Interviewed By Kazi Umme Sumaiya, CFA on behalf of MBR Team

MBR: Globally mutual fund is a very popular investment tool. Why do you think it failed to attract investors in Bangladesh?

Mr. Shahidul Islam, CFA: Mutual funds are collective investment vehicles that issue securities representing shared ownership in the asset the vehicles hold. As mutual funds are managed by professional fund managers, they contribute to efficiency and stability of capital markets all over the world. Mutual funds are suitable investment alternatives for retail investors who are interested to take exposures in capital market instruments such as stocks and bonds but are unable or unwilling to do research on the companies that issue those instruments. Such investors can invest in mutual funds and benefit from well-researched investment decisions of professional fund managers. Also, generally, an equity mutual fund is less risky than an individual stock or a fixed-income mutual fund is less risky than an individual bond because the underlying assets of mutual funds are welldiversified and professional fund managers manage the investment risks of the assets. For these reasons, in some financial markets, the total assets under mutual funds and other collective investment vehicles such as exchange-traded funds (ETFs) are more than 50% of the stock market capitalization of those markets. The mutual fund industry is, unfortunately, very small in Bangladesh. Total assets of all the mutual funds in the country is equivalent to about 3.5% of the country’s equitymarket capitalization. There might be few reasons why mutual funds in Bangladesh failed to attract investors. Firstly, I think, fund managers failed to meet investors’ expectations in terms of returns, compliance of securities laws and professionalism. Secondly, I think, there is a lack of understanding among investors about mutual funds. Investors’ lack of understanding may partly explain the reason why closed-end mutual funds in Bangladesh sometimes trade at deep discounts or high premiums to their net asset values (NAVs).The price of a unit of a listed closed-end fund in the secondary market should be equal to or close to its NAV. Though investors’ lack of trust in fund managers or the NAV reported by them may be one of the reasons why many closed-end funds have been trading at very high discounts for long a period of time, investors’ ignorance or speculative tendency is the only reason why mutual funds trade at high premium to their NAVs. In last 12-14 years, we have noticed that some closed-end fund shave traded at a premium as high as 600% to the NAVs. 

MBR: Very few fund managers have a decent performance record over 3- or 5-years’ horizon. Why do you think majority of the mutual funds are failing to generate expected return?

Mr. Shahidul Islam, CFA: Stock-market returns in Bangladesh have been very low or negative in Bangladesh in last 10-years or so. In fact, most of the fund managers performed better than the market during that time frame, if we trust the NAV numbers reported by them. But it seems that investors don’t trust those numbers. Otherwise, why would closedend funds trade at discounts as low as 50% to NAV? As I mentioned earlier, a mutual fund unit should trade at a price that is equal to or close to its NAV. That is generally the case in most other markets because a mutual fund represents a portfolio of securities and its price should not be significantly more than or less than the value of its underlying securities.

MBR: What factors do you think would help to improve the performance of mutual funds?

Mr. Shahidul Islam, CFA: The fund managers can improve the performance by practicing strict investment disciplines and doing proper research before investing. Also, fund managers need to control the expenses of the funds. Expenses of the funds as percentage of fund under management seem to be high in Bangladesh compared to other markets.

MBR: What steps should be taken to instil the confidence of investors in the mutual fund industry?

Mr. Shahidul Islam, CFA: Mutual fund managers and trustees need to strictly abide by the terms and conditions as disclosed in the fund documents: the prospectus, trust deed and investment management agreement. Investors invest in a fund expecting that the fund managers and trustees will follow the terms and conditions as mentioned in those documents. If fund managers, trustee and other parties do not abide by those terms and conditions, investors will lose confidence in the funds. Also, fund managers need to ensure transparency of the funds by publishing their financial statements and portfolio holdings on a quarterly basis. That would enhance investors’ trust in NAV numbers the funs publish weekly.

MBR: What factors should investors consider before investing in mutual funds (both open end and closed end mutual funds)?

