KARACHI: Ammar Valika, head of sales strategy at UBL Fund Managers expects mutual funds to catch up with bank deposits over the next decade as more people enter the working class and asset managers increase their presence and product awareness.

  1. Do you see the penetration of asset management industry is low, and it oversees only a small fraction of the total bank deposits? A. The assets under management of the asset management industry as a percentage of bank deposits is a small number, however there are clear reasons for why this number stands where it does at present.

First of all let’s consider that the asset management industry in Pakistan is still in its infancy stages, the oldest companies have existed for less than two decades, when you compare that with the banks, they pre-date partition and well before that as well.

The branch network of most banks has been able to provide them with penetration from Khyber Pakhtunkhwa to Karachi and there is a relatively direct correlation between the number of branches/geographical presence to the size of deposits held in banks.

Asset management companies are specialised investment firms that have been catering primarily to the affluent members of Pakistan’s society and salaried class individuals over the past two decades , only very recently have they started opening their own branches and investment centres across Pakistan.

I am pretty sure that even all the branches and investment centres of asset management companies put together don’t add up to the number of branches of the smallest commercial bank operating in Pakistan.

Keeping this in mind, since there is a lack of presence, there has also been a lack of general awareness about mutual funds as an investment vehicle in Pakistan. In urban centres, we have seen a rise in awareness about the asset management industry and this has resulted in a substantial increase in the investment amounts managed by the asset management companies. However, the real challenge remains in second and third tier cities, where presence and awareness are minimal and investments remain centred in bank deposits.

A fair analysis of the strength of penetration of the mutual fund industry would be if we compared the deposit base in urban centres versus the penetration of asset managers in the same areas and then doing the same comparison for second and third tier cities.

Considering all these limitations, I believe the asset management industry has actually done a more than fair job; today asset management companies manage over Rs500 billion for investors and that is a significant sum.

All this said I would like to clarify that it’s not the weakness of the asset management industry that it stands where it does, but the strength of the banking system in Pakistan which makes this ratio seem skewed towards bank deposits.

Over the next decade, as Pakistan becomes more educated, more people enter the working class and asset managers increase their presence and awareness of their products I am confident you will see them catching up with bank deposits.

  1. How do you see the investment trend in mutual funds in the presence of low interest rates?
  2. We have now entered an interest rate cycle that most of us working professionals as well as investors have not seem in their lifetimes. When interest rates are low, pure economics indicate an increase in consumer spending as well as investments in avenues that offer higher returns albeit at more risk.

We have already started witnessing that.

Individuals who had bank deposits parked at double digit rates a couple of years ago, are searching for new investment options, and are starting to look to mutual funds that provide higher returns via exposure in bonds , equities, etc.

Even on the institutional investments front as well as retirement funds managed by organisations, we have recently seen a surge in demand for the services of asset managers to help achieve higher returns and overall investment goals.

Over the short and medium term, I see an increase in demand for equity-based funds as well as fixed income funds, with aggressive exposure to instruments, such as term finance certificates which offer attractive returns compared to rates offered by bank depositsand national savings schemes.

I personally think we are heading into a largely positive time for the asset management industry, where investors will be looking to find us as per their needs and requirements, which is the opposite of what has happened over the last couple of decades where they had simple alternative investment avenues to make returns for themselves; as I said, times are different now and we shall be sure to be net beneficiaries in this scenario.

  1. What’s the role being played by the fund managers in channelising private investments into savings?
  2. All leading asset management companies have earmarked this current time as an opportunity to really go out and increase awareness about their products and services.

We have seen partnerships forming between leading asset managers and institutions like the Pakistan Stock Exchange (PSX) where they are holding joint awareness sessions in various cities.

Similarly, this year has seen the launch of the “Jamapunji” website by SECP which is aimed at educating the masses about investments.

A rising trend has also been observed with asset management companies doing road shows; kiosk-based activities as well as arranging regular presentations at schools, colleges as well as institutions with the aim of increasing awareness about savings and the advantages of investing in mutual funds.

  1. What about the growth trend in investment in Shariah-complaint funds?
  2. There has definitely been an increase in the demand for Shariah-based funds, in fact, over the past couple of years, most product launches and new funds that have been introduced by the asset management industry are Shariah-compliant in nature.

There are two sides to this story, firstly lets understand this purely from a business point of view. When you launch a Shariah-based fund, it can attract both Islamic and conventional investors, whereas when you launch a conventional fund, it cannot accommodate Islamic investors. However, where the asset management industry deserves credit is that these Islamic funds, albeit restricted by the investment avenues available to them, have still managed to outperform conventional funds in many cases.

Once investors have realised that there is not a substantial return differential (you may just make more money in Islamic than conventional funds) they tend to go for the Shariah-compliant funds.

  1. 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. Is that a correct assessment?
  2. This is a pretty spot on assessment of the current situation, however as noticed in other countries, asset management is an industry that didn’t become big overnight; money was always parked in bank deposits, foreign currency, gold, etc, but the need for professionals to manage money continued to rise.

Slowly, but gradually, in Pakistan, we are witnessing this shift, the investor base for asset management companies is increasing and what is most encouraging is that once an investor has opted to invest with an asset management company, even in the case of where they have been disappointed by the performance of the asset manager, they have switched to other asset managers but not back to traditional bank deposits.

This is a crucial fact which has made the industry realise that once we bring customers onboard they truly realise the value added by asset managers, and continue to work with them.


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