IIFA Country Report of Mutual Funds Association of Pakistan

Transcription

1 IIFA Country Report of Mutual Funds Association of Pakistan ECONOMIC AND FINANCIAL BACKGROUND Pakistan s economy has been struggling to regain financial stability as the overall performance of the economy has been moderately satisfactory during the fiscal year The real GDP has grown at the rate of 3.7% as against 3.0% last year. All the three major sectors, namely, agriculture, industry and services have provided support to economic growth. The commodity-producing sector (agriculture) contributed 17.98%, while industry contributed 23.43% to the real GDP growth. The services sector as a whole contributed almost 58.58% to the overall GDP. The economic growth is mainly underpinned by high exports, strong workers' remittances inflows, easing of inflationary pressures and massive buildup of foreign exchange reserves. Remittances from Pakistanis abroad rose per cent to $ billion in , compared with $11.2 billion the previous year. Discount rate has been lowered by cumulative 200 bps to 12% (and subsequently to 10.50% in August 2012) citing improvement in the prospects for inflation, together with a need to encourage investment in private sector in order to stimulate sustainable economic growth. Despite these recent improvements, persistent rise in international oil prices, continuous decline in investment, widening current account deficit and internal security hazards raise concern about the long-term growth prospects. Furthermore, infrastructural deficits, especially in terms of energy generation and gas production, continue to impede acceleration of growth. The Pakistan Stock Markets remained range bound during first half with predominately declining trend (9.2 percent). However, the KSE -100 index resumed momentum during the 3rd and 4th quarters of the FY 12. The robust performance of Pakistani stock markets during 2nd half of was due to certain encouraging measures like considerable reduction in discount rate by the central bank during later period of the FY 12 and increase in foreign exchange reserves. Further, the market sentiment was boosted by the promulgation of the Capital Gains Tax Ordinance. Under the CGT Ordinance the National Clearing Company of Pakistan Limited (NCCPL) has been appointed as an intermediary entity to compute, determine, collect and deposit the CGT on listed securities. In addition, no question relating to the source/nature of money will be asked by the tax authorities if the money remain invested in the stock market for a period of 45 days (till June 30, 2012) and 120 days (till June 30, 2014) before and after the promulgation of CGT Ordinance. The investment by foreign investors in the capital markets during the period from July, 2011 to March, 2012 depicted a net outflow of US$ million. This reflects that present bullish sentiments in the equity markets are due to restoration of the confidence of the local investors. The Pakistani Stock markets performed well during the current fiscal year as compared with the other world indices. This was mainly due to the steps taken by the current government to boost the confidence of the equity market investors which includes reforms in the Capital gains tax, demutualisation of stock exchanges etc. Pakistan was in the forefront in pioneering the initiation of mutual funds from amongst the developing countries with the introduction of National Investment (Unit) Trust, an open end mutual fund in 1962, which was followed by the Investment Corporation of Pakistan launching closed end funds starting from The mutual fund industry grew with the opening provided to the private sector to launch open-end mutual funds in The mutual funds have not been able to make inroads towards attracting household savings and for this reason the investors in mutual funds and asset under management (AUM) as per cent of bank deposits has remained low. Presently there are 27 Asset Management Companies managing 148 open end/ closed-end funds and eleven Voluntary Pension Schemes, launched by six licensed Pension Fund Managers. Mutual Funds net assets exhibit strong recovery. Since FY 08, the mutual funds industry witnessed a significant decline in its net assets as the investors interest was shaken by the freezing of the Karachi Stock Exchange in Sep-08. In last two years, the losses incurred discouraged the prospective investors to venture in the mutual funds. However the mutual funds industry witnessed a recovery in its net assets mainly on the back of investment activities in the money market instruments and partially from the equity market. Besides the revival in the net assets, the number of mutual funds has also increased. Page 1 of 6

