Chapter 1

Synopsis
"Mutual Fund Industry in Pakistan, Past and Present"

Statement of the Problem:

"Mutual funds industry in Pakistan" A review of the past and present."

Introduction:
As students of MBA (finance), which deals with the effective and efficient management of fund,
the topic, which has been chosen by researchers, is of great importance. The topic will elaborate
the mutual fund industry in Pakistan and will provide a lucid cognizant congenial to investors in
order to develop deep understanding about investments into the mutual funds. Moreover, the
research paper will focus on industry analysis on mutual fund with respect to past and present, as
well as, in terms of risk and return on investments into the mutual funds. It will also deal with the
financial impacts of current political and economical conditions on the profit margins of the
Asset Management Companies.

Significance:
This study will help the readers to understand the exact operations about the Mutual fund/Asset
management products at domestic level. It will also provide a consulting guide for the investors.

Research question:
How the mutual fund industry is performing in Pakistan?

Limitation of study:
The whole analysis will be at a broad level so it cannot guide the investors with profound
knowledge to make investment decisions because conditions of market varies according to the
time. Especially, the Pakistani market is one of the most volatile markets of the world, which
generates limitations for future investment decisions.

Delimitations:
Evaluate past five years performance is still too short to analyze the industry's past performance.
Moreover, assumptions have been made that the selected sample will be true representative of
the population.

Methodology:
Researcher's course of action shall be literature review of the data available on performance of
Mutual fund industry in Pakistan and objective analysis of different Funds.

Two types of sources will be used to gather the required information.

Primary Sources
Asset management companies

Mutual fund association of Pakistan

Secondary data
Annual reports of equity and balance funds for the 2005-2009

End of Month closing prices 2005-2009 from KSE

Reports published by S.E.C.P

Economic Surveys

Statistical bulletins

Finance journals

Electronic Databases

Sample Size
Researchers will use convenient sampling and will select following asset management
companies:

Tristar Mutual Fund

Safety Mutual Fund

NIT

Picic Investment Fund

Almeezan Mutual Fund

Asian Mutual Fund

Chapter 2

Literature review

What Is Asset Management Company

An asset management company is a company that invests its clients' pooled fund into securities
that match its declared financial objectives. Asset management companies provide investors with
more diversification and investing options than they would have by themselves. Mutual funds,
Hedge funds and pension funds are also part of AMC

AMCs offer their clients more diversification because they have a larger pool of resources than
the individual investor. Pooling assets together and paying out proportional returns allows
investors to avoid minimum investment requirements often required when purchasing securities
on their own, as well as the ability to invest in a larger set of securities with a smaller
investment.

The concept of asset management starts with investment management. "Investment management
is the professional management of various securities (shares, bonds etc.) and assets (e.g., real
estate), to meet specified investment goals for the benefit of the investors". Now the questions
arises who are the investors?The investors may be

Institutions

Insurance companies,

Pension funds,

Corporations etc. or

Private Investors (both directly via investment contracts and more commonly via collective
investment schemes)

Mutual funds

Exchange Traded Funds

Asset management is sometimes used to refer to the investment management of collective

investment. (not necessarily), the more generic fund management may refer to all forms of
institutional investment as well as investment management for private investors. Investment
managers who specialize in advisory or discretionary management on behalf of (normally
wealth) private investors may often refer to their services as

Wealth management or

Portfolio management

These are often within the context of so-called "private banking"

Elements of investment management

The term 'investment management services' includes the following major elements of

Financial analysis

Asset selection,

Stock selection,
Plan implementation

Ongoing monitoring of investments

Investment management is a large and important global industry in its own right responsible for
caretaking of trillions of dollars, euro, pounds and yen.Coming under the remit of financial
services many of the world's largest companies are at least in part investment managers and
employ millions of staff and create billions in revenue.

Industry scope

The business of investment management has several facets, including

The employment of professional fund managers,

Research(of individual and classes of assets)

Dealing,

Settlement,

Marketing,

Internal auditing and

The preparation of reports for clients

The largest financial fund managers are firms that exhibit all the complexity their size demands.
Apart from the people who bring in the money (marketers) and the people who direct investment
(the fund managers), there are compliance staff (to ensure accord with legislative and regulatory
constraints), internal auditors of various kinds (to examine internal systems and controls),
financial controllers (to account for the institutions' own money and costs), computer experts,
and "back office" employees (to track and record transactions and fund valuations for up to
thousands of clients per institution.

