fall far below the target level of 5.6 per cent. Services sector (including wholesale and retail trade) constituting more than 50 per cent of GDP, is dependent on agriculture, manufacturing, imports, exports and government's current expenditure. The inflation target of 9.5 per cent for FY11 will be missed and it is apprehended that it may hit the range of 15-20 per cent. Inflation in the short term (1-3 months) is likely to spike significantly in the face of shorter supply (due to crop destruction). The inflation will occur in daily use items such as vegetables, spices lentils, fruits, meat and milk products. Medium term inflation (4-8 months) will rise due to spike in prices of wheat, rice and sugar until the next harvest. Shortages and increased demand of construction materials, fertilisers and pesticides will contribute to spikes in non-food inflation. The budget deficit before the food crisis was estimated to reach 4.5 per cent of GDP, now it is estimated to be as much as 6-7 per cent of GDP. The government needs around $3 to $4 billion or Rs300 billion to kickstart the rehabilitation process. It can not depend wholly upon financial help from the international community only which at best would be $1 to $1.5 billion. It has limited options for
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The devastation is likely to affect revenue collection and increase expenditures, which will widen the budget deficit. It will also hit textile and sugar sector, which will in turn affect the balance of payments and external resource stability. creating fiscal space by either borrowing from multilateral institutions or mobilising domestic financial resources by imposing direct taxes on selected items consumed by affluent segments of the society. In either situation, the focus should be on keeping the economic recovery on track. The government will further cut down the expenditure on Public Sector Development Programme (PSDP) by Rs30 billion to bring it down to Rs250 billion from Rs280 billion. There are also discussions of charging a one time 10 per cent 'flood surcharge' on tax liabilities exceeding annual income of Rs300,000 to get additional funds of Rs75 billion. As compared to the $6 billion given by the world to the military government for the 2005 earthquake, the total present pledges so far stand at only $1 billion and the actual money received so far is only $82 million. According to economists, there are three key challenges. First is to pro-
vide quick relief. Second is to repair public infrastructure so that those living in relief camps could return to their places. And third relates to rebuilding and reconstruction of all types and in all areas to rehabilitate flood-affected people and to achieve economic recovery. They said that the real challenge lies in repairing damaged public infrastructure. That is where Pakistan needs tens of billions of rupees within months and that should ideally come in as aid and grants from abroad. But part of it can also be arranged by diverting this year's pro-poor budgetary allocations and by slashing uplift projects. They further said that as for reconstruction of economy and rehabilitation of flood survivors, a $1 billion loan committed by the World Bank and another $2 billion offered by the Asian Development Bank are crucial. But we need to involve our own private sector as well as governments of foreign countries and their private sectors to undertake reconstruction projects. Now it remains to be seen that how government cope with the challenges of relief in first phase and thereafter the most vital phase of the rehabilitation which calls for long-term approach with judicious use of funds to re-erect the entire infrastructure better than the devastated one. Thereafter, the most crucial phase of recovery would begin and its success entirely depends upon how government tackles the challenges of relief and rehabilitation.
Review
Investors’ Guide
Flood's effect on mutual funds
FOR A WHILE Mutual funds offloaded their holdings at the Karachi Stock Exchange during third week of August and sold holding worth $13.41 million but invested $4.03 million in shares resulting in net offloading of $9.38 million as per the data made available by the National Clearing Company of Pakistan Limited (NCCPL). Investors Guide Report
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he impact of flood is ubiquitous and mutual fund industry is no exception. However, experts said that the adverse affect of worst natural calamity would be shorter than that of other sectors because mutual fund industry mostly bases upon equity market and its is the feature of stock market that it imbibes any pressure in few weeks and discounts its shock. Thereafter, it begins to recover to face another correction onwards. This is the entrenched beauty of the stock market everywhere around the world. On the same premise local stock market is discounting the impact of flood and mutual funds particularly those which are directly related with stocks are also following the suit and this trend will stay put for another month until the market absorbs the jitter fully. Mutual funds offloaded their holdings at the Karachi Stock Exchange during third week of August and sold holding worth $13.41 million but invested $4.03 million in shares resulting in net offloading of $9.38 million as per the data made available by the National Clearing Company of Pakistan Limited (NCCPL). During the referred week, mutual funds remained concerned on aftermath of flood losses and resorted to selling of the stocks. According to one of the fund mangers, it virtually sold the entire holding keeping in view irreparable losses incurred by Pakistan due to catastrophic floods. He was also of the view that international commitments are not sufficient to offset the estimated losses. According to Muhammad Shoaib, CEO, Meezan Asset Management
Limited, the main reason of taking back investment from stock market by mutual funds is not risk factor because likelihood of redemption pressure also counts a lot. There are several smart institutional investors in stock funds which may have evaluated the impending pressure on stock market and therefore have decided to park their funds in some secured securities till the crisis is over. However, he admitted that mutual fund managers have also their own assessment of future trends of the stock market and they may be doing on the basis of their assessment. Some fund managers are of the view that investment in equity funds is generally made on long-term basis. Therefore, the main reason of withdrawing funds from stock can be regular redemption pressure alone because most of the investors try to take long-term position in stock
funds and therefore, the recent exit by mutual funds could not be any fear factor. However, they admitted that the recent drive to offload holdings must have some sound reasons which could not be declared collectively because every AMC might have its own reasons to take off from stock market for the time being. The equity funds, which constitute 25.4 per cent of the total open-end mutual fund asset size, have posted a descent growth of 4.4 per cent in their asset size to Rs41.15 billion in July 2010 as compared to Rs39.41 billion in June 2010. However, it is forecast that the month of August would not be so much rewarding for the fund because market would be in range even if it sustain the pressure of flood impact. Moreover, the 75 per cent of open end mutual funds and entire close end fund does not receive direct influence of stock market. Therefore, overall performance of mutual funds would be free from any abnormal situation. Some market pundits are quite optimist and said that impact would not be as large as it is predicted generally. They said that the direct hit of the flood would be on real sectors i.e agriculture and manufacturing while services sector having major chunk of the total size of the GDP would not fall under its direct blow. Therefore, market would be taking support from various sub-sectors of services sector and meanwhile both the real sectors would start recovering. However, they also said that short-term negative effect on stock market is obvious because market sentiments receive every impact, either more or less, but it is the ingrained feature of the market that it braves the pressure after a while.
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Interview
Investors’ Guide
Islamic funds shine on features Islamic mutual funds' growth potential is higher in Pakistan Sharia-compliance is top priority in Islamic finance Meezan Islamic fund is biggest private equity fund Flood impact on financial sector would be limited Invest in cash fund for short-term, in stocks for long-term By: Mujtaba Baig Investors' Guide: How do you see the impact of floods on services sector especially financial one and more particularly on mutual fund industry? How long will it take to recover? Mohammad Shoaib: Obviously the impact of floods is enormous and commodities have directly been hit while estimates are being made of total losses. Its ultimate affects would soon be felt in all the leading sectors of the economy. Agriculture and industrial produce would be less in next season while its input cost will increase because most of the inputs in flood-affected areas have also been swept away. Definitely services sector actually facilitate other sectors to perform better. Therefore, when it will not have more to serve then financial
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sector being an important component of the services sector will also suffer. However, it is a matter of satisfaction that all stakeholders have come out to lend hand in time of grief. Either they are donor agencies, friendly countries, world communities, global financial institutions, governments or local NGOs all are trying to contribute maximum in rescue, relief and rehabilitation. The transition time till complete rehabilitation would be more trying for the financial sector during which saving would be less and ultimately investments would also suffer. However, public investment for rehabilitation will boost economic activity and after recovery there would be retreat of economy from downturn. But we must keep in mind that this entire process would take sizeable time and in the short-term all and sundry will have to face the hard times
Mohammad Shoaib, CFA Chief Executive Al Meezan Investments Mohammad Shoaib holds MBA degree from IBA besides Chartered Financial Analyst (CFA) charter from CFA Institute USA. He has served as Senior Vice President and Head of Department for Capital Markets Division at Pak Kuwait Investment Company (PKIC). During his tenure of five years PKIC equity portfolio expanded from Rs60 million to over Rs3,000 million.
Interview
Investors’ Guide financially. Investors' Guide: It is observed that lack of exclusive professionalism is main problem of Islamic financial institutions which means there is no separate breed of professionals for this system and this is the main reason that its products are not developed and marketed at required scale. Mohammad Shoaib: It is not a problem. It's a plus point for Islamic financial institutions because once a person switches over to conventional institutions he or she feels a clear difference in quality of services offered in Islamic institutions and other conventional institutions. In Islamic financial products there is no any hidden cost nor do they have over-ambitious targets. Customer relationship is an important tool in financial products industry which offset the less-thanrequired performance of any product because customer satisfaction could not be gained merely through the yardstick of robust return. The element of credibility and long-term stability also counts a lot and in this way Islamic financial products have certain edge over the peers. Investors Guide: Lack of innovations is said to have been another main reason affecting the smooth expansion of Islamic financial products. Who do you think is it mainly responsible for narrow range of financial products in Islamic finance? Mohammad Shoaib: This is the hallmark of any creative venture that you have to stay within limits while making innovation in services you offer. Islamic financial products are being innovated but obviously they have to follow certain Sharia principles and therefore their impact lies in staying within set parameters while offer maximum customer satisfaction. This is not a challenge it's an opportunity to make market players realise that art of innovation can be applied even there is limited liberty to create big ideas. Investors Guide: Don't you think Islamic AMCs are facing dual challenges; first to make aware people on mutual funds and second to convince them to buy Islamic mutual funds which offer safe returns and are Sharia-compliant? Mohammad Shoaib: It is indeed a huge task in a society where majority of people are already unaware of significance of mutual fund investing. But I would again say it is also an
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Floods brought a lesson Flood havocs have an implied message for our development economists. Now there must be clearcut plans with different length of time i.e short, medium and long-term. Development could not suffer frequent natural disasters. In slight span of six years, this is the second natural disaster in the country. Therefore, now development economists have to rationalise their plans. Similarly investment experts have also lot to learn from this disaster. Capital expenditures could not resist such devastation unless all such expenditures are interlinked with each other and are free from political duress. opportunity because you don't have to contact people twice to cope with these dual challenges. Yet, you have another support argument of being
Sharia-compliant if your target person tries to avoid investing in interestbased funds. Therefore, it is an edge of Islamic AMCs over conventional ones that they can exploit belief system of the majority of populace to make them invest in mutual funds. This is the reason that being only Islamic AMC of the country Al Meezan Investment Management Limited has 75 per cent market share and with 200 branches of its associated company Al Meezan Bank it is focusing retail customers vigorously because institutional investors have no concern about the nature of AMCs or funds and their main concern is returns. Therefore, realising this unique feature of local market we are trying to expand our outreach to provide our services at grassroots level and I am happy that we are quite successful in this strategy. Investors' Guide: In a regime of high discount rate how new investment could be brought into mutual funds especially in Islamic mutual funds where the minimum rate of return could not be guaranteed? Mohammad Shoaib: Unless government borrowing eases, interest rate is not going to lower and this will clip the wings of mutual fund industry because fixed investment products offered by government capture the main market share. Therefore, product innovation is the only way to stay put in high interest rate regime. Owing to rising inflation people don't have any other safe option but to invest in
Interview
Investors’ Guide government securities which offer secured returns. In this way investors are not getting good returns in real terms and they are just offsetting the inflation factor to retain the real value of their money. However, new products of mutual funds with high quality of service can compete with government securities because people have different vision about investment and some people want to put their money in various sources of investment in the longterm. In this way best-planned capital protected funds with reasonable rate of return can help grow mutual fund industry in era of monetary tightening. Investors' Guide: In monetary terms what are the main advantages of Islamic mutual funds as compare to their conventional counterparts? Mohammad Shoaib: When a person makes up his or her mind to invest in Islamic mutual funds then the decisive factor is rarely monetary benefits. It is the nature of that fund which motivates one to invest in Sharia-complaint fund. However, service quality can help retain the clientele in the long-term and Islamic financial sector is more particular about service quality because its other constraints like relative limits on product innovation and being new in the market could be offset by better services which are always called for by all customers. Investors' Guide: It is said that TFC market might be seeing some jerks in coming days and its chain-effect will also be felt on income funds. Do you think this is going to happen? Mohammad Shoaib: I think this factor has already been experienced by income fund market and it has received a hit due to some volatility in TFC market. I don't think in future such a big problem would arise. However, owing to previous shocks it is now pretty difficult to motivate investors to invest in income funds in bulk. Investors' Guide: What should be the role of regulator in developing mutual fund industry? Mohammad Shoaib: I have said several times that the role of regulator should be more than being mere a regulator. It should come forward for the development of mutual fund
industry. Lengthy list of laws to regulate the industry are commendable for good business practices but they can not alone help grow any industry. Therefore, regulator must redefine its role just like its regional peers to make the mutual fund industry fully tap the existing potential for the maximum growth of savings and investments. Investors' Guide: Do you feel that Mufap is playing its due role for safeguarding the interests of fund industry? Mohammad Shoaib: The role of Mufap is actually collective role of all AMCs. It is doing its best for the promotion of mutual fund industry in Pakistan. However, its efforts to raise awareness on this important tool of investment need more momentum. But Mufap can not be alone responsible for the lack of awareness on mutual funds because it is the job of all market players and stakeholders including regulator to make efforts to popularise this mode of investment all over the country. Investors' Guide: What are your upcoming funds? Mohammad Shoaib: We are planning to introduce another Capital Protected Fund in near future. Moreover, various investment plans including child education and marriage are in pipeline apart from Exchange Traded Fund which would be quite new for the market. Investors' Guide: Tell our readers about your company? Mohammad Shoaib: We, Al Meezan Investment Management Limited (Al Meezan Investments), are a joint venture of Meezan Bank and Pak Kuwait Investment Company (PKIC), dedicated to providing Shariah-compliant investment solutions. We specialise in investment management, specifically developing, floating and managing both open and closed-end mutual funds, investment advisory and the discretionary management of institutional as well as high net worth individuals (HNW) portfolios. Investors' Guide: How did your funds perform so far? Mohammad Shoaib: Net assets of Meezan Islamic Fund as at July 31, 2010 stood at Rs4.3 billion. The fund's NAV increased by 9.2 per cent
during the period under review against an appreciation of 9.6 per cent in the benchmark index (KMI30) while KSE-100 Index during the same period increased by 8.2 per cent. Net assets of Meezan Islamic Income Fund (MIIF) as at July 31, 2010 stood at Rs3.3 billion. MIIF has provided annualised returns of 15 per cent for the month of July as compare to its benchmark which has provided annualised returns of 5.87 per cent during the same period. Net assets of Meezan Cash Fund (MCF) as at July 31, 2010 stood at Rs6 billion. MCF has provided annualised returns of 10 per cent for the month of July as compare to its benchmark which has provided annualised returns of 7.7 per cent during the same period. Meezan Sovereign Fund (MSF) was launched during February, 2010. As of July 31, 2010, the net assets of the fund stood at Rs668 million, showing a decline of 31 per cent month on month. For the month of July, the fund has provided annualised returns of 10.7 per cent against returns of 7.7 per cent of its benchmark. As at July 31, 2010, total size of Meezan Tahaffuz Pension Fund (MTPF) stood at Rs288 million. For the month of July, the equity sub fund provided a return of 8.6 per cent to its investors while debt and money sub funds posted annualised returns of 14.7 per cent and 14.4 per cent respectively. As at July 31, the net assets of Meezan Capital Protected Fund (MCPF-1) stood at Rs649 million, showing an increase of 2 per cent month-on-month. For July 2010, MCPF-1 provided returns of 2 per cent. Net assets of Al Meezan Mutual Fund (AMMF) as at July 31, 2010 stood at Rs1.5 billion. The fund's NAV appreciated by 9.4 per cent during the month of July against an increase of 9.6 per cent in the benchmark index (KMI-30) while KSE 100-Index, during the same period increased by 8.2 per cent. Net assets of Meezan Balanced Fund (MBF) as at July 31, 2010 stood at Rs1.34 billion. The fund's NAV increased by 5.2 per cent during the month.
