Shahidul Islam, chief executive officer of VIPB Asset Management Company Limited, in an exclusive interview with Dhaka Tribune tells having a regulatory framework is a must for development of the business in Bangladesh
At which stage Bangladesh’s mutual fund industry is today?
The sector is still at a nascent stage as it is very small compared to the capital market. Though there are about 15 asset management companies licensed by BSEC (the securities regulator), only seven have money under management. The asset management companies manage roughly Tk5,000 crore which is less than 3% of the total market capitalisation. In many countries mutual fund assets are close to 50% of market capitalisation.
If market needs more funds, then why isn’t VIPB launching another?
Well, coming up with new funds is not easy as currently most closed-ended funds are trading at 30-40% discounts to net asset value (NAV). So clearly there is a lack of demand for such funds. Investors would invest in existing funds that are trading at deep discounts instead of investing in new funds that would be offered at prices close to the NAVs. Also, the existing funds have shorter time to maturity compared to new funds. Shorter time to maturity generally means less uncertainty for the investors. As a result we have witnessed under-subscriptions of the IPOs (initial public offerings) of closed-ended funds, which aren’t common for the IPOs of companies.
Under such circumstances, launching new closed-ended funds will not be wise. However, some asset management companies have come up with open-ended mutual funds. But it has not been a huge success either. We are also in the process of launching an open-ended fund. With our exceptional track record in the last couple of years we hope to make it a success.
So, why do you think the funds are traded at a discount whereas we have some institutional and foreign investors who, at least, should understand that they are huge bargains?
Other than the institutions you mentioned market players in general do not understand mutual funds. And those who understand mutual funds have a general lack of trust for managers in the country. Also most of our active investors are inclined towards short term, speculative trades. Mutual funds at deep discounts fail to attract them.
Also lack of disclosures by the mutual fund managers discourage investors from investing in mutual funds. In most countries mutual fund portfolios are made public but all the asset management companies in Bangladesh do not do so.
How investors’ trust on the funds can be built?
Firstly, immediate redemptions of the funds that have already missed their original deadlines will help gain investors trust. I personally think all close-ended mutual funds should be redeemed on the date of its maturity mentioned on the prospectus and trust documents.
Secondly, funds should make the information of their portfolio holdings public.
Lastly, BSEC (Bangladesh Securities and Exchange Commission) should be sending teams of inspectors to have a look into the funds' portfolio, operation and investment decision process. Mutual funds books should be inspected by BSEC inspectors in the same way bank books are inspected by Bangladesh Bank inspectors. Banks take deposits from the public and invest it in loan products whereas the asset management companies raise money from the public for investing mainly in the capital market. As investing in capital market is riskier than investing in loans, monitoring of the mutual fund industry is at least as important as monitoring banks.
What might be stopping the regulators in improving the industry?
The BSEC lacks human resources to oversee the funds. Perhaps, they don’t understand the importance of inspecting or monitoring the funds.
Internationally where do we stand?
In respect of mutual fund management, Bangladesh stands nowhere close to the rest of the world. It’s not all about the relative smallness of the industry in Bangladesh. It’s about the regulatory environment, professionalism of the asset management companies and awareness of the investors. Only a few years ago we saw an insane phenomenon in Bangladesh - mutual funds trading at 200-300% premium to their NAVs.
Now things have somewhat reversed. Many closed-ended funds are trading now at 30-40% discounts to NAVs. To explain this I had previously told to the Dhaka Tribune that either the investors do not understand the funds or they don’t trust fund managers. Now I think that investors’ lack of trust in the fund manager perhaps is the main reason behind the current predicament of the industry.
What are the problems you faced that prevented you from creating value for the unit-holders?
First of all, let me clarify that VIPB Asset Management Company has been able to generate exceptional returns for its investors since launching its first fund. We have generated double digit returns even in the years when the stock market return was negative. In 2013, our funds generate 13% return compared to about 5% return of the capital market.
However, in the long-run, mutual funds’ performance will be closely related to the performance of the economy in general and the capital market in particular. If the listed companies do not perform well, the funds will not be able to create value for the investors because the funds invest mostly in the listed companies. I think proper corporate governance and financial disclosures of the listed companies are critical for the overall development of the capital market. The accountability of the auditors and accountants is paramount for an effective capital market.
Also the professionalism and credibility of the fund managers are extremely important. Some funds have recently reported abnormal and absurd net asset values, which was also published at Dhaka Tribune but you would see that no explanations were made.
Summing up - what are the major challenges before mutual funds to excel?
Lack of the capacity of BSEC as I mentioned before is a big challenge. Also the lacks of transparency, good corporate governance in the listed companies, accountability of the accounting and audit profession and professionalism and integrity of fund managers are major challenges.
A simple question for the last - do you think mutual funds create value for its investors?
Mutual funds definitely create value for investors and, therefore, they manage trillions of dollars globally. Unfortunately, due to the challenges I mentioned, you can always argue that the mutual fund industry in Bangladesh is not creating value for investors. But the solution is to address the issues, not to shut down the industry.
