COMICSMUFAP Quarterly Newsletter

July - September 2013

Meeting of the Board of Directors

In order to ensure that the Board of Directors ful�ls the duties and responsibilities conferred by the members of MUFAP, the Board conducts meetings on a regular basis to make immediate and prudent decisions. �e Board of Directors held three meetings during the quarter Jul-Sep 2013.

�e activities undertaken by Board are as follows:

Proposed amendments in the de�nition of Related Parties in Restricted List of Code for Distributors

�e Board deliberated in detail on the matter of proposed

amendments in the de�nition of Related Parties in the Restricted List of Code for Distributors. After careful consideration of the impacts that the amendments may entail, it was decided that all individuals (namely employees, directors, sponsors of the RSPs) should be excluded from the de�nition of Related Parties. �e revised de�nition is applicable to all new investments brought in on or after July 16, 2013 and is not applicable to existing investments made by or before July 15, 2013.

Valuation of GOP Ijarah Sukuk

�e Board recommended that AMCs should use ‘PKISRV’ quoted on Reuters as the relevant price to value the GOP Ijarah Sukuks to determine net assets of CIS under their management, which the SECP approved in September.

Meetings of the Committees

MUFAP Committees held many discussions to make important, well planned proposals on behalf of industry. �e following table presents the number of meetings held during the quarter Jul-Sep’13.

Technical Committee - VPS

�e VPS – Technical Committee held extensive discussions to discuss the dissimilar taxation and operational practices being adopted by di�erent VPS Managers. �e VPS Committee constituted a Sub-Committee, involving a representative from each VPS Manager, to draw up recommendations for the tax treatment. �e Committee also engaged Senior Tax expert, Mr. Shabbar Zaidi on the matter and has requested for clari�cation from FBR on one of the matters.

Meeting with NCCPL A meeting was held between operations sta� of AMCs and NCCPL representatives on July 22, 2013 to evaluate the mechanics and possible data sharing from AMCs to NCCPL for netting of CGT. It was decided that NCCPL would develop a concept paper covering brief mechanism of centralized CGT collection to AMCs for their review and comments.

Elections to elect Directors/Executive Committee Members of MUFAP for the year 2013 / 2014

As required under the Trade Organizations Rules, 2007, MUFAP is required to hold its elections each year to elect Directors against the vacancies arising on account of completion of two-year tenure of some Directors. Board members are elected for a two-year term.

�e retiring Directors on the completion of their two year tenure on September 30, 2013 are: 1. Mr. Adnan Siddiqui (Resigned August-2013)2. Mr. Amer Maqbool 3. Mr. Imran Azim 4. Mr. Mir Muhammad Ali 5. Mr. Nihal Cassim

�e continuing Directors of MUFAP for the year 2013/ 2014 are: 1. Dr. Amjad Waheed 2. Mr. Imran Motiwala 3. Mr. Mir Adil Rashid 4. Mr. Rashid Mansur 5. Ms Maheen Rahman6. Ms Hina Ghazanfar (on reserved seat for women)

In addition, Mr. Rehan N. Shaikh will serve on the Board as provided under Rule 23(5)(d) of the Trade Organization Rules, 2007. At the Extra Ordinary General Meeting on September 26, 2013, MUFAP announced the appointment, by virtue of elections, of the following directors to the Board, namely:1. Mr. Farid Ahmed Khan 2. Mr. M. Habib-ur-Rahman 3. Mr. Mohammad Shoaib 4. Mr. Yasir Qadri 5. Mr. Enamullah Khan

New Board of Directors

�e new Board of Directors of MUFAP at its �rst meeting held on October 1, 2013 elected Dr. Amjad Waheed as Chairman, Mr. Mohammad Shoaib as Senior Vice Chairman and Mr. Farid Ahmed Khan as Vice Chairman MUFAP for the year 2013-2014.�e Board of Directors of MUFAP for the 2013-14 term is as follows:

1) Dr. Amjad Waheed - Chairman; 2) Mr. Mohammad Shoaib - Senior Vice Chairman; 3) Mr. Farid Ahmed Khan - Vice Chairman;4) Mr. Rehan N. Shaikh;5) Mr. Rashid Mansur;6) Mr. M. Habib-ur-Rahman;7) Mr. Yasir Qadri8) Mr. Imran Motiwala;9) Ms Hina Ghazanfar;10) Ms Maheen Rahman;11) Mr. Mir Adil Rashid;12) Mr. Enamullah Khan; and13) Ms Mashmooma Z. Majeed - Chief Executive

