May 28, 2019 (MLN): Investors have long known that mutual funds roil the markets when they buy and sell in large quantities due to their size in the local equity market. The continuous selling of equities by mutual funds in the past three months have taken a toll on the trading of Pakistan Stock Exchange (PSX), showing a sharply declining trend over the period.
According to the figures released by National Clearing Company Limited (NCCPL), the mutual funds have treaded along the market curve on its southward journey, selling off about 118.8 million dollars of equities since February 2019 to date. Some say it was a blood bath, and a classic one at that; no swords were swung, no defaults were seen, and no tears were shed, all along the historical meltdown that saw equity values being halved or quartered even!
Surprisingly, from February 2017 to July 2017 the stock market was coasting above the 45,000 line, primarily due to the increased inflows into the mutual funds, as seen here.
When mutual funds sell off large holdings, the price drop can create uncertainty in the stock market.
A Fund Manager at one of the AMCs, who holds an alternate point of view justified this incidence saying that one shouldn’t “single out the mutual fund industry here, any large investor has the same effect in an illiquid market. Liquidity, for all we know, is always available on the opposite side; a lot of buyers in a surging market and vice versa”.
According to him, the misery of a large trader does not stop there, in a choppy market, liquidity is neither on the left nor on the right side of the order book.
As per the Fund Manager, indeed, swings like these, by the institutional investors, create a lot of uncertainty. Mutual fund investors wonder whether to keep ignoring NAV emails dropping into their inbox or act and redeem. Whether to rejoice or be worried!
It’s a dilemma that small investors face every time the market tumbles. Unfortunately, they usually end up making the wrong decisions. Some stop their investment in equity funds while others redeem their investments to avoid further losses.
A finance professor while elaborating on the behavior of the stock market and its irrational vulgarities once said: the markets can go up, or down, or downtown, and being an investor, you have to decide whether you want to take a taxi or walk there!
A finance professor also said that, it is not where you end up, it is the path that you take that helps you count the coins in your kitty! It is a well-established fact, since the times of Louis Bachelier that stock prices are random in the short run; a plethora of factors influence their behavior and direction. Those who act on something inherently random to make that extra buck or avoid that pothole end up creating more uncertainty and trading costs for their investors.
Another case that negatively impacts the stock markets is the mis-selling endemic to the mutual fund industry, helped along by desperate sales targets in the hands of ill-trained sales force takes us to an altogether different dimension along the uncertainty-generation path.
According to a Fund Manager, a household mutual fund investor knows little about Asset Allocation, Constant Proportion Portfolio Investment, or even for that matter, an Equity Fund. The way these funds are sold and the colorful returns that they dish out, generate a roller coaster ride for the uninformed! This not only tears apart their confidence in the concept of mutual funds, but also produce sales and redemptions at the precisely, and very, wrong time. Why is it that an industry that claims to be experts at the unwieldy field of Investments end belly up when it comes to sales force training? One wants to throw dishes at the mutual funds’ sales guy when they even attempt to explain what equity investment is!
This unfair selling pattern creates distortion in the market. The market is in dire need of liquidity as the mutual funds are switching from equity funds to money market funds.
According to official data, mutual funds of the equity sector showed a net outflow of Rs. 12.7 billion from the equity category during Dec 2018 to Apr 2019 against a net inflow of Rs. 7.27 billion in the same period last year. On the other hand, the money market funds have received an overall net inflow of Rs. 695.4 million, up from Rs.563.9 million in the same period last year.
The substantial outflow was witnessed in the equity funds with a majority of it being shifted towards the asset allocation funds based with notable investment in money market.
To mitigate the risk of losing money, and to compensate the losses, many AMCs in Pakistan launched Equity based Capital Protected Mutual Fund Schemes which deploy a conventional capital protection strategy of investing a significant portion of their assets (80%-85%) in bank deposits/government securities, for capital protection at maturity, while the remaining assets (15%-20%) are invested in high yielding assets such as equities for capital growth. Sadly, these schemes fail to earn the desired level of returns for the investors. This is mainly because, when stock market is rising, the returns of these conventionally structured capital protected schemes do not improve significantly due to their fixed and very limited exposure in equities.
Since 2008, the unprecedented growth has been seen in mutual funds, after which individual broker accounts in PSX witnessed decline while share of mutual funds in stock market witnessed an increase, but if the selling off mutual funds of the equity sector or switching from equities to money market funds continues in the current economic situation, this would exert downward pressure on Pakistan’s Stock market which has been in a great turmoil since past few weeks.
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