KARACHI, May 13: The plethora of ‘right issues’ by mutual funds dishearten investors, who in the matter of subscribing to such issues are faced with the Hobsons’ choice (damned if they do and damned if they don’t).
Most fund managers admit that there is a penchant among some of the funds to issue right shares, which places the certificate holders in a dilemma: Those who cannot find money to subscribe to the rights are at a loss, if the Net Asset Value (NAV) of the fund is higher and the benefit passes on to those who can purchase the ‘letter of rights’ from the market. The certificate holder who decides to subscribe, often sulk for having been short changed when market prices are seen to slide.
Interestingly, the chief executives of two of the country’s largest (competing) group of mutual funds: Najam Ali of ABAMCO Limited and Nasim Beg of Arif Habib Investments had the same distaste for right issues. They informed that the Securities and Exchange Commission of Pakistan (SECP) had recently concurred with the fund managers view that if at all closed-end funds wished to offer right shares; they ought to be at a price, which was average of the last three years NAVs. As for the ‘bonus issues’, in case of mutual funds, internationally, these were considered merely as ‘stock split’ and had little significance. The preferred mode of payout was, therefore, a cash dividend.
The discussion with Najam Ali, who also holds the slot of chairman Mutual Fund Association of Pakistan (MUFAP), came up in regard to an announcement by ABAMCO on Saturday which said that the board of directors had announced a cash dividend at Rs3.50 (35pc) for certificate holders in UTP — Growth Fund (UTP-GF). That followed the completion of amalgamation proceedings of the ABAMCO Capital Fund (ACF), ABAMCO Stock Market Fund (ASMF) and ABAMCO Growth Fund (AGF) into UTP-Growth Fund (UTP-GF).
“Fulfilling its commitment to announce dividend immediately upon completion of the required regulatory formalities, the board has approved a cash dividend of Rs3.50 per certificate in their meeting held on Friday”, Najam Ali observed and added that an amount of Rs1.113 billion would be disbursed as dividend to the certificate holders of UTP-GF. Persons holding certificates of all or any of the three funds on June 6, 2006 would be entitled to the dividend on the certificates of UTP-GF to be allotted as per the swap ratio outlined in Scheme of Arrangement for Amalgamation.
ABAMCO observed that UTP-GF shall be in a better position to achieve the economy of scales, carry on the business more economically and efficiently and spread the frozen shares of Pakistan State Oil over a wider asset base resulting in better allocation of the fund in other stocks. The figures released by the company showed that total profitability of ACF, ASMF and AGF increased by 230pc, 250pc and 61pc, during the nine months period ended March 31, 2006 compared to the same period last year and stood at Rs1,253.202 million, Rs570.262m, and Rs273.571 million (Earnings per certificate – Rs6.18, Rs6.52 and Rs9.93), respectively. The year to date appreciation of Net Asset Value of ACF, ASMF and AGF was recorded at 41pc, 39pc and 30pc, respectively. “Total interim payout so far for the year ending June 30, 2006 from the closed end funds managed by the company amounts to Rs2.622 billion”, ABAMCO concluded.
And now back to the payout preferences of mutual fund industry, which has grown to collectively hold Rs200 billion under management. As regards the bonus shares, fund managers say that those are useful where the closed-end funds have ‘life finite’, but almost all funds in Pakistan are ‘perpetual closed-end funds’ and cash dividends should be abundantly paid out to attract investors. “Even foreign funds seek a regular stream of cash dividends and are loathe to invest in closed-end funds that do not give a cash payout”, Nasim Beg said. Only one closed-end fund had hit the market in last two years.
For newly launched funds, it is now mandatory to obtain permission from the SECP before proposing a bonus or right issue. The Fund managers asked that mutual funds be allowed to go for ‘treasury stock’ (buy back of own certificates and to hold for future floatation without cancelling them). That, they said would help in rationalising market price of mutual funds. Incidentally, all of those payout pains were not involved in the open-end funds, where a certificate holder could enter and exit at any point in time at the prevailing NAV on that day.