Key problems in investment management

Market valuation and revenue are directly linked ,A major fall in asset prices causes a precipitous
decline in revenues relative to cost

Better fund performance difficult to sustain,and Clients may not be patient during times of poor
performance

More Competent The Fund Managers Are More Expensive and may be headhunted by
competitors

Above-Average Fund Performance Appears To Be Dependent On The Unique Skills of the fund
manager; however, clients are loath to stake their investments on the ability of a few individuals-
they would rather see firm-wide success, attributable to a single philosophy and internal
discipline

Analysts Who Generate Above-Average Returns Often Become Sufficiently Wealthy that they
avoid corporate employment in favor of managing their personal portfolio

Global fund management industry outlook

Assets of the global fund management industry increased for the fourth year running in 2007 to
reach a record $74.3 trillion. This was up 14% on the previous year and double from five years
earlier. Growth during the past three years has been due to an increase in capital inflows and
strong performance of equity markets.

Pension assets totalled $28.2 trillion in 2007, with a further $26.2 trillion invested in mutual
funds and $19.9 trillion in insurance funds. Together with alternative assets, such as those of
sovereign wealth funds, hedge funds, private equity funds and funds of wealthy individuals,
assets of the global fund management industry probably totalled around $110 trillion at the end
of 2007

The US was by far the largest source of funds under management in 2007 with nearly a half of
the world total. It was followed by the UK with 9% and Japan with 6%. The Asia-Pacific region
has shown the strongest growth in recent years. Countries such as China and India offer huge
potential and many companies are showing an increased focus in this region

When ranked by number of deals, 2008 was the second most-active year on record in the global
asset management industry, 217 compared with 242 in 2007. With $1.99 trillion in assets under
management transacted, 2008 also ranked second overall, tied with the 2007 total of $1.99
trillion, and below the peak of $2.65 trillion set in 2006, according to Jefferies Putnam Lovell.
However, based on disclosed deal value, M&A activity in 2008 fell dramatically from the
previous year`s total of $52.1 billion. With $16.1 billion in disclosed deal value, 2008 was only
the fifth-highest year on record. Only three deals announced in 2008 exceeded $1 billion in
purchase price, compared with fifteen $1 billion-plus transactions in 2007.
(www.reuters.com/article/pressRelease, mon jan 12,2009)

Largest Asset Management companies:

Largest AMCs as of 31 December 2008.

Ranking

Manager

Assets under management

(US$ billion)

Country

1.

UBS AG - according to its website (31.03.09)

2059

Switzerland

2.

Barclays Global Investors

1,400

UK

3.
State Street Global Advisors

1,367

US

4.

Fidelity Investments

1,299

US

5.

The Vanguard Group

852

US

6.

JPMorgan Chase

782

US

7.

Capital Group

1200

US

8.

Deutsche Bank

723

Germany

9.

Northern Trust

598

US

10.

AllianceBernstein
516

US

11.

Wellington Management Company

484

US

12.

Merrill Lynch & Co.

473

US

13.

Credit Agricole

461

France

14.

Goldman Sachs

452

US

15.

Citigroup

437

US

Mutual funds

"An investment chosen by people who pool their money to buy stocks, bonds, and other financial
securities selected by professional managers who work for an investment company". It is
actually the helping tool to investors how to invest in stocks and bonds. In other words, if you
ever thought of an investment in stocks and bonds but you are afraid of investing because of not
having enough knowledge and you don't have enough money to invest. Therefore, mutual funds
can help in making good decision by providing good investment opportunities with less capital
requirement. From the above text we may come to know that there are two major reasons which
beget the requirements of mutual funds

Investor doesn't have enough information to invest

Investor doesn't have enough money to invest

The above two reasons are the core points for the generation of mutual funds. Fund managers are
knowledgeable, as well as, expert enough to invest pooled investment in a diversified way.

Individual

Corporations

Pension/

Provident/

Gratuity

Banking/

Insurance

Equity

Money

Investments

Returns

Mutual Fund

History of mutual funds

Mutual funds really captured the public's attention in the 1980s and '90s when mutual fund
investment hit record highs and investors saw incredible returns. However, the idea of pooling
assets for investment purposes has been around for a long time. Here we look at the evolution of
this investment vehicle, from its beginnings in the Netherlands in the 18th century to its present
status as a growing, international industry with fund holdings accounting for trillions of dollars
in the United States alone.

