বিগত কয়েক মাসে বাংলাদেশের পুঁজিবাজারে বেশ তেজিভাব লক্ষ করা গেছে। গত ২৫ অক্টোবর ঢাকা স্টক এক্সচেঞ্জের সাধারণ মূল্যসূচক (ডিজিইএন) সর্বকালের সর্বোচ্চ সীমা অতিক্রম করে। ২৬ তারিখে সাধারণ মূল্যসূচক ছিল ৩৩১১ পয়েন্ট, যা জুলাই মাসের শুরুর মূল্যসূচক থেকে প্রায় ১৭ শতাংশ বেশি। মাত্র তিন মাসের ব্যবধানে পুঁজিবাজার থেকে এই পরিমাণ মুনাফা সামান্য ব্যাপার নয়। আমাদের পুঁজিবাজারে গত বছরের আয়ের তুলনায় এখনকার মূল্য প্রায় ২০ গুণ, অর্থাত্ পুঁজিবাজারের এখনকার মূল্য আয় (পিই) অনুপাত ২০×। পিই অনুপাত পুঁজিবাজারের মূল্যমানের একটি বহুল প্রচলিত নির্দেশক। পিই অনুপাত সাধারণভাবে বোঝায়, কত বছরের আয় একসঙ্গে যোগ করলে একটি শেয়ারে আপনার বিনিয়োগ সম্পূর্ণভাবে ফেরত পাবেন। পুঁজিবাজারের সঙ্গে তুলনা করুন অন্য যেকোনো বিনিয়োগের, যেমন—পোলট্রি ফার্ম। বিনিয়োগ ফেরত পেতে আপনি কি ততদিন অপেক্ষা করতে রাজি?
আজকের তুলনায় ২০০৯ সালের শুরুতে পুঁজিবাজারের পিই অনুপাত ছিল ১৮.৪×, ২০০৭ সালের শুরুতে ছিল ১৪.৫×। শেয়ারের দাম বা মূল্যসূচকের এ ধরনের ঊর্ধ্বগতি সত্ত্বেও কারও পক্ষে নিশ্চিতভাবে বলা সম্ভব নয় যে, বাংলাদেশের পুঁজিবাজার অতি মূল্যায়িত বা শেয়ারের দাম অতিরিক্ত বেশি। পুঁজিবাজারে মূল্যমানের অনেকগুলো নির্ধারক আছে, যেমন: আগামী বছর লাভের সম্ভাবনা, জিডিপি প্রবৃদ্ধি, সুদের হার, মূল্যস্ফীতির হার, বাজারে অর্থের জোগান (সরবরাহ), পুঁজিবাজার ছাড়া অন্যান্য বিনিয়োগে মুনাফার হার ইত্যাদি। এই নিয়ামকগুলো একে অপরের সঙ্গে সম্পর্কিত হওয়ার কারণে শেয়ারের মূল্যমান সম্পর্কে আগাম ধারণা করা বা সুনির্দিষ্ট মত দেওয়া কঠিন।
তার পরও বাংলাদেশের পুঁজিবাজারে এক ধরনের শেয়ার সম্পর্কে সুনির্দিষ্টভাবে বলা যায়, এগুলো অতি উচ্চমূল্যে লেনদেন হচ্ছে। বর্তমানে মিউচুয়াল ফান্ড ইউনিটগুলো যে দামে বিক্রি হয়, তা কোনো যুক্তিতেই স্বাভাবিক নয়। পুঁজিবাজারে ১৭টি মিউচুয়াল ফান্ডের ইউনিট গড়ে তাদের নিট সম্পদমূল্যের ২ দশমিক ৮ গুণ এবং গত বছরের আয়ের ৭৫ গুণ বেশি দামে লেনদেন হচ্ছে। এর সঙ্গে আমরা তুলনা করেছি এশিয়ার বিভিন্ন দেশের ২১টি মিউচুয়াল ফান্ডের দাম। এই ২১টি ফান্ড তাদের নিট সম্পদমূল্যের শূন্য দশমিক ৯১ গুণ দামে বা নিট সম্পদমূল্যের কমে লেনদেন হচ্ছে। বাস্তবে নিট সম্পদমূল্যের থেকে বেশি দামে মিউচুয়াল ফান্ড লেনদেন হওয়ার কোনো কারণ নেই।
কোনো নির্দিষ্ট দিনে মিউচুয়াল ফান্ডের নিট সম্পদমূল্য নির্ধারিত হয় এভাবে: মিউচুয়াল ফান্ডের অধিকৃত শেয়ার বা অন্য সম্পদের মোট মূল্য থেকে মোট দায় বিয়োগ করে পাওয়া যায় নিট সম্পদ। এই সংখ্যাকে মিউচুয়াল ফান্ডের মোট ইউনিটসংখ্যা দিয়ে ভাগ করলে ফান্ডের ইউনিটপ্রতি নিট সম্পদমূল্য পাওয়া যায়। মিউচুয়াল ফান্ডের একটি ইউনিট বলতে তাই বোঝায় এক ঝুড়ি শেয়ারের আংশিক মালিকানা।
বোঝার সুবিধার জন্য একে তুলনা করা যায় এক ঝুড়ি ফলের সঙ্গে, যেখানে আছে এক ডজন কলা, ছয়টি আপেল ও ছয়টি কমলা। ধরুন, খোলাবাজারে কলা, আপেল ও কমলার ডজনের দাম যথাক্রমে ৯০, ১৭০ ও ১৭০ টাকা। ঝুড়িটির দাম যদি হয় ২০ টাকা, তাহলে সেই এক ঝুড়ি ফলের মোট মূল্য হওয়া উচিত ২৮০ টাকা। যদি এই ঝুড়ি বাজারে বিক্রি হয়, তাহলে আপনি কি তা ৩০০, ৪০০ বা ৫০০ টাকা দিয়ে কিনবেন? পুঁজিবাজারের মূল্যমান অনুযায়ী প্রতিটি ঝুড়ি এখন লেনদেন হয় গড়ে ৭৮৪ টাকা বা নিট সম্পদমূল্যের ২ দশমিক ৮ গুণ বেশি দামে। যদি খোলাবাজার থেকে ফল কিনে ঝুড়িটি আপনি নিজে তৈরি করে নিতে পারেন, তবে এই অতিরিক্ত মূল্য দেওয়ার কোনো কারণ আছে কি? মিউচুয়াল ফান্ডের বেলায় একই কথা খাটে। কারও কারও মতে, ফান্ডের ম্যানেজার বা তহবিল ব্যবস্থাপক তাঁর ভালো শেয়ার চেনার দক্ষতা দিয়ে ফান্ডের ভবিষ্যত্ সাফল্য নিশ্চিত করেন, তাই এই উচ্চমূল্য। বাস্তবে ফান্ডের অধিকৃত যেসব মানসম্পন্ন শেয়ারের ওপর ফান্ডের ভবিষ্যত্ সাফল্য নির্ভর করে, তাদের স্বতন্ত্র মূল্যেই এই ভবিষ্যত্ সাফল্য প্রতিফলিত হয়। যেহেতু ফান্ডের নিট সম্পদমূল্য একক শেয়ারগুলোর মূল্যের যোগফল, তাই দ্বিতীয়বার ফান্ডের মূল্য বাড়ার কোনো সুযোগ নেই।
