Quarterly Newsletter

VOLUME 5

OCTOBER – DECEMBER 2011

I N S I D E

MUFAP Activities Meeting of the Board of Directors Meeting of the Committees

Events

IFC Workshop on Corporate Governance

TCF Golf Tournament SECP Updates

SECP allows relief to the MTS market with relaxed cash margin requirements and participation of individual investors as financers

SECP approves reporting of trades in unlisted term finance certificates

SECP develops databases on equity and debt markets

SECP finalizes revisions to the Code of Corporate Governance

SECP seeks feedback on amendments to Voluntary Pension Systems Rules

Market Development in Q2-FY12 Equity Market Money Market Debt Market Mutual Funds Industry

Articles

Saving & Investment ! Same meaning different sounds? (By Mr. Syed Owais Ali)

Noise or News?

(By Mr. Zulfiqar Azam) Industry Statistics

Net Assets – Open-Ended Schemes Net Assets – Voluntary Pension Funds Net Assets – Closed-Ended Funds Industry-wide - Net Assets SALES REDEMPTIONS Net Sales Open-Ended Schemes Return Voluntary Pension Funds Return Closed-Ended Funds Return

The Team:

Editor

Ms Shafaq Khurram Mr. Zulfiqar Azam

Researcher Mr. Siraj Ali

For any feedback or comments feedback@mufap.com.pk

Dear Readers,

Welcome to the December Edition of our Quarterly e-Newsletter One of our core objectives is to build trust in mutual funds as well as to ensure that people consider it as ideal investment plan that offers flexibility, transparency, liquidity and a disciplined approach to savings. Effective communication of information plays a strategic role in shaping the attitudes and mindsets of investors. In order to develop a comprehensive communication strategy, it is important to acknowledge stakeholders involved in the process. MUFAP has been focusing on distribution systems as it recognizes the importance of setting regulatory standards for distributors in promoting mutual funds. In its incessant efforts to encourage registration of distributors, MUFAP proposed SECP to amend Clause 38 (K) of the NBFC & NE Regulations, 2008. Consequently, SECP issued an amendment to NBFC & NE Regulations, 2008 and made it a requirement for distributors to register with MUFAP as Registered Service Providers and abide by the code of conduct set by MUFAP. The main purpose of this amendment is to set educational and proficiency standards for Distributors to advice clients effectively and to ensure advertisements and promotional material of mutual funds comply with the MUFAP’s guidelines. It enforces distributors to make ethical decisions in the conduct of their work and prevent from accepting an engagement in conflict with professional duty to another asset management company. In this connection, MUFAP has issued letters to distributors to complete registration formalities and set up a committee to update ‘Code of Distributors’. Looking towards the content of this newsletter, we have highlighted the key activities of the MUFAP Board of Directors, its committees and the events took place during the quarter. We have also included a special tribute to late Arfa Karim, the youngest Microsoft Certified Professional. Wrapping up this bulletin are two articles, the first article ‘Saving & Investment’ provides some brief guidelines to discover saving and investment as two related but independent processes that one shouldn’t confuse, while the second delves into the role of knowledge in financial decision making. I hope you enjoy reading this issue and find it interesting and insightful. I would like to take the opportunity to thank all the participants who have contributed to the success of this Newsletter. I would also request the readers to give their valuable feedback for the improvement of newsletter. Shafaq Khurram

Editor

Page 2 of 11

Quarterly Newsletter

VOLUME 5

OCTOBER – DECEMBER 2011

OBITUARY

Arfa Karim, the youngest Microsoft Certified Professional, passed away at 16 MUFAP expressed grief on the sad demise of Arfa Karim, who passed away on January 14, 2012 from complications following an epileptic attack and cardiac arrest. The news of her death affected so many of us with a deep sense of grief and loss as we have lost one of our shining stars. She was an extraordinary genius girl who was awarded on the basis of a range of achievements in the field of Computer Science. She got the honor of World’s Youngest Microsoft Certified Professional when she was only 9 years old in 2004. She also received the Fatima Jinnah Gold Medal for science and technology, the Salam Pakistan Youth Award and the President’s Award for Pride of Performance, a civil award granted to people who have shown excellence in their respective fields over a long period of time. She was invited by Microsoft in 2006 to be a keynote speaker at the Tech-Ed Developers Conference, where she was the only Pakistani among over 5,000 developers. She was also working on a project for NASA at the time of her hospitalization. She will always be remembered for her intellect and will be a source of inspiration for our youth. She can be described greatly through one of her nineteen poems. I look to the sky at night and admire the beauty of the stars. I stand in awe of their brilliance; They are as shining and constant and they have been since the beginning of time. They light the heavens and fill our hearts with wonder. When one burns out, another takes its place; for they are eternal. Wherever you are, they guide you from their home high above the earth. At times, they seem close enough to touch, as they transport your dreams far away. Their magic compels us to offer up wishes for their consideration. They make us realize that even when the sky is the darkest, a tiny beacon of light still shines through. They are God's reminder to us that some things really do go on forever.

MUFAP ACTIVITIES – Overview

Meeting of the Board of Directors The Board of Directors held six meetings during the quarter Oct 2011- Dec 2011.