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Comments
Investors’ Guide
Shutdowns in mutual fund industry
Beyond consolidation?
Mujtaba Baig
I
t was being predicted for quite a long time and now this process has already been started. Is it consolidation in mutual fund industry or something beyond this? Let's have a look on what is happening around. In this regard AMZ Asset Management Limited has already rolled up its operation in the beginning of this year while, according to internal sources, another company renowned for its innovative funds for women and children is also considering for closure. Sources said that the main reason to close the company is said to be extraordinary redemption pressure from institutional investors which company can not sustain because of huge volumes of such redemption calls. If it pays out the cost of fund management would skyrocket and this ultimately would steeply push the company in negative zone. It is quite clear that most of the mutual funds in the industry depend upon fistful of institutional investors. Similarly, another asset management company - a subsidiary of a South Asia company- is in process of its sell off to a leading investment bank of the country. It is also being
under pressure of huge redemption by institutional investors and it has no way out to face it and its parent company has decided to sell it to any serious buyer. According to internal sources, a tycoon of capital market has started shrinking his few businesses in the country and plan to sell this AMC is also part of the same strategy. Likewise another AMC is also moving towards closure because of dwindling sizes of its various funds. According to experts, the key reason of redemption pressure in mutual fund industry is dismally low real returns, lower quality of assets and high-risk instruments like TFCs and Sukuks apart from weak economic indicators. Moreover, intensified regulatory regime of Securities and Exchange Commission of Pakistan is also said to be one reason of de-motivation of fund managers to explore any way out to sustain the recent hike in redemption pressure. A fund manager lamented that sometimes it becomes so painful to respond to unnecessary queries of regulator especially when every venture is towards slowdown. It may be recalled that after commencement of mutual fund industry
in private sector a mushroom growth was observed in this sector when series of companies started venturing into this new business in the country. Even local banks and brokerage houses could not let this avenue unutlised and stepped in with the support of their expertise in financial management and some of them did quite well for the greater good of the industry. However, the bad omen in the beginning of this globally-acclaimed safe and reliable source of investment in the country was all-pervasive herd instinct in every mutual fund company. Most of them blindly followed speculative surge in stock market during first half of this decade and amassed their funds into the labyrinth of stock trading completely putting aside the fact that our bourse never performed in such a robust way since the inception of equity markets in the country. Most of our fund managers willfully or ingeniously forgot that our economy was relying on the crutches of services sector during those days owing to more-than-expected boost in telecom and banking sectors while performance of real sectors ie agriculture and manufacturing was quite normal like it is at present. Despite this fact, most of the financial managers wrongly presumed that stock market was positively responding to economic surge and eventually they were the people who were worst affected professionally by the consecutive two crisis in the stock market. Consequently slowdown also took place in mutual fund industry because major allocation of the industry is usually made in stock market particularly in a country where commodities market is not advance enough while bond and government securities have limited range of offerings. In such a scenario the downturn in mutual fund industry is continuing unabated where total funds under management were near Rs400 billion in times of boost are now hovering at the brink of Rs200 billion mark. Saner fund managers at the outset of the slowdown in the market prophesied that consolidation was likely in the industry but symptoms are now signaling beyond consolidation where many companies seem to be fighting for the very survival.
17
Review
Investors’ Guide
Flood's impact on banks
MODEST HIT Investors' Guide Report
T
he massive devastation due to floods has also hit banking industry as most of the bank branches located in flood-affected areas wholly or partially damaged while the impact of twenty per cent inundated agrarian economy would take its toll in months to come. Experts said that in coming months the rate of loan default especially pertaining to micro financing and farming will move up while deposits' growth will also falter putting adverse impact on overall increase in deposits. Banks will have to share the cost of crop damages in medium term because farm sector has lost its standing crops on millions of hectares and
will claim moratorium on loans. Moreover, for the next crop, farming community will claim loans on subsidised rates and both these factor will hit the banking spreads. The damages to banking infrastructure including bank buildings and equipment is neither so large nor banks are very much concerned about it because each banking company has provision against abnormal losses and the same will be covered accordingly. "The matter of grave concern for banking sector is widespread crop and livestock loss because it would unleash a chain of loan defaults and bring pressure on their profits as banks would be required to make substantial provisioning against their fresh bad debts", said a banker. He said it is difficult to immediate-
ly estimate the actual fallout of the flash flood on the banking sector because their impact will begin to appear gradually in the weeks and months to come. But, he warned, the losses of the banks in terms of loan defaults and lost deposits could be substantial. Agriculture is the second larges sector of the economy after services sector and it nearly contributes 20 per cent to the GDP. If its 20 per cent is severely hit by the flood it means that its role in GDP of current fiscal would be only 16 per cent instead of previous 20 per cent. It has already been declared by the experts that it will take two years to start farming in flood-affected areas afresh which means the impact of less contribution by agriculture sector on GDP
"The matter of grave concern for banking sector is widespread crop and livestock loss because it would unleash a chain of loan defaults and bring pressure on their profits as banks would be required to make substantial provisioning against their fresh bad debts"
18
Review
Investors’ Guide will stay for the next two years affecting overall economic growth of the country. A stock analyst in his recent analysis said considering that the agriculture sector contributes over 20 per cent to gross domestic product (GDP) and that a large part of the corporate sector is directly linked to the agriculture sector, the banking industry is both directly and indirectly exposed to the consequences of the disastrous floods. Immediately, he adds, the banks have to contend with potential writeoff of direct agriculture loans, damage to their branch networks, and possible pressure on selected corporate borrowers. That said, he argues, the banks do not face much of a risk of losing money on their agriculture lending. "The banks' direct agriculture lending (ex-commodity financing) is limited it is less than five per cent of the total loans of five major banks, and lenders can recover their losses from crop insurers," he contends. Another important aspect of flood impact on banking sector is doublehit feelings of small banks which were already containing their operations to reduce their operational cost on the back of their relatively less market share. More than eighty per cent share of banking industry is under the control of five big banks while the leftover is to be shared amongst forty local and foreign banks. It may be recalled that larger banks amassed more than 90 per cent of the total banking sector profits during 2009. Now after the floods, small banks will also be impacted more severely because their collective share will also shrink accordingly. Before this natural calamity, some small banks were closing down their loss-making branches and operations and firing workers, others were trying to expand their operations to the rural sector to tap its hitherto untapped potential for deposits. But now a major part of the devastated rural economy will not be their target market and it will bring change in their approach for survival before the few giants. Over the last several years, even the larger banks have tried to trim their workforce per branch to cut their operational costs. Habib Bank, for example, brought down the number of staff per branch to 8.8 in 2009
Agriculture is the second larges sector of the economy after services sector and it nearly contributes 20 per cent to the GDP. If its 20 per cent is severely hit by the flood it means that its role in GDP of current fiscal would be only 16 per cent instead of previous 20 per cent from 9.8 in 2007. Similarly, United Bank reduced its workforce to 12.7 per branch from 13.7, Muslim Commercial Bank to 12.5 from 16.7 and National Bank of Pakistan to 12.6 from 13. Allied Bank, however, has raised the number of its workforce per branch to 15 from 13.6 during the same period, said a report issued recently. According to State Bank of Pakistan, the non-performing loans of the banks and development finance institutions touched alarming height despite slower pace of accumulation in the second quarter of the calendar 2010. The combine NPLs of banks and DFIs stood at record Rs473.89 billion as of June 30, 2010. The alarming surge in NPLs will ultimately hit the economic growth. The SBP data showed that the NPLs of all banks and DFIs rose by Rs2 billion during the second quarter of the calendar 2010 while the NPLs of all banks rose by 2.6 billion to Rs459.84 billion during the same period. The largest accumulation of NPLs was recorded by the private sector banks, which are the biggest loan provider to the private sector. The NPLs of the private banks during the second quarter increased by Rs4.7 billion to Rs307.6 billion and that of specialised banks rose by Rs1.1 billion to Rs28.488 billion. The public sector banks including National Bank of Pakistan (NBP), Bank of Punjab (BOP), Bank of Khyber (BOK) and First Women Bank performed better as their NPLs dropped which was against the previous trend. The NPLs of the public sector banks declined by Rs4.3 billion during the second quarter while it had accumulated Rs4.8 billion in
first quarter. On the flip side, despite poor economic scenario, banks kept improving their profits during the first half of this calendar year as they earned a net profit of Rs35.5 billion. The private sector did not play a key role for banks' profits; it was the banks' investment mostly in government papers which yielded profit for them. During the second half of the calendar year, the government kept borrowing heavily from commercial banks through treasury bills while the banks found it easy to get risk free high return. The half yearly report showed that banks earned by keeping most of the profits at the cost of depositors. The latest information provided by the State Bank showed that the banking spread has sharply increased to 7.6 per cent in July, which was 16-month high. Higher banking spread means banks get more while depositors get less return on their deposits. The banking industry in United States and Europe is still under pressure, particularly in the US where government pumped hundreds of billions of dollars to save banks and the banking system. Last year the Pakistani banks earned high profits but the five big banks dominated the scenario and they grabbed over 90 per cent of entire profits earned by the banking sector. The situation did not change during the half year of this calendar year. The situation is alarming for the small and medium banks trying to survive in the situation completely dominated by the five big banks. The situation has been the same for the last three years and the State Bank remains silent over it. The small and medium banks were not helped out nor was any step taken to reduce the monopolistic domination of the 5 big banks. However, the only relaxation given to the small and medium banks was the extension of deadlines to meet the Minimum Capital Requirement. At least 12 small and medium banks were unable to meet MCR at the end of December 2009. The State Bank extended the deadline twice but these banks could not come out from this mire. But now after flood havoc, both small and big banks have to face some consequences in the short run.
19
Review
Investors’ Guide
Insurance against natural disasters
Is it too late? Investors' Guide Report
Alas!
Had my cotton crop been insured, I would have not suffered this much losses as the compensation would have somewhat offset the quantum of the losses of my crops, said Dhani Bux sitting idle in a relief camp near Toll Plaza, Super Highway. He had ten acre land in Thul district Jacobabad where cotton crop was about to be reaped but the merciless flash floods swept the entire produce and inundated his land and property forcing him to take refuge in a relief camp with his family hundreds of miles away from his hometown. But his regret for not getting insured his crop was quite reflected in his somber eyes which showed the importance of insurance to cover unforeseen losses. According to an expert of general insurance, out of total devastation hardly 10 per cent may have been insured, approximately 2 per cent in Khyber-Pakhtunkhwa and 7 to 8 per cent in southern Punjab while in Sindh there might not be even a single agriculture field or crop insured because of apathy of local people to such precautionary measures. He said that out of insured losses only fifty per cent might have been covered by any credible insurance company while rest of the others were done by so-called insurance agencies which are duping the innocent villagers by charging fee for nothing. He said probably these companies would not
20
pay compensation or whatsoever they do so would be next to nothing to cover the huge losses suffered by affectees. According to another expert, apart from agriculture or crop insurance there is a provision of atmospheric disorders in fire insurance which covers the property losses owing to natural calamity. But general insurance is equal to none in rural areas and one can not say even one per cent of destroyed property by flooding may have been covered. However, it is said that life insurers have penetrated in rural areas but in recent floods non-life losses are far higher than life losses while general insurance is totally missing in rural areas because of rural people's cultural norms which ask villagers to leave everything on destiny without taking care of it. According to insurance experts, most of the crops were insured in flood-affected areas through Zarai Taraqiati Bank which prefers to develop understanding for this purpose with smaller insurance companies where it has more room for its pie than the big companies which offer less to intermediaries. It is learnt that under every agricultural loan there is an option of insurance which the borrower leaves to the consent of lender means whichever company a lender deems fit may hire for the insurance service. In most of the cases Zarai Taraqiati Bank arranged crop insurance through a small company which means now claims will take sizeable time to mature and ultimate
sufferers would be flood-affectees who need prompt compensation to restart their lives. Some large insurance companies are expanding their marketing networks because they believe that after recovery from flood, people would become more aware on importance of insurance and an aroused interest from rural side might be witnessed after few months. Therefore, some big companies are planning to expand their marketing force to avail this opportunity which was not created but emerged due to flood which has shattered the rural economy and its rehabilitation will take a longtime. Thereafter, our general insurers might be receiving huge orders from rural side for both crop and property insurance. According to experts, now it all ups to insurance companies how they develop their marketing strategy and exploit this worst disaster for the broader good of insurance sector. They said that at the time of assassination of Mohtarama Benazir Bhutto huge losses of property and vehicles incurred but because of conflict among insured and insurer most of them could not be covered. They said that like atmospheric disturbances, the provision of terrorism and riots should also be included in fire insurance to broaden the scope of fire insurance. However, in case of flood there is no discrepancy with respect to property losses by floods and insurer is bound to pay compensation for the loss of property and valuables.
Analysis
Investors’ Guide
From income fund to aggressive income fund
Be aggressive for compliance Shiraz Ahmed
M
any asset management companies having dwindling income funds are covertly very grateful to apex regulator which ingenuously helped the fund managers to retain asset allocation under said funds in forbidden low-rated TFCs by letting them to convert their income funds into aggressive income funds just for the sake of compliance of certain rules. Securities and Exchange Commission of Pakistan has offered enabling space to AMCs to easily turn income fund into an aggressive income fund. Once income funds were badly hit by their allocations in jittery TFC market and in some cases low-rated TFCs were tried by targetcentric fund managers and as a result they secured less returns and faced huge redemption pressure on said funds. Irony of the fact is that by simply adding the word aggressive before income fund a fund manager can make allocations under this category in prohibited low-rated TFCs and may ward off regulatory rebuke on failing to maintain the portfolio of the fund within set parameters. Experts said that sometimes consequences of any regulatory order are not properly previewed and this did happen when SECP issued Circular No 07, 2009 on March 06, 2009 which binds AMCs not to allocate assets of income funds in TFCs having low ratings. But under aggressive income fund such TFCs could be ventured and there is no restriction for investing in them. Recently, the category of Alfalah GHP Income Multiplier Fund was changed from "income fund" to "aggressive income fund", which completely altered its outlook. Its income fund has asset allocation within the range of 5.21 per cent to 14.51 per cent in four TFCs with rat-
Alfalah GHP Income Multiplier Fund Aggressive Income Fund Compliance TFCs Allocation (% of total Assets) Jul-10 Financial Rec'Bles Sec'Zation Co. Ltd 1.09% Pakistan Mobile Communication 9.99% Trakker 1.43% SME Leasing 0.93% Trust Investment 5.14% Al-Zamin 7.78% Agritech 17.23% Maple Leaf Sukuks 10.19% Kohat Cement Company 11.62% Security Leasing 0.50%
ings below BBB which is minimum standard set by regulator but as soon as the Fund was converted into aggressive income fund all such deviations turned into compliance by the grace of SECP. A look at the asset allocation of previous income fund and current aggressive income fund for the month of July of the Fund is given below. Alfalah GHP Income Multiplier Fund Aggressive Income Fund Income Fund It may be noted that after witnessing disappointing performance of income funds in FY10, investors have switched their existing portfolios from income fund category to money market fund category. This is evident from the fact that at the end of FY09 the asset under management in income fund category declined from Rs75 billion to Rs55.8 billion, a decline of Rs19.28 billion in absolute terms or 25.7 per cent YoY. Three new income funds were launched in FY10; these were Lakson Income Fund, NAFA Saving Plus Fund and NIT Income Fund which cumulatively added Rs3.33 billion. If these funds are excluded the decline may have been more than 30 per cent. According to fund managers, the recent slowdown in growth of income funds is due to eroding value of TFCs and Sukuks which hit a blow on over-
Income Fund Non Compliance Jun-10 Rating 1.05% AA8.42% AA1.21% A 0.99% BBB+ 5.21% BBB 6.71% NPA 14.51% NPA 8.51% NPA 9.79% NR 0.43% NR
all size of income funds in recent past and these are still recovering from this hit. Experts said the main reason of huge redemption pressure on income fund category is not merely its allocation in loss-making TFCs but also of inefficiency of fund managers to take exit from declining TFCs while their lack of vision is also another factor which could not made them preview the fall in TFCs and despite of this fact they continued allocating assets under low-performing securities. On the flip side, the performance of the money market funds category was outstanding in FY10 as asset under management in this category grew by 728 per cent to Rs43.5 billion in FY10 as compared to Rs5.2 billion in FY09, a growth of Rs38 billion in absolute terms. The increasing trend of investment in money market funds was due to its return two-time higher than those offered by income fund category (money market has provided average returns of 10.43 per cent in FY10 as compared to 5.80 per cent average returns of income fund category), apart from having low risk and high liquidity due to its no exposure in TFCs. Almost all the AMCs have now brought out their money market funds after experiencing massive hit in income funds category to avoid possible redemption.
