The Asset Under Management (AUM) of 36 listed closed-end mutual funds was Tk 57.3 billion as of Monday but the market value was only Tk 37.3 billion, according to BRAC EPL Stock Brokerage.
The Tk 20 billion was lost to the price erosion in the secondary market. So, if investors have to sell assets before the expiry of a mutual fund when liquidation is done at Net Asset Value, they will have no scope of getting back the money invested let alone gaining any profit.
Of the MFs, 34 have been traded at prices far below the face value of Tk 10.
Experts say the units of MFs had become overpriced in the bullish market before the 2010-11 stock market debacle and then the market crash led to the huge plunge in prices. Policy changes until now, done on the pretext of helping the market thrive, have proved unfavourable, and scams committed by fund managers further ravaged the industry.
Faruq Ahmad Siddiqi, former chairman of the Bangladesh Securities and Exchange Commission (BSEC), said most of the funds had been floated to book quick profits from the bullish market.
"It's not rational in the context of MF management," he added.
Investors turned away from MFs and so the market value has not increased for more than a decade though the index has gone up and the overall market gained strength in terms of market capitalisation.
During the time, asset management companies (AMCs) floated only three new close-end funds in 2017, one in 2018 and one in 2022 amid the fear of under subscription.
Investors are not interested in purchasing new fund units at the face value of Tk 10 when the existing funds are cheaper.
Amid the dire state of the closed-end MFs, the AMCs floated open-end MFs as investors preferred the liberty of liquidating investments at any time as per the net asset value (NAV).
The number of open-end MFs rose to 83 quickly.
Two recent scams committed by fund managers diminished the possibility of further expansion of such funds too.
The managing director of Universal Financial Solutions (UFS) fled the country embezzling Tk 2.35 billion from four open-end MFs. Then the chief of Alliance Capital Asset Management moved away Tk 450 million from two unit funds.
Every time, the regulator failed to take timely action to prevent the fund misappropriation.
In consequence, some AMCs, including LankaBangla Asset Management and ICB AMCL, have been facing mounting pressure for asset liquidation by investors.
An MF is a financial vehicle that pools money from people to invest in securities, such as stocks, bonds and money market instruments. It is managed by professional fund managers. The portfolio is structured and maintained to match the investment objectives stated in the prospectus.
Unfavourable policy changes
Talking to the FE, experts and AMCs explained the reasons behind the sorry state of the MF industry.
In 2013, the securities regulator allowed the MFs to issue re-investment unit (RIU) as dividend. AMCs' management fees increased as the fund size was expanded through new units. But investors were not benefitted as the market prices of a majority of the closed-end funds were below the face value.
In July 2019, the provision of issuing RIU was scrapped for what the BSEC said was the interest of investors. Instead, the regulator made it mandatory for both open-end and close-end MFs to give cash dividends.
The regulatory decision to extend the tenure of close-end MFs in October 2018 was probably the final nail in the coffin for the industry. The BSEC allowed extension of the tenure of closed-end MFs by 10 years, saying it is in the interest of the capital market.
Former BSEC chairman Mr Siddiqi said the decision did not help the market. "Rather, a gap has been created between the funds' NAV and the market cap."
Unit holders of two closed-end funds even went for legal battles to liquidate their investments but to no avail. The time extension ultimately helped the AMCs to secure benefits for an additional period.
Some AMCs violated rules by investing in non-listed securities. LR Global in 2015 invested in a family-run private enterprise and was later fined Tk 5 million.
Scams and policy changes aside, insiders say, a lack of fixed-income asset class was a major barrier to the development of the MF industry.
Recently, the securities regulator asked the AMCs to increase minimum investment in listed securities from 60 per cent to 80 per cent, which, asset managers say, will squeeze the scope of risk diversification and profit generation.
What to do next
Mr Siddiqi said no further time extension of closed-end MFs should be allowed.
Secondly, the securities regulator should ensure that AMCs with skilled manpower get licences to operate MFs, he added.
Shekh Mohammad Rashedul Hasan, managing director at UCB Asset Management, said, "The industry will grow if the number of institution-based AMCs increases."
The AMCs, which are subsidiaries of big corporate entities, have little scope of embezzling investors' money.
Echoing his view, an official of the securities regulator, preferring anonymity, said such companies are operated under a corporate framework.
"The management capacity of institutional AMCs is also better than the companies run by individuals."
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