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

FUNDAMENTALS - Investor Magazine 02

 Voluntary Pension Schemes: Features & Benefits
Defined contribution scheme
VPS is a defined contribution style offering where the participant
contributes to his individualized pension account (lump sum or
on a regular basis) and the contributions accumulate return over
the working life of the participant to provide a final retirement
fund.
Different to provident and gratuity funds
Individuals or employers on behalf of their employees can
contribute to the scheme. Due to the defined contribution nature
of VPS, the end beneficiary is only the individual. Furthermore,
unlike in the case of provident or gratuity funds, the benefit is
not dependent on the length of service or any other condition
of employment.
Customization
The individual accounts are customized according to the specific
needs and requirements of the investor. VPS gives participants
the option to choose their own asset allocation, enabling
individuals to allocate contribution between equities, debt and
money market instruments in accordance with their risk tolerance
and investment time horizon.
Portability
In addition, the feature of portability improves the mobility of the
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.
Tax credit on contributions
There are tax advantages offered to participants who choose
VPS for their retirement savings. Participants can claim a tax credit
of up to Rs. 100,000 (for salaried individuals) and up to Rs.125,000
(for self-employed individuals) every year on the amount they
contribute towards their scheme. Such a tax credit is not available
on contributions to provident funds.
Tax free lump sum withdrawal and regular income post retirement
At retirement, the participant is allowed to withdraw up to 50%
of his accumulated fund as tax-free lump sum; a feature that is
very popular with most participants. If the participant chooses
to receive a lump sum payment at retirement, the remaining
balance can be used to enter an Income Payment Plan managed
by the pension provider. This plan could invest in equity, debt
and money market based on the participant’s preference and
will be used to provide a monthly income to the participant once
he or she has retired.
A step in the right direction
Saving for retirement may not necessarily be your top priority,
especially if you are 20 or more years away from it. However,
planning now can ensure that you can enjoy a financially
independent and worry-free lifestyle post-retirement. Through
the Voluntary Pension Scheme, there is a genuine retirement
savings product on offer. The next challenge is to discipline
yourself to start contributing early and on a regular basis.

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…
Give your children the future they deserve
Every parent wishes to gift their children a secure financial future.
We all wish that our child would be highly educated, and never
face any financial constraints. However, education expenses
are, by no means, low, and if sound investment planning is not
done for your child’s future in a timely fashion, meeting these
expenses can prove to be rather tricky. Fortunately, parents
can, by following some broad investment guidelines, easily make
the necessary financial arrangements for their children, without
having to make any compromises.
Fixed investment horizon
Saving for children’s education has one significant advantage
over many other types of investment – you know when you are
likely to need the money. It could be their 18th birthday, their
21st or some other date you have in mind, but it means you can
plan very specifically for the time frame.
FUNDAMENTALS - Investor Magazine
By: Maleeha Mimi Bangash, Chief Strategy Officer
Start early & invest regularly
Investment plans for children generally encourage parents to
start saving from an early stage of their child’s life. Education
expenses are continually on the rise, and there is no way to
predict the figure at which these expenses will stand in a few
years' time. Hence, it makes sense to put aside a part of your
present income regularly towards your child's education fund.
Powerful growth for the long-term
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
stock-based funds, as these funds offers long-term growth
potential that other types of investment cannot match. Of course,
recent years have reminded us that stock markets are subject to
volatility - that is they can rise and fall unpredictably over short
periods. However, the fact is that stocks tend to rise in value
over the long-term.
04
For example, if we take a look at the performance of the domestic
stock market since 1994, long-term investors choosing to stay in
the market for at least 10 years enjoyed annual returns of 59%
on average despite the short-term market ups and downs.
If you to choose to invest in the stock market through a mutual
fund, you can considerably reduce the level of risk involved. This
is because you will be holding a selection of stocks chosen by an
expert fund manager, so each company that the mutual fund
invests in is only a small part of your total investment portfolio.
You can potentially reduce risk even further by holding a mix of
mutual funds that invest in different sectors or geographical
regions as this gives you access to a wider range of opportunities.
Switch between asset classes
Another advantage of investing in stocks is that you can take
your money out easily at any time. As a result, as you come closer
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
Investing for children is all about the long-term; to give
your investment as much time as possible to grow, you
need to start investing as soon as possible.
The sooner you invest the more time your money will
have to grow. You will also benefit more from the power
of “compounding”, which is the snowball effect you
have when the growth your investment has achieved
also starts to grow. If you delay, you will probably have
to invest much more to achieve a similar result.