ফান্ডের মূল্য যে নিট সম্পদমূল্যের চেয়ে বেশি হওয়ার কোনো কারণ নেই, এটি অন্যান্য দেশের পুঁজিবাজারে সবাই বোঝে। কেবল ‘বাংলাদেশের পুঁজিবাজার ভিন্ন প্রকৃতির’ এই অমোঘ সত্যটি বোঝানোর জন্য আরও দুটি যুক্তির আমদানি করা হয়। প্রথমটি হলো মিউচুয়াল ফান্ড সম্পর্কিত উচ্চ আদালতের মামলা। এখন আদালতের রায় যেদিকেই যাক না কেন, তা মিউচুয়াল ফান্ডের দামকে প্রভাবিত করার কোনো কারণ নেই। লভ্যাংশ দেওয়া হলে তা দেওয়া হবে ফান্ডের মোট সম্পদ থেকে, অর্থাত্ লভ্যাংশ দেওয়ার পর ফান্ডের সম্পদমূল্য এবং বাজারমূল্য ঠিক সেই পরিমাণেই কমে যাবে। এ ছাড়া আমাদের পুঁজিবাজারে যে বোনাস শেয়ার দেওয়া হয়, সেটাও মূলত অর্থহীন। বোনাস শেয়ার হচ্ছে কোম্পানির পুঁজির (ক্যাপিটাল) পুনর্বিন্যাস, যে পুঁজির মালিক এমনিতেই শেয়ারের ক্রেতারা। বোনাস শেয়ার দেওয়ার মাধ্যমে ব্যবসার লাভ যেমন বাড়ে না, তেমনি শেয়ারের ক্রেতাদেরও কোনো বিশেষ সুবিধা দেওয়া হয় না।
ফান্ড ইউনিটের উচ্চমূল্যের আরও একটি কারণ হিসেবে উল্লেখ করা হয় আইপিওতে মিউচুয়াল ফান্ডের জন্য সংরক্ষিত শেয়ারের বিষয়টিকে। আমাদের সিকিউরিটিজ আইন অনুযায়ী যেকোনো আইপিওর ১০ শতাংশ শেয়ার মিউচুয়াল ফান্ডের জন্য সংরক্ষিত। এটি নিশ্চিয় ফান্ড ইউনিটের দামকে প্রভাবিত করে, কিন্তু কতখানি? গত বছর পুঁজিবাজারে ১৬টি আইপিওর মোট মূল্য ছিল ৪১০ কোটি টাকা। আমরা যদি ধরে নিই, এর ১০ শতাংশ সে সময়কার ১৪টি মিউচুয়াল ফান্ডকে বিতরণ করা হয় এবং এই শেয়ারগুলোর মূল্য আইপিওতে ইস্যুকৃত মূল্য থেকে গড়ে ২০০ শতাংশ বৃদ্ধি পায়, তাহলেও আইপিওর শেয়ার থেকে মিউচুয়াল ফান্ডগুলোর লাভ হবে পাঁচ শতাংশেরও কম এবং তা কোনো অবস্থায়ই ১৮০ শতাংশ উচ্চমূল্যকে সমর্থন করে না। অধিকন্তু, বাজারে মিউচুয়াল ফান্ডের ক্রমবর্ধমান সরবরাহ ভবিষ্যতে আইপিও থেকে প্রাপ্ত লাভকে কমিয়ে আনবে।
মিউচুয়াল ফান্ডগুলোর লাগামহীন মূল্যবৃদ্ধি এমন পর্যায়ে পৌঁছেছে যে, বাজারে নতুন মিউচুয়াল ফান্ড চালু করার মতো সহজ ও স্বাভাবিক প্রক্রিয়াটি একটি নাটকীয় মাত্রা পেয়েছে। মিউচুয়াল ফান্ডটি কোন শেয়ার বা সম্পদে বিনিয়োগ করছে, তার চেয়ে বেশি জরুরি তথ্য হয়ে দাঁড়িয়েছে কারা এর বরাদ্দ পাচ্ছেন। অতি সৌভাগ্যবানেরা বরাদ্দ পাওয়ার পরপরই এই ফান্ড ইউনিট বিক্রি করছেন প্রায় আকাশছোঁয়া ২০০ শতাংশ লাভে। কিন্তু এটাও সত্য, আইপিও-পরবর্তী বাজারে (সেকেন্ডারি মার্কেট) প্রকৃত মূল্যের এত ওপরে বিনিয়োগ করা অত্যন্ত ঝুঁকিপূর্ণ। সময়ের সঙ্গে সঙ্গে যখন মিউচুয়াল ফান্ডের দাম তাদের সম্পদমূল্যের সঙ্গে সংগতিপূর্ণ হয়ে আসবে, তখন বেশি দামে কেনা অনেক বিনিয়োগকারী ক্ষতিগ্রস্ত হবেন। সাধারণভাবে বিনিয়োগকারীরা মনে করতে শুরু করবেন, মিউচুয়াল ফান্ডে বিনিয়োগ করাটা লাভজনক নয়। তাতে করে দেশি পুঁজি জোগানের এই সম্ভাবনাময় বাহনটির হয়তো অকালমৃত্যু ঘটবে।
এ ক্ষেত্রে সরকার বা পুঁজিবাজারের নিয়ন্ত্রক সংস্থাগুলোর খুব বেশি কিছু করণীয় নেই। বিনিয়োগকারী স্বেচ্ছায় কত দামে শেয়ার বা অন্য কোন সিকিউরিটি কেনেন, তা সরকার নির্ধারণ বা নিয়ন্ত্রণ করে না এবং মুক্তবাজার অর্থনীতিতে তা কাঙ্ক্ষিতও নয়। এ ক্ষেত্রে একমাত্র রক্ষাকবচ হচ্ছে ‘ক্রেতা সাবধান’ এই সতর্কতা। বিনিয়োগকারীদের সচেতনতা বৃদ্ধির মাধ্যমেই বাজারে এ ধরনের ঝুঁকিপূর্ণ প্রবৃত্তি এড়ানো সম্ভব।
এমন নয় যে, আমাদের দেশের বিনিয়োগকারীরা কাণ্ডজ্ঞানের ধার ধারেন না, তাঁরা কেউই ২৮০ টাকার ফলের ঝুড়ি ৭৮০ টাকায় কিনবেন না অথবা এমন কোনো ব্যবসায় বিনিয়োগ করবেন না, যেখানে বিনিয়োগের টাকা ফেরত পেতে ৭৫ বছর অপেক্ষা করতে হয়। অবস্থা দেখে মনে হয়, কেবল পুঁজিবাজারে এলেই বিনিয়োগকারীদের কাণ্ডজ্ঞান লোপ পায়। লোকে অতিমূল্যায়িত শেয়ার কেনে এই ভেবে যে, তার থেকে বড় বোকা তাঁর কাছ থেকে আরও বেশি দামে সেই শেয়ারটি কিনে নেবেন। কিন্তু মুক্ত ও স্বচ্ছ বাজারে কেউই যখন জানে না ঠিক কখন বিক্রি করাটা সবচেয়ে লাভজনক, তখন সম্ভাবনা থাকে, যে কেউই খালি ছালাটি হাতে নিয়ে দাঁড়িয়ে থাকবেন এবং সবচেয়ে বড় বোকা বলে প্রমাণিত হবেন। তাই শেয়ার কেনার সময় একমাত্র বিবেচনা হওয়া উচিত ব্যবসার ধরন ও ভবিষ্যতের আয়ের সম্ভাবনা। মিউচুয়াল ফান্ডের বেলায়ও এ ধরনের বিবেচনার ব্যতিক্রম হওয়া উচিত নয়।
Tuesday, December 22, 2009
Friday, December 18, 2009
Commercial banks' participation in investment banking
Until recently commercial banks have been involved in the capital markets mainly through ownership of brokerage businesses. Seventeen banks operate brokerage businesses as members of the Dhaka Stock Exchange (DSE). Historically revenue from securities business was low compared to a bank's core business of deposit-taking and term-lending. With a rising share market, contribution to revenue from the brokerage businesses has risen significantly. This has provided a much needed respite to many banks in the midst of reduced lending and trading activities. Most banks generated this extra revenue by lending to Beneficial Ownership (BO) accounts of investors against their stock portfolios at high interest rates (margin loans).
