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F UND A ME N TA L S Semi-Annual Magazine - Vol 4 (Jul - Dec 2010)

Enjoy financial
freedom in your
golden years

Strategies
to beat
inflation

Investment
planning for your
child’s education

Understanding
your risk profile

Trust the Experts!


Call 0800-00026 SMS ‘INVEST’ to 2600
www.UBLFunds.com info@UBLFunds.com
YOUR RELIABLE IN VESTMENT PARTNER
WITH UNIQUE ABILITIES.

STABILITY
S U S TA I N A B I L I T Y
RELIABILITY
IN V E S T A B I L I T Y
P RO F I T A B I L I T Y

UBL Fund Managers is proud to be one of the largest private


Asset Management Companies in Pakistan.
F UND A ME N TA L S

Features UBL Funds News


02 Enjoy financial freedom in your Funds Performance Review
golden years July 2009 - June 2010
It is a reality that people do not actively think about their UBL Liquidity Plus Fund (ULPF)
retirement until they are too close to it. And by then, the Fund Yield: 10.52% p.a.
opportunity to efficiently plan that phase of one’s life is Benchmark Yield: 8.47% p.a.
lost. The latest data on mortality around the world and in
Pakistan tells us that people are living longer. Planning for United Growth & Income Fund (UGIF)
retirement therefore becomes ever more so important. Fund Yield: 9.26% p.a.
Benchmark Yield: 12.53% p.a.

04 Investment planning for your United Stock Advantage Fund (USF)


child’s education Fund Yield: 24.11%
Benchmark Yield: 35.74%
Every parent wishes to gift their children a secure financial
future. We all wish that our child would be highly educated, United Islamic Income Fund (UIIF)
and never face any financial constraints. However, Fund Yield: 5.44% p.a.
education expenses are, by no means, low, and if sound Benchmark Yield: 7.68% p.a.
investment planning is not done for your child’s future in
a timely fashion, meeting these expenses can prove to be United Composite Islamic Fund (UCIF)
rather tricky. Fund Yield: 16.36%
Benchmark Yield: 27.55% p.a.

06 Portfolio Strategy 2010


A follow-up of the article “Portfolio Strategy” published UBL Funds launches
in the previous issue of Fundamentals, in this feature,
Hasnain Raza Nensey, Chief Investment Officer (CIO), does
Voluntary Pension Schemes (VPS)
a performance review of the investment portfolios
recommended for Jan-Jun 2010 and suggests new portfolio To help investors plan for their retirement, UBL Fund
allocations and readjustments for Jul-Dec 2010. Managers launched ‘UBL Retirement Savings Fund’ and
‘UBL Islamic Retirement Savings Fund’ - Voluntary Pension
Schemes (VPS) that provide investors with an affordable
and easy way of growing their savings so they can enjoy
10 Weathering stock market a financially independent and rewarding life after
volatilities retirement.

Surprise. Nervousness. Alarm. Sell! While this sequence


can be a natural reaction to stock market volatilities,
avoiding an emotional response to investing by keeping
sight of your investment objectives during these times
could be the determining factor in long-term success.

12 Strategies to beat inflation


Inflation is an investor’s worst enemy. It eats away the real
purchasing power of an investor’s assets. Only when the
return exceeds the rate of inflation does the portfolio start
to generate any increase in the purchasing power.
Enjoy financial freedom in
your golden years

Asad Raza Bhojani, Manager of UBL Retirement


Savings Fund and UBL Islamic Retirement Savings
Fund, is a Chartered Actuary from the UK having
over nine years of experience.

It is a reality that people do not actively think about their retirement until they are too
close to it. And by then, the opportunity to efficiently plan that phase of one’s life is
lost. The latest data on mortality around the world and in Pakistan tells us that people
are living longer. Planning for retirement therefore becomes ever more so important.

Retirement Savings: Why Bother? And with temptations galore, the money could be used to fund
say a holiday or home renovation. While these expenditures
Ask an employed individual about how he or she intends to
fund his retirement and how it has been planned, a popular may be totally justifiable, the end result is that funds may not
answer would be along the lines of ‘I have got that covered necessarily be directed towards one’s retirement savings and
through my employer’s gratuity and provident fund’. Pose the as a result an individual may find insufficient funds to get a
same question to a self employed individual and what you decent pension.
probably get is a blank look.
What individuals need is a disciplined approach towards funding
The existing structures of employer offered provident and their retirement.
gratuity funds may not necessarily provide all the answers.
When it comes to retirement savings, these funds are not strictly
for retirement and there are two main problems with them.
Voluntary Pension Schemes
Firstly, loans or advances are permitted in such funds. For Voluntary Pension Schemes (VPS) as introduced by the Securities
example, an advance may be taken against a provident fund to & Exchange Commission of Pakistan (SECP) in 2007 is the first
buy a vehicle, finance the wedding of a loved one, etc.. Secondly, step towards pension reform in Pakistan. The scheme aims to
upon switching jobs, the individual gets his hands on the entire encourage savings for retirement and help participants become
provident and gratuity fund that he or she has accumulated. self-reliant in old age and maintain a good standard of living.