21
Performance
Investors’ Guide
EQUITY FUNDS D
uring July '10, the benchmark KSE100-Index surged by 8.20 per cent. Equity market funds that track KSE 100-Index followed the suit. Out of sixteen equity funds, all of them posted positive returns. Six of them also outperformed KSE-100 returns of 8.20 per cent due to overall broader market which moved upward during the period under review. The average returns of equity funds were 8.0 per cent in July '10 which were 675 basis points higher than those of previous month. Regarding fund's performance, Atlas Stock Market Fund secured best risk-adjusted returns; it also outperformed average equity returns by 247 basis points and posted 10.47
per cent returns in July '10. In terms of assets' size, the equity funds, which constitute 25.4 per cent of the total open-end mutual funds' asset's size, has posted a decent growth of 4.4 per cent to Rs41.15 billion in July '10 as compare to Rs39.41 billion in June '10. Once again the increase in assets' size would be higher if we adjust dividends announced by equity funds. In terms of increase in individual equity fund's asset's size, Pak Oman Advantage Stock Fund surged by 12.8 per cent MoM to Rs117 million followed by MCB Dynamic Stock Fund and KASB Stock Market Fund which assets' size soared by 11.4 per cent and 7.80 per cent respectively.
Equity Funds Atlas Stock Market Fund United Stock Advantage Fund ABL Stock Fund MCB Dynamic Stock Fund IGI Stock Fund KASB Stock Market Fund Crosby Dragon Fund
July 2010 Returns (%) 10.47 10.08 9.01 9.00 8.96 8.87 8.00
Lakson Equity Fund NAFA Stock Fund
7.92 7.86
HBL Stock Fund Pakistan Stock Market Fund National Investment Trust First Habib Stock Fund
7.56 7.49 7.45 6.80
Alfalah GHP Alpha Fund AKD Opportunity Fund Pak Oman Advantage Stock Fund Source: TFD Research & Fund Manager Report
6.73 5.49 5.25
Source: TFD Research & Fund Manager Report
22
Performance
Investors’ Guide
INCOME AND MONEY MARKET FUNDS
I
ncome and money market funds performed relatively well during July '10 as compare to previous months, thanks to Mufap which has re-priced TFCs on the upward basis. Furthermore, launch of PICIC Income Fund has also increased funds' size of income fund category. Once again money market funds remained in limelight as their asset under management up by 21 per cent in July '10. Income and money market funds which are 61 per cent of total open-end mutual funds' asset's size showed positive growth of 8.4 per cent to Rs107.57 billion at the end of July '10 as compare to Rs99.2 billion in June '10, a rise by Income & Money Market Funds
July 2010 Returns (%) Dawood Money Market Fund 157.84 AKD Income Fund 14.60 IGI Money Markets Fund 11.39 JS Aggressive Income Fund 11.26 UBL Liquidity Plus Fund 11.25 MCB Cash Management Optimizer Fund 11.20 KASB Cash Fund 11.14 JS Cash Fund 11.00 MCB Dynamic Cash Fund 10.90 Atlas Money Market Fund 10.89 Lakson Money Market Fund 10.84 Askari Sovereign Cash Fund 10.78 Pakistan Cash Management Fund 10.77 Alfalah GHP Cash Fund 10.77 Meezan Sovereign Fund 10.69 Pakistan Income Enhancement Fund 10.66 NAFA Government Securities Liquid Fund 10.59 Faysal Savings Growth Fund 10.58 NIT Income Fund 10.53 ABL Income Fund 10.47 NIT Government Bond Fund 10.45 BMA Express Cash Fund 10.45
n/r BBB(f) n/r n/r AA+(f) AA(f) AA+(f) n/r A+(f) AA(f) n/r AA+(f) AAA AA(f) AA+(f) A+(f) AA+(f) A(f) n/r A+(f) n/r AA+(f)
Rs8.40 billion in absolute terms. Out of Rs8.40 billion; UBL Liquidity Plus Fund, MCB Cash Management Optimizer Fund and Nafa Government Securities Liquid Fund assets' size surged by Rs3,209, 1,825 & 1,641 million respectively to Rs11.05, 8.35 & 7.45 billion in July '10. Comparing fund's performance, Dawood Money Market Fund obtained annualised returns of 157.8 per cent in July '10 and thus outperformed its respective category, followed by AKD Income Fund and IGI Money Market Fund with returns of 14.60 per cent and 11.39 per cent respectively. Pakistan Income Fund IGI Income Fund Meezan Cash Fund
10.36 10.24 10.03
AA-(f) n/r AA(f)
Lakson Income Fund
9.91
n/r
First Habib Income Fund
9.89
AA-(f)
NAFA Saving Plus Fund
9.52
AA-(f)
JS Income Fund
9.22
AA-(f)
Crosby Phoenix Fund
8.28
A(f)
NAFA Cash Fund
8.09
A+(f)
KASB Liquid Fund
7.63
BBB+(f)
MSF - Perpetual
7.45
AA (f)
HBL Income Fund
6.47
A(f)
Alfalah GHP Income Multiplier Fund
-0.10
u/p
Askari Income Fund
-3.59
n/r
Atlas Income Fund
-6.16
A+(f)
POBOP Advantage Plus Fund
-6.98
A-(f)
-8.47
A(f)
BMA Chundrigar Road Saving Fund
United Growth & Income Fund
-11.70
A-(f)
Namco Income Fund
-34.92
A(f)
n/r: not rated u/p: under progress Source: TFD Research & Fund Manager Report
Source: TFD Research & Fund Manager Report
23
Performance
Investors’ Guide
BALANCED FUNDS
B
alanced funds looked more flexible for switching of assets in terms of allocation. Out of five funds, all the funds posted positive returns. However, none of them could outperform KSE 100-Index. The average returns of balanced fund category during the month of July '10 were 4.53 per cent as compare to returns of 0.72 per cent in June '10, up by 381bps MoM. Nafa Multi Asset Fund secured 6.13 per cent returns and once again outperformed balanced fund category's average returns by 160bps and remained best pick in balanced fund category. The outperformance was due to its significant exposure in E&P sector. In terms of asset's size growth the category stood at Rs5.12 billion at the end of July '10 as compare to Rs5.18 billion in previous month (June '10), declined by 1.2 per cent MoM. The drop in asset's size was due to dividend announcements by almost all the funds for the
Balanced Funds
July10 Return (%)
NAFA Multi Asset Fund
6.13
HBL Multi Asset Fund
5.53
Faysal Balanced Growth Fund
5.31
Pakistan Capital Market Fund
4.95
Unit Trust of Pakistan
4.22
KASB Balanced Fund
1.04
Source: TFD Research & Fund Manager Report
year FY10. In terms of growth in fund's asset size, Pakistan Capital Fund jumped by 4.5 per cent to stand at Rs460 million.
ISLAMIC EQUITY FUNDS
A
s far as Islamic funds are concerned, all the three Islamic equity funds - which are exposed to local capital market posted positive returns. However, except JS Islamic Fund, remaining two outperformed KSE 100-Index returns of 8.20 per cent. Atlas Islamic Stock Fund and Meezan Islamic Fund provided optimum risk-adjusted returns in this category as they posted gains of 10.01 per cent and 9 per cent respectively in July '10 as compare to average category returns of 8.89 per cent, and thus outperformed category by 112bps & 11bps respectively. The size of Islamic equity funds slightly increased by 7.8 per cent to stand at Rs4.96 billion in July '10 as compare to Rs4.60 billion in June '10.
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Islamic Equity Funds
July 10 Return (%)
Atlas Islamic Stock Fund
10.01
Meezan Islamic Fund
9.00
JS - Islamic Fund
7.66
Source: TFD Research & Fund Manager Report In terms of growth in individual fund's asset size in Islamic equity fund category, Meezan Islamic Fund hiked by 9.5 per cent to Rs4,341 million at the end of July '10.
Performance
Investors’ Guide
ISLAMIC INCOME FUNDS During July '10, the assets' size of Islamic income funds dropped by 3.3 per cent to Rs6.11 billion as compare to Rs6.32 billion in June '10 showing a fall of Rs206 million in absolute terms. Meezan Islamic Income Fund - which contribute around 54 per cent of category's size - posted annualised returns of 14.98 per cent in July '10 and remained the top pick in the category, fol-
Islamic Income Category Meezan Islamic Income Fund
lowed by Faysal Islamic Savings Growth Fund and IGI Islamic Income Fund with annualised returns of 9.45 per cent & 9.27 per cent respectively. In terms of growth in asset's size, IGI Islamic Income Fund grew 14.4 per cent to stand at Rs453 million during the month under review.
July 2010 Returns (%) 14.98
Faysal Islamic Savings Growth Fund
9.45
IGI Islamic Income Fund
9.27
Atlas Islamic Income Fund
9.16
Pak Oman Advantage Islamic Income Fund
8.18
Askari Islamic Income Fund
8.08
NAFA Islamic Income Fund
3.79
United Islamic Income Fund
-4.71
KASB Islamic Income Fund
-27.34
Source: TFD Research & Fund Manager Report
25
Performance
Investors’ Guide
ASSET ALLOCATION FUNDS
A
sset allocation funds adopted a mild view for switching of assets in term allocation. Funds in the respective category were aggressively exposed to equity market during the period under review on anticipation of surge in KSE 100-Index. Out of five funds in the asset allocation category, all of them posted positive returns. However, none of them could outperform KSE-100 returns in July '10. JS Aggressive Asset Allocation Fund was best pick in asset allocation category as it posted gains of 7.66 per cent and outdid its category by 190bps, followed by Askari Asset Allocation Fund and Faysal Asset Allocation Fund with returns of 6.52 per cent and 5.60 per cent respectively. In terms of growth in assets' size, the category stood at Rs1.48 billion at the end of July '10 as compare to Rs1.55 billion in last month; a decline of 4.6 per cent MoM.
Asset Allocation Category
July 2010 Return (%)
JS Aggressive Asset Allocation Fund
7.66
Askari Asset Allocation Fund
6.52
Faysal Asset Allocation Fund
5.60
MCB Dynamic Allocation Fund
5.50
Alfalah GHP Value Fund
3.54
Source: TFD Research & Fund Manager Report
In terms of growth in individual fund's asset size, JS Aggressive Asset Allocation Fund move up by 6.6 per cent to Rs163 million at the end of July '10.
ISLAMIC ASSET ALLOCATION FUNDS
T
he assets' size of Islamic asset allocation funds posted positive growth of 0.5 per cent in July '10. All the funds in the Islamic asset allocation category secured positive returns. However except Dawood Islamic Fund none of them could outperform KSE 100-Index returns. The category's asset's size stood at Rs2.16 billion as compare to Rs2.15billion in June '10, increase by 0.50 per cent MoM. Dawood Islamic Fund was the best pick in Islamic asset allocation category as it posted gains of 9.06 per cent and thus outperformed its asset allocation fund category average by 345 bps. In terms of asset's size growth, Pakistan International Element Islamic Fund and United Composite Islamic Fund reflected positive growth of 4.9 per cent and 4.9 per cent to stand at Rs410 million and Rs524 million respectively.
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Islamic Asset Allocation category
July 2010 Returns (%)
Dawood Islamic Fund
9.06
Pakistan International Element Islamic Fund
6.95
NAFA Islamic Multi Asset Fund
6.30
United Composite Islamic Fund
5.74
Pak Oman Advantage Islamic Fund
4.78
Alfalah GHP Islamic Fund
4.33
Askari Islamic asset allocation
2.13
Source: TFD Research & Fund Manager Report
Performance
Investors’ Guide
Performance of Mutual Funds in July, 2010
MODEST RECOVERY Investors' Guide Research
M
utual funds' size surged impressively by 5.60 per cent in July, the first month of new fiscal year 2010-11 where its asset's size rose to Rs208.6 billion as compare to Rs197.5 billion in June 2010. Open-end funds which contribute almost 85 per cent of total mutual funds industry's size stood at Rs176.28 billion
in July '10 as compare to Rs167.6 billion in June '10, showing an increase of 5.2 per cent month-on-month (MoM); while closed-end funds were at Rs32.29 billion. In absolute terms, the total mutual fund industry rose by Rs11.06 billion MoM. Out of Rs11.06 billion, Rs8.4 billion (76 per cent) were raised by money market and income funds followed by equity funds which added Rs1.74 billion. During the month Picic Asset
Categories Jul-10 (Rs in bn) Equity Market Funds 41.15 Income & MM Funds 107.57 Balanced Funds 5.12 Islamic Funds 4.96 Islamic Income Funds 6.11 Hybrid Funds 6.86 Asset Allocation Funds 1.48 Islamic Allocation Funds 2.16 Fund of Fund 0.87 Open-End Fund Size 176.28 Closed-end Fund Size 32.285 Total Mutual Funds Asset Size 208.6 Source: TFD Research & Fund Manager Report
Management Company launched its first open-end fund namely Picic Income Fund which in the first month raised Rs2.3 billion. However, dividend announcement from all AMCs caused the funds' size to decline. Otherwise, we would have seen the increase of 15 per cent in total industry's assets' size. Before evaluation of the mutual fund industry, given below is overall scenario of the industry.
Jun-10 (Rs in bn) 39.41 99.22 5.18 4.6 6.32 8.33 1.55 2.15 0.84 167.6 29.9 197.5
% change 4.4 8.4 -1.2 7.8 -3.3 -17.6 -4.5 0.5 3.6 5.2 8.0 5.60
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Funds in Focus
Investors’ Guide
LAKSON EQUITY FUND Key Facts Fund Manager Fund Type Fund Launch\ Date Minimum Investment Front End Load (%) Management Fees (%) Fund Size (mn) Benchmark Trustee Auditor
while the P/E and dividend yield of the portfolio of LEF is 7.56x and 6.45 per cent respectively.
Lakson Investment Equity Fund 13th November, 2009 Rs 5,000 3.0 3.0 Rs 138 KSE100 Index CDC BDO Ebrahim & Co
Outlook After the increase in discount rate by the SBP, the economic outlook appears more difficult and if the fiscal imbalances prevail then the SBP may further increase the discount rate that will negatively affect the valuations of the market. Keeping in view all these factors the LEF will maintain high exposure in defensive and dividend-yielding stocks while the LEF will maintain an overall exposure of 70 per cent in equities.