Because of a perception of easy profits, commercial banks are preparing to enter into the securities market on a larger scale. Many banks have either received or applied for merchant banking licenses, which would allow them to manage issues, underwrite public offerings, and offer wealth management services. Currently, banks hold 10, out of a total 31 merchant banking licenses. While diversification of revenue is desirable for banks, it is also important to note that the business of securities is different from that of banking, and presents different risks. The foray of commercial banks into the securities market raises some concerns, both from risk management and competitiveness perspectives.
Risk perspective: As new issues are few and far between, margin lending and trading remain the focus for merchant banking operations. Merchant banks are allowed to provide as much as 150% of the portfolio value in margin loans. Margin lending increased significantly in the last year. According to a report published in an English daily in its issue on July 14, 2009, two commercial banks increased their brokerage profit during first half of 2009 by 20% and 300% respectively, compared to last year.
Supposing margin interest rate and borrowing costs remained fairly same, it could be assumed that most commercial banks increased their margin-lending volume in similar degrees. During that period, market capitalisation of the Dhaka Stock Exchange (DSE) increased 21%, from Tk. 776.4 billion in June, 2008 to Tk. 938.0 billion in July 2009. New issues (a total of 16) accounted for only Tk. 4.1 billion of this increase. It can be safely assumed that margin lending played a role in this significant advance; excess liquidity drove up the share prices in a market that experienced limited security supply.
Margin lending is attractive to banks for two reasons; first, it earns interest income and second, it generates trading revenue. This is also true for independent merchant banks not affiliated with a commercial bank. However, banks can bring to bear enormous amounts of funds from their deposit base at a low cost. Consequently, they also have the ability to render a much larger impact on the market. In contrast, independent merchant banks have higher costs of capital and hence are more selective in margin lending. In a rising market, margin lending encourages speculative trading and creates significant risk for investors, for banks and for the market.
Risk to investors: A portfolio created out of borrowed funds magnifies the risk of losses. A 10% market correction causes as much as 25% loss to an investor who is leveraged 150%. An investor not only absorbs losses incurred on his own money, but also on the money borrowed, as the lender does not assume any market risk. If significantly leveraged, an investor may lose a large part of his savings during a big market correction.
Risk to banks: Although margin loans are secured by shares purchased, banks take on significant risk through such lending. A 40% correction in the market would wipe off the entire equity of the investor and expose the margin lender to losses. This risk is reflected in the new banking supervision rules; under Basel II framework, investment in equity should be risk weighted at 100%. In other words, no matter the quality of share, the margin loan disbursed against such security would have to be fully risk-weighted.
