Mr. Asad - Al Meezan Investment Management

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Islamic Mutual Funds
April 24, 2012
Alhuda-CIBE Trainings
Avari Towers, Karachi
2
Overview
1.
Islamic Mutual Funds: Modus Operandi
2.
Islamic Asset Management Industry in Pakistan
3.
KSE-Meezan Index 30 (KMI-30)
Islamic Mutual Funds:
Shariah Guidelines & Modus Operandi
Difference between Conventional & Islamic Mutual Funds
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•
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Presence and careful monitoring by the Shariah Board
It is ensured that all aspects of the Shariah are adhered to before, during and after an investment is carried
out in a Shariah Compliant manner
Well defined and Specific Investment Avenues
Investment avenues are limited to those that comply with the Shariah
Charity and Purification
Any investment/financing that is deemed to have an element of Riba becomes liable for Purification and has
to be given away as charity
Asset Ownership
The ownership of an asset lies with the party that provides financing and bears the risk e.g. financing by a
bank, and assumption of all the risk (non recovery, etc) associated with it.
Permissible transactions
Transactions have to be conducted according to the Shariah, e.g. no short sales
Islamic Investment in only Shariah Compliant Avenues
For Islamic mutual funds and other Islamic Investors, investment can only be made in those securities
(equity, debt, etc) which comply with well defined screening ratios
Shariah Screening for Equity
Shariah compliance of stocks is done under the guidance of qualified and reputed Shariah experts. For stocks to
be “Shariah compliant”, it must meet ALL the six key tests given below:
1. Business of the Investee Company
Core business of the company must be halal and in line with the dictates of Shariah. Hence, investment in
securities of any company dealing in conventional banking, conventional insurance, alcoholic drinks, tobacco,
pork production, arms manufacturing, pornography or related activities is not permissible.
2. Debt to Total Assets
Debt to Asset ratio should be less than 37%. Debt, in this case, is classified as any interest bearing debts. Zero
coupon bonds and preference shares are, both, by definition, part of debt.
3. Non-compliant Investments to Total Assets
The ratio of non compliant investments to total assets should be less than 33%. Investment in any non-compliant
security shall be included for the calculation of this ratio.
4. Non-complaint Income to Total revenue – Purification of Non-compliant income
The ratio of non compliant income to total revenue should be less than 5%. Total revenue includes Gross
revenue plus any other income earned by the company. This amount is cleansed out as charity as a pro rata ratio
of dividends issued by the company.
5. Illiquid Assets to Total Assets
The ratio of illiquid assets to total assets should be at least 20%. Illiquid asset, here, is defined as any asset that
that Shariah permits to be traded at value other than the par.
6. Net Liquid Assets to Share Price
The market price per share should be greater than the net liquid assets per share calculated as: (Total Assets –
Illiquid Assets – Total Liabilities) divided by number of shares
Trading Guidelines & Ready Buy Deferred Transactions
Trading Guidelines
1. Same day purchase and selling of the same scrip is prohibited
2. Shares should not be sold before settlement i.e. their possession has been transferred to the fund/owner
3. Blank sale or short sale is not allowed
Ready Buy Deferred Sale Transactions
Same day trading and forward sale transaction of shares as practiced in stock market is not allowed in Shariah. However
as an alternative, following procedure may be adopted.
1.
Day 1: Fund buys shares from stock market via broker. On the same day the broker enters into a unilateral promise
to purchase these shares from Fund at the future date.(The broker will act as end buyer/Principal)
2.
The format for unilateral promise to purchase will clearly state that this document represents only unilateral promise
to purchase shares from bank and actual sale transaction may take place on future promised day.
3.
Day 3: Fund receives the share in its CDC account as per settlement schedule of the stock market. (T+1)
4.
Day X (Transaction Date):On the agreed day the actual sale transaction of the share take place between the fund and
the broker and will be recorded with the help of sale advice issued by Fund.
5.
Settlement Date: Fund would transfer the shares directly into brokers CDC account and will receive the payment
from the broker against the shares sold.
Charity Account & Dividend Purification
Dividend Purification
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Dividend purification means eliminating prohibited income that is mixed up with the earnings of the
company and the onus is on the owner of the shares.
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Dividend purification exercise are carried on periodic basis in accordance with Shariah standards.