Investment Objectives The investment objective of the Lakson Equity Fund is to provide longterm capital appreciation by investing mainly in equity and related listed securities. Investments will be made in companies of substance, financial strength and demonstrably superior management skills with some exposure given to smaller capitalized value stocks. Return on Fund July10 Return 2 Months 3 Months 4 Months 6 Months Since Inception
Fund Return (%) 7.92 9.60 -1.28 -1.34 3.34 7.20
Monthly Annualised Returns
LEF (%)
Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Source: Fund Manager Report
1.65 0.29 4.44 -0.06 -9.93 1.56 7.91
Fund Size (Rs in mn) Jan-10 134.0 Feb-10 134.0 Mar-10 140.0 Apr-10 140.0 May-10 126.0 Jun-10 128.0 Jul-10 138.0 Source: Fund Manager Report
Benchmark Return (%) 8.10 12.79 0.87 3.35 9.41 16.01 KSE100 (%) % Excess Return 2.42 -0.77 0.45 -0.16 5.39 -0.9 2.45 -2.51 -10.56 0.63 4.34 -2.78 8.10 -0.19 % Growth MoM 8.06% 0.00% 4.48% 0.00% -10.00% 1.59% 7.81%
Fund Manager point of view The Lakson Equity Fund (LEF) provided a return of 7.92 per cent in July '10 as compare to the benchmark (KSE-100 Index) return of 8.10 per cent translating into an underperformance of 18 basis points. The LEF has appreciated by 7.20 per cent since its inception in November '09. The underperformance of the LEF in comparison to the benchmark has reduced in July '10 as during the month the investors focused on the blue chip stocks other than the index heavyweights. The LEF reduced its exposure in equities to 82 per cent as compare to 83 per cent in June '10 as the LEF booked some gains in banks and energy stocks. The market is currently trading at a P/E of 8.44x with a dividend yield of 5.40 per cent,
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Top Holdings Allied Bank Limited Attock Petroleum Limited Engro Corporation Limited Fauji Fertilizer Company Limited MCB Bank Limited Pakistan Oil Fields Pakistan Petroleum Limited Pakistan State Oil Hub Power Company Limited United Bank Limited Source: Fund Manager Report
Funds in Focus
Investors’ Guide
PAKISTAN CAPITAL MARKET FUND Key Facts Fund Manager Fund Type Fund Launch\ Date Minimum Investment Front End Load (%) Management Fees (%) Fund size (mn) Benchmark Trustee Auditor
Arif Habib Investment Balanced Fund 24th January, 2004 Rs 5,000 2.0 2.0 Rs 460 50% KSE100 Index / 50% 1yr T-Bills CDC A.F. Ferguson
Investment Objectives The objective of the Fund is to provide investors a mix of income and capital growth over medium to long term from equity and debt investments.
In fixed income portfolio, Masood Textile [Pref Shares} was reduced to 3.64 per cent from 5.62 per cent. TFC portfolio of the Fund remained unchanged at 9.87 per cent, while T-bills comprised 23.81 per cent of the portfolio. Top Holdings Engro Corporation Pakistan Petroleum Pakistan Oil Field Fauji Fertilizer Company Limited Packages Kot Adu Power Company Pakistan Suzuki Motor Company Allied Bank Limited Source: Fund Manager Report
Return on Fund July10 Return Quarter on Quarter FY11 to Date Since Inception
Fund Return (%) Benchmark Return (%) 4.95 4.94 0.90 1.84 4.95 4.94 129.80 103.27
Monthly Annualised Returns Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Source: Fund Manager Report
PCM (%) 0.61 0.41 1.62 3.49 -6.08 2.36 4.95
Benchmark (%) 1.78 0.65 3.48 1.83 -5.55 2.75 4.94
Fund Size (Rs in mn) Jan-10 480.0 Feb-10 480.0 Mar-10 470.0 Apr-10 480.0 May-10 440.0 Jun-10 440.0 Jul-10 460.0 Source: Fund Manager Report
% Growth MoM 0.00% 0.00% -2.08% 2.13% -8.33% 0.00% 4.55%
Fund Manager point of view PCM NAV increased 4.95 per cent in July as compare to its benchmark increase of 4.94 per cent during this time. Amongst the top holdings, Engro, PPL, POL, FFC, PSMC and HUBC outperformed, while Packages, Kapco, ABL and ICI underperformed the market. Overall equity exposure increased to 57.04 per cent compared to 53.41 per cent a month earlier. Exposure in Chemicals was added, while that in food producers (Nestle) was offloaded during the month.
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Funds in Focus
Investors’ Guide
MCB CASH MANAGEMENT OPTIMIZER FUND Key Facts Fund Manager Fund Type Fund Launch\ Date Performance Benchmark Initial Public Offer Front End Load Management Fees Fund Size (mn) NAV Fund Rating Trustee Auditor
Performance Review MCB Asset Management Money Market 1 October, 2009 Average 3M deposit rates of AA and above rated Scheduled Banks, net of expense Rs 100 Nil 10% of Gross Earnings Rs 8,350 Rs 100.9070 AA (f) by PACRA CDC A.F Ferguson
Investment Objectives To provide unit-holders competitive returns from a low risk portfolio of short duration assets while maintaining high liquidity. Return on Fund July Return Year to Date Return Since Inception Monthly Annualised Returns Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10
MCBCMOF (%) 11.2 11.2 10.9
Benchmark (%) 5.4 5.4 6.1
MCB-CMOF (%)
Benchmark (%)
11.50 10.7 11.10 11.30 9.40 10.70 11.20
7.30 7.20 7.20 7.40 4.30 7.40 5.40
Fund Size (Rs in mn) Jan-10 6,834.0 Feb-10 6,822.0 Mar-10 6,756.0 Apr-10 7,949.0 May-10 7,269.0 Jun-10 6,525.0 Jul-10 8,350.0 Source: Fund Manager Report
% Growth MoM 47.57% -0.18% -0.97% 17.66% -8.55% -10.24% 27.97%
Asset Size
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During the month, the fund increased its exposure significantly in government papers to around 81 per cent with a focus on short tenor papers in order to reduce its duration. The fund's exposures to TDRs were reduced during the month amid a) maturities of previous placed TDRs b) lack of attractive opportunities post-June.
World Stocks
Investors’ Guide
World stocks in July 2010
Mostly moved up Investors Guide Research
R
egional economic recovery once again came back on the track. Sequential real GDP growth in the current fiscal year once again seems to rebound sharply from slowdown. The surging retail sales and industrial production reflected strengthened domestic demand. The positive momentum has boosted business and consumer confidence further. Meanwhile, the unemployment rates have also stabilised, despite being at recent peak levels. External activities, however, continued underperforming with no signs of a turnaround to positive growth in the near terms. India's benchmark stock index Sensex 30 climbed by 0.95 per cent, led by real estate developers and automakers, amid expectation that rising incomes and the nation's economic growth will boost profitability. Foreign investors purchased a net $5.8 billion of Indian stocks in June and July, making up half of the $11.7 billion going to the region's developing markets excluding China and Malaysia. The massive foreign buying was due to expectation that India's $1.2 trillion economy may expand 9.4 per cent in year, the fastest pace since 2007. China stocks rallied by sending the benchmark index up on the likelihood that government may relax its policy tightening measures which ultimately spurred gains for the nation's bank and property companies. The Shanghai Composite index declined 23 per cent this year, the worst performer among the benchmark Asian gauge. However, it recovered strongly in July 2010 and posted 9.97 per cent returns during the month. Moving forward towards Asian countries, Sri Lanka and Pakistan bourses have posted 11.90 per cent and 8.20 per cent respectively. Nikkei gained 1.65 per cent during the month of July as exporters were also hurt by a stronger yen after the dollar hit an eight-month low against the yen, extending earlier losses. On the flip side, US stocks posted significant gains of 7.08 per cent as monthly job data and consumer company results painted a more promising picture for the recovery. Taiex (Taiwan benchmark index) surged by 5.88 per cent, as Taiwan's export once again started to pick up, due to strong demand from china resulting trade deficit into surplus at the end of the month. Going forward, it is previewed that economic indicators
Source: Reuters
would further improve across the globe. It is likely that demand pressure may retain inflationary pressure, which would ultimately force central bank to push policy rate upwards.
Performance of Regional indices in July10 Country Sri Lanka China Pakistan U.S.A U.K Taiwan Indonesia Hong Kong South Korea Malaysia Japan India
Indexes COLOMBO SHANGHAI KSE100 DOW JONES FTSE 100 TAIEX JAKARTA HANG SENG KOSPI KUALA LUMPUR NIKKEI 225 SENSEX 30
July10 Return (%) 11.90% 9.97% 8.20% 7.08% 6.94% 5.88% 5.34% 4.48% 3.59% 3.57% 1.65% 0.95%
Source: Reuters
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Stocks
Investors’ Guide
Performance of KSE in July 2010
FOREIGNERS BOOSTED INDEX Investors' Guide Research
K
arachi stock market gained 8.20 per cent (797 points) in July10, the first month of FY10, mainly due to continued foreign interest, buying in E&P, Fertilizer and Power sectors, expectations of good corporate results and higher international oil prices. However, selling from government institutions adversely affected the market sentiments. The benchmark, KSE 100-index, closed at 10,519 points at the end of the month. The month started with the positive note despite of implementation of capital gains tax from 1st July onwards, as almost all the negative factors already incorporated in last fiscal year. Average daily ready volume fell by 11.4 per cent to 69.0 million shares as compare to 77.8 million shares in last month. Foreign investors were mainly on the buying side as according to the NCCPL figures there was a net foreign buying of $42.4 million in July10. Moreover, news regarding introduction of leverage product worked as a catalyst for the market. Among the sectors, Cement, Power, E&P, Fertilizer and Banking outperformed the index. Cement dispatches rose by 9 per cent in FY10 despite of the fact that export cement dispatches down 1 per cent in FY10; however it was domestic cement demand which rose by 15 per cent in last fiscal year. Both market leaders in cement stocks - DG Khan Cement and Lucky Cement gained 18.42 per cent and 12.01 per cent respectively. In Power sector, Hub Power Company outperformed the index as company had posted returns of 12.70 per cent against the KSE 100Index return of 8.20 per cent. The significant gain in stock prices was due to anticipation of better-than-expected result, owing to high tariff structure, currency depreciation and bonus issued by Wapda. In Fertilizer sector the entire three blue-chip companies moved upward as actual gas load-shedding was lower than initially estimated by the government, as a result all the three major fertilizer producers posted above-expectation results in 1HCY10. Fauji Fertilizer Bib Qasim market price appreciated by 13.06 per cent as company had posted EPS: Rs1.88/share as compare to consensus research estimates of EPS: Rs1.65/share. Market prices of the shares of Engro Corporation and Fauji Fertilizer Company appreciated by 10.13 per cent and 9.17 per cent respectively.
Source: KSE website
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Going forward, it is previewed that unexpected increase in discount rate and flood situation will keep the market in pressure. The impact of flood will first be reflected in agriculture as around $1.5 billion worth of crop estimated to have been damaged which will result in contraction in GDP growth to 3 per cent from initial estimates of 4.5 per cent. Moreover, it is seen that economic indicators would further deteriorate in FY11 as impact of flood will increase government borrowing, food inflation and will ultimately widen twin deficit. However, on the flip side, foreign aids plus foreign inflows will ease liquidity position and also help manage fiscal deficit.
Money Market
In an unexpected move, State Bank of Pakistan raised the discount rate by 50 basis points to 13 per cent from 12.5 per cent for August-September 2010, due to fiscal and inflation pressures. This first increase in policy rate since November '08, comes after a 250 basis points easing cycle and is somewhat surprising as more than 90 per cent of market participants expected discount rate to remain unchanged. It is expected that increase in the discount rate would enhance the lending rates in the country and would slow down private sector credit demand further. However, how effectively this move would be in pulling the aggregate demand down to contain inflation remains a question mark. Restraining the fiscal deficit at announced target of 4 per cent of GDP for FY11 seems challenging mainly due to meeting the tax collection target of Rs1,667 billion that would require a 25.6 per cent growth which seems unlikely to achieve in current circumstances. Furthermore, delays in committed external fund would put pressure on external accounts' sustainability. Earlier during the month, long-term interest rates moved higher with some downward pressure at the shorter end, leading to steepening of the yield curve, given indication of increase in discount rate. However, later on, prior to monetary policy announcement the government has rejected all the PIB yields, which indicated no change in discount rate. During the month under review, State Bank of Pakistan has conducted T-Bills auction twice a time with a total target of Rs185 billion against the maturity of Rs174 billion. But this time maximum participation was seen in short term paper due to higher inflation concerns ahead. Going forward, auction target for 1st quarter FY11 (July - September, 10) was announced with pre auction target of Rs535.0 billion against maturities of Rs500 billion. 3MT-Bills 6MT-Bills 12MT-Bills
June2010 12.1036 12.3029 12.4188
July 2010 12.1036 12.3707 12.4568
% Chg 0bps 7bps 4bps
1M KIBOR 3M KIBOR 6M KIBOR 9M KIBOR 1Yr KIBOR
June 2010 12.45 12.29 12.37 12.64 12.72
July 2010 12.39 12.33 12.42 12.70 12.76
% Chg -6bps 4bps 5bps 6bps 4bps
Feature
Investors’ Guide
Levy of CGT
Modus Operandi
Investors Guide Monitoring ll asset management companies (AMCs) have informed their unit-holders that gain on sale or redemption of investment units would be liable to capital gain tax (CGT). Most of the AMCs have dispatched letters to their unit-holders in this regard. According to a copy of letter issued by one of the AMCs, CGT is also applicable on any gain earned by investors in all mutual funds at the rates specified in Division VII - Part I of the First Schedule of the Income Tax Ordinance 2001. Accordingly asset management companies have been given the responsibility to withhold CGT at source at the rate of 10 per cent for holdings of less than six months, 7.5 per cent for those of more than six but less than twelve months and zero per cent for holdings of more than one year on redemption, transfer, conversion/merger of units. Furthermore, any capital losses accrued during the tax year can be adjusted against gains earned in the same year by the investors. Meanwhile, the Federal Board of Revenue (FBR) has issued comprehensive procedure for computation of
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capital gain tax (CGT) on shares trading at the stock exchanges to clarify issues related to acquisition and disposal dates of shares. The FBR draft rules have clarified issues pertaining to date of securities acquisition, their disposal, holding period, derivative products and miscellaneous issues with respect to buying and selling of shares at the stock exchanges. According to the proposed rules, where requisition of securities (including letter of rights, units of mutual funds, securities in physical form) has taken place on trading platforms (including Platform for Off Market Transactions) provided by stock exchanges, the date of settlement of the relevant trade shall be taken as date of acquisition and broker's bill shall be the conclusive evidence of such acquisition. Where the title in the securities is not acquired physically through trading platforms provided by stock exchanges, the date on which the name of transferee is recorded in the share certificate shall be taken as date of acquisition. In case of initial public offerings, including the shares of founders/sponsors where securities are on electronic form with the date
of receipt of securities into CDC Account of the person, and where shares are in physical form, the date on which the company registers the person as its shareholder, shall be taken as dates of acquisition. The rules further said that where the securities are bonus shares, the date of receipt of such shares in electronic form into CDC Account of the person and where shares are in physical form, the date on which the company registers the person as its share holder in respect of such bonus shares shall be taken as date of acquisition. In case of securities being "right shares" the date of receipt of such shares in electronic form into CDC Account of the person and where shares are in physical form, the date on which the company registers the person as its shareholder in respect of such "right shares", shall be taken as date of acquisition. In case of securities being units of an open-end mutual fund, the date of acquisition shall be, the date of purchase/conversion in/transfer in/switching in of such units. Certified statement of account provided by asset management company shall be the conclusive evidence of such acquisition.