List of No. of Board Meetings held and attended during the quarter Oct-Dec 2011

Name of

Directors

Dates Total

(Out

of 6) 1-

Oct

25-

Oct

3-

Sep

29-

Nov

29-

Dec

10-

Jan

1 Mr. Imran Azim Yes Yes Yes Yes Yes Yes 6

2 Mr. Mohammad Shoaib

Yes Yes No Yes Yes Yes 5

3 Mr. Adnan Siddiqui

Yes No Yes Yes Yes Yes 5

4 Mr. Amer Maqbool

Yes Yes Yes Yes No Yes 5

5 Mr. Babar Ali Lakhani

No Yes No Yes Yes Yes 4

6 Mr. Farid Ahmed Khan

Yes No No Yes Yes Yes 4

7 Mr. Mohammad Habib ur Rahman

Yes Yes Yes Yes Yes Yes 6

8 Mr. Mir. Muhammad Ali

Yes Yes Yes No Yes Yes 5

9 Mr. Nihal Cassim Yes Yes No Yes No Yes 4

10 Mr. Shahid Ghaffar

Yes Yes Yes Yes Yes Yes 6

11 Ms. Tara Uzra Dawood

Yes No No No No Yes 2

11 Mr. Wazir Ali Khoja

No No No No No No 0

12 Mr. Yasir Qadri Yes Yes Yes Yes Yes Yes 6

13 Mr. Shamshad Nabi

Yes Yes Yes Yes Yes Yes 6

The activities undertaken by the Board are as follows: Standardization of Investment Forms MUFAP noted that various types of Investment forms with several different financial terminologies tend to confuse investors. Therefore in order to facilitate an understanding of the information for least sophisticated investors, the Board decided to develop a practical, easy to understand and investor friendly Investment forms. The Board constituted a team comprising Mr. Adnan Siddiqui, Mr. Mir Mohammad Ali and Mr. Shahid Ghaffar to prepare a template Investment Form that reflects all the relevant information in plain language that a lay investor needs in order to make an informed investment decision. Amendments to MUFAP’s Articles of Association Consequent to SECP’s amendments to the NBFC & NE Regulations, 2008, MUFAP members approved the incorporation of ‘Registered Service Provider’ in the Articles of Association of MUFAP. It requires Distributors of mutual funds to obtain registration with the MUFAP as Registered Service

Page 3 of 11

Quarterly Newsletter

VOLUME 5

OCTOBER – DECEMBER 2011

Top

Providers before the first day of March 2012 in order to abide by the Code of Conduct set by MUFAP. Annual General Meeting of MUFAP The 10th Annual General Meeting of MUFAP was held on November 28, 2011 to consider and approve the audited Financial Statements of MUFAP for the year ended June 30, 2011. Amendments to Voluntary Pension System Rules, 2005 MUFAP Board Members and VPS Committee reviewed the VPS Exposure Draft, released by SECP for consultation with all the stakeholders, to forward meaningful, well-thought-out submission to the SECP. The proposal suggested the following improvements: (1) the remuneration accrued up to the date of computation payable to the Pension Fund Manager for providing management and other services shall be included as an expense; a security not listed or quoted on a stock exchange, other than debt security, shall be valued at investment price or its breakup value as per last audited accounts, whichever is lower; and Government debt securities not listed on a stock exchange and traded in the interbank market shall be valued at the average rate quoted on a widely used electronic quotation system and such average rate shall be based on the remaining tenor of the security, (2) period of submission of quarterly and half yearly accounts of the pension fund to be in line with mutual funds, (3) term of appointment of auditors to be in line with NBFC Regulation and Code of Corporate Governance applicable to listed companies and a list of approved auditing firms shall be prepared by Commission, (4) the submission of half yearly accounts of the pension fund manager to SECP should be two months from the close of half-year, (5) the definition of ‘eligible person’ under VPS rule should be in line with Income Tax Ordinance, (6) participants should be allowed to change allocation twice during the financial year of the pension fund, (7) the retirement age should be extended to seventy-five years and conditions imposed for disabilities should be relaxed, (8) participants should be allowed to withdraw in a period up to fifteen years from the date of retirement, (9) Pension Fund Manager on behalf of the pension fund should be allowed to invest in listed securities of connected persons up to a maximum of one percent per company and five percent in total, (10) Trustee should be registered under the NBFC Regulations, and (11) Trustee should ensure that the Pension Fund Manager has specified a criteria in writing to provide for a diverse panel of brokers at the time of offering of a pension fund or for any subsequent change and has been diligent in appointing brokers to avoid undue concentration of business, that is, more than ten per cent of the pension fund’s brokerage commission in any one financial year with any broker.

Meetings of the Committees MUFAP Committees held many fruitful discussions to make important, well planned proposals on behalf of industry. The following table presents the number of meetings held during the quarter Oct-Dec’11.

Committee No. of

Meetings Held

Audit, Accounts & Taxation 2

Rules Regulations & Product Development - Mutual Funds

-

Ethics, Corporate Governance and Development of Codes

1

Pricing Policy, Development and Promotion of Debt Securities

1

Public Awareness, Public Relations & Education 1

Legal Affairs 2

Voluntary Pension Scheme 2

Publications 1

Publication Committee MUFAP released its second Yearbook 2010-2011 on December 15, 2011. This yearbook features various important facets of the Pakistan mutual fund market, including industry statistics for last ten years in one convenient source and recent developments, useful articles covering industry issues and a detailed performance review of the member companies. The Year-Book has been distributed to all members of MUFAP, Senate, National Assembly, Federal Board of Revenue, State Bank of Pakistan, Securities Exchange Commission of Pakistan, Stock Exchanges, Competition Commission, Planning Commission, NCCPL, Trustees, Banks, Audit Firms, Listed Companies, International Associations, Business Schools, Hospitals, Welfare Organizations and Clubs. This Year-Book has now become a recurring annual task with a purpose to keep investors abreast of the key industry developments in order to encourage the savings through mutual funds and pension funds. Public Awareness Committee MUFAP Public Awareness Committee recognizes and values the importance of educating retail clients about the mutual funds. Committee is planning to undertake a joint awareness campaign of mutual funds in close collaboration with CDC. Ethics Committee Rising interest in improving corporate governance practices reinforces the merits of prescribing criteria for Proxy voting on behalf of collective investment schemes. In order to ensure that voting by AMCs on behalf of CIS is done in the best interest of the unit holders, SECP has prepared a draft Circular on proxy voting to solicit feedback. MUFAP members reviewed the draft guidelines and put forward recommendations to SECP after considering proxy policies in several international jurisdictions.