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Dividend is purified by calculating percentage of non-compliant income to the gross revenue (Gross sales +
Other Income) for each investee company. The resultant rate is called as Charity rate.
a. Charity rate for each investee company is multiplied with the dividend income from the respective
company to get the amount to be transferred to charity account.
b. The whole process of income purification is verified by Shariah advisor who then issues a certificate
to be included in the annual accounts of the funds.
Charity Account
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A separate Charity account is maintained for each Islamic Fund.
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All contributions to the charity account are recorded as Liability of the Fund.
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Donations from the charity Account are only made to charitable organizations/individuals as approved by
the Shariah Advisor.
Islamic Asset Management Industry in Pakistan
50 Years of Mutual Funds in Pakistan
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Mutual funds were first introduced in Pakistan back in 1962, with the public offering of
open ended National Investment Trust fund
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The fund remained at that time as the only open ended mutual fund in Pakistan for 30 years and was later
followed by the establishment of Investment Corporation of Pakistan (ICP) in 1966
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In 1971, the Government allowed private sector close-ended funds to enter the industry
by issuing the Investment Companies and Investment Advisors Rules (IC & IA Rules)
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This led to the launch of Golden Arrow, the first close-ended fund established in the private sector in 1983
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The biggest milestone for the industry was the promulgation of Asset Management
Companies Rules, 1995
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This provided the necessary legal framework for launching and managing open-end funds by the private
sector, and led to the launch of the first private sector mutual fund in Pakistan by ABAMCO
Brief History of Mutual Funds in Pakistan
2008:
2002:
1996:
1995:
1971:
1962:
The first open
ended mutual fund
Govt. allowed
private secotr closed
- ended funds
Formation of
MUFAP
2002:
1996:
1983:
1966:
2008
Establishment of
NBFC Rules
1996:
Establishment of
Investment
Corporation Of
Pakistan (ICP)
Launch of UTP Islamic Fund, the
first Islamic open
Promulgation of
Asset Management
Companies Rules
was launched -National Investment
1962
Establishment of
NBFC Regulations
Gloden Arrow was
launched. It was the
first closed - ended
fund established in
Launch of AMMF,
the first Islamic
close ended fund
ABAMCO Limited
was launched, the
first private sector
open ended funds
11
Islamic Financial Industry in Pakistan
•
Total Islamic Banks’ Deposits currently stand at Rs. 448.5 billion, which has grown
from Rs. 147 billion in 2007, representing a growth of 205.1%.
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Meezan Bank is the pioneer in the Islamic Banking sector in Pakistan which started its operations in 2002.
In 2012, its deposit base stands at Rs. 175 billion, which is 38% of the Islamic Banking sector in Pakistan.
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Total size of Islamic Assets have shown a significant increase
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The total value of issued Ijarah stood at Rs. 333 billion at the end of March 2012.
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Total number of Islamic institutions has increased over the years
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Number of Islamic banks stood at 5 while number of Islamic windows of Conventional Banks stood at 12
at the end of March 2012
Islamic Mutual Funds in Pakistan
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In Pakistan, Asset Under Management of mutual funds are only 5% the banking deposit.
•
Islamic asset management is one of the fastest growing sectors within the Islamic finance industry
today
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•
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The growth in AUM of Islamic Funds is commendable, witnessing a surge from PKR 14Bn in FY 07 to PKR
39Bn FY11, which translates into a CAGR of 29%.
Inclination towards Islamic Mutual Funds is on the rise
Interestingly total AUMs for the entire Pakistani Mutual Fund Industry, since FY07 have remained flat, while
AUMs for Islamic Funds have increased and that for Conventional Funds have decreased. Thereby indicating that
investors are switching from conventional funds to Islamic funds.
Major room for growth in Islamic Fund evident
-
FY11 reveals Islamic Funds constitute only 15% of the total Mutual Fund Industry, which is a total pie of PKR
334 Bn. The low size indicates a massive untapped potential and possible growth in this area
•
Al Meezan Investments is the biggest and the only full fledged Islamic AMC with Funds base of
Rs. 39 billion which constitute 76% of the Islamic Mutual Fund Industry.
