Newsletter - Oct 06. Table of Contents

Transcription

1 We are a part of the Jahangir Siddiqui Group, jointly setup with AMVESCAP Plc. and the International Finance Corporation (IFC). Table of Contents Financial markets review 2 Economy - As Time Goes By... 3 FMR - UTP 4 FMR - UTP-AAAF 5 FMR - UTP-ISF 6 FMR - UTP-IF 7 FMR - UTP-FoF 8 FMR - UTP-A30+ 9 Newsletter - Oct 06 Head Office: Regional Office: 7th Floor, The Forum, G-20 Ground Floor Khayaban-e-Jami, Clifton 307, Upper Mall Karachi 75600, Pakistan. Lahore. Contact: (92-21) Contact: (92-42) Branch Offices: Shop # 6-7 Shop # 8, Ground Floor Property # 41/97 40, Trust Plaza 27th Paris Road Razia Sharif Plaza, Blue Area Business Avenue, Block-6 Ground Floor G.T. Road Sialkot. Islamabad. PECHS, Karachi. Saddar Cantt. Hyderabad. Gujranwala. Contact: (92-51) Contact: (92-21) Contact: (92-22) Contact: (92-55) Contact: (92-52) Disclaimer: The infomation, tools and materials presented in this report are provided to you for information purposes only and may not be reproduced or distributed without the consent of JS ABAMCO Limited (formerly ABAMCO Limited). We believe the information provided in this report to be accurate and complete as at the compilation of this report. JS ABAMCO Limited (formerly ABAMCO Limited) does not accept liability for any gains or losses caused by actions, opinions and views created by this report. Investments in mutual funds are subject to market risks and past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. Please read the offering documents of respective funds and consult your legal advisor for understanding the investment policy of each fund and the risks involved. Note that all returns are net of all expenses.

2 Analysts: Ali Khizar (Research Analyst), Ata Rahman (Head of Research) Financial Markets Review - Oct 2006 Ramadan could not slow down the positive momentum of the market as it sustained its upward trend for the second consecutive month, to close at 11,327 points, an appreciation of 7.75% MoM (0.26% YoY). In fact, this was the best single month, year to date, with returns of 4.45%, -4.13% and 5.09% for Sep, Aug and Jul 06, respectively. The market was spurred primarily by record foreign portfolio investment (FPI) of USD mn for the month moving the total to USD for the year. Commercial banks were once again the favoured play among investors in spite of the recent interest rate related developments, posting a return of 10.70% over the month in review. Renewed vigour on the privatization front with announcement of PSO's privatization by calendar year end and release of Information Memorandums for SNGP and SSGC also helped boost local market sentiments. The tight monetary policy environment has not been able to halt the rally in the banking sector owing to the strong long run fundamental positives for the sector. OGDC was the volume leader for the month with average daily volume (ADV) of 23 mn shares, posting a return of 16.30% in Oct 06, on the back of drilling rights granted to OGDC in Balochistan. The second most active scrip was the banking giant NBP with an ADV of 21 mn, returning 12.53%, followed by PPL and MCB which exhibited returns of 8.7% and 7.6% respectively and ADV s of around 8 mn each. Cement sector was under the hammer as the results of major scrips were well below general expectations and because cement prices in the market took a major dip with average price per bag free falling from PkR 240 to PKR 210 ( in some places they have gone as low as PkR 170 per bag). DGKC and LUCK plummeted by 11.4% and 6.6% over the period in review. KSE ,750 11,500 11,250 11,000 10,750 10,500 KSE-100 index & Volumes Volume (R.H.S) KSE-100 Index (L.H.S) Vol. mn , Sep 5-Oct 11-Oct 17-Oct 31-Oct The most tangible index driver was the success of MCB's GDR which was 4.66x over-subscribed (book size of USD 150 mn). The GDR was listed at LSE at USD 17.4 per GDR or PkR 264 per share, very close to the prevailing market price. Further, the purchase of UNBL by SCB at PkR 91 per share and the news of Prime Bank due diligence by ABN AMRO have all helped re-price the sector. These factors should also help hype up the expected GDRs of NBP, UBL, and HBL. SBP s minimum paid up