Risk to the market: Margin lending exacerbates market volatility. A rising market lowers margin ratio allows further borrowing and encourages more buying. This in turn drives up the share prices. In a falling market, brokers call for more collateral to cover margin, often forces investors to sell, which pushes prices down, and creates further selling pressure. Such increase in volatility is detrimental to market stability.
Competition perspective: Merchant or investment banks serve an important role in a capitalist economy. It ensures efficient capital allocation to profitable businesses, improves market liquidity, facilitates price discovery through vigorous trading and reduces cost of capital by innovative structuring. In such a skill-driven business, intellectual capital is much more important than financial capital. Such intellectual capital is developed through incessant focus on the market by capital market professionals. The same quality may not develop in a large organisation engaged in a multitude of businesses.
Banks are important players in capital market, but their unrestrained expansion would deter the growth of independent merchant banks. If size and easy access to capital become the only criteria in awarding merchant banking mandates, we will never see a rise of independent merchant banks that lead their respective markets in innovation and service quality.
Case for limiting bank participation in the capital markets: Regulators in many countries favour separation of banking and securities businesses. An early example of this approach is the Glass Steagall Act of the US Congress of 1933. This Act separated investment and commercial banking activities, preventing overzealous commercial bank involvement in stock market. It was deemed that such involvement caused the banking crisis of 1929 when commercial banks took on too much risk with depositors' money. The core banking practices of deposit taking, term lending and risk management took a backseat. In many cases, banks would issue unsound loans to companies in which it had invested. Clients would also be encouraged to invest in those same stocks. Separation of banking and securities businesses removed such practices.
The Act was repealed in 1999 under pressure from the financial services industry who argued that by preventing diversification, the Act made banks riskier. Overnight, commercial banks, merchant banks and insurance companies merged under the same umbrella, creating financial behemoths. The most famous example was Citigroup, created through the merger of Citibank and the Travellers Group. The subsequent misfortune of Citigroup and other financial omnibuses highlights the relevance of the separation of banks and securities business. China, the new financial powerhouse, still maintains a separation between the two businesses.
As we are still developing our financial markets, we need to take a prudent approach to this issue. Banks should still be allowed to participate in merchant banking, but the practice of banks' margin lending should be limited with a keen eye on regulatory capital requirement. This would stop certain institutions from cornering the market by putting in huge capital in select securities or pulling out; a practice that creates huge volatility.
Also, in order to ensure the growth of independent merchant banks, it must be ensured that mandates such as issue management and underwriting offerings are equitably awarded to these institutions. The government can take a proactive role by selecting independent firms for management of government issues. Currently, Investment Corporation of Bangladesh (ICB) seems to have the sole mandate of such issues, which is not conducive to a competitive market. We need to develop various counter and competitive forces in order to ensure a competitive and efficient market.
Because of a perception of easy profits, commercial banks are preparing to enter into the securities market on a larger scale. Many banks have either received or applied for merchant banking licenses, which would allow them to manage issues, underwrite public offerings, and offer wealth management services. Currently, banks hold 10, out of a total 31 merchant banking licenses. While diversification of revenue is desirable for banks, it is also important to note that the business of securities is different from that of banking, and presents different risks. The foray of commercial banks into the securities market raises some concerns, both from risk management and competitiveness perspectives.
Risk perspective: As new issues are few and far between, margin lending and trading remain the focus for merchant banking operations. Merchant banks are allowed to provide as much as 150% of the portfolio value in margin loans. Margin lending increased significantly in the last year. According to a report published in an English daily in its issue on July 14, 2009, two commercial banks increased their brokerage profit during first half of 2009 by 20% and 300% respectively, compared to last year.
Supposing margin interest rate and borrowing costs remained fairly same, it could be assumed that most commercial banks increased their margin-lending volume in similar degrees. During that period, market capitalisation of the Dhaka Stock Exchange (DSE) increased 21%, from Tk. 776.4 billion in June, 2008 to Tk. 938.0 billion in July 2009. New issues (a total of 16) accounted for only Tk. 4.1 billion of this increase. It can be safely assumed that margin lending played a role in this significant advance; excess liquidity drove up the share prices in a market that experienced limited security supply.
Margin lending is attractive to banks for two reasons; first, it earns interest income and second, it generates trading revenue. This is also true for independent merchant banks not affiliated with a commercial bank. However, banks can bring to bear enormous amounts of funds from their deposit base at a low cost. Consequently, they also have the ability to render a much larger impact on the market. In contrast, independent merchant banks have higher costs of capital and hence are more selective in margin lending. In a rising market, margin lending encourages speculative trading and creates significant risk for investors, for banks and for the market.
Risk to investors: A portfolio created out of borrowed funds magnifies the risk of losses. A 10% market correction causes as much as 25% loss to an investor who is leveraged 150%. An investor not only absorbs losses incurred on his own money, but also on the money borrowed, as the lender does not assume any market risk. If significantly leveraged, an investor may lose a large part of his savings during a big market correction.
Risk to banks: Although margin loans are secured by shares purchased, banks take on significant risk through such lending. A 40% correction in the market would wipe off the entire equity of the investor and expose the margin lender to losses. This risk is reflected in the new banking supervision rules; under Basel II framework, investment in equity should be risk weighted at 100%. In other words, no matter the quality of share, the margin loan disbursed against such security would have to be fully risk-weighted.
Risk to the market: Margin lending exacerbates market volatility. A rising market lowers margin ratio allows further borrowing and encourages more buying. This in turn drives up the share prices. In a falling market, brokers call for more collateral to cover margin, often forces investors to sell, which pushes prices down, and creates further selling pressure. Such increase in volatility is detrimental to market stability.
Competition perspective: Merchant or investment banks serve an important role in a capitalist economy. It ensures efficient capital allocation to profitable businesses, improves market liquidity, facilitates price discovery through vigorous trading and reduces cost of capital by innovative structuring. In such a skill-driven business, intellectual capital is much more important than financial capital. Such intellectual capital is developed through incessant focus on the market by capital market professionals. The same quality may not develop in a large organisation engaged in a multitude of businesses.