Mutual Funds Growth in AUMs –Past 5 Years
Total Islamic Funds
60
450.00
400.00
50
Thousands
Thousands
Total Fund Market Size
350.00
40
300.00
250.00
30
200.00
20
150.00
100.00
10
50.00
Mutual Fund Industry
Total Industry
Islamic Funds
Islamic Market Share
FY07
FY09
FY11
3QFY12
5 Year
Growth
349,099
14,135
246,610
19,682
273,593
39,433
357,628
51,128
2.44%
261.70%
4.05%
7.98%
14.41%
14.30%
1-Mar-12
1-Dec-11
1-Sep-11
1-Jun-11
1-Mar-11
1-Dec-10
1-Sep-10
1-Jun-10
1-Mar-10
1-Dec-09
1-Sep-09
1-Jun-09
1-Mar-09
1-Dec-08
1-Sep-08
1-Jun-08
1-Mar-08
1-Dec-07
1-Sep-07
1-Jun-07
0
3 Year
Growth
45.02%
159.77%
Mutual Funds AUMs 5 Years
June 2011
32%
23%
March 2012
Total Income Funds
18%
Total Money Market
Funds
15%
Total Income Funds
9%
30%
Total Sovereign Funds
Total Equity Funds
60%
13%
Total Money Market
Funds
Total Sovereign Funds
Total Equity Funds
Sovereign Fund Growth in AUMs –Past 5 Years
Total Islamic Sovereign Funds
30
120
25
100
20
80
15
60
10
40
5
20
0
0
Sovereign Funds
FY07
Total Industry
Islamic Funds
Islamic Market Share
N/a
FY09
1,415
0.00%
FY11
3QFY12
5 Year
Growth
32,308
15,108
75,421
23,540
N/a
N/a
46.76%
31.21%
Thousands
Thousands
Total Sovereign Funds
3 Year
Growth
5230.13%
N/a
Money Market Fund Growth in AUMs –Past 5 Years
Total Islamic Money Market Funds
9
120
8
100
Thousands
Thousands
Total Money Market Funds
7
6
80
5
60
4
3
40
2
20
1
FY07
Total Industry
Islamic Funds
Islamic Market Share
N/a
FY09
2,491
624
25.05%
FY11
3QFY12
5 Year
Growth
66,455
6,353
101,284
8,180
N/a
N/a
9.56%
8.08%
1-Feb-12
1-Dec-11
1-Oct-11
1-Jun-11
Money Market Funds
1-Aug-11
1-Apr-11
1-Feb-11
1-Dec-10
1-Oct-10
1-Aug-10
1-Jun-10
1-Apr-10
1-Feb-10
1-Dec-09
1-Oct-09
1-Aug-09
1-Jun-09
1-Apr-09
1-Feb-09
1-Dec-08
1-Oct-08
1-Aug-08
0
1-Jun-08
0
3 Year
Growth
3966.34%
1211.15%
Income Fund Growth in AUMs –Past 5 Years
Total Islamic Income Funds
12
200
180
10
Thousands
Thousands
Total Income Funds
160
140
8
120
6
100
80
4
60
40
2
20
Income Funds
Total Industry
Islamic Funds
Islamic Market Share
FY07
FY09
FY11
3QFY12
5 Year
Growth
112,240
3,162
84,372
7,854
50,261
5,673
53,743
6,279
-52.12%
98.57%
2.82%
9.31%
11.29%
11.68%
1-Mar-12
1-Dec-11
1-Sep-11
1-Jun-11
1-Mar-11
1-Dec-10
1-Sep-10
1-Jun-10
1-Mar-10
1-Dec-09
1-Sep-09
1-Jun-09
1-Mar-09
1-Dec-08
1-Sep-08
1-Jun-08
1-Mar-08
1-Dec-07
1-Sep-07
0
1-Jun-07
0
3 Year
Growth
-36.30%
-20.06%
Equity based Fund Growth in AUMs –Past 5 Years
Equity Funds
FY07
FY09
Total Industry
Islamic Funds
Islamic Market Share
130,811
10,973
8.39%
99,893
11,786
11.80%
FY11
3QFY12
5 Year
Growth
69,507
11,482
72,043
12,390
-44.93%
12.91%
16.52%
17.20%
1-Mar-12
-
1-Dec-11
0
1-Sep-11
20.00
1-Jun-11
2
1-Mar-11
40.00
1-Dec-10
4
1-Sep-10
60.00
1-Jun-10
6
1-Mar-10
80.00
1-Dec-09
8
1-Sep-09
100.00
1-Jun-09
10
1-Mar-09
120.00
1-Dec-08
12
1-Sep-08
140.00
1-Jun-08
14
1-Mar-08
160.00
1-Dec-07
16
1-Sep-07
180.00
Thousands
Total Islamic Equity Funds
18
1-Jun-07
Thousands
Total Equity Funds
3 Year
Growth
-27.88%
5.12%
Pension Fund Growth in AUMs –Past 5 Years
Total Islamic Pesion Funds
1.4
2.5
1.2
Thousands
Thousands
Total Pension Funds
2
1
1.5
0.8
0.6
1
0.4
0.5
0.2
Pension Funds
FY07
Total Industry
Islamic Funds
Islamic Market Share
N/a
FY09
877
529
60.27%
FY11
3QFY12
1,555
901
2,107
1,260
57.94%
59.81%
5 Year
Growth
N/a
N/a
1-Mar-12
1-Dec-11
1-Sep-11
1-Jun-11
1-Mar-11
1-Dec-10
1-Sep-10
