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An exclusive interview with Mr. Farid Khan CEO, ABL AMC.

An accomplished, results-oriented leader, Farid Khan has been involved with capital markets for over 19 years and has a broad-based, global experience with bulge bracket firms in Fund Management, Investment Banking, Investment Research and Sales, Business Development & Project Finance. He has been with ABL Asset Management as CEO for the past three years. He joined ABL AMC from Credit Suisse, where he was the Country Manager of Credit Suisse Pakistan and a member of Credit Suisse' Asia Pacific Management Committee. Prior to that, he worked for MCB, initially as Head of Investment Banking Group and later as the CEO of MCB Asset Management, where he was instrumental in successfully launching this new business for MCB Bank. Farid has extensive experience outside Pakistan, having worked at Morgan Stanley, INC Barings Securities and CLSA Emerging Markets in Kuala Lumpur, London and Istanbul in a variety of senior positions. He holds an MBA in Finance from IBA, Karachi and got his CFA qualification in 1998.

ER: Where do you see the stock market gain in near future? Do you perceive the rally to be sustainable?

You can trace the roots of the current rally to two main triggers. The first is the reduction in political risk premium, which has happened since the election process started; and the process started with the departure of the previous administration. So ever since the uncertainty about elections waned and a general euphoria developed about the new administration taking more proactive steps to restore the economy, the sentiment turned for the better.

The second trigger which has helped the market is very strong and sustainable fund flow, both domestic and foreign, which have been coming to the market to take advantage of relatively attractive valuations vis-a-vis our regional players. Part of it is contributed by strong corporate earnings growth, decent dividend payout; and the other part of it is from the money that has been flowing into the global financial system. We have not only seen the Karachi Stock Exchange achieving new heights, we have seen Dow Jones, FTSE, achieving new heights; we have seen Nikkei at a ten-year high. So it is a general re-rating of global markets also on the back of extremely low interest rates and investors' growing confidence on the equities after the 2008 crisis. Pakistan is also a beneficiary of that trend.

ER: Do you think foreign buying has a significant role in this surge in Pakistan?

In Pakistan it certainly is and we have seen pretty sustained flows. It's not that investors are buying one week and selling in another; throughout this fiscal year we have seen sustained foreign flows. These include not only your normal portfolio growth but also large blocks and buyouts. And then we have seen the locals jumping on the bandwagon. We have seen Unilever getting delisted and that money is coming back in the system as well. So foreigners have been at the forefront of this rally, and as we speak, they continue to do so. That's why I think it looks unlikely that his rally will snap at this point in time. It may continue.

ER: Due to the Balance of Payment issue that is arising, IMF is expecting rupee depreciation. What are your concerns on this matter?

Generally speaking, as a nation we have witnessed rupee depreciation ever since we started tracking the markets. So it's nothing new for us. Every year when we are forecasting or making budgets we incorporate a certain depreciation of rupee in our forecasts and as long as it remains within that range, it doesn't upset anyone. So if you look at the historic trend over the last 20 years, rupee on average has depreciated by almost 4-5% per year; there have been periods when it has remained quite stable and then there have been years when it has gone down by more than 20%. Considering that there is an inflation differential between our economy and the global economy and the fact that we run a large trade deficit, we do suffer from chronic BoP issues. Unfortunately, as a growing economy, we have huge energy requirements and much of our energy is imported, so we will continue to suffer from inelasticity of energy import bill as well.

Part of this deficit is negated by remittance inflows, FDIs, FPIs; even if there is a gap we then have to go to IMF and multi-lateral agencies to plug this gap. For the situation as it stands right now, yes there is a real issue facing us. It can snowball into a full-fledged crisis if not handled properly. On the other hand, if we get further support from multi-lateral agencies, it could be a soft landing also. Right now the markets are not panicking because they believe that the new government will take some steps to resolve this issue. We are also confident that it will be a soft-landing. Having said that, the next two months will tell us whether the government is moving in the right direction. Are we going to get the right amount of help from multilateral agencies and friendly countries; if not, then it can snowball into a Balance of Payment crisis with severe implications for Pak Rupee.

The impact will also be inflationary, as most of our imports are inelastic, so the impact could be quite severe. Our system has an in-built shock absorber which works until 5-7% rupee depreciation. Anything above that starts to hurt importers, investments and anyone with rupee exposure. We are in that comfort zone at this point in time.

ER: ABL AMC is in the process of launching an Islamic equity fund. Would you like to share some information about it?

This will be our second Islamic product; the first one was launched back in 2010, a fixed income fund. That was the first time we started exploring, the Shariah-compliant market. It is a well-known fact that the Shariah-compliant segment of the global financial system has been one of the fastest growing segments. Being a country where a lot of people prefer Islamic way of life, this segment in Pakistan has shown a very significant growth. You look at the Islamic banks, their market share, the growth in their balance sheets--it has been quite spectacular. Similarly, if you look at the fund management industry, the demand for Islamic products has been increasing. So in order to satisfy that demand from our investors, in order to tap that market and expand our product portfolio, we ventured into this segment in 2010. Since then we have been looking at the right time to launch an equity fund. We are now gearing for launch in the first week of June. We are currently at the end of the pre-IPO road show.

ER: Islamic Income funds started in Pakistan back in 2002, even ABL's Income fund started operations in 2010. Do you think it is late for Islamic equity fund to enter this market now?

ABL Asset Management is a relatively young player in the local scene. The company was born in 2007, launched its first product in 2008. That was the time when markets were undergoing some major corrections. From 2008 to 2010 we launched conventional products and then we ventured into the Islamic segment. For long term investors, equity market timing does not matter too much. While the market has lately been doing quite well, the long term prospects appear very bright. We are a subsidiary of a conventional bank, so for us it was literally an experiment or a new line of business where a lot of thought process had to go in. Our Islamic fund has done reasonably well, in terms of both return and growth, fund size has tripled since launch.

