Comparison of Bank Managed Mutual Funds with Private Houses Managed Mutual Funds

Project Supervisor: Sir. Ovais Zahid Course Code : MS-699 Specialization : Banking & Finance Semester : FALL -2011

SUBMITTED BY:
SALMAN HAIDER (BME-1185) UMAIR ALTAF (BME-1031) SOHAIL IQBAL (BME-1008 )

WHAT IS MUTUAL FUNDS?

A mutual fund is just the connecting bridge or a financial intermediary that allows a group of investors to pool their money together with a predetermined investment objective. Three benefits of investors Small investors Diversification Professional management

Types of Mutual Funds Open Ended Closed Ended Open-end Mutual Fund Open ended fund is a fund which issues or redeems its units at net asset value (NAV). It dose not have a fixed fund size. Investors can get back their investment at any time by selling the units back to the fund. These are no fixed number of units.

Close-end Mutual Fund Close end fund is a fund whose certificates are traded at market prices other than the NAV. Compulsory listed . Investors can sell their certificates to any buyer through an exchange where the certificate is listed other then the issuing company. These are fixed number of certificates.

BACKGROUND OF MUTUAL FUND

The first mutual funds were established in Europe. One researcher credits a Dutch merchant with creating the first mutual fund in 1774. Mutual funds were introduced into the United States in the 1890s. The first open-end mutual fund with redeemable shares was established on March 21, 1924. Fund industry growth continued into the 1980s and 1990s. At the end of 2010, there were 7,581 mutual funds in the United States with combined assets of $11.8 trillion.

 Realizing the importance of mutual fund industry, the Government of Pakistan (G0P) set up National Investment Trust Limited (NITL) in 1962 to manage an open-end mutual fund. In 1966, G0P set up another institution Investment Corporation of Pakistan (ICP) . In 1971, G0P allowed private sector closedend funds to enter the industry.

Back Ground of Mutual Fund Industry in Pakistan

 the period 1991 onwards that the private sector closed end funds were launched. Golden Arrow was the first closed end fund to be established in the private sector in 1983. Asset Management Companies Rules, 1995 to provide the necessary legal framework for launching and managing open-end funds by the private sector. 1994-95 - More funds launched in private sector .

 incentive to setup open-end mutual funds and a record 15 new listings came out in 2002. 2006 - Total number of AMCs are 30 managing 56 mutual funds . 2011- Total number of AMCs are 22 managing managing 128 open end funds and 14 close end funds.(source MUFAP).

Top ten open-end fund Asset Management Companies, September 2011

S.no Manager

Assets under management 41,554,316 30,065,889 28,997,336 28,762,310 19,052,040 16,414,916 11,965,032 9,647,665 8,358,898 6,383,753

% 16.82 12.17 11.73 11.64 7.71 6.64 4.84 3.9 3.38 2.58

National Investment Trust Al Meezan Investment Management MCB Fund Managers UBL Fund Managers ABL Fund Managers NBP Fullerton Asset Management JS management HBL Fund Managers Askari Asset Management Faysal Asset Management

10

174,142,854

70.5

PRODUCTS AND PORTFOLIOS OF Mutual Funds

Stock Fund / Equity Fund / Capital Market Fund
80% in equity. 20% bank deposit.

Fixed Income Fund / Money Market Fund

Above 60% in bonds 25% T.bills 15% banks deposit not more than this.

Islamic Fund 80 % on Government of Pakistan sukkuk. 20% bank deposit in islamic banks. Hedge Funds(not present in pakistan) Hybrid Funds Its a balance fund invest in capital market and money markets and remaining in bank deposit.

SECP

 AMC
Manage mutual funds Discretionary portfolio. Wealth management.

Investors/unit holders
Make investment They invest after reviewing Offering documents.

Trustee
Payment & Receipt under observation of trustee.

Registrar
Official keeper of record. Units sale ,redemption , unit holder , dividend distributor.

 Custodian / Depository
to hold in safekeeping assets (CDC)

Other Key words

Net Asset Value Sale Sale price Redemption Redemption price Management Fee Sale load/Front End Load Back end load Front end load

Asset Management Companies Managed by Banks Banks have recently decided to divest into the business of asset management as the other private groups and brokerage houses were earning a handsome return through this business. Asset Management Companies Managed by Private Groups Asset management companies owned by private houses are the oldest players in this industry creating big names in the financial markets. Players like JSABAMCO, Arif Habib, and AKD are all renowned names in the market.

HYPOTHESIS TESTING
Hypothesis 1 Ho: Banks Managed Funds give higher returns on income funds as compared to Income fund managed by other private groups. Ha: Banks Managed Funds do not give higher returns on income funds as compared to Money market Funds managed by other private groups. Hypothesis 2 Ho: Private groups manage Stock funds better than Banks AMC could. Ha: Private groups do not manage Stock funds better than Banks AMC could.

