Tracking the herd

Dear Friends,

A frequent question I get from investors is “what is the market thinking?” Global funds want to hear how is the market sentiment locally and vice versa. This is not unique to Pakistan. In the UK, Procensus is trying to solve the sample biases in this by setting up a digital platform for gauging market sentiment (click here). I am a small angel investor in Procensus. This week as a research exercise, my colleague Sarim Kamran Khan and I  mapped investment flows in the market and tracked the top shareholding of some of the large domestic asset managers as a gauge of market sentiment.

Year to date, Foreign investors have been the biggest net buyers in the market (data published by NCCPL). Overall net inflows from foreign investors are around $78m. This is especially interesting since the market had outflows of around $1.6bn over 2015-18. Besides the foreign funds, other net buyers are domestic banks ($49m), followed by individuals ($29m) and Corporates ($19.7m). Prop books of brokers have also been net buyers of $5.6m

Domestic mutual funds have been the largest net sellers year to date with net outflows of $161m. Insurance companies have also been pulling out of equities, with net outflows of $20m).

What I find very interesting with this data point is that two net sellers from the market are domestic institutions who might be suffering from outflows from their eventual client base. Which means that their selling might not be purely driven by their views on the market but might be also forced due to their clients. According to data from Mutual Fund Association of Pakistan (MUFAP), the total asset management in open-ended funds has declined by 21% between May 2017 and May 2019 (from PkR647.102 to PkR531.18). There is a further hit from a shift in asset allocation away from equity. The asset under management for equity funds has declined by a massive 47% during this period. MUFAP data is only till May 2019 (Click here). I suspect this trend has continued over the past two months.

The shift from equity to fixed income is understandable. Year to date, the two top-performing equity funds, Faysal Stock Fund is down -3% and Lakson Equity Fund is down 4.1%. Over the past 12 months, even the best performing equity fund has returned -16.6% (NAFA Financial Fund). I suspect, most retail investors care more about the absolute returns, rather than relative performance. In comparison, over the past 12 months, in other assets classes, the returns have been much superior. The best performing funds outside of equities over the past 12 months have generated:
Meezan Gold Fund: +42%
Lakson Developed Market Fund: +17%.
and most income funds are up +8 to +10%

After the 700 bps increase, the policy rate is around 13.25% and risk-free products such as the National Savings Schemes are offering around 14% returns. Consequently, it is quite understandable that retail investors want to shift their allocations. This of course creates opportunities for buyers who can accumulate stock for the medium-term holding.

Pakistan has 20 asset management firms. The top 6 account for around 65% of the total industry assets under management. We tracked the top 10 shareholdings of a sample of asset managers (the top 8 who have greater than PKR20bn of AUM)

The results for the 18 funds for the 8 asset managers are presented in the table below.

The results show a crowding in of the funds in very similar stocks. Oil and gas in general and OGDC, in particular, seems to be the most popular stock. OGDC is a top 3 holding for 83% of the funds in our sample. Similarly, its peer Pakistan Petroleum is a top 10 holding for all of the funds in this group and Mari Petroleum and HUBC (power) is held by 16 of the 17 funds. Engro Corp is held by 15 funds.

The other popular stocks are UBL (9), followed by Bank Alfalah and Engro Fertilizers which are top 10 holding for 8 funds each. Another thing which is interesting is that the funds seem to have concentrated their holdings in the top ten names. For most of the funds, the top ten stock account for around 60% of their total portfolio (for some it is close to 80%). Also, the rotation out of cyclical sectors such as cement and autos already seems to have played out. The detailed data is below. I am happy to share this in excel, please email me if you want it.

Ali Farid Khwaja

Managing Director
Khadim Ali Shah Bukhari Securities

* This is not research material and there is no investment recommendation in this blog. These are my personal views.