1-Jun-10
1-Mar-10
1-Dec-09
1-Sep-09
1-Jun-09
1-Mar-09
1-Dec-08
1-Sep-08
1-Jun-08
1-Mar-08
1-Dec-07
1-Sep-07
0
1-Jun-07
0
3 Year
Growth
140.11%
138.28%
KSE-Meezan Index 30 (KMI 30)
21
KMI-30 Technical Screening Filters
In addition to the Shariah screening filters, the following filters are applied on stocks for them to be eligible for the
KMI-30 index.
Screening Criteria # 1:
•
The Company which is on the Defaulters’ Counter and/or its trading is suspended, declared Non-Tradable (i.e. NT) in preceding 6
months from the date of re-composition shall NOT be considered for inclusion in KMI-30 Index
Screening Criteria # 2:
•
•
The Company will be eligible for KMI-30 Index if its securities are available in the Central Depository System
Screening Criteria # 3
•
The Company should have a formal listing history of at least two months on KSE
Screening Criteria # 4
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The company must have an operational track record of at least one financial year
Screening Criteria # 5
•
The Company should have minimum free-float shares of 5% of total outstanding shares
Screening Criteria # 6
•
The Company will be eligible for KMI-30 Index if its securities are traded for 75% of the total trading days
Screening Criteria # 7
Mutual Funds (both Open-Ended and Closed-Ended) are ineligible for inclusion in the KMI-30 Index
KMI-30 Selection
•
The KMI-30 uses free float methodology for inclusion of stocks according to the following calculation:
•
From the list of Shariah compliant companies, securities are selected on the basis of Free Float and Impact Cost.
•
While ranking the companies 50% weight is assigned to Free Float capitalization and the remaining 50% is
allocated to Impact Cost, such that the companies with the Islamic Index highest Free Float and the lowest
Impact Cost get the highest rank in the selection process.
•
Top 30 ranked companies as per above criteria are included in Islamic Index.
Shariah Compliant Stocks
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Al Meezan Investments receives a list of eligible stocks from KSE. Usually this list comprises of over 200 stocks
and constituting over 90% of the entire market capitalization.
•
This list is screened on Shariah filters and around 100 companies (as of last screening) remain as Shariah
Compliant companies. These companies based on the last screening comprised of approximately 56% of the total
market capitalization.
•
Out of the above list, the top 30 stocks based on the methodology discussed are derived. As of the last screening,
this list comprised of approximately 50% of the total market capitalization.
Performance of Islamic vs. Conventional Indices - Pakistan
Index Performance
FY09
FY10
FY11
Cumulative
KSE Meezan - 30 Index
-28%
34%
45%
41%
Karachi Stock Exchange - 100 Index
-41%
34%
25%
-1%
Karachi Stock Exchange - 30 Index
-46%
24%
21%
-19%
50%
40%
30%
20%
10%
0%
-10%
-20%
-30%
-40%
-50%
-60%
45%
34%
34%
24%
FY09
FY10
41%
25%
21%
FY11
-1%
3 Years
-19%
-28%
-41%
-46%
KMI - 30 Index
KSE - 100 Index
KSE - 30 Index
KSE Meezan 30 Index vs KSE 100 Index
1,200
$1,110
Investment value (USD)
1,000
800
$809
600
400
200
0
KMI-30
KSE-100
Thank You
Muhammad Asad
Chief Investment Officer
Al Meezan Investment Management Limited
Karachi.
27
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