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ASSET management is an emerging industry in Pakistan. Even though fund managers have been around for quite a long time, mutual funds became a mainstream instrument of investments only after private sector entered this market to tap its growth potential in the early 2000s.

Though the first mutual fund was created in the public sector in 1962, it took the private firms 21 years to enter this market and 40 years to significantly expand their presence.

The period between 2002 and 2008 saw the assets under management grow from a mere Rs25.34b to Rs335.23b as more and more private funds were launched on rising local and foreign investment in the stock market.

The size of assets under the industry’s management remains only a small fraction of the total bank deposits and the number of investors or unit holders still at around 200,000, with only a quarter of them actively participating in the funds

Excess liquidity, low interest rates and tax incentives made banks and institutional investors channelise funds into the stock market and mutual funds. Incentives for bank investments in mutual funds too played a critical role in the expansion of this sector as many banks set up their own asset management firms.

The fund managers, however, saw their fortunes decline by over 45pc to just Rs182.36b as the economy faced a downturn on global financial crisis and spiking oil prices. The rupee lost almost 29pc of its value against the dollar and the stock markets tanked in the second half of CY2008.

Though the industry has since recovered much of the lost ground with improving economic conditions and spectacular rise of the stock market, the size of the assets under its management remains only a small fraction of the total bank deposits and the number of investors or unit holders still at around 200,000, with only a quarter of them actively participating in the funds.

“This indicates the growth potential of the asset management industry,” argues Yasir Qadri, chief executive officer of UBL Fund Managers who manage assets worth Rs64b.

The fund managers, according to the Mutual Funds Association of Pakistan (MUFAP), are currently managing funds to the tune of Rs500bn, mostly invested in open end schemes (Rs465.47bn). The rest of the funds are invested in voluntary pension schemes (Rs16.30b) and close end schemes (Rs17.47bn).

Shariah-compliant funds have given a big boost to the industry as the investment in this category of funds has grown to Rs124bn or a quarter of the total assets under management, from just Rs9bn in the last 10 years. Industry sources expect the demand and appetite for Shariah-compliant funds to increase significantly over the next few years and overtake the conventional mutual funds.

“Asset management industry is a growing industry, which can play a critical role in the country’s economic progress by channelising private savings into investment,” Yasir, who has a long experience of asset management, says. “Mutual funds act as a bridge between small investors — who neither have any knowledge of the stock markets nor time, and, sometimes, even not enough capital to invest — and the industry. We can also help meet financing needs of government at a lower than bank rates.”

Industry sources say numerous factors are responsible for slowing growth of mutual funds industry: very small base of investors as most savers tend to keep their money with banks or invest in the government saving schemes, low saving rate, tax policies and anomalies burdening both the asset management companies and investors, and over-regulation of the industry.

“In an economy where middle class households have little to save and invest, the fund managers also have to compete with government and large banks to attract investors, and to find a way of survival through a maze of heavy taxation and regulation,” Yasir contends.

Zeeshan Afzal, financial analyst and head of Taurus Securities, believes that mutual funds have not been able to flourish also because of the asset managers’ failure to tap potential retail investors in the remoter areas. “The fund managers have done little to increase their penetration and reach out to small savers and investors beyond major cities,” he insists.

Indeed, almost half of the funds invested in mutual funds are generated from Karachi and the rest from the major cities of Punjab, and, according to MUFAP, individual investors held only a third of the assets under management (Rs431bn) at the end of FY2015. The rest were held by institutional investors.

“Around 85pc the funds invested in the mutual fund industry come from urban savers and investors and the rest from the rural areas,” Yasir concedes.

However, he adds, the firms are increasing their penetration and presence in the rural areas as well to attract potential retail investors. “The fund managers are using their affiliation with banks to take advantage of their vast network to reach out to potential small savers and investors outside the bigger cities. “The industry is in nascent stages of development; we are learning from our experiences.

Mashmooma Zehra Majeed, chief executive officer of MUFAP, agrees that the mutual fund industry has failed to develop the market and tap potential retail investors. But, she insists, it is primarily because of shortage of resources available with the asset management companies that work on thin margins of less than 1pc and heavy taxation.

“Tax anomalies are the major factor retarding the growth of this industry,” she says. The MUFAP Year Book for 2015 points out that the changes in tax rates applicable for corporations from investments in mutual funds had contributed to significant decline in the assets under management at the end of the last financial year from a high of Rs520b in April 2015 to Rs443bn.

“A big chunk of meagre financial resources of fund managers is wasted in fighting legal battles with the Federal Board of Revenue (FBR),” she argues. “At the end of the day, the funds’ cost of management rises and returns on investment decreases and they are left with little for market development,” she adds.

She says the present size of the mutual fund industry is only 5pc of the bank deposits. In India, it is 40pc and in the United States 150pc. “You can see the growth potential of this industry if tax anomalies are removed and asset managers facilitated.”

Published in Dawn, Business & Finance weekly, April 25th, 2016