Invest as much as you can afford
Many people find it hard to work out how much money
they need to save to help fund their child’s education.
This is why the best strategy is to put aside as much as
you can afford. This means you are not just more likely
to achieve your goal, you could build up more than you
need – which could then help you with any other
expenses you may face, such as your child’s marriage.
FUNDAMENTALS - Investor Magazine
The idea is that as you come closer to achieving your financial
objective, for example when your child becomes eligible for
college, your savings should be transferred to more liquid and
secure assets such as fixed income and money market funds.
Pick a fund that does the work for you
If you don’t want to manage the move from stock funds to fixed
income and money market funds yourself, you could choose an
investment plan that does it for you. A customized children savings
plan will automatically move your money over the years, so that
you take the right level of risk at the right time. All you have to
do is choose the maturity age for your child’s plan and proceed
to making regular contributions. The fund manager will make
allocations on your behalf in different asset classes such as stocks,
fixed income and money market, keeping in mind your overall
investment objective and maintaining a balance between capital
appreciation and liquidity.
Think about saving each month
Unless you have a large sum to invest, a good way to
build up significant savings for your children over the
years is to start a monthly savings plan. This can help you
maintain a long-term investment strategy and is a useful
way of being disciplined about saving for your children’s
future – you will soon start thinking of your regular
payment as an essential part of your budget.
Monthly investments also give you a way to smoothen
out the market volatility. If stock prices go up, the
stocks/units you already own will increase in value. On
the other hand, if prices go down, your next investment
will buy more stocks/units.
Don’t try to time the markets
Instead of investing straight away, you might be tempted
to wait for the market to reach a low point or for
confirmation that a recovery is really happening. But
how will you know what this low point is? And how long
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.
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%)
over the long-term; however this has come at the cost of higher
volatility of around 6% (annualized). The moderate portfolio
offers slightly lower return (29%) while reducing the volatility
to a much more manageable level of around 4% (annualized).
The conservative portfolio reduces the volatility to a mere 2%
(annualized) while sacrificing return but still generating a much
respectable 19.4% in the Jan 09 – Jun 10 period.
(Note: Annualized “Standard Deviation” has been used as a
measure of volatility in the above analysis)
Developments across various asset classes
and their future outlook
Equities
Risk: High | Return: High | Investment Horizon: 2Y – 5Y
KSE100-index generated an absolute return of -1.35% during
the period (1 Jan 10 to 15 June 2010). The movement in the local
equities can be summarized as a correction followed by
consolidation after the impressive 31.1% return generated in
the prior six months (Jul – Dec 2009). We mentioned in our last
issue that the market was fairly valued and the low hanging fruit
had been picked, hence we did not expect above average
returns in the coming six months – our view proved to be correct
as the market closed the period with a flat return. The KSE100
is currently trading at PE(11E) (Price-to-Earning Ratio) of
approximately 6.5x which is at about 20% discount to the
historical average forward PE of 8.0x – therefore we maintain
our expectations for a 20% annual return from equity markets.
The systematic risk and uncertainties will play a large role in the
coming year as “Capital Gains Tax” and “Value Added Tax” are
implemented and the Government goes through negotiations
with IMF for conditions applicable on the current SBA (Stand By
Arrangement) facility and potentially a new one as well. The
security conditions continue to be volatile as well – an
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,
we expect a moderate level of noise to envelop the market’s
basic fundamentals in the coming period.
Global equity markets were battered by concerns regarding
sustainability of the Euro-zone and the Greek crisis during the
last six months. The Chinese market was especially hurt by the
combined effects of global risk aversion and hints of monetary
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%
30%
Commodities
25% Aggressive Portfolio
Return
20% GoP
Moderate Portfolio
Schemes
15%
Conservative Porfolio
TDR
10% Income
Funds
5%
Cash
5% 10%
Risk
consolidated to close the period with a return of -0.3%. Dow
Jones was almost flat for the period with a return of -0.2% but
the European markets were significantly worse (FTSE: -3.6%,
DAX: 3.7%, CAC: -7.0%). The declines in MSCI World Index
(-5.16%) and MSCI Emerging Market Index (-5.23%) during the
period provides a summarized view of the market movement.
On valuation basis, the regional peers are trading in the PE range
of 15x-17x while developed markets are trading in the 11x-15x
range. Therefore, Pakistani equities trade at a significant discount
to regional peers – this can generate substantial foreign interest
if the country’s risk perception improves.