In the Beginning

Historians are uncertain of the origins of investment funds; some cite the closed-end investment
companies launched in the Netherlands in 1822 by King William I as the first mutual funds,
while others point to a Dutch merchant named Adriaan van Ketwich whose investment trust
created in 1774 may have given the king the idea. Ketwich probably theorized that
diversification would increase the appeal of investments to smaller investors with minimal
capital. The name of Ketwich's fund, Eendragt Maakt Magt, translates to "unity creates strength".
The next wave of near-mutual funds included an investment trust launched in Switzerland in
1849, followed by similar vehicles created in Scotland in the 1880s.

The idea of pooling resources and spreading risk using closed-end investments soon took root in
Great Britain and France, making its way to the United States in the 1890s. The Boston Personal
Property Trust, formed in 1893, was the first closed-end fund in the U.S. The creation of the
Alexander Fund in Philadelphia in 1907 was an important step in the evolution toward what we
know as the modern mutual fund. The Alexander Fund featured semi-annual issues and allowed
investors to make withdrawals on demand.

The Arrival of the Modern Fund

The creation of the Massachusetts Investors' Trust in Boston, Massachusetts, heralded the arrival
of the modern mutual fund in 1924. The fund went public in 1928, eventually spawning the
mutual fund firm known today as MFS Investment Management. State Street Investors' Trust
was the custodian of the Massachusetts Investors' Trust. Later, State Street Investors started its
own fund in 1924 with Richard Paine, Richard Saltonstall and Paul Cabot at the helm. Saltonstall
was also affiliated with Scudder, Stevens and Clark, an outfit that would launch the first no-
load fund in 1928. A momentous year in the history of the mutual fund, 1928 also saw the launch
of the Wellington Fund, which was the first mutual fund to include stocks and bonds, as opposed
to direct merchant bank style of investments in business and trade.

Regulation and Expansion

By 1929, there were 19 open-ended mutual funds competing with nearly 700 closed-end funds.
With the stock market crash of 1929, the dynamic began to change as highly-leveraged closed-
end funds were wiped out and small open-end funds managed to survive.

Government regulators also began to take notice of the fledgling mutual fund industry. The
creation of the Securities and Exchange Commission (SEC), the passage of the Securities Act
of 1933 and the enactment of the Securities Exchange Act of 1934 put in place safeguards to
protect investors: mutual funds were required to register with the SEC and to provide disclosure
in the form of a prospectus. The Investment Company Act of 1940 put in place additional
regulations that required more disclosures and sought to minimize conflicts of interest. (For
further reading, see Policing The Securities Market: An Overview Of The SEC.)

The mutual fund industry continued to expand. At the beginning of the 1950s, the number of
open-end funds topped 100. In 1954, the financial markets overcame their 1929 peak, and the
mutual fund industry began to grow in earnest, adding some 50 new funds over the course of the
decade. The 1960s saw the rise of aggressive growth funds, with more than 100 new funds
established and billions of dollars in new asset inflows.

Hundreds of new funds were launched throughout the 1960s until the bear market of 1969 cooled
the public appetite for mutual funds. Money flowed out of mutual funds as quickly as investors
could redeem their shares, but the industry's growth later resumed.

Recent Developments

In 1971, William Fouse and John McQuown of Wells Fargo Bank established the first index
fund, a concept that John Bogle would use as a foundation on which to build The Vanguard
Group, a mutual fund powerhouse renowned for low-cost index funds. The 1970s also saw the
rise of the no-load fund. This new way of doing business had an enormous impact on the way
mutual funds were sold and would make a major contribution to the industry's success.

With the 1980s and '90s came bull market mania and previously obscure fund managers became
superstars; Max Heine, Michael Price and Peter Lynch, the mutual fund industry's top
gunslingers, became household names and money poured into the retail investment industry at a
stunning pace. More recently, the burst of the tech bubble and a spate of scandals involving big
names in the industry took much of the shine off of the industry's reputation. Shady dealings at
major fund companies demonstrated that mutual funds aren't always benign investments
managed by folks who have their shareholders' best

interests in mind.