capital requirement of PkR 6 bn for all banks by 2009 should help the theme of mergers and acquisitions which should continue to help the sector. Permission for institutional investment in NSS could drain deposits from the banking system while the enhancement of reserve requirements and subsequent upward interest rate movements could continue to put short term pressure on credit off take. However, in the long run, all these measures should augur well for the banking system quality Over at the CFS market, average rates were up by 97 bps at 14.59% vis-à-vis 13.62% in the previous month. Demand for equity financing was higher, increasing to PkR bn from PkR bn. General trend was leaning towards speculative positions as the average unreleased investment declined by PkR 1.73 bn while the average released portion climbed up by PkR 1.92bn. Punters favored day trading and the ready market ADV soared from 131 mn shares in September to 191 mn shares in October directly leading to a MoM decline in ready future spreads by 41 bps (9.30% to 8.89%). The expected implementation of the new risk management system at KSE (based on international practices such as calculating margins as per actual positions without netting), the generally strong economic growth and cheap valuations relative to region should help stock returns though slight erorsion of index gains might be seen along the way as speculators lock their gains to re-enter the market at a later stage. KSE Relative Performance Page 2 of 9

3 Analysts: Farrukh Karim (Economist), Ata Rahman (Head of Research) As Time Goes By... In our August issue, we had underlined that the current degree of monetary tightening was insufficient to restore equilibrium to our economy. Acknowledging the raising of reserve requirement and the discount rate as "welcome developments' but insufficient to rid the country of its growing economic imbalances, our recommendation was for a 50 basis point rise in the discount rate at the time of the issuance of the next MPS in January. Turns out that we did not have to wait till the New Year for the required monetary tightening to materialize; the MoF decision to re-allow institutional investment in NSS led to outflows from the banking system, causing an increase of 20 basis points in the six month KIBOR in Oct. A more conservative approach to monetary policy is now required- a maintenance of the status quo with any further tightening to be data dependant. A closer analysis of monetary statistics reveals that in terms of FY07 YTD flows, the credit multiplier of the banking system is 0.76; less than even 1! Theoretically, it could be as high as 4, given that reserve requirements are 25% of total deposits. The major reason for the fall in the bank credit multiplier is the rise in CRR requirements, which meant that approximately PkR 56 bn of deposits, which could potentially have been lent, had to be placed with the SBP in the form of cash reserves. (We are excluding SLR requirements as those have been largely fulfilled by keeping a larger stock of government securities with the SBP, and their impact on money supply cannot be accurately determined). This argument is reinforced by the fact that reserve money (M0) and Currency in Circulation (CiC) have grown at a healthy pace of 10% and 8% respectively in first quarter of FY07. It is not the monetary base that is diminishing; rather it is the reduction in money creation that is causing a slowdown in M2 growth. Significantly, private sector credit has shown a visible slowdown this year, growing by an anaemic PkR 32.5 bn in the first three months of FY07 (-56% YoY). M2 growth in the same period has been just 1.83%, against a full year target of 13%. Many put forth the seasonality argument, highlighting that a similar trend was witnessed in first quarter of FY06, with negative M2 growth of -0.35% However, the source of decline in M2 early last year had more to do with a sharp drawdown in Net Foreign Assets (due to falling exchange reserves). Private sector credit off-take, typically the most interest sensitive component of M2, rose by a robust PkR 72 bn. Furthermore, much of the growth of M2 in FY07 owes to GoP borrowing from the SBP (73% to be precise), and