Why the mutual fund industry is sinking

TBS Illustration

Mutual funds dominate capital markets around the world, however, the prospect for mutual funds in Bangladesh is not as promising. Nearly all of the country's 36 closed-end mutual funds have been struggling to make a profit. 

Mutual funds have become a discredited segment in the country's financial market. 

The two main reasons behind the failure of the country's mutual funds are largely the bad policy decisions of the regulatory authority, the Bangladesh Securities and Exchange Commission (BSEC), and the inefficiency and greed of asset management companies.   

There is a rule that irrespective of what the fund managers or asset management company earns, 75 percent shall be given to the unitholders in cash. 

Some years back when the capital market was bearish, asset management companies lobbied the regulatory authority BSEC and convinced them that if asset management companies paid unitholders dividends in cash, they would have to sell their shares. As a result, the price of the shares would fall further in the capital market. 

Consequently, asset managers were permitted to disburse reinvestment units (RIU) to unitholders instead of cash. Later, the investors sold the reinvestment unit but not at the price at which they bought it. As a result, the investors had to incur losses, making them lose confidence in the mutual funds.

Generally, a mutual fund is traded at plus-minus 10 percent of the (net asset value) NAV value. Now, mutual funds are being traded at 50 percent lower than the net asset value. What does it mean? It means that nobody trusts them. No unitholder or investor has faith in the asset management companies. Investors have faith neither in their skills nor in their honesty. 

Abu Ahmed. Illustration: TBS

Over the last 10 years, these mutual funds have grossly deceived investors. Although the price of shares has increased, the price of mutual funds has not increased accordingly. They have not given investors a 5 percent dividend. Sometimes, they have not given a single taka to investors because they failed to make a profit.  

Another big reason for the indifference of the investors to mutual funds is that investors do not know when they will get their money back. The tenure of a closed-end mutual fund is 10 years. The investors are supposed to get their money back after the liquidation of the mutual fund afterwards. 

However, many asset management companies have extended the tenure another 10 years by lobbying the BSEC. Then, why will people buy mutual funds? Closed-end funds are not supposed to carry on indefinitely.  

The Bangladesh Securities and Exchange Commission should not extend the funds' tenure anymore. After 10 years, the BSEC should ask the companies to distribute the money they raised. If anyone wants to launch a mutual fund, the regulatory authority should scrutinise its earlier performance. 

There was also news about some high-value mutual funds investing in certain non-listed sectors that are not permitted, without the prior knowledge of the BSEC. They have not been successful there either, they just played with ordinary people's money. 

Decades back, we would advise small investors that if they do not understand the stock market, they can go to mutual funds. Now, the biggest losers are mutual fund investors. People who invest in the stock market usually do not suffer this bad. The reason is simple, the asset management companies have squandered the investors' money. 

Not only have they wasted their investors' money but also most of the asset management companies suffer from a severe lack of professionalism. In the past, the BSEC Chairman, Professor Shibli Rubayat-Ul-Islam said that the fees of bad and good performing asset management companies cannot be the same. He is right. But why have they realised this so late? 

Non-performing asset management companies should not be allowed to have the same amount of fee in terms of percent, in comparison to a good performing asset management company. 

Yet there continues to be no difference in the fees. Asset management companies have raised their fund size with reinvestment units to justify raising their fees. But mutual fund unitholders received no benefits from this. For reasons like this, among others, nobody shows interest in mutual funds anymore. 

If you give your money to a low performing asset management company, then your returns and dividends will undoubtedly be uncertain. If you invest your money in a company that does not have integrity or the necessary skills, wherefrom will they provide you with a return?

Non-performing asset management companies should liquidate and return the money to their investors. 

The government should scrutinise the expertise of the fund managers before approving any new mutual fund. Portfolio management is a matter of knowledge, skill and expertise. It is a matter of understanding the market sentiment. Otherwise, a layman could do it. 

Once the government starts cracking down on non-performing asset management companies, others will fall in line. 

It should also be noted that Bangladesh's capital market is volatile. When the capital market fares well, mutual funds often do well. But mutual fund managers are supposed to be professionals who have been given the responsibility to manage and create profitable portfolios irrespective of market conditions. Why will people invest with them if they cannot consistently beat the market?

If a sailor falls in the midst of a storm, he can manage to take the boat to the shore. But in the event of an unintelligent sailor, he drowns before the storm comes. That is the difference. 

The author is a stock market analyst and a former economics professor at the University of Dhaka.