Greedy asset managers hurt mutual fund investors' confidence

FT ONLINE

Asset managers get an annual fee against their service to the mutual fund investors. Regulators have set a percentage of the fund under management as the managerial fee, which investors are not unhappy to pay.

But the problem in the mutual fund industry is that some large asset managers are allegedly desperate to increase the fee at anyway, even at the cost of investors. For that, they look for an increased fund size and extended life of closed-end mutual funds.

The capital market regulator, the Bangladesh Securities and Exchange Commission (BSEC), had attempted to introduce a performance-based fee structure in mutual funds a few years ago. But the initiative was not successful, allegedly, because of the influential asset managers' resistance.

Some greedy asset managers have not only looked for an increased fee, but some of them have also grossly violated mutual fund rules and regulations through non-transparent, and poor or ill investments in non-listed companies, causing the investors' trust in them to erode.

The desired exit route only extends further

At the stock exchanges, listed mutual funds are closed-end by nature, and have a predeclared life span, after which these have to be liquidated.

Asked what the tenure of a closed-end mutual fund means to an investor, a market analyst said, "Anywhere in the world, if you put your money for a longer period, you will enjoy a better rate of return."

"If someone offers you a Tk10 bill with a condition that you cannot use it for the next 10 years, how much would you like to pay for the genuine note?"

"It should not be more than Tk3-5. Because we all will look for the present value of that Tk10 a decade later. Paying even Tk5 against the offered note may also be an unwise investment. Because, if you deposit Tk5 in a bank under a fixed deposit scheme for six years in Bangladesh, it will grow to Tk10. It is much quicker than the opportunity offered by the Tk10 note seller," explained the market expert.

The extension had the same effect at listed mutual funds' unit price and only widened the discount factor, he added.

Following the finance ministry's instruction, the BSEC extended closed-ended mutual funds' life span for another ten years in 2018. And all the asset managers are taking the opportunity to be in the job for longer.

"The listed funds which were recently speculated to be liquidated, in time, have witnessed the narrowing of secondary market discounts. Investors hoped to get their money back earlier, and that is based on present assets, not the present depressed market price of units," said a market analyst preferring anonymity.

Rakibur Rahman, a former president and presently a director at the Dhaka Stock Exchange (DSE), was one of those who did not support the regulatory body's decision for tenure extension of listed mutual funds.

He came up with another analogy to explain the pains of closed-end mutual fund investors, "Say you have deposited an amount of money in a bank for 10 years. Upon its maturity, the banker tells you the deposit scheme has been extended for another 10 years for the sake of the bank, the banking industry and the money market. You are not getting the money back before that. What would you do?"

"You will look for someone interested in buying your asset if you are desperately looking for an exit," said the veteran stockbroker.

"But now there's no one in the market who is willing to pay the actual value of the deposit scheme. The only option, in that case, is to keep counting years or sell at a loss. Mutual fund investors at the stock exchange are exactly in a similar situation," Rakibur explained.

He said the regulator and the asset managers, who took advantage, failed to protect the unitholders' interest.

City of London, a large UK-based closed-end mutual fund investor, has recently criticized the BSEC over the decision to extend the life of closed-end mutual funds in 2018.

The foreign investment firm has heavily invested in listed mutual funds at stock exchanges in Dhaka and Chattogram. Now, like all other investors, it is at a loss.

Non-transparent, poor or ill investments in non-listed companies

Like many other markets, mutual funds in Bangladesh are also bound to invest 60 percent of the money in listed securities like shares, bonds, debentures and mutual funds. Updated prices of those are published every day in the stock exchange.

It is a real-life challenge for mutual fund managers to manage the risks in a market that is falling or getting ready for a nosedive.

That is why asset managers are allowed to invest the remaining 40 percent of the fund in good non-listed companies or various fixed income tools outside the stock exchanges. It can be a bank deposit as well.

Ideally, asset managers explore more opportunities while cutting risk through that rules relaxation concerning non-listed securities investment.

However, in the local asset management industry, some large asset managers are believed to misuse the opportunity for their gains at the cost of investors.

Existing rules, regulations and guidelines for asset managers outline what they can or cannot do.

In 2015, the BSEC had fined LR Global Bangladesh Asset Management Company Limited for violating rules while investing in some private companies.

The second-largest asset manager had challenged the punishment in court and the legal battle continues. But mutual fund investors in Bangladesh had taken notes that their asset manager may not do everything for the benefit of investors.

Investors' confidence in the mutual fund was seriously damaged when they saw an asset manager spending their money to chase his own benefits only.

The BSEC in 2015 ordered LR Global Asset Management Limited to return all the unitholders' money, which they had taken for paying their bills.

According to regulation, asset management companies' expenses are to be paid from their income, not from the mutual funds.

Race Asset Management, the largest asset manager of the country, provided one-fourth of the initial capital for Farmers Bank. In 2017, when the bank was on the verge of collapse following corruption of some directors and officials, that also hurt mutual fund investors' confidence.

However, with the support of state-owned banks, Farmers Bank had managed to survive and rebranded itself as Padma Bank. The asset manager took charge of the bank and under its leadership, the bank is struggling for making a turnaround.

In recent months, investments in private companies have emerged as the most discussed issue in the mutual fund industry as the LR Global Bangladesh Asset Management attempted to buy stakes of a struggling local news portal with the unitholders' money. the paid price for each share of the media company is unbelievably high.

Some worried institutional unitholders of the funds have sent a legal notice to the regulators, company registrar, and the trustee of the funds to stop the investment process. The BSEC and the Anti-Corruption Commission are scrutinizing the investment details and the asset manager is yet to get the go-ahead signal.

Very recently, majority unitholders of two closed-end mutual funds have fired the LR Global from the position of an asset manager with regulatory permission and appointed a new firm.

Investment experts said such events discourage mutual fund investors.

Dividend debate is gone but the dent is not

As per the rules, mutual funds are instructed to pay 70 percent of their annual earnings as dividends.

There had been two ways for doing this: paying cash dividend or issuing more units popularly known as "reinvestment units", similar to bonus shares in equity.

There was a guideline to select a preferable mode of dividends based on investors' benefit. But some asset managers preferred the second one that helped them retain more money within funds and earn more fee against extended funds under management.

Reinvestment units had been a widely debated method in the Bangladeshi mutual fund industry. Regulating the matter never followed a smooth path over the last decade until the BSEC prohibited issuance of reinvestment units from listed mutual funds.

To explain how reinvestment units pushed investors into a losing territory, analysts said if a mutual fund pays a 10 percent cash dividend, it provides unitholders Tk1 against each unit and Tk10 against 10 units. But when the dividends are paid as bonus units, that means paying one new unit against 10 existing units and it is priced lower in the market.

This means some asset managers were forcing their unitholders to receive the dividend which is equal to the cash in terms of payout percentage, but proportionately lower than the discount factor in market reality.

The debate is over as the BSEC stopped the practice. But investors who suffered for the reinvestment units are yet to recover.