Despite the 2003 mutual fund scandals and the global financial crisis of 2008-2009, the story of
the mutual fund is far from over. In fact, the industry is still growing. In the U.S. alone there
are more than 10,000 mutual funds, and if one accounts for all share classes of similar funds,
fund holdings are measured in the trillions of dollars. Despite the launch of separate
accounts, exchange-traded funds and other competing products, the mutual fund industry
remains healthy and fund ownership continues to grow.
MUTUAL FUNDS in the Unites States:

MUTUAL FUNDS IN USA

A group of investors pool their money in order to make an investment which is called a mutual
fund. It includes stocks, bonds, securities etc. It is managed by a portfolio manager hired by the
investors. The main objective of the manager is to buy and sell the stocks regularly according to
the agreement made by the investors. The gains and losses are equally distributed among the
investors on an annual basis.

Technically, mutual funds are open-ended funds, which is a type of an investment company.
Other three types are

close-ended funds

exchange-traded funds

unit investment trusts.

There are numerous advantages of buying a mutual fund such as

investing for retirement

Education

For achieving other financial goals.

History OF MUTUAL FUNDS IN USA :

On March 21, 1924 Massachusetts Investors Trust, today known as MFS Investment
Management, was founded. As a result, after a year it had 200 shareholders and $392,000 in
assets. However, in 1929 the stock market crash hampered the growth of mutual funds. In order
to counter the situation, the Securities Act of 1933 and the Securities Exchange Act of 1934 was
passed by Congress. According to these laws, a fund should be registered with the U.S Securities
and Exchange Commission and provide the interested investors with a prospectus containing
required disclosures about the fund, securities themselves and the fund manager. Today, the
Investment Company Act of 1940 sets the guidelines which all the funds registered with the
Securities and Exchange Commission of U.S should follow. In 1976, Vanguard 500 Index Fund
(then known as First Index Investment Trust) was formed and headed by John Bogle. It was the
first retail index fund. Being the world's largest mutual fund, it has more than $100 billion in
assets.

A change introduced in 1975 in the Internal Revenue Code accelerated the growth of the mutual
funds. It allowed individuals to open Individual Retirement Accounts (IRAs).

A national trade association of investment companies in the United States, the Investment
Company Institute had 8,015 mutual funds in October 2007, with combined assets of $12.356
trillion.

Now with a rapid growth, the worldwide value of mutual funds was found to be more than $26
trillion in 2008.

Determination of the Net Asset Value of a Mutual Fund:

The current market value of the fund's holdings minus the fund's liabilities is the net asset value
(NAV) of a fund. Some funds update their NAV many times during a day while some funds
require updating once a day after the close of trading.
Public Offering Price:

The Public Offering Price (POP) is the Net Asset Value plus a sales charge.

The sale of shares by Open-end funds:

The open-end funds sell shares at the POP and buy back shares at the NAV.

The sale of shares by Closed-end funds:

Closed-end funds trade at either a higher price than their NAV (premium) or at a lower price than
their NAV (discount).

Calculation of Average Annual Return:

The average annual compounded rates of return are calculated for 1-year, 5-year and 10-year
periods for each fund. The U.S mutual funds use Securities and Exchange Commission form N-
1A for this purpose. It uses the following formula:

P(1+T)n = ERV

Here, 'P' is a hypothetical initial payment of $1000, 'T' is the average annual total return, 'n' is the
number of years and 'ERV' is the ending redeemable value of the hypothetical $1000 at the
beginning of the 1-, 5- or 10-year periods and at the end of 1-, 5- or 10-year periods (or fractional
portion).

Calculation of the Turnover:

The measure of a fund's securities transactions is known as a turnover. Mostly, it is calculated

over a period of one year and as a percentage of the Net Asset Value. It is calculated as the value
of all transactions divided by 2, divided by the fund's total holdings (i.e. one security sold and
another bought is counted by the fund as one turnover).

Expenses and Total Expense Ratio:

Similar to other companies, mutual funds also have to bear some expenses. Mainly management
fee, non-management expense and 12b-1/non-12b-1 fees which are all expressed as a percentage
of the average daily net assets of the fund.

The fee charged for the management of a fund's investment (the contractual investment advisory
fee) is known as the management fee of the fund. Sometimes, contractual administrator fee is
also included with the contractual advisory fee as a management fee. Some funds have a flat-rate
contractual advisory fee, while in other funds as the value of a fund's assets increases, the
advisory fee decreases.

There are also some non-management expenses that have to be born by the fund such as legal
expense, custodian expense, registration expense, printing and postage expense etc.

The contractual fee charged by a fund to cover its marketing expenses is known as 12b-1 service
fee, in the United States. While the servicing fees which do not fall under the Securities and
Exchange Commission rule 12b-1 are known as non-12b-1 service fees.