2 DATA ON FUNDS UNDER MANAGEMENT AND PORTFOLIOS Net Assets - Open End Schemes Asset Allocation 3,881 4,003 Balanced 2,962 2,861 Capital Protected 2, Equity 44,597 52,594 Income 62,964 94,341 Money Market 104, ,509 Total Net Assets Open End Schemes Dec-11 Jun-12 Total 266, ,310 Net Assets Islamic Open End Schemes Islamic Asset Allocation 1,139 1,120 Islamic Balanced Islamic Capital Protected Islamic Equity 6,605 8,393 Islamic Income 28,825 30,632 Islamic Money Market 7,728 7,762 Net Assets - Pension Funds General Pension Fund 751 1,101 Net Assets Islamic Pension Funds Islamic Pension Funds 1,079 1,640 Total Net Assets Pension Funds Total 1,830 2,741 Net Assets - Closed End Schemes Asset Allocation Balanced 1,257 1,286 Capital Protected - - Equity 15,478 19,102 Income 1,085 1,142 Money Market - - Total Net Assets Closed End Schemes Dec-11 Jun-12 Total 19,529 23,489 Industry-wide - Net Assets Net Assets Closed Open End Schemes Islamic Asset Allocation - - Islamic Balanced 1,327 1,535 Islamic Capital Protected - - Islamic Equity - - Islamic Income - - Islamic Money Market - - Dec-11 Jun-12 Open End Funds. 266, ,310 Pension Funds 1,830 2,741 Closed End Funds. 19,529 23,489 Total. 288, ,540 Page 2 of 6

3 Trend of Industry Wide- Net Assets (last ten years) (PKR millions) 400, , , , , , ,000 Open End Funds Closed End Funds Pension Funds 50,000 - KEY TRENDS IN FLOWS AND ASSETS UNDER MANAGEMENT: During the year ended June 30, 2012, the industry witnessed a growth of 53%. However, this growth is mainly in money market funds. There is a need to educate investors (and particularly individual investors and retirement funds managed on behalf of its members who are individuals) to invest a portion of their savings in equity related funds. This is important, as one of the objectives of long term savings is to be a hedge against inflation. Public awareness remains a pressing long-term issue and MUFAP has been investing resources in building awareness. MUFAP in collaboration with the Federation of Pakistan Chambers of Commerce & Industry and Overseas Investor Chambers of Commerce and Industry held seminars to spread awareness regarding Mutual Funds and Voluntary Pension Schemes. MUFAP s aim is to spread awareness amongst masses regarding importance of savings and investment. The Securities and Exchange Commission of Pakistan has launched a comprehensive country wide public awareness and investor education program in June 2012 in which MUFAP is an active participant. SECP is planning to work together with MUFAP on a public awareness and investor education program for mutual funds and voluntary pension schemes targeting the individual investors. PRODUCT DEVELOPMENTS: During the year Securities and Exchange Commission of Pakistan (SECP) issued Guidelines for Exchange Traded Funds (ETFs). MUFAP worked closely with the Commission on their issue. Our industry is expected to launch ETFs soon. Also, MUFAP and SECP have formed a joint committee to frame up regulatory changes needed to allow open end mutual funds to invest directly in commodities for example Gold etc. as a result of which our industry will be able to launch open end commodity funds. The regulatory changes will enable both the launch of conventional funds that would settle in cash and Islamic funds that would where settlement would be delivery based. REGULATORY AND SELF REGULATORY DEVELOPMENTS (INCLUDING TAX) Amendments to NBFC & NE Regulations 2008 (our main regulatory framework): The Securities and Exchange Commission of Pakistan (SECP) has notified amendments to the NBFC and Notified Entities Regulations, T The significant amendments made are as follows: (a) Replacement of seed capital requirements with minimum fund size of Rs 100 million; (b) Enhancement of unit-holders 'rights in case of any material change in offering documents and trust deeds; Page 3 of 6