Page 4 of 11

Quarterly Newsletter

VOLUME 5

OCTOBER – DECEMBER 2011

Mr. Mir Adil Rashid, CEO - PICIC Asset Management Company Limited distributing prizes to the winners at the Tournament.

Legal Committee The legal affairs committee of the board invited senior professionals and tax consultants of Member institutions and MUFAP’s Legal Counsel (M/S Fazleghani Advocates) to hold an exchange of views on FED matter and sought legal advice from MUFAP’s Legal Counsel in this regard.

EVENTS IFC Workshop on Corporate Governance MUFAP hosted a pilot workshop on Corporate Governance Scorecard in consultation with International Finance Corporation (IFC), a member of the World Bank Group, on December 1, 2011. This workshop was designed to provide a platform to build capacity of MUFAP members and staff to improve techniques for assessing Corporate Governance practices of investee companies. The workshop was conducted by Mr. Mohsin Ali Chaudhry who explained the corporate governance scorecard methodology for rating corporate governance practices of Investee Company. The workshop was concluded with a dynamic participatory session included case studies, group discussion and open questioning. Corporate Social Responsibility Activities of Members - 8th TCF Golf Tournament

MUFAPs Member Institutions are strongly committed to participating in and contributing to worthy Corporate Social Responsibility causes. On the 17th and 18th December , 2011 The Citizens Foundation (TCF) held its 8th Golf Tournament for the purposes of raising funds for meeting the running costs of its more than 700 schools in which more than 102 , 000 students from poor and deprived families are receiving quality education on payment of token fees . For this year’s TCF Golf Tournament PICIC Asset Management Company Limited was the main sponsor of the Tournament and the list of supporting sponsors included Atlas Asset Management Limited and Al Meezan Asset Management Limited . MUFAP Member Institutions have been regular supporters of the TCF and the list of active supporters includes Atlas Asset Management Limited, Arif Habib Investments Limited, IGI Funds Limited, NBP Fullerton Asset Management Limited and UBL Fund Managers Limited.

SECP UPDATE

SECP allows relief to the MTS market with relaxed cash margin requirements and participation of individual investors as financiers The amended Securities (Leveraged Markets and Pledging) Rules, 2011 now empower the regulator to prescribe lenient cash margin requirements and allow individual investors to participate as financiers in the MTS. The amended rules relax the earlier mandatory condition of depositing at least 25% equity participation in the form of ‘cash only’ by the financees in MTS. The SECP will now prescribe reduced minimum cash margin requirement while allowing a certain portion of the equity participation to be acceptable in shares of selected companies with necessary haircut for improved risk management. Also, the restriction of only corporate bodies to act as financiers in the MTS has been waived and individuals meeting minimum eligibility requirements will be allowed to participate as financiers. SECP approves reporting of trades in unlisted term finance certificates SECP has approved the amendments to the regulations of National Clearing Company of Pakistan Limited (NCCPL) for electronic reporting of trades executed in unlisted term finance certificates (TFCs). This will not only provide market participants with transparent and accurate trading information but will also assist in the price discovery process. SECP develops databases on equity and debt markets In order to ensure the provision of accurate and timely information relating to performance and dynamics of capital market to various stakeholders, the SECP has developed various databases, which include a wide range of information relating to equity and corporate debt markets of the country. SECP finalizes revisions to the Code of Corporate Governance The Securities and Exchange Commission of Pakistan (SECP) held a meeting with the Pakistan Institute of Corporate Governance (PICG) task force to finalize the proposed revisions to the Code of Corporate Governance in light of recommendations received from different stakeholders. SECP seeks feedback on amendments to Voluntary Pension System Rules The SECP is amending the Voluntary Pension System Rules to facilitate growth of the pension industry and to protect participants’ interests. The amendments approved by the SECP seek alignment in provisions of the VPS Rules and the tax law.

Market Developments in Q2 FY12 Equity Market The index showed a mixed performance in October. In the first half of the month, the impact of rising cement and urea prices, higher-than-expected downward revision of 150 basis points in discount rate and reconciliation between government and MQM helped lift the index to 12,092.32 on a closing basis. Despite strong corporate results sentiment reversed in the latter half after release of disappointing macro-economic data of the first quarter of 2012. Moreover, deteriorating Pak-US relations, meek global outlook and heavy foreign net selling left the index up 106.91 points, or 0.91%, to 11,868.88 in October. Stock market took a roller coaster ride

Page 5 of 11

Quarterly Newsletter

VOLUME 5

OCTOBER – DECEMBER 2011

Source: KSE

Source: State Bank of Pakistan

Source: State Bank of Pakistan

Top

Top

Top Source: KSE

Source: SBP

Source: SBP

Source: SBP

during November as KSE 100 index soared to 12,038.93, plummeted to 11,494.15 and then ended at 11,532.83, down 336.05 points, or 2.83%. Initially, stock prices gained some ground owing to increase in urea prices, discovery of oil and gas reserves in Nashpa fields and Zin Block, resolution of circular debt issue of power sector and stable credit rating outlook by S&P. However, stock prices tumbled down due to concerns over memo-gate controversy, European sovereign debt crisis, Nato attack on a Pakistani checkpost, political uncertainty, fall in global stocks and commodities and slowdown in US economic growth. Selling pressure became more visible in December as KSE-100 index fell another 185.17 points, or 1.61%, to 11,347.66 as a result of shortage of gas supply to manufacturing sector, weakening rupee, lower remittances, widening trade deficit and escalating political tensions. For the period ahead, the outlook remains uncertain as local political landscape and the flow of foreign funds pose a significant challenge to stock market growth. However, in the short-run, some specific stocks are expected to gain buying momentum in anticipation of upcoming result season.