FUNDAMENTALS - Investor Magazine 02


Voluntary Pension Schemes: Features & Benefits Tax credit on contributions
There are tax advantages offered to participants who choose
Defined contribution scheme VPS for their retirement savings. Participants can claim a tax credit
VPS is a defined contribution style offering where the participant of up to Rs. 100,000 (for salaried individuals) and up to Rs.125,000
contributes to his individualized pension account (lump sum or (for self-employed individuals) every year on the amount they
on a regular basis) and the contributions accumulate return over contribute towards their scheme. Such a tax credit is not available
the working life of the participant to provide a final retirement on contributions to provident funds.
fund.
Tax free lump sum withdrawal and regular income post retirement
Different to provident and gratuity funds At retirement, the participant is allowed to withdraw up to 50%
Individuals or employers on behalf of their employees can of his accumulated fund as tax-free lump sum; a feature that is
contribute to the scheme. Due to the defined contribution nature very popular with most participants. If the participant chooses
of VPS, the end beneficiary is only the individual. Furthermore, to receive a lump sum payment at retirement, the remaining
unlike in the case of provident or gratuity funds, the benefit is balance can be used to enter an Income Payment Plan managed
not dependent on the length of service or any other condition by the pension provider. This plan could invest in equity, debt
of employment. and money market based on the participant’s preference and
will be used to provide a monthly income to the participant once
Customization he or she has retired.
The individual accounts are customized according to the specific
needs and requirements of the investor. VPS gives participants A step in the right direction
the option to choose their own asset allocation, enabling Saving for retirement may not necessarily be your top priority,
individuals to allocate contribution between equities, debt and especially if you are 20 or more years away from it. However,
money market instruments in accordance with their risk tolerance planning now can ensure that you can enjoy a financially
and investment time horizon. independent and worry-free lifestyle post-retirement. Through
the Voluntary Pension Scheme, there is a genuine retirement
Portability savings product on offer. The next challenge is to discipline
In addition, the feature of portability improves the mobility of the yourself to start contributing early and on a regular basis.
participant. The individual’s account will stay with the participant
even if he or she switches jobs. Contributions can be resumed
at any time either through the new employer or based on personal
contribution. The participant can also transfer the account to and
from another pension fund manager without bearing any cost.

An illustration showing growth of savings till retirement.

Starting Age Starting Age Starting Age


25 years 35 years 45 years

Retirement Age Retirement Age Retirement Age


60 years 60 years 60 years

Years Investing Years Investing Years Investing


35 years 25 years 15 years

Monthly Contribution Monthly Contribution Monthly Contribution


Rs. 3,000 Rs. 8,000 Rs. 20,000

Total Contribution Total Contribution Total Contribution


Rs. 1,260,000 Rs. 2,400,000 Rs. 3,600,000

Value at Retirement* Value at Retirement* Value at Retirement*


@14% p.a.: Rs. 3.3 Crores @14% p.a.: Rs. 2.1 Crores @14% p.a.: Rs. 1.2 Crores

*Important: Rate of return is only to illustrate the effect of compounded growth. It is not intended to reflect future values or return on investment.
Investment Planning
for your Child’s
Education
It starts out with diapers and baby food, dolls and cars, through clothing,
books, tuition fee and graduation…

By: Maleeha Mimi Bangash, Chief Strategy Officer

Give your children the future they deserve Start early & invest regularly
Every parent wishes to gift their children a secure financial future. Investment plans for children generally encourage parents to
We all wish that our child would be highly educated, and never start saving from an early stage of their child’s life. Education
face any financial constraints. However, education expenses expenses are continually on the rise, and there is no way to
are, by no means, low, and if sound investment planning is not predict the figure at which these expenses will stand in a few
done for your child’s future in a timely fashion, meeting these years' time. Hence, it makes sense to put aside a part of your
expenses can prove to be rather tricky. Fortunately, parents present income regularly towards your child's education fund.
can, by following some broad investment guidelines, easily make
the necessary financial arrangements for their children, without Powerful growth for the long-term
having to make any compromises.
If you know you will be investing for ten years or more, you may
want to consider investing a major part of your investments in
Fixed investment horizon stock-based funds, as these funds offers long-term growth
Saving for children’s education has one significant advantage potential that other types of investment cannot match. Of course,
over many other types of investment – you know when you are recent years have reminded us that stock markets are subject to
likely to need the money. It could be their 18th birthday, their volatility - that is they can rise and fall unpredictably over short
21st or some other date you have in mind, but it means you can periods. However, the fact is that stocks tend to rise in value
plan very specifically for the time frame. over the long-term.

FUNDAMENTALS - Investor Magazine 04


For example, if we take a look at the performance of the domestic The idea is that as you come closer to achieving your financial
stock market since 1994, long-term investors choosing to stay in objective, for example when your child becomes eligible for
the market for at least 10 years enjoyed annual returns of 59% college, your savings should be transferred to more liquid and
on average despite the short-term market ups and downs. secure assets such as fixed income and money market funds.

If you to choose to invest in the stock market through a mutual Pick a fund that does the work for you
fund, you can considerably reduce the level of risk involved. This
If you don’t want to manage the move from stock funds to fixed
is because you will be holding a selection of stocks chosen by an
income and money market funds yourself, you could choose an
expert fund manager, so each company that the mutual fund
investment plan that does it for you. A customized children savings
invests in is only a small part of your total investment portfolio.
plan will automatically move your money over the years, so that
You can potentially reduce risk even further by holding a mix of
you take the right level of risk at the right time. All you have to
mutual funds that invest in different sectors or geographical
do is choose the maturity age for your child’s plan and proceed
regions as this gives you access to a wider range of opportunities.
to making regular contributions. The fund manager will make
allocations on your behalf in different asset classes such as stocks,
Switch between asset classes fixed income and money market, keeping in mind your overall
Another advantage of investing in stocks is that you can take investment objective and maintaining a balance between capital
your money out easily at any time. As a result, as you come closer appreciation and liquidity.
to the time when your child will need the money, you have the
option of moving your savings into less volatile asset classes such
as fixed income funds. These don’t offer the same level of growth
potential as stock funds, but they are also much less likely to fall
in value. You could also move some of your savings into money
market funds which provide a relatively lower return but are
largely risk-free and very liquid.