is thus largely unrelated to the monetary policy stance of the central bank. Government borrowing notwithstanding, M2 growth would have been much slower. Therefore, we believe that whilst last year's negative growth in M2 was involuntary in nature, and reversed in the latter part of the year as capital inflows materialized, this year's slow growth in M2 is a manifestation of the SBP's tight monetary policy. PkR bn Gov t Borrow ing Priv ate Sector credit NFA Contribution to M2 At this stage, we believe that further overt tightening threatens to turn off the credit taps completely, especially because the banking system may lose some further funds to NSS. On the other hand, a wait and see approach does not necessarily signal that the end of monetary tightening is nigh. Private sector credit may yet take off again- the recent depression in bank credit, as we have underscored earlier, is largely a result of the rise in reserve requirements. Also, if the GoP's privatizations and GDR's do not go according to timetable, they will have to compete for internal funding, raising interest rates in the process. And in truth, economic imbalances continue to remain problematic, with inflation at an upward trajectory in 1QFY07, standing at 8.43% against a full year target of 6.5%. However, the inflation problem is more food related. Core inflation, the SBP's preferred measure to gauge monetary policy effectiveness has declined to 6.21% in FY07 (-14% YoY). A greater structural concern is the rising trade deficit, having reached USD 3.1 bn in just the first quarter of FY07. The problem in FY07 to date is not just a rising import bill of USD bn (+13.38% YoY), but flat exports of USD bn (+2.80% YoY) due to the slump in the textile exports. Although we believe that in the coming months, the trade deficit is likely to narrow, reflecting the lagged impact of monetary tightening and the recent decline in oil prices, the fear is that it may not be enough to rein in the trade gap meaningfully. It would be unwise to depend completely on monetary policy to curb external excesses, and maybe it is time to revisit the free-for-all liberal import policy. As time goes on, help from Islamabad is not only desirable, but perhaps becoming necessary QFY06 1QFY07 Page 3 of 9

4 Unit Trust of Pakistan (UTP) UTP operates a diversified portfolio of securities representing investments in the capital and money markets. Returns are a combination of capital gains, equity dividends and interest-based income. The fund relies heavily on equity investments with an efficient and timely switch to other asset classes, allowing it to maintain low volatility. The fund's NAV increased by 5.69% for the month whereas the year-to-date (YTD) return (i.e. from June 30 to October 31, 2006) stood at 8.16%. Our portfolio mix helped us producing the valueadded return as the rally stretched itself with strong momentum during October. At the same time, we also availed the opportunity to preserve capital gains where valuations seemed to reach near our immediate-term target levels. There is a fine line between what we call our immediate-term target levels and what the more traditional nomenclature in investment s reckons as target levels or fair values. The latter simply speaks of the long term valuation whereas the former is determined by the degree of short-termism prevalent in any given stock/ company, which comprise of factors that may have an impact on the prices in the near term. Fund launch date 27 October, 1997 Net assets (PkR mn) 3, Net assets per unit (PkR) 7, KPMG Taseer Hadi & Co. Medium risk 5 star Management fee 2.00% Benchmark UTP Benchmark = 70%KSE100 & 30% Income fund return - During the month, we mainly reduced our holdings in Banking, E&P, Cements and Telecom stocks and brought down our exposure in Equities from previous month s 71.5% to 61.7%, while kept our investment level in Fixed income at 21.9%. In the upcoming sessions, we expect some correction in prices and plan to rebuild positions provided we find any attractive opportunities. 3 2 Change in holdings by sector (% of NAV) 31-Oct Sep-06 Equities, 61.7% Asset Allocation Sector Allocation* Stock Allocation* Textile 9.2% Cements 8.7% 23.2% 50.5% Cash, 16.4% Fixed income 21.9% Fertilizer 12.2 % Comm. bks 16.0 % exp. 30.7% ANL 9.2% PPL 9.2% OGDC 9.5% NBP 9.6% POL 12.1% * As % of market value of equities investment Page 4 of 9