Money Market Liquidity conditions in the money market remained fairly tight during the quarter Oct-Dec’11 on account of significant contraction in NFA and lower government borrowings from SBP. Therefore, SBP mainly relied on open market operations (OMOs) to meet the demand for money. The liquidity constraint forced SBP to inject Rs. 3,855 billion, which is significantly higher than normal injections. However, it mopped up Rs. 24 billion in the latest OMO conducted in December.

The need to spur economic growth coupled with expected CPI inflation and comfortable external current account position helped SBP to ease its monetary policy stance with a 150 basis points cut in the discount rate from 13.5 percent to 12 percent in October. However, during November, SBP adopted a cautious approach by keeping the discount rate unchanged at 12 percent considering the resurgence in inflationary pressures and emerging risks to macroeconomic stability. Movement in KIBOR

Tenor Q1-FY12 Q2-FY12

KIBOR 3-month 13.20%-13.63% 11.77%-13.17% KIBOR 6-month 13.25%-13.81% 11.82%-13.20% KIBOR 12-month 13.60%-14.26% 12.21%-13.53%

Treasury Bills A total of 6 T-bill auctions were held by SBP during the quarter in which a total amount of Rs. 840 billion was raised.

3-Month Cut-off Rates

6-Month Cut-off Rates

12-Month Cut-off Rates

Amount Accepted

06-Oct-11 12.75% 12.78% 12.84% 182.15 20-Oct-11 11.87% 11.92% 11.94% 121.36 03-Nov-11 11.78% 11.81% 11.88% 292.98 17-Nov-11 11.78% 11.81% 11.88% 126.71 01-Dec-11 11.65% 11.67% 11.80% 113.26 29-Dec-11 11.83% R 11.90% 3.54

Pakistan Investment Bonds Like previous several auctions, activities remained skewed towards 3 and 10 year tenor bonds in the PIB auctions held during the quarter. Investors seemed to be most interested in 10 year PIBs, as about 45.61% of the money was raised through this tenor. Auc Dt 13-Oct-11 24-Nov-11 22-Dec-11

Cut-off rate

Offered

Accepted

Cut-off rate

Offered

Accepted

Cut-off rate

Offered

Accepted

3-Year 12.16 9.33 4.94 12.22 9.1 4.9 12.45 6.95 4.25

5-Year 12.19 2.9 2.45 R 3.02 R 12.7 2.7 1.5

7-Year R 0.25 R R 0.2 R R - R

10-Year 12.24 11.98 10.13 12.32 7.35 4.95 12.7 2.83 0.05

15-Year - - - - - - - - -

20-Year - - - - - - - - -

30-Year - - - - - - - - -

Total - 24.46 17.52 - 19.67 9.85 - 12.48 5.8

GoP Ijarah Sukuk The Government accepted a total of Rs. 70 billion against received bids of Rs. 84 billion in the latest Ijara Sukuk auction held on Dec 20, 2011.

Q1-FY12 Q2-FY12 (%) Change

KSE-100 Index 11,761.97 11,347.66 (3.52%) KSE-30 Index 11,220.93 10,179.03 (9.29%)

Market Capitalization (PKR bn) 3,103.91 2,945.79 (5.09%)

Net Foreign inflow (US $ mn) (46.09) (111.31) -

Avg. daily volume (mn shares) 59.33 59.72 0.66%

Q1-FY12 Q2-FY12 ALL TIME HIGH

KSE-100 (Highest Close)

12,576.48 (Jul 05, 11)

12,092.32 (Oct 10, 11)

15,676.34 (Apr 18, 08)

KSE-30 (Highest Close)

11,917.40 (Jul 22, 11)

11,634.34 (Oct 10, 11)

18,996.33 (Apr 17, 08)

Page 6 of 11

Quarterly Newsletter

VOLUME 5

OCTOBER – DECEMBER 2011

Top

Source: MUFAP

Source: MUFAP

Source: MUFAP

Debt Market The table below summarizes the TOP 15 TFCs/Sukus on the basis of Face value during the Q2-FY12:

TFCs / Sukuks Face

Value (PKR mln)

Trade Value (PKR

mln)

No. of Trans.