Fixed Income
Risk: Low | Return: Moderate | Investment Horizon: 6M – 1Y
Term Deposits
At the time of publication of our last issue (6 months ago),
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
on a risk-averse footing, the deposit rates have stayed low during
the last six months. Recently the liquidity situation of the money
market has relatively tightened, leading to improvement in Term-
Deposit rates for 6 month placements in AA-rated banks to
stand in the range of 11%-11.75% p.a. The low risk nature of
these placements and expectations of the Central Bank continuing
with an accommodative monetary policy stance over the longer-
term, some exposure in the asset class can be justified. However,
the return on GoP securities (discussed below) is higher and we
prefer that asset class over TDRs for our conservative and
moderate portfolios.
Income Funds
We highlighted in the past that fixed income funds are poised
to outperform term deposits and money market funds over the
medium to long-term – albeit at the cost of much higher volatility.
Therefore we only recommend medium to long-term investments
in these instruments as volatility smoothens itself out over longer
time scales.
Government of Pakistan (GoP) Schemes
In our last issue, we recommended, then newly introduced,
“National Savings Bonds” (NSB) which yield 12.5% p.a. for a 3
year instrument. The yield structure of the instruments remains
unchanged and we recommend them for our risk-averse
portfolios, especially considering the low risk exposure and the
potential for capital gains in case of further relaxation in the
monetary policy.
Equities Return Vs Risk of
Various Asset Classes
January 2009 - June 2010
The chart on the left shows how the
recommended portfolios achieved the
desired Risk / Return mix using the
Real Estate available asset classes.
Diversification in the portfolios helped
reduce risk and added to the
portfolio’s return per unit risk.
15% 20% 25%
 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
in calculating real estate returns. We have estimated the return
of the asset class through inflation data collected by the Federal
Board of Statistics. According to the data, the Real Estate index
(building & construction material) rose from 186.7 (Dec 2009)
to 221.1 (Jun 2010), generating an absolute return of 18.4%
during the period. However, the figure can be misleading as the
actual volume of real estate transactions is very low due to
liquidity constraints.
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.
We recommended noney market funds for parking liquidity. The
money market liquidity has relatively tightened in the recent past
and minor increase in rates is expected which will benefit the liquid
fund yields. We expect the Central Bank to maintain the policy
rate at status-quo over the short to medium-term with an
underlying bias towards an accommodative monetary policy.
Therefore, liquid funds are expected to continue generating returns
in the current range over the coming months. The stable returns
of these funds also provide a hedge against the volatile nature of
local capital markets.

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 !!!
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.
Making the most of the stock market volatilities
While no one can predict when markets will decline or rebound,
a strategy of adding to holdings when markets are “on discount”
may provide significant advantages versus a strategy of pulling
out of the market.
Be informed - Understand market ups and downs
Understanding general stock market behavior is an important
factor for investing during good times as well as trying times,
and in achieving long-term investment success. Stocks have
historically proven to be a very good investment. This does not
mean that every year will produce a double-digit, or even a
FUNDAMENTALS - Investor Magazine
By: Salim Mehdi, Head of Institutional Business
positive return. In other words, down periods as well as up, are
natural parts of equity investing. Unpredictable events will have
an impact on markets, sometimes negatively. However, it may
not be beneficial to let the short-term declines distract you from
your long-term goals or the long-term potential of stock market
investing.
Be invested - Keep your money working for you
Over every market cycle, there will be up days and down days.
Missing even a few of the stock market’s best-performing days
can result in significantly lower returns than the market index.
Often, a few very good days account for a large part of the
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
market rallies that could substantially improve your overall return
and long-term wealth. Staying the course when confronting
difficult markets ensures that investments will be “in” the market
on the good as well as the bad days and may ultimately prove
rewarding. During difficult market conditions investors should
also consider their overall objectives and how the risks of their
investments fit these objectives.
10
Be resolute - Stay the course
The rallies you miss could significantly hurt your overall return
and impede achieving your investment goals. Goals that are most
important to investors, such as a financially secure retirement,
funding children’s education, providing for the well-being of
one’s own parents, require a long-term perspective. Clouding
long-term goals by reacting to short-term events and interrupting
a disciplined investment approach could be counterproductive
to achieving those goals.
Be opportunistic - Take advantage of the downturns
By viewing market declines as buying opportunities, you could
significantly enhance your long-term return potential when the
market rebounds. While no one can predict when markets will
decline or rebound, some investors choose to add to holdings
when markets are “on discount”. This strategy may still prove
risky and incur additional losses, but adding to holdings or looking
to diversify when markets are cheaper may provide significant
advantages versus a strategy of pulling out of the market near
the bottom.