ER: With Islamic equity fund coming in, what impact are you expecting on your conventional products?

We are looking at it as tapping into a new market; for example a Shariah-compliant investor never invests in a conventional fund. However, conventional investors always have the option of going for conventional or Islamic funds and those who are chasing returns probably do the switching as well; we call them agnostic investors as they look at the commercial aspect rather than the spirit of it. But if the conventional fund is doing better, the Islamic investor will never go to a conventional fund. From the agnostic segment there could be some cannibalization if the Islamic fund does really well. From that perspective there could be some cannibalization but the client remains with us and at the same time there is a vast universe of new investors that opens up for us.

ER: Do you perceive the new fund to be more suitable for institutional investors or retail investors?

This fund is a vehicle to take exposure to Pakistan's capital markets. So it is suitable for both. Stock investing is a more sophisticated and refined business than conventional fixed income investment. It needs more application, experience and is more of an art one needs to learn over a period of time.

Both retail and institutional investors can take advantage of our expertise in this area and take exposure to the stock market. Stock market investment should be a long-term business. Short-term or opportunistic investment in the stock market is usually termed as speculation, which we do not encourage. We want investors to save their funds and take a long term view on the market and grow with the market. Do not be afraid of the volatility in the short term as high risk, high returns come together.

For retail investors the biggest advantage is that with small amount they can get diversification and expert management. For institutional investors, like provident funds or pension funds, we see in most cases that the requisite skill set and time is not available internally. Trustees are managing these funds on behalf of the employees. Since it is a fiduciary responsibility, it is in their best interest to take expert advice. That's where we can help them through our funds and investment advisory services.

ER: With a lot of funds coming in the market, is the Asset Management industry getting overcrowded? Please share your thoughts about it.

Everyone is offering a similar kind of product, but the industry is not overcrowded. I do not mind having a lot of players as long as each of them is able to innovate or carve out a niche. Even if we have 25-26 players but there is very little differentiation in their product offering, marketing pitch and approach to investment, then it becomes overcrowded.

The number of players is not huge but there is lack of innovation and diversity in the market. Part of it is because of regulation which restricts innovation in a certain way; part of it is because the markets are not very conducive for innovation and the third, I would say lethargy which may be part of our industry.

The markets do not seem supportive because we have not seen fresh listings in the past 5 years, hardly a handful of companies with no privatization, no new sectors listing up. There is no fresh thought or blood coming into the system. We have not seen derivatives, commodities and real estate developing; and even the stock market now we have seen going up but for a good part of 2008-2010 the market was dead. So with that background it is very difficult for us to come up with new products. We also struggled to bring new products because there is no diversity in the market. What we had back in 2005 is still there in 2013--hardly a couple of companies have gone here and there. We have not had any regulatory development, for example, on derivatives, ETFs, sector-specific funds, REITs, private equity and so on. The flavors are still the same that were there 10 years ago.

ER: Please share your thoughts about the overall state of the economy?

If you want to get a good idea about where the economy is going, you can look at the corporate profitability of listed companies, which is just one aspect. You see that all the companies or most of them are doing quite well, in terms of earnings, sales, margins, dividend payouts, and listed companies are just one snapshot of the corporate Pakistan. I am sure there are a lot of unlisted companies or small and medium-sized enterprises that are doing equally well, if not better, and a large undocumented economy, which I can make a guess by association, must be doing well.

Despite the challenges of energy deficit, law and order situation, and inconsistent policies, still the economy has shown a lot of resilience in growth. Unfortunately a lot of that growth has not been documented and the economic governance has not been up to mark. It is effectively like driving a car with 2 wheels flat, but you are still going forward, so I would say the economy is quite resilient. If you inflate the remaining two tyres, you can achieve 6-7% growth.

ER: How do you see the future prospects of Islamic investment funds industry in Pakistan?

This segment has started to grow, and there is tremendous amount of untapped potential. We have just scratched the surface and that too only in urban areas. We have not really gone deeper down to small towns and rural areas. We have not done much in terms of product innovation, integrating our services with Takaful and Islamic banks; so the market is thirsty for new products on this end and I am sure that if the financial markets become a little more helpful, if the political and regulatory framework improves then you will see this segment of the financial sector growing exponentially. I think awareness is also spreading and as more and more products become available people will have a choice. What we have seen in the last 10 years is that there is tremendous amount of untapped demand in this segment and it will continue to grow.

On the Islamic products and instruments front, there has been a lot of work and effort put in the past few years which has started to bear fruit. For example, up until 4-5 years ago we did not even have an Islamic index in the stock market. When that index came, it gave people idea to start Islamic stock funds, government started issuing Sukuks which opened up a new universe on the fixed income side. In the past 5 years we have seen some important developments taking place in the Islamic space and one just hopes that this pace continues; and with that both the Islamic banking industry and Islamic fund management industry will prosper. Our fund is just an attempt in that direction to offer more choice to the investors. We have one of the largest retail distribution networks of any asset management company in Pakistan, so this fund will be available at all the 800 outlets of Allied Bank. People who did not previously have access to Islamic product in their branch will now have access, so it addresses the issue of availability of product. We are hopeful that we will get a good response on the retail as well as institutional fronts.
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Title Annotation:ABL AMC / ISLAMIC FUNDS / INTERVIEW; ABL Asset Management Company; chief executive officer
Comment:An exclusive interview with Mr. Farid Khan CEO, ABL AMC.(ABL AMC / ISLAMIC FUNDS / INTERVIEW)(ABL Asset Management Company)(chief executive officer)
Publication:Economic Review
Article Type:Interview
Geographic Code:9PAKI
Date:Jun 1, 2013
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