05 December 2004	Sunday	22 Shawwal 1425

KARACHI, Dec 4: In an exceptional stock market boom witnessed in the last two fiscals, the number of mutual funds grew fast and posted outstanding financial performance.

Yet, going by its size, the range of its products and the level of skills required to capture the full potential of the capital market, the industry is clearly under-developed, say eminent economists and financial analysts.

A total of 31 mutual funds boost of record net assets of $1.66 billion, which is equal to 1.7 per cent of the GDP. But India's 33 mutual funds, offer more than 400 schemes and their net assets totals $33 billion (5.9 per cent of the GDP). A private sector local mutual fund market has developed rapidly but is still dominated by an efficiently-run state-owned National Investment Trust.

The industry's underdevelopment is attributed primarily to weak skills in managing investment portfolio, though it varies from fund to fund when judged by return on investments. Another handicap is the lack of depth in the capital market, more so, with de-listing outpacing listing of companies. For the short-term, the market is receiving a shot in the arm from flotation of shares by state enterprises.

A whole range of skills are required by fund managers whether it is evaluation of short-term and long term investment, risk management, market fundamentals or the exercise of discipline in speculative investments. Better skills are needed to manage return on investments in a market, back to normal after two exceptional years of unprecedented boom. Ultimately, the market reflects the underlying industrial growth.

In the first quarter of fiscal 2005, the return on investment by the mutual funds dropped sharply as was expected with space for capital gains shrinking with no more steep rises in the market. But corporate profits are improving. It means picking up core income stocks.

According to a study carried out by the National Investment Trust, six of the eleven open ended funds covered by analysis have posted negative return on their investments in the first quarter of fiscal year 2005 against two in 2004 and none in 2003. Perhaps, in this case, the KSE 100-share index was the trend setter with a return of -1.17 per cent.

The best performing open ended fund for the quarter was Pakistan Stock Market Fund with return at 4.34 per cent as against 62.26 per cent in fiscal 2002 and 81.82 per cent in 2003.

This was followed by state-run NIT with a return of 2.46 per cent against 105.05 per cent in fiscal 2003 and 60.74 per cent in fiscal 2004. The return of four funds for the quarter ranged between 0.92-1.43 per cent against 10.13 - 5.37 in 2004. Incidentally, Faysal Balanced Growth Fund moved from negative to positive territory during the period under review.

NIT continues to dominate the market with net assets at Rs50.2 billion against the aggregate total of Rs66.8 billion for the 11 companies as on September 30, 2004. It is among the five companies whose net assets have improved as compared to last year against decline in case of the rest. Pakistan Income Fund is the second largest with net assets of Rs3.2 billion followed by Unit Trust of Pakistan at Rs3.1 billion.

But the outcome has been worse for closed-end mutual funds in the first quarter of current fiscal. All the 18 funds have posted negative returns on the adjusted market price when compared to 2004. The range is between - 3.13 to -55.28 per cent. In fiscal 2004, at least eight funds managed returns ranging from 16.45 per cent to 133.33 per cent.

The net assets of the 14 closed end funds, for which NAV were available to NIT, showed decline at the end of September as against June 30, 2004. The overall net assets for these funds dropped from Rs25 billion to Rs23.9 billion.

In fiscal 2004, the net asset value per share of the closed-end mutual funds declined though the aggregate net asset under management increased as a result of issue of right and bonus shares, says State Bank's Financial Market Review 2003-2004. In that year, the net assets of this fund saw a substantial increase as the growth in this case was not limited by a fixed capital base.