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Posted 13 September 2006 - 05:05 PM
by Zainab Omar
Although National Investment Trust (NIT), the government owned mutual fund and Investment Corporation of Pakistan (ICP) were established in the 1960s, today the mutual fund industry in Pakistan is just 5% of the market, (Rs. 100 billion) compared to the US where it is 80% or Europe where it is 60%. The mutual fund industry in Pakistan has been on a slow growth till recently when brokerage firms have entered the market. The new mutual fund, NAFA (National Fullerton Asset Management Company Ltd) a joint venture between National Bank of Pakistan, Temasek and NIB Bank, launched with an extremely successful IPO. Targeting a billion rupees, they reached three and a half billion, although they haven’t even begun to tap into retail distribution as the IPO attracted mainly institutional money. But on the back of National Bank’s branch network of over 1,300 branches they may just have an edge over other mutual funds when it comes to attracting retail customers.
Unlike other mutual funds in Pakistan which are either owned or dominated by a single brokerage house or bank NAFA is not owned by any single entity and is an independently managed and independently structured mutual fund. With Temasek’s involvement, NAFA brings in strong foreign investment and expertise and Temasek’s fund management arm, Fullerton owns 40% of NAFA and is the majority shareholder.
Temasek, a US$ 64 billion investment company owned by the government of Singapore is much bigger than any institution in Pakistan and has significant shareholdings in Singapore Telecom, Singapore Power, Singapore Airlines, Singapore Port Authority, and has a 12% shareholding in Standard Chartered. In Pakistan, Temasek has bid for Allied Bank and owns 60% of NIB. Temasek feels that the engine of global growth has shifted to Asia and it wishes to benefit from this. It intends to move tens of billions of US dollars from the United States and Europe to this region in the coming years. It sees opportunity in Pakistan and has already demonstrated its intent by acquiring 60% of NIB Bank and 70% of NAFA through its subsidiary — Fullerton.
According to Nadim Hasan, the head of marketing of NAFA, “In my dealings in the financial sector in Pakistan I always found the capital market lacking in depth and credibility. It is my belief that the market needed an asset management company that was: (a) owned by strong and well reputed institutions and ( managed by well known professionals who could innovate products, market aggressively and generally think out of the box as well as a management which could think tactically and strategically not only within Pakistan but also outside for South Asia and the Middle East.”
Nadim adds that he saw the existing market as either a monopoly of NIT (which really was offering nothing to the market) or broker driven which in his eyes was not fair to the emerging middle class or to the corporate sector. Although the corporate sector was increasing its profits, it had limited options on investments. Pakistan was registering impressive GDP growth since 2001 and at the same time, the finance ministry (under Shaukat Aziz) was taking various incremental steps towards expanding and reforming the capital markets. “Armed with this dream, I decided to go and light a match under one person who I knew would start a prairie fire!” says Nadim. “I went to Iqbal Hassan [President of NIB] and a star, NAFA, was born.”
Dr. Amjad Waheed, the CEO of NAFA, who has vast experience running mutual funds, says, “The size of the mutual fund industry is US$ 2.7 billion in Pakistan versus US$ 50 billion in India. Even if we incorporate the 1:7 difference in economy and population between the two countries, the size of the industry should have been about US$ 7 billion in Pakistan. However, things look bright in the future, and we expect the industry to grow at 30% per annum over the next 10 years”. Waheed was with NIT for several years and understands how the equity markets work here. He also has experience with running a vast mutual fund in Saudi Arabia.
“NAFA brings together the local know-how of two banks (NBP and NIB) and the international experience of Fullerton Fund Management, which has experience of managing tens of billions of US dollars worldwide. The success of our first fund — NAFA Cash Fund, whose size has grown to Rs. 3.7 billion in its third week of launch is partly due to the credibility of its promoters and partly due to the experience, expertise and efforts of the management. NAFA Cash Fund is the largest open-end fund ever launched in Pakistan,” says Waheed.
When I met Ali Raza, President of NBP, he explained to me that the financial services industry in Pakistan five years ago was literally on its knees and was insolvent. Local banks had problems with bad loans, extremely high administrative costs, no new products and no use of technology. When he joined NBP in July of 2000, that was when the financial reforms began. “Today, banking in Pakistan is stable, robust and one of the most profitable industries in the country. The reform process has been a success story.” The World Bank, which provided the initial funding for the reforms, quotes Pakistan as one of the prototype success stories of banking reform.