Factors through which Hypothesis Result would be driven The result of the aforementioned hypothesis is represented through five most appropriate statistical tools used in the industry to evaluate the performance of income funds. These five methods are described below Sharpe ratio Standard Deviation Net Asset Value Returns Credit Rating Distribution channel Funds Inject on urgent basis

ANALYSIS INCOME FUND AVERAGE RETURN BASE

Based on the AVERAGE RETUEN ONE MONTH,TWO MONTHS,THREE MONTHS,SIX MONTH,CALENDER YEAR,FISCAL YEAR following results were obtained
Funds Name One Month Two Month Three Month Six Month CY11-YTD FY11-TD

BANK BASED

ABL Income Fund

12.97

13.08

13.23

12.81

12.64

13.23

UBL Income Fund

14.23

14.67

13.85

13.02

12.79

13.85

MCB Income Fund

13.66

13.89

12.79

12.95

12.95

12.79

BANK BASE AVERAGE

13.62

13.88

13.29

12.93

12.79

13.29

Pakistan Income Fund

8.41

7.79

8.92

11.59

10.38

8.92

Lakson Income Fund

12.84

13.17

12.56

12.24

12.23

12.56

JS Income Fund

13.86

19.72

17.14

-4.23

0.84

17.14

PRIVATE HOUSE AVERAGE

11.70

13.56

12.87

6.53

7.82

12.87

Difference

1.92

0.32

0.42

6.39

4.98

0.42

GRAPHICAL REPRESENTATION

Other Different Variables for comparison

Comparison of Income Funds respective on SHARPE RATIO, STANDARD DEVIATION, NET ASSET VALUE ,CREDIT RATING.

Funds Name BANK BASED ABL Income Fund UBL Income Fund MCB Income Fund BANK BASE AVERAGE PRIVATE HOUSE BASED Pakistan Income Fund Lakson Income Fund

sharp ratio

Standard deviation %

Net Asset Value Amount in Million 4.6 2.3 5.2 4.03

Credit Rating

0 -2.93 0.024 -0.97

0.95 1.11 5.7 2.59

A+(f)(JCR-VIS) AA-(JCR-VIS) A+(f)(PACRA)

-0.03 -1.05

6.59 1.1

1.7 0.7

AM2(PACRA) AM3+(PACRA)

JS Income Fund

25.7

AM2-(JCR-VIC)

PRIVATE HOUSE AVERAGE Difference

-0.36 -0.61

11.13 -8.54

1.13 2.90

ANALYSIS
STOCK AVERAGE RETURN BASE: Based on the AVERAGE RETUEN ONE MONTH,TWO MONTHS,THREE MONTHS,SIX MONTH,CALENDER YEAR,FISCAL YER following results were obtained:
Funds Name BANK BASED ABL Stock Fund UBL Stock Fund MCB Stock Fund BANK BASE AVERAGE PRIVATE HOUSE BASED Pakistan Stock Fund Lakson Stock Fund JS Stock Fund PRIVATE HOUSE AVERAGE Difference 4.19 5.98 4.89 5.02 0.83 0.49 0.31 1.16 0.65 0.72 -1.02 -0.4 0.89 -0.18 1.07 -3.65 -1.64 -2.28 -2.52 2.64 0.81 0.6 0.44 0.62 5.16 -1.02 -0.4 0.89 -0.18 1.07 One Month % 6.12 5.54 5.88 5.85 Two Month % 1.05 0.55 2.52 1.37 Three Month % 1.15 -0.47 1.99 0.89 Six Month % 0.44 -2.27 2.19 0.12 CY11-YTD % 5.83 3.45 8.05 5.78 FY11-TD % 1.15 -0.47 1.99 0.89

GRAPHICAL REPRESENTATION

Funds Comparison with Benchmark Bank group performance

One Month

Two Month

Three Month

Six Month

CY11-YTD

FY11-TD

BANK BASE AVERAGE

5.85

1.37

0.89

0.12

5.78

0.89

Benchmark KSE-100 index

6.25

-3.51

-5.87

-0.40

-2.17

-5.87

Difference

0.40

-2.14

-4.98

-0.28

3.61

-4.98

GRAPHICAL REPRESENTATION

Private houses group performance

Funds Name PRIVATE HOUSE AVERAGE Benchmark KSE-100 index Difference

One Month 5.02 6.25 1.23

Two Month 0.65 -3.51 -2.86

Three Month -0.18 -5.87 -5.69

Six Month -2.52 -0.40 2.12

CY11-YTD 0.62 -2.17 -2.79

FY11-TD -0.18 -5.87 -5.69

GRAPHICAL REPRESENTATION

Further analysis

Distribution Channel Bank Injects Funds Trust of Investors

CONCULSION AND RECOMMENDATION Conclusion

Strong Management team that involves good professionals having experiences of managing funds and their appropriate qualifications have helped them manage funds more efficiently. Mutual funds core concept is to minimize the Risk involved in Investments and most of the Banks managed AMC have strong Risk management department.

 Banks capacity to channelize their account holders to invest in their funds have given them an extra edge over others, as the investors feel secure to carry their confidence from one business to another. Based on the above hypothesis we could conclude that Banks group manages mutual funds in a more efficient manner giving superior risk adjusted return as compared with private houses managed mutual funds.

Recommendation
The most vital problem spotted is of ignorance. Investors should be made aware of the benefits. Nobody will invest until and unless he is fully convinced. Investors should be made to realize that ignorance is no longer bliss and what they are losing by not investing. Mutual Fund Company needs to give the training of the Individual Financial Advisors about the Fund/Scheme and its objective, because they are the main source to influence the investors.

 Mutual funds offer a lot of benefit which no other single option could offer. But most of the people are not even aware of what actually a mutual fund is? They only see it as just another investment option. So the advisors should try to change their mindsets. The advisors should target for more and more young investors. Young investors as well as persons at the height of their career would like to go for advisors due to lack of expertise and time. Before making any investment Financial Advisors should first enquire about the risk tolerance of the investors/customers

THANK YOU