Chairman Dr. Amjad Waheed, CFA

Dr. Amjad Waheed holds a doctorate in Investments & Finance from Southern Illinois University, USA and is also a Chartered Financial Analyst. For the last 7 years he is CEO of NBP Fullerton Asset Management Ltd (NAFA), which is a subsidiary of National Bank of Pakistan, with Fullerton Fund Management Company of Singapore as the other joint venture partner. NAFA is presently managing fourteen mutual funds and several portfolios with about Rs 45 billion invested in these funds. NAFA is among the largest Asset Management Companies in Pakistan today.

Before joining NAFA, Dr. Waheed was Head of Equity Mutual Funds & Portfolios at Riyad Bank, Saudi Arabia, for about 5 years where he was managing US$ 7.5 billion invested in 22 mutual funds. Prior to that Dr. Waheed was Head of Investments at NIT,

and Chief Operation O�cer of FC-ABN AMRO Equities for several years. Before moving back to Pakistan, Dr. Waheed was Assistant Professor of Finance at Tennessee State University, USA and has published several articles in top journals of the world such as Journal of Banking & Finance and Financial and Financial Management.Dr. Waheed has served on the Board of various companies including Siemens, Nishat Mills, PICIC, Askari Bank, Millat Tractors, Fauji Fertilizer, Pakitstan Tobacco Company, Treet Corporation, Gul Ahmed Textile, Bata Pakistan.

Senior Vice Chairman Mr. Mohammad Shoaib, CFA

Mr. Mohammad Shoaib, CFA is the Chief Executive of Al Meezan Investment Management Ltd. He has played a key role in setting up the company and has been associated with it since inception. He is a highly quali�ed and seasoned professional with 23 years experience in capital markets. He has to his credit many accolades and awards, the most signi�cant of them being the "Most In�uential CFA charter holder" awarded by CFA Institute in 2006.

Mr. Shoaib holds an MBA degree from IBA besides being a Chartered Financial Analyst (CFA) charter holder. He has to his credit the honor of being the founder and �rst president of CFA Association of Pakistan, a member society of CFA Institute. He has been active participant in the Islamic �nance and asset management for the last 10 years. In this respect, he has also actively participated as a speaker and panelist in various international and domestic seminars, conferences and workshops.

Mr. Shoaib has also served in voluntary capacity at di�erent domestic and international institutions. He has served as a Director on the Board of Karachi Stock Exchange and Vice Chairman on the Board of Mutual Funds Association of Pakistan. He is currently serving on the Board of Directors of Pakistan Institute of Corporate Governance and Institute of Capital Markets. He has also served on various global and regional committees of CFA Institute including Asia Paci�c Advocacy Committee, Global Task Force on Corporate

Governance, GIPS Regional Council and Asset Manager Code Advisory Committee. He has also had the honour to represent over 16,000 charterholders in Asia Paci�c Region as their representative on the Presidents' Council of CFA Institute.

Vice Chairman Mr. Farid Ahmed Khan, CFA

Mr. Farid Ahmed Khan, CFA is the CEO of ABL Asset Management. He has been involved with capital markets for over 18 years and has a broad-based, global experience with bulge bracket �rms in Asset Management, Investment Banking, Investment Research and Sales, Business Development & International Project Finance. He joined ABL AMC from Credit Suisse, where he was the Country Manager of Credit Suisse Pakistan. Prior to that, he worked for MCB, initially as Head of Investment Banking Group and later as the CEO of MCB Asset Management. Mr. Khan has extensive experience outside Pakistan, having worked at Morgan Stanley, ING Barings Securities and CLSA Emerging Markets in Kuala Lumpur, London and Istanbul in a variety of senior positions. He holds an MBA in Finance from IBA, Karachi and got his CFA quali�cation in 1998.

