More than 90% closed-end mutual funds are being traded at lowest-ever discount rates, deepening investors losing appetite for the funds over the last four years.
As of last week, 36 out of 41 closed-end mutual funds were traded below their respective net asset values (NAVs), widening the discount rates over the last four years, according to the Dhaka Stock Exchange (DSE).
NAV is computed daily based on the closing market prices of the securities in the fund’s portfolio. Closed-end funds are mutual funds that act much like stocks. Fund managers issue a finite number of shares which trade on stock exchanges.
Among the closed-end funds now trading at significant discounts, NCCBLMF1 and DBH1STMF had the highest discounts and both were trading at 60% discount as of last week, according IDLC Investments analysis.
However, 6THICB and 1STPRIMFMF were traded at higher multiple than others, at 16% and 10% premium, respectively.
“Such deep discounts to so many closed-end mutual funds for so long are unprecedented in the history of capital market anywhere in the world,” says Shahidul Islam, CEO at VIPB Asset Management Company.
Despite the fact that returns from the stock market have been higher than the falling bank interest rate in the recent months, investors are reluctant to bet on the funds.
About dismal performance of closed-end funds, Islam said: “The main reason, I think, is that investors have witnessed clear violations of basic contracts by some fund managers. Some funds continued to operate before stated maturities. No depositors would deposit money to a bank that does not allow depositors to encash their FDRs at maturity. Similarly, investors would not invest in closed-end funds that continue to operate after their stated maturities.”
Also, perhaps investors don’t trust the NAV figures reported by the fund managers because some fund managers don’t disclose their holdings, according to Islam.
He also blamed investors’ lack of understanding of mutual funds. “For example, lack of understanding resulted in mutual funds being traded at even 500% premiums to NAVs around six years ago. Only insanity can explain mutual funds trading at such premiums to NAVs”
Former chairman of Bangladesh Securities and Exchange Commission Faruq Ahmed Siddiqui said mutual funds remained under pressure for long, denting investors’ confidence.
“Expertise and professionalism fail to grow up to the mark so far. There remained a high level of skepticism about the rally of mutual funds and skepticism was bullish.”
Total market capitalisation of mutual funds accounts for only more than 1% or Tk27bn of the total DSE market capitalisation, which is more than 50% in many markets.