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Feature
Investors’ Guide In case of securities being "letter of rights" the date of receipt of such letter of rights in electronic form into CDC Account of the person and where letter of rights is in physical form, the date on which the company registers the person as entitled to such letter of rights, shall be taken as date of acquisition. In case securities have been acquired on account of nomination under section 80 of the Companies Ordinance 1984 under bequest or inheritance, the date of acquisition shall be the date of death of the person making such nomination or such bequest as the case may be. Where securities are acquired through a gift in an electronic form, date of transfer of such securities to CDC account is received in a physical form, the date on which such securities are entered against the name of such donee in time register of share holders of the company through such endorsement in the
of securities being units of an open end mutual fund, the date or redemption/conversion out/transfer out/ switching out of such units, shall be taken as date of disposal and certified statement of account issued by asset management company shall be the conclusive evidence of such disposal. In case of derivative products, date of exit from purchase contract or sale contract of the financial instrument shall be taken as date of disposal. Highlighting the 'holding period', the rules said that where contract for the purchase and sale of securities is periodically or ultimately settled by the actual delivery the period between the date of acquisition and date of disposal shall be reckoned as the holding period. In case of derivative products the period between the date of entry into contract of purchase or sale and date of exit from contract of purchase or sale shall be taken as the holding period. In case securities not traded
to be employed consistently, at the option of the person holding such securities, shall be either "Moving Weighed Average Cost method" or "Specific Identification Cost method on FIFO basis". The profit made on sale of borrowed shares shall be treated as capital gain when such shares are acquired for their return to authorised intermediary. Period intervening between acquisition and disposal of such borrowed shares shall determine the "holding period" in which the capital gain or loss fails. "Specific identification method" shall be used to determine the acquisition cost and consideration for disposal of such securities. The difference between cost of acquisition and consideration received against disposal (net off all borrowing costs) of such shares shall be treated as capital gain or loss. This rule shall he applicable to the securities borrowed in accordance with the "Securities Lending and Borrowing
In case of securities being units of an open end mutual fund, the date or redemption/conversion out/transfer out/ switching out of such units, shall be taken as date of disposal and certified statement of account issued by asset management company shall be the conclusive evidence of such disposal share certificates, shall be taken as the dates of acquisition. In case securities have been acquired under stock option scheme for employees of a company approved by SECP, the date on which the option is exercised shall be taken as date of acquisition. In case of derivative products, date of entry into purchase contract or sale contract of the financial instrument shall be taken as date of acquisition. The procedure regarding "date of disposal" of shares revealed that in case disposal of securities (including letter of rights, securities in physical form and units of mutual funds) has taken place on trading platforms (including platform for Off Market Transactions) provided by stock exchanges, the date or settlement of the relevant trades shall be taken as date of disposal and broker's bill shall be conclusive evidence of such disposal. In case, title in the securities in physical form has been transferred at the end of the register of shares, the date on which name of transferee is recorded in the share certificate shall be taken as date of disposal. In case
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on trading platforms (including Platform for Off Market Transactions) provided by stock exchanges, the period between date of acquisition and date of disposal, shall be taken as the holding period. The securities held for a period 182 days and for a period of 365 days shall be taken as held for six months and one year respectively. The securities held for less than one day shall be treated as held for less than six months. About the derivative products, the rules said that for the purpose of section 37-A, "derivative product" means financial contracts traded on stock exchanges of Pakistan that do not necessarily settle periodically or ultimately by the actual delivery of securities and include Future Contracts Options, Swaps and Contract of Right etc. The rules further said that the method to determine date of acquisition of different/various securities, disposed of, for the purpose of determination of holding period to be employed consistently shall be "first in first out". To determine the cost of acquisition of securities the method
Scheme" approved by Securities and Exchange Commission of Pakistan. The profit made on disposal of shares acquired under margin finance scheme, margin trading scheme or other financing/leverage schemes approved by Securities and Exchange Commission of Pakistan shall be treated as 'capital gain'. The difference between cost of acquisition (inclusive of borrowing cost) and consideration received against disposal of such shares shall determine the quantum of capital gain or loss. The FBR has further specified that only express and specific exemptions in respect of income from 'capital gains' as provided under the second schedule to the Income Tax Ordinance, 2001, shall apply for the purposes of taxation of income from 'capital gains' arising from disposal of securities. The loss suffered on disposal of securities during the period of a tax year shall be set off against capital gains from disposal of securities during such tax year, irrespective of the period of holding of such securities in such tax year, the draft income tax rules added.
Review
Investors’ Guide
KSE awaits return of leverage products
MTS DELAYED, STEAM DENIED Investors' Guide Report
T
he dissenting note on the proposed margin trading system (MTS) by the chairman KSE, Zubyr Soomro is yet to be reviewed by the BoD which was due to meet on 26th but owing to non-availability of dissenter in the town it was postponed indefinitely. The observations of Mr Soomro raised eyebrows in stock fraternity and most of the key market players including member directors have termed his apprehensions overcautious and turned down any lack of technicality in proposed MTS. The contents of the chairman Soomro's dissenting note included: No counter party risk assessment as no pre-trade disclosure; use of shares in blocked account; risk management; the default process; legal frameworkcontractual obligations and anti money laundering related issues. Chairman Soomro's emphasis on the last - anti money laundering (AML) - issues ran thus: "Given the international focus on anti-money laundering issues and our own recent legislation on this, we should ensure that the proposed product is in compliance with the letter and spirit of these requirements," said the note, adding: "The fact is that counter-parties will not be known at the time that credit is extended to them. How then can AML due diligence be done on them before execution of the transactions?" A letter signed by the five broker directors rebuffed chairman's statement that he was abroad and could not study the proposal. "The excuse is not valid since the MT concept paper had been in discussion since October 2009," the directors wrote, adding: "His stance that till he is satisfied nothing move betrays an attitude problem and reflects that he has not even read Articles of Association, which states that all decisions taken
by majority in the Board meeting will be carried and respected." The letter of member directors unequivocally stated that the "observations of the chairman do not merit point-wise reply because he does not seem to understand the basic dynamics of the capital market" say the five signatories to the letter adding: "To use a fashionable phrase of money laundering and concerns thereof, he seems to be unaware that 'no' investor can operate at the exchange without UIN which is allotted by the NCCPL after getting CNIC information of the account holder verified from Nadra." In a separate letter to the Director SECP, the five KSE member directors respond to the apex regulator's letter dated Aug 16 asking for "comments on Chairman's dissent note." The broker directors stated that the KSE chairman's concerns completely ignored the expert committee's report wherein all issues had been debated and resolved. The directors asserted that the KSE management had given a detailed presentation in the meeting on July 26 where the proposal was approved by majority. The brokers reminded the SECP that the MTS proposal was firmed up by the Experts Committee formed by SECP and headed by director (SE). The concept paper was later sent to all exchanges, CDC & NCCPL for comments. The KSE Board had decided by a majority vote
in favour of the concept paper. But the sting of the broker directors' letter to the SECP was in its tail: "What is surprising is that SECP, as the apex regulator is giving an indication that it is either not supporting the concept of MT or it is bent upon delaying it." The launching of the proposed leverage product of Margin Trading System (MTS) will increase the turnover and value of traded shares at the local bourse manifold, analysts said. They said that the absence of ready board leverage facility was the main reason for declining turnover at the local bourse. It is worth mentioning here that the KSE board of directors had approved the proposal of MTS. However, the KSE Chairman Zubyr Soomro expressed reservations with the proposed product of MTS approved by the KSE board of directors. Given the scuffle within the board, several major investors at the market thought that the MTS which had been under the limelight since October 2009 might be delayed but it was unlikely to be denied. Everyone agreed that the episode had placed the apex regulator - SECP-- in an uncomfortable position. In a recent development, a meeting was held between broker directors and the chairman who participated through tele-talk from his hometown. Experts are terming this move a positive sign which may take the issue towards resolution.
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Article
Investors’ Guide
World's tinniest investor base in stocks and mutual funds
SHOCKING FACTS Shiraz Ahmed
I
t is viewed with proud that our stock market became best performing market in 2002 and 2008 while it was ranked 5th best performer in last fiscal year which showed that it has strong fundamentals but main drivers for momentum are not merely strong fundamentals. There are several other factors most importantly economic and political which actually steer the movement of the benchmark either downward or upward. Recently very strange facts and figures were highlighted by some reports about stock market trading. Most important of them is that there are 40 registered traders, identified through unique identification number (UIN), who control nearly 60 per cent trading and investing in stock market. All these accounts are benami (nameless) which could not be identified on personal basis. Such accounts are always a cause of concern for genuine traders because such accounts have more control in the market in terms of brining selling pressure or buying spree in the market. Similarly, there are nearly 1,35,000 UIN out of total 2,70,000 which actively trade in the market and this percentage is less than 0.01 per cent of total population of the country. Moreover, the 40 most influential traders who control 60 per cent of the trading and investing are merely ridiculous 0.03 per cent of active UIN and next to none or 0.014 per cent of total registered UIN in the CDC. This shows the gloomy picture of investor base in the stock market and this situation is more or less equal to mutual funds clients which collectively stand 2,50,000 in the country if their duplication in various funds is taken into account. If these counts are compared with 30 million bank depositors in Pakistan, it became clear that both stock market and mutual fund companies have failed to attract investors. Its main reason may be some rightful constraints including a relatively
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complicated procedure of investing in them. In banks one has to visit the premises and get open the account of any kind. For this purpose only money and CNIC is required apart from some minor conditions. But in case of stepping in stock market and mutual fund industry first of all one has to be aware on them and thereafter should have proper knowledge to utilise these services. Moreover, opening of account is not less complicated but one would not start investing in them unless one has complete knowledge of how much he would or may gain in investing in stocks are mutual funds. According to analysts, the investor base is more or less stagnant for the past decade despite the fact that the KSE-100 Index, the key barometer of the market activity, has jumped by more than ten times since 2001. It crossed the psychological barrier of 15,000 points to make an all time high of 15,737 on April 20, 2008.
"We aren't comparing ourselves with the developed markets like the USA where every third person invests in stocks. Even India and Bangladesh have an investor base of 5 million and two million investors' respectively." said one analyst. In third world countries, shortsightedness is main feature of the mindset which equally plays its role in investment decision. Every one needs quick but huge returns and mostly is devoid of long-term vision as far as returns are concerned. This is the main reason which aroused majority of the population in the country to invest in real estate which is neither a regulated market nor it has any centralised mechanism for buying and selling. Moreover, the fears of forgery and illegal occupation are attached with real estate business but despite of these facts people feel comfortable to invest in real estate and are still scary to step in stocks and similar types of investment.
Big News
Investors’ Guide
AH Dow Jones SAFE Pakistan Titans 15 Index Fund unveiled
An audacious launch Mujtaba Baig generous Iftar-dinner was the hallmark of the ceremony to launch the AH Dow Jones SAFE Pakistan Titans 15 Index Fund (AHDJPF) in a five start hotel during a cloudy evening of Ramadan and some eyebrows discernibly raised and some whispers termed the arrangement superfluous on the back of gloom prevailing in society due to flood havocs. But in his keynote speech Nasim Beg, Chief Executive of Arif Habib Investments blew out the concerns of cynics and helped eyebrows retreat by announcing that the amount equal to expenses of launch ceremony would be donated for flood relief apart from other contributions by Arif Habib Group. He kicked off a new fund by setting a new example of keeping beautiful balance between professional commitment and personal responsibility. Narrating the main features of the newly launched fund, he said that AHDJPF will employ a passive management approach to replicate the performance of the constituents of Dow Jones SAFE Pakistan Titans 15 Index. The Fund will invest all or substantially all, of its assets in securities that make up the target index. Excess cash, if any, may be kept in daily-return bank deposits or short-term money market instruments. The Fund is not allowed to take leveraged investment positions. This fund also provides a low cost exposure to a portfolio primarily holding bluechip liquid stocks selected on the basis of free-float market capitalization. He said that its offering would be made as soon as flood water recedes and market settles and expressed hope that within three months this will be held out for subscription to public. He further said that if one wants to sell the units of AHDJPF one would not have to go for its redemption but it can be sold to any other buyer through broker and this provision would be applied for this Fund particularly to simplify the offloading mechanism. "We believe that this fund will become the ideal one-window vehicle for investing in the Pakistan stock market; it should provide ease of taking Pakistan exposure for foreign investors and become a low cost vehicle for domestic retail investors for taking a diversified entry into the market. We intend having this open-end fund traded at the Karachi Stock Exchange which would enable investors to buy and sell units of the Fund and settle the transaction in a manner similar to that of buying and selling shares, with delivery at the Central Depository Company", he added. In his key note speech Arif Sultan, Business Development Director of Dow Jones Indexes, Singapore said that Dow Jones SAFE Pakistan Titans 15 Index is a free float-adjusted market capitalisation based index comprising of fifteen Pakistani stocks. The index is a subset of 15 largest and liquid stocks (as measured by one-year average daily trading volume in the Dow Jones SAFE (South Asian Federation of Exchange) 100 Index which captures performance of 50 larges stocks from India and 50 largest stocks from Pakistan Bangladesh, Sri Lanka and Mauritius. The index at present constitutes 15 stocks, which comprises 57 per cent of the overall market capitalisation of KSE-100 Index. The allocation is divided in six major sectors of the equity market including Oil and Gas Producers (38.08%), Banks (30.78%), Chemicals (20.29%), Electricity (5.46%), Construction & Materials (3.96%) and Financial Services (1.43%). It may be pointed out here that Arif Habib Investments Limited (AHI) under a licensing agreement with CME Group Services LLC has launched its first Index Tracker Fund - AHDJPF. According to AHI, the Index Fund will provide investors a very low cost solution to investing in select (most liquid) Pakistani stocks, the (simulated) price performance of which has historically been highly correlated with the performance of the broader KSE-100 Index.