New Committees

MUFAP Board elected its Professional Committees, Chairperson and Vice-Chairperson of each Committee for the year 2013-14. �e list of Committees, their Chairperson and Vice-Chairperson is as follows:

SECP forms Shariah Advisory Board

SECP constituted a Shariah Advisory Board (SAB) to harmonize the Shariah interpretations and strengthen the regulatory and supervisory oversight of Islamic �nancial institutions (IFIs) and Islamic capital markets (ICMs) in Pakistan. It will also advise the Commission on the Shariah-compliance aspects of various products launched and or the processes being adopted by the regulated entities. It will also provide guidance for issuance of new laws, rules and regulations for e�ective monitoring and supervision of Islamic Financial Products and to suggest ways and means for development of IFIs and ICMs in the country.

Money Market

To meet the challenges of maintaining stability in the foreign exchange market and controlling high growth in money supply, SBP decided to gradually decrease the outstanding amount of liquidity injections. Since the beginning of FY14, interbank market liquidity conditions have considerably eased primarily due to substantial increase in the pace of government borrowing from the SBP. In fact, SBP mopped up Rs. 1,556.45 billion and injected Rs. 630.70 billion during Q1-FY14.

In terms of controlling growth in money supply, however, SBP’s e�orts of curtailing liquidity injections did not experience much success as these were o�set by an increase in direct �scal borrowings from the SBP. �e increase of Rs. 1,446 billion in budgetary borrowings from the banking system during FY13 was almost Rs. 1 trillion higher than the original target and was even higher than the total expansion in M2. Deviation of this scale has signi�cantly constrained e�ective monetary management, disrupted �nancial intermediation in the economy, and has led to a sharp increase in domestic debt. Showing a growth of 24.6% in FY13, the stock of government’s domestic debt has reached Rs. 9.5 trillion as of end-June 2013. Similarly, a considerable increase in public debt to revenue ratio re�ects weak repayment capacity of the government. �e acceleration in �scal borrowings from the SBP during H2-FY13, Rs. 714 billion, and Q1-FY14 up till 30th August 2013, Rs. 547 billion, is particularly worrisome. �e inability to raise the tax-GDP ratio is the fundamental source of large �scal de�cits, high borrowings, and rising debt. Although there has been a consistent gap between Federal Board of Revenue’s (FBR) budget targets and actual outcomes in the last few years, the gap of Rs. 445 billion in FY13 was exceptionally high. In fact, this is more than the cumulative shortfall of Rs. 349 billion during the last �ve years.

On the external front, stress in the external account has gradually increased with every passing month of 2013 due to shrinking net capital and �nancial �ows and high loan repayments to the IMF.

While the former was only $517 million or 0.2 percent of GDP, the latter increased to $3 billion in FY13. As a result, despite reduction in the external current account de�cit by about half, to $2.3 billion or 1.0 percent of GDP, the SBP’s foreign exchange reserves declined to $6 billion by end-June 2013 from $10.8 billion at the beginning of FY13. �ese stand at $5.2 billion as on 6th September, 2013 after receiving $544.5 million under the new IMF program. Despite pressures and speculations of a drop in the value of the Pak rupee the foreign exchange market has largely remained stable in FY13. However, since the beginning of FY14 the rupee has depreciated by 5.0 percent as of 12th September 2013.

�e year-on-year CPI based in�ation rate was recorded at 8.3% in July 2013, then to 8.55% in August 2013, however dipped down to 7.39% in September 2013.�ough CPI In�ation remained within single digit, however, it witnessed an upward trend as it increased to 7.39 percent in September 2013 compared to 5.85 percent in June 2013 and 6.6 percent in March 2013. �e impact of upward adjustments in energy prices and an increase in the GST together with the removal of certain exemptions put pressure on in�ation.In order to counter in�ationary expectations, SBP raised the discount rate by 50 basis points to 9.5 percent with e�ect from September 16, 2013.

Movement in KIBOR

Treasury Bills:

A total of 6 T-bill auctions were held by SBP during the quarter in which a total amount of Rs. 1,348.88 billion was raised. Since the beginning of FY14, market’s preference for shorter tenor T-Bills has increased as about 83% of the bank’s total o�ers in recent T-Bill auctions were concentrated in 3-month bills.

T-Bill Auctions (Amount in PKR billion; rates in %)

Pakistan Investment Bonds

�e accepted amount in the PIB auctions during Q1-FY14 fell short of the target .