Banks are important players in capital market, but their unrestrained expansion would deter the growth of independent merchant banks. If size and easy access to capital become the only criteria in awarding merchant banking mandates, we will never see a rise of independent merchant banks that lead their respective markets in innovation and service quality.
Case for limiting bank participation in the capital markets: Regulators in many countries favour separation of banking and securities businesses. An early example of this approach is the Glass Steagall Act of the US Congress of 1933. This Act separated investment and commercial banking activities, preventing overzealous commercial bank involvement in stock market. It was deemed that such involvement caused the banking crisis of 1929 when commercial banks took on too much risk with depositors' money. The core banking practices of deposit taking, term lending and risk management took a backseat. In many cases, banks would issue unsound loans to companies in which it had invested. Clients would also be encouraged to invest in those same stocks. Separation of banking and securities businesses removed such practices.
The Act was repealed in 1999 under pressure from the financial services industry who argued that by preventing diversification, the Act made banks riskier. Overnight, commercial banks, merchant banks and insurance companies merged under the same umbrella, creating financial behemoths. The most famous example was Citigroup, created through the merger of Citibank and the Travellers Group. The subsequent misfortune of Citigroup and other financial omnibuses highlights the relevance of the separation of banks and securities business. China, the new financial powerhouse, still maintains a separation between the two businesses.
As we are still developing our financial markets, we need to take a prudent approach to this issue. Banks should still be allowed to participate in merchant banking, but the practice of banks' margin lending should be limited with a keen eye on regulatory capital requirement. This would stop certain institutions from cornering the market by putting in huge capital in select securities or pulling out; a practice that creates huge volatility.
Also, in order to ensure the growth of independent merchant banks, it must be ensured that mandates such as issue management and underwriting offerings are equitably awarded to these institutions. The government can take a proactive role by selecting independent firms for management of government issues. Currently, Investment Corporation of Bangladesh (ICB) seems to have the sole mandate of such issues, which is not conducive to a competitive market. We need to develop various counter and competitive forces in order to ensure a competitive and efficient market.
The Local Mutual Funds Industry
Recently we observed a heightened interest in the country's capital market surrounding mutual funds. Four new mutual funds have been launched since January 2007 with a target to raise Tk 2.55 billion. Another six mutual funds will be launched within the year and are expected to raise Tk 12 billion.
Most of these funds are sponsored by private financial institutions and offer an alternative to Investment Corporation of Bangladesh (ICB) mutual funds. Mutualisation of investors' fund is an old concept. Initially the goal was to create a large pool allowing investment in large projects. The advancement of investment theories in the 1950s and 60s and an understanding of the benefits of diversification added to the popularity of mutual funds.
Economic growth in developed countries after World War II led to a rapid growth in individuals' savings, which further encouraged a demand for better investment options. As of 2008, worldwide investment in registered mutual funds stood at $21.7 trillion. Although asset under management (AUM) declined from its 2007 peak of $26.2 trillion, this still amounts to a cumulative annual average growth rate of 10 percent over 85 years.
A mutual fund is usually a collection of a few separate companies. At the core is the fund itself whose sole purpose is to raise capital from investors and disbursement of the capital. The ownership of the fund is divided into many units, which are owned by individual investors. The fund is overseen by directors or trustees and managed by a fund manager or an asset management company (AMC). The AMC makes the investment decisions and is paid a fee for its services, usually a percentage of the total AUM.
A security broker executes trade for a fee. A custodian or trust company holds the securities for the fund. There are countless variations of this simple model depending on investment style, asset mix, size of the fund, fee structure, and inclusion or exclusion of new investors.
Net asset value (NAV) of a fund unit represents the share of assets (less any liability) of each unit. There is no reason for a fund to trade above or below its NAV except for temporary or liquidity reasons or unless the NAV calculation is grossly erroneous.
The simple model of the mutualisation of individuals' funds offers a number of advantages. An average trade by a mutual fund is much larger than that of an individual's portfolio lowering overall transaction costs, asset diversification in a large portfolio is easier to attain and mutual funds can spread the cost of investment research over many investors.
The proliferation of institutional investors (mutual funds, private funds or retirement funds) brought some secondary benefits to the investment management industry, like institutional investors through large shareholding can exert strong influence to improve corporate governance of businesses and because of their large resources, institutional investors can take position in unconventional assets. This improves portfolio diversification and aid global capital flow.
The Securities and Exchange Commission (SEC) is responding well to the growth in institutional funds by formulating regulations and guidelines for the AMCs. Based on my experience in the mutual funds industry and my review of the prospectuses of the four latest mutual funds, I shall point out a few issues that are important, requires attention, and needs to be addressed for a healthy growth of the industry.
Expenses and management fee
A fund pays all its expenses and a fee to the AMC from its assets. Size of the expenses and fees affects the performance of a fund. Funds are free to choose their fees subject to the competitive environment. Of the four funds, annual fees ranged between below 1 percent (Grameen Mutual) to 2.5 percent (two ICB NRB) before expenses. The three funds managed by ICB AMCL anticipate annual expenses up to 4 percent of the NAV. Taken together, management fees and expenses can cost as much as 6 percent annually. In comparison, investors in advanced countries pay about 2.5 percent in management expense ratio (MER). Bangladeshi AMCs charge a 'formation fee' between 1 percent and 5 percent at inception, which does not have a parallel in other markets. Because of compounding, high management fees and costs make a sizable dent in the total savings, as shown in the table below. Hopefully management fees will eventually decline as competition grows. For now however, should the funds be allowed to charge high fees simply because they can? I am not recommending regulation of fees, but some balance must be achieved by exact and prominent disclosure of the fees and expenses.
Credentials of a portfolio manager
In the investment management industry, portfolio managers are highly regarded for their knowledge of the profession and the high standards they practise. Portfolio managers must clearly understand and practise certain duties including the duty of care, duty of diligence and duty of a fiduciary. Managers in advanced markets undergo extensive training and licensing requirements. I understand that the SEC of Bangladesh grants a license to an AMC based on the credentials of its professional staff. The following questions should be answered to make the process transparent: is there a clear guideline that states who can be presented by an AMC as a portfolio manager? To what standards should a portfolio manager be held, and how are these standards enforced? The regulator and the market participants should also develop training and licensing programmes for mutual funds distributors, portfolio managers and other market participants. These programmes should focus on industry knowledge and the regulatory, legal and ethical aspects of the business.