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Views
Investors’ Guide
Islamic finance in world
Sukuk widely eyed in west Investors' Guide Report
M
any western financial institutions are seriously considering the option of investment in Sukuks after the recent crisis in financial markets of the west which brought on collapse of many giant institutions especially tailspin of Lehman Brothers has shaken the confidence of European investors on conventional financial system, said Arif Sultan, Business Development Director of Dow Jones Indexes, Singapore. Talking exclusively to Investors' Guide in soft launch ceremony of AH Dow Jones SAFE Pakistan Titans 15 Index Fund in a local hotel recently he said that South Asia has immense potential for growth of Islamic banking and finance and Pakistan lead the queue in this regard and tremendous growth potential is still there despite exponential growth in Islamic finance in a slight span of one decade which is record itself. He said that Malaysia is flagship of Islamic financial institutions as far as growth and expanded outreach is concerned while Middle East countries have also vastly adopted this mode of financing which is not only Sharia-compliant but it offers safe and reasonable returns to all types of investors. It may be mentioned here that Sukuk is the Arabic name for financial certificates, but commonly refers to the Islamic equivalent of bonds. Since fixed income and interest bearing bonds are not permissible in Islam, Sukuk securities are structured to comply with the Islamic laws and its investment principle prohibits the charging, or paying of interest. Financial assets that comply with the Islamic laws can be classified in accordance with their tradability and non-tradability in the secondary markets. Arif Sultan further said that books on Islamic financing are being translated into Japanese language because Japanese society is so keen to adopt this system of finance which is an ample proof of the fact that Islamic
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financial system is for the entire humanity regardless of religion or sect. He said that it is very incorrect to presume that main initiators of Islamic financial system are western financial institutions. He said that this system of financing has been originated from Asia and now it is expanding towards every direction of the globe and western financial institutions are very keen to adopt this system of finance. Since the launch of Islamic equity funds in the early 1990s, there has been the establishment of credible equity benchmarks by Dow Jones Islamic market index (Dow Jones Indexes pioneered Islamic investment indexing in 1999) and the FTSE Global Islamic Index Series. The Web site failaka.com monitors the performance of Islamic equity funds and provides a comprehensive list of the Islamic funds worldwide. It may be pointed out that Shariacompliant assets reached about $400 billion throughout the world in 2009, according to Standard & Poor's
Ratings Services, and the potential market is $4 trillion. Iran, Saudi Arabia and Malaysia have the biggest Sharia-compliant assets. In 2009 Iranian banks accounted for about 40 per cent of total assets of the world's top 100 Islamic banks. Bank Melli Iran, with assets of $45.5 billion came first, followed by Saudi Arabia's Al Rajhi Bank, Bank Mellat with $39.7 billion and Bank Saderat Iran with $39.3 billion. In Malaysia, the National Sharia Advisory Council, which has been set up at Bank Negara Malaysia (BNM), advises BNM on the Sharia aspects of the operations of these institutions and on their products and services. In Indonesia the Ulema Council serves a similar purpose. A number of Sharia advisory firms have now emerged to offer Sharia advisory services to the institutions offering Islamic financial services. Issue of independence, impartiality and conflicts of interest have also been recently voiced. The World Database for Islamic Banking and Finance (WDIBF) has been developed to provide information about all the websites related to this type of banking. Sharia banking has been trying to market itself to investors, businesses and the general public as a credible alternative to conventional western banking. At first blush, the exponents of Islamic finance certainly have a bullet-proof argument-that the reckless risk-taking and bad decisions that tipped global banking into meltdown could not happen under the wise leadership of the Sharia sector. If only it were that simple. While international finance suffered humiliating government bailouts, there is little evidence that Islamic banking has stepped in to fill the void. But Sharia banking's secular cousin, the ethical banking sector, has clearly benefited. Are the men at the top of the Islamic finance tree engaging in self-criticism and calls for rejuvenation? Is there even much call from outside this elite group for a revolution that could bring success?
Article
Investors’ Guide
Commodity Mutual Fund
AMCs yet to venture Jameel Siddiqui
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ommodity mutual funds are an interesting, and potentially rewarding, way to diversify your investment portfolio beyond stocks and bonds. That's because commodities are often viewed as a hedge against inflation. Meaning the prices of commodities tend to rise in step with inflation. This movement runs to counter stock prices - which is an attribute that makes commodity mutual funds so attractive to many investors. Unfortunately in Pakistan there is no any commodity based mutual fund because there is no regulated market of commodities here. Recently National Commodities Exchange Pakistan Limited started regulated trading but it has long way to go. Till then it seems riskier to venture commodity mutual funds in local market. Some months back a local AMC with an associate company of Middle East showed its intention to launch a commodity mutual fund. However, despite lapse of several months it has not yet unveiled any such fund. According to internal sources of said AMC in near future too, it does not have any plan to launch it and idea is still rolling in papers. According to mutual fund experts, after huge devastation due to floods commodity market will remain depressed in year or two where most of the demand would have to be fulfilled through imports by putting extra burden on import bill. Therefore, in this scenario it would be unwise to launch commodity fund and best time would be after complete recovery from flood havocs. Some experts said even in normal market conditions the chances are quite bleak for the launch of commodity mutual fund because commodities will always be traded in local market in conventional way despite presence of commodity exchange. Most of the people related with commodity business are not in favour of regulated trading because of lack of awareness and due to their reluctance to enter
into a registered method of trading. Generally commodities are defined as things that tend to come from the earth or are grown. This includes grains, minerals and metals, livestock, cotton, oils, sugar, coffee, and cocoa. Some of the more common commodities traded on the exchange include crude oil, cotton, gold and wheat. Commodities are traded in the spot market or in the form of futures contracts. Spot market trades are made for immediate delivery. For example, energy could be traded on the spot market and delivered immediately into the electrical network. When trading on the spot market, physical delivery of the commodity often takes place. Commodities traded as futures are contracted for a "future" delivery date. Most investors in the commodity market trade in futures contracts and many of these contracts are sold before the contract expires. That means the average investor never takes physical delivery of the commodity itself, rather they are looking to make money on their investment through the changes in the commodity's value over time. Traditionally, many investors working in the commodities futures market invest using a margin account. When using a margin account the investor might only need to invest 5 per cent of the contract's total worth to hold it. While this approach creates windfall profits for some, the added risk produces many losers too.
Commodity Index Funds Whenever there is a need in the market, smart people are quick to fill that void. In the same way that traditional mutual funds allow investors to create portfolios of common stocks or bonds, commodity mutual funds give investors the option of adding commodities to their portfolio and limit the risk associated with the commodities market. Alternatives to Commodity Funds The alternative to commodity mutual funds is to create your own portfolio of mutual funds that invest in companies that are in the commodity business. For example, in western countries you can invest in gold mutual funds, natural resource mutual funds, oil companies, and other energy funds. Fidelity's Select Industrial Materials is a mutual fund of companies in the chemicals, metals, and building materials industry. Pros and Cons of Investing in Commodity Funds Commodities offer portfolio diversification. Investing in futures contracts or actual commodities provides a portfolio component that is not a traditional stock, bond, or a mutual fund that invests in stocks and/or bonds. Historically, commodities have had a low correlation to traditional equity markets, meaning that they do not always fluctuate in tandem with market movements. For many investors, achieving this low correlation is the primary objective when seeking to add diversification to a portfolio.
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Review
Investors’ Guide
SECP for reporting dubious transactions to FMU
Tough measures in hard times Tanzeel-ur-Rehman
S
ecurities and Exchange Commission of Pakistan has recently issued instructions to all the exchanges and clearings house to report the suspicious transactions' reports (STR) and currency transaction reports (CTR) to its Financial Monitoring Unit. The apex regulator took this step under Anti Money Laundering Regulations 2008 and directed the KSE, LSE, ISE, CDC, NCCPL, NECL to submit details of STR and CTR to FMU. It may be noted that the AML regulations define that it is justifiable to suspect any customer who is reluctant to provide normal information and documents required routinely by the financial institutions in the course of the business relationship. However, market players have taken this step of the chief regulator with reservations and said that in stressful times for stock markets and economy as a whole it is quite irksome to declare details for those who intend to avoid limelight while putting their money in various sources of fund. A renowned stock broker said that owing to fragile law and order condition many big investors have started hiding their identification due to fear of outlaws and if regulator forces to show their identity they may shift their money from local market to other regional markets. Transactions that do not make economic sense, for example a customer having a large number of accounts with the same financial institution, transactions in which assets are withdrawn immediately after being deposited, transactions that cannot be reconciled with the usual activities of
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An analyst said that those who earn black money could not be trapped so easily because mostly black-money holders are powerful people and any authority could not investigate their sources of wealth unless green light is given to them from top notch of the country the customer, transactions involving large amounts of cash and transactions involving structuring to avoid reporting or identification requirement fall under the ambit of suspicious transactions, must also be reported to the FMU. Market sources also said that many investors have amassed wealth through speculative trading during the days of stock boost in local market. They have removed their previous accounts from books and now registered themselves as fresh investors in automated trading system but now they are quite scary to see strict regulatory regime of the SECP and are planning to withdraw their investment from the local market. An analyst said that those who earn black money could not be trapped so easily because mostly black-money holders are powerful people and any authority could not investigate their sources of wealth unless green light is given to them from top notch of the country. He alleged that still there are many big fish in the market who are working as proxy of some political tycoons and no one has courage to
identify that person or his or her master-financier. Transfer of money abroad by an interim customer in the absence of any legitimate reason, repeated transfers of large amounts of money abroad accompanies by the instructions to pay the beneficiary in cash have also been suspicious. Such cases were unofficially quoted in the market but people try to avoid such incidents and most people believe that after some deal such dubious investors may again be holding control on stock trading in the market. In recent move, the stock exchanges have been asked to report transactions with complete details, such as purchasing of securities to be held by the financial institution in safe custody, where this does not appear appropriate given the customer's apparent standing; requests by a customer for investment management services where the source of funds is unclear or not consistent with the customer's apparent standing; large or unusual settlements of securities transactions in cash form and buying and selling of a security with no discernible purpose or in circumstances which appear unusual. Experts said that if apex regulator is really serious to pinpoint such elements who have dubious sources of income and nature of their transactions also arouse suspicion then action must be taken against such element without any duress and no discrimination should be applied while dealing with such elements. It is generally felt in the market that some most powerful persons of present setup are directly involved in equity markets through their stooges and all developments are made on their instigation which is quite worrisome for the market.
Article
Investors’ Guide
SOCIAL ASPECT OF MUTUAL FUNDS Adnan Hussain
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orld's mutual fund industry has hit the mark of $23 trillion assets under management which showed the acceptability of this mode of investment moving up gradually because of volatility in stock and bond markets all around the world. According to reports, before the advent of mutual funds at global scenario the widely adopted mode of investment was stock markets and real estate but the series of crash in world bourses and subprime crisis has shifted the global focus to mutual funds which is treated as a rational and judicious way of investment where greed and anxiety have narrow room to stay put. Financing for stock trading has also decreased to a significant level because now investors have not so much confidence on rising index which has more than once shattered their confidence and brought on collapse of several big financial giants like Lehman Brothers and AIG. This is the main reasons that now every third Amercian and sixth British has some part of his or her investment in mutual funds while ageing manpower mostly prefer to invest in pension funds to make their postretirement life free from financial worries. According to a social scientist fragile family norms is another factor which forces ageing manpower of the west to fret over their lives after retirement and at the age of fifty their investment strategy mainly focuses on pension funds. Because of growing yuppie culture in western world workers do not rely on institutional pension schemes because they keep on switching over job during their whole working lives. Therefore, they keenly invest in mutual fund based pension funds which guarantee a handsome monthly amount on regular basis after their retirement. On the other hand, in third world countries where cultural values still dominate despite crack in family system, majority of ageing people plan
to rely on their offspring especially the boys after retirement and whatever they save they spend it for the education of sons and marriage of daughters. Despite of this, there is a class of urban old-timers who now came to realise the collapsing family system and plan monetary self-sufficiency after their retirement. Government servants receives pension from government after retirement but rising inflation and demanding life style has made this amount of pension insufficient to spend a decent life after retirement and they have to partially rely on their children for their financial needs especially medical ones. Due to provision of low quality basic needs including food, water and residence older people suffer from diseases earlier than the previous times when clean air and clean water was not hard to find because of low congestion in living areas and high standard of municipal services. However, it seems that our population has yet to realise the importance of saving for life after retirement because their working life has so much worries to cope with them and therefore, people don't have time to think about future in
the long-term. This is the reason that they reach the brink of old-age and they don't have enough to spend their ending time with financial peace and have no option but to depend on their children. In this scenario there is pressing need to make people aware on importance of saving for the long-term to protect their post-retirement life with regular disbursal of handsome amount as return of their life-long investment. For this purpose mutual fund companies should also devise long-term marketing strategies to publicise their pension funds and develop their features in easy to understand dialect for the comprehension of common man. Another important point is that entire target audience of pension funds does not live in cities, there is a sizeable population of ageing people who live in small towns and villages and are self-employed who can easily invest a handsome amount regularly to make their old age free from financial stress. But unfortunately our mutual fund companies do not have this level of long-term vision to popularise a significant mutual fund which actually focuses the social wellbeing of an important segment of the society.
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Article
Investors’ Guide
Investment Option
Stocks or Real Estate Investors' Guide Report
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tock market's crashes of 2005 and 2008 are not distant memories while big tumble in real estate during the first tenure of PPP government and recently prevailing slowdown are also enough to shake confidence of retail investors to try their luck in both the sources of investment. Against the backdrop of less returns of bank deposits and low real interest rate of NSS and mutual funds' depressed profit margins there is no any other option for the experienced retail investors but to either go for stocks or real estate. In the opinion of leading investment experts, both markets are good but the investment objectives and one's sources of income determine one's choice. Another investment consultant concurred, saying that the choice of any form of investment will depend on many factors. During present times of political uncertainty and directionless economic management one wonders to opt for real estate because of integral flaws in its market which is unregulated in Pakistan. On the other hand persistent lackluster in stock market is another fear factor to put money in this avenue. But one can not afford to keep one's money in state of disuse. Therefore, it is necessary to make its detailed comparison to go either way. Performance Based on performance and rate of return, stocks can be good. As a standard parameter the long-term returns of real estate is 3 per cent a year in a normal market while that of stocks is 9 per cent to 10 per cent. If we see the previous fiscal year's performance stocks gained 35 per cent while real state stayed flat. Therefore, both in long and short-term stocks offer returns better than real estate. Leverage The option of financing is available in stock market and one can gain by investing the financed money in
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stocks if market is upward. However, if market goes down he has to face multiple losses one is capital loss and other one is interest on financed money. In housing finance however, the situation is not so volatile. It happens rarely that prices of real estate go down in short-term.
Therefore, housing finance can be good option for beginners to enhance their investment base in real estate. Cost Stocks trade for a transaction cost of within one per cent of total buy or sell as brokerage commission, and funds charge 1 per cent or lower of your investment account. Real estate transactions can run you 2 per cent to 5 per cent of your home's sale price with fees covering appraisals, inspections, processing, title insurance, credit report checks, transfer tax, agent costs, moving costs and the like. Taxes Stocks have a short-term capital gain tax rate of 7.5 to 10 per cent. You can also offset your stock gains by your losses. But check out real estate tax breaks: you can deduct property taxes at the time of buy; you can claim the rebate for capital value tax if the size of your property is less than prescribed limits. Transparency How well do you know your investment? How accessible, real and tangible are they to you? It appears that in the world of stocks and real estate, they each have their pros and cons. Ultimately, you'll just have to trust the information available about that piece of property or that company's offerings when you take out the money to make your purchases. Due diligence can tip the scales in your
favour but doesn't erase the risks inherent in any investment. Effort It's clear that maintaining a stock market portfolio is far easier than running to and fro to your rental property making sure that repairs are being done. On top of that, with real estate you'll have to deal with the human factor as well, where you'll have to negotiate with tenants who may or may not give you a hard time. Likewise, fear of illegal occupation always hovers on you in present scenario of real estate world in big cities especially Karachi. Stocks market investments hold a higher liquidity value and are therefore easier to sell in comparison to the real estate investments. They are also more flexible and can be transferred to a retirement account. The second big advantage of stocks market investments is that rate of turnover they can generate in a year is much higher if the financial position of the company is stable. Some of the stocks also bring in huge profit as some companies have an average growth rate of 20 per cent or even 50 per cent. Real estate investment also has great benefits, such as tax deductions and continuous appreciation rates of properties. Land is one tangible asset the value of which continues to appreciate with time. Therefore, real estate investment usually generates consistent turnover every year. Sometimes due to regional growth the property rates are doubled within years and fetch the investor's huge profits. To conclude, stock market investments usually are more advantageous than real estate investments in certain categories. Although, real estate offers greater stability and tax relief but stock market investments can generate huge profits in lesser time and offer greater flexibility in terms of liquidity. It is advisable to make your decision keeping in consideration your financial position.