4 (c) Suspension of redemption of units restricted to a maximum of 15 working days and calling of meeting of unit holders to in case if suspension is needed to be extended; (d) Introduction of a detailed procedure for winding up of an open-end fund; (e) Registration of trustees of open-end mutual funds by the SECP (f) Registration of distributors of mutual funds with the MUFAP (g) Exemption granted to index fund, fund of funds and capital protected fund from group company investment limits (h) Reduction in limit of annual equity brokerage commission per broker from 30 percent to 15 percent and; (i) Restriction on mutual funds to subscribe to an issue under-written, co-underwritten/sub-underwritten by group companies of its Asset Management Company. Amendments in Code of Corporate Governance: The SECP notified Code of Corporate Governance This has been discussed in detail below. Proposed amendments to Voluntary Pension System Rules, 2005: The proposed amendments are under discussion with the SECP. Restriction on sharing of management fee by AMCs with unit holders: SECP has issued directive to Asset Management Companies to ban the sharing of management fee with any of the unit holders in any form whether in cash or in kind. It further ordered that an Asset Management Company is required to ensure that distributor of mutual funds does not share commission/fee in any form with the underlying unit holders of a CIS. Standardisation of benchmarks: Various benchmarks are being used by Funds of similar category thereby measuring performance of the Funds difficult and confusing for investors or prospective investors. Heading towards making performance reporting by the Industry more transparent, MUFAP s Board of Directors has decided to standardise benchmarks for different funds, thereby making them a true performance measurement yardstick. The existing benchmarks were evaluated against attributive criteria of benchmark as defined by CFA Institute and weaknesses of existing benchmarks were identified. Standardized Benchmarks for each category of mutual funds were worked out after taking account of existing weaknesses, prevailing fund management strategies along with International best practices. We have concluded that one size fits all approach would not work due to the wide variety of investment policies followed by funds even within a particular category. Therefore it has been recommended that each Fund manager be allowed to choose from two main benchmarking methodologies for the fund: peer group indices or Fund specific benchmarks. Peer group indices and Asset class wise indices (fund specific benchmarks will be hybrids of benchmarks of asset classes constructed according to composition specified in each relevant investment strategy statement of the Fund) will be maintained by MUFAP so that source of Benchmark construction and information is single and uniform for every Fund. MUFAP is in talks with SECP on the matter. Advertising Code: MUFAP had taken the initiative of developing an Advertising Code for the industry and had submitted it to the SECP in 2008 but no any further activity occurred in that year. In July 2012, the SECP sent MUFAP a draft circular on requirements for advertisements of a Collective Investment Scheme which is under discussion with the SECP and is expected to be finalised soon. Proxy voting: As per the international best practices AMCs are required to establish written policies and disclosure regarding proxy voting to the mutual fund investors. Considering the importance of the issue the SECP had sent a draft circular to MUFAP for its comments on which MUFAP sent its comments. This is expected to be finalised soon. Registration of mutual fund distributors with MUFAP and their code of conduct: During the year the SECP mandated mutual funds distributors to register with MUFAP and to follow MUFAP;s prescribed Code of Conduct. MUFAP released Code of Qualification and Conduct for Registered Service Providers (persons involved in distribution and marketing of mutual fund units) The contents of Code have been Page 4 of 6