Furthermore, “rupee-cost averaging”, in which you invest a fixed
amount of money at regular intervals, is a disciplined investment
strategy that can turn volatility into a potential positive. Ultimately,
a lower average cost translates to a higher return when the
market swings back up and vice versa. Since such a plan involves
continuous investment in securities regardless of their fluctuating
price levels, you should consider your financial ability to continue
purchases through periods of low price levels.
Be diversified - Reduce volatility and enhance returns
Rather than trying to pick a single investment type, diversifying
across asset classes may help to decrease your risk and enhance
long-term return potential. Not all investment types perform the
same during similar time periods. Investing across multiple asset
classes, sectors and regions reduces risk and enhances the
potential for being invested in the best performing assets and
diminishes the impact of being invested in the worst. This strategy
may be especially important in a difficult market environment
when sector rotations and market fluctuations happen
continuously. Diversification may reduce the overall volatility of
your entire portfolio while helping you achieve above-average
long-term returns.
Be confident - Be invested
Investors have seen a number of shocks and disruptions to
financial markets caused by both political and economic factors,
and markets may react dramatically in response to specific events.
While investors may see the market react dramatically to adverse
events, they should be far more influenced by their long-term
goals. Maintaining a clear focus on your investment objectives
during difficult times is often a determining factor in long-term
success. Seasoned investors know that, in the long run, markets
have shown remarkable resiliency in times of crisis. Investors
who are informed, invested, resolute, opportunistic and diversified
can have a greater degree of confidence that their investment
goals can be met.

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
“Inflation is when you pay fifteen dollars for the
ten dollar haircut you used to get for five dollars
when you had hair.”
- Sam Ewing
Inflation is an investor’s worst enemy. It eats away the real
purchasing power of an investor’s assets. Over any given time
period, a portfolio’s return needs to equal the rate of inflation
just to preserve the purchasing power the investor started with.
Only when the return exceeds the rate of inflation does the
portfolio start to generate any increase in the purchasing power.
The first step to protect yourself from inflation is to enroll in a
Systematic Investment Plan (SIP) – this is a vehicle offered by
mutual funds to help investors save regularly for accumulation of
wealth in a disciplined manner over the long-term. Investments
made through SIP can be invested in equity, money market or
balanced funds in order to earn positive “inflation adjusted
returns”.
There is a common misconception that savings accounts at banks
can help investors accumulate wealth over the long-term. These
accounts offer a meager return of 5%, which does not
compensate for the inflation levels in Pakistan (11mFY10 CPI:
11.64%YoY). Savings certificates / term-placements and bonds
do slightly better but not by much.
So what is an investor to do? Following are some of the options
at hand.
FUNDAMENTALS - Investor Magazine
By: Wahaj Aslam
Fund Manager - Islamic Funds
Short-Term Money Market Funds
Whenever there are inflationary concerns, it may be best to keep
your money in short-term accounts or money market funds which
provide market based returns, or in other words floater returns.
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
transferred to the investor instantly as the portfolio adjusts
instantaneously. This provides an opportunity to enjoy market
based returns and an opportunity to lock-in long-term high yielding
instruments when the interest rates have peaked or are in a
comfortable zone.
Stocks / Equities
Stocks, unlike bonds, provide a variable income. Stock represents
ownership of a business, and a stock’s value depends, in broad
terms, on the success, or lack thereof, of the underlying business.
Investing in quality, blue chip stocks has traditionally been the
best long-term way to beat inflation. The only problem is that if
inflation becomes a major impediment to economic growth, the
stock market will most likely suffer too. One way to reduce that
risk is to stick with big, blue chip companies which, by virtue of
their size, have more pricing power than small companies.
Moreover, these companies often pay out dividends which, in
contrast to investing in fixed-income investments, should provide
a reasonably good long-term inflation hedge because earnings
grow on a nominal basis and investors retain exposure to economic
performance. Any share price gains are simply a bonus on top of
the payout increases.
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
By: Farooq Ahmed, Head of Retail Business
Whether it is investing, driving, or just
walking down the street, everyone
exposes themselves to risk. Your
personality and lifestyle play a vital role
on how much risk you are comfortably
able to take on.
We know investing is highly personal; everyone has different
goals, timeframes and sensitivities to risk. We also know that
every investment is subject to some level of risk. The first thing
you need to do before you start investing is to understand your
ability and willingness to take risks. In doing so, you will determine
how best to allocate your savings among various asset classes.