Four essential investment ideas


The best time to start investing is now Think about saving each month
Investing for children is all about the long-term; to give Unless you have a large sum to invest, a good way to
your investment as much time as possible to grow, you build up significant savings for your children over the
need to start investing as soon as possible. years is to start a monthly savings plan. This can help you
maintain a long-term investment strategy and is a useful
The sooner you invest the more time your money will way of being disciplined about saving for your children’s
have to grow. You will also benefit more from the power future – you will soon start thinking of your regular
of “compounding”, which is the snowball effect you payment as an essential part of your budget.
have when the growth your investment has achieved
also starts to grow. If you delay, you will probably have Monthly investments also give you a way to smoothen
to invest much more to achieve a similar result. out the market volatility. If stock prices go up, the
stocks/units you already own will increase in value. On
Invest as much as you can afford the other hand, if prices go down, your next investment
Many people find it hard to work out how much money will buy more stocks/units.
they need to save to help fund their child’s education.
Don’t try to time the markets
This is why the best strategy is to put aside as much as Instead of investing straight away, you might be tempted
you can afford. This means you are not just more likely to wait for the market to reach a low point or for
to achieve your goal, you could build up more than you confirmation that a recovery is really happening. But
need – which could then help you with any other how will you know what this low point is? And how long
expenses you may face, such as your child’s marriage. do you wait until you are sure it is a recovery? Even the
experts find it impossible to “time the markets”. If you
put-off making an investment because you think prices
will fall further or you are not sure they have really started
to recover, there is a risk that you will miss out on the
significant rises that often occur in the early days of an
upward trend.

FUNDAMENTALS - Investor Magazine 05


Portfolio Strategy 2010
A follow-up of the article “Portfolio Strategy” published in the previous issue of Fundamentals, in
this feature, Hasnain Raza Nensey, Chief Investment Officer (CIO), does a performance review
of the investment portfolios recommended for Jan-Jun 2010 and suggests new portfolio allocations
and readjustments for Jul-Dec 2010.

This is the fourth issue of UBL Fund Manager’s semi-annual Absolute Return
magazine “Fundamentals” and our “Portfolio Strategy” feature (Jan - Jun 2010)
has become the heart of the publication. The success of the Equities -1.35%
simple yet smart asset allocations recommended in the article Fixed Income:
over the last year-and-a-half is proof that intelligent investment - Term-deposits 5.6%
strategies can help generate impressive returns for all types of - Income Funds 2.4%
investors. The years 2009 and 2010 have been extremely volatile - GoP Schemes 6.3%
for both local and global markets. But despite the tough investing Real Estate 18.4%
environment, the recommended strategies have managed to Commodities (Gold) 11.7%
preserve capital while generating value. In this feature, we Cash (Money Market Funds) 4.7%
review the performance of the recommended portfolios and
give fresh recommendations for July to December 2010.
The recommended portfolios have performed well versus the
investible asset classes and the asset allocation hedged low risk
Performance Review of Recommended portfolios from market uncertainty while the aggressive portfolio
Portfolios performed well despite the turbulent market conditions.

Following is a snapshot of the returns of the recommended


portfolios from January 2009 to June 2010 (1.5 years) since we
started writing this strategy feature.
6-Month Absolute Return
January - June 2010

Conservative Moderate Aggressive


18 Months Absolute Return
Portfolio Portfolio Portfolio January 2009 - June 2010

4.5% 5.8% 6.0%


Conservative Moderate Aggressive
Portfolio Portfolio Portfolio
Individual returns (Jan-Jun 2010) for the asset classes that make
up the portfolios, are shown in the table on the top right.
19.4% 29.0% 34.0%

FUNDAMENTALS - Investor Magazine 06


The aggressive portfolio has generated the highest return (34%) consolidated to close the period with a return of -0.3%. Dow
over the long-term; however this has come at the cost of higher Jones was almost flat for the period with a return of -0.2% but
volatility of around 6% (annualized). The moderate portfolio the European markets were significantly worse (FTSE: -3.6%,
offers slightly lower return (29%) while reducing the volatility DAX: 3.7%, CAC: -7.0%). The declines in MSCI World Index
to a much more manageable level of around 4% (annualized). (-5.16%) and MSCI Emerging Market Index (-5.23%) during the
The conservative portfolio reduces the volatility to a mere 2% period provides a summarized view of the market movement.
(annualized) while sacrificing return but still generating a much On valuation basis, the regional peers are trading in the PE range
respectable 19.4% in the Jan 09 – Jun 10 period. of 15x-17x while developed markets are trading in the 11x-15x
(Note: Annualized “Standard Deviation” has been used as a range. Therefore, Pakistani equities trade at a significant discount
measure of volatility in the above analysis) to regional peers – this can generate substantial foreign interest
if the country’s risk perception improves.

Developments across various asset classes Fixed Income


Risk: Low | Return: Moderate | Investment Horizon: 6M – 1Y
and their future outlook
Term Deposits
Equities At the time of publication of our last issue (6 months ago),
Risk: High | Return: High | Investment Horizon: 2Y – 5Y 6 - month TDR rates for AA category banks were in the 10.75%
to 11.5% (annualized) range. As the local banking sector is still
KSE100-index generated an absolute return of -1.35% during on a risk-averse footing, the deposit rates have stayed low during
the period (1 Jan 10 to 15 June 2010). The movement in the local the last six months. Recently the liquidity situation of the money
equities can be summarized as a correction followed by market has relatively tightened, leading to improvement in Term-
consolidation after the impressive 31.1% return generated in Deposit rates for 6 month placements in AA-rated banks to
the prior six months (Jul – Dec 2009). We mentioned in our last stand in the range of 11%-11.75% p.a. The low risk nature of
issue that the market was fairly valued and the low hanging fruit these placements and expectations of the Central Bank continuing
had been picked, hence we did not expect above average with an accommodative monetary policy stance over the longer-
returns in the coming six months – our view proved to be correct term, some exposure in the asset class can be justified. However,
as the market closed the period with a flat return. The KSE100 the return on GoP securities (discussed below) is higher and we
is currently trading at PE(11E) (Price-to-Earning Ratio) of prefer that asset class over TDRs for our conservative and
approximately 6.5x which is at about 20% discount to the moderate portfolios.
historical average forward PE of 8.0x – therefore we maintain
our expectations for a 20% annual return from equity markets. Income Funds
The systematic risk and uncertainties will play a large role in the
We highlighted in the past that fixed income funds are poised
coming year as “Capital Gains Tax” and “Value Added Tax” are
to outperform term deposits and money market funds over the
implemented and the Government goes through negotiations
medium to long-term – albeit at the cost of much higher volatility.
with IMF for conditions applicable on the current SBA (Stand By
Therefore we only recommend medium to long-term investments
Arrangement) facility and potentially a new one as well. The
in these instruments as volatility smoothens itself out over longer
security conditions continue to be volatile as well – an
time scales.
improvement on this front can lead to a valuation re-rating of
the market while any deterioration in the law and order
conditions can also damage the investor sentiment. In short, Government of Pakistan (GoP) Schemes
we expect a moderate level of noise to envelop the market’s In our last issue, we recommended, then newly introduced,
basic fundamentals in the coming period. “National Savings Bonds” (NSB) which yield 12.5% p.a. for a 3
year instrument. The yield structure of the instruments remains
Global equity markets were battered by concerns regarding unchanged and we recommend them for our risk-averse
sustainability of the Euro-zone and the Greek crisis during the portfolios, especially considering the low risk exposure and the
last six months. The Chinese market was especially hurt by the potential for capital gains in case of further relaxation in the
combined effects of global risk aversion and hints of monetary monetary policy.
tightening by the Chinese central bank; Shanghai Index declined
-21.6% during the period. Indian equities also corrected and

