Final Meezan Magzine[1]

7/29/2019 Final Meezan Magzine[1]

http://slidepdf.com/reader/full/final-meezan-magzine1 1/22

Inside:• Asset Allocation Advice

f or Various Age Profile

by Muhammad Asad

• Smart Investments

Through Tax Savingsby Bushra Tariq

by Sanam Khan

• Rupee Cost Averaging

April 2012

Your Guide to

UnderstandingInvestments

Your Guide toUnderstanding Investments.



I take this opportunity to present to you the second issue of our bi annual magazine Istismar –Your Guide to Understanding Investments.

In this issue, we will take you through the development and launch of Pakistan’s first Islamicindex – KSE Meezan 30 Index, a joint effort between Al Meezan Investments, Meezan Bank and

Karachi Stock Exchange. Asset allocation is the key to successful investing and our second articlefocuses on asset allocation based on age group and time horizon.

Discipline is a key to success in any field and those who follow a discipline in their investmentdecision-making and investment patterns are more likely to be successful in achieving theirinvestment objectives. Hence we have included an article on Long-term Systematic savings andits benefits.

Tax considerations are an important variable of the investment policy of any investor as oneneeds to focus on tax-adjusted returns and maximize any tax credits available for investments.We have touched upon that area also in this publication.

Behavioral Finance is the key to understand how human mind works while making investmentdecisions. e elements of greed and fear are key determinants for any investment decision-making. However, it is interesting to know how an otherwise rational person can end up makingirrational decisions. We have touched upon that aspect also and provided some guidelines in thisrespect.

I hope that you will enjoy the variety of different facets of investing that we have covered in thisissue of the newsletter and I am sure that after reading this one, you will be keenly looking for thenext issue of the magazine!

Please feel free to reach us at our toll free number 0800-HALAL (that is 0800 42525) and we willbe happy to answer any questions that you may have or provide you any guidance on how tosuccessfully invest your savings to achieve your financial objectives.

Welcome Note:

Your Guide toUnderstanding Investments.Page 01

Happy Investing

Mohammad Shoaib, CFAChief Executive Ocer

Table of Contents

www.almeezangroup.com Page 02

5 Eat Well vs.Sleep Well

Afifa Jeelani discuss thetrade-off an investor needs toundertake in deciding whatto chose amongst risky andrisk-free assets.

6 Managing YourInvestmentPortfolio in Times

of Fiscal &Monetary Abuse

Ahmed Hasan guidesregarding the approach totake while investing in timeswhen paper money loses itsstatus as store of value

7 50 years of MutualFund Industry

Farhan Lakhani takes youthrough the past, the present

and the future of mutual fundindustry in Pakistan.

pg29

pg33

pg37

Articles

Editor in chief : Sanam Khan

Sub Editor : Afifa Jeelani

Contributors : Muhammad Saad Ali, Anas Rehan, Muhammad Asad, Bushra Tariq,

Sanam Khan, Afifa Jeelani, Ahmed Hasan, Farhan Lakhani

Design : Synergy

Publisher : Al Meezan Investment Management

pg1

pg9

pg19

pg23

1 KMI- 30; StellarPerformance

Muhammad Saad Ali & AnasRehan traces how the KMI-30index rose to become the bestperforming index on the KSE

2 Asset Allocation Advicefor Various Age Profile

Muhammad Asad offers some valuable insights on how yourage should influence your assetallocation

3 Smart Investmentsrough Tax Savings

Bushra Tariq elaborates uponhow savings can be augmented by taking the benefit of tax credit.

4 Rupee CostAveraging

Sanam Khan examines theconcept of Rupee dollar averag-ing and how it makes an impacton the investments you’ve done.




Stellar PerformanceIndex (KMI-30)KSE Meezan

By Muhammad Saad Ali & Anas Rehan

Islamic Index outperforms other indices

Your Guide toUnderstanding Investments. Page 04

Introductione previous decade saw tremendous rise in the acceptability and growth of Islamic financial products in

Pakistan. Deposits of Islamic Banks grew from an insignificant amount in 2002 to over Rs. 400 billion in

mid 2011, representing 8% market share of the entire deposits in banks. With the development of the

financial markets in the country, there was a need felt for new i nvestment products to facilitate the growth

and promotion of savings. Mutual funds industry has played an active role in providing new investment

alternatives. Presently, mutual funds industry stands at Rs. 333 billion, in which the size of Islamic funds isRs. 45 billion. e market share of Islamic mutual funds has shown incredible growth over the period and

has increased to 14% from 7.54% in mid 2008, also illustrated in the figure below:

With the rapid growth and acceptance of Islamic

products in the market, a void was created for a

benchmark that can accurately compare the

performance of Islamic equity funds. As a result,KSE-Meezan Index (KMI-30) was established by

the collaboration between Al Meezan Investment

Management Ltd. (Al Meezan) and the Karachi

Stock Exchange (KSE) in 2008. Al Meezan, in

consultation with Shari’ah Department of Meezan

Bank, provides Shari’ah expertise, guidelines, skills

and stocks screening towards the activities

pertaining the re-composition of the Index;

whereas, KSE provides maintenance and

dissemination support for the index.

e index helps Shari’ah conscious investors to

identify the Halal equity investments. It also provides

them with a suitable benchmark to compare the

performance of their investments. Besides trackingthe performance of Shari’ah compliant equities, its

construction was meant to increase trust of Shari’ah

conscious investors and enhance their participation.

e following table lists the Islamic Equity Funds in

Pakistan, all of which use the KMI-30 Index as a

benchmark. In addition, it is also used by five

Islamic Balanced Funds or Islamic Asset Allocation

Funds for benchmarking.

Need for an Islamic benchmark

FY08

16%

14%

12%

10%

8%

6%

4%

2%

0%

FY09 FY10 FY11

MARKET SHARE OFISLAMIC FUNDS




Since inception, the KMI-30 index has provided a

return of 41% to its investors. During the same period,

KSE-100 (which tracks the performance of the top 100

market capitalized companies) and KSE-30 (which

tracks the performance of the top 30 most liquid

stocks based on free float methodology) both

underperformed considerably; and, in fact, provided

negative returns. e time when KMI-30 Index was

launched concurred with a financial crisis that swept

the global markets, which also affected Pakistan’sCapital Market. Despite these setbacks, the KMI-30

has been able to outperform KSE-100 and KSE-30 by

42% and 60% respectively.

Let us illustrate this with an example. We take three

hypothetical passive investors, each of whom invested

a capital of Rs. 1,000 in the stock market at the start of

the FY’08. ey chose to invest differently however.

Investor A invested in the KMI-30 index, while B and

C invested in KSE-100 and KSE-30, respectively. e

following graph illustrates how each fared at the end

of FY’11.

Investor A’s investment had grown to Rs. 1,413.57

yielding 41%. Investor B’s portfolio was worth

Rs. 991.97 (a loss of 1%) and investor C lost 19%

of his investment, which was worth Rs. 806.93It can be inferred from the same figure that

once recovery began in the market, KMI-30

index outperformed the KSE-100 and KSE-30

indices over the entire period. At times, the gap

widened substantially.

