Permitted to invest abroad

The State Bank of Pakistan has allowed Mutual Funds to invest 30 percent of their funds abroad subject to a cap of $15 million at any given time. The investment abroad must be approved by the Securities and Exchange Commission of Pakistan and prior approval of the SBP has, of course, to be obtained by the locally established mutual funds.
The SBP will provide the necessary foreign exchange for this purpose with the aim of increasing the dividend income for local shareholders.
It may sound perplexing that a country seeking forex capital from other countries is allowing local companies to invest abroad. But this is how a two way traffic normally operates.
The USA is the biggest recipient of FDI in the world. The dividend pay-out and yield earned on US treasuries by non-US citizens is still less than the dividend earned by US companies on investment abroad. Since local earning opportunities for Pakistani mutual funds are limited and industrialisation will take time to materialise, it is logical to give mutual funds permission to invest abroad and earn a return in foreign exchange for their clients.
As it is, our investor class does invest its savings in Wall Street and in mutual funds abroad. Now the investor relying on experts in the mutual fund industry can also benefit from similar transactions.
However, both SECP and SBP need to revisit the terms and conditions stated by a mutual fund at the time of its public floatation prior to grant of permission to invest abroad.
If the subscribers were told that their funds will be invested in the local market only, then it will be inappropriate to invest abroad. The second point to ascertain is whether the Articles and Memorandum clauses provide for investment abroad. In case, they do not, then amendment in the Articles must be sought with the requisite majority. These legal hurdles need to be overcome by existing listed funds. In case of new public floatation, we are sure this problem will be adequately addressed.
We are certain that both the SBP and the SECP will provide guidelines while giving permission to local fund managers, to invest abroad. Some kind of benchmarks should be in place, such as: (a) only those mutual funds can invest abroad which have out-performed the KSE index consistently for the last three years; (b) which have distributed all of their realised gains ie dividend income earned; (c) investment will be permitted in only shares not in options and futures where the element of risk is higher; (d) investment will be restricted to listed securities which have not suffered a loss for last three years; and (e) investments can be made only in debt instruments which are of investment grade ie BB rating.
Obviously, the investment pool abroad is much larger than the total opportunities available locally. However, the risks abroad are also greater. Local fund managers must be obligated not to invest in junk bonds or in associated companies of their group or in associated companies of Pakistani businessmen abroad.
We are sure that the local fund managers have the tools and the expertise to assess the market and take independent investment decisions. After all, it is the large brokerage firms which own the best performing funds in our market. Other local investors, whether big or small, tend to follow them. Until more financial institutions establish asset management companies and learn to operate independently, the pool of talented analysts and risk takers will continue to flock to the mutual fund industry.