A year ago, I shared my optimism that investors would eventually realise that not all asset managers are the same. A few recent developments have compelled me to return to share my thoughts.
It took more than 50 years for our depositors to realise that not all banks are safe. I believe the recent banking crisis will dramatically reshape the mindset of our household savers, especially when it comes to trusting a financial institution. Be it a bank, non-bank financial institution (NBFI), insurer or capital market intermediary, depositors and investors will now park their money with only credible institutions, making well-governed institutions disproportionately large.
For financial services, where trust is the only foundation, this consolidation would have happened long ago had we not issued so many licences. A handful of well-governed institutions will eventually handle the majority of the country’s financial intermediation, and you do not have to be an analyst to predict that.
But the bigger question is where household and institutional savings may go in this changing environment. This is exactly the kind of environment that sets the platform for a professional fund management industry to take off, where scalability is just a matter of time.
No matter the ticket size, individual savers can earn superior risk-adjusted returns without worrying much about which institutions or instruments to choose when professional managers manage their money.
Interestingly, we find much larger inefficiency at the institutional level. Large pools of long-term capital, such as provident funds and insurance investments, remain poorly channelled into subpar investments. Capital that could otherwise finance economic growth remains persistently misallocated.
Additionally, with no mature demand-side alternative, banks, which are in need of capital, have leaned disproportionately on other banks rather than a broader investor base. The recent subordinated bond issuances hint at what a deeper fund management industry could offer: a meaningful share of those bonds was absorbed by asset managers, proving that professional investors can provide banks with a market-based alternative to bank-to-bank financing, which created an additional layer of systemic risk.
More fundamentally, the absence of patient capital has stunted the long-term orientation a capital market needs to mature. Long-term investors, who are willing to hold investments through market cycles, bring depth and discipline. Without them, we would never develop the market structure and price discovery that more advanced capital markets already facilitate.
A large part of the problem is that general investors often assume all companies listed on the stock exchange are going concerns and therefore investable without proper due diligence.
Their investments consequently become driven largely by speculation and gambling instincts rather than business fundamentals.
But the cost does not stop with individual losses. When the market cannot distinguish good businesses from weak ones, it fails at price discovery. Quality companies remain inefficiently valued, giving large unlisted businesses less incentive to go public.
That deprives minority shareholders — effectively, the broader public — of a share in the profitability of some of the economy’s strongest growth engines. It also denies the economy the accountability and transparency gains that public listing typically brings.
This is the national foregone opportunity: capital that could finance productive businesses, jobs and growth instead sits trapped or misallocated.
The banking-sector crisis shows how serious that misallocation can become. When savings of depositors are channelled into poorly governed institutions and weak borrowers, the resulting losses do not remain with the original savers. Eventually, the entire nation pays the price.
Had a greater share of those deposits been allocated through professional fund managers, depositors would not have lost their money. Funds could have been channelled into well-capitalised, well-governed banks and non-bank financial institutions, while capital could also have been directed towards more productive opportunities.
Finally, the investment management industry is evolving.
Our investment management industry was long dominated by closed-end funds, and we all know how that ended for most investors. For years, professionals advocated open-end funds, but even a decade ago there was little ray of hope.
Well, that has changed.
Open-end funds are now growing rapidly, driven largely by fixed-income funds. I, as well as a few other asset managers, have long argued that fixed-income products should be introduced and popularised first, so that equity schemes and other complex products can become easier to familiarise with afterwards.
Let me share a statistic. Fixed-income open-end funds have attracted more than Tk1,000 crore in just three years.
UCB Income Plus Fund alone crossed Tk400 crore in assets under management (AUM) this June — within just three years — a rare feat achieved by any mutual fund since 2012. Most importantly, all the other fixed-income funds are also performing exceptionally well, both in terms of returns and AUM growth.
The experience of India, Pakistan and Sri Lanka points to an important pattern.
A deep, liquid benchmark sovereign yield curve is essential for a fixed-income fund industry because it provides the basis for pricing and trading. Countries that have managed to build such a market have been able to scale their fixed-income mutual fund industries.
India, with a more mature mutual fund industry and assets under management exceeding 20 per cent of gross domestic product (GDP), was predominantly debt-oriented until 2014, after which investor preference gradually shifted towards equities.
Pakistan remains in the growth phase. Its industry has around $15.8 billion in AUM, equivalent to roughly 4 per cent of GDP, with more than 70 per cent of AUM concentrated in fixed-income funds.
Sri Lanka is at an earlier stage, with mutual fund AUM of around 2 per cent of GDP. Its industry has an even stronger fixed-income orientation, with approximately 85 per cent of AUM invested in fixed-income funds.
And let’s not discuss where we stand.
We must prioritise an enabling environment in which a robust yield curve emerges from the participation of real market participants. That starts with building a vibrant secondary market for government securities.
Bangladesh has seen poor examples involving some closed-end mutual funds extending their tenures without taking investors’ interests sufficiently into consideration. Such practices undermine confidence because investors need assurance that the contractual terms under which they commit their money will be respected.
Failure to ensure contract enforcement significantly hurts investor confidence and is rare by global standards. Without trust in contracts, even a well-designed investment product will struggle to attract long-term capital.
Finally, I urge our regulators and market participants to get their priorities straight. I strongly believe that, if our intention is right, everything else will fall into place eventually.
Author is the Managing Director and CEO, UCB Asset Management. The views expressed in the article are solely those of the author.
