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Dynamic shifts in Pakistan’s mutual funds

Dynamic shifts in Pakistan’s mutual fund

Conversation with Mohammad Shoaib, CFA, Chief Executive Al Meezan Investment Management Limited


Profile:

Mr. Mohammad Shoaib is the founding CEO of Al Meezan Investment Management Ltd. His journey spans from setting up Pakistan’s First Shariah Compliant Asset Management Company in Pakistan to making it the Largest AMC in the country. Under his visionary leadership Al Meezan leads the market with assets under management of over PKR 335 Billion*, a diverse customer base of over 227,000 investors ranging from institutions and businesses to individuals and High Net Worth clients (*Data as of September 30th, 2023). With the highest management quality rating of AM1 (by Vis & PACRA) and a nationwide footprint across 13 major cities, Al Meezan continues to win accolades locally and globally. The most recent of which include “Best Asset Management Company of the Year FY2023” for the second consecutive year by CFA Society Pakistan at the 20th Annual Excellence Awards and the “Asset Management Company of the Year” at the 8th Islamic Finance Forum of South Asia held in Srilanka.

Mr. Shoaib completed his MBA from IBA in 1988 and got his CFA charter from CFA Institute, USA in 1999. He has to his credit setting up CFA Society Pakistan in 2002 and serving it as its founder President.

He has received many accolades for his contribution in promoting Shariah compliant investing as well as CFA program as a tool to improve skillset of Pakistani investment professionals. He was recognized as the “Most Influential CFA Charter Holder” by CFA Institute Magazine, in 2006, and was awarded another accolade of “Volunteer of the Year: Lifetime Achievement Award” in 2019 by CFA Institute.

He has been an active volunteer in many areas in the financial sector and some of his volunteer roles include; Nominee director of SECP on Board of Pakistan Stock Exchange, Board member of Institute of Financial Capital Markets in Pakistan, Chairman, Mutual Funds Association of Pakistan, Board member Pakistan Institute of Corporate Governance etc.

In December 2021 he was recognized by Asia Asset Management as “One of the Top 25 Leaders in Asset Management” in Asia and in the year 2022, he was recognized as “CEO of the Year” by 16th Consumers Choice Awards.

He has also participated in Advanced Management Program (AMP) at Harvard Business School alongside global business leaders and CEOs, which reflects his commitment to lifelong learning.

He is board member of CFA Society Pakistan and holds the portfolios of Advocacy and GIPS Chair. He is also director on the board of Mutual Funds Association of Pakistan. Additionally, he has been nominated as a Member in the Committee formed by SECP for promoting Islamic Finance in the Non-Banking Financial Sector.

He has participated in various seminars, conferences and workshops across the globe during his 31-year career in managing investments.


Pakistan & Gulf Economist had an exclusive conversation with Mr. Mohammad Shoaib about the Mutual Fund Industry of Pakistan. Following are the excerpts of the conversation:

Mutual funds were first introduced in Pakistan back in 1962, with the public offering of “National Investment Trust fund”, an open-ended mutual fund. The fund remained at that time as the only open-ended mutual fund in Pakistan for 30 years and was later followed by the establishment of Investment Corporation of Pakistan (ICP) in 1966 in the public sector.

It was in 1971 that the government allowed the private sector to launch closed-ended funds and, thus, enter the industry for the first time. The government issued the “Investment Companies and Investment Advisors Companies (IC & IA Rules)” as a means to provide an enabling platform. This led to the launch of Golden Arrow, the first closed-ended mutual fund to be established in the private sector in 1983.

Thereafter, perhaps one of the biggest milestones for the industry was the promulgation of Asset Management Companies Rules, 1995 which provided the necessary legal framework for launching and managing open-ended mutual funds by the private sector. Shortly thereafter, the first private sector open-ended mutual fund was launched by ABAMCO Limited in 1996. This proved to be the turning point and following this several open and closed-ended funds were subsequently launched resulting in the growth in fund launches and eventual formation of “Mutual Funds Association of Pakistan (MUFAP)” in 1996.

Later, in the same year, Al Meezan Mutual Fund (AMMF), the first Islamic fund was launched in Pakistan. This was followed by NBFC rules which were established in 2003.