Article
Investors’ Guide
Maybe, you are hedging Tauseef Ahmed o one is immune from risk. Therefore, everyone is cautious of it. Even when we take a single step, we analyse all kinds of risk while doing so. It means risk is ingrained in every venture especially the business one. Either to go this way or that way, it sometimes becomes dilemma to decide. Ultimately you prove to be a judicious decision maker and adopt any one of the paths but keeping the chance to follow the other quite open. However, in business and investment you have broad options. Simultaneously you can adopt two or several tracks. This is the benefit of business ventures either it is trading or investment you can make a good mix of several options. When you adopt at least two ways hoping to offset the loss from one if the second one does not give you a profit, this is called hedging. The best way to understand hedging is to think of it as insurance. When people decide to hedge, they are insuring themselves against a negative event. This doesn't prevent a negative event from happening, but if it does happen and you're properly hedged, the impact of the event is reduced. So, hedging occurs almost everywhere, and we see it everyday. For example, if you buy house insurance, you are hedging yourself against fires, breakins or other unforeseen disasters. Portfolio managers, individual investors and corporations use hedging techniques to reduce their exposure to various risks. In financial markets, however, hedging becomes more complicated than simply paying an insurance company a fee every year. Hedging against investment-risk means strategically using instruments in the market to offset the risk of any adverse price movements. In other words, investors hedge one investment by making another. Technically, to hedge you would invest in two securities with negative correlations. Of course, nothing in this world is free, so you still have to pay for this type of insurance in one form or another. How Do Investors Hedge? For the most part, hedging tech-
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niques involve using complicated financial instruments known as derivatives, the two most common of which are options and futures. We're not going to get into the nitty-gritty of describing how these instruments work, but for now just keep in mind that with these instruments you can develop trading strategies where a loss in one investment is offset by a gain in a derivative. Let's see how this works with an example. Say you own shares of ABC Corporation. Although you believe in this company for the long run, you are a little worried about some short-term losses in the industry. To protect yourself from a fall you can buy a put option (a derivative) on the company, which gives you the right to sell at a specific price (strike price). This strategy is known as a married put. If your stock price tumbles below the strike price, these losses will be offset by gains in the put option. The other hedging example involves a company that depends on a certain commodity. Let's say ABC Corporation is worried about the volatility in the price of cement, the plant used to make big quantity of products. The company would be in deep trouble if the price of cement were to skyrocket, which would eat into profit margins severely. To protect (hedge) against the uncertainty of prices, you can buy a futures contract that allows the company to buy the
share at a certain price. Now you can budget without worrying about the fluctuating commodity. Hedging Advantages vs. Forward Cash Contracting Hedging allows flexibility to later select the appropriate physical delivery point. This may be important for producers with several buyers competing for the grain or oilseed. Hedging provides the flexibility to reverse a market position because of changes in crop growing conditions, changes in the condition of stored grain, or changes in price outlook. Once a forward cash contract commitment is made, it may be difficult to cancel or to alter. A position in the futures market can be terminated by offsetting the position. Financial compensation, of course, must be made for any adverse price change occurring while the futures position was held. Hedging can greatly reduce the exposure to price risk. It is an important marketing tool for establishing price while retaining considerable marketing flexibility. However, hedging does not guarantee a profit. The hedging decision must still take into account production costs and market outlook. For many producers, deciding when to hedge is one of the most difficult aspects of marketing. An understanding of market alternatives such as hedging can help avoid such problems and lead to a more successful grain marketing program.
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Article
Investors’ Guide
Investing in mutual funds
Become your own advisor I
Jameel Siddiqui mpersonated as unaware intended investor when this scribe contacted various mutual fund companies of the country to start investing with Rs2,00,000 plus per month addition of Rs40,000 all the companies contacted for this purpose replied differently and offered funds of different families. Like an associated AMC of renowned brokerage firm insisted me to invest in an income fund, while an arm of one of the five top banks of the country offered an income and growth fund for investing. Similarly an Islamic bank's associated AMC invited my investment in a mix of equity, liquidity and cash funds. But the main focus was not my investment objectives but to sell their products by hook or crook. Such behavior usually demotivates intended investors to step in mutual funds. Therefore, keeping in view of information provided by AMCs it is necessary that a person intended to invest in mutual funds must assess the risk factor in each fund apart from seeking detailed information on previous performance and asset allocation of the concerned fund. There is some degree of risk in every investment. Although it is reduced considerably in mutual fund investing but can not be avoided at all. Do not let the specter of risk stop you from becoming a mutual fund investor. However, it behooves all investors to determine for themselves the degree of risk they are willing to accept in order to meet their objectives before making a purchase. Knowing of potential risks in advance will help you avoid situations in which you would not be comfortable. Understanding the risk levels of the various types o mutual funds at the outset will help you avoid the stress that might result from a thoughtless or a hasty purchase. Let us now examine the risk levels of the various types of mutual funds. LOW-LEVEL RISKS Mutual funds characterized as lowlevel risks fall into here categories 1. Money market funds 2. Treasury bill funds
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3. Insured bond funds MODERATE-LEVEL RISKS Mutual funds considered moderaterisk investments may be found in at least the eight types categorised below. 1. Income funds 2. Balanced funds 3. Growth and income funds 4. Growth funds 5. Short-term bond funds 6. Intermediate bond funds 7. Insured government/municipal bond funds 8. Index funds. HIGH-LEVEL RISKS The types of funds listed below have the potential for high gain, but all have high risk levels as well. 1. Aggressive growth funds 2. International funds 3. Sector funds 4. Specialized funds 5. Precious metals funds 6. High-yield bond funds (taxable and tax-free) 7. Commodity funds 8. Option funds LOW-LEVEL RISK CONSERVATIVE PORTFOLIO 50 per cent govt treasury bill funds 50 per cent money market funds MODERATE-LEVEL RISK CAUTIOUSLY AGGRESSIVE PORTFOLIO 40 per cent growth & income funds 30 per cent govt bond funds 20 per cent growth funds 10 per cent index funds HIGH-LEVEL RISK AGGRESSIVE PORTFOLIO 25 per cent aggressive growth funds
25 per cent international funds 25 per cent sector funds 25 per cent high yield bond funds MEASURING RISK As you become a more experienced investor, you may want to examine other, more technical, measures to determine risk factors in your choice of funds. Beta coefficient is a measure of the fund's risk relative to the overall market. For example, a fund with a beta coefficient of 2.0 means that it is likely to move twice as fast as the general market - both up and down. High beta coefficients and high risk go hand in hand. Alpha coefficient is a comparison of a fund's risk (beta) to its performance. A positive alpha is good. For example, an alpha of 10.5 means that the fund manager earned an average of 10.5 per cent more each year than might be expected, given the fund's beta. Interest rates and inflation rates are other factors that can be used to measure investment risks. For instance, when interest rates are going up, bond funds will usually be declining, and vice versa. The rate of inflation has a decided effect on funds that are sensitive to inflation factors; for example, funds that have large holdings in automaker stocks, real estate securities, and the like will be adversely affected by inflationary cycles. The information is supplied here merely to acquaint you with the terminology in the event you should wish to delve more deeply into complex risk factors. The more common risk factors previously described are all you really need to know for now, and perhaps for years to come. One caveat is in order, however. There is no such thing as an absolutely 100 per cent risk-free investment. Even funds with excellent 10 year past performance records must include in their literature and prospectuses the following disclaimer: "Past performance is no guarantee of future results." However, by not exceeding your risk tolerance level, you can achieve a wide safety and comfort zone with mutual fund portfolios such as those shown above.
Article
Investors’ Guide
Your age and portfolio rotecting the long-term value of your investments means using a variety of investments. As an investor, you're interested in investing your money wisely. But what is the best way to invest? For this purpose your age factor counts a lot. It's difficult to know which funds will outperform other funds at any given time. Therefore, you adopt a sensible, time-honored investment strategy that's easy to understand and easy to put into practice. It's called diversification. Diversification means spreading your money over a variety of investment opportunities instead of betting the bank on one potentially high-flying stock. Stocks often get more attention
Some mutual funds contain elements of all three categories. A blended fund may contain stocks, bonds and stable value instruments. The exact mix of holdings in a blended fund may vary from month to month depending on whether the fund's managers see a brighter future for stocks or bonds. So, it turns out diversification is pretty simple. You just need to hold a little bit of everything -- using funds that hold stocks, bonds and money markets. You need to hold investments that match your particular goals. And your goals can vary depending on your age, your accumulated wealth and your inclination to take greater risks for potentially greater returns. Youngsters on the block Young investors with small invest-
Investors who are closer to retirement often turn the percentages around and hold 40 per cent stocks and 60 per cent bonds. Asset preservationists People who are retired or close to retirement tend to "play it safe," especially when compared to youngsters. They realise that stocks can rise and fall dramatically, and they're also aware that they have less time to recover from market losses. Often, the pleasure of watching stock prices rise is overcome by their dissatisfaction when prices fall. As a result, this group tends to favour bonds and money market funds more highly than stocks, often removing stocks from their portfolios entirely. Keep in mind that these are only examples. For instance, some young-
than the other asset categories, but bonds and stable value instruments are also popular with many investors. Let's review the options: Stocks When you own stock, you own a part of a company. The risks can be high, but so is the potential for return. Bonds Bonds are the IOUs of the investment world. Businesses and governments issue bonds and promise to return your principal to you plus interest. The risks are generally lower than stocks and so is the potential return. Stable value instruments Money markets, usually viewed as having "stable" or steady returns, fall into this category. Such funds are considered less risky than either stocks or bonds. But lower risk has its price; in the case of money market funds, the long-term potential return is lower than either stocks or bonds.
ment accounts generally feel more comfortable taking risks if those risks come with the potential for greater returns down the road. As long-term investors, they know that interest rate changes come and go, and that, even though the past is no guarantee of future results, the stock market has historically provided positive returns. Not surprisingly, many youngsters build portfolios composed entirely of stock funds. Middle of the road People in their 30s and 40s often tend to incorporate bond and/or money market funds into their investment portfolios. They like having their money in stocks, but they also appreciate the lower risk of other investment vehicles. And they count on the power of compounding to add to their retirement nest eggs. Younger, more aggressive Middle Roaders might build 60/40 portfolios: 60 per cent stocks, 40 per cent bonds.
sters like to include bond funds in their portfolios. They know the power of compound interest helps them more than older investors, so they look more favourably on "low-powered" investments that carry less risk. At the other end of the scale, some asset-preservationists keep some of their money in stock funds. In recent years, they have benefited from their participation in the stock market, even if their portfolios were heavily invested in bond and money market funds. In short, the best diversification strategy for you is the one you're most comfortable with. Form a plan that makes sense to you, and keep in mind your comfort level when it comes to risk. Most of all, remember you're investing for the long haul. You don't have to keep your finger on the pulse of the market all the time, unless, of course, you're invigorated by all the hustle and bustle.
Tanzeel-ur-Rehman
P
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Review
Investors’ Guide
Baseless BoI Shiraz Ahmed
T
he role of any public sector institution is to perform its duties in accordance with the mandate given to it by the government. Public sector organizations have become a metaphor of inefficiency and bad governance. Their annual losses are commonplace figures and everybody knows how much nation has to pay for the poor performance of such institutions. The debate to either privatise such organizations or to restructure them had faded away because of dilemma of decision makers to come on same page in this regard. Unfortunately there are also some government organisations which are not in the category of loss-making public sector entities but their existence is also for nothing and a sizeable chunk of budget is allocated for the recurring expenditures including salaries, petrol, allowances and office expenditures. Such organizations have nothing to do with the mandate assigned by the government to them. These organisations have a fixed and limited agenda of work which is strictly tedious and stereotyped with nothing innovative and new for the result-oriented efforts. Board of Investment is an organisation mandated by the government to promote and bolster investment in Pakistan. According to its website, BoI is facilitating local and foreign investors for speedy materialisation of their projects. BoI is doing its best to attract foreign investors to Pakistan through a most liberal investment policy, said the website. Its outdated website said that the BoI assists companies and investors who intend to invest in Pakistan as well as facilitates the implementation and operation of their projects. A wide range of services provided by the BoI include extending information on the opportunities for investment and facilitating companies that are looking for joint venture partners. The BoI acts as a focal point of contact for prospective investors, both domestic and foreign to provide them with all the necessary information and assistance in coordinating with other
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government functionaries. The BoI also evaluates applications of investors for the work and business visas, branch liaison office and security clearance. However, if we cast a pragmatic look at the performance of BoI, the above claims of the BoI are not noticeable like most of government departments usually make such claims to brush up their performance and be noted by their high-ups. But in this particular case one would be shocked if the website contents of the BoI are thoroughly examined. Thanks to unchanged nature of some initial information given under the window of Investors' Guide at the website of BoI which informs the reader about the basic information of Pakistan like area, population and cultural mix which remain unchanged at least since the census is not made. Apart from it, most of the information available under this head is outdated and portrays an old picture of the various sectors of the economy. Like data about financial sector is of before 2006 which means the robust growth shown by our financial sector before the mid of 2008 has not been mentioned which has strength to impress the foreign investors. Similarly, five key reasons mentioned to urge the foreigners to invest in Pakistan are devoid of empirical evidence and even fall short of concrete arguments to prevail upon the foreign-
ers to come forward and pour in their funds in various sectors. Interestingly, most of the data is destitute of any statistical support and arguments and if there is any argument in any contents that too lacks strength which depict how haphazardly the task of content development of the website was made and how unskillfully it was presented. It shows that either BoI lack professional staff or it has nothing to do with professionalism. The Chairman of BoI, Mr Saleem Mandviwala is a well known person of business world but experts said that owing to lack of support from government and from within the organisation he is helpless to take ahead the agenda of investment promotion in Pakistan. Lack of infrastructure is another impediment of BoI and its provincial chapters seem to be working autonomously at provincial level without keeping proper coordination with the head office. Experts said that in a country which desperately needs both foreign and local investment in huge number it is very necessary that its investment promotion agenda be clearly defined and immaculately implemented. For this purpose an autonomous body on the lines of a private sector organisation may serve the purpose because the performance of existing body BoI may carry some weight but on-ground realities are indicating otherwise.
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Before you regret Investors' Guide Report
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o err is human and to forgive is divine. This famous saying encourages people to go ahead, to take steps and to bring change either at individual level or collective one; be it political, financial or social but it is cherished by all if it is for the broader good of all. However, in financial world mistake has its own cost. It not only leaves a lesson for the future but it also makes you suffer some losses either these are tangible or intangible but their financial worth can not be ignored. When it comes to investing there are lots of ways to get it wrong, but if you avoid these five blunders then you should do just fine. While the secret to investing is to buy low and sell high, you also need to remember there are no guarantees when it comes to investing. Strategy first Designing an investment strategy is similar to designing a house. You want to start with a solid foundation, then you can start building the walls and roof, rather than worrying about what type of window frames you should have. What are your wants and needs? When do you want to retire? What kind of income do you need? Once you know these answers you can start to develop an overall investment strategy. You can determine how much money should be invested in "growth" assets (property & shares) and how much should be invested in "income" assets (fixed interest & cash). Once you have got the
Greed and fear are two emotions that drive investment decisions. People need to understand the difference between investing and speculating. Many investors in local stock market during the crash of 2005 were speculators. They bought and sold shares in companies without knowing what those companies actually did.
asset mix sorted out you can choose the best investments in the various categories. Branch out broadly A lack of diversification is a common mistake made by investors; so don't put all your eggs in one basket. The turmoil in the financial market has highlighted the perils of a lack of diversification for many investors. Putting Rs20,000 into five different finance companies is not diversification. If you have a mix of investments, such as property; shares; fixed interest and cash you are more likely to even out your investment returns over time, even if your investments are affected by short-term volatility in a particular sector. Dig out details Investing blindly is asking for trouble. Do your homework. A lot of investors will spend more time planning their holiday on the internet, than researching their investments or an advisory firm. A good place to start learning more about finance and investment is through online tutorial websites. For more investment information, sites such as www.secp.gov.pk, www.mufap.com.pk or www.kse.com.pk also provide a valuable source of information.
