Equity Mutual Fund Assets Grow 32% As Market Falls 17%

Listed stocks fell 17% over five quarters to end-March 2016, and despite the slump, equity mutual funds are opening new accounts with assets under management growing 32%

Two elections in 2015, domestic policy uncertainty and a global stock market rout resulted in Sri Lanka’s listed stocks falling 17% during a 15-month period to end-March 2016. During this period, equity mutual funds have grown 32% in value to Rs5.4 billion. It’s not clear how much of this is from new accounts and capital gains, but nearly 740 new accounts were opened during this period, growing by 20%.

The number of new accounts is insignificant compared to 60,000 active investors who traded at least once on the Colombo Stock Exchange in 2015, but the trend is significant: people are realising the value of investing for the long term and letting professional fund managers do the work.

“More young people are driving this change”, says Ruvini Fernando, chief executive of Ceylon Guardian, which manages a Rs400 million equity fund, Guardian Acuity Equity Fund (GAEF), in a joint venture with Acuity Partners. It’s not clear how young people are impacting the equity mutual trust industry, but for GAEF, nearly half its client base is below 40 years.

Equity delivers superior returns over many asset classes, from real estate to bank fixed deposits and government securities, but investing directly in the stock market can be a risky business for ordinary people without the necessary tools and time to unravel companies, industries and the economy for sound investment decisions. This is where mutual funds step in.

Equity mutual funds, a pooled fund managed by a single fund management firm, are ideal for small investors because professional fund managers make all the hard investment choices driven by a mantra to always outperform the market. Revenue is tied to the size of the fund, so fund managers have an incentive to outperform the market: the fund size can grow in two ways, from capital gains and new accounts.

In 2015, GAEF made a 2.5% return for investors, while listed stocks lost 5.5%. The fund’s assets under management more than doubled to Rs453 million, its client base growing 60%. During the first quarter of this year, listed stocks fell 12% and the fund was not far behind, down 11%, but it still increased its client base by 8%. The Guardian-Acuity group manages two other mutual funds – one in short-term government securities and the other in money market assets, both these generating gains of 9% and 9.95%, respectively, in annualised yields. Equity mutual fund investors can shift to any of these funds, called fixed income funds, rather than see their equity investments haemorrhage in the short term, or even take their money to another fund management firm.

Over a decade, tax breaks for corporate bonds and a hunt for better returns as interest rates declined led to higher allocations for fixed-income assets in mutual funds. Equity made up 70% of mutual fund industry assets in 2006, falling steadily to 11% in 2015. Convincing investors of sticking out a slump is tough. “Sometimes, when the market dips, we don’t even bother if we think it is a temporary blip. We invest in listed companies well managed with strong earnings potential. People are beginning to understand, especially young people who are smarter and like to try new things,” Fernando says. From 2012 to end-April 2016, GAEF gained 13% on average each year, three times more than the stock market, which grew by just 4%. But for all the fund management success, it serves only 242 investors.

Not enough people see the benefits of mutual funds as longterm equity investment vehicles. The eight equity mutual funds manage less than 2% of stock market value.

Basic understanding of how equity investment and mutual funds work is not universal. “We are not ready to take mutual funds mass market yet. We need to start with people who have some understanding of how things work and are willing to stay for the long term,” Fernando says.