Open-end MFs interest fund managers more

Most of the fund managers now prefer floatation of open-end mutual funds (MFs) to closed-end ones, as they consider options of the open-end ones more viable and investor-friendly than the latter ones.

As a result, the number of open-end MFs has gradually increased over the last five years, while the number of closed-end ones has declined during the period.

An official of the Bangladesh Securities and Exchange Commission (BSEC) said a number of factors, including small size, prompted the fund managers to float more open-end MFs than closed-end ones.

"The greater public portion of the closed-end MFs remains under subscribed due to continuous volatility of the capital market."

It is easier to float an open-end MF due to its small size as well as the fund manager's scope of becoming a sponsor of it with a limited amount, he opined.

The minimum size of a closed-end MF is Tk 500 million, whereas the minimum size of an open-end fund is Tk 100 million.

According to the BSEC information, two open-end MFs were floated in 2014, three in 2015, 13 in 2016, seven in 2017, and 14 in 2018. Presently, the number of this type of funds stands at 53.

On the other hand, only seven closed-end MFs were floated in last five years, and the total number of such funds is presently 37.

In terms of performance, the new open-end MFs are performing better compared to the old ones, as portfolio of the first ones witnessed less erosion.

Apart from capital gain, the investors, who purchased units of those open-end MFs, were able to realise dividend yield at rates ranging from 6.0 per cent to 10.20 per cent.

The DSEX, the broad index of the Dhaka Stock Exchange (DSE), declined 14 per cent or 859 points in 2018.

Five open-end MFs generated net asset value (NAV) returns ranging from 4.20 per cent to 22.90 per cent in 2018 amid 14 per cent correction in the broad index.

The five funds are - ATC Shariah Unit Fund, CAPM Unit Fund, EDGE Bangladesh Mutual Fund, Shanta First Unit Fund, and Zenith Annual Income Fund.

Amid the persisting declining trend in the capital market, the dividend yields of many open-end MFs are higher than those of many companies, known as blue chip securities.

The dividend yield of ICB AMCL Unit Fund was 8.09 per cent, ICB AMCL Pension Holders' Unit Fund 6.35 per cent, and Bangladesh Fund 5.83 per cent as per their latest declarations.

The series of the Investment Corporation of Bangladesh's (ICB) eight funds, which were converted into open-end ones from closed-end, posted dividend yields ranging from 9.09 per cent to 10.30 per cent as per the latest declarations for the year ending on December 31, 2018.

The dividend yield is the financial ratio that measures the quantum of cash dividends paid out to shareholders in relation to the market value per share.

The ratio is computed by dividing the dividend per share by the market price per share, and multiplying the result by 100.

Of the open-end MFs managed by the private asset management companies (AMCs), VIPB Accelerated Income Unit Fund declared 8.10 per cent cash dividend for the year ending on June 30, 2019. For the fiscal year, the fund's dividend yield stood at 6.39 per cent.

Some fund managers said the returns, including dividend yields, of the open-end MFs have declined gradually during the last few years following frequent spells of turmoil and subsequent volatility in the capital market.

Ali Imam, the chief executive officer (CEO) of EDGE AMC, said the returns of the open-end MFs have declined, as capital gains and dividends from the listed securities declined.

"The AMCs prefer the listed companies, having good fundamentals and corporate governance. Some of those companies are facing structural challenges and litigation, affecting growth of the MFs."

Another fund manager said the investors' returns are comparatively well protected in the open-end MFs due to the scope of selling their units as per NAV.

He also said public trust and interest regarding MFs are yet to be significant due to the investors' improper knowledge, limited scope of marketing, stipulated investment thresholds, and post-effect of the 2010-11 stock market debacle.

As per the existing rules, a fund manager is allowed to invest at least 60 per cent in the capital market, while the remaining 40 per cent is invested in the non-listed securities, including bonds.

Former chairman of the Bangladesh Securities and Exchange Commission (BSEC) Faruq Ahmad Siddiqi said the stipulated investment ceiling should not be applicable to the open-end MFs.

"The AMCs should be allowed to re-balance their portfolios as per their assessment. Investment ceiling should be applicable to the closed-end MFs only," he opined.

The fund managers said sometimes they cannot ensure returns for unit-holders due to informal regulatory instructions of not selling securities in the name of market support.

However, Mohammad Saifur Rahman, an executive director of the BSEC, said they are not aware of any such regulatory instruction of not selling securities by the AMCs.

"The securities regulator sometimes looks into the matter whether an AMC complies with the investment rules or not. It also observes the intention of an AMC, so that the market does not face sell pressure," he added.

Md Golam Rabbani, chief executive officer (additional charge) of ICB AMCL, said the investors' interest regarding the MFs is yet to be notable due to the limited scope of distributing their units.

"The banks are not interested to sell the units due to lower fees. We have to sell the units through our branch offices," he noted.

Another fund manager said officials of the ministry concerned also do not have proper knowledge about the MFs.

As per the existing rules, the unit-holders of a MF can realise returns anytime by surrendering their open-end units at discounts ranging from three to five per cent of its NAV.

On the other hand, the sector of closed-end MFs is currently being traded at around 44.1 per cent discount from their NAV at market price due to the declining market trend.

Presently, the total assets under management (AUM) is roughly Tk 142.03 billion or US$ 1.69 billion only.

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