Fund objective/style and benchmark
Based on the skills and strength of the AMC, mutual funds adopt an investment style and choose a benchmark based on the style. Fund performances are evaluated with respect to the benchmark. Because of a shallow market, the four listed mutual funds did not specify an investment style. They also did not offer a benchmark that could be used to evaluate their performance. The use of a broad index such as the DSE/CSE indices would assist investors' selection of a mutual fund.
Performance standards
Seasoned investors look at the past performance of a mutual fund when selecting a fund. Standardisation of performance reporting is necessary as AMCs can otherwise paint a rosier picture of their performance by cherry-picking the investment interval and other variables. It is important to establish the basic rules of performance reporting while the industry is still young. The SEC can look at various industry organisations and regulatory bodies that have established uniform performance measurement standards. The CFA Institute advocates use of the Global Investment Performance Standards (GIPS) and makes it publicly available.
Use of unlisted securities a nd their valuation
The last issue of concern is the inclusion of unlisted securities in mutual fund portfolios. All funds allow inclusion of unlisted securities. For our four funds, as much as 50 percent of the securities can be unlisted.
Calculation of the NAV
Valuation of unlisted securities poses a problem as they do not provide a daily closing price. The stated policy for valuation of unlisted securities, including the frequency, process and oversight by trustees, is not very transparent. In other words, AMCs are giving themselves a wide berth in valuing unlisted securities. Impact of the valuation is still more important as calculation of the NAV determines the management fees.
Disclosure of holdings
None of the AMCs make any promise about regular disclosure of their fund holdings. Registered mutual funds in advanced markets are required to disclose their holdings at least quarterly. This disclosure enables investors to monitor whether and how a fund is complying with its stated investment objectives. If a fund consistently trades in unlisted securities, lack of quality and liquidity of such securities can dramatically affect the risk profile of the fund. A mandatory policy of disclosure of portfolio holdings, especially unlisted securities, can reduce such risks.
The author is an investment analyst and the head of research of a Canadian national brokerage and can be reached at AHCapCorp@live.com.
Most of these funds are sponsored by private financial institutions and offer an alternative to Investment Corporation of Bangladesh (ICB) mutual funds. Mutualisation of investors' fund is an old concept. Initially the goal was to create a large pool allowing investment in large projects. The advancement of investment theories in the 1950s and 60s and an understanding of the benefits of diversification added to the popularity of mutual funds.
Economic growth in developed countries after World War II led to a rapid growth in individuals' savings, which further encouraged a demand for better investment options. As of 2008, worldwide investment in registered mutual funds stood at $21.7 trillion. Although asset under management (AUM) declined from its 2007 peak of $26.2 trillion, this still amounts to a cumulative annual average growth rate of 10 percent over 85 years.
A mutual fund is usually a collection of a few separate companies. At the core is the fund itself whose sole purpose is to raise capital from investors and disbursement of the capital. The ownership of the fund is divided into many units, which are owned by individual investors. The fund is overseen by directors or trustees and managed by a fund manager or an asset management company (AMC). The AMC makes the investment decisions and is paid a fee for its services, usually a percentage of the total AUM.
A security broker executes trade for a fee. A custodian or trust company holds the securities for the fund. There are countless variations of this simple model depending on investment style, asset mix, size of the fund, fee structure, and inclusion or exclusion of new investors.
Net asset value (NAV) of a fund unit represents the share of assets (less any liability) of each unit. There is no reason for a fund to trade above or below its NAV except for temporary or liquidity reasons or unless the NAV calculation is grossly erroneous.
The simple model of the mutualisation of individuals' funds offers a number of advantages. An average trade by a mutual fund is much larger than that of an individual's portfolio lowering overall transaction costs, asset diversification in a large portfolio is easier to attain and mutual funds can spread the cost of investment research over many investors.
The proliferation of institutional investors (mutual funds, private funds or retirement funds) brought some secondary benefits to the investment management industry, like institutional investors through large shareholding can exert strong influence to improve corporate governance of businesses and because of their large resources, institutional investors can take position in unconventional assets. This improves portfolio diversification and aid global capital flow.
The Securities and Exchange Commission (SEC) is responding well to the growth in institutional funds by formulating regulations and guidelines for the AMCs. Based on my experience in the mutual funds industry and my review of the prospectuses of the four latest mutual funds, I shall point out a few issues that are important, requires attention, and needs to be addressed for a healthy growth of the industry.
Expenses and management fee
A fund pays all its expenses and a fee to the AMC from its assets. Size of the expenses and fees affects the performance of a fund. Funds are free to choose their fees subject to the competitive environment. Of the four funds, annual fees ranged between below 1 percent (Grameen Mutual) to 2.5 percent (two ICB NRB) before expenses. The three funds managed by ICB AMCL anticipate annual expenses up to 4 percent of the NAV. Taken together, management fees and expenses can cost as much as 6 percent annually. In comparison, investors in advanced countries pay about 2.5 percent in management expense ratio (MER). Bangladeshi AMCs charge a 'formation fee' between 1 percent and 5 percent at inception, which does not have a parallel in other markets. Because of compounding, high management fees and costs make a sizable dent in the total savings, as shown in the table below. Hopefully management fees will eventually decline as competition grows. For now however, should the funds be allowed to charge high fees simply because they can? I am not recommending regulation of fees, but some balance must be achieved by exact and prominent disclosure of the fees and expenses.
Credentials of a portfolio manager
In the investment management industry, portfolio managers are highly regarded for their knowledge of the profession and the high standards they practise. Portfolio managers must clearly understand and practise certain duties including the duty of care, duty of diligence and duty of a fiduciary. Managers in advanced markets undergo extensive training and licensing requirements. I understand that the SEC of Bangladesh grants a license to an AMC based on the credentials of its professional staff. The following questions should be answered to make the process transparent: is there a clear guideline that states who can be presented by an AMC as a portfolio manager? To what standards should a portfolio manager be held, and how are these standards enforced? The regulator and the market participants should also develop training and licensing programmes for mutual funds distributors, portfolio managers and other market participants. These programmes should focus on industry knowledge and the regulatory, legal and ethical aspects of the business.