Mr. Shahidul Islam, CFA: Investors should analyze the track record of the fund managers before investing in any fund. They should also do research on the backgrounds and professionalism of the fund managers. In case of open-ended mutual funds,investors can buy fund units from the fund manager only at a price which is equal to or close to the latest NAV of the fund. So, price is not an important deciding factor in case of investing in an open-ended fund. In case of closed-end fund, however, the market price in the secondary market can be significantly more or less than the fund’s NAV. If an investor trusts the fund manager and the trustee of a closed-end fund, they can comfortably invest in the fund if it trades at a price that is significantly below its NAV. But, under no circumstances, they should buy a closed-end fund at a significant premium to NAV. A mutual fund is not an operating company that produces goods and services. It just represents a portfolio of securities. Its price should not be significantly more than or less than its NAV. We can explain it by using an analogy of a basket of apples and oranges. If, for example, the price of one KG apples is Tk. 200 and the price of one KG oranges is Tk. 300, the price of a basket containing one KG apples and one KG oranges should be Tk. 500, not Tk. 800 or Tk. 1,500. However, the value of the basket can be less than Tk. 500 if the buyers perceive that the apples and oranges in the basket are rotten or if they think that the basket actually contains value-less garbage instead of apples and oranges that it is supposed to contain.

MBR: Why are open-ended funds more popular than closed-end funds globally? What risks are associated with closed end mutual funds?

Mr. Shahidul Islam, CFA: Closed-end mutual funds are less common in markets outside of Bangladesh. Globally, vast majority mutual assets are in openended funds. In Bangladesh, however, due to some legacy issues, closed-end funds have more asset under management than open-ended funds. Things have started to change in Bangladesh as well: almost all the newly-approved funds are open-ended.
As the managers of open-ended funds are bound to redeem the outstanding units of open-ended funds at prices which are equal to or close to the reported NAVs, investors can exit from such funds easily any time if they don’t trust the fund managers or the trustees anymore. In case of closed end funds, however, investors can exit from a fund by selling the fund units in the secondary market. But, exiting from a closed end fund by selling its units in the secondary market is not easy in Bangladesh. As I mentioned earlier, vast majority of closed end funds in Bangladesh have been trading at very high discounts to NAV in last 10 years or so.

MBR: Currently, there is no way to compare the performance of all the mutual funds over different time horizons. Resultantly, people can’t take proper decision when investing in a mutual fund. How do you think this problem can be addressed?

Mr. Shahidul Islam, CFA: It would be fantastic if reputed international organizations, e.g., Morning star, that measure performance of mutual funds operated in Bangladesh. Unfortunately, the mutual industry and the investing population are still too small in Bangladesh for them to make any financial sense to start an operation in the country. Until that happens, investors need to do their own due diligence on the performance and professionalism of fund managers before investing. Perhaps Bangladesh Securities and Exchange Commission (BSEC) can start licensing registered investment advisors who could advise investors on performance and risk aspects of mutual funds.

MBR: In India, Association of Mutual Funds of India (AMFI) played a vital role in the development of the industry. Is it possible to do the same in Bangladesh?

Mr. Shahidul Islam, CFA: AMFI played a vital role in promoting mutual funds in India. A mutual fund association can try to do the same in Bangladesh. However, before mutual funds are promoted to retail investors aggressively, the fund managers, trustees, custodians, sponsors and regulators need to do their job properly and bring back investors’ confidence in mutual funds.

MBR: All the mutual funds in the industry are equity focused. Do you think there is scope to launch other types of mutual funds in Bangladesh?

Mr. Shahidul Islam, CFA: Yes, I think there is a scope to launch other types of mutual funds, especially the fixed income mutual funds, in Bangladesh and some AMCs are already in the process of launching such funds. However, we need to have a vibrant secondary bond market to ensure liquidity of fixed income funds. BSEC has taken some initiatives recently to create a vibrant secondary market for fixed income securities. Hopefully, we will have some fixed income mutual funds in Bangladesh soon.

MBR: How do you think regulators and policy makers can play a role in the growth of the industry?

Mr. Shahidul Islam, CFA: The role of the regulators is very critical. Like all other segments of financial markets, a mutual industry can gain investors’ confidence and thrive only if there is a rule of law in the industry. Regulators play a critical role in ensuring the rule of law.