Funds Find Fertile Ground in Pakistan


While the U.S. mutual-fund industry continues to be buffeted by a declining stock market and jittery investors, in Pakistan, things have never been better, according to the country's Mutual Fund Assn. The benchmark KSE-100 index gained an impressive 112% in 2002, making Pakistan's stock market one of the best performers worldwide and helped bring new mutual funds to market.

In the last five years, seven promising funds have been born -- five of them in last year alone. They've been launched by big-name domestic brokers like Jahangir Siddiqui & Co. and Arif Habib Investments with the goal of creating opportunities for the individual investor. Also, as part of the country's overall reform program, the giant state-owned National Investment Trust (NIT) has finally gone professional. Trained financial managers have crafted a smart new portfolio that's churning out 13% returns, vs. an average of less than 7% before reform began in 2001.

CREATING CONFIDENCE. "We changed our portfolio to bring in stocks of strong yields," says NIT Chairman Tariq Iqbal Khanof. "And that, along with better returns, has created confidence in our [shareholders,] which was lacking." NIT is expected to be up for sale this year following the successful privatization of the government-owned family of closed-end funds run by the Investment Corporation of Pakistan (ICP) in 2002.

These changes have been a long time coming. Historically, with an underperforming, poorly governed stock market and a virtually nonexistent corporate-debt market, Pakistan had no private-sector mutual-fund industry to speak of. Government-owned NIT's open-end funds and ICP's family of closed-end ones ruled the market. But both NIT and the ICP funds were poorly managed by government employees rather than professional fund managers, and they languished after their brief moment of post-birth glory in the late '60s. And with NIT's unit value determined by the government rather than its net asset value, the fund was unable to meet redemption requests.

The private sector began to show signs of life only after the historic bull market of 1994, and about a dozen funds came to the market in the mid '90s. But the Corporate Law Authority -- now known as the Securities & Exchange Commission of Pakistan -- granted licenses for closed-end funds only. "They didn't have to make an effort because once the funds were locked in, they didn't have to seek new investors," says Nasim Baig, CEO of Arif Habib Investments, which runs two open-end funds worth almost $22 million. As a result, many of the 13 closed-end funds grossly mismanaged their portfolios and have been unable to provide shareholders with decent returns, despite the Pakistani bourse's record-breaking performance in 2002.

IMPROVING CONDITIONS. The industry's fortunes changed last year when new regulations and a strong stock market gave brokers the incentive to branch into open-end mutual funds. As interest rates began to decline, the corporate-bond market also boomed, and a record 15 new listings came out in 2002. This allowed the fund industry to diversify its offerings. Today, an investor can choose from pure stock funds, income funds, hybrids, and even Islamic funds, which invest only in those securities approved by religious boards.

Declining interest rates also meant that Pakistanis started pulling their money out of bank accounts and began hunting for alternative investment avenues. And nonresident Pakistanis, increasingly reluctant to invest abroad since September 11, began routing more money back home. These factors also helped boost the fund industry.

Yet Pakistan's maturing fund industry has its share of growing pains. For example, the fixed-income funds invest more than 70% of their money in the carry-over transactions market (COT -- the market for share financing) with just the remaining 30% invested in corporate bonds. With just 30% of their money invested conservatively, the funds could suffer severe losses if the shares they've invested in prove to be volatile or take a nosedive.

RETAIL TARGET. Equally important to the industry's survival will be its ability to attract more individual investors. Most private-sector funds have less than 15% of their portfolios held by individuals. NIT, the leader with individual investors, has a relatively paltry 60,000 customers. Funds blame poor marketing and lack of investor education for the low percentages. Says Baig of Arif Habib Investments: "We're working on this, and it will have to be done either via distribution through banks or through independent selling agents who go door-to-door."

Still, despite a 6% year-to-date correction in the stock market, Pakistan's fledgling fund industry still has plenty of reason to be optimistic. After all, the private sector still accounts for less than 25% of the $700 million industry. Habib-ur-Rehman, CEO of ABAMCO, an asset-management outfit that runs four mutual funds, says he expects the mutual-fund industry to double in size within the next five years. Compared to the U.S., though, Pakistan's industry is tiny. Total assets in its U.S. counterpart -- which includes funds that invest overseas as well as money funds -- is $6.4 trillion.

"There's a big opportunity for growth in the mutual-fund industry," says Shaukat Aziz, Pakistan's Finance Minister, who describes it as "underutilized and underexploited." Adds Aziz: "We need more professional fund managers and better retail marketing. Then I do see a gradual shift from national savings schemes to mutual funds." Zaigham M. Rizvi, president of the trade group Mutual Funds Association of Pakistan, anticipates that the industry will see 5 to 10 new funds coming to the market in the next three years, most of which will be either fixed-income or Islamic funds. For now, though, the government-run National Savings Schemes (NSS) are still Pakistan's most popular savings and investment vehicles, with some $13.5 billion in holdings.

BANKS' EDGE. To compete successfully with the NSS, mutual funds will have to adopt more aggressive marketing. Banks, with their wide reach thanks to extensive branch networks, might prove to have an edge. United Bank Limited, which was privatized last year, launched its United Money Market Fund in November via its several thousand branches. "Think about the fact that NSS has about [$13.5 billion]. Imagine if we tap just 10% of that -- it's huge," says Shahrayar Ahmad, CEO of United Money Market Fund. "So far we haven't even got an iota of that."

With investments in mutual funds equaling just about 5% of the country's bank deposits and with the stock market's fundamentals still strong, Pakistan's mutual-fund industry has plenty of growth potential. By Naween A. Mangi in Karachi


Steve Ballmer, Power Forward
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