Asset managers' last-ditch effort to keep investors with pooled funds

The country's mutual fund (MFs) industry is in a tight spot as unitholders, frustrated over no return and persistent erosion in the equity market, have increasingly been withdrawing their investments. 

The disinterest shown in open-ended funds has raised concerns among fund managers as investors have already turned away from close-ended funds for loss of faith in them after repeated financial frauds.

Most listed MFs at present trade at far below the net asset value (NAV) and face value, making it difficult for unitholders to exit the market after the extension of the funds' maturity periods. With the current unabated fall of the index, there is a further downward pressure on the unit price of close-ended MFs.

This is the backdrop against which fund managers are facing an existential crisis. They want to make it through this difficult time by issuing dividends to investors even if that entails temporary non-compliance with the provision requirement.

"The distribution of dividends with partial provisioning will not lead to any serious disruption to operations. Rather, it will help keep unitholders' confidence up a bit," said a senior official of the state-run Investment Corporation of Bangladesh (ICB).

Owing to the fund withdrawal, assets under management (AUM) in open-ended funds are depleting fast.

For example, 509 unit holders of ICB AMCL Unit Fund withdrew an aggregate amount of investments worth more than Tk 531 million in the 10 months through April, FY24. During the same period in FY25, some 659 unit holders withdrew investments amounting to more than Tk 711 million from the same fund.

The higher withdrawal of investments in the 10 months of FY25 was accompanied by lower inflow of fresh investments in the open-ended fund.

ICB AMCL Unit Fund witnessed injection of new money dwindling from around Tk 335 million in the 10 months through April, FY24 to a mere Tk 50 million during the same period of FY25.

Talking to The FE, some private asset management companies (AMCs) acknowledged a decline in the sales of fresh units of open-ended funds.

According to data from IDLC Asset Management, the total AUM in open-ended funds was Tk 56.90 billion in January last year, but by the end of the year the AUM fell to Tk 49.5 billion. The AUM of close-ended funds during the same period experienced 17 per cent erosion to Tk 48.8 billion.

The decline in AUM may happen when the redemption of units is higher than the issuance of fresh units. Also, distribution of any dividends and erosion in assets' value are two other factors behind a reduction in AUM.

Recently, the ICB proposed giving dividends to investors at a meeting between the Bangladesh Securities and Exchange Commission (BSEC) and stakeholders of the capital market.

Many companies are in favour of distributing dividends without meeting the obligation to keep 100 per cent provision against unrealised losses in a bid to appease investor frustration.

Experts warn that such payout of dividends causes erosion of capital put in the investment vehicles in the first place. But fund managers think the lost capital would be recovered following a revival of the market.

There may also be a guilty conscience from the side of fund managers in this.

They have been charging fees for handling clients' investments year after year, securing little or no return. So, with shrinking portfolios, clients are now more likely than ever to feel discouraged to continue with MFs.

The realisation of management fees with incomplete provisioning also takes a slice of unitholders' capital.

"The asset managers earned fees even when funds experienced losses. So, they should be allowed to distribute dividends keeping provisioning incomplete at least for a year as unitholders have become frustrated," said the official of the ICB, requesting anonymity.

A majority of the MFs did not pay any dividend for FY24 following erosion in the portfolios.

The industry failed its clients miserably during the 2010-11 stock market debacle.

During the market's bull-run before the crash, many new asset management companies (AMCs) started operations on receiving licence from the securities regulator. But instead of making prudent investments with clients' funds, they injected money in speculative stocks to take advantage of abnormal rallies.

The funds met a sharp reduction in assets' value following the debacle.

Later, many fund managers committed scams and siphoned off investors' money.

Preferring anonymity, a senior official of EDGE Asset Management said the unruly fund managers could not be made responsible for their crimes yet.

Investors' misery did not end there; the regulatory decision in 2018 to extend the tenures of the closed-end funds put the final nail in the coffin for the MFs.

The industry has still been enduring the consequences.

Usually, units of MFs are supposed to be traded at prices around NAV (net asset value).

During the good time of the industry before the 2010-11 stock market collapse, units of listed funds had been traded above NAV. Now a majority of listed funds are not only traded at prices far below NAV, but also below the face value of Tk 10 each unit.

With pessimism about listed MFs high, open-ended funds became popular as investors could liquidate assets anytime they wanted. But as the equity market's bearish spell has been dragging on, the industry altogether has lost its allure.

A senior official of HF Asset Management said unit surrenders are accelerating, resulting in shrinking AUM and higher expense ratios, which would in turn hurt long-term fund performance.

"In this situation, the distribution of dividends can be a strategy at least for FY25 to keep unitholders inspired," he said, preferring not to be named.

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