5 UTP Aggressive Asset Alloctaion Fund (UTP-AAAF) The fund aims to actively switch between asset classes to maximize returns with the option to switch up to 100 percent in any one class to take advantage of directional macro and micro trends. Emphasis is placed on investments in asset classes with low valuations as compared to other options on the horizon. And the inherent risk is actively managed to give high risk adjusted returns. October spelt a breath of fresh air for the market as well as for your fund. During the month the NAV of your fund grew by 5.2% against the 7.8% increase in the overall market. The fund underperformed the market this month as well but as per our expectation our portfolio has started showing its value as during the month index heavyweights started to perform. The Oil & Gas E&P sector outperformed the market during the month as did the Banks. We booked profits in the Oil & Gas E&P sector and increased exposure in Commercial Banks and Oil & Gas Marketing sectors. The increased purchases of OMC's and the already significant exposure in Cements resulted in the fund underperforming the market as the sectors hugely underperformed the market despite bearing value, in our opinion. We believe our portfolio distribution is well diversified and still has value which should get highlighted in the near future in terms of fund performance. During the month exposures in Oil & Gas E&P, Fertilizer, Banks, Fertilizer, Insurance sectors was altered as per figure. Once the regulatory developments are sorted out by the SECP we remain optimistic about stock market performance on the back of strong economic growth coupled with improved political conditions & healthy foreign portfolio investments. Fund launch date 28 June, 2005 Net assets (PkR mn) 2, Net assets per unit (PkR) Ford Rodes Sidat Hyder & Co. High risk n/a Management fee 3.00% KSE-100 UTP-AAAF - 2 Change in holdings by sector (% of NAV) 31-Oct % 29-Sep % Equit ies, 88.8% Asset Allocation Sector Allocation* Stock Allocation* Others 35.0% 51.3% Insurance 10.7% ANL 7.2% Cash, 11.2% Textile Fixed 11.2 % income, mkt % Comm. bks. 14.7% exp. 16.5% PPL 9.5% APL NBP AICL * As % of market value of equities investment Page 5 of 9

6 UTP Islamic Fund (UTP-ISF) UTP-ISF is a Shariah compliant, profit and loss sharing scheme. Our aim is to use our expertise to provide an optimum rate of return along with reasonable capital security and liquidity for Shariah conscious investors. Investments are limited to asset classes approved by the Shariah Advisory Council and all companies under investment consideration our screened for Shariah compliance. The funds NAV increased by 5.42% as compared to KSE-100 index gains of 7.8% in. The market remained quite bullish throughout the month with the Banking sector outperforming the others. This was apart from healthy earnings, due to mergers and acquisitions especially from the foreign banks such as ABN-AMRO and reports of other foreign banks in search of potential acquisitions. Being an Islamic fund and restricted from investing in banks, we could not avail this opportunity. A simple portfolio mix of NBP, MCB, BOP and UBL would have shown a price increase of an average of 14.4% in October alone. The oil exploration heavyweights OGDC, PPL, and POL together showed an average increase of 10.50% with only OGDC giving a double digit percentage increment in price within this month.omcs showed a decline in prices this month with SHELL and PSO together showing an average price fall of 7.2%. The Fertilizer sector showed a negligible increase in price and remained neutral. Equit ies, 88.7% Textile 8.5% Fund launch date 27 December, 2002 Net assets (PkR mn) Net assets per unit (PkR) M. Yousuf Adil Saleem & Co. Equity 3 star Management fee 3.00% KSE % UTP-ISF Change in holdings by sector (% of NAV) Keeping in light the above figures our fund has been very competitive with the index while keeping Shariah compliant conditions in 2 mind. However, going forward we expect some major incremental price changes from certain fertilizer stocks. We also expect oil stocks to perform healthier this time around and certain cement scripts as well. We have restructured our portfolio slightly to maximize returns in the coming month and expect an even better performance. Asset Allocation Sector Allocation* Stock Allocation* 50.6% 31-Oct Sep-06 Telcom 8.9% Cash, 11.3 % mkt % Fertilizer 19.7% exp. 28.5% OGDC 8.7% PTCL 8.9% Engro 9.5% PSO 10.6 % POL 11.9 % * As % of market value of equities investment Page 6 of 9