There are certain expenses which do not pass through the statement of operations for the funds.
They are mostly sales loads or contingent deferred sales loads, not included in the fund's total
expense ratio.

Brokerage commissions are an expense which cannot be controlled by the investor because it
does not pass through the statement of operations of the fund. They have a direct relation with
portfolio turnover. Most of the time higher brokerage commissions are due to higher rate of
portfolio turnover.

Types of Mutual Funds:

Certain different types of mutual funds are discussed here. Firstly, the most common type of fund
is the open-end fund. In this fund at the end of each day, the company issues new shares to
investors and buys new shares. An investment company is declared an open-end investment
company by the Securities and Exchange Commission (U.S) if it does not issue undivided
interests in specified securities and if they issue redeemable securities.

Closed-end funds are those registered companies that are not unit investment funds or open-end
investment companies.

There is another investment company known as exchange-traded fund. It has characteristics of

both mutual funds and closed-end funds. On the stock exchange, they are traded all through the
day. Most of these are index funds based on stock market indexes. It is believed that these funds
are more efficient than the traditional mutual funds and they have lower expenses.

For foreign investors, exchange-traded funds are very beneficial as they can be easily traded on
stock markets because of their limitations regarding their participation in the traditional mutual
funds in U.S.

In the U.S. 50% of all amounts invested in mutual funds are of equity funds. They are also
known as stock funds which can be managed actively or passively. Their main target is business
sectors like real estate, healthcare and commodities.

18% of mutual funds consist of bond funds. There are further types of bond funds such as term
funds which have a fixed time period of maturity. Bond funds having lower returns but tax
advantages and lower risk are called municipal funds.

Money market funds have lower risks and contribute 26% to mutual funds assets in the U.S. The
main aim is to preserve the principal along with modest dividends. These funds invest in treasury
bills, certificates of deposit and commercial paper. They maintain liquidity and are easily
redeemed.

Investment is also made in other underlying mutual funds. These are funds of funds. They have a
higher expense fee as they include part of the fee of the underlying fund. Since fund of funds
have further invested in stocks and shares, it often becomes difficult to keep track of them all as
there is a chance that the fund of funds owns the same stock through some other different funds.

Hedge funds have loose Securities and Exchange Commission regularities. They are pooled
funds in the U.S. According to the Investment Advisors Act, the hedge fund manager does not
have to strictly abide by the rules of the act. He can manage the funds according to his own
convenience. There is a 1% management fee charged by the hedge funds, along with a
performance fee of 20% of the fund's profit

Open ended and closed ended funds

Mutual funds are further bifurcated into open ended and closed ended funds

Open ended funds

A mutual fund whose shares are issued and redeemed by the investment company at the request
of investors. An open ended fund operated by an investment company which raises money from
shareholders and invest in a group of assets, in accordance with a stated set of objectives.
Closed ended funds

A mutual fund whose shares are issued by an investment company only when the fund is
organized.

Both types of funds are similar in that they provide professional management and diversification.
However they are different in various aspects: the method of purchase, the number of shares
outstanding and the relation ship of share value to the market value. The following tables
highlights these major differences

Method of purchase

number of Shares outstanding

Redemption of shares at net asset valuation

Open end

Direct from fund or from sales man

Fluctuates

Yes

Close end

Stock exchange

Fixed

For a period

No

NET ASSET VALUATION

Net asset valuation is derived by dividing the net assets with the number of shares

outstanding. Its abbreviation is NAV.

It can also describe as current market value, less funds liabilities, expressed as per share amount.
For most funds it is determined daily, but some funds compute NAV multiple times during a
trading day.

NAV= ASSETS - LIABILITIES / TOTAL NUMBER OF SHARES

In open end, shares are always redeemed or purchased at their NAV, which makes it popular in
investment community, whereas shares of closed end funds are not necessarily redeemed or
purchased at their NAV. This is because they are traded in stock exchanges and their prices are
influenced by changes in both NAV and investor expectations. .

RETURN ON MUTUAL FUNDS

Return or income comes from the following three sources in the mutual funds

DIVIDEND AND INTEREST: Income is earned from dividends on stocks and interest on bonds.
They normally pays out nearly all the income from dividend and interest to the fund owners in
the form of distribution.
CAPITAL GAIN: if the fund sells securities that have increased in price, the fund has a capital
gain. Fund manager also pass these gains to a fund owner in a distribution.