Remain unfazed Greed and fear are two emotions that drive investment decisions. People need to understand the difference between investing and speculating. Many investors in local stock market during the crash of 2005 were speculators. They bought and sold shares in companies without knowing what those companies actually did. Good investing requires self-discipline and a long-term perspective. It means not getting greedy when markets are booming and not getting spooked when markets are falling. A common mistake is selling out of investments when they experience a temporary correction. Over time, markets will have periods where they go through dips. What we also notice during these times is the large lift in trading volumes which indicates that one group of investors is selling out at low prices to another group that is only too happy to buy a bargain. It's better to be happy bargain hunter than a depressed stock-dumper. Do something The biggest mistake is failing to invest at all. Returns from shares and property have typically outperformed fixed interest investments, and yet people often think investing is "all too difficult" so they don't do anything. Also, people who start investing early in life enjoy the benefits of compound interest.
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Company & Industry News PRL FY10 losses at Rs2.97bn Pakistan Refinery Limited (PRL) posted loss after taxation of Rs2.97 billion in financial year 2010 as against Rs4.57 billion in financial year 2009, translating in to loss per share of Rs85.01 in contrast to Rs130.62 earlier. The company has announced its financial result for the year ended June 30, 2010. Though the result was disappointing, yet the company managed to reduce losses. Beside negative gross refinery margin of 0.82 per cent, PRL faced low off-take during the year because of circular debt, financing cost, and higher turnover tax.
PQFTL declares 15pc surplus Pak-Qatar Family Takaful (PQFTL) has declared a surplus of 15 per cent for its individual customers for the financial year 2009-10. This was announced by CEO of PQFTL, P Ahmed following the meeting of Shariah Supervisory Board which was chaired by Justice (R) Mohammad Taqi Usmani. Surplus, which is an inherent benefit of Takaful, is calculated as per the amount available in the Waqf Fund after paying off all the claims and meeting all the expenses for the year. The company will share the surplus amount with the Individual Takaful participants on the basis of their contribution in the Waqf Fund.
NIB Bank suffers Rs9.2bn losses NIB Bank posted unconsolidated loss after tax of Rs9.2 billion (LPS: Rs0.48) for the first half ending June 2010 (1HCY10) as against loss of Rs7.1 billion (LPS: Rs014) for the corresponding period last year. This disappointing performance can be attributed to colossal rise in provisioning and persistent hike in administrative expenses. Administrative expenses grew to Rs3,216 million in the six months from Rs2,566 million a year ago. The point to be noted is that the bank's total income for 1HCY10 was Rs1,049 million and its administrative expenses exceeded Rs3,216 million. The situation was not precarious for 1HCY09 because total income was Rs3,447 mil-
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lion, enough to take care of administrative expenses amounting to Rs2,566 million.
IMC FY10 profits up 149pc Indus Motor Company Limited (INDU) recorded a staggering 149 per cent surge in its net earning to Rs3.44 billion for the year ending June 2010 as compared to Rs1.38 billion during the preceding year. The company saw 49 per cent jump in its sales and rise of 148 per cent in other income during the year, according to the company's financial results. Earning per share stood at Rs43.81 as against Rs17.62. Indus Motor announced final cash dividend of Rs10 per share for the financial 2010. This is in addition to interim dividend of Rs5 per share, bringing annual total payout to Rs15 per share.
Bank Alfalah posts Rs492mn profit Bank Alfalah (BAFL) posted a net profit of Rs492 million in the quarter ended on June 30, 2010 against Rs 661 million in the same quarter of last year, showing a negative growth of 25.6 percent. The net profit translated into earnings per share of Rs 0.36 in the quarter under review against Rs 0.49 in the similar quarter of last year. However, earnings-before-tax of Rs 749 million in the said quarter was up 1.4 per cent year on year (YoY) because effective tax rate in the same quarter of 2009 was much lower at 10.5 per cent against 34.3 percent in the 2nd quarter of 2010. The half year ended on June 30, 2010 indicated that the bank's net profit was down by 2.8 per cent to Rs 1.079 billion against Rs 1.109 billion in the same period of last year.
KESC reports lower losses Loss-after-tax of Karachi Electric Supply Company (KESC) has declined to Rs14.641 billion during the year ending on June 30. According to financial results of the company dispatched to Karachi Stock Exchange, lossbefore-tax also dropped to Rs14.737 billion as loss per share stood at Rs0.74.
PTCL secures Rs9.294bn net in FY10 Pakistan Telecommunication Company Limited (PTCL) has posted Rs9.294 billion net profit in financial year (FY) 2009-10 against Rs9.151 billion in the same period of last year. The company's earnings per share also rose to Rs1.82 in the year under review against Rs1.79 in the previous year. The company's revenue, however depicted three per cent decline to Rs57.174 billion against Rs59.239 billion in the last year whereas cost of service rose to Rs38.258 billion against Rs37.732 billion in the last year.
Al-Ghazi announces dividend Al-Ghazi Tractors Ltd has posted a record profit after tax of Rs997.805 million for the half year ended June 30, 2010 and declared an interim dividend of Rs7.5 per share. According to information reaching KSE, the pre-tax profit of the company also jumped to Rs1.567 billion as compared to Rs1.337 billion in the corresponding period last year. The earning per share climbed to Rs23.24 in June 2010 as against Rs20.46 in June 2009. AlGhazi's sales surged to record Rs8.455 billion in six months.
NBP, FABL, AKBL post results National Bank of Pakistan (NBP) and Faysal Bank Limited (FABL) posted results below than expectation while Askari Commercial Bank Limited (AKBL) announced results near expectations. National Bank of Pakistan, posted Rs7.82bn profit in the first half of current calendar year (1HCY10) as against Rs6.28bn in the same period last year (1HCY09), bringing earning per share to Rs5.81 as compared to Rs4.67 previously. Profit after taxation of Faysal Bank Limited rose 271pc to Rs1.73bn in this period over Rs467mn in the comparable period, resulting in to earning per share of Rs2.85 as compared to Rs0.77. Earnings of Askari Bank Limited grew 22pc to Rs714mn in 1HCY10 (EPS: Rs1.13) over Rs585 million in 1HCY09 (EPS: Rs0.95).
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Company & Industry News PPL pursues to buy BP
decrease, according to the financial results of the company.
Pakistan Petroleum Limited (PPL) despite being a public sector entity is attempting to manipulate the purchase of British Petroleum through the backdoor and maneuvering the sale for its partner Eni, an Italian exploration and production company. Sources in the Ministry of Petroleum told that PPL also exploiting its clout to influence on the purchase of the assets of Petronas Carigali (Pakistan) Ltd in the same manner. It's worth mentioning here that Petronas has failed to operate the venture after securing license for exploration. Thus, both ventures being offered for selling out are under huge financial strain and it would remain a huge concern for any interested buyer(s) in regard with the status of all these liabilities, sources said.
SBP drawing new MFB plan
Fatima Fertiliser eyes NYSE listing Fatima Fertilizer is planning to issue ADR (American Depositary Receipt) to be listed in New York Stock Exchange (NYSE) by the end of 2010. In this regard, Bank of New York Mellon is assisting the firm. This will be an offer for sale of shares by the sponsors, as per analyst briefing of company.
Al Meezan declares cash dividend The Board of Directors of Al Meezan Mutual Fund Limited and Al Meezan Investment Management Ltd. (Al Meezan) declared final cash dividend at 8.5 per cent i.e., Rs0.85 per share for Al Meezan Mutual Fund Limited and 5.5pc i.e., Rs0.55 per certificate for Meezan Balanced Fund (MBF), says a press release.
Unilever earnings down 3.3pc Unilever Pakistan Limited has recorded net profit of Rs1.18 billion in the first half ended June 30, 2010 as against Rs1.22 billion in the same period of previous year. The company's earning per share also declined to Rs89.3 as compared to Rs92.27 showing a 3.3 per cent
State Bank of Pakistan is working on a new 'strategy' for microfinance banks with a greater focus on 'inclusive financial services' that will enable them to cope with emerging challenges. The new strategy will emphasise upon the industry to strengthen its fundamentals by developing infrastructure required for sustainable and inclusive growth. "The new strategic framework is intended to help the sector get back on its growth trajectory while stressing on new initiatives in the areas of deposit mobilisation, up-scaling loan sizes, developing partnerships, and encouraging successful provincial / regional Microfinance Banks (MFBs),", said acting Governor SBP, Yaseen Anwer in a meeting held recently.
Modarabas' registration fee raised The Securities and Exchange Commission of Pakistan (SECP) has raised the registration fee for Modaraba Companies from Rs150,000 to Rs250,000, while annual renewal fee has been raised from Rs10,000 to Rs25,000. According to the latest amendment in the Modaraba Companies and Modaraba Rules, 1981 notified in August, 2010; the non-refundable registration fee has been raised to Rs250,000 while renewal annually in the month of January has been raised by 150 percent to Rs25,000.
SECP effects CCP proposal The Securities and Exchange Commission of Pakistan (SECP) has incorporated changes suggested by the Competition Commission of Pakistan (CCP) in the code of corporate governance. SECP chairman Salman Ali Shaikh has written a letter to the CCP chairperson that it has given due consideration to the competition concerns raised in the CCP policy note and that the former understands the need to discourage any
entry barriers that may lead to the creation of a monopoly and prevent competition in the market.
PSEs to issue convertible bonds The Privatisation Commission has decided to re-launch the convertible bonds proposal to strengthen Public Sector Entities (PSEs) to generate additional revenue for the government, which is currently under severe financial constraints due to the devastation caused by the floods. The proposal of the convertible bonds is aimed at turning the Rs265 billion loss making public sector units into Rs500 billion profitable units, a spokesman of the commission said on Friday.
Housing plan may catch big FDI Federal Minister for Housing and Works, Rehmatullah Kakar has said that German and Canadian construction companies have showed willingness to invest $8 billion in housing sector under Prime Minister Housing Plan. The Minister said President of German Jiaklien Company Klanfelter and Canadian Stardeor during a meeting said that their companies will participate in the construction of housing units in Pakistan under Prime Minister housing scheme by investing $8 billion.
FFC to buy 79.85pc shares of Agritech Fauji Fertiliser Company (FFC) intends to acquire 79.85 per cent shares of Agritech Limited. Habib Bank Limited has been appointed as manager to offer as required by the statute. According to a notice sent to Karachi Stock Exchange (KSE), HBL informed that its client FFC intends to acquire shares of Agritech Limited under the Listed Companies (Substantial Acquisition of voting Shares and Takeovers) Ordinance, 2002 and Listed Companies (Substantial Acquisition of Voting Shares and Take-over) Regulations, 2008 (collectively referred to as "Statute").
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Investors’ Guide
Company & Industry News Change of AHBL name The State Bank of Pakistan (SBP) has issued notification for change of name of Arif Habib Bank Limited to Summit Bank Limited. According to announcement in exercise of the powers conferred on State Bank of Pakistan (SBP) by clause (c) of sub-section (2) of Section 37 of the SBP Act, 1956; SBP is pleased to notify the change of name of "ARIF HABIB BANK LIMITED" to "SUMMIT BANK LIMITED" with effect from August 18, 2010.
NAFA launches two new funds NBP Fullerton Asset Management Limited (NAFA), formerly National Fullerton Asset Management Limited, has launched two open-end funds namely NAFA Riba Free Savings Fund (NRFSF) and NAFA Asset Allocation Fund (NAAF). The Initial Public Offer of NRFSF and NAAF began on the 16th of August and lasted on 20th of August 2010. NRFSF is a Sharia-compliant Income scheme with the objective of providing preservation of capital and earning a reasonable rate of return along with a high degree of liquidity. The Fund invests in Sharia-compliant instruments having a minimum credit rating of AAand place deposits with Islamic banks/Islamic windows of commercial banks having a minimum credit rating of A. NRFSF will not invest in Sukuks or the Stock market. The Fund carries no entry or exit load.
JCR-VIS assigns ratings to ABL funds JCR-VIS Credit Rating Company Ltd (JCR-VIS) has assigned preliminary fund stability rating of AA+(f) (Double A plus (f)) to ABL Cash Fund (ABL CF) and AA(f) (Double A (f)) to ABL Islamic Cash Fund (ABL ICF). The ABL CF fund aims to invest in market treasury bills, term deposits, money market placements and reverse repos (underlying security being market treasury bills). The ABL ICF fund aims to invest in government guaranteed Sukuks, cash and bank deposits, Sharia-compliant
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instruments including COIIs, COMs, CODs and other Sharia-compliant avenues as per guidelines of the fund's Shariah advisor.
SECP suspends cos' trading The Securities and Exchange Commission of Pakistan (SECP) has ordered suspension of trading in the shares of listed companies that are in continual violation/ non-compliance of securities market laws, initially for a period of 60 days or till further orders. The SECP taking cognisance of the fact that such companies not only pose serious threat to the development of a robust capital market but also inhibit investors' confidence due to lack of transparency, in consultation with the stock exchanges, had earlier initiated a comprehensive exercise for reviewing the status of these listed defunct/ noncompliant companies.
Moody's lowers ratings of 5 top Pak banks The Moody's investor services downgraded the outlook ratings of top five Pakistani banks, including the state-run National Bank of Pakistan (NBP), a local English newspaper said. The other four banks are Habib Bank Limited (HBL), United Bank Limited (UBL), MCB Bank Limited and Allied Bank Limited (ABL). "On September 2, the Moody's investor services changed the longterm local currency deposit ratings and bank financial strength ratings (BFSRs) of the big-5 banks from stable to negative," same newspaper quoted saying Muniba Saeed, an analyst at Invest Capital. "The change in the outlook of the banks was driven mainly by the impact of flood giving rise to economic challenges." The corporate sector's recovery is expected to be further hindered due to slowdown in the economic growth and inflationary pressures on account of food shortages and rising input prices. The rating agency expects that higher input prices would lead to a loss of competitiveness in certain export-oriented sectors, especially textiles.
As per data issued by the State Bank of Pakistan (SBP), the banking sector exposure to textiles as of June stood at eight per cent of the total exposure, however, the banking sector exposure to cumulative textiles and the crop growing category of agriculture stood at 11 per cent of the total, or Rs635 billion. Also textiles being the highest borrower in the manufacturing segment, such dependence are likely to dent the sectors profitability, owing to increased provisioning requirement and resultant increased probability of the non-performing loans (NPLs). Moody's expects the banks' adequate capitalisation levels and comfortable liquidity profiles funded mainly by customer deposits to continue to provide stability amid deteriorating macroeconomic conditions.
PSO's dues surge to Rs141bn The financial woes of the Pakistan State Oil (PSO) have increased manifold as its outstanding dues have surged to a whopping Rs141.275 billion. In a communication to the Ministry of Finance, PSO, the country's largest oil marketing company, receivables stood Rs 141.275 billion on various organisations while its payable to refineries reached at Rs111.881 billion.
MFBs data entry timeline altered The State Bank of Pakistan, reducing the data submission timeline, has asked the microfinance banks (MFBs) to submit quarterly data, within 18 working days from the end of each quarter. In this regard the central bank, referring to Regulation No 27 of Prudential Regulations for MFBs and SBP, MFD Circular Letter No 01 dated October 20, 2009, has issued OSED Circular Letter No 02 of 2010. According to this circular, the data submission timeline of quarterly data from quarter ending June 30, 2011 has been changed. MFBs will now onward upload their quarterly data through Data Acquisition Gateway (DAG) portal within 18 working days from the end of each quarter instead of 30 days.
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