Mutual fund business: Prioritising customer\\\'s interest

"You can buy some mutual funds below the price of one stick of cigarette", said an investor. He also added he had bought one mutual fund at Tk 10.00 and half of his capital is lost. Nowadays investors feel fear when the matter of investing in mutual fund is raised.
But if you look at the world you will be amazed to see that people are willingly giving money to professional fund managers. Forty-two per cent of the world's total investible wealth is in mutual funds. As per a report titled 'Asset management 2020, A brave new world', the total global asset under management in FY2012 was US$ 63.9 trillion and in mutual fund it was US$ 27 trillion. Our country's GDP (gross domestic product)  is US$ 130 billion in FY2014. So you can imagine the activity in mutual funds occurring right now in the world.  Then the question is how this industry came into such a bad shape. In our opinion, partly money manager's greed, partly regulator's ambiguous signal and partly investor's lack of knowledge are responsible.
There are two types of mutual funds - closed end and open-ended funds. Closed-ended funds have fixed life normally 10 years in Bangladesh; they are listed and traded in the stock exchanges. The funds we see trading in stock exchange are such type of funds. On the other hand, open-ended funds are not listed and don't have a fixed tenor. Investors buy close-ended funds at market prices and can sell those funds at market prices later on. However, when the fund expires, say after 10 years, the AMC (Asset Management Company- which manage mutual funds) will sell funds shares and refund the proceeds to the fund unit-holders.
In our country, the first mutual fund was established on April 25, 1980 which is named 1stICB mutual fund managed by the ICB. Though it had been 34 years, the fund is yet to be liquidated. Recently, we saw one fund liquidated i.e. ICB AMCI 1st Mutual fund in fiscal 2013-2014. The fund was converted to open-ended from close-ended. However, true liquidation is yet to be seen in the market.
There are also 1st ICB MF, 2nd ICB MF, 3rd ICB MF, 4th ICB MF, 5th ICB MF, 6th ICB MF, 7th ICB MF and 8th ICB MF, AIMS1stMF, Grameen1 which expired but were not liquidated yet. Investors get only dividend from these funds.
Now, take the case of 1st ICB MF as if it were liquidated right now. An investor can buy 1st ICB MF at market price of Tk. 1,091.8 as on March 5, 2015 and its NAV (Net Asset Value) at market prices is Tk.1,638.53 as on March 8, 2015 (source: DSE). The investor will get proceeds close to that NAV at market prices at liquidation. That is a huge gain for the owner of fund. If other funds were liquidated in similar fashion, seeing such benefit, rational investors will increase the demand for these funds. Ultimately, the prices of mutual funds will trade close to their NAV which is the ideal case for closed- end funds. Thus, liquidation became necessary a long time ago.
Now, let's talk about the greed of AMCs. According to the BSEC's website there are 17 AMCs.  11 of them floated 40 close-ended funds listed till date. Before the year 2009, there were only 16 closed-ended mutual funds in the 29-year period of the industry. AMCs seeing low hanging fruit during the bull market launched 15 mutual funds in just two years (2009 and 2010). When a fund is launched, the AMC immediately pockets large amount of formation fees. As mutual funds by rule have to be invested in shares/bonds within the stipulated time period, they bought shares at extreme level. After the crash in 2010, the result was inevitable. Poor performance still continues. The industry suffers from under-subscription for the new funds. More to add to the injury is some managers used fund's money to invest in their pet projects. Recently, the BSEC took a very bold step and fined LR GLOBAL and its trustee BGIC handsome amount of money. This was a long due imperative to bring some good governance.
Now, coming to regulator's role, we don't find any reason why the BSEC provided right to AMCs to declare bonus shares. It is just another accounting treatment. There is no value addition in unit holder's wealth. Moreover, if the BSEC extends the expired fund's life further, the staggering situation is more likely to be continued. We think, it is the duty of the BSEC to make a clear distinction between open and close-end fund.
Other things to improve the industry that come to mind are briefly mentioned below:
1. Rating the mutual funds: We have different categories of shares like A,B,Z. Then why not we differentiate mutual funds rather than categorising them all in Category "A". Mandatory rating by rating agencies will assist investors to take better decisions. In this regard, we may follow a fund rating company Morningstar's rating methodology.
2. Introduction to performance-based fees: Whether you increase unit holder's capital or not, every week AMCs charge management fees. We think the management fee schedule in mutual fund rules needs to be revised down. There may be some benchmark return, say 5 per cent yearly return. Above that benchmark, performance-based fees, say 20 per cent of the profits, may be shared by the AMCs. This will make compensation more reasonable.
3. Increase of paid-up capital of AMCs: The strong logic behind this that Tk 500 million paid- up capital is meagre to run costly investment research activities before AMCs reach sizeable business. Up to that time, they need to carry on operation through own fund. At present condition, we think Tk 500 million paid-up capital is reasonable. The weak logic behind is to create a barrier to entry. Some businesspersons seeing such cheap license just got one and keep it in deep freeze. They are waiting for another bull run to get easy money again.
In conclusion, AMC business is very sophisticated and prioritising customer's interest is the key to success. AMC should remember this business is not one-day game. If you treat investors unfairly, they will just leave you alone. It is for their own good to bring discipline to their own business.
 maruf154@gmail.com