Reasons why mutual funds’ growth elusive

At least 34 closed-end mutual funds out of 36 have long been trading below their face values in the country’s premier bourse – Dhaka Stock Exchange (DSE) – putting both local and portfolio investors in dismay.

Meanwhile, the net assets of the country’s closed-end mutual funds, dropped by 8.27 per cent in the year 2022, compared to a surge of 5.65 per cent in 2021.

Such flimsy performance of mutual funds was outlined in the ‘Bangladesh Capital Market Review 2022’, a study conducted by LankaBangla Securities Ltd, a leading stockbroker.

The closed-end funds registered a portfolio loss of 8.27 per cent in 2022, whereas the broad market declined by 8.14 per cent, according to the study.

The entire mutual fund industry displayed an unsmiling show last year, as per the LankaBangla study.

RACE, according to the study, holds the highest market share of 50.2 per cent with 10 funds and AUM of Tk 29 billion. The fund manager has the lowest price/NAV ratio of 0.55x, while LR Global stands at the second lowest price/NAV ratio of 0.65x, followed by LR Global, VANGUARD, ICB AMCL, AIMS, SEML, CAPM, VIPB, and ATCP.

The ratio of Bangladesh’s mutual fund assets to its gross domestic product (GDP) is only 0.4 per cent, the lowest among the peer countries, representing the sector’s exponential growth potential, which still remain untapped.

As on July 2022, the assets under management (AUM) of Bangladesh’s MF industry, operated by 54 asset management companies (AMCs) stood at $1.6 billion, according to IDLC, an investment bank.

In this context, the AUM of the Indian MF industry operated by 43 AMCs was $472 billion during the same period, it said.

AUM refers to the total market value of investments which fund managers make on behalf of their clients.

Analysts and stock market insiders have attributed a lack of investable funds and less confidence to the unpopularity of MFs in Bangladesh.

Md Moniruzzaman, managing director of IDLC told The Business Post, “Mutual funds in developed countries are one of the most popular investment tools. In the USA, the size of the industry is larger than its economy.”

“But Bangladesh is lagging far behind its neighboring nations such as India in terms of the size of the mutual fund industry,” he added.

The current ratio of mutual fund assets to Bangladesh’s GDP is only 0.4 per cent which is 16.2 per cent in India, followed by 54 per cent in Malaysia, 1.3 per cent in Pakistan, 28.3 per cent in Thailand, 6.6 per cent in Vietnam, 195.7 per cent in the USA, and 180.8 per cent in Canada.

Among the 36 mutual funds, 34 were traded at discounted prices last year. The market capitalisation of 36 funds stood at Tk 37.7 billion, while the assets under management of the sector stood at Tk 57.7 billion, according to the LankaBangla Securities study.

Currently, 354 companies and 36 closed-end mutual funds remain listed on the Dhaka Stock Exchange’s main trading board. Except for two funds, the remaining 34 closed-end mutual funds were still trading below their face values yesterday, according to the DSE data.

Only two mutual funds – Prime Finance First Mutual Fund, and CAPM IBBL Islamic Mutual Fund – traded above or up to their face values.

Market insiders figured out six reasons behind the less popularity of mutual funds in the country.

The reasons include the lower financial literacy, no easy way to buy and sell mutual fund units, lack of fixed income-focused funds, rigid investment constraints for asset and sectoral allocation, and a lack of promotion and investable companies.

Insiders said the capital market volatility from the very beginning of FY22 also hampered the profit-making ability of the MFs.

Commenting on the issue, an official at the Bangladesh Securities and Exchange Commission (BSEC) said, “Mutual funds play a pivotal role in the stock market. But mutual funds in the last 10 years failed to meet investor expectations.”

Professor Abu Ahmed, a capital market analyst, said, “A fund manager needs to restore investor confidence by ensuring transparency in managing funds professionally and offering healthy returns.”

“The industry should be regulated painstakingly, as anomalies related to fund management have already been detected. The country’s mutual fund AUM to GDP ratio remains significantly low at 0.4 per cent. It has enough room to grow,” he added.

The Association of Asset Management Companies and Mutual Funds President Hasan Imam said, “We aim to uplift the size of the mutual fund industry by at least 25 per cent within a year. To that end, each asset manager needs to contribute separately.”

“This year, each mutual fund company paid healthy cash dividends from profits gained from FDR. So, on average, the mutual funds paid a 7 per cent dividend.”