We attempt to evaluate the performance of the KMI-30 Index against the other indices on Karachi Stock

Exchange since its launch in 2008. Some interesting facts emerge through this exercise:

Performance & Returns of KMI-30 Index

Islamic Equity Funds in Pakistan

Meezan Islamic Fund Al Meezan Investments KMI-30

Al Meezan Mutual Fund Al Meezan Investments KMI-30

Atlas Islamic Fund Atlas Asset Management KMI-30

HBL Islamic Stock Fund HBL Asset Management KMI-30

JS Islamic Fund JS Investments Limited KMI-30

Pakistan International Islamic Fund Arif Habib Investments 70% KMI-30 Index +

30% DJIM-World Index

Fund Manager Benchmark

Islamic Equity Funds in Pakistan

KSE Meezan - 30 Index -28% 34% 45% 41%

Karachi Stock Exchange - 100 Index -41% 34% 25% -1%

Karachi Stock Exchange - 30 Index -46% 24% 21% -19%

FY09 FY10 FY11 Cumulative


1,600

1,400

1,200

1,000

I n v e s t m e n t v a l u e

800

600

400

200

KMl-30 KSE-100 KSE-30

30-Jun-08 | 30-Jun-09 | 30-Jun-10 | 30-Jun-1131-Dec-08 | 31-Dec-09 | 31-Dec-10 |

-

Now we dwell upon the reasons for the phenomenal

performance of KMI-30 in the last 3 years.

1. Underperformance of Financial sector

2. Over leverage increases risk and affects return

3. Awareness about & investors’ inclination towards

Islamic products

Since the onset of the global economic crisis, the

overall risk of financial assets had increased, whichraised concerns for increased provisioning in the

banking sector. As a result, investors avoided stocks of

banking sector, which noticeably underperformed in

the last three years.

Another factor that contributed to this difference in

earnings was the excessive use of leverage by some

companies. For example, we can take the example of

Engro Corporation and Fauji Fertilizer (FFC), both

operating in the lucrative fertilizer sector. In case of

Engro, we witnessed sharp increase in leverage as it

increased its Debt to Asset ratio from 63% in June 2008

to 79% in March 2011. Due to excessive leverage,

Engro’s stock became non-compliant and hence has

been ousted from the universe of KMI-30 since 2009.

Meanwhile, in the case of FFC, its leverage position

decreased from 30% to 20% during the same period.

Now what happened to the prices of these twostocks? A person who had invested in Engro since June

2008 has not been able to recover his principal

investment, as now the stock is worth lesser than it did

on July 1, 2008. On the other hand, a person who

invested in FFC in the same period got returns of 183%.

is is a classic example of how a low leveraged and

hence Shari’ah compliant company outperformed one

with very high le verage.

On the Karachi Stock Exchange, theKSE-100 and the KSE All indices areassorted using the market capitalization of the listed companies. Market capitalizationis number of outstanding shares times thecurrent market price. e investmentcommunity uses this figure to determine acompany's size. e KSE-Meezan Index, onthe other hand, uses the Free Floatmethodology for this purpose. e FreeFloat of a company is the number of sharesthat are available for trade on the exchange;thus, it excludes all the locked in shares heldby the sponsors, directors, promoters andthe government, thereby reflecting the trueliquidity of the market.

Free Float Methodology




Conclusion The KMI-30 index was developed to serve as a

benchmark for equity investments in Shari’ah

compliant avenues. It has not only done well in

fulfilling this need, but also proved to be an

effective investment guide. In the tough

economic conditions of the recent past,

companies that qualified as Sharia’h compliantand thus featured on the KMI-30 index have

performed far better than those which did not.

These firms have characteristically low levels of

leverage. Since the economic outlook for the

near future suggests more problems with a

weakening global economy, closely tied with our

market; the KMI-30 index can be relied on to

again outperform the KSE-100 index, and thus is

a suitable investment platform for all investors.




BACK GROUNDThe global economic scenario has radically changed in last six monhts,prior to that we were more focused on Pakistan but no w the issueneed to be seen in all encompassing (holistic) manner. Thispaper presents an overview and general introd uctio nof asset allocations . It is intended to present s e p a r a t epaper on pensions in next issue.

By Muhammad Asad - Chief Investment Ocer


Nearly three years after the full scale of globalfinancial crisis jolted the markets, a series of aftershocks manifesting in shape of the Europeandebt crisis, the US debt ceiling deadlock and thesubsequent stripping of the US of its AAA rating by S&P are deepening the sense of skepticism about the

global economic recovery especially in the Westernhemisphere. Waning confidence in traditional reservecurrencies (USD, EURO and GBP), wild gyrations inthe stock markets and increasing wariness about thecreditworthiness of a growing number of Euro-zonecountries are making the investors search frantically for new safe havens. is is reflecting in shape of exponential rise in gold prices, strengtheningcurrencies of countries endowed with naturalresources such as Australia and Canada and also thatof Switzerland – a country with a robust externalaccount position and a strong banking system.

Pakistan’s stock market has not been immune to themovements in global markets in recent times.KSE-100 fell by 11% from 2011 peak of 12,745 inJanuary 2011 to 11,348 on December 31,2011 much inline with global trends primarily on fears of foreignselling than its actual quantum which was only USD157 million during this period. However, with lowmarket liquidity and memories of 2008-09 marketcrash still being fresh, domestic investors also soldearly perhaps resulting in a bigger decline in marketthan was warranted considering the quantum of actual foreign selling.

Notwithstanding the decline in KSE-100, the marketfundamentals have largely remained intact. ecountry’s economy is impacted more by domesticfactors (fiscal deficit and energy crisis) than by changes in global economic situation. GDP growth islikely to average 3-4% per annum and will require

rigorous fiscal and energy sector reforms to lift thegrowth trajectory. External account position iscurrently comfortable with FX reserves at USD16.9billion (sufficient to cover six months imports) andcurrent Account deficit restricted to 2.2% of GDP ason december 31 2011. As for corporate profitability,besides the textile sector, which is likely to faceearnings squeeze due to sharp fall in cotton prices,the earnings momentum is very strong in othersectors such as Energy, Banking and Fertilizer.Overall market valuations are also cheap by historicaland regional comparisons with average prospectiveP/E of 6.5x and dividend yield of 8%.

Pakistan’s stock

market has notbeen immune tothe movementsin global marketsin recent times.

Page 09 Your Guide toUnderstanding Investments.




e global economic scenario has radically

changed in last six months, prior to that we were

more focused on Pakistan but now the issues need

to be seen in all encompassing (holistic) manner.

In the last six months, economic scenario has

taken a new turn which raises valid question

and need to revisit the investment

strategy that guides the

investors in the global

scenario. ecircumstances

in the

markets, though

have improved but the

situation warrants a

need for more

careful and flexible

investment strategy

not only to successfully

combat challenges that may arise in the

times ahead and also to achieve the investment

objectives. We are currently experiencing times of rapid changes that call for equally prompt and

proactive/flexible investment strategies. is

article is a brief attempt to analyze the investment

avenues that are available to investors of different

age groups and having different needs so as to

enable them to select the most appropriate

investment instrument that best meet their risk

profiles in the present circumstances. Based on

profiles and age groups, this article suggests

suitable investment strategies which would help

an investor’s to achieve optimal returns on their valuable investments.

...the situationwarrants a needfor more careful

and exible

investmentstrategy not onlyto successfully

combat challengesthat may arise in

the times ahead ...


A. Avenues of Investment

1. INVESTMENT IN EQUITIES – MUCH

BETTER THAN ALTERNATIVES!

When different available alternatives are comparedwith respect to return over ten years, equities haveremained the best choice for investors who have along term perspective and can withstand short tomedium term volatility in stock market returns.