Return Vs Risk of Various Asset Classes


40%

35%
Equities Return Vs Risk of
30% Various Asset Classes
Commodities January 2009 - June 2010
25% Aggressive Portfolio
Return

20% GoP
Moderate Portfolio The chart on the left shows how the
Schemes recommended portfolios achieved the
15% desired Risk / Return mix using the
Conservative Porfolio
TDR
Real Estate available asset classes.
10% Income
Funds
5%
Cash Diversification in the portfolios helped
reduce risk and added to the
portfolio’s return per unit risk.
5% 10% 15% 20% 25%
Risk
Real Estate Cash
Risk: Moderate | Return: High | Investment Horizon: 10Y Risk: Low | Return: Low | Investment Horizon: 3M - 6M

Lack of transparency in the real estate market is a major obstacle We recommended noney market funds for parking liquidity. The
in calculating real estate returns. We have estimated the return money market liquidity has relatively tightened in the recent past
of the asset class through inflation data collected by the Federal and minor increase in rates is expected which will benefit the liquid
Board of Statistics. According to the data, the Real Estate index fund yields. We expect the Central Bank to maintain the policy
(building & construction material) rose from 186.7 (Dec 2009) rate at status-quo over the short to medium-term with an
to 221.1 (Jun 2010), generating an absolute return of 18.4% underlying bias towards an accommodative monetary policy.
during the period. However, the figure can be misleading as the Therefore, liquid funds are expected to continue generating returns
actual volume of real estate transactions is very low due to in the current range over the coming months. The stable returns
liquidity constraints. of these funds also provide a hedge against the volatile nature of
local capital markets.
We recommended exposure in real estate with a long-term view
and continue to believe that the asset class offers exceptional
value for long-term investors, especially as a hedge against
inflation. Pakistan’s demographics, a young growing population
and urbanization are the key factors behind our stance on the
asset class.

Commodities (Gold)
Risk: Moderate | Return: High | Investment Horizon: 1Y

Gold prices have gained from USD1,095/oz (Dec 2009) to


USD1,223/oz (Jun 2010) during the period, generating an absolute
return of 11.7%. The European economic crisis sent jitters down
the spine of global investors and triggered a fight to risk-averse
assets. Gold prices rallied strongly as the precious metal is
considered the best hedge against economic turmoil and current
volatility.

We have previously expressed our expectations of high future


inflation and devaluation of paper money resulting from the
sharp increase in money supply due to government sponsored
bail-out packages. The recent bail-out package offered to weak
European countries will further add to the phenomenon. We
continue to prefer gold as a hedge against this long-term risk.

Portfolio Recommendations for July - December 2010

Conservative Portfolio Moderate Portfolio Aggressive Portfolio

Cash, 15% Cash, 10% Equities, 25% Cash, 5% Equities, 40%


Commodities Commodities
(Gold), 10% (Gold), 15%

Real Estate,
Income 15%
Real Estate,
Funds, 30%
20%

GoP Schemes, Income Funds, Income Funds, GoP Schemes,


GoP Schemes, 55% 20% 20% 10% 10%
Disclaimer: All investments in Voluntary Pension Schemes are subject to market risks. The value of investments may depreciate as well as appreciate subject to market
fluctuation and risks inherent in all such investments. Investors should read the Offering Document carefully to understand investment policies, risks and tax implications
and should consult their legal, financial or tax advisor before making investment decisions. Withdrawals before retirement age are subject to tax under provisions of the
Income Tax Ordinance , 2001.

Plan your retirement today and enjoy financial freedom!

Introducing UBL Retirement Savings Fund


The decisions you make today will shape your life tomorrow.
With UBL Retirement Savings Fund, you can plan a retirement that allows you to enjoy
a carefree lifestyle today and financial freedom tomorrow.

Customized Investment Solutions Long-term growth of savings


Minimum Investment: Rs. 500 only Professional Fund Management
Convenient Regular Contribution Options Islamic option also available

The sooner you start saving, the more time your money will have to grow!

Invest & avail tax credit of up to Rs. 125,000/-*

Trust the Experts!


