Mutual funds increase the retail base and equity allocations

Equity allocations increase by Rs400 million as the mutual fund industry grows its retail investor base

Total assets managed by the mutual fund industry declined 12% during the year ending June 2017, but two trends are emerging: the number of retail, or individual, investors is growing and mutual fund managers are increasing equity allocations. According to the Unit Trust Association of Sri Lanka, the mutual fund industry body, total assets managed by the mutual fund industry declined 12% to Rs100 billion in the year ending June 2017, with the number of unit holders declining 3% during this period. The decline is largely due to corporate investors pulling out of fixed income mutual funds that invest in assets like government securities, corporate debentures and commercial papers. Corporate investors swarmed fixed income mutual funds after returns were exempted from corporate tax in 2012, resulting in assets managed by mutual funds more than tripling in three years to Rs130 billion in 2015. Interest rates rising since have made bank fixed deposits more attractive, offering higher returns to investors. The removal of exemptions for corporate mutual fund investors from next April precipitated the outflow. With income tied to the size of the fund, management firms have no choice but to grow their retail client base fast enough to recover from a sharp earnings decline as corporates exit.

“We already see signs of this change taking place,” says Ruwan Perera, president of the Unit Trust Association. “During the year ending June 2017, the number of new unit holders increased by over 4,000, a majority of them retail investors.”

Mutual funds are also increasing their equity allocations despite the Colombo Stock Exchange’s All Share Index making an 8% negative return over a 30-month period ending June 2017. Overall equity allocation in the mutual fund industry increased to 14% at end-June 2017, compared to 12% a year ago.

The value of equity assets increased 2% to Rs13.7 billion during this period as the number of unit holders grew 4%. “Inflows into mutual funds that invest in listed stocks grew by Rs400 million, mostly from individual investors,” says Perera, who is also chief operating officer of NDB Wealth, which manages several equity and money market funds.

The Colombo Stock Exchange’s All Share Index returned 6.6% during the first seven months of 2017, reversing a two-year 15% decline over 2015-2016. Gilt-edged funds in government securities mostly matched returns of the All Share Index, with the exception of NAMAL Gilt, managed by National Asset Management, which returned 36%. Most money market funds (like corporate debentures and bank deposits) had lower returns than the CSE during the seven-month period. Several mutual fund management companies increased equity allocations during the one-year period ending June 2017, and outperformed the CSE.

The Comtrust Equity Fund returned 12% in the seven months of 2017. The fund decreased money market allocations and increased equity allocations to 67% from 58% a year earlier. The National Equity Fund returned 12%, with a 75% allocation in listed stocks.

Two equity funds managed by National Asset Management, Acuity Value Fund and Growth Fund, have a 90% and 80% exposure to listed stocks, respectively, and both funds returned about 14% during the first seven months of 2017. The JB Vantage Value Equity Fund has an impressive 97% allocation in stocks, returning 12.5% during this period. The CAL Quant Equity Fund returned 10.93%, and has a 95% allocation, up from 73% a year earlier. The First Capital Equity Fund increased its equity allocation from 61% a year ago to 94%, returning nearly 10% during the first seven months of 2017. The Ceylon Equity Fund also increased its equity allocation to 86% from 71% a year ago, and returned 12.23% during the first seven months of the year.

With income tied to the size of the fund, management firms have no choice but to grow their retail client base fast enough to recover from a sharp earnings decline as corporates exit

Despite recent gains, the Colombo Stock Exchange is clouded in uncertainty. Perera says a majority of equity mutual fund management companies still prefer to allocate a higher proportion of their portfolios into fixed income securities to avoid their clients losing capital. “Besides, some money market funds are returning above 20% from fixed income assets,” he says. “I doubt the stock market will pick up in the short term, but as the economy shows an improvement, the turnaround will come. It has to,” Perera says.