During the last decade (2001-2011), Pakistan’sstock market has provided an average annualreturn of 33% on investments, which is muchhigher as compared to other asset classes that arepreferred by investors. e second best performingasset over the same period (gold) that hasglittered/shined over last two years in fact has alsolagged behind equities by a whopping 14% perannum. Taking a practical example, if an investorwho invested in Meezan Islamic Fund on itsinception in August, 2003, has earned an

annualized return of 18.43%. is proves the factthat if invested in equity in long term, returns aremostly positive and higher compared to theinvestments in other instruments. e chart below shows performance of different asset classes over a10 year horizon.

Why has return on equity been the highest? eanswer is simple: Investors can choose to placetheir money in a bank account or in governmentbonds which offer near assured, stable returns, i.e

their principal is almost guaranteed while rate of return does not fluctuate much from month tomonth. In contrast, investing in the equity marketexposes investors to a high level of volatility inreturns due to day to day fluctuations in stockprices. ese fluctuations are specific to the risks

of equity investments particularly where theinvestor is taking a very short term perspective orspeculating. erefore, these risks have to bematched by higher average returns in the equity market to make it an acceptable investment option.Hypothetically if there was an economy in whichbanks gave the same average returns asequities/shares, there would be a mad dash of investors selling off their shares and moving theirmoney into bank accounts (to avoid volatility of returns). In the process, the basic principle of supply and demand would come into play i.e. shareprices would fall and at the lower prices, shareswould once again be attractive and offer higherprospective returns in terms of dividend yields.

Bets placed on individual stocks are extremely

risky, and at times there is little reward for bearingsuch high risks. However, when we consider equity as an asset class, almost every stock market(represented by an index) in the long term provideshigher average returns as compared to fixedincome instruments in the same economy. e key to proper investing is to focus on average returnover long time periods on well diversified equity portfolios.




2. GOLD – RISING TO FRESH HIGHS!

Gold prices were up by more than 30% and 11% in

can be attributed to fears of the European debt crisiswhich was a major driver of gold in the first half of 2010, as investors bought both gold and the dollar in

their flight to safety, and also the rising demand of the yellow metal in fast growing economies of China andIndia. Prices initially rallied as Central Bankspurchased gold to diversify their reserves amid risingconcerns on the sustainability of the US dollar asworld’s reserve currency. Central Banks gold reserveshave continued their upward trend over the last oneand a half years, while simultaneously sellers of goldsuch as IMF and central banks in the industrializedcountries have stopped selling gold, thus creatingan imbalance in the supply and demand of themetal.

Central Banks of emerging economies have very small investments in gold as compared to theirholdings of the US dollar. For example, Reserve

Bank of India’s stockpiles of gold increased to6% in September 2009 from 3.5% when itpurchased 200 tons. As highlighted in India’scase, very small increase in gold investment by central banks to diversify away from the USdollar can spiral a new sustaining effect onthe prices of gold.

Stimulus package of purchase of assetsworth US$ 600bn by US Federal Reservealso popularly known as QuantitativeEasing of part II (QEII) has led prices toreach new highs. For the year 2010,almost all the gains made by the dollaragainst main currencies were erodedwhile gold finished the year with a

decent rise of 30%.

It has been a great decade for gold,primarily due to the explosion in consumercredit and debt, going forward, gold may still haveimportant role to play. Speculations combined withband wagon effect may drive gold prices higher.

Prices initiallyrallied as CentralBanks purchasedgold to diversifytheir reserves

amid risingconcerns on thesustainability of the US dollar asworld’s reservecurrency.


3. FIXED INCOME AVENUES– LOW RISK

AND STABLE!

Fixed income investments are quite varied, theserange from risk free treasury bills and othergovernment backed instruments to high risk/ highreturn corporate Term Finance Certificates/

determine investment in which particular fixedincome instrument is appropriate for diversifiedinvestment portfolio. For example, a conser vativefixed income portfolio, possibly for retirement,might consists largely of high quality, low risk andlow yield investments, whereas more aggressiveportfolios might have fixed income investmentsoffering higher yields with greater risks.

Fixed income investments do add a degree of stability to an investment portfolio against rapidfluctuations because of the fixed income amountbut simultaneously the erosion of principal valuedue to inflation is a major concern.

Fixed income instruments available in Pakistanare:

a. Long term Government Instrument of

(Sukuks), NSS, Conventional Bonds, PakistanInvestment Bonds and Defense Saving Certificates

which normally have an investment horizon of 3 years to 1 0 y ears and yield range between 12% to

investors as they provide stable returns with very low risk. Since these instruments are backed by Sovereign Guarantee, probability of default is very low. However, there is a hidden cost involved inthese instruments, as investment is locked in forspecific period, and any premature withdrawalreduces the yield because of encashment penalty.

Some of the other fixed income investmentinstruments are:

liquid Government saving avenue which include

instruments having maturity of 3 months to 1 yearwith yield of approximately 12.0%.

c. Term Deposits (Banks) – If we take the historicalnumbers for last 10 years, average deposit rateshave remained on the lower side and are hoveringaround 4% because of historical low interest rateenvironment. However, with monetary tightening,the rates have improved and are currently hoveringaround 10% to 11% for six month deposits withbanks having rating band of AA and above.

d. Money market /Income Funds –

and less volatile investmentavenues and provide betterreturns as compared to bank

market/income funds arepresently in the range of 11% to11.5%.




Usually, a person’sability to take risk decreases as he

approachesretirement. As a result,

asset allocation tilts

towards high risk assets in early part of the employment cycle

and to safeinvestments at end of

the cycle.

4. REAL ESTATE–ILLIQUID AND

INACCESSIBLE!

One of the other popular investment avenues inPakistan is real estate. However, investments in realestate are mostly illiquid investments and these arenot easily accessible to investors in time of real need.ere is also the chance of erosion of principalamount invested depending on the timings wheninvestments were made. Real Estate InvestmentTrusts (REITS) are yet to be formally launched inPakistan. An investment in real estate can be fromtwo perspectives: for capital appreciation by aspeculator, or by a genuine buyer who is in need of a

house. If we consider the need factor of owning ahouse rather than as an investment avenue, then anindividual should plan accordingly.

B. Investor Profile

Self Assessment- Where You Fit!

Investors can broadly be categorized into four

sub-groups, starting from entry into employmentcycle till the end of cycle i.e. retirement. Age profilemay vary for people who are self – employed. einvestment cycle starts when one starts earningsand ends when one retires.

Age groups of investors are categorized as

follows:

25 TO 35 YEARS

Being young and energetic, they have few responsibilities hence cash inflows are relatively greater than outflows.

35 TO 50 YEARS

Generally at the prime of their career, withresponsibilities increasing over time hencecashflows have to be managed prudently.

50 TO 60 YEARS

Approaching retirement, their cash inflows willsoon decrease to pension alone. As they plan forretired life, investment is diverted to safer avenues.

60 PLUS YEARS

Post retirement age, their inflows are restricted to

pension and return on investment. Outflowsexceed inflows since no future inflows except forinvestment income are expected


RISK TOLERANCE- INTRODUCTION

Optimum asset allocation requires clearly definedrisk tolerance limits. Unfortunately, the concept of risk tolerance is generally not very well understoodwhich often results in suboptimal asset allocation.

ere is a tendency to use risk tolerance as abarometer of an individual’s proclivity forgambling. is happens as for most peopleinvestment and speculation are the two sides of thesame coin – something which could not be fartherfrom the truth. It is therefore critical to understandthe parameters that define risk tolerance correctly such as time horizon, size of portfolio, cashreserves, family situation (i.e. number of children)and age, current net worth, income expectations,etc.

ough age is an important factor in determiningasset allocation, it is not the sole consideration. Infact, it is highly likely that two individuals with thesame age have different risk profiles. An

individual’s risk profile is defined by his ability andwillingness.