Call 0800-00026 SMS ‘PENSION’ to 2600
www.UBLFunds.com info@UBLFunds.com

*As per Section 63 of the income Tax Ordinance, 2001, this is the maximum tax credit applicable on an annual taxable income of more than Rs. 1,300,000
(tax bracket 25%) for self employed individuals. Salaried individuals can avail tax credit of up to Rs. 100,000 on an annual taxable income of more than
Rs. 8,650,000 (tax bracket 20%)
Weathering
Stock
Market
Volatilities
Surprise. Nervousness. Alarm. Sell !!! By: Salim Mehdi, Head of Institutional Business
While this sequence can be a natural
reaction to stock market volatilities,
avoiding an emotional response to
positive return. In other words, down periods as well as up, are
investing by keeping sight of your natural parts of equity investing. Unpredictable events will have
investment objectives during these times an impact on markets, sometimes negatively. However, it may
not be beneficial to let the short-term declines distract you from
could be the determining factor in long- your long-term goals or the long-term potential of stock market
term success. investing.

Be invested - Keep your money working for you


Making the most of the stock market volatilities
Over every market cycle, there will be up days and down days.
While no one can predict when markets will decline or rebound, Missing even a few of the stock market’s best-performing days
a strategy of adding to holdings when markets are “on discount” can result in significantly lower returns than the market index.
may provide significant advantages versus a strategy of pulling Often, a few very good days account for a large part of the
out of the market. market’s total return. By trying to determine when to be in and
out of the market in the short-term, you potentially miss out on
Be informed - Understand market ups and downs market rallies that could substantially improve your overall return
and long-term wealth. Staying the course when confronting
Understanding general stock market behavior is an important difficult markets ensures that investments will be “in” the market
factor for investing during good times as well as trying times, on the good as well as the bad days and may ultimately prove
and in achieving long-term investment success. Stocks have rewarding. During difficult market conditions investors should
historically proven to be a very good investment. This does not also consider their overall objectives and how the risks of their
mean that every year will produce a double-digit, or even a investments fit these objectives.

FUNDAMENTALS - Investor Magazine 10


Be resolute - Stay the course Be diversified - Reduce volatility and enhance returns
The rallies you miss could significantly hurt your overall return Rather than trying to pick a single investment type, diversifying
and impede achieving your investment goals. Goals that are most across asset classes may help to decrease your risk and enhance
important to investors, such as a financially secure retirement, long-term return potential. Not all investment types perform the
funding children’s education, providing for the well-being of same during similar time periods. Investing across multiple asset
one’s own parents, require a long-term perspective. Clouding classes, sectors and regions reduces risk and enhances the
long-term goals by reacting to short-term events and interrupting potential for being invested in the best performing assets and
a disciplined investment approach could be counterproductive diminishes the impact of being invested in the worst. This strategy
to achieving those goals. may be especially important in a difficult market environment
when sector rotations and market fluctuations happen
Be opportunistic - Take advantage of the downturns continuously. Diversification may reduce the overall volatility of
your entire portfolio while helping you achieve above-average
By viewing market declines as buying opportunities, you could long-term returns.
significantly enhance your long-term return potential when the
market rebounds. While no one can predict when markets will Be confident - Be invested
decline or rebound, some investors choose to add to holdings
when markets are “on discount”. This strategy may still prove Investors have seen a number of shocks and disruptions to
risky and incur additional losses, but adding to holdings or looking financial markets caused by both political and economic factors,
to diversify when markets are cheaper may provide significant and markets may react dramatically in response to specific events.
advantages versus a strategy of pulling out of the market near While investors may see the market react dramatically to adverse
the bottom. events, they should be far more influenced by their long-term
goals. Maintaining a clear focus on your investment objectives
Furthermore, “rupee-cost averaging”, in which you invest a fixed during difficult times is often a determining factor in long-term
amount of money at regular intervals, is a disciplined investment success. Seasoned investors know that, in the long run, markets
strategy that can turn volatility into a potential positive. Ultimately, have shown remarkable resiliency in times of crisis. Investors
a lower average cost translates to a higher return when the who are informed, invested, resolute, opportunistic and diversified
market swings back up and vice versa. Since such a plan involves can have a greater degree of confidence that their investment
continuous investment in securities regardless of their fluctuating goals can be met.
price levels, you should consider your financial ability to continue
purchases through periods of low price levels.

Equities Vs Fixed Income Returns

The chart below shows the value of Rs.1000 invested in the local stock market in 1998 versus the value of Rs.1000 invested
in a fixed income instrument (Defence Saving Certificate) at the same time.

As is evident from the graph, despite the volatility, equity investments (1998 – 2010: 10.05 times | 1,005%) have
generated much higher value for the investor versus the fixed income investment (1998 – 2010: 2.84x | 284%).

Defence Saving Scheme KSE

Rs. 18,000
Rs. 16,000
Rs. 14,000
Rs. 12,000
Rs. 10,000
Rs. 8,000
Rs. 6,000
Rs. 4,000
Rs. 2,000
0
FY2010*
FY2004
FY2000

FY2006

FY2008

FY2009
FY2005
FY2003
FY2002

FY2007
FY2001
FY1998

FY1999
Strategies to beat inflation By: Wahaj Aslam
Fund Manager - Islamic Funds

“Inflation is when you pay fifteen dollars for the Short-Term Money Market Funds
ten dollar haircut you used to get for five dollars Whenever there are inflationary concerns, it may be best to keep
your money in short-term accounts or money market funds which
when you had hair.” provide market based returns, or in other words floater returns.
- Sam Ewing This is because money market funds invest in short-term money
market instruments and in case of higher inflation expectations,
it is soon followed by higher interest rates as well which are
Inflation is an investor’s worst enemy. It eats away the real transferred to the investor instantly as the portfolio adjusts
purchasing power of an investor’s assets. Over any given time instantaneously. This provides an opportunity to enjoy market
period, a portfolio’s return needs to equal the rate of inflation based returns and an opportunity to lock-in long-term high yielding
just to preserve the purchasing power the investor started with. instruments when the interest rates have peaked or are in a
Only when the return exceeds the rate of inflation does the comfortable zone.
portfolio start to generate any increase in the purchasing power.

