Recall that fixed income funds have yielded an average return of nearly 8 percent (annualized) and KSE 100 index delivered an absolute return of 50 percent in CY13. With interest rates on the rising trend, and equity market continuing to perform well, the idea of investing in a mixed fund offering capital preservation with added flexibility to change the asset mix (up to 100% equity) in order to capture higher yields surely grabs attention.
One such fund has recently been launched by Al Meezan Investment Management namely “Meezan Capital Preservation Fund” that along with aiming to safeguard the initial capital investment carries the added feature of increasing the value of investment over the lock-in period.
In order to secure the objective of capital protection, the fund will employ Capital Principal Preservation Investment (CPPI) methodology, where actively rebalancing the portfolio mix between equity (up to 100% equity) and fixed income will be the key. Thus, an investor can spawn profit over and above the invested amount, thereby combating inflation risk. In contrast, investing in bank deposits or government securities will bear interest rate risk especially in a soaring interest rate environment, as is the case now.
With regards to the performance of other capital protected funds in the industry, the funds have yielded an average industry return of 18.3 percent over a three-year period which makes sense in contrast to the average annualized return of 28 percent of KSE 100 index over three years that carries the highest risk and volatility amongst other asset classes. The return is even higher than the average inflation of around 11.23 percent since FY11.
Apart from Meezan Islamic Principal Preservation Fund, other Islamic Principal Preservation Funds freshly launched in the industry include: UBL Islamic Principal Preservation Fund I launched in April 2013 offering an inception to date return of 12.95 percent, UBL Islamic Principal Preservation Fund II launched in November 2013 yielding inception to date return of 5.47 percent and ABL Islamic Principal Preservation Fund which was introduced on December 24, 2013. The returns under this scheme turn out to be exceptional compared to fixed income and money market returns.
Just to present an overview of the success of Meezan Financial Planning Fund of Funds, launched nearly eight months back, the fund has been a success with all the three categories, i.e. Aggressive, Conservative and Moderate outperforming not only their benchmarks but also other investment avenues particularly SSC, Gold and T-Bill. (See the graph), which has enabled the fund to fetch an AUM size of nearly Rs0.77 billion in less than a year.
The funds under each category compare favourably with the industry average returns, whereas in most cases the returns are more sophisticated than the average of industry wide returns.
In contrast to opting for investment avenues bearing extreme risk and return profiles, Islamic principal preservation funds have opened a way for risk averse investors who wish to earn profit while not risking their initial investment. Whether this new trend in principal preservation fund is able to come to public attention will depend much on the fund managers as to how well they implement the aforementioned investment strategy.