If return objectives are high relative to portfoliosize and the time horizon is short, the ability torecover from any unfavorable portfolioperformance, is reduced and, so is risk tolerance.

Willingness to take risk is more subjective, and alsopartly determined by the psychological profile of an individual. is depends on our inherentnature, our attitude towards life, finance, andknowledge of financial products, etc. So you caneither be extremely cautious by nature and youmay not be willing to t ake risks or you can be a risktaker and be willing to speculate heavily. e

degree of loss aversion with regards to a negativechange in the value of yourr portfolio is also animportant determinant of willingness to take risk.

INDIVIDUAL INVESTOR CONSTRAINTS

Along with an objective to achieve maximumreturn on his investment with minimum risk, aninvestor has to face multiple constraints which play a major role in his investment decision making.

ese constraints are broadly divided into fivecategories ranging from time horizon of investment to unique circumstances.

1) Time horizon- governs the level of risk thatinvestor should assume in his/her portfolio. ose

with short-term horizons cannot afford to take ahigh level of risk in their portfolios, as they haveless time to recoup losses.

2) Tax consideration-Tax needs to be consideredfrom the point of view of the investors overallincome, rather than just on a portfolio level. Aninvestor circumstances along country taxregulation can have significant impact on aninvestors’ return. For example, in Pakistaninvestment in mutual funds can help an investor toreduce his effective tax rate.

3) Legal and regulatory factors- Usually, there arefew legal and regulatory requirements forindividual portfolios. However, in the case of

institutions, investment limits and permissibleasset classes are important factors to consider.

4) Liquidity Constraints of a portfolio- is relatesto the ability to meet every day needs as wellunexpected expenses. Liquidity characteristic is a very important factor to be considered as forexample house/private company holdings arerelatively illiquid assets.

5) Unique circumstances- is is a case of specificconstraints and depends on investor preferences.Some investors may have preferences about theasset classes/specific investment they do not wishto invest in for personal reasons, e.g. tobaccocompanies. is needs to be taken into account

when selecting investments for the portfolio.




C. Portfolio Recommendations

In light of the brief introduction on various investment options currently available to investors and identifyinginvestors risk profile, we recommend the following asset allocation strategy for our investors:

Broadly, asset allocation for an individual based on hisage and employment cycle can be divided into fourcategories. Starting from young age, when one has few responsibilities and high willingness and capacity totake risk, asset allocation should be aggressive.Aggressive allocation at the early stage has two majorbenefits. Firstly, the high returns that can be earnedthrough investing aggressively leads to higher com-pounding effect, secondly, there is greater time periodavailable to recoup any losses sustained.

In middle age and heading towards retirement, theinvestors’ responsibilities increase and hence risk

taking abilities declines. So, asset allocation at thisstage should start shifting slowly towards higherallocation into lower risk and more liquid invest-ments.

Last stage is when one’s employment cycle has cometo an end and he reaches the age of retirement(normally ranges from 60 to 70 years in Pakistan) hebecomes dependent on his savings to meet his daily needs. During post retirement stage, individual risk

taking ability reduces substantially, so the best strat-egy is to keep assets in low risk, stable return andhighly liquid assets.

Equity Gold Regular Cash ExpectedIncome Return (%)

Investment Style Risk Taking Ability Portfolio Composition (%)Young Aggressive High 60 15 15 10 23.4

Middle Aged Balanced Medium to High 40 10 30 20 20.3

Retirement age Conservative Low to Medium 20 0 50 30 16.3

Post Retirement Very Conservative Low 0 0 70 30 13.1


Conclusion

A structured and disciplined approach to wealthmanagement is the key to achieving satisfactory financial results. is entails appropriate assetallocation choices, subsequently leading to smart

security selection. e asset allocation is deter-mined to a great extent by age, and the stage of thelife cycle that an investor is in. Other factors suchas time horizon and liquidity requirements are alsoimportant to consider. e process of portfoliomanagement is dynamic and differs from individual to individual, as well as for the same individual at different points of time in life. us, it isimportant to actively monitor one’s portfolio tokeep changing it dynamically as risk and returnobjectives change with developments in life.

The process of portfolio

management isdynamic anddiers fromindividual to

individual, as wellas for the same

individual atdierent points of

time in life.




By Bushra Tariq - Senior Manager Investments


Pakistan is emerging as a country where the investment in mutual funds

is now considered a lucrative option. Beside the traditional avenues of

investing in government papers or placing the money in bank deposits,

more and more people are now investing in different equity and fixed

income funds as per their risk/return appetite.

As discussed by various portfolio

theories, and highlighted as an effective

advertising tool by the asset

management companies, an investor

can benefit in a number of ways by

investing in mutual funds; he can avoid

the hassle of actively managing his

portfolio and take advantage of the

expertise of the fund manager, he can

benefit from the diversification of stocks

in equity funds, or ensure minimum risk

with stable return by investing in fixedincome funds.

The irony, however, remains that many

investors still remain ignorant of many

other benefits they can reap by

investing in mutual funds. One key

positive, which often goes unnoticed, is

the augmented return an investor can

earn by claiming tax rebate on his

investment in mutual funds. To explain a

little, tax rebate is a benefit that an

investor gets for his investment in an

open end fund at his marginal tax rate.

It is applicable for all open end mutual

funds since they continuously offer their

units for sale, and this falls under the

domain of new subscription under

section 62 of the Income Tax

Ordinance, 2001.

177.57




Recently, the government offered certain incentives and amended the Finance Bill 2012.

An individual investor can claim tax credit up to Rs. 100,000/- (in case of salaried

person) or Rs. 125,000/- (in case of self employed) in a tax year on investment up to Rs.

500,000/- or 15% of individual’s taxable income (whichever is lower), subject to that an

investment is held for a period of three years. The major amendments are summarized inthe table below:

Applicable Rules before Changes Applicable Rules after Changes

e mandatory holding period for units inrespect of which the tax credit may beavailed was 12 months.

e period has now been extended to 36months.

i Holding Period

b) Rs 300,000, whichever is lower Rs. 500,000, whichever is lower

ii Maximum Ceiling for Tax Credit


We can explain it further by taking an example of two investors Mr A and Mr B. Let us assume

that the both investors fall in the 20% tax slab and invest Rs 500,000 in a fixed income fundproviding an annual return of 12%. Assume further that both Mr A and Mr B have a time horizon of

three years. The only difference between both of them, however, is that Mr A availed tax credit of

Rs 100,000 (as per his relevant tax slab), whereas Mr B wasn’t aware of benefit and hence didn’t

avail it.

For Mr A, inv estment net of his tax credit was Rs 400,000 and at the end of Year 1, his total return

stood at 40% against Mr B’s return of 12%. The incremental return was thus a significant 28%

between both the investors. In the same way, at the end of the next two years, Mr A stood in a far

better position than Mr B. His annualized return at the end of Year 2 and 3 stood at 25.2% and

20.6% as against Mr B’s flat return of 12% for three years. Whereas, cumulative return at the end

of three years for Mr A was 75.6% as compared to 40.5% for Mr B. A table summarizing the

calculations for both the investors is presented below:

We illustrated that how by availing the tax credit; you not only can save on taxes, but also increase

your effective return. In the present scenario where the economic managers suggest of every

possible step to increase the tax-GDP ratio, such tax credit offers an amazing opportunity for the

investors in mutual funds to optimize their wealth and augment their returns.

