Fixed-income mutual funds gain traction when equity struggles

Infographic: TBS

When equity investors are struggling amid the inflationary cycle, smart investors continue to rush into fixed income for the third consecutive year.

Bangladesh's equity-focused mutual fund industry has also entered the scene, offering a robust fixed income window for clients who are cheering a 9%-10% return in a turbulent year.

In the past two years, opportunities for the general public to benefit from rising interest rates have expanded with the launch of six open-end fixed-income mutual funds, offering steady returns alongside tax efficiency.

While still not sizable, their assets under management (AUM) have grown every quarter, more than tripling to Tk542 crore in two years, as of 30 September.

IDLC Asset Management and Shanta Asset Management launched their fixed-income open-end mutual funds in 2021, and the rate hike driven by the Ukraine war in 2022 further fuelled this growth.

Over the past two years, the size of the Shanta Fixed Income Fund grew to over Tk94 crore from less than Tk12 crore, while the EDGE High Quality Income Fund grew to Tk65 crore from Tk25 crore. The Ekush Stable Return Fund grew fourfold, reaching over Tk40 crore in 18 months.

The UCB Income Plus Fund, already the largest among its open-end peers, grew to over Tk187 crore from Tk66.5 crore in just 12 months.

Globally, the fixed income fund industry is three times the size of equity funds. In Bangladesh as well, fixed-income investments through traditional channels are much larger than those in equities. Asset managers have seized the opportunity to allow people to invest through professionals.

"We were looking for a fixed income fund to offer our clients the flexibility like that in a current account in a bank and return like fixed deposits," said UCB Asset Management Managing Director and CEO Shekh Mohammad Rashedul Hasan.

When equity funds became difficult to navigate due to floor price restrictions and rising interest rates, his firm launched a fixed income fund. The initial Tk50 crore subscription primarily came from institutional investors, but most of the subsequent investments were from nearly a thousand individual investors.

Shanta Asset Management is now handling more individual funds in its fixed income fund than institutional funds.

According to the latest reports, five of the six open-end fixed income funds posted an annualised return of 9% to over 10% earlier this week.

Sandhani AML purchased Beximco Green Sukuk and some undervalued equities at perceived discounts from its fixed income fund.

However, unexpected capital erosion there dragged its annualised return down to 4.5%, according to its MD and CEO Mir Ariful Islam. He noted, "This is a bad year for equities and a good one for fixed income investment."

"We are among a very few asset managers in the industry which calculate fixed income portfolio asset value based on market price of the securities and maintain full provisions even though unrealised losses drag down our earnings during market adversity. However, at the end, provisioning proves to be a healthier accounting practice," Ariful said.

The DSEX, the broad-based index of the Dhaka Stock Exchange (DSE), fell by more than 16% this year, while stock prices dropped by a third to two-thirds for the majority of companies. On the other hand, government Treasury bond yields surged to over 12.5%.

According to a 17 November report by BRAC EPL Research, none of the 37 listed mutual funds could avoid the stock market downturn this year, as all but one are equity-focused.

These funds posted capital erosion of 4% to 28% this year, as asset managers had few opportunities to navigate the market before and after the floor price withdrawal earlier this year.

Chartered Financial Analyst Kazi Monirul Islam, CEO of Shanta Asset Management, told TBS that fixed income funds are a tremendous alternative to traditional savings tools. However, he emphasised that equity, as an asset class, has a historic track record of outperforming in the long run.

After the sharp fall in stock prices, both fixed income and equity show potential for gains, as many blue-chip shares are undervalued. Additionally, a drop in interest rates would help fixed income funds' capital appreciation, he said, adding that most of the assets in fixed income funds are parked in government Treasury bills and bonds.

Asset managers attribute the growth of fixed income funds to timely product-market fit, prevailing tax efficiency, and the regulatory flexibility in fund operations and dividend policies that have been allowed in recent years.

For instance, the Bangladesh Securities and Exchange Commission (BSEC) allowed three funds – UCB Income Plus Fund, Ekush Stable Return Fund, and Sandhani AML SLIC Fixed Income Fund – to have flexibility in deciding their dividends.

Mir Ariful Islam said that the goals of investors are not the same. Some seek stable income, while others aim for capital appreciation.

"Tax on cash dividends is higher than on long-term capital gains, and many investors, especially those with enough disposable income, prefer no dividends. Moreover, capital gains of less than Tk50 lakh a year from the market are tax-free," he said.

Other asset managers are opting for similar fixed income funds, seeing the increasing response from investors. For example, LankaBangla Asset Management has applied to launch a fixed-income fund with dividend flexibility.

The flexibility approved by BSEC was on a discretionary basis, as mutual fund rules require mandatory payouts from the yearly income of a fund. However, after 5 August, the BSEC, in a move to stick to the rules and potentially amend them, has yet to respond.

"LankaBangla Securities has the largest client base in the brokerage industry, and many of them are asking for an open-end fixed income fund that can help maximise their wealth. We need the dividend flexibility to attract high-net-worth individuals," said an official of LankaBangla Asset Management.

In its letter to BSEC earlier this month, the asset manager sought approval for its proposed fixed income fund with the same dividend flexibility that has already been granted to three other funds.

"Otherwise, we will face an uneven competition," said the LankaBangla Asset Management official.

Only SEML PBSL Fixed Income Fund that floated in September last year saw fund size squeezed to one-fourth as it faced fund withdrawal after March this year and its asset eroded by 2.7% this year till date due to a big exposure in equities -- around half of the fund.

VIPB Asset Management in the middle of this year floated its fixed income fund VIPB Fixed Income Fund which announced to disburse 70% of the annual income as cash dividends. The fund starting with Tk10 crore initial size grew by over 20% in size in a few months.