“As we became more stable as an industry, we realised that the mutual fund industry became a necessary extension of what we were doing in the financial services industry. Everywhere else in the world what people keep in banks is essentially what they keep for business and personal needs but they don’t save through banks.” He explained that in Pakistan people buy bonds, equities or mutual funds. Approximately 70% of our bank deposits are current accounts and 30% are time deposits. In the US the ratio is completely different. “We think that this culture of people keeping bank deposits for daily use as opposed to savings will continue for quite some time and therefore there is a huge opportunity to create instruments for savings in the form of mutual funds.” I asked him why we didn’t have them before? “Simply because we had firstly, a dysfunctional banking system, secondly, we had a very poorly performing stock market and thirdly, no fixed income instruments.” He explained that mutual funds straddle all three given categories: bank deposits, equities and fixed income instruments.
The fund would not have been as successful had it not been for the combination of good sponsors, good presentations made by an excellent management team and the fact that people see potential in this industry. “The success of NAFA has to do with the credibility of its major sponsors,” says Ali Raza. “NBP is the largest bank in the country and now has a decent reputation, so there is a lot of credibility. Temasek is one of the largest government owned investment arms in the world, a huge entity that makes long and short-term investments in entities that it sees potential in. The management team that has been put together is strong. Amjad Waheed used to work at NIT and then ran a very large mutual fund in Saudi Arabia. This is an industry where we don’t have too much expertise locally. Other than NIT, there didn’t exist any mutual fund in the private sector until a few years ago.” He adds, “Strangely enough, promoting the mutual fund industry axes our own feet because our own deposits will ultimately be attracted towards these funds.”
By creating different kinds of funds I ask whether the banks will be competing against themselves with different types of mutual funds. “No, some banks have as many as 10 different types of mutual funds,” says Ali Raza. “Our greatest strength is our distribution franchise with over 1,300 branches. The biggest benefit to NAFA is our branch network.”
Ali Raza goes on to add, “The mutual fund industry is only 5% right now but in five years I predict it will be 25%. This is a fact that the banking industry will have to accept. There will be some growth in the overall financial services. Our loss in market share will be their gain in market share. It is better to see this reality and position oneself for it rather than lose it to someone else. At least we will lose to one of our own entities. Here we are pre-empting for the future as a strategic objective.”
Today NIT captures 70% of the total mutual fund market. The total banking industry today is Rs. 2.3 trillion. The mutual fund industry is Rs. 100 billion, just 5% of the overall market share. I ask Ali Raza if he sees growth potential for the mutual fund industry in Pakistan? “Yes I see it developing here. NIT is being privatised, split into six entities and NBP owns 30%. We will have the single largest mutual fund as NBP.”
But why did NBP set up another mutual fund when they already had these large holdings in NIT? “Our joint venture objective is different and has been in process for 18 months now. This was to partner with Temasek because we didn’t know when NIT was going to be privatised. We wanted to get experience with a first class operator.” Temasek runs a number of successful mutual funds around the world so NBP has an opportunity to get acquainted with the systems, the technology, gain experience and start selling the units through their branch network so that when NIT is privatised they would have gained experience.”
About the bid for NIT’s privatisation, Iqbal Hassan, President of NIB says, “When things are not privately owned they are influenced by other factors but NIT is large and it is going to be broken up and privatised and that’ll end up in the hands of six players: NBP, Faysal Bank and Bank of Punjab and NAFA hopes to be an aggressive bidder for one of the three remaining pieces.”
I asked Iqbal about NAFA. “In the past I’ve been involved in creating a broking house and investment banking company and now the commercial bank, so from our end we felt that having an asset management option was important because in the long term, people will want to diversify the way they manage their money. Although we are a bank, we want to cater to the requirements of people that go beyond basic banking services. Since we believe it’s a growing business we wanted to be a part of it.”
