Almost all mutual funds have come up with huge discounts, but they are still failing to attract investors due to a lack of trust, poor performance of fund managers and meagre dividends.
Mutual funds pool together the money from many investors and channel it into securities such as stocks, bonds and other assets.
Once profits are logged, the fund manager disburses it among the unit holders.
Investors buy mutual fund units considering their net asset value (NAV). A mutual fund is considered discounted and lucrative when its price is lower than its NAV.
Among 37 closed-end mutual funds, 35 are being traded at a discount at the Dhaka Stock Exchange (DSE). Of the 35 funds, 18 are traded at discounts of more than 30 per cent, according to data from IDLC Asset Management Company.
“Most mutual funds were launched during the bubble and crash period of 2010 and so, many of them bought shares at high prices,” said Faruq Ahmed Siddiqi, former chairman of the Bangladesh Securities and Exchange Commission (BSEC).
Some 24 funds were kicked-off the trading list during 2019 and 2020, according to BSEC data.
“Their motive was profit making instead of investment and they were not professional enough to realise that the high prices would not continue,” Siddiqi said.
“So, they incurred loss.”
Although the number of mutual funds in the market has risen over the past decade, skilled manpower did not grow in the sector.
Mutual funds are enjoying 10 per cent quota in every initial public offering (IPO), which is a huge opportunity for them to make profit.
“But why their profit is still not attractive should be analysed by the BSEC,” Siddiqi said.
The market regulator should also investigate how and where the funds are being invested to find whether the cause of their poor performance is due to a lack of efficiency or misuse of funds.
Sudden policy changes without analysing the potential impacts should be stopped as well, he said, adding that mutual funds should not be allowed to raise their fund size through returns.
“The fund tenure should also not be extended by any means.”
In 2018, the BSEC allowed the extension of closed-end mutual fund tenures by another 10 years following calls from a few asset management companies.
“Our investors don’t realise the function of mutual funds. They think the units are company’s shares so they expect capital gains rather they should invest here for dividend gains,” the former BSEC chairman said.
When a stock price rises and investors make profits, it is considered capital gains and when companies provide dividends, it refers to dividend gains, he added.
“The performance of mutual funds are not attractive to us because their portfolio shows many non-performing stocks are bought by them,” said Torkiul Islam, a stock investor.
“How can a fund manager buy low performing company’s stocks? Many fund managers bought stocks at higher prices, but with what valuation analysis?”
“Actually, many fund managers made their funds as dumping stations so they bought low-performing and junk stocks even at higher prices,” he said.
They are not giving good dividends either, Islam said, adding that only a few have good track records of providing higher dividends.
Among the 37 mutual funds on the market, the dividend yield of 17 is zero as they declared no dividend for the year that ended on June 30, 2020, IDLC Asset Management data shows.
The dividend yield shows how much a company pays out each year relative to its stock price.
“No one even asked them why their performance is poor and why they are buying junk stocks or low performing stocks,” Islam said.
The BSEC’s biggest blunder was when it allowed fund managers to extend the tenure by 10 years without approval from unitholders.
How can a fund manager extend the tenure of a fund if it is not their own money. So, the right only belongs to investors, he added.
A top official of a stock brokerage house said some fund managers misused the fund’s money by investing in non-listed low performing companies which are giving no returns.
So, investors have no trust in most fund managers and as a result, they do not buy units of mutual funds despite discounts, he said.
Only two funds are trading over their NAV, IDLC data shows.
Performance of open-ended funds is better than that of the closed-ended.
On March 16, returns of the DSEX year to date was 3.1 per cent while return of aggregated closed end funds was 5.3 per cent and the rate is 6.5 per cent in open-ended funds.
These open-ended funds are not traded in the stock market and their dividend was between 5 to 17 per cent last year, which is much higher than the bank deposit rate.
The total assets under management is Tk 13,640 crore.
In order to return investors’ confidence to the sector, accountability of fund managers needs to be ensured so that they cannot invest in sick companies.
The regulator should also give priority to investors rather than fund managers, the stock broker said.
The regulator should also find out if any other fund managers invested in any other sick company from their funds, he added.
“We are working closely to ensure transparency and accountability in the mutual fund sector,” said Mizanur Rahman, a commissioner of the BSEC.
“Firstly, we are checking whether the fund managers are lawfully charging management fees and other operating expenses against the mutual funds.”
Secondly, some fund managers had invested in unapproved private equities. Those investments often turned out to be non-performing assets.
“So, we are forcing them to bring back the money and taking enforcement actions,” Rahman added.
Some asset managers also invested in junk stocks and incurred large losses against those investments. They then avoided making provisions for losses and thus overstated profits and net asset values for years.
“So, we are instructing them to recognise the loss in financial reports and keep provisions against the loss,” said Rahman, also a member of the Bangladesh Financial Reporting Council (FRC).
This would ensure fair presentation of the funds’ health and avoid overestimation of profits.
Some fund managers invested in private companies engaged in money laundering to personally benefit. The commission will prosecute them following the rule of law, the commissioner said.
A few fund managers made related party transactions whereby they benefited at the cost of investors and shareholders.
A few rogue asset managers also harmed the interest of their shareholders by denying them dividends and transparency for years.
“So we are putting an end to their opacity and unlawful activities.”
The BSEC is working for good governance and accountability in asset management companies.
The commission is also looking into some allegations that some asset managers are abusing minority shareholders’ interest, especially that of foreign shareholders, Rahman added.
The top officials of three asset management companies, all preferring anonymity, said a few fund managers’ activities dampen investors’ confidence toward the sector.
“So, the regulator should punish them,” they said, adding that the free fall of stocks last year forced many funds to not declare dividends.
People invest for return and most of the mutual funds did not pay good return due to their mismanagement, said Yawer Sayeed, CEO of AIMS Bangladesh Ltd, a leading private asset management company.
The other reasons for low interest among investors include a lack of variation in the funds’ activities and an absence of efforts to popularise the sector.
He recommended launching performance-based reward and punishment while ensuring good governance.