Not knowing what your tolerance to risk is or what you are
investing in may cost you financially.
What is Risk?
Most people think of investment risk in one way: “How likely am
I to lose money?” This statement describes only part of the picture,
however. When considering how much risk you can take, you
need to analyze your risk appetite against common factors such
as your age, your attitude towards risk, the time-frame available
for your strategy to work, your financial skills and (availability of
time to utilize them), your net income, net worth, and your
lifestyle.
Your Age
The younger you are, the more risks you can afford to take. You
have time on your side to ride out the short-term fluctuations on
your investments. Therefore, young investors can afford more
aggressive investment strategies possibly involving equity funds.
If you are retired or nearing retirement, you should invest in low
risk assets like fixed income and money market funds.
Your Attitude & Emotions Towards Risks
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
investor who is concerned about preserving the value of your
investment, earning consistent modest returns over a long period
of time, then you are a conservative investor. If you looking for
higher returns with some protection for your investment, then
you are a moderate investor. If you are looking for high growth
FUNDAMENTALS - Investor Magazine
in the value of your investments and are prepared to accept
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
emotions impact your investment decisions as that can raise the
probability of making wrong decisions in haste.
Your Investment Horizon
You will need to take on more risks if your plan is to earn say
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
shorter the time-frame, the more risks you will have to take to
achieve your objectives.
Your Financial Skills
Generally investing in stocks is perceived to be riskier than investing
in low risk assets such as fixed income and money markets.
However, if you understand financial markets and economic
trends, you may be able to reduce risks by selecting the right
stocks. Your own financial skills and talent can play an important
part in your investment strategy. An investment which is more
risky to others might be less risky to you.
Managing risky investment such as equities is a time consuming
activity that involves staying abreast of latest news, digging into
corporate financial statements and dealing with brokers. If you
are a full-time professional, then you will most likely not have
adequate time at hand to perform these activities. In this case,
it is better to invest through stock-based mutual funds where
experienced and skilled professionals take on the responsibility
of performing these activities on your behalf at a marginal cost.
Your Net Cashflow & Net Worth
The higher your net cash flows, the more risks you can afford to
take. Net cashflow means excess cashflow after deducting all
living expenses and financial obligations from your income. Also
the higher your net worth, the more risks you can take.
Social Factors
Are you single or married? Do you have children or parents who
depend on you for financial support? If yes, then you should be
careful taking risks because any negative financial impact on your
investments could affect these people besides you.
Conclusion
In summary, risk is a natural part of investing. You need to find
your comfort level and build investment portfolios and
expectations accordingly. Even though there are thousands of
investment strategies available out there, the best strategy is the
one you plan for yourself because only you know yourself best.
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
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
of 10% p.a.
2. An investment that may have a negative return
every 8 years but will usually have an annual
return between -5% and 14% p.a. with an
average return of 12% p.a.
3. An investment that may have a negative return
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.
4. An investment that may have a negative return
every 4 years but will usually have an annual
return between -9% and 20% p.a. with an
average return of 17% p.a.
5. An investment that may have a negative return
every 3 years but will usually have an annual
return between -11% and 30% p.a. with an
average return of 20% p.a.
Calculate your tolerance to risk by adding the numbers
(given next to the answers) for each box you have
ticked in questions 1 to 9.
MY RISK SCORE IS _________
Now match your risk score to the risk profile in the
table to the right to determine your risk profile. The
next step should be to meet with your investment
advisor to develop a portfolio based on your
investment objectives and risk profile.
FUNDAMENTALS - Investor Magazine
Score Your Risk Profile
9-16 CONSERVATIVE
A VERY LOW RISK TAKER
You are a conservative investor. Risk must
be very low and you are prepared to
accept lower returns to protect capital.
The negative effects of inflation will not
concern you, provided your initial
investment is protected.
17-23 MODERATELY CONSERVATIVE
A LOW RISK TAKER
You are a moderately conservative
investor seeking better than basic returns,
but risk must be low. Typically an investor
seeking to protect the wealth that you
have accumulated, you may be prepared
to consider less aggressive growth
investments.
24-30 BALANCED
AN AVERAGE RISK TAKER
You are a balanced investor who wants
a diversified investment to work towards
medium to long-term financial goals.
You require an investment strategy that
will cope with the effects of inflation.
Calculated risks will be acceptable to you
to achieve good returns.
