Asset managers squeezed by selling pressure of open-ended funds

Asset managers dealing with open-ended mutual funds (MFs) have been enduring liquidity pressure while having to pay off unitholders against the sell-off of units for investments are stuck in the capital market due to floor price.
In recent years, open-ended funds have become more popular than close-ended pooled funds because unitholders of the former have the scope of offloading units any time at prices close to the net asset value (NAV).
Fund managers pay back unitholders from cash generated by selling securities in the MF portfolios, which has been a challenge for more than a year now for a lack of buyers willing to buy stocks at the lowest prices set by the securities regulator.
"There is no denying of the problems. Apart from the fund managers, other market operators have also been facing problems as they are unable to realise funds from the market," said Vice-chairman of Shanta Asset Management Arif Khan.
Many fund managers claimed they had invested in good stocks, including blue-chip stocks, which saw no significant price movements after the introduction of the floor price. At the same time, junk stocks have been exhibiting abnormal price appreciations.
For example, Grameenphone has remained stuck at the floor price of Tk 286.6 since September 22 last year, while junk stock Imam Button Industries has experienced a 652 per cent price hike in the last two years.
Therefore, many open-ended funds have been unable to liquidate investments in good stocks.
On the other hand, unitholders feel discouraged to keep their money in the MFs as annual dividends given by fund managers against MF units have declined for low returns on investment in stocks.
"Under the present market situation, it's difficult to give better dividends," said the chief executive officer of ICB AMCL Mahmuda Akhter.
On top of the low return from equity investments, MFs are required to keep 100 per cent provision against the value erosion of assets of the funds. Fund managers keep such provision from profits made out of the MFs.
Higher provision is a major reason behind the decline in the amount of dividends.
For example, ICB AMCL Unit Fund distributed Tk 10 per unit as cash dividends for FY23, which was Tk 11 per unit and Tk 16 per unit for FY22 and FY21 respectively.
The dividend yield from the MF was below 5 per cent for FY23 against the unit price of more than Tk 200.
Officials handling the open-ended fund said dividend payouts could be higher had the provisioning requirement been relaxed.
Meanwhile, many investors have withdrawn investments from open-ended MFs to divert money to fixed-income securities, while the NAV per unit in many cases shrank or remained static.
As per the regulatory requirement, a fund manager is required to invest at least 60 per cent of a fund in the capital market and the remaining 40 per cent in unlisted investment vehicles.
Most of the fund managers have injected more than 80 per cent of the MFs in the capital market, a major chunk of which is in fact in equity securities since the number of listed debt instruments is limited.
With floor prices in place, the asset value of many open-ended funds has remained flat mimicking the market.
Keeping investors’ faith in mutual funds
The securities regulator has been informed of the problems facing fund managers.
Mizanur Rahman, a commissioner of the Bangladesh Securities and Exchange Commission, say he is optimistic that things will improve after the national election as the price restriction is likely to be lifted.
Several leading asset management companies (AMCs) said they could settle payments to unitholders of open-ended MFs mainly because of their strong financial base.
They said they were ensuring payments to unitholders for the sake of reputation. Otherwise, unitholders will lose faith in the fund managers.
"Without support from the [capital] market, we have been ensuring unit holders' payments by generating cash from FDRs (Fixed Deposit Receipts) and Treasury bonds," said Shahidul Islam, chief executive officer (CEO) of VIPB Asset Management.
Preferring anonymity, a fund manager said the issue of some unsettled payments had been discussed in a recent meeting of the association of fund managers.
Over the last decade, the number of closed-end mutual funds fell to 37, whereas the number of open-ended funds rose to 87.
Asset managers worry that if the present situation persists investors will turn away from open-ended funds as they did from close-ended MFs for some policy decisions, leaving the industry in distress.

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