The first step to protect yourself from inflation is to enroll in a


Stocks / Equities
Systematic Investment Plan (SIP) – this is a vehicle offered by Stocks, unlike bonds, provide a variable income. Stock represents
mutual funds to help investors save regularly for accumulation of ownership of a business, and a stock’s value depends, in broad
wealth in a disciplined manner over the long-term. Investments terms, on the success, or lack thereof, of the underlying business.
made through SIP can be invested in equity, money market or Investing in quality, blue chip stocks has traditionally been the
balanced funds in order to earn positive “inflation adjusted best long-term way to beat inflation. The only problem is that if
returns”. inflation becomes a major impediment to economic growth, the
stock market will most likely suffer too. One way to reduce that
There is a common misconception that savings accounts at banks risk is to stick with big, blue chip companies which, by virtue of
can help investors accumulate wealth over the long-term. These their size, have more pricing power than small companies.
accounts offer a meager return of 5%, which does not Moreover, these companies often pay out dividends which, in
compensate for the inflation levels in Pakistan (11mFY10 CPI: contrast to investing in fixed-income investments, should provide
11.64%YoY). Savings certificates / term-placements and bonds a reasonably good long-term inflation hedge because earnings
do slightly better but not by much. grow on a nominal basis and investors retain exposure to economic
performance. Any share price gains are simply a bonus on top of
So what is an investor to do? Following are some of the options the payout increases.
at hand.

FUNDAMENTALS - Investor Magazine 12


Top Dividend Yielding Stocks Commodities and equities generally complement each other’s
performance during different phases of the economic cycle.
Company Name Dividend Yield When inflation is high, commodities are the best performers
Hub Power Company 16% while the performance of equities is relatively subdued due to
high interest rates. Alternately, equities are the best performers
Kot Addu Power Company 14% when inflation is low as it is accompanied by low interest rate;
however performance of commodities is subdued in this phase.
National Refinery 14% Therefore it is a good idea to have a mix of equities and
Fauji Fertilizer Company commodities in a portfolio in order to generate stable returns
13%
across the economic cycle.
Fauji Fertilizer Bin Qasim 13%
Pakistan Petroleum 12% Real Estate
Pakistan Oilfields Real Estate is also categorized as a “real asset” and has been
11% traditionally considered a good hedge against inflation. The large
National Bank of Pakistan 11% transaction size and limited liquidity are significant obstacles for
small investors looking to enter into this asset class. Small investors
Attock Petroleum 10% can access the asset class through Real Estate Investment Trusts
Shell Pakistan 9% (REITs), which are essentially a securitized version of direct
ownership (with a management company providing the actual
The table above shows a list of stocks which offer an attractive dividend yield. investment decision making and day-to-day operations). REITs
HUBCO has been a long-term market out-performer on total return basis. Since its are currently not available in Pakistan, however regulations are
IPO in 1994, HUBCO has provided a total return of 16.5% p.a. – outperforming KSE- being streamlined by the Securities & Exchange Commission of
100 return of 10.4% p.a. during the same period and also beating inflation (Average
inflation since 1994: approximately 8% p.a.) by a significant margin. Pakistan (SECP), and REITs are expected to be launched shortly
thus providing an alternate investment opportunity to the
investors.
Commodities
Conclusion
Oil / Gold – commodities are categorized as “real assets” and are
considered a better way to protect one’s capital from inflation. Inflation is considered to be a “monetary phenomenon” under
Investing directly in commodities has not been a real option for the Milton Friedman school of thought. It is the result of central
Pakistani investors as no avenue to trade them was available. bankers not being able to adjust the monetary policy perfectly
However, with the recent launch of “National Commodities inline with the ever changing economic dynamics. However, the
Exchange”, commodities are expected to become a regular part nature of inflation is different every time and no single asset class
of portfolios. Crude oil prices have provided a 14% p.a. return provides the ultimate shield against adverse effects of this
over the last 10 years, once again beating the average inflation phenomenon. Therefore, it is recommended that investors create
rate during the same period. Similarly, gold prices have yielded a suitable mix of the asset classes discussed above to enjoy benefits
12% p.a. during the last 10 years and investing directly in the gold of “diversification” as well as build real purchasing power over
bullion has been a popular investment avenue in our society in the long-term.
the past. Commodity investments can also be made through
commodity mutual funds which help manage risks better, however
these funds are not readily available to Pakistani investors yet..

FUNDAMENTALS - Investor Magazine 13


Understanding
your Risk Profile
in the value of your investments and are prepared to accept
By: Farooq Ahmed, Head of Retail Business volatility in the short-term, then you are an aggressive investor.

In reality, investing is an emotionally engaging process because


your hard-earned money is at stake. You should not let your
Whether it is investing, driving, or just emotions impact your investment decisions as that can raise the
probability of making wrong decisions in haste.
walking down the street, everyone
exposes themselves to risk. Your Your Investment Horizon
personality and lifestyle play a vital role You will need to take on more risks if your plan is to earn say
on how much risk you are comfortably Rs. 300,000 in the next 3 years compared to someone who plans
to make Rs. 200,000 in 8 years. The higher the target return and
able to take on. shorter the time-frame, the more risks you will have to take to
achieve your objectives.

We know investing is highly personal; everyone has different Your Financial Skills
goals, timeframes and sensitivities to risk. We also know that
every investment is subject to some level of risk. The first thing Generally investing in stocks is perceived to be riskier than investing
you need to do before you start investing is to understand your in low risk assets such as fixed income and money markets.
ability and willingness to take risks. In doing so, you will determine However, if you understand financial markets and economic
how best to allocate your savings among various asset classes. trends, you may be able to reduce risks by selecting the right
Not knowing what your tolerance to risk is or what you are stocks. Your own financial skills and talent can play an important
investing in may cost you financially. part in your investment strategy. An investment which is more
risky to others might be less risky to you.
What is Risk?
Managing risky investment such as equities is a time consuming
Most people think of investment risk in one way: “How likely am activity that involves staying abreast of latest news, digging into
I to lose money?” This statement describes only part of the picture, corporate financial statements and dealing with brokers. If you
however. When considering how much risk you can take, you are a full-time professional, then you will most likely not have
need to analyze your risk appetite against common factors such adequate time at hand to perform these activities. In this case,
as your age, your attitude towards risk, the time-frame available it is better to invest through stock-based mutual funds where
for your strategy to work, your financial skills and (availability of experienced and skilled professionals take on the responsibility
time to utilize them), your net income, net worth, and your of performing these activities on your behalf at a marginal cost.
lifestyle.
Your Net Cashflow & Net Worth
Your Age
The higher your net cash flows, the more risks you can afford to
The younger you are, the more risks you can afford to take. You take. Net cashflow means excess cashflow after deducting all
have time on your side to ride out the short-term fluctuations on living expenses and financial obligations from your income. Also
your investments. Therefore, young investors can afford more the higher your net worth, the more risks you can take.
aggressive investment strategies possibly involving equity funds.