Trade Price Range

United Bank Ltd. (14-02-08) 726.98 725.21 19 99.28 - 100.2 NIB Bank Ltd. (05-03-08) 293.58 286.35 8 97.00 - 98.25 Engro Fertilizer Ltd. (30-11-07) 280.06 273.78 4 96.50 - 100.0 Bank Al-Habib Ltd. (30-06-11) 274.00 289.22 8 104.0 - 106.0 Pakistan Mobile Communication Ltd. (28-10-08)

158.00 156.65 9 98.31 - 100.3

Faysal Bank Ltd. (27-12-10) 105.98 109.69 5 103.4 -103.7 Bank Alfalah Ltd.-Fixed (02-12-09)

97.44 101.53 8 103.5 - 104.5

Maple Leaf Cement Factory Ltd. (03-12-07)

94.86 30.35 1 32.00 - 32.00

Askari Bank Ltd. (23-12-11) 90.00 90.00 1 100.0 - 100.0 Agritech Ltd. (30-11-07) 84.93 28.31 5 30.00 - 40.00 Pak Arab Fertilizers Ltd. (28-02-08)

74.00 74.00 1 100.0 - 100.0

United Bank Ltd. (15-03-05) 59.98 57.00 2 95.00 -95.05 Engro Fertilizer Ltd. (06-09-07) 52.00 52.77 2 101.0 - 101.5 Askari Bank Ltd. (18-11-09) 48.96 50.95 4 103.0 - 104.5 Century Paper & Board Mills Ltd. (25-09-07)

47.10 47.08 1 99.95 - 99.95

Mutual Fund Market: The total net assets expanded by 16.72% quarter over quarter. This growth applies to open-end funds and pension funds. The open-end funds went up by 19.34% to Rs. 266.998 billion, pension funds went up by 13.88% to Rs. 1.829 billion and closed end decreased by 10.12% to Rs. 19.529 billion. Funds launched during the quarter Q2-FY2012.

Fund Name Category Inception Date

IGI Capital Protected Fund Capital Protected October 5, 2011

Lakson Asset Allocation Developed Markets Fund

Asset Allocation October 10, 2011

Lakson Asset Allocation Emerging Markets Fund

Asset Allocation October 10, 2011

Lakson Asset Allocation Global Commodities Fund

Asset Allocation October 10, 2011

NAFA Financial Sector Income Fund

Income October 28, 2011

ABL Government Securities Fund Income November 30, 2011

HBL Pension Fund Pension December 16, 2011

HBL Islamic Pension Fund Islamic Pension December 16, 2011

Funds with changed structure

New Fund Name

Old Fund Name

Old Structure

New Structure

Date of Change

ABL Islamic Income Fund

ABL Islamic Cash Fund

Money Market

Income September-2011

Review of compliance with the mandatory disclosure requirements of monthly FMR MUFAP has been closely monitoring the mandatory disclosure requirements on the monthly FMR. MUFAP has made itself available to its member institutions for any clarifications required to comply with the

standardized format of the FMR. There have been a couple of issues faced by the member institutions, for which we have held a few meetings to justify and clarify the concerns. As per our previous practice the names of only the compliant AMCs are mentioned below:

1. Alfalah GHP Investment Management Limited 2. Arif Habib Investments Limited 3. Atlas Asset Management Limited 4. BMA Asset Management Company Limited 5. Faysal Asset Management Limited 6. Habib Asset Management Limited 7. HBL Asset Management Limited 8. IGI Funds Limited 9. JS Investments Limited 10. KASB Funds Limited 11. PICIC Asset Management Company Limited

ARTICLES Disclaimer: The opinions expressed in these articles are the views of the author of the articles and not necessarily the views of MUFAP.

Saving & Investment! Same meanings different sounds? Syed Owais Ali Senior Research Analyst Habib Asset Management Limited Saving is the process of putting cold, hard cash aside and parking it in extremely safe and liquid securities or accounts. This can include savings schemes (Government backed certificates & bonds), savings accounts, short-term certificates of deposit etc. In simple economies, there is little distinction between savings and investments. One saves by reducing present consumption, while invests in the hope of increasing future consumption. Investment is the process of using money (called “capital”) to buy an asset that you think will generate a safe and acceptable return over time, making you wealthier with each passing year. An investment can include anything from a small business to fine art, powder milk to gold coins, comic books to stocks, mutual funds, bonds, real estate, and antiques etc. Good investments are the best way of growing wealthy but can take time so one has to be patient enough because perhaps it takes even years to get fruit from your investment tree. Think Smartly, Act Rationally If bank pay you 5% per annum on your money and inflation is at 4% per annum; your investment is only growing at a mere 1% per annum. It’s really not worth it. And you had not invested handsome capital to earn just peanut. Think Smartly before investing. Do thorough research and consult the concern person to make your investment worthwhile. Economies face Boom and Bust days, sometimes move zigzag, sometimes bullish sometimes bearish. When it is going down, Act Rationally and do not expect your investment to grow consistently. Are they having same meanings? Saving and investment are often used interchangeably, but they are quite different! Investing is like taking a risk with a portion of your savings such

Page 7 of 11

Quarterly Newsletter

VOLUME 5

OCTOBER – DECEMBER 2011

TOP

as by buying stocks or bonds, in hopes of realizing higher long-term returns. Unlike bank savings, stocks and bonds over the long term have returned enough to outpace inflation, but they also decline in value from time to time. The rate of returns and risk for savings are often lower than for other forms of investment. Return is the income from an investment. Risk is the uncertainty that you will receive an expected return and preservation of capital. The decision about which investment to choose is influenced by factors such as yield, risk, and liquidity. Investments may produce current income while you own the investment through the payment of interest, dividends or rent payments. When you sell an investment for more than its purchase price, the profit is known as a capital gain, also called growth or capital appreciation. How Much Should I Save and How Much Should I Invest? Saving always comes first. Think of it as the foundation upon which your financial house is built. The reason is simple - unless you inherit a large amount of money, it is your savings that will provide you with the capital to feed your investments. There are two primary types of savings programs you should include in your life. They are:

As a general rule, your savings should be sufficient to cover all of your personal expenses and unforeseen events like any of your family member gets ill and what if you lose your job? You should have save enough to overcome your expenses for at least six months. That way, you’ll be able to have sufficient time to adjust your life without the extreme pressure that comes from.