Fund objective/style and benchmark
Based on the skills and strength of the AMC, mutual funds adopt an investment style and choose a benchmark based on the style. Fund performances are evaluated with respect to the benchmark. Because of a shallow market, the four listed mutual funds did not specify an investment style. They also did not offer a benchmark that could be used to evaluate their performance. The use of a broad index such as the DSE/CSE indices would assist investors' selection of a mutual fund.
Performance standards
Seasoned investors look at the past performance of a mutual fund when selecting a fund. Standardisation of performance reporting is necessary as AMCs can otherwise paint a rosier picture of their performance by cherry-picking the investment interval and other variables. It is important to establish the basic rules of performance reporting while the industry is still young. The SEC can look at various industry organisations and regulatory bodies that have established uniform performance measurement standards. The CFA Institute advocates use of the Global Investment Performance Standards (GIPS) and makes it publicly available.
Use of unlisted securities a nd their valuation
The last issue of concern is the inclusion of unlisted securities in mutual fund portfolios. All funds allow inclusion of unlisted securities. For our four funds, as much as 50 percent of the securities can be unlisted.
Calculation of the NAV
Valuation of unlisted securities poses a problem as they do not provide a daily closing price. The stated policy for valuation of unlisted securities, including the frequency, process and oversight by trustees, is not very transparent. In other words, AMCs are giving themselves a wide berth in valuing unlisted securities. Impact of the valuation is still more important as calculation of the NAV determines the management fees.
Disclosure of holdings
None of the AMCs make any promise about regular disclosure of their fund holdings. Registered mutual funds in advanced markets are required to disclose their holdings at least quarterly. This disclosure enables investors to monitor whether and how a fund is complying with its stated investment objectives. If a fund consistently trades in unlisted securities, lack of quality and liquidity of such securities can dramatically affect the risk profile of the fund. A mandatory policy of disclosure of portfolio holdings, especially unlisted securities, can reduce such risks.
The author is an investment analyst and the head of research of a Canadian national brokerage and can be reached at AHCapCorp@live.com.
Wednesday, December 16, 2009
Unusual Valuation of Mutual Funds
With the stock market rallying stronger in the last few months, the inflated prices of mutual funds come to the forefront.
The DSE General Index was 3,356 on October 25, which is 17 percent higher since the rally started in July. The P/E (price to earnings) ratio of the market currently stands at 20x. The P/E was 18.4x in January 1 and 14.5x on January 1, 2007.
The P/E ratio indicates roughly the number of years of earnings it will take to recoup the price of the stock, not the original investment. Compare this to an alternative investment such as a poultry farm, and ask yourself if you are willing to wait that long.
Even when the index is at an all time high, one cannot say with certainty that stocks are overvalued. One can only draw conclusions based on a relative basis, such as stocks are overvalued compared to other assets, other markets, or other points in time.
Many variables are associated with stock pricing, including outlook for earnings, GDP growth, interest rate, inflation rate, money supply, other investment options. Most of these variables are interrelated, making an estimation of fair value very difficult.
However, one can state with absolute confidence that one class of securities in the local market is hugely overpriced. Closed end mutual fund units trade at a level that defies reason.
Currently 17 mutual funds trade at an average of 2.75 times their net asset value (NAV) and 75 times their earnings. We looked at a sample of 21 mutual funds in the Asia Pacific region and found they trade at 0.91 times or below their NAV. There is no reason for a mutual fund unit to trade at a price higher than its NAV.
NAV represents the net worth of a mutual fund unit. NAV on valuation date is the price of all securities in the mutual fund, less any liabilities, divided by the total number of mutual fund units. A mutual fund is the partial ownership of a basket of securities.
For simplicity, let us compare this with a basket of fruits. This basket contains six apples, a dozen bananas and six oranges. It costs Tk 170, Tk 90 and Tk 170 to purchase a dozen apples, a dozen bananas and a dozen oranges, and Tk 20 for a basket. Consequently, the fruit basket should cost Tk 280, which is its NAV.
If the fruit basket were traded in the stock market, will you pay Tk 300, Tk 400 or Tk 500 for it? According to the table, you will pay about Tk 750 or 2.7 times the NAV of the basket.
Are you not better off making your own fruit basket by buying individual fruits? Similarly, if you can replicate the basket of securities (mutual fund), by buying the same securities from open market, why will you pay more? Granted that the content of the basket is not public knowledge, however, if the fund manager changes the portfolio often between disclosure dates, the actual value is destroyed by high trading costs.
Sometimes it is argued that a premium over NAV reflects a reward for the fund manager for superior stock selection. In reality, the fund manager is already rewarded when an investor selects her fund and pays her the management fees.
I hear two other theories explaining the insane pricing of mutual funds in our market. Both point out the obvious -- “The Bangladesh market is different”.
One theory states the high valuation of mutual funds reflects a favourable disposition of the courts toward dividend and bonus shares. This argument misses the fact that dividends are paid from the NAV, and NAV drops by the same amount as the dividend paid.
Also, bonus shares do not create wealth out of thin air, but are a simple hogwash by rearranging capital that belongs to unit holders anyways.
The second theory states the high valuation of mutual funds reflects the advantage of special initial public offering allocation. Under the Securities and Exchange Commission rules, mutual funds are entitled to 10 percent allocation of any IPO. Newly listed securities appreciate by as much as 200 percent on the first day of trading, so surely this rule adds significant value to mutual funds.
Last year, the total value of all IPOs was approximately Tk 4.1 billion. Assuming 10 percent of this volume was allocated to 14 available mutual funds and new listings appreciated by 200 percent on average, the gain for 14 mutual funds would be less than 5 percent. This hardly justifies a 170 percent premium. In future, gain from this source will moderate as new mutual funds are launched.
