Gone are the days when investors had to compromise on the returns of fixed income funds and where maintaining stability and managing risk were the primary considerations. The time has now changed; fixed income funds are now ruling with their investors basking in healthy gains.
Longer-term bonds continue to be the lucky charm for fund managers. Last few months have seen fund managers diverting their funds from TFCs to PIBs. By allocating a bigger proportion to PIBs at higher yields, these funds are continuing to reap healthy mark-to-market gains on their PIB holdings amid lower interest rates. This is evident as over the past 5-6 months, yields on long-term bonds have dropped by nearly 200bps to 9.6-9.7 percent, thus resulting in substantial gains on portfolios accruing PIBs on higher rates, according to a fund manager.
Income funds, on average, yielded a heartening return of 17 percent during January 2015. However, it is nearly 170bps lower than the return in the preceding month. Mark-to-market losses on term finance certificates (TFCs) might have been culprit. Yet, the return is still considered to be on the higher side especially considering that returns on other investment avenues have also gone down in tandem with the drop in interest rates.
Aggressive income funds are still delighting in sizeable returns with their average return inching up a tad to 19.6 percent in the month under review. Again, PIBs have been the saviour. Having the flexibility to hold higher portfolio duration, this fund category has stood at an advantage to income funds of late.
Although return on money market funds has improved in recent times (9.56% in Jan15), they may perhaps lose their appeal, going forward. Fund managers regard this as a temporary period of joy for money market funds. This is because fresh instruments will be accrued at lower rates, perhaps below the discount rate of 8.5 percent, hence the returns cannot be expected to stay at this level, fixed income experts say.
Equity funds are staying lull, with average return for this category underperforming the benchmark KSE100 index during the month. One reason could be the underperformance of the oil and gas sector (due to waning international oil prices) along with the pharmaceutical sector owing to the drug pricing issues. Considering the dynamic circumstances, active fund management has become even more critical of equity fund managers.
For income fund managers, keeping the duration low on long-term bonds will be focus. "One bad news is more than enough to change the market direction; hence a lower duration on longer-term bonds will lessen the impact of external market shocks", said a senior fixed-income specialist. Nonetheless, allocation will continue to be tilted towards government bonds preferably of say 2 years or 3 years.
Perhaps, declining government bond yields will lead to reviving the attractiveness of TFCs. So for corporations looking to raise capital via TFCs, this is just the right time!
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Mutual Funds Monthly Performance Trend
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Mutual Fund Classification Jan15 Dec14 Nov14 Oct14
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Fixed Income Funds
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Aggressive Fixed Income
(Annualized Return) 19.609 19.372 12.297 18.739
Income (Annualized Return) 17.006 18.661 15.236 15.321
Money Market (Annualized Return) 9.596 8.821 8.638 8.606
Islamic Income
(Annualized Return) 9.888 7.445 5.948 7.081
Islamic Money Market
(Annualized Return) 7.640 2.875 7.270 7.345
Islamic Aggressive Fixed
Income (Annualized Return) 2.900 5.767 6.040 7.200
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Equity Funds
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Equity (Absolute Return) 6.778 4.112 4.201 2.775
Islamic Equity
(Absolute Return) 7.952 2.074 4.388 2.614
Index Tracker
(Absolute Return) 6.940 2.525 1.815 0.840
Islamic Index
Tracker (Absolute Return) 5.980 1.270 2.090 0.520
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Source: Mutual Fund Association of Pakistan (MUFAP)
Average industry returns
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