If fund holdings increase in price but are not sold by the fund manager, the funds shares increase
in price. It can then sell for a profit.

Mutual funds raise money by selling shares of the fund to the public, much like any other type of
company can sell stock in itself to the public. Mutual funds then take the money they receive
from the sale of their shares (along with any money made from previous investments) and use it
to purchase various investment vehicles, such as stocks, bonds and money market instruments. In
return for the money they give to the fund when purchasing shares, shareholders receive an
equity position in the fund and, in effect, in each of its underlying securities. For most mutual
funds, shareholders are free to sell their shares at any time, although the price of a share in a
mutual fund will fluctuate daily, depending upon the performance of the securities held by the
fund.

Benefits of mutual funds

Benefits of mutual funds include

Diversification

It offers diversified investment portfolio which reduces risk.

Professional money management

Professional fund mangers are competent enough to provide better money management

It offers choice, liquidity and convenience ,

It offers an easy way of managing investor's money for investment.

It requires a minimum investment.

The investor with less amount of money can also invest in it.

Disadvantage of mutual funds

It offers Fluctuating Returns

Unlike fixed income products like govt bonds etc. Mutual funds experience price fluctuations
along with the stocks that make up the fund. Another important thing to know is that mutual
funds are not guaranteed by the. Government, so in the case of dissolution, you won't get
anything back. This is especially important for investors in money market funds.

2. Sometimes it moves towards over Diversification

No doubt, diversification is the most suitable way of investment but, many mutual fund investors
tend to over diversify. The idea of diversification is to reduce the risks associated with holding a
single security; over diversification (also known as diworsification) occurs when investors
acquire many funds that are highly related and, as a result, don't get the risk reducing benefits
of diversification.

At the other extreme, just because you own mutual funds doesn't mean you are automatically
diversified. For example, a fund that invests only in a particular industry or region is still
relatively risky.

3. It cannot utilize all the Cash

Mutual funds pool money from thousands of investors, so everyday investors are putting money
into the fund as well as withdrawing investments. To maintain liquidity and the capacity to
accommodate withdrawals, funds typically have to keep a large portion of their portfolios as
cash. Having ample cash is great for liquidity, but money sitting around as cash is not working
for you and thus is not very advantageous

4. It incurs more cost

Mutual funds provide investors with professional management, but it comes at a cost. Funds will
typically have a range of different fees that reduce the overall payout.

Other Types of Mutual Funds

The managers of mutual funds design their investment portfolios according to the investment
objectives of their customers. Usually a fund's objectives are plainly disclosed in its prospectus.
In most cases, the name of the category gives a pretty good clue to the types of investment
included within the category. The major fund categories are described as follows

AGGRESSIVE GROWTH FUND

ASSET ALLOCATION FUND

BALANCED FUND

BLEND FUND

BOND FUND

CAPITAL APPRECIATION FUND

CLONE FUND

CLOSED FUND,

CROSSOVER FUND

EQUITY FUND

FUND OF FUNDS

GLOBAL FUND

GROWTH FUND,

GROWTH AND INCOME FUND,

HEDGE FUND,

INCOME FUND,

INDEX FUND,

INTERNATIONAL FUND,

MONEY MARKET FUND,

MUNICIPAL BOND FUND,

PRIME RATE FUND,

REGIONAL FUND,

SECTOR FUND,

SPECIALTY FUND,

STOCK FUND, AND

TAX-FREE BOND FUND.

Parameters to evaluate mutual funds performance

There are different parameters to evaluate the mutual funds performance. The most commonly
used are as follows

2. Sharpe ratio

3. Trey nor ratio

REREARCHES CONDUCTED ON MUTUAL FUNDS PERFORMANCE

S.M. AAMIR SHAH & SYED TAHIR HIJAZI(2005) in their research work on "Performance
Evaluation On Mutual Funds In Pakistan" on the basis of historical analysis of mutual funds
performance in Pakistan concluded that "Worldwide there had been a tremendous growth in this
industry; this growth in mutual funds worldwide is because of the overall growth in both the size
and the maturity of many foreign capital markets, we are far behind. The need of an hour is to
mobilize saving of the individual investors through the offering of variety of funds (with
different investment objectives).The funds should also disclose the level of risk associated with
return in their annual reports for the information of investors and prospective investors. This will
enable the investors to compare the level of return with the level of risk. The success of this
sector depends on the performance of funds industry and the role of regulatory bodies. Excellent
performance and stringent regulations will increase the popularity of mutual funds in Pakistan".

