July 8, 2019 (MLN): The completion of Fiscal Year 2019 (FY19) warrants for an annual report on the performance of mutual funds and we have a lot to assess in the non-shariah compliant equity division. But before diving into the progress of these funds, an evaluation of the benchmark, KSE – 100 index is in order.
Over the course of last 12 months, the index has performed rather poorly as was expected considering the annual performance of the rest of economic indicators. Playing to their beat, the index lost over 8,000 points and concluded the year 19% lower on June 30, 2019.
The past year comprised of a series of ups and downs but the index still managed to trade sideways for the first 6 to 7 months of the year. However the latter period (Feb 4th – May 20th) weighed the heaviest on the index and pulled it down by 7,862 points to an annual low of 33,351 points mid-May.
Factors that sped up gravity on trading floors during this period range from extreme tension on the Indo-Pak border which constantly pointed towards a potential war outbreak, to FATF’s unsatisfactory opinion on government’s effort to comply with AML/CFT regulations, to anticipation on IMF deal, inflation, interest rate hikes, expected MSCI downgrades, panic selling, rupee devaluation, you name it!
The latter months of the year demonstrated a plethora of uncertainty within the market as it went through one of the roughest roller coaster rides in the past few months.
In addition to this, the market capitalization of KSE – 100 index declined from Rs.2.05 trillion to Rs.1.59 trillion, marking a drop of 22.5%, YoY. In dollar terms, it fell from $16.8 billion to $9.9 billion (a drop of 41.6%, YoY).
The miserable presentation of 100 – index provides the equity mutual funds with a safety cushion to fall back on, in order to defend their own poor performance in the past year.
All the mutual funds that invest in the equity market suffered negative returns during the year which means that the best performing fund shall be picked based on whichever fund made least losses.
Going by the established ground rule, out of 23 such mutual funds, 11 recorded smaller losses than the benchmark index (19%), in their respective net asset values (NAV).
According to records maintained by Mettis Global Private Limited, NAFA Financial Sector Fund (NAFAFSF) emerged as the best annual performer with the smallest negative return of 9.4% (YoY). The Fund’s NAV stood at Rs.10 per share at the start of FY19 but had lost 94 paisa by the end of it.
NAFAFSF which holds high risk profile and an Asset Manager Rating of ‘AM1’, (very high quality) – assigned by Pakistan Credit Rating Agency (PACRA) – mostly played in the field of financial institutions as it held most of its investments in HBL (13.70%), UBL (13.10%), BAHL (12.80%) and MCB (12.20%) as of May 2019.
All in all, the 87% of the fund’s holding were in commercial banks while 5.5% of its investments were held within the insurance sector.
The benchmark for NAFAFSF however, is KSE – 30 index which lost 4,675 point in FY19 and stepped down by 22.7% to 15,892 points.
Next in line comes UBL Financial Sector Fund (UBLFSF) which gave negative returns of 12.13% over the year. The fund’s NAV lost Rs.11.06 over the year as it was recorded at Rs.91.22 per share on June 30, 2018 and at Rs.80.16 per share on June 30, 2019.
This high risk, open ended equity fund also held the larger portion of its investment with commercial banks (76.75%) while 13.86% went in the insurance sector.
As of May 2019, 17.1% of UBLFSF’s holdings were in BAFL, 16.50% in HBL and 14.90% in ABL.
The commercial bank sector index came down by 14.6% last year, while the insurance sector index plunged by 41.7%, YoY.
Apart from factors that weighed down the index in general, a continuous sell-off by mutual funds has been another emergent reason for the free-fall of equity market. It goes without saying that the trade of securities in bulk, tends to have a significant impact on market movement.
Sometimes, bulky sell-off by funds is a consequence of hiring an ill-trained sales force who, in their desperate attempts to accomplish their respective sales targets, fail to communicate the nature of investment to the investors.
This in turn creates chaos during times of uncertainty and prompts the panic stricken investors to opt for redemption, thus coercing the funds to liquidate their investments and thereby enhance a sell-off.
Under these circumstances, sidestepping damages and making minimal losses becomes another challenge to deal with and although NAFAFSF and UBLFSF recorded losses like all other funds, they managed to minimize these losses better than the rest.
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*Disclaimer: This analysis is only based on funds that have completed a full year