Mir Muhammad Ali, CFA became the CEO of UBL Fund Managers in July 2005. He has been having extensive experience in investment banking and fund management during the last 24 years. Prior to joining UBL Fund Managers he was with Asian Development Bank. Before joining ADB, Ali worked as Head Investment Banking of United Bank Limited.
He was instrumental in setting up of the Investment Banking Group (IBG) at UBL which obtained the best investment bank award for the year 2002-2003 from the CFA Association of Pakistan. Apart from doing a large number of debt and capital market transactions, his achievements include setting up of UBL Fund Managers and execution of Pakistan's first listed asset backed securitization transaction. Being CEO of UBL Fund Managers he led the company to become one of the largest private sector asset management companies in Pakistan. Below are the edited excerpts of a discussion BR Research had with Mir Muhammad Ali.
BR Research: Tell us something about UBL Fund Managers.
Mir Muhammad Ali: UBL Fund Managers is Pakistan's first asset management company established by a commercial bank. It was formed in 2001 and right now we are managing funds worth over Rs 45 billion. Most of our funds are invested in fixed income funds and we invested around 20% in equity funds. We have managed over 28,000 investors. Our broad product line includes Islamic funds, equity, capital protected, fixed income, asset allocation and also pension funds.
We are represented in all major cities of the country and we have our presence in Middle East in UAE and Qatar as well. We are getting a very good response from Pakistani investors residing there.
BRR: Brief us a little about the new funds recently launched by UBL Fund Managers.
MMA: In 2013, UBL Fund Managers launched three funds in UAE taking the total number of funds in UAE to seven. However, we successfully launched around six funds last year in Pakistan.
Main strength of UBL Funds is the capital protected fund series and we hold the privilege of being the first asset management company in Pakistan to launch principal preservation funds which invests up to 100% in equities. The principal preservation funds launched by us received a tremendous response and we are able to fetch very good investments. Our performance compared to others in the industry is far superior.
BRR: Where did the idea of principal preservation funds actually come from?
MMA: The idea was first introduced in 2008 when we launched our first principal preservation investment plan. But, unfortunately, the response was not very good at that time because it was the time when the stock market crashed. And now with investors regaining their lost confidence, we have seen much interest coming in from investors in such funds. We currently have 5 funds in the capital protected fund category. Our first fund UPPF-1 matured in February 2014 and yielded a return of 63% over a two-year period.
BRR: Why should individuals invest in mutual funds?
MMA: Because mutual fund is a product that is objective-oriented. Say, you want to send your son for higher education or you want to save money for your daughter's marriage, if you save that money in bank accounts or invest in similar products which are not very liquid and don't even grow with the inflation, your investment ends up losing its value.
Sadly, what actually happens is that people invest in bank deposits and consider it safe to invest and feel that their principal value doesn't get eroded but the reality remains that banks yield negative real returns (inflation adjusted).
So, in order to avoid your investments from losing the value with the passage of time, mutual funds make allocations for you and they invest money on behalf of their investors based on the objectives. I believe smaller or salaried investors should consider investing in mutual funds from that angle.
BRR: How has the performance of equity funds been compared to the broader market?
MMA: Last year was very good for the market and our funds in particular performed very well compared to the broader market. Our fund's return was around 53 percent whereas the market gave a return of 49 percent.
BRR: What was the basic strategy that helped your fund in outperforming the industry?
MMA: It was the timely decision making, I must say! We were able to identify companies earlier than others. We invested in those companies and made very good returns on that. Moreover, our research capability is also quite strong, thus we were able to identify opportunities at the right time which helped in flourishing our returns. That's how we were able to beat the competition.
BRR: What are your company's plans going forward?
MMA: We are planning to launch more equity capital protected funds in the very near future. We will grow our existing capital protected series.
BRR: Considering that UBL Fund Managers is already offering so many funds, do you think there is a need to add more funds to the portfolio?
