Mutual funds - the way forward

For the uninitiated investor, mutual fund investing offers a convenient and viable avenue to access the capital markets, however, unfortunately, the retail investor in Pakistan is still going through the learning curve of trying to invest for himself without understanding market dynamics, investing fundamentals and personal risk appetite and profile. The recent events at Karachi Stock Exchange - the phenomenal rise and subsequent correction - are a case in point and deserve an analytical and detailed review to ascertain the lessons that may be derived concerning various aspects of the market and especially concerning the retail investor.
In the same context, the mutual fund industry has also failed to target, and consequently, educate the retail investor with respect to benefits and advantages of investing through mutual funds.
The retail investor in Pakistan has so far been unable to realise that there is, by definition, a difference between the value of a share and the price of that share and that the markets do not always price a share as per the intrinsic value of that particular share. As per certain investment disciplines, this difference in pricing or mis-pricing serves to determine whether it is viable to purchase a certain equity share at a certain price or whether it makes sense to sell a share at a certain price if the investor holds that share.
The retail investor needs to appreciate that as he will not purchase any household item if the price quoted to him for that item exceeds the value that he perceives the product to hold, similarly, he should not purchase a share if he perceives that the price of the share exceeds the intrinsic value of that share. But does he know the value of the share. Furthermore, in recent perspective, does he know the price determination mechanism and the risk profile of a derivative?
Retail investors do not have the skills, time and data to determine the inherent value of a business and its share and hence are not, from a technical viewpoint, in a position to invest in the stock market as in the absence of information they cannot form a logical basis to enter the market. The worst form of investment philosophy at retail level is to invest on rumours and hearsay. It will serve retail investors to realise that investing should not be treated as a do-it-yourself endeavour if relevant knowledge and understanding is not available.
Furthermore, in the absence of savings schemes offering fantastic returns, the retail investor who cannot afford to enter the real estate market is not left with any viable options for long term savings that offer a decent return on his capital.
In the above described scenario, the best course of action for the retail investor who wants to accumulate decent amount of savings over the long term to meet his various financial objectives is to look for a mutual funk that invests as per a Strategy and has a profile that matches the retail investor's needs and time available to meet those needs. The current socio-economic environment adequately establishes the need to market mutual funds.
Realising that the demand for mutual funds exists, the question that why mutual funds have not gained widespread acceptance by the investing public and others deserves an explanation and subsequent implementation of related remedial steps. Among the reasons as to why the mutual fund and asset management industry in Pakistan has not been able to attain its potential over the last couple of years is its failure to project itself correctly at the retail market highlighting the benefits that it offers, its failure to properly educate the target market, its failure to institute working and accessible distribution structures and, perhaps, the failure to overcome the lure of making quick profits based on stock tips on the part of the retail investor.
To realise the true potential of the market, asset management companies need to reengineer their business strategies with a view to target the segments that have the potential to offer substantial long term growth and consequently become the largest customer group. The companies need to focus on sustained returns over the long term and undertake measured product development as opposed to offering a commodity type me-too product.
The asset management industry in order to move forward and attain the next level of industry and market development and growth needs to start looking beyond corporate sector customers and focus strategically on the retail sector. However, the structural weaknesses, that have so far inhibited such focus, need to be removed in order to properly exploit this customer group. Major effort needs to be expended in terms educating the retail market and instituting proper distribution structures which are currently non-existent. A brief discussion of required actions follows.
The industry needs to come out strongly in the media and disseminate information about mutual funds and project them as an alternate and liquid savings vehicle. The connotations surrounding the word "Mutual Fund" need to be removed so that it is perceived as something that a common person can easily get into. The advantages of investing through mutual funds need to be strongly projected. The above can be achieved through educational brochures, newspaper supplements, small seminars organised in major metropolitan areas, infomercials and television programs on mutual funds etc.
A market educational initiative on the above pattern may be taken up as a partnership among asset management companies under the aegis of an association and will provide dividends in the form of an expanded and informed market base willing to listen to management company massages.
The criticality of distribution in the mutual funds industry cannot be overemphasised, however, as a functional area it has been lacking resources and manpower. Distribution needs to be developed with the outlook of developing it into a long term competitive advantage giving the industry market reach and penetration among different customer segments.
It needs to be realised that as a product, retail investors do not see mutual fund investing as a need and are definitely not willing to buy units off the shelf. Therefore, the product needs to be properly presented and explained to the retail investor covering benefits and long term advantages along with provision of adequate customer service and hence, the need for well structured distribution networks.
The mutual fund industry should strive to make mutual funds a household generic product on the same lines as various other financial products, which were non-existent a couple of years ago in our markets, were established owing to effective and sustained business strategies. The industry needs to incorporate and implement strategic plans aimed at developing long term competitive advantages to ensure sustained growth.
(The writer is Head of Retail Marketing Alfalah GHP Investment Management Ltd)