Speculative pricing of mutual funds has reached such levels that launching of mutual funds has become a placement pursuit rather than an investment activity. As soon as a fund hits the market, units appreciate by 200 percent. The very blessed beneficiaries of IPO placement offload their allocation and realise windfall profits. Unfortunately, such speculative investment is a zero-sum game. When unit prices revert back to their NAV, a lot of people would lose their money and lose confidence in the utility of mutual funds. That would be a sad event for an investment vehicle such as mutual funds that bear so much potential in mobilising capital.
Unfortunately there is not much the government or regulators can do to determine what investors buy at what prices. There is no place for such intervention in a free market unless clear violation of the securities laws occurs.
Consequently, the only safeguard for investors is 'Caveat Emptor' or 'Buyer be Aware'. General investors appreciate the value of common sense -- no one buys a fruit basket for Tk 750 when it can be created for Tk 280, or pays for a poultry farm at a price that takes 20 years to recoup.
It seems only in the stock market does investor common sense take a leave. People buy overpriced stocks expecting to find 'bigger fools' than themselves, who would willingly purchase their stocks at an even higher price.
However, not knowing exactly when to sell, everyone in a heated market runs the risk of holding the bag and appearing the “biggest fool” when the music stops. While pricing a security, the only important parameter is its future earning power. The same goes for mutual fund units.
The DSE General Index was 3,356 on October 25, which is 17 percent higher since the rally started in July. The P/E (price to earnings) ratio of the market currently stands at 20x. The P/E was 18.4x in January 1 and 14.5x on January 1, 2007.
The P/E ratio indicates roughly the number of years of earnings it will take to recoup the price of the stock, not the original investment. Compare this to an alternative investment such as a poultry farm, and ask yourself if you are willing to wait that long.
Even when the index is at an all time high, one cannot say with certainty that stocks are overvalued. One can only draw conclusions based on a relative basis, such as stocks are overvalued compared to other assets, other markets, or other points in time.
Many variables are associated with stock pricing, including outlook for earnings, GDP growth, interest rate, inflation rate, money supply, other investment options. Most of these variables are interrelated, making an estimation of fair value very difficult.
However, one can state with absolute confidence that one class of securities in the local market is hugely overpriced. Closed end mutual fund units trade at a level that defies reason.
Currently 17 mutual funds trade at an average of 2.75 times their net asset value (NAV) and 75 times their earnings. We looked at a sample of 21 mutual funds in the Asia Pacific region and found they trade at 0.91 times or below their NAV. There is no reason for a mutual fund unit to trade at a price higher than its NAV.
NAV represents the net worth of a mutual fund unit. NAV on valuation date is the price of all securities in the mutual fund, less any liabilities, divided by the total number of mutual fund units. A mutual fund is the partial ownership of a basket of securities.
For simplicity, let us compare this with a basket of fruits. This basket contains six apples, a dozen bananas and six oranges. It costs Tk 170, Tk 90 and Tk 170 to purchase a dozen apples, a dozen bananas and a dozen oranges, and Tk 20 for a basket. Consequently, the fruit basket should cost Tk 280, which is its NAV.
If the fruit basket were traded in the stock market, will you pay Tk 300, Tk 400 or Tk 500 for it? According to the table, you will pay about Tk 750 or 2.7 times the NAV of the basket.
Are you not better off making your own fruit basket by buying individual fruits? Similarly, if you can replicate the basket of securities (mutual fund), by buying the same securities from open market, why will you pay more? Granted that the content of the basket is not public knowledge, however, if the fund manager changes the portfolio often between disclosure dates, the actual value is destroyed by high trading costs.
Sometimes it is argued that a premium over NAV reflects a reward for the fund manager for superior stock selection. In reality, the fund manager is already rewarded when an investor selects her fund and pays her the management fees.
I hear two other theories explaining the insane pricing of mutual funds in our market. Both point out the obvious -- “The Bangladesh market is different”.
One theory states the high valuation of mutual funds reflects a favourable disposition of the courts toward dividend and bonus shares. This argument misses the fact that dividends are paid from the NAV, and NAV drops by the same amount as the dividend paid.
Also, bonus shares do not create wealth out of thin air, but are a simple hogwash by rearranging capital that belongs to unit holders anyways.
The second theory states the high valuation of mutual funds reflects the advantage of special initial public offering allocation. Under the Securities and Exchange Commission rules, mutual funds are entitled to 10 percent allocation of any IPO. Newly listed securities appreciate by as much as 200 percent on the first day of trading, so surely this rule adds significant value to mutual funds.
Last year, the total value of all IPOs was approximately Tk 4.1 billion. Assuming 10 percent of this volume was allocated to 14 available mutual funds and new listings appreciated by 200 percent on average, the gain for 14 mutual funds would be less than 5 percent. This hardly justifies a 170 percent premium. In future, gain from this source will moderate as new mutual funds are launched.
Speculative pricing of mutual funds has reached such levels that launching of mutual funds has become a placement pursuit rather than an investment activity. As soon as a fund hits the market, units appreciate by 200 percent. The very blessed beneficiaries of IPO placement offload their allocation and realise windfall profits. Unfortunately, such speculative investment is a zero-sum game. When unit prices revert back to their NAV, a lot of people would lose their money and lose confidence in the utility of mutual funds. That would be a sad event for an investment vehicle such as mutual funds that bear so much potential in mobilising capital.
Unfortunately there is not much the government or regulators can do to determine what investors buy at what prices. There is no place for such intervention in a free market unless clear violation of the securities laws occurs.
Consequently, the only safeguard for investors is 'Caveat Emptor' or 'Buyer be Aware'. General investors appreciate the value of common sense -- no one buys a fruit basket for Tk 750 when it can be created for Tk 280, or pays for a poultry farm at a price that takes 20 years to recoup.
It seems only in the stock market does investor common sense take a leave. People buy overpriced stocks expecting to find 'bigger fools' than themselves, who would willingly purchase their stocks at an even higher price.
However, not knowing exactly when to sell, everyone in a heated market runs the risk of holding the bag and appearing the “biggest fool” when the music stops. While pricing a security, the only important parameter is its future earning power. The same goes for mutual fund units.
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