MMA: Capital protected funds are different; we are not going to offer plain vanilla funds instead we will offer some value-added funds.
As you see, capital protected funds are 'fixed-term' funds. We can say that we are not launching a new fund rather introducing another tranche of the same fund. And it's not a very different concept but repetition of the same concept again and again. And obviously, it has its own demand since capital protected funds tend to mature over a certain time period; new funds need to be introduced to cater to investors' growing needs.
BRR: Can we say that the investors' inclination towards capital protected funds is linked more to their risk-averse mindset?
MMA: True, investors in Pakistan are very risk-averse. Capital protection is something that you can get even in equity funds if you hold it for quite some time. But investors are not very comfortable with pure equity funds because of the perception issue that they want some comfort in the form of capital protection/capital guarantee/capital preservation. They prefer capital protection along with decent returns. For them, even a five percent of inflation adjusted return is actually good.
BRR: What's the general threshold where investors start redeeming their investments from equity funds?
MMA: Last year saw a lot of redemptions coming in especially in equity funds, but the market went on increasing so investors regained their confidence level.
Redemptions come usually from big investors who have more options to invest such as real estate, bonds, dollars, etc, while small investors generally don't redeem much.
The bulk of investors, ie nearly 80 percent in terms of value are corporate, while the remaining 20 percent are retail investors. And in terms of number of investors, 95 percent are retail investors who are usually risk-averse and can't tolerate volatility in returns.
BRR: Are there any measures taken to offer protection against stock market volatility?
MMA: Capital protection is available where asset allocation is there. Since retail investors are not as much informed as the fund managers, we manage money for investors on their behalf and personally monitor and manage those investments. That's why we have introduced asset allocation funds where we move money in and out of equities on a regular basis based on prevailing market situations.
BRR: How has the growth been in the investor base?
MMA: There has been around 20-25 percent growth in the number of retail investors.
BRR: What is the major issue being faced by Pakistan's mutual fund industry?
MMA: The major issue being faced is the taxation issue. The government has imposed FED as a result, investors are being hurt. Moreover, there is sales tax too and on top of that there is CGT. This doesn't make a level playing field for the industry. Resultantly, industry growth has slowed down.
Consider for example 'deposits'. Although CGT in the shape of withholding tax is applicable on deposits, but there is no FED or sales tax imposition as such.
The Government and SECP should understand the importance of the mutual fund industry as it is the major conduit to channel savings from small investors to the main sector and helps in building the capital markets and increasing the savings' culture in this country.
BRR: How is investors' interest in Islamic products?
MMA: We see a lot of interest in Islamic mutual funds. Islamic finance is the fastest growth market right now for us and we are growing in a quite decent way there. The returns are almost equal to the conventional ones and even better in some cases. UBL Funds recently re-branded and re-launched its Islamic funds with the brand name of Al Ameen Funds.
BRR: Why investors are more interested in Islamic funds?
MMA: That's because of the mindset and the fate. That's the case with retail investors in general and also with some of the corporate as well.
The main consideration of investors is on the 'return'. If the return on an Islamic fund is comparable to that of a conventional fund, an investor might be willing to opt for an Islamic product by adhering to religious values. And this makes a rationale for them.
BRR: Can we double the industry size in say like 5 years or it's a tough task?
MMA: I think we need to divide this industry into various segments and see where the growth is coming from. Currently, retail segment holds a lot of potential. In the next five years, doubling the retail investor segment is possible but that will require support from government in terms of clarity on taxation issues.
Moreover, the government needs to focus on fostering the growth of mutual fund industry considering that the industry holds a lot of potential. This is imperative as the government can raise a lot of savings which are in the unregulated sectors or in banks. Because mutual fund money is ultimately invested in the market, so in a way people are shy investing in an equity market but they are comfortable investing in say principal protected funds which is ultimately invested in the stock market. This way the stock market grows. And when stock market is growing, government's privatisation plans become easier, price discovery gets better and that's where the cycle starts.