If you are retired or nearing retirement, you should invest in low


Social Factors
risk assets like fixed income and money market funds. Are you single or married? Do you have children or parents who
depend on you for financial support? If yes, then you should be
Your Attitude & Emotions Towards Risks careful taking risks because any negative financial impact on your
investments could affect these people besides you.
Different people react differently towards risks. Some are risk
averse while some are risk takers. You should not take on any
more risks than you are comfortable with. If you are the type of Conclusion
investor who is concerned about preserving the value of your In summary, risk is a natural part of investing. You need to find
investment, earning consistent modest returns over a long period your comfort level and build investment portfolios and
of time, then you are a conservative investor. If you looking for expectations accordingly. Even though there are thousands of
higher returns with some protection for your investment, then investment strategies available out there, the best strategy is the
you are a moderate investor. If you are looking for high growth one you plan for yourself because only you know yourself best.

FUNDAMENTALS - Investor Magazine 14


What is your
risk profile?

Investing in financial markets carries risks. This means there Q.4. I am willing to experience the ups and downs of the market
is a chance the value of your investments will rise or fall in for the potential of greater returns over the long-term.
value. Everyone has a different attitude to investments. Some 1. Strongly disagree
people need certainty that the value of their investment will not
fluctuate by much. In exchange for this assurance they are 2. Disagree
prepared to accept the prospect of lower returns in the long run. 3. Neutral
Others are willing to accept that the value of their investment
4. Agree
could go down in the short-term in anticipation of achieving
higher returns in the long run. Understanding your attitude to 5. Strongly agree
money is vital in determining how to invest your money. We call
this ‘knowing your risk profile’. Q.5. Which of the following best describes your attitude to
financial risk?
To determine your risk profile, complete the questionnaire given
below. Tick one box for each question. People who hold assets 1. A very low risk taker
jointly often have differing views regarding the level of risk they 2. A low risk taker
are prepared to accept. If you have different views to your partner,
3. An average risk taker
please complete a separate questionnaire. You may also have a
different attitude to risk for each of your goals. You may like to 4. A high risk taker
complete a separate questionnaire for each goal. 5. A very high risk taker

Q.6. Which statement best describes your understanding of


financial markets and investments?
Q.1. If my investment value fluctuated more than 20% over any 1. I am not familiar with financial markets and I have
time frame, I would find it hard to sleep at night. little interest in them
1. Strongly agree 2. Not very familiar
2. Agree 3. I have had enough experience to understand the
3. Neutral importance of diversification
4. Disagree 4. I understand that markets fluctuate
5. Strongly disagree 5. I am experienced with all investment sectors

Q.2. I am willing to accept more risk to possibly achieve higher Q.7. My main concern is security. Keeping my money safe is
returns. more important than earning higher returns.
1. Strongly disagree 1. Strongly agree
2. Disagree 2. Agree
3. Neutral 3. Neutral
4. Agree 4. Disagree
5. Strongly agree 5. Strongly disagree

Q.3. If you had an investment portfolio, how often would you Q.8. How do you normally feel after you have made a significant
rearrange it? financial decision?
1. Whenever there is a fall in value 1. Very concerned
2. At least every 3 years 2. Concerned
3. Every 3 to 5 years 3. A little uneasy
4. Whenever my investments go up significantly 4. Content I have made the right decision
5. Every 5 years or more 5. Optimistic that my decision will provide benefits

FUNDAMENTALS - Investor Magazine 15


Q.9. Investments that experience high volatility have generally
compensated investors with higher returns over the long-
term. If you could invest in an investment for between 10 Score Your Risk Profile
and 20 years, which of the following would most suit you?
1. An investment that may have a negative return
every 10 years but will usually have an annual return
between -2% and 11% p.a. with an average return 9-16 CONSERVATIVE
of 10% p.a. A VERY LOW RISK TAKER
2. An investment that may have a negative return You are a conservative investor. Risk must
every 8 years but will usually have an annual be very low and you are prepared to
accept lower returns to protect capital.
return between -5% and 14% p.a. with an
The negative effects of inflation will not
average return of 12% p.a.
concern you, provided your initial
3. An investment that may have a negative return investment is protected.
every 5 years but will usually have an annual
return between -7% and 17% p.a. with an
average return of 14.0% p.a. 17-23 MODERATELY CONSERVATIVE
4. An investment that may have a negative return A LOW RISK TAKER
every 4 years but will usually have an annual You are a moderately conservative
return between -9% and 20% p.a. with an investor seeking better than basic returns,
average return of 17% p.a. but risk must be low. Typically an investor
5. An investment that may have a negative return seeking to protect the wealth that you
every 3 years but will usually have an annual have accumulated, you may be prepared
return between -11% and 30% p.a. with an to consider less aggressive growth
average return of 20% p.a. investments.