’

Tax Slab 20%Investment (Rs) 500,000Time Period 3 YrsTax Credit Availed (Rs) 100,000

Investment net of tax credit (Rs) 400,000

Yr 1 Yr2 Yr3Investment Value (Rs) 560,000 627,200 702,464Annualized Return 40.0% 25.20% 20.60%Cumulative Return at Yr 3 75.6%

Tax Slab 20%Investment (Rs) 500,000Time Period 3 YrsTax Credit Availed (Rs) 0

Yr 1 Yr2 Yr3Investment Value (Rs) 560,000 627,200 702,464Annualized Return for Mr B 12.0% 12.0% 12.0%Cumulative Return at Yr3 40.49%

Incremental Return 28.0% 13.2% 8.6%




By Sanam Khan - Head of Research


It’s an individual dream to invest atbottom of the market and divest at peakof the market. ough easy to say, butactual implementation is logically impossible, even then some may claimsuccess based on fair chance of luck orprobably probability was working intheir favor. You may have come

across a pundit or guru (self proclaimed)who proudly would have told you, how successfully he has predicted past ups and downsof market. Volatility or risk or beta is an inbuiltfeature of markets which depicts itself in peak orbottom. Volatility in market is dynamics of multiple variables, direction and depth of whichis not humanely possibly to predict. Based oninformation available on relevant variable, somepeople may be better at predicting future, butthey can’t state with surety the repetition of pastsuccess. Volatility, a feature of market measuringthe risk has challenged theories such as “efficientmarket hypothesis”. If two investors have samelevel of information, then as per efficient markethypothesis, should depict same investmentpattern. But we have witnessed in past that at

every peak somebody was buying and at every bottom somebody was selling. If it is so difficult toforecast the bottom and peak of the market thenhow should an average investor with limited timeand knowledge invest?

For such investors we recommend Rupee cost of

averaging, it is investment approach designed tobuild wealth over long term by continuously investing a fixed rupee amount in securitiesregardless of prices of those securities.

Rupee Cost Averaging and Mutual Fund

Industry

Rupee cost averaging is most often associatedwith mutual fund investing. Beyond buildingwealth, this approach may deliver other benefitsalso. Because of short term price fluctuation forfunds, more units can be purchased when pricesare low, and of course, fewer units when prices arehigh. Overall, as investor makes additionalinvestment, the average cost for purchasing unitsis probably less than the average market price.In-fact many investors establish rupee costaveraging program by linking mutual fundaccounts with their checking accounts; a conceptknown as “Systemic Invest ment Plan” or SIP.

If analyzed over short term horizon, a long termbull market may make dollar cost averaging very successful. But what about this strategy duringthe declining market? e emotional pressure tocease dollar cost averaging plan tends to escalatewhen stock prices fall. Investor may feel they arethrowing “good money after bad money” if pricedeclines over protracted period. To better explainRupee cost averaging concept, let us assume an

investor who puts RS 1000 in index on aparticular day of month. For every month hefollows that strategy, so how he fares compared tomarket? Under this strategy, investor not only achieves same behavior as depicted by the index,but also returns. We back tested this strategy, andgiven below is the investor portfolio behaviorcompared to KSE 100 index trend.

it is investmentapproach

designed to

build wealthover long termby continuouslyinvesting a xedrupee amount

in securitiesregardless of

prices of thosesecurities.




Let’s have look at below given graph, whereRs 1000 are regularly invested in market index onevery first day of month irrespective of marketlevel. Blue line is the portfolio value of investor onfirst day of month. Now, compare it with greenline, which is simply chart of KSE 100 index. It

was very interesting to see investor portfolioreflects same trend as that of market. at simply means that just by investing once a month, aninvestor can build a portfolio which can trackmarket trend. In the same graph, red lineindicates cumulative investment of Rs 123,000and blue line indicates market value of Rs 284,069at the end of 10 years i.e in a decade investor valuehas doubled.

Rupee cost averaging has its shortcomings too;for example if an investor has adopted thisstrategy for equity instruments at peak of themarket, then his average purchase cost per unitwill be higher than market price. is will createan emotional pressure to take exit from thisstrategy. To highlight it better, assume thataforementioned investor entered in the market atthe peak of April, 2008. en market continuedwith downward decline and touched the bottomof 5,334 in February, 2009 i.e. down 65% from the

peak level. During this declining period, investoraverage purchase cost per unit will be higher thanmarket rate. As a result, investor would havesuffered emotional pressure to exit from thestrategy. Whereas, investor which stood firm tostrategy was able to achieve purchase cost perunit lower than market by August, 2009. Asmarket started upward rally in March, 2009, it notonly resulted into lower average cost of portfolio

than prevailing market prices but also increasedmarket value of his old purchases.

Another major drawback of strategy is whenapplied to stock or shares; it requires regularinvestment irrespective underlying investmentfundamentals of that company, managementefficiency, and sales of company, etc.

18,000350,000

250,000

200,000

150,000

100,000

50,000

-

300,00016,000

14,000

12,000

10,000

8,000

6,000

4,000

2,000

0 1 6

1 1

1 6

2 1

2 6

3 1

3 6

4 1

4 6

5 1

5 6

6 1

6 6

7 1

7 6

8 1

8 6

9 1

9 6

1 0 1

1 0 6

1 1 1

1 1 6

1 2 6

MarketIndex(LHS)Cumul Investement(LHS)MarketValue(RHS)

18,000

16,000

14,000

12,000

10,000

8,000

6,000

4,000

2,000

-

1 - A p r - 0 8

Av era ge co st / un it M ark et Ind ex

1 - J u n - 0

8

1 - A u g - 0

8

1 - O c t - 0 8

1 - D e c - 0

8

1 - A p r - 0 9

1 - F e b - 0

9

1 - J u n - 0

9

1 - A u g - 0

9

1 - O c t - 0 9

1 - D e c - 0

9

1 - A p r - 1 0

1 - F e b - 1

0

1 - J u n - 1

0

1 - A u g - 1

0

1 - O c t - 1 0

1 - D e c - 1

0

1 - A p r - 1 1

1 - F e b - 1

1

1 - J u n - 1

1

1 - A u g - 1

1


Practical Approach to Rupee Cost

Averaging

Earlier we gave an example of an investor whoregularly invested in KSE 100 index, thepracticality of this example is questionable as an

investor does not have the ability to investdirectly in an index due to lack of index trading inour market. As a result, we have tried to extendthe investment strategy to Meezan Islamic Fundinvestor. Keeping the same assumptions, investorregularly invested 1000 per month and reinvestsdividends back into fund. As a result, investor wasable to invest at bottom and peak of the marketand by reinvesting dividends was able to achievebenefit of long term compounding.

Now, let’s analyze an investor who adopted Rupeecost of averaging investment strategy at the peakof April, 2008. Initially, investor would have gonethrough major emotional pressure as his averagepurchase cost per unit would be higher than NAV of the fund. It would have created a psychology

pressure for the investor to take exit but if hestood firm to strategy, his average cost per unitwould be lower than NAV of the fund just afterone year.