Naim sipra(2006) in his research work on "Mutual fund performance in Pakistan , 1995-2004"
performed the past 10 year performance analysis on mutual fund industry in Pakistan, he found
that "the performance of Mutual funds cannot be considered to be very good relative to the
market portfolio. These results are however, not different from results of studies conducted over
much longer period in US & Europe. There are also small portions of the funds (approximately
30%) beat the market in a given period, but the composition of these market beaters kept on
changing from period to period. Thus, suggesting no special competency on the part of the
mutual funds to consistently beat the market".

Wermers(2000) carried out a research work on mutual fund performance in America and found
that funds hold stocks that out perform by market 1.3%per year, but their net results under
perform by one percent.

Adnan hussain(2003)in his research based article on "history, performance of indo-pak mutual
fund industry" found by comparing the historical mutual fund performance of India and Pakistan
that "despite almost same number of asset management companies, the size of Indian mutual
fund industry is 20 times larger than Pakistan mutual fund industry. It is due to number of
potential investor, awareness and government role in policies which motivate to save rather than
consume."

David Blake & Allan Timmermann (1998) conducted a research on "Performance evaluation of
UK mutual funds" and found that the average equity fund appears to under perform by around
1.8% per annum on a risk adjusted basis. The researcher says that there is also some evidence of
persistence of performance , on average, a portfolio composed of the historical best performing
quartile of mutual funds performs better in the subsequent period than a portfolio composed of
historically worst performing quartile of funds.

Khawaja amjad saeed(2006)in his research based article on "Testing the health of stock market",
the author analyzed that there are 6 components of financial sector. These include close-end,
open end mutual funds, modarbas, leasing companies, investment banks commercial banks and
insurance. In this article he only examines the performance of listed mutual funds on KSE. 21
out of 652 companies listed on KSE represents that the potential for mutual funds is to big to tap
for that aggressive marketing effort is needed to increase the market share comparing this to
Indian mutual fund industry the current share of mutual funds in Pakistan is too small. He
analyzed that 62 percent of the mutual funds listed on the stock exchanges are below par value
on the KSE. Historical data depicts that from 1980 to 2006 the mutual funds had shown the
growth from 10 percent to 43 percent. He also revealed the fact that total market capitalization of
KSE was RS 2952 billion against RS 32 billion relating to listed closed end mutual funds. This
represents 1.08 percent. A strategic plan to increase the share is the carrying need of today.

CHAPTER 3

RESEARCH METHODOLOGY

Researcher's course of action shall be literature review of the data available on performance of
Mutual fund industry in Pakistan and objective analysis of different Funds.

3.1. Population

The population for this research consisted of all mutual funds existing in Pakistan.

3.2. Sample

It was mentioned in the research proposal that a sample of 6 mutual funds selected for the study,
because, due to scattered population, it became difficult, as well as, time and resource consuming
to cover all mutual funds.

Tristar Mutual Fund

Safety Mutual Fund

NIT

Picic Investment Fund

Almeezan Mutual Fund

Asian Mutual Fund

3.3. Tools for data collection

The internationally accepted four models for the performance evaluation of mutual funds are as
follows

1. sharpe ratio

2. treynor ratio

3. jensen ratio
4. fama French ratio

Due to time limitations we have performed analysis on the basis of 2 ratios and i.e.

Sharpe Ratio and Treynor ratio.

Sharpe model:

The model was inculcated by William F. sharpe to work on portfolio theory.

This model is used to measure the performance of managed portfolio in respect of

return per unit of risk. It also measures the portfolio/investment managers' ability
on the basis of rate of return performance and diversification by taking in to account
total risk of the portfolio

Sharpe Ratio = (Rp-Rf)/S.d.

In other words, our tool for data collection is document analysis. Our research approach was
exploratory because we had to explore acutely the current scenario of mutual fund performance
on the basis of past trend analysis.

Treynor model:

It inculcated two types of risk

1. Systematic risk---which is also called undiversified risk

2. Unsystematic risk--- which is a specific risk to a company.

It is used to measure the performcance of a managed portfolio in respect of return per unit of
risk(systematic risk). Therefore, the predilection will be for investment in that funds which
provide highest return per

3.4. Data Collection

Opening & closing monthly prices of selected mutual funds since jan 2005 till oct 2009

Opening & closing monthly market return, which in this case was taken from Kse 100 since
January 2005 till October 2009

Risk free rate of return since January 2005 till October 2009

3.5. Data Analysis

Finally data were analyzed and the results were formed through the internationally accepted
models for the performance evaluation of mutual funds and interpreted through

Tables and graphs.