31-37 MODERATELY AGGRESSIVE
A HIGH RISK TAKER
You are a moderately aggressive investor,
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.
16
Market Watch
Fund Manager - Fixed Income Funds
After last years global and local economic crisis, do you
think this fiscal year has seen some improvement or are
we still facing its repercussions?
The fiscal year 2009-10 in my opinion was a much better year
despite the severe energy crisis, foreign debt piling up, high
interest rates and a low agricultural output. The economic growth
rate picked up during FY2010 on the back of the revival in the
industrial sector and high growth in the services sector. Balance
of payments deficit declined as imports plummeted and fortunately
enough the price of oil declined. The level of reserves improved,
reaching about USD15bln. However, the fiscal front stayed gloomy
with fiscal deficit showing an uptrend, tax collection falling below
target and high government borrowing continuing to fuel inflation.
What about the foreign inflow, since the funds promised
at the FODP’s forum haven’t materialized, what do you
think the Government’s next step should be?
I expect that a similar financing facility from International Monetary
Policy (IMF) will again be needed following the close of the existing
facility of USD 11.2bln in December this year and the IMF will once
again throw a list of embargoes on us. Already, the next tranche
is stalled due to the failure of the government organs to institute
the tax reforms. Most notable is the implementation of Value
Added Tax (VAT) which has remained much controversial. For this
purpose, the Government needs to walk a tight rope on the fiscal
discipline and has to seriously work towards reducing its
expenditures.
Do you think the rising international oil prices will create
havoc again for our economy?
The international oil prices have started to rise just at a time when
Pakistan seems to re-emerge from an economic slowdown - this
price hike was also responsible for the previous slow down
witnessed in 2008 and similar price increases will have significant
negative consequences for the broader economy. The first and
foremost consequence will be higher prices to be paid for imported
fuel (for energy generation purpose). We have seen that since
the past two years Pakistan has experienced a severe shortage
of electricity which was triggered by higher oil prices and has
resulted in a vicious circular debt issue. In the aftermath the
domestic fuel prices will increase, as a result commodity prices
and inflation will also witness an upsurge. As cost of doing business
will rise, the pressure will be seen on exports as well as the trade
deficit which in turn will put pressure on the balance of payments.
FUNDAMENTALS - Investor Magazine
With Junaid Qamar
What are your comments regarding the inflationary
pressure the country has been facing since last year?
The State Bank of Pakistan (SBP) amid resurging inflationary
pressures and fiscal slippage has been on a “Wait and See” mode
since November 2009. Inflation bottomed in October 2009 at
7.5%, post which it has been regaining strength. We have seen
the effect of higher inflation i.e. the credit price (the interest
rates) is high which forms a hindrance to fresh investments and
makes exports non-competitive in the international market place.
Food inflation has been high in the last three fiscal years and this
year too (FY11) it is expected to remain in double digits. The
Government, in the federal budget has announced an inflation
target of 9.5% which is quite unrealistic whereas the IMF and
the SBP have targets of 12.5% and 12% respectively. The SBP in
its third-quarterly report on the state of the economy has clearly
pointed out that the rise in food and energy prices seen since
January 2010 is now having a strong second-round effect. Hence
there is a greater need for targeting inflation through controlling
fiscal borrowing. I expect the status quo to be maintained on
the interest rates front for the medium-term and if the dual
disease of fiscal deficit and inflation are muted, then only the
SBP can have a monetary accommodation stance.
What impact do you think liquidity would have on money
market yields?
On the money market front, there has been a phenomenon of
flight to quality in the domestic banking system in which all the
deposits have gone to Government of Pakistan (GoP) Securities
i.e. T-Bills. This is why growing deposits (14% in 4MCY10 - twice
the figure in the corresponding month last year) has improved
the system’s liquidity. According to an estimate, an overall amount
of PKR 150bln has been added to the system owing to deposit
growth. This has only channeled to GoP Securities. The average
ADR (advances to deposits) ratio has declined from 75.2% to
72.3% during the last four months. Higher support prices of
various commodities and lower inflow of funds to National Savings
Schemes (NSS) - the monthly average has declined from PKR
27.7bln to PKR 17bln - has also served the purpose for the banks.
This is why, pressure on T-bills yeilds has been witnessed during
the last 6-months. This money has trickled down to Mutual Funds
and the industry has witnessed an inflow of around PKR 20bln.
in last few months. In this backdrop, increased liquidity is unlikely
to have a significant impact on money market yields and we
expect them to remain sticky downward.
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.