Regulation of the Mutual Fund Industry:

Mutual funds in Pakistan are regulated by the Securities and Exchange Commission of Pakistan (SECP) with the objective of investor protection and capital market development. The process for granting licenses to Asset Management Companies (AMC’s) is transparent and thorough.

The SECP conducts continuous monitoring of mutual funds through reports that mutual funds are required to file with the SECP on a regular basis. These include issuance of monthly Fund Manager Reports (FMRs), Financial statements (every quarter) and a plethora of regulatory filings on periodic basis. SECP also performs on-site inspections of AMCs to ensure that they are constantly complying with applicable regulations.

As a secondary regulator, all investments in mutual funds are held and owned by the trustee. In Pakistan, the trustee for most mutual funds is the renowned “Central Depository Company of Pakistan (CDCPL)”. The trustee, not only protects investors interest by safeguarding their assets, but also provides an additional layer of check and balances on every day operational elements (transactions, etc) of the fund. The robust systems at CDC definitely add to investor protection and assurance, thereby providing additional comfort and assurance that due diligence, legal procedure and transparency is embedded in all facets of a mutual fund’s operations.

It is pertinent to note that for Islamic Mutual funds, there is yet another 3rd and vitally important layer of oversight. This is provided by the mutual fund’s Shariah Advisor, who along with the Shariah Auditor ensures that all operations of the mutual fund as well as the asset management company managing it, conforms to the principles of Islamic Shariah.

Following regulations and rules are applicable to mutual funds:

Non-Banking Finance Companies (Establishment & Regulation) Rules, 2003.

Non-Banking Finance Companies & Notified Entities Regulations, 2008.

Part VIII of The Companies Ordinance, 1984.

Circulars and Directives issued by the SECP under the provisions of the Ordinance.

Apart from the above, SECP also monitors the investment universe globally & periodically issues amendments/ new regulations to keep up with the international regulatory regime. Thus, making for a very robust and foolproof regulatory environment, in which all mutual funds in Pakistan have to operate.

Industry Growth over the years:

Today, there are 20 Asset Management Companies (AMCs) operating in the country, offering 313 open-ended mutual funds and 2 closed-ended mutual funds, along with a total of 24 voluntary Pension Funds. These AMCs are also offering investment advisory and asset management services to the clients, while also managing Separately Managed Accounts (SMA), including discretionary and non-discretionary portfolio mandates.

Above Exhibit A shows the remarkable growth of the industry in the past 10 years. The Mutual Fund Industry grew from Rs. 359 Bn in FY13 to Rs. 1.95 Tn by the end of October 2023. This translates into a CAGR growth of 17.8% over this period.

There are two main types of mutual funds available to investors in Pakistan, with regards to shariah compliance preference. If we evaluate the growth of Islamic funds compared to their conventional counterparts the 10-year CAGR growth is even more remarkable for Islamic funds than conventional ones. Exhibit B displays the growth of both types during the same period and shows that Islamic funds grew at a CAGR of 28.4% when compared to 13.2% for conventional funds, clearly highlighting investors growing interest towards shariah compliant mode of investing when choosing mutual funds.

Exhibit C above shows, the various diverse categories of mutual funds available for investors to chose from. The largest segment that has seen massive growth and interest over the years is the Money Market segment, which currently consists of almost 60% of all money that is entrusted to mutual funds by the public. Index Funds come next with 25% and the Equity segment follows with 8%. The Index Tracker segment, Commodity and ETF are relatively new and due to their miniscule size are almost negligible when compared to the entire market size of Rs. 1.95 Tn

Al Meezan Investment Management Ltd & Shariah Compliant Investing:

The first license for a full-fledged Shariah compliant AMC was issued in 2003 to Al Meezan Investment Management Limited. To date, Al Meezan has the privilege of being the only full fledged Shariah Compliant AMC in the private sector, as well as in Pakistan. The Company has the sole objective of providing Shariah Compliant Investment Solutions to its clientele, which ranges on a continuum from small retail investors to large Institutional ones. The company’s foundations have been built upon a combined financial strength of its illustrious sponsors; the Premier Islamic Bank of Pakistan: “Meezan Bank Ltd” and one of the largest Development Finance Institution (DFI) in the country: “Pak-Kuwait Investment Company Ltd”.