7 UTP Income Fund (UTP-IF) The fund aims to reduce market risk while offering competitive returns, regular income, and liquidity.the fund invests in a diversified portfolio of investment-grade debt securities, government securities and money market instruments. Policies are in place to ensure timely redemption; adequate liquidity is maintained in the form of CFS, spread transactions and bank deposits. Interest Rates: The SBP conducted its planned PIB auction by reopening the previous issue in the 3, 5 & 10Y tenors while the coupon rates on the 15 & 20Y were increased. The SBP picked up PkR bn in all 3 tenors thereby increasing the cut-off yields substantially. This comes after the announcement by the GoP to allow institutional investors to invest in NSS schemes. Performance: UTP-IF continued to remain invested in the shorter tenor (3-mths or less) to take advantage of movement in interest rates. We have managed to maintain a stable return on our portfolio and this strategy has helped us in re-deploying funds quickly if we see a significant opportunity between asset classes. We have succesfully placed a substantial portion in TDRs in the same duration which give a higher return than the CFS and Futures spreads which averaged 14.92% & 9.09% (gross) respectively. However, with the new CFS rules to come into play in Nov '06 we will be able to take advantage of the higher spreads/ CFS rates going forward. Your fund is continously monitoring interest rate regime and increasing its exposure in TFCs which are KIBOR linked since we believe interest rates are still heading north. Most of the upcoming TFCs are due for Pre-IPO disbursement in mid-nov, which will increase our portfolio yield significantly thereby increasing overall returns. Outlook: We continue to see an upward adjustment in interest rates, and therefore forecast a higher stable digit return for Nov '06. Fund launch date 26 August, 2002 Net assets (PkR mn) 4, Net assets per unit (PkR) Ford Rhodes Sidat Hyder & Co. Low risk 5 star Management fee 1.50% % % CFS 19.5% 18.0% 16.5% 15.0% 13.5% Cash & Equiv. Asset Allocation Sep vs. Oct 2006 Placements CFS PIBs TFCs Spread Trans. CFS Rates & Volumes (Sep '06) Volume - CFS (R.H.S) CFS Rate (L.H.S) Oct-06 Sep-06 Vo l. mn 12.0% Oct-06 9-Oct Oct Oct % 10.3 % PkR Yield Curve UTP-IF vs. 6M KIBOR Inflation Jul '05 - Sep '06 UTP -IF 10.39% 9.56% 6M KIBOR % 9.56% 1 9.0% YoY Core - After Rebasing 9.8% 9.3% 8.8% 8.3% Sep-06 Oct-06 90D 365D 4Y 6Y 8Y 10Y Sep-06 Oct % 6.0% Jul-05 Nov-05 Mar-06 Jul-06 Page 7 of 9

8 UTP Fund of Funds (UTP-FoF) Fund aims to maximize total investment return through diversified investments in leading mutual funds. This gives investors an opportunity to own a mix of equity, fixed income, balanced and money market funds. Apart from the diversity, investors also benefit from the expertise of underlying managers at maximizing performance. Performance evaluation is an extremely important aspect in managing any Fund of Funds and it has never been an easy subject. Quantitative analysis, however, reveals interesting clues but restricting oneself only to that can result in counterproductive decisions. Remember that past performance should never be taken as an indication of future performance and hence just looking at the performance data can sometimes prove to be misleading. We say that's where the Qualitative analysis adds value and in fact plays an even more crucial role in the entire process. It requires analyzing the people and procedures involved in the fund management. Our Fund Managers' selection criteria consider a broad range of quantitative and qualitative factors for arriving at our evaluation decision. In our previous issue, we