Any specific purpose in your life that will require a large amount of cash in five years or less should be savings-driven, not investment-driven. The stock market in the short-run can be extremely volatile, losing more than 50% of its value in a single year. Purchasing a home is a great example “To Invest Your Save Money”

Why should one invest and save? In order to protect from unforeseen events everyone should save and invest. I you want to achieve the best possible results, it's crucial that you match your saving or investing goals with the proper financial tools. For instance, stocks and stock mutual funds are generally considered to be excellent long-term investment options. For the majority of the last century, stocks have produced some of the best returns when compared to virtually every other investment available. But over a short time frame (under five years), they can be quite volatile and dangerous to an ill-prepared portfolio because stocks - and the stock market in general - have historically experienced short-term drops in value. If you're looking to make a down payment on a new home in two years, or one of your kids will be entering college in three, you simply can't make a long-term investment commitment to handle those expenses. Such short-term needs are much better addressed with the concept of saving and preserving your capital. Whereas, investing attempts to make money grow by allowing it to compound with the assumption a certain risk level, savings act to protect your investment capital so that it's both intact and accessible when it's needed. Who saves and why? Savings are done by three ‘entities’ in the economy: households, companies and government.

Households save essentially for two reasons: to cover future expenses (children’s education, illness and for securing life after retirement. Company savings are simply that part of their profits that they do not pay out to shareholders as dividends, but retain it to finance future investment in the business (expansion of existing facilities and the replacement of outdated plant). Government saves when its tax revenues exceed its expenditures (such as wages, social security payments, fuel, pensions, health expenses, etc). If its tax revenues exceed these current expenses, it has money left to spend on the building of new roads, bridges, hospitals, schools, etc. The role of savings in the economy Savings play an important role in any economy and its role is important at different levels. To understand the role of savings one must understand the impact of savings on the economy. The savings and economic growth are closely related with each other. The relationship between the savings and economic growth are studied in Economics by various economists a number of times. The economic growth of a country can be referred to as the economy's capacity to increase the productivity of services and goods in comparison with previous time period. While comparing the economic growth between two different countries, the GDP (Gross Domestic Product) or GNP (Gross National Product) per capita income are compared. Every single rupee you save today will have a trickledown effect on country’s’ economy. The impact of economic growth of a particular country can be very well felt in the increase in the disposable income (Disposable income is total personal income minus personal current taxes) of an individual. According to the theory of marginal propensity to save, the savings increases with the increase in the income. Hence, following this theory it can be easily understood that with an economic growth, the amount of savings also increases.

Noise or News? Zulfiqar Azam Senior Research Analyst MUFAP “A good decision is based on knowledge and not on numbers.” – Plato We see numbers all day long, but do they mean anything? In the context of financial markets, there are market makers, market manipulators, speculators and investors, everyone is throwing numbers. While focusing on a single investment instrument, if we place all the numbers on a piece of paper we see a trend. Will this be the trend the investment instrument will follow in future? Or does it show the correct picture? If we draw a line of the observed trend, we’ll see that most of the numbers lie near the trend line, but there are a few numbers deviating or lying far away from the trend line. These numbers are called ‘the outliers’. If we exclude these outliers the direction of the trend line changes. Does it make sense to exclude these observations? Are they noise or news? One possible explanation for these numbers would be inexperienced investors pitching random numbers. But there is no investor who puts his money at stake without having complete knowledge of the investment. Another possible explanation may be expectations from the investment. Although, the instrument may be fundamentally good or bad, the investor treats them differently based on their expectations. Well there might be

Page 8 of 11

Quarterly Newsletter

VOLUME 5

OCTOBER – DECEMBER 2011

TOP

various reasoning to explain the outliers, but the important thing to look into that is whether these are just noise or there are any hidden news. The outliers may provide some important information about the investment instrument. We should use our judgment to determine whether those outliers contain information (be included in financial analysis) or have no material information at all. Eugene Fama, an American economist came up with the Efficient Market Hypothesis (EMH), which suggests that at any given time, the prices/rate of any investment instrument reflects all publicly available information. Therefore no investor has an advantage over each other as everyone has the same information to work on. But sadly, this is not the case in Pakistan. Although, EMH doesn’t require the prices to be equal to the fair value, and there may be instances when they are over-valued or under-valued but still tend to revert back to their fair value. Since the economic recession, the trades in the fixed income market have totally dried up. MUFAP has been involved in valuation of these fixed income securities in Pakistan, and has faced a lot of difficulties. The trade information we receive, in a few buckets, are sometime totally random. The procedure to calculate the prices for the non-traded securities are such that yields are calculated from the prices of the traded securities and then these yields are used to calculate the price of the similar non-traded securities. To sort similar securities, we have to judge from two main

criteria, which is 1) as per ratings and 2) as per maturities. Therefore a matrix is formed with maturities and rating. Every cell (bucket) of matrix is filled in with yields calculated from the relevant traded securities. On observation of the yields of a single bucket only, we see huge variances. Let’s take an example of a bucket with securities with 1 to 3 years maturities and a rating of A+; the yields normally lie around 3%. There are few securities whose yields range at around 8% to 9%, contaminating the whole exercise. As most of the securities in a bucket follow a similar trend, a smart move is to remove the outliers from the analysis. If a single security is consistently been an outlier, we have a problem. On observing some of the securities, we observed that there are certain internal issues attached to the security/or its issuer due to which they aren’t following the trend of the bucket in which it is present. An important thing to notice here is that whether these securities rated appropriately; if they bear such risk and investors aren’t willing to pay the amount, its worth to note that there is a problem with its rating. In conclusion, I believe in all the noise there exists some news, may it be relevant to the analysis or not, the news is still there to take on some action. These actions will lead to a better informed society and so building the trust in the society. Once every investor has the same information, we will automatically move towards becoming an efficient market and hence solve the mystery of low volumes.