What type of products is NAFA offering? “The first fund is a money market fund which provides liquidity.” Iqbal explains that the average person gets bored of keeping money dormant in a bank deposit but usually doesn’t have the time to actively manage equities, especially in a volatile market like Pakistan, so they choose several mutual funds. “People at different stages in life manage their money differently. When they’re young they may take more risks. Some people may want Islamic mutual funds or real estate or equity, so the industry is nascent and we expect it to deepen and diversify substantially.”
Who is the existing client base? Is NAFA competing to attract money away from other mutual funds? “I don’t think it shifts money from other existing mutual funds to us. If I was asked for advice I would advise that people should not go to just one mutual fund. I would always encourage people to diversify. Because we are completely independent, people may prefer us. Some people have lingering doubts about stock broking firms and their AMC [asset management company] arms.”
Iqbal goes on to explain that NAFA is a fund management company that will launch a wide enough product range to appeal to those segments that have investible surpluses. “These are young people, older people, institutional investors etc, so I would be surprised if NAFA didn’t have at least 10 to 12 different funds under its umbrella in the next two years, subject to approval. We’re not a bank running a mutual fund. NAFA is positioned as an independently run AMC. The big challenge for the industry is how you give people the confidence for them to know that you’ll be giving them completely independent advice. If you have involvement then you have your own house positions, especially when companies are small.” He feels it is important to stress that NAFA is independent “There is no single institution or individual who can influence NAFA”.
Amjad Waheed: “I was approached by Iqbal Hassan, who informed me about the proposed joint venture and asked me to also meet Syed Ali Raza on this matter. I had been working in Riyadh Bank, Saudi Arabia for about four years by that time, where I was managing US$7.5 billion invested in 22 mutual funds. During my first three years at Riyadh Bank, I was very busy structuring and growing the department at full pace. However, by the fourth year, things had settled down and become routine, and this is where I lost interest. Also, during my tenure at NIT I had enjoyed enormous status managing the largest mutual fund in Pakistan and being an NIT nominee on the board of about two dozen major Pakistani companies. Although the salary was very good in Riyadh, I missed the status. An important factor in my decision to join NAFA was my comfort level with Ali Raza and Iqbal Hassan. I had known both of them for a long time, and had a lot of respect and admiration for their professionalism. Ali Raza is the best banker in Pakistan and a thorough gentleman. Iqbal is one of the best entrepreneurs in the country. He had the courage to quit his very senior position in Citibank to start a new brokerage house — Global Securities — which he was able to establish as a leading player in the country. He is now trying to do the same with NIB Bank. I ask him about growth in the mutual fund industry. “It’s a question of time where people gain confidence in letting people handle their money. There have been some bad experiences with things like the cooperatives scandals. It’ll change with time.”
Iqbal says, “What we bring to the table is a very strong ownership structure. If we look at all the AMCs right now I would have to say somewhat immodestly that NAFA has the strongest ownership structure. That brings credibility, distribution, and strong, independent management which we, the board don’t interfere in as sponsors.”
I asked each of the people who I interviewed what the difference was between NAFA and an AMC run by a brokerage firm. They turned the question on me each time. “If you had to choose, where would you put your money and why?” I did get an answer from Masood Karim Shaikh, Chairman of NAFA though. “Here we can support our own fund. This kind of comfort a unit holder can’t get anywhere else. Why would someone come to NAFA and not a brokerage mutual fund? Their financial strength is their own family run brokerage firms. An asset management company has to have a lot of strength while the paid up capital of an AMC by the SECP is very small which we believe should be increased to have large players coming in. At the moment anybody can form an AMC with Rs. 30 or 50 million rupees of capital. What a unit holder gets at NAFA is financial strength of these three banks, not just one brokerage house.”
Ali Raza says, “Everywhere in the world the most successful funds have been launched by strong commercial banks partnering with others.”
Masood Karim Sheikh adds “For the moment we’re just concentrating on the mutual funds. The fund that NAFA has started out with is a fixed income instrument which will give an indicative yield of around 11%. To suit the risk profile of every individual investor”.
Source: Blue Chip Internet Edition
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Abdul Mateen Khan
Posted 24 August 2007 - 07:55 PM
Posted 13 January 2008 - 09:30 PM
Posted 09 February 2008 - 11:57 AM
can anyone please advice me what are the NAFA funds listed on stock exchange... Thanks