briefed you on our investment theme for your fund. And the market in fact provided us with the opportunity to execute what we promised. We plan to continue with our strategy of a model portfolio of funds that can provide you with a perfect mix of each asset class. During October, your fund's NAV appreciated by 3.80%, while the YTD return comes to 4.87%. We argue that Qualitative analysis comes first. And while doing that, we have tried to structure our portfolio of funds with a mix of investment styles that can deliver sustainable returns over the long term. Because, in our opinion, it's the overall composition both in terms of asset allocation as well as investment styles (either aggressive or conservative/ growth or value) that matters in determining the fund's return trajectory. During the month, Equity funds (including Pure Equity funds as well as Balanced Funds) performed quite well during October; with an average (simple mean) month-on-month return of 4.81% as compared to a rise of 7.75%, 5.29% and 5.23% in KSE-100, KSE- 30 and A-30 respectively. We believe most of these funds already had a decent exposure in Equities, which helped them provide competitive returns. On the other hand, the Income Funds provided an annualized monthly yield of 9.9% for October. Whereas, the closed end fund's Market capitalization increased by 1.27% during the month with improved volumes. Fund launch date 31 October, 2005 Net assets (PkR mn) Net assets per unit (PkR) KPMG Taseer Hadi & Co. Medium risk n/a Management fee 1.00% KSE-100 UTP-FOF 6.0% -6.0% -12.0% Nov-05 Feb-06 May-06 Aug-06 *NAV change -1 UTP-FoF Close End Funds -2 Nov-05 Feb-06 May-06 Aug-06 * Price change f unds 66.8% Asset Allocation Closed end f unds 17.0 % Cash 16.2 % UTP-FoF vs Equity & Income/Money Mkt.* UTP-FoF Equit y Funds Income Funds UTP-FoF vs Close End Funds* Page 8 of 9

9 UTP A30+ Fund (UTP-A30+) It invests in the JS ABAMCO 30 Index stocks in proportion to their index weighting. The strategy is to keep a passive approach to investing and minimize transaction costs. To maintain liquidity, the fund can invest all or part of its portfolio in fixed income instruments. This fund is meant for investors who can time their entry and exit from the fund or seek a long term exposure to the market. In October, UTP A-30's NAV has grown by 5.9% against 7.8% increase in the KSE-100 index. The year-to-date return of the fund stands at 10.86% which is far better than most of the funds in the industry. Despite the significant exposures in sectors like Commercial Banks and Oil & Gas E&P, which outperformed the KSE- 100 index by huge margin, the fund has under performed. We believe that the notable underperformance of Fertilizers, Oil & Gas marketing and Cement sectors has nullified the impact of outperforming sectors. UTP A-30, being an index fund, has to replicate the underlying A30 index it follows as benchmark, despite underperformance of any sector. On a sector basis, the weight of Commercial Banks has further increased by 1.39% while most of the other sectors witnessed slight decline in exposures. Among the top stocks there was just one change that FFC has declined to fifth level due to its underperfrmance while MCB and NBP remained the top heavyweights and the outperformers.like September, the fund's exposure in equities remained lower due to non availability of cash to fund managers to invest due to certain right issues and dividend announcements. Fund launch date 29 May, 2006 Net assets (PkR mn) Net assets per unit (PkR) Muslim Comm. Fin. Ser. (Pvt) Ltd. Ford Rodes Sidat Hyder & Co. High risk n/a Management fee 3.00% KSE-100 UTP-A % Change in holdings by sector (% of NAV) 31-Oct Sep % We believe the market to maintain its strong momentum on the back issues like inflow of foreign portfolio investment, global listing of stocks, healthy corporate earnings etc. and hence expect the index fund to perform well in the long term. Asset Allocation Sector Allocation* Stock Allocation* Equities, 97.1% Fertilizer 12.2 % Oil & Gas Mkt % Cement 6.6% 19.4 % NBP 9.7% POL 7.1% OGDC 6.4% FFC 5.9% MCB 18.0 % Others 52.9% Cash, 2.9% exp % Comm banks 33.5% * As % of market value of equities investment Page 9 of 9