Mutual Funds Association of Pakistan

207- 209, 2nd Floor, Kassam Court, Block-5, Clifton Karachi Tel: 92-21-35293103, 35293136-7, Fax: 92-21-35293104

Email: feedback@mufap.com.pk www.mufap.com.pk

Page 9 of 11

Quarterly Newsletter

VOLUME 5

OCTOBER – DECEMBER 2011

Source: MUFAP

Source: MUFAP

Source: MUFAP

Top

Top

Top

Top Source: MUFAP

INDUSTRY STATISTICS

Net Assets - Open End Schemes (PKR in million)

Schemes FY07 FY08 FY09 FY10 FY11 FY12Q1 FY12Q2

Asset Allocation 2,582 4,985 2,508 2,389 3,066 2,983.50 3,880.96 Balanced 7,459 12,353 7,100 5,182 3,525 3,249.37 2,962.31 Capital Protected 2,617 5,019 6,194 7,147 3,368 1,968.93 2,271.36 Equity 113,147 104,162 61,542 39,374 52,458 48,236.41 44,597.28 Income 112,327 140,381 78,461 62,092 47,504 49,724.73 62,964.20 Money Market - 114 3,282 32,046 77,304 79,197.41 104,917.27

Islamic Asset Allocation 1,073 1,832 1,520 1,178 1,263 1,199.04 1,138.63 Islamic Balanced 965 1,916 1,358 911 767 731.00 701.00 Islamic Capital Protected - 579 582 637 - 407.60 407.96 Islamic Equity 5,108 7,425 4,501 4,601 5,320 6,913.01 6,605.38 Islamic Income 3,162 9,103 7,855 7,289 20,793 22,218.23 28,824.74 Islamic Money Market - - 624 5,224 7,170 6,892.47 7,727.72

Total 248,440 287,870 175,528 168,071 222,537 223,721.69 266,998.81

Net Assets - Pension Funds (PKR in million)

Schemes FY07 FY08 FY09 FY10 FY11 FY12Q1 FY12Q2

Pension - 305 349 572 655 655.26 750.52

Islamic Pension - 466 530 729 902 951.56 1,079.35

Total - 770 878 1,301 1,558 1,606.82 1,829.87

Net Assets - Closed End Funds (PKR in million)

Schemes FY07 FY08 FY09 FY10 FY11 FY12Q1 FY12Q2

Asset Allocation 646 592 283 345 435 454.29 382.24 Balanced 2,135 1,971 1,243 1,144 1,317 1,311.09 1,257.33 Capital Protected 108 1,397 1,297 1,404 - - - Equity 44,609 38,145 22,171 24,036 17,810 17,552.37 15,477.86 Income 1,027 1,115 1,084 1,111 1,125 1,056.66 1,084.77 Money Market - - - - - - -

Islamic Asset Allocation - - - - - - - Islamic Balanced 1,598 1,424 1,143 1,278 1,523 1,353.77 1,327.10 Islamic Capital Protected - - - - - - - Islamic Equity 2,219 1,906 1,174 1,404 1,707 - - Islamic Income - - - - - - - Islamic Money Market - - - - - - -

Total 52,341 46,549 28,394 30,723 23,917 21,728.19 19,529.30

Industry-wide - Net Assets (PKR in million)

FY07 FY08 FY09 FY10 FY11 FY12Q1 FY12Q2

Open End Funds 248,440 287,870 175,528 168,071 222,537 223,721.69 266,998.81 Closed End Funds 52,341 46,549 28,394 30,723 23,917 21,728.19 19,529.30 Pension - 770 878 1,301 1,558 1,606.82 1,829.87

Total 300,781 335,189 204,801 200,095 248,013 247,056.69 288,357.98

Page 10 of 11

Quarterly Newsletter

VOLUME 5

OCTOBER – DECEMBER 2011

Source: MUFAP

Source: MUFAP

Source: MUFAP Top

Top

Top

Sales (PKR in millions)

FY07 FY08 FY09 FY10 FY11 FY12Q1 FY12Q2

Asset Allocation 2,943 6,538 849 461 871 201.35 1,226.48

Balanced 3,007 9,585 827 627 165 11.96 0.31

Capital Protected 2,624 2,591 2,951 2,848 - - 368.65

Equity 21,609 39,580 14,638 11,825 13,286 1,115.51 5,410.51

Income 178,192 385,817 128,626 113,145 45,670 11,526.84 30,062.49

Money Market - 115 4,813 84,831 133,516 39,151.17 66,636.90

- -

Islamic Asset Allocation 594 2,049 458 387 154 26.63 20.67

Islamic Balanced 1,310 2,507 255 526 123 22.71 6.06

Islamic Capital Protected - 581 9 - - 395.74 -

Islamic Equity 1,879 4,934 931 764 1,167 356.29 324.56

Islamic Income 4,018 22,288 14,596 9,108 34,135 4,727.03 10,401.87

Islamic Money Market - - 676 13,094 6,309 2,172.07 2,536.43

Total 216,176 476,585 169,628 237,618 235,396 59,707.31 116,994.93

Redemptions (PKR in millions)