80.00

70.00

60.00

50.00

40.00

30.00

20.00

10.00

-

7 - A p r - 0 8

7 - J u l - 0 8

7 - O c t - 0 8

7 - A p r - 0 9

7 - J a n - 0

9

7 - J u l - 0 9

7 - O c t - 0 9

7 - A p r - 1 0

7 - J a n - 1

0

7 - J u l - 1 0

7 - O c t - 1 0

7 - A p r - 1 1

7 - J a n - 1

1

7 - J u l - 1 1

1 - O c t - 1 1

Averagecost /unitNAV ofMIF

250,00

200,00

150,00

100,00

50,00

-

180.00

160.00

140.00

120.00

100.00

80.00

60.00

40.00

20.00

8 - A u g - 0

3

8 - F e b - 0

4

8 - A u g - 0

4

8 - A u g - 0

5

8 - F e b - 0

5

8 - A u g - 0

6

8 - F e b - 0

6

8 - A u g - 0

7

8 - F e b - 0

7

8 - A u g - 0

8

8 - F e b - 0

8

8 - A u g - 0

9

8 - F e b - 0

9

8 - A u g - 1

0

8 - F e b - 1

0

8 - A u g - 1

1

8 - F e b - 1

1

Portfol io Val ue(RHS) MIF NAV (Adj .Bonus) (LHS )

200,00

180,00

160,00

140,00

120,00

80,00

100,00

40,00

20,00

60,00

-

160.00

140.00

120.00

100.00

80.00

60.00

40.00

20.00

1 - S e p - 0

3

1 - M a r - 0 4

1 - S e p - 0

4

1 - S e p - 0

5

1 - M a r - 0 5

1 - S e p - 0

6

1 - M a r - 0 6

1 - S e p - 0

7

1 - M a r - 0 7

1 - S e p - 0

8

1 - M a r - 0 8

1 - S e p - 0

9

1 - M a r - 0 9

1 - s e p - 1

0

1 - M a r - 1 0

1 - S e p - 1

1

1 - M a r - 1 1

Portfol io Value(RHS ) MIF NAV (Adj.Bonus) (LHS)

It would havecreated a

psychologypressure for theinvestor to take

exit but if hestood rm tostrategy, his

average cost perunit would be

lower than NAV of the fund just after

one year.



Pros and Cons of Rupee Cost Averaging

Like every investment strategy, this investment strategy has its benefits and weak points too. Which areshortly covered below;

Inculcates financial disciplineBy following Rupee cost averaging, investor regularly saves and is aware of his current financialsituation and future cash flow needs.

Average out your cost of investment and hence reduce your risk

Rupee cost averaging over the long term helps an investor to achieve an average cost per unit lower thanmarket price and hence reduce risks. To better explain, take an example of investor X, who regularly invests Rs. 1000 per month. For first month, he purchased 50 units as market price of security wasRs. 20 per unit and for month two he purchased 100 units as market price went down to Rs. 10 per unit.At end of month two as shown in below table, he has invested Rs. 2000 and purchased units of 150.Now, Average Market value of investment is Rs. 1500 (please refer to cell I) and average cost unit is Rs.13.3 per unit. Taking case of another investor Y, who invested a straight sum of Rs. 2000 in month 1(market price Rs. 20 per unit) and she was able to purchase only 100 units– her investment market value at the end of the month 2 is only be Rs. 1000/-.

Investment Amount Market Price Units purchased Net value

A B C=(A+B) D E F G H=(F+G) I=(HxE)

Month 1 Month 2 Total Month 1 Month 2 Month 1 Month 2 TotalInvestor X Rs 1000 Rs 1000 Rs 2000 Rs 20/ unit Rs 10/ unit 50 100 150 1500

Investor Y RS 2000 Rs 2000 100 100 1000

Page 27 Your Guide toUnderstanding Investments. www.almeezangroup.com Page 28

Helps in compounding your wealthRupee cost averaging has a compounding effecton your investments. In long term, regularinvestment as low as Rs. 1000/- per month willswell into a huge amount as investor reaps thebenefit of compounding. Consider two investors

A & B; investor A starts investing an amount of Rs. 750 per year at age of 15 years for 15 years andhe reinvests returns till he retires. At age of 60 years, her investment would grow to Rs. 2.6mn (atexpected rate of 15% annualized) vs. cumulativecontribution of Rs. 11,250. As for investor B, shestarts investing an amount of Rs. 5000 per year atage of 30 till her retirement. Value of Binvestment at age 60 will be Rs. 2.2mn i.e lowerthan A’s investment value of Rs. 2.7. is can bebest explained by the following graph.

By investing early and regularly, investor A wasable to make savings more than investor B, whoalso was regular investor but start later.

By investing earlyand regularly,investor A was

able to makesavings more thaninvestor B, whoalso was regular

investor but startlater.



By Afa Jeelani - Manager Research

Eat

Sleep VsWell

Well

We put all ourintellect at

stake and optfor the one thatbest ts ourrequirements.

Page 29 Your Guide toUnderstanding Investments. www.almeezangroup.com Page 30

e charm of life comes from the fact that weare always flooded with a plethora of optionsand we have to make decisions in the midst of favorable and not so favorable options. We put

all our intellect at stake and opt for the onethat best fits our requirements. But as humanswe tend to rely heavily on stereotyping owingto our limited horizon and myopic vision, weregard our actions as perfect, and disregard

the point of view of others. But one sizedoesn’t fit all and everyone tends to opt for thesolution that best fits their needs and fulfillsthe purpose they aim for.

Eat Well vs. Sleep Well is used as an adagereferring to the risk/return trade-off. And

therefore it impacts the type of security aninvestor chooses to invest, depending onwhether he or she wants to eat well or sleepwell. e first and most fundamental invest-ment decision that all investors must make is

the percentage allocation to risky assets and

risk free assets in their portfolio. e choicemade by any investor is totally personal anddepends on their risk appetite. And the basicinvestment concept at work is - the higher the

risk, the higher the return but at the price of losing a few nights’ sleep. Investment in risky assets describes the scenario where return isnot guaranteed, while investment in risk freeassets guarantees a predictable future return.



Sometimeshistory repeats

itself; but

sometimesmarkets learnfrom its mistakes.An investor needs

to understandhow various asset

classes haveperformed in the

past beforeplanning their

nances.

e Options Available:

Eat well - is is a phrase used to describethe situation faced by an investor who undertakesinvestments in risky assets. One with a high risk

portfolio eats well because he reaps the fruit of ahigh expected rate of return on the portfolio,granting the investor a more luxurious lifestyle.But this comes with its own repercussions as theinvestor needs to go through the stress of very volatile returns. Investing in high-risk,high-reward securities will offer the investor,potential to eat well, but the risky nature of thesesecurities might prevent an investor from sleepingat night as it is bartered for good and gradualreturns.

Sleep well - By contrast, investing safely means that an investor will sleep well, but the low rate of return may keep one away from eating well.

An investor with a low risk portfolio sleeps wellbecause he/she does not need to worry about thepossibility of losing one's investment in the way asthe one taking more risks does. Investors whoprefer to sleep well are assumed to be risk averseand better candidates to own more risk freesecurities than risky, volatile assets. ey tend tocompromise on short term gains in order to gainbenefits from long term stability.


How to Make the Choice?

Investors of course do not make all or nothingchoices from the investment class of risky and riskfree assets. ey tend to construct their portfoliosfrom all asset classes- a process known as asset

allocation where they choose among broadinvestments classes rather than specific securitieswithin each asset class. And this entails the mostcrucial part of portfolio construction.

e option an investor chooses entails a trade- off between risk and return. Individual investors withdifferent levels of risk aversion, given an identicaloptimal portfolio (the best combination of risky assets) will formulate different portfolios (entireportfolio including risky and risk free assets)depending on their levels of risk aversion. Butthere are six major factors which influence theinvestment decision-making criteria for anindividual:

Past market trends - Sometimes history repeatsitself; but sometimes markets learn from itsmistakes. An investor needs to understand how various asset classes have performed in the pastbefore planning their finances.

