What are the possible reasons behind the poor performance of our Mutual Funds (MF)? Why are they less attractive with 41 closed end mutual funds? Why a sophisticated industry in developed and emerging countries is still in its nascent stage here? These are pertinent questions, answers to which are crucial in finding out solutions.
This writer has seen many research works (mostly academic) on the performance of the mutual fund industry. But what is the point of such research works if those can not contribute to educate investors in such a retail driven market? I have also seen countless advertisements of training courses on Fundamental Analysis and Technical Analysis, but there is barely any on awareness of MF or better fund management? This clearly reflects the deficiency in our education on financial system.
The concept of MFs appears to be difficult to understand by the majority of our people. For instance, many people talk about the offer price or face value of MFs instead of their Net Asset Value (NAV) while they get listed through Initial Public Offering (IPO). This lack of financial literacy definitely creates distortion in the market more than anything.
Overall market sluggishness has been perceived as the key reason of poor performance of MFs. But in recent times, it can be observed that even though the Dhaka Stock Exchange (DSEX) rallied up to 11.4 per cent in one month (January 2014), MFs still fail to attract investors' attention on a decent scale. There is simply no demand and as a result a significant number of MFs are still in discount to their respective NAVs. Not only that, some MFs have shown a drop in their NAVs at market price on a weekly basis where it should have been on a rising trend. This actually calls for a question mark about the level of skills on the fund managers' part.
Majority of the people view this market as a place for short-term money making. You invest, you get return within a couple of weeks, if not t+3 (T+3 means that when a security is purchased, payment and the securities certificate must change hands no later than three business days after the trade is executed) and then you exit. However, that is not how it works. If a mutual fund is 30 per cent discounted to its NAV, theoretically, it should be a good long-term pick given that the fund managers are skilled. But since, investing in MFs requires a long-term approach (say 5 years), the myopic investors are less interested. This is reflected in the trading volume of MFs. The liquidity is not up to the mark. For instance, on February 5, 2014, the turnover of MFs represented only 2.1 per cent of the total turnover.
Another source of loophole is the lack of transparency. MFs are not mandated to make disclosures of their holdings and their underlying financial health. Our fund management industry just reports NAV at cost and market price on a weekly basis, while a prudent investor can always question if that reported NAV is reliable at all.
Again, most of the fund managers have been on a safe side after the stock market crash using their full allowable limit of 40 per cent as cash position (e.g., fixed deposit reserves). Now if the investors' sentiment is positive about the overall market, why would they invest in MFs and miss out the opportunity to participate in a rally? Simply there is no incentive. It involves opportunity costs too. Fund managers might reshuffle their portfolio when the right time comes but the change in strategy will obviously involve considerable amount of transaction cost.
Another reason for our underdeveloped MF industry - and probably the most crucial reason - is that there is simply no incentive to manage a fund with the best effort. A firm receives a certain percentage of the asset under management as management fee. Regardless of the status of the fund, the fund manager will receive this fee. In other countries, in addition to the management fee, an incentive fee is also involved if the fund's performance exceeds a certain predetermined benchmark performance. This actually motivates a fund manager to perform better and to take part in active management. Since there is no such arrangement in our fund management industry, fund managers do not feel the urge to exercise their expertise to the best possible use and take 'necessary' risks.
Mutual fund sector of Bangladesh is very small compared even to those in the neighbourhood. It represents only around 2.0 per cent of the total market; and as far as the growth prospect of the fund management industry is concerned, it does not look that bright unless some effective and decisive steps are taken. Where the existing MFs are well discounted to their NAVs, new funds will simply bleed from under subscription and thus inadequate funds.
The writer is Analyst, Asian Tiger Capital Partners. [email protected]
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