5 drafted to ensure the inclusion of all necessary items whilst focusing on fit and proper criteria for distributors and restriction on management fee sharing with the clients. Procedure for conducting unit holder meetings: SECP has issued detailed requirements and procedures for convening meeting of the unit holders of open-end and closed-end mutual funds in order to strengthen mutual fund governance. Finance Act, 2012: Following significant proposals submitted by MUFAP to Federal Board of Revenue (FBR) through the Securities and Exchange Commission of Pakistan were incorporated in the Finance Act 2012/ For tax credit on new investment, the investment limit in new issues and mutual funds has been enhanced from 15% to 20% of taxable income with maximum limit raised from Rs. 500,000 to Rs. 1,000,000. The required holding period of investment for availing tax credit has been reduced from three years to two years. Tax exemption has been provided on withdrawal of accumulated balance from voluntary pension funds if the withdrawn amount represents amount transferred from provident funds. Tax exemption has been provided on payment representing monthly instalment from an income payment plan invested out of the accumulated balance of an individual pension account of Voluntary Pension Funds subject to the condition that the accumulated balance is invested for a period of 10 years. Asset Management Services of Asset Management Companies have been exempted from Federal Excise Duty retrospectively from the year CVT imposed on purchase of shares of listed companies from stock exchanges. The National Clearing Company of Pakistan Limited (NCCPL) has been appointed as an intermediary entity to compute, determine, collect and deposit the CGT on listed securities; rate of CGT has been frozen from increasing. Tax arbitrage available to banks on investment in mutual funds has been curtailed. Debt Securities Trustee Regulations: SECP has approved the Debt Securities Trustee Regulations 2012, which will provide guidance to the trustees in discharging their responsibilities under the Trust Deeds. The regulations require the trustees to (i) regularly monitor payment of profit/markup/interest to the debt security holders and redemption of the securities; (ii) regularly monitor maintenance of the security, if any, backing the debt instrument; (iii) ensure compliance with the provisions of the Trust Deeds, particularly their covenants, are adhered to; and (iv) monitor that the debt security holders complaints are resolved by the issuers. The Regulations are aimed at safeguarding and protecting the interest of the investors in the debt securities. Other key areas covered in the DST Regulations are the eligibility requirements for registration; seeking registration and renewal; duties and responsibilities of Debt Securities Trustees; maintenance of records and documents; suspension/cancellation of registration; compliance with the code of conduct; and list of minimum contents of the Trust Deed. Under the DST Regulations, registration has been made compulsory to act as trustee. Standardised Trust Deed and Offering Document: Central Depository Company of Pakistan (Trustee for majority of mutual funds in Pakistan) and MUFAP finalized Standardized Trust Deed for Mutual Funds. During the year, the CDC and MUFAP teams have been working for finalizing a Standardized Offering Document. These are expected to be finalised together very soon. The Standardized Trust Deed and Offering Document for Mutual Funds once approved by the SECP will help in saving a lot of time and money in the approval process in the future. CORPORATE GOVERNANCE MAJOR DEVELOPMENTS: The SECP has launched Code of Corporate Governance Code, It requires at least one independent director while preference is for 1/3rd of the total members of the board to be independent directors. Criteria for assessment of independence have been substantially expanded. Maximum number of executive directors has been decreased from 75% to 1/3rd of elected directors including CEO while the number of directorships has been decreased from 10 to 7 that a director can hold at the same time. In the new Code, requirement of board Page 5 of 6

6 evaluation has been introduced while office of the Chairman and CEO has been separated. The Chairman shall now be elected from amongst the non-executive directors of a listed company. It will now be mandatory for directors of listed companies to attain certification under any director training program offered by any institution (local or foreign), which meets the criteria specified by the SECP. The appointment, remuneration and terms and conditions of employment of the Chief Financial Officers (CFO), Company Secretary (CS) and the Head of Internal Audit (IA) of listed companies shall be determined by the Board rather than CEO. The removal will also be by the Board for CS and CFO. The Qualification criteria has been introduced for Head of IA. The removal of Head of IA is with the approval of the Board only upon recommendation of the Chairman of the Audit Committee. A formal and transparent procedure should be followed regarding remuneration of Directors and disclosure of aggregate remuneration in the annual report. It is now mandatory for the Chairman of the audit committee to be an independent director, who shall not be the chairman of the board. Audit Committee shall comprise of nonexecutive directors. The secretary of Audit Committee shall either be the Company Secretary or Head of Internal Audit. However, the CFO shall not be appointed as the secretary to the Audit Committee. Human Resources and Remuneration Committees have been introduced. The internal audit function may be outsourced by a listed company to a professional services firm or be performed by the internal audit staff of the holding company. Page 6 of 6