Risk appetite - e ability to tolerate risk differsfrom person to person. It depends on factors suchas financial responsibilities, operationalenvironment, basic personality traits, age, p ersonalliabilities, etc. erefore, understanding ones’capacity to take risk becomes a crucial factor ininvestment decision making.

Investment horizon - How long can an investorkeep the money invested? e longer thetime-horizon, the higher the risk tolerance andhence the greater are the returns that one shouldexpect.

Investible surplus - How much money is aninvestor able to keep aside for investments? einvestible surplus plays a vital role in selectingfrom various asset classes as the minimuminvestment amounts differ and so do the risks andreturns.

Investment needs - How much money is requiredat the time of maturity? is helps in determiningthe required rate of return and the amount of money needed to invest every month or year toreach the magic figure.

Expected returns -e expected rate of returns is acrucial factor as it will guide the choice of investments. Based on expectations, an investorcan decide whether he/she want to invest heavily into equities or debt or keep a balanced portfolio.

Taking this into account, it is the task of professional financial adviser to presentinvestment opportunity alternative to clients,obtain an assessment of the client’s risk tolerance,and help them determine an appropriate portfoliofor them.

Capital Protection &

Growth, Hand in Hand




By Ahmed Hassan, CFA - Senior Manager Research

Managing Your InvestmentPortfolio in Times of

Monetary Abuse

&Fiscal


Experience, however, shows that neither astate nor a bank ever have [sic] had the

unrestricted power of issuing paper money

without abusing that power; in all states,therefore, the issue of paper money oughtto be under some check and control; andnone seems so proper for that purpose as

that of subjecting the issuers of paper money to the obligation of paying their

notes either in gold coin or bullion.

David Ricardo

It seems that only days pass by and the world manages to produce yet

another trillion dollars out of thin air. At the time of writing of this piece, the

world is no different as US Congress passed a bill to raise the debt ceiling

by $2.4 trillion, meaning that the US will borrow more money from Federal

Reserve, the Central Bank of USA. It should be noted that the debt ceiling

has been raised over 70 times in the past 50 years alone and there seem

to be no immediate signs that the US government will ultimately take

decisive action and do away with its bad habits. The US is not alone in

doing so, Pakistan’s Central Bank has reportedly printed 1.167 trillion of

currency notes in past 4 years and so has the European Central Bank. So

what does all this mean?




Why is this

The reason this is important for investors,not only in Pakistan but across the world,is because this borrowed money iscreated or in crude terms it is printed without the backing of any asset. Whennew money gets printed and spent itleads to a rise in prices of goods andservices, a concept more commonly known as inflation. So if you had PKR100under your pillow back in 2007 and itcould have bought 7.22kg of Flour,however, in 2010 the same amount of

money could only buy 3.33kg of theproduct. In other words, you havesuffered a 53.8% decline in purchasingpower as flour prices have roughly doubled during the period.

Presently, leading economiesrepresenting over half of the world GDP

are submerged in debt that they cannotafford to repay without some short-termassistance or additional borrowing. Thereason of their inability to repay lies in thefact that these economies face fiscaldeficits that cannot be reduced unlessradical measures are taken. Thiscombined with the fact that politiciansremain persistently unwilling to transfer the pain to their constituents in the formof either higher taxes or lower spendingfurther makes deficit reduction difficult.

Thus, the combined effect of these willonly lead to more borrowing by thesenations to finance their excessexpenditures, which mean more money insupply and lesser value of your PKR100.So what can you do to counter thisdecline in purchasing power? Allow us tooffer some help in this regard.

investors in Pakistan?important for

3500.000

Currency in Circulation of Major Economies

B n D o l l a r s

3000.000

2500.000

2000.0001500.000

1000.000

500.000

0.000

Dollars

J a n - 0 2

S e p - 0 2

M a y - 0 3

J a n - 0 4

S e p - 0 4

M a y - 0 5

J a n - 0 6

S e p - 0 6

M a y - 0 7

J a n - 0 8

S e p - 0 8

M a y - 0 9

J a n - 1 0

S e p - 1 0

M a y - 1 1

Ye n E ur o

8.00

6.00

4.00

2.00

2007

Bars of Soap

Kg of WheatFlour

Kg of Rice Liters of Petrol

Kg of Beef -

What PKR100 Could Buy - Then and Now

Source: FBS - Statistical Yearbook 2011- Wholesale

2010


An important characteristic of the money is that it is a store of value, meaning, that you can store the value of the services that you delivered in your young age to repay your medical bills when you grow old. However, the present need of leading Fiscal Authorities to finance expenditures through additional borrowingdirectly attacks at the concept of money as a store of valuethrough rampant inflation and currency depreciation. Hence your PKR100 will decline in value if it is kept under the pillow.

One way to protect yourself is to combine the real-assets withperpetual income earning assets to provide consistent incomestream. This will provide you with regular income as well as act asan hyper-inflation shield. In the following case we have presentedthat an average investor can combine real assets with MeezanSovereign Fund to yield superior inflation adjusted returns for FY11.

Currency War

Final Word:Keeping Buoyantin the Flood of Paper Money

The structural problems ofmajor economies requireradical measures that are atodds with the politicalinterests of the saidcountries. Presently, thepopular remedy by thesecountries to fight the excessis through additionalborrowing either in the formof revised debt ceiling in theUS or “debt restructuring” inthe EU or additional T-billissuance in Pakistan. Giventhe lack of will to address

the problems we would notbe surprised if further debtceiling revisions or debtrestructurings are pursued.Hence, for the time beingwe advise our investors tomaintain acceptable level ofreal assets in theirportfolios.

Portfolio 1 Weightage Return

Gold 10.27% 23.71%

Meezan Sovereign Fund 89.73% 11.45%

Effective FY11 Return 12.7%


Silver 10.27% 86.3%



Meezan Islamic Fund 10.27% 38.7%



10.27%

Gold

89.73%

Meezan Sovereign

10.27%

Silver

89.73%

Meezan Sovereign

10.27%

MeezanIslamicFund

Meezan Sovereign

89.73%





Years Pakistan’s

Mutual Fund

of

Industry

By Farhan Lakhani - Fund Manager



In the last fifty years, Pakistan’s mutual fund

industry has gone through both highs and

lows, but has been able to establish itself as alucrative investment option. Initially, for a long

time, government controlled the industry as

ICP, which provided several closed-end

mutual funds, and NIT, which was an open-

end mutual fund, were the only players in the

game. Later the government allowed private

sectors’ investment in the industry which led

to the launch of several open and close ended

mutual funds. The industry since then has

shown remarkable growth, especially in

recent years, both in terms of asset undermanagement and number of funds. Growing

number of investors appear to be putting

their trust and money in mutual funds. The

choice for investors in mutual funds is now

widening, and various types of mutual funds

have been launched in recent years, with

many more in pipeline.