Chapter 4

Data Analysis

Analysis is the application of reasoning to understand and interpret the data that have been
collected. The final stage of the research process is to interpret the information and draw
conclusions relevant to managerial decisions. Making recommendations is often a part of this
process. (Zikmund, 2003:73).

This chapter deals with the analysis and interpretation of data. The treynor ratio indicates that it
is used to measure the performance of a managed portfolio in respect of return per unit of risk
(systematic risk). Therefore, the greater the ratio the more it is good for the investor. The analysis
performed from the treynor ratio represents all the selected mutual funds with negative value
except NIT, which is not a good sign. As the historical beta of all the selected mutual funds is
less than 1, which shows that the mutual fund companies are defensive in their movements of
returns as compared to the market returns(KSE 100 INDEX).Average treynor ratio of selected
mutual funds is -2.31, which means that investor is getting negative return for 1 percent of extra
risk.

Sharpe ratio model, which includes table and graphs, is used to measure the performance of
managed portfolio in respect of return per unit of risk. It also measures the portfolio/investment
managers' ability on the basis of rate of return performance and diversification by taking in to
account total risk of the portfolio. As Sharpe ratio model represents the negative return per unit
of risk and the overall average is -0.099.the result of these two ratio should be same but the
major reason of not having the same result shows that selected mutual funds are facing
diversification problem

Sharpe Ratio Model

Sr . No.

COMPANY NAME

AVG SHARPE RATIO

S.D.

Avg return

Avg Rm

Tristar Mutual Fund

2.77

0.316

0.208

0.014253

Safety Mutual Funds

-0.08

0.26

0.17

0.014253

NIT

-0.48

0.18

0.002

0.014253
Picic Investement Fund

-1.25

0.14

0.006

0.014253

Almeezan Mutual Funds

-0.6

0.126

0.0004

0.014253

Asian Stock Fund

-0.95

0.343

0.044

0.014253

AVG

-0.098333333

0.2275

0.07173333

0.014253

Treynor Ratio model

Systematic Risk & Return Analysis

Sr No.

COMPANY NAME

Avg TREYNOR RATIO

BETA

Avg return

Avg Rm

1.

TRISTAR MUTUAL FUND

-11.26

-0.47
0.208

0.014253

2.

safety mutual funds

-0.63

0.016

0.17

0.014253

3.

NIT

0.096

0.67

0.002

0.014253

4.

PICIC INVESTEMENT FUND

-1.77

0.77

0.006

0.014253

5.

ALMEEZAN MUTUAL FUNDS

-0.05

0.87

0.0004

0.014253

6.

ASIAN STOCK FUND

-0.23

0.101

0.044
0.014253

AvG

-2.307333333

0.326167

0.07173333

0.014253

Fig(a)Graphical Representation Of Sharpe Ratio Model

Fig(c)

Fig(b)

Fig(d)

Graphical Representation of Treynor Ratio Model

Fig(e)

Fig(d)

Fig(f)

Fig(h)

Ch 5

Conclusion

Our thesis project provides an overview of the Pakistan mutual fund industry and investigates the
mutual funds risk adjusted performance using mutual funds performance evaluation models
(Sharpe ratio & trey nor ratio). 5 years is too short a period to make any definitive
conclusionabout the performance of mututal fund industry in pakistan. Nevertheless, the
performance of the selected funds is not very good.There are some Mutual funds' return beat the
market return but on average most of the funds show less return than that prevail in market. As
we selected 6 different mutual funds for the performance evaluation of mutual fund industry in
Pakistan. the performance evaluation was performed on the basis of Sharpe ratio and trey nor
ratio.

Sharpe Ratio -------through this model an investor can know what should be the required rate of
return for a risky asset.

Trey nor ratio------- It is used to measure the performance of a managed portfolio in respect of
return per unit of risk(systematic risk).

We have concluded that the mutual industry didn't perform well because our whole market is in
crises, it does also have an affect on mutual fund industry. The ratios of all the selected mutual
funds results show this fact that the mutual funds are in able to give positive returns. .Moreover,
the companies have been facing the diversification problem.