Al Meezan has been competing successfully with its more recognized conventional counterparts in the Asset Management Industry, since May of 1995. The organization has yearned to give dedicated consideration to the massive, yet untapped market of the “Shariah Compliant Investor”. This is evident from the fact that today, Al Meezan remains the only Asset Management Company (in a total of 20 Asset Management Companies) dedicated to providing only Islamic Investment opportunity to those Investors that seek and trust this mode of investing. Based upon the desire to satisfy client needs, the company continuously strives to innovate and provide new services and products that make Shariah Compliant investing easy and transparent.

Al Meezan has an established track record of generating successful returns that are at par with its conventional peers over the long term. The primary objective of the company is to provide a maximum total return (for a given level of risk), while remaining within confounds of Shariah Law.

Shariah Compliant Investing:
Characteristics Islamic Capital Market Conventional Capital Market
Shariah framework Islamic funds are designed/ developed based on Shariah law. Shariah scholars ensure adherence to Islamic laws and provide guidance. Not based on any religious laws or guidelines.
Prohibited Investments Islamic funds restrict purchase or investment in stocks of companies dealing in unlawful activities such as gambling, pork, alcohol, tobacco, pornography and arms & ammunition.Similarly, Islamic Income/ Money market funds invest in Islamic banks, Sukuks, Islamic commercial papers, etc. Which by themselves are carefully structured and approved by shariah advisor’s and ensure these are backed by real assets Except for money laundering and the financing of criminal activities, such activities are permissible for companies whose stock conventional funds may purchase.Conventional Income/ Money Market funds usually invest in conventional banks, T Bills or PIBs.
Prohibited transactions No borrowing on interest, no short selling, no transactions with element of gharar (uncertainty), etc No restrictions as such
Shariah Review & Shariah Audit The Shariah auditor reviews all operations of the fund at least once a year, to ensure conformity with Islamic Shariah No requirement for shariah review or audit
Future Outlook and potential for Growth in Mutual Fund sector of Pakistan:

The Mutual Fund Industry of Pakistan has come a long way over the years and, as shown earlier, has grown to a commendable size. However, with the untiring efforts of the SECP, AMCs and various important market players, including the government and stock exchanges, there is still a lot of untapped potential.

Especially in the Real Estate sector, we have only just started to see Real Estate Investment Trusts (REITs) raise their heads as potentially a very significant sub-segment of the Mutual Fund Industry. Further, there is a lot of room for Private Equity transactions to be undertaken through asset management companies. Exchange Traded Funds (ETFs) are another potentially important area that can see growth in future as investors seek fund exposure at minimized costs.

In the wake of Covid-19, business as usual has all but changed drastically. The future belongs to technology and we are seeing rapid technological progress in the Pakistan’s mutual fund industry also. Focus has shifted significantly from paper-based transactions to digital, which include transactions from banking platforms, AMC websites, smart phones, etc, thus also lowering cost of doing business. There is growing traction in this area and sales representatives of mutual fund companies are now ever closer to their customers than before. For customers, as well, trust is enhanced in the fund management company many folds as website or phone applications gives them a sense of connectivity and convenient means of monitoring their portfolio.

Many important initiatives recently implemented by many asset management companies in Pakistan include easy/ instantaneous redemptions, Debit cards, Sahulat Sarmayakari Digital accounts, Roshan Digital Accounts (RDA), digital distributor channels, WhatsApp, real time chats, etc. Yet, we expect significant new technological developments still to take place.

For example, we expect that once mutual fund will function just like one’s bank account and the customer will be able to conduct all such transactions like IBFT, Utility bill payment, etc from their mutual fund accounts. More and more telcos will be integrated with asset management companies to provide mutual funds to their clients, perhaps 24/7. Most importantly, the customer journey which actually starts with creating their mutual fund account will be simplified in future, as more and more companies shift to digital account opening and do away with unnecessary and hard-to-understand legal jargon that is associated with investing in funds.

The industry is growing at a rapid pace, aided by new business segments, growing customer demand for lucrative investment avenues and an astronomically faced paced technological evolution and acceptance, both at the AMC level as well as the customer level.

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