Overview

Mutual funds were first introduced in Pakistan back in 1962, with the public offering of open

ended National Investment Trust fund. The fund remained at that time as the only open ended

mutual fund in Pakistan for 30 years and was later followed by the establishment of Investment

Corporation of Pakistan (ICP) in 1966 in public sector. Then in 1971, the Government allowed

private sector close-ended funds to enter the industry by issuing the Investment Companies

and Investment Advisors Rules (IC & IA Rules). This led to the launch of Golden Arrow, the first

close-ended fund to be established in the private sector in 1983. Then,

the biggest milestone for the industry was the promulgation of Asset

Management Companies Rules, 1995 which provided the necessary legal

framework for launching and managing open-end funds by the private

sector. Shortly after, the first private sector opened ended fund by

ABAMCO Limited was launched in 1996. This proved to be the turning

point and following this several open and close ended funds were

launched resulting in the formation of Mutual Funds Association of

Pakistan (MUFAP) in 1996. Later in the same year, Al Meezan Mutual Fund

(AMMF), the first Islamic fund was launched in Pakistan. After that NBFC

rules were established in 2002 and then NBFC regulations were put into

place in 2008 to regulate the Non-Banking Finance Companies.

Brief History



The current size of the mutual fund industry at the end of the fiscal year FY11 stood at Rs. 250

billion which is about 1.5% of the GDP. In the last three years, mutual funds have registered a

rapid growth after the market crash witnessed in calendar year 2008. The growth can be

attributed to the fact that mutual funds in Pakistan are making a strong impact and are now

considered by most investors a safe investment option. This is depicted by the fact that AUMs

are steadily increasing as can been seen from the graphs below:

HISTORY OF FUND IN CHRONOLOGICAL ORDER

Present


1962:Therstopenendedmutual fundwas

launched- NationalInvestementTrustFund

1995:PromulagationAssetManagement

CompaniesRules

1996:Formation

of MUFAP

2002:Launch of UTP-IslamicFund,

therstIslamicopenendedfunf

2008:Establishmentof NBFCRegulations

1971:Govt.allowedprivatesectorclosed-

endedfunds

1966:Establish-mentof

InvestementCorporation

of Pakistan (ICP)

1983:Golden Arrowwaslaunched.Itwastherstclosed- endedfund

establishedin privatesector

1996:ABAMCOLimitedwas

launched,the rstprivatesectoropen endedfunds

1996:Launch of AMMF,the rst

Islamiccloseendedfund

2002:Establishmentof

NBFCRules


AUMs peaked in FY08 but then its faced its worst crisis with the freeze on Karachi stock

exchange. Due to this mutual funds suspended redemptions on equity funds as they faced

problems of price discovery and liquidity. Subsequently, investors redeemed from other catego-

ries of funds in fear of suspension of redemption. This coupled with liquidity issues in banking

sector led to major redemptions in fixed income funds and hence AUMs dropped by 40% in

FY09. Since then, follwing the removal of freeze on Karachi stock exchange, equity funds haveposted exceptional returns and due to which some of the investors’ confidence is restored. At

the same time, the launch of new and innovative types of funds, catering to the needs of

investors at far end of spectrum, has also helped industry to post high growth. An interesting

point to take into consideration is that in the last few years, the number of AMCs have

decreased while the number of funds offered are increasing owing to the mergers across AMCs.

Currently, i.e. at the end of FY11, there are 134 funds and 27 AMCs.

It can be observered from the above pie chart (FY11) that the funds are almost equally divided

among Fixed, Money and Equity market. Now if we look at the y-o-y comparison, it is interest-

ing to note here that investors’ in general are moving to short term and less risker investments

as there is substainal increase in the weightage of money market funds. Another obersation

here of note is that investors’ in Pakistan generally don’t perfer equity funds as there is a

constant decline in their weight over the years, whereas investor’s in general across the global

prefer equity funds as they offer a higher risk – reward ratio. Lack of perference for equity funds

in Pakistan says a lot about the confidence of a general investor in the equity market of Pakistan.

Fund Categories:

FixedIncome,

38%

MoneyMarket,

16%

Equity,35%

FY10 FY11

Others,11%

FixedIncome,30.90%

MoneyMarket,30.97%

Equity,31.80%

Others,6.33%

-

80,000

160,000

240,000

320,000

400,000

F Y 0 1

F Y 0 2

F Y 0 3

F Y 0 4

F Y 0 5

F Y 0 6

F Y 0 7

F Y 0 8

F Y 0 9

F Y 1 0

F Y 1 1

0

30

60

90

120

150

No of AMCs

Total no of funds

AUM

-

80,000

160,000

240,000

320,000

400,000

-50%

-10%

30%

70%

110%

150%

F Y 0 1

F Y 0 2

F Y 0 3

F Y 0 4

F Y 0 5

F Y 0 6

F Y 0 7

F Y 0 8

F Y 0 9

F Y 1 0

F Y 1 1

A UM G ro wt h



It can be seen from the above table that NIT is t he largest AMC in terms of AUM followed by

Al-Meezan Investment Management Limited and Arif Habib Investment Management Limited.

The point worth mentioning here is that, even the biggest private-sector fund i.e. Al-Meezan,

have not been able to entice more than 20,000 individuals, less than 0.003% of the population.

This tells us that even though the growth in recent years is phenomenal, but still the penetra-

tion is still very low and there is still huge potential in this segment.

Key Players

Fastest Growing Segment:

Islamic Mutual Funds

The future outlook of the mutual funds industry

is very promising and encouraging. As previously

mentioned, there is a still enough potential in

the industry to excite new players in the industry.

The current penetration ratio of our industry is

low and is expected to increase rapidly. At the

same time, corporate earnings are expected to

remain high and since most of the mutual funds

have large exposures in equities any improve-

ment in corporate earnings is expected to have

positive impact on them. We expect that shor tly

mutual funds would be recognized as a reliable

separate asset class by all types’ of investors as it

has been providing versatile and attractive

investment avenues to the general public while

paying comparatively better returns based on

dividend yields and capital gains.

Future Outlook

The fastest growing segment in the mutual fund

industry is the Islamic funds category. These funds

are recent addition to the industry but have

attained significant acceptance in a short span of

time. The first open ended fund in this category

was JS’s UTP – Islamic fund and it was launched

back in 2002. This was followed by the launch of

several other Islamic funds as it can be seen from

the above graphs. There has been gradual in

increase in AUMs and number of funds (Currently

there are 27 funds in this category). This phenom-

enal growth is due to increase in awareness

among the general public about Halal investment

options available in the market place.

Your Guide toUnderstanding Investments.Page 41 Your Guide to

Understanding Investments. Page 42

PKR mn

80,000

70,000

60,000

50,000

40,000

30,000

20,000

10,000

NIT Al-Meezan Arif Habib UBL ABL

-

S.No

Total # of Funds

FY03

1

FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12

3 3 4 7 14 18 22 26 27

F Y 0 3

F Y 0 4

F Y 0 5

F Y 0 6

F Y 0 7

F Y 0 8

F Y 0 9

F Y 1 0

F Y 1 1

GrowthPKR

350%

300%

250%

200%

150%

100%

50%

0%

-50%-

F Y 0 3

F Y 0 4

F Y 0 5

F Y 0 6

F Y 0 7

F Y 0 8

F Y 0 9

F Y 1 0

F Y 1 1

AUMPKR

40,000

32,000

24,000

16,000

8,000

-

Saving taxes

simply means

more money

for you

1 A s p e r S e c t i o n 6 2 ( s u

b j e c t t o 3 y e a r h o l d i n g p e r i o d ) &

6 3 ( f o r v p s ) o f t h e I n c o m e T a x O r d i n a n c e ,

2 0 0 1

Tax Credit1

1

PotentialGrowth on

investment

2

Investments, when made in

Mutual funds and

Pension funds, are twice as good!

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Final Meezan Magzine[1]