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Investors’ dilemma in choosing asset class

April 15, 2013

Pakistani stockbrokers watch the share price board during a trading session at the Karachi Stock Exchange. The benchmark KSE-100 Index closed the day at 16372.08, with increase a 101.60 points. – Photo by AFP
Pakistani stockbrokers watch the share price board during a trading session at the Karachi Stock Exchange. – Photo by AFP/File

AS an asset class for investment, gold gave a stunning return of 216 per cent over the last five-year period. The glitter of the yellow metal put into shade the returns on all other investment avenues.

The National Saving Schemes produced 96 per cent cumulative return, currency yielded 65 per cent, term deposits with banks 147 per cent, Treasury Bills 78 per cent and stocks 67 per cent.

However, over a one-year period (2012), the double-digit return from investment in gold, at 16 per cent, was over-shadowed by bulls at the stock market, who tossed returns of 49 per cent to the investors.

The currency (dollar) yielded nine per cent. In the falling interest rate scenario, small savers were hard hit as bank returns on term deposits receded to 8.7 per cent.

Meanwhile, the favoured investment avenue for retirees, pensioners, widows and those looking for a regular monthly income from National Saving Schemes (NSS) helplessly witnessed their principal amount eaten away by inflation, and returns on investment erode to 14 per cent (slightly higher on Bahboob, Mahana Amadni and Pension Certificates).

While the National Savings Centre takes pride in having raised funds under its various schemes, it scarcely cares for the misery of those who look upon the NSS to keep their body and soul together.

The last Economic Coordination Committee (ECC) of the cabinet further reduced the NSS’s need to look after small savers by allowing institutional investment into the Scheme. The idea was to let the government raise a substantial sum from non-banking domestic sources to finance its budget deficit. It was also to drown out the voices of criticism against the government’s increasing dependence on the banking system. An investment advisor said that the principal objectives of an investor, when opting for investment tool, included both security of capital, and good return. So where should the investor put his money?

Executive Vice Chairman at Arif Habib Securities and chairman of the Mutual Fund Association of Pakistan, Nasim Beg, observed that investment strategy depended on the investment horizon: whether an investor wants to put his money for short-term or long-term. When asked to simplify, he said that for short-term investors, money market (T-Bills) was a safe option. For long-term investment, equities and real estate could be the best bet.

Beg thought that a mutual fund represented a safer avenue for small investors who wanted to take exposure in stocks, but had neither time nor inclination to go deeper into the fundamentals of underlying companies.

This is best done by professional fund managers, who usually allocate a larger portion of funds under their management into stocks, but also diversify into money market funds, Islamic funds and others, so as to hedge against risks in any single product.

Mutual funds are divided into open and close-ended funds. Returns are sometimes stunning. “If someone had invested Rs100,000 in the Pakistan Stock Market Fund at the time of its inception 11 years ago, then the investment will have multiplied to Rs1.1 million,” said Beg, while giving just one example. There are many more.

Meanwhile, a stock broker who had lost a big fortune in the market meltdown of 2008, scoffed at the return of a staggering 49 per cent produced by equities in 2012. Stocks outperformed all other asset class that year.

But this broker pointed out that setting 2012 aside, when the market had benefited from a sharp drop in interest rates, in the last five years, stocks had yielded an average annual return of only 18 per cent. “This was scarcely impressive against average inflation of 12 per cent in the five years,” he said. “Those who may have invested in T-Bill or NSS in March 2008 will be richer than those who invested in equities,” the broker added.

A disadvantage of the Pakistani stock markets is that they are predominantly engaged with trading in just equities, and unable to quench savers’ thirst for more diverse products. The lukewarm efforts to develop a corporate debt market have scarcely met with success.

Head of research at Foundation Securities, Mohammad Fawad Khan, also recommends mutual funds for savers as an avenue to take exposure in equity and money markets. He also opines that stocks are not likely to repeat the grand performance of 2012, and that investors wishing to dabble in shares should be selective in picking up stocks of high growth and high return companies.

From January 2013 to date, stocks have already given return of 7.6 per cent. Fawad believes that in a rising interest rate scenario, ‘risk averse’ investors should also avoid fixed or money market funds, and NSS. “Those avenues should be explored when interest rates are stable or declining,” he said.

Gold, he said, may lose its glitter, going forward. When the dollar was under pressure in previous years, central banks of several countries rushed to pull out their forex reserves, and sought the safety of gold as a safe haven. But international dynamics have since changed.

It is common knowledge that when the property market heats up, investment in real estate has the potential to multiply in the wink of an eye. Yet, the real yearly return on putting money into real estate is almost impossible to figure out, as the entire sector falls under the ‘undocumented’ economy. Investors are therefore spooked to enter the real estate market.

But a solution was in the mills: Real Estate Investment Trust/Treaty (REIT), a major new asset class, which, when fully launched, is expected to receive widespread acclaim. The potential for all stakeholders in REIT Mutual Funds is thought to be enormous. While sponsors of real estate projects will be able to raise money from the public in a documented manner, investors are likely to receive healthy returns along with the safety of their investment.

Another investment strategist summed up the savers’ decision of where to put their money by saying that investment was never passive. “An investor has to keep an eye on his money, and he must continuously monitor and revise his strategy, whenever needed.”