24-30 BALANCED
AN AVERAGE RISK TAKER
Calculate your tolerance to risk by adding the numbers
You are a balanced investor who wants
(given next to the answers) for each box you have a diversified investment to work towards
ticked in questions 1 to 9. medium to long-term financial goals.
You require an investment strategy that
will cope with the effects of inflation.
MY RISK SCORE IS _________ Calculated risks will be acceptable to you
to achieve good returns.
Now match your risk score to the risk profile in the
table to the right to determine your risk profile. The 31-37 MODERATELY AGGRESSIVE
next step should be to meet with your investment A HIGH RISK TAKER
advisor to develop a portfolio based on your You are a moderately aggressive investor,
investment objectives and risk profile. probably earning sufficient income to
invest most funds for capital growth.
Prepared to accept higher volatility and
moderate risks, your primary concern is
to accumulate assets over the medium
to long-term. The assets you hold will be
similar to a balanced investment but more
aggressive investments may be included.

38-45 AGGRESSIVE
A VERY HIGH RISK TAKER
You are an aggressive investor prepared
to compromise investment balance to
pursue potentially greater long-term
returns. Your investment choices are
diverse, but carry with them a higher
level of risk. Security of capital is
secondary to the potential for wealth
accumulation.

FUNDAMENTALS - Investor Magazine 16


Market Watch With Junaid Qamar
Fund Manager - Fixed Income Funds

After last years global and local economic crisis, do you What are your comments regarding the inflationary
think this fiscal year has seen some improvement or are pressure the country has been facing since last year?
we still facing its repercussions? The State Bank of Pakistan (SBP) amid resurging inflationary
The fiscal year 2009-10 in my opinion was a much better year pressures and fiscal slippage has been on a “Wait and See” mode
despite the severe energy crisis, foreign debt piling up, high since November 2009. Inflation bottomed in October 2009 at
interest rates and a low agricultural output. The economic growth 7.5%, post which it has been regaining strength. We have seen
rate picked up during FY2010 on the back of the revival in the the effect of higher inflation i.e. the credit price (the interest
industrial sector and high growth in the services sector. Balance rates) is high which forms a hindrance to fresh investments and
of payments deficit declined as imports plummeted and fortunately makes exports non-competitive in the international market place.
enough the price of oil declined. The level of reserves improved,
reaching about USD15bln. However, the fiscal front stayed gloomy Food inflation has been high in the last three fiscal years and this
with fiscal deficit showing an uptrend, tax collection falling below year too (FY11) it is expected to remain in double digits. The
target and high government borrowing continuing to fuel inflation. Government, in the federal budget has announced an inflation
target of 9.5% which is quite unrealistic whereas the IMF and
What about the foreign inflow, since the funds promised the SBP have targets of 12.5% and 12% respectively. The SBP in
at the FODP’s forum haven’t materialized, what do you its third-quarterly report on the state of the economy has clearly
pointed out that the rise in food and energy prices seen since
think the Government’s next step should be?
January 2010 is now having a strong second-round effect. Hence
I expect that a similar financing facility from International Monetary there is a greater need for targeting inflation through controlling
Policy (IMF) will again be needed following the close of the existing fiscal borrowing. I expect the status quo to be maintained on
facility of USD 11.2bln in December this year and the IMF will once the interest rates front for the medium-term and if the dual
again throw a list of embargoes on us. Already, the next tranche disease of fiscal deficit and inflation are muted, then only the
is stalled due to the failure of the government organs to institute SBP can have a monetary accommodation stance.
the tax reforms. Most notable is the implementation of Value
Added Tax (VAT) which has remained much controversial. For this What impact do you think liquidity would have on money
purpose, the Government needs to walk a tight rope on the fiscal market yields?
discipline and has to seriously work towards reducing its
expenditures. On the money market front, there has been a phenomenon of
flight to quality in the domestic banking system in which all the
Do you think the rising international oil prices will create deposits have gone to Government of Pakistan (GoP) Securities
i.e. T-Bills. This is why growing deposits (14% in 4MCY10 - twice
havoc again for our economy?
the figure in the corresponding month last year) has improved
The international oil prices have started to rise just at a time when the system’s liquidity. According to an estimate, an overall amount
Pakistan seems to re-emerge from an economic slowdown - this of PKR 150bln has been added to the system owing to deposit
price hike was also responsible for the previous slow down growth. This has only channeled to GoP Securities. The average
witnessed in 2008 and similar price increases will have significant ADR (advances to deposits) ratio has declined from 75.2% to
negative consequences for the broader economy. The first and 72.3% during the last four months. Higher support prices of
foremost consequence will be higher prices to be paid for imported various commodities and lower inflow of funds to National Savings
fuel (for energy generation purpose). We have seen that since Schemes (NSS) - the monthly average has declined from PKR
the past two years Pakistan has experienced a severe shortage 27.7bln to PKR 17bln - has also served the purpose for the banks.
of electricity which was triggered by higher oil prices and has This is why, pressure on T-bills yeilds has been witnessed during
resulted in a vicious circular debt issue. In the aftermath the the last 6-months. This money has trickled down to Mutual Funds
domestic fuel prices will increase, as a result commodity prices and the industry has witnessed an inflow of around PKR 20bln.
and inflation will also witness an upsurge. As cost of doing business in last few months. In this backdrop, increased liquidity is unlikely
will rise, the pressure will be seen on exports as well as the trade to have a significant impact on money market yields and we
deficit which in turn will put pressure on the balance of payments. expect them to remain sticky downward.

FUNDAMENTALS - Investor Magazine 17


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FUNDAMENTALS is a semi-annual magazine for existing and potential clients of UBL Fund Managers.

Date of print: July 8, 2010

Disclaimer: Information presented in this magazine was prepared based


upon information believed to be reliable and is not guaranteed by UBL
Fund Managers to be accurate, and should not be considered to be all-
inclusive. This magazine contains forward-looking statements that
involve risks and uncertainties. This material is for informational purposes
only and should not be construed as an offer or solicitation to buy or
sell securities. This information is in summary form and does not purport
to be complete. It is intended as a general guide and is not a substitute
for professional advice. The information does not take into account
your personal needs and financial circumstances and you should consider
whether it is appropriate for you.