FY07 FY08 FY09 FY10 FY11 FY12Q1 FY12Q2

Asset Allocation 5,119 3,621 2,166 1,164 952 225.49 256.17

Balanced 3,831 5,841 2,934 3,605 1,918 317.50 159.10

Capital Protected 57 164 806 233 3,540 633.09 109.54

Equity 16,577 37,407 13,103 15,799 15,281 1,617.26 4,850.17

Income 104,836 369,510 180,573 133,660 62,821 9,196.86 17,742.80

Money Market - 3 1,683 57,790 101,027 40,005.27 45,026.63

- -

Islamic Asset Allocation 900 1,604 634 795 366 31.61 33.72

Islamic Balanced 452 1,522 505 1,213 440 55.35 22.84

Islamic Capital Protected - - 10 26 1,532 - 0.02

Islamic Equity 1,954 2,469 1,615 1,984 2,038 401.29 171.95

Islamic Income 927 17,547 16,187 10,000 12,865 3,545.02 4,098.88

Islamic Money Market - - 54 8,812 5,301 2,629.49 1,872.53

Total 134,653 439,689 220,269 235,081 208,080 58,658.23 74,344.36

Net Sales (PKR in millions)

FY07 FY08 FY09 FY10 FY11 FY12Q1 FY12Q2

Asset Allocation (2,176) 2,917 (1,317) (703) (80) (24.14) 970.31 Balanced (824) 3,744 (2,108) (2,978) (1,753) (305.54) (158.69) Capital Protected 2,567 2,427 2,145 2,614 (3,540) (633.09) 259.11 Equity 5,032 2,173 1,535 (3,973) (1,994) (501.75) 560.34 Income 73,356 16,307 (51,947) (20,516) (17,152) 2,329.98 12,319.68 Money Market - 112 3,129 27,042 32,489 (854.09) 21,610.27 - - Islamic Asset Allocation (306) 444 (175) (407) (213) (4.98) (13.05) Islamic Balanced 858 985 (249) (687) (317) (32.64) (16.78) Islamic Capital Protected - 581 (1) (26) (1,532) 395.74 (0.02) Islamic Equity (75) 2,465 (684) (1,219) (870) (45.00) 152.61 Islamic Income 3,091 4,741 (1,592) (892) 21,270 1,182.01 6,302.99 Islamic Money Market - - 622 4,282 1,008 (457.42) 663.90

Total 81,523 36,896 (50,641) 2,537 27,316 1,049.08 42,650.67

Page 11 of 11

Quarterly Newsletter

VOLUME 5

OCTOBER – DECEMBER 2011

Source: MUFAP

Top

Source: MUFAP

Source: MUFAP

Top

Top

Open End Funds' Return**

FY07 FY08 FY09 FY10 FY11 FY12Q1 FY12Q2

Asset Allocation 18.79% -3.29% -22.33% 9.23% 17.79% -0.35% -2.67%

Balanced 27.16% 1.87% -25.01% 14.24% 16.20% 1.74% -4.05%

Capital Protected 5.57% 5.26% 14.67% 8.96% 9.71% 2.21% 3.73%

Equity 44.11% -4.29% -39.31% 18.93% 24.50% -0.85% -7.14%

Income* 9.07% 8.58% 7.68% 8.95% 8.20% 8.79% 7.55%

Money Market* - 8.75% 10.33% 10.68% 11.80% 11.94% 11.19%

Islamic Asset Allocation 23.38% 5.49% -2.63% 6.93% 11.36% 1.87% -2.62%

Islamic Balanced 14.86% -1.17% -15.11% 16.83% 27.17% 1.43% -1.71%

Islamic Capital Protected - -0.40% 0.76% 13.62% 14.12% 3.18% 0.10%

Islamic Equity 25.09% -0.70% -30.12% 29.34% 37.26% 2.71% -5.71%

Islamic Income* 9.81% 7.52% 8.06% 5.64% 10.41% 11.25% 10.85%

Islamic Money Market* - - 7.79% 10.10% 10.79% 11.60% 11.15%

Pension Funds' Return**

FY07 FY08 FY09 FY10 FY11 FY12Q1 FY12Q2

Equity - -4.40% -26.78% 20.32% 26.45% -0.45% -6.55% Debt* - 3.54% 12.67% 7.67% 10.69% 12.86% 9.58% Money Market* - 6.25% 10.00% 3.54% 10.94% 11.06% 8.95% - Islamic Equity - 0.13% -8.72% 23.13% 34.76% 2.75% -5.92% Islamic Debt* - 6.71% 9.91% 8.87% 9.65% 7.37% 7.33% Islamic Money Market* - 5.96% 9.17% 6.69% 9.03% 7.07% 9.24%

Closed End Funds' Return**

FY07 FY08 FY09 FY10 FY11 FY12Q1 FY12Q2

Asset Allocation 17.32% 5.41% -45.64% 26.44% 42.46% 4.62% -1.61% Balanced 14.95% 0.92% -29.19% 0.12% 13.15% 1.18% -2.39% Capital Protected 14.79% -4.25% -1.13% 8.16% Equity 29.22% 0.35% -37.80% 13.30% 17.29% -1.31% -9.60% Income* 2.70% 12.15% 5.76% 12.46% 11.67% 12.43% 11.11% Islamic Balanced 24.94% 1.76% -10.86% 22.81% 25.35% 3.00% -2.00% Islamic Capital Protected Islamic Equity 9.38% -2.78% -31.63% 31.40% 37.37% - -

Sources: MUFAP

* Annualized ** Average for the Industry