PIB Auctions (Yields in % and Face Value in PKR billion)

Debt Market

�e table below summarizes the TOP 15 trades of TFCs/Sukuk on the basis of Face value during the Q1-FY14:

Equity Market

KSE-100 index made a strong start to the �scal year 2014, as the index gained 826.99 points, or 3.94%, to stand at 21,832.68 points during the �rst three months of FY14. During the period, index struggled to cross the 23,000 points level and made a high of 23,776.22 on a closing basis. Stock market began the �rst month of �scal year 2014 with a strong rally, overcoming jitters stemming from treason proceedings against former president General (retd) Pervez Musharraf and slowdown in global markets. �e government’s successful negotiations with IMF for a $5.3 billion loan, resolution of circular debt by issuing treasury bills and bonds and anticipation of strong corporate earnings for the quarter ended June 30 buoyed investors’ con�dence as the share prices appreciated across the board and index posted a gain of 2.307.09 points, or 10.98% to settle at 23,312.78 level in July.

After posting strong gain in July, KSE-100 faltered in August as investors continued to worry about ever-escalating Syrian crisis and tumbling regional markets. Stock market further pressured by a slew of disappointing and less-than-expected corporate earnings, falling foreign exchange reserves and high in�ation �gures for July. Moreover, concerns on a possible interest rate hike in the upcoming monetary policy announcement, potential spike in oil prices, decline in cement prices due to breakdown in price discipline, heavy foreign net selling and persistent depreciation in the rupee dragged the KSE-100 index down 1,151.93 points, or 4.94%, to 22,160.85 in August. �e index showed a mixed performance in September. In the �rst half of the month, the approval of the $6.64 billion loan package by IMF, the plans to privatize Pakistan International Airlines, strong foreign in�ows and the release of the IMF’s �rst tranche worth of $550 million helped lift the index to 23,639.97 on a closing basis. However, sentiment reversed towards the end of the month after the central bank’s decision to increase the rate of return on savings deposits to 6.5%. Moreover, steep decline in the value of Pakistani

rupee against the US dollar, constant repayments to IMF, a 50 basis points increase in the discount rate and heavy foreign net selling dragged the KSE-100 index down 328.17 points, or 1.48%, to 21,832.68 in September.

Mutual Fund Market:

�e total net assets decreased to Rs. 359.947 billion in the �rst quarter of FY14 versus Rs. 361.668 billion for the Q4FY13, a reduction of 0.48% quarter over quarter. �e open-end funds went up by 0.71% to Rs. 327.594 billion, pension funds went up by 9.67% to Rs. 5.288 billion and closed-end decreased by 14.23% to Rs. 27.064 billion.

Funds launched during the quarter Q1-FY14

Funds matured during the quarter Q1-FY14

Funds with changed structure/other features Energy Crisis: Causes and ImpactsBy Sara Aquil Walji, Research Analyst, HBL Asset Management

Energy is the cornerstone for any economy’s development and growth. �e current situation has worsened in Pakistan over the past few years and likely to continue if measures are not taken to mitigate the issue on a long term basis. �e gap between demand and supply has reached 6000MW resulting in scheduled and unscheduled load shedding, negatively a�ecting our industrial sector, hurting our exports and has even hampered the GDP growth rate by 2%. Subsidies to the power sector have steadily been increasing and form the biggest part of total subsidies amounting to around Rs 349,287mn (95% of the total subsidies) in FY 2012-13. �e new government has allocated Rs. 220,100mn to the power sector for the FY 2013-14 which is 91.5% of the total subsidy budget. (Source: Annual budget 2014) With recent emphasis on matters to resolve energy crisis and develop renewable and non-renewable sources of energy, it is worthwhile to note why energy crisis became as severe as it is now.

�e root of this crisis is that Pakistan’s electricity generation mix is highly skewed towards the most expensive kinds .�ere appears to be an almost inverse relationship between the sources of electricity that are most expensive to set and those that are most expensive to run. �e following chart depicts this relationship:

Source: Express Tribune �is highlights the fact why there is a heavy concentration toward

the construction of thermal power plants since they are relatively cheaper to build than hydropower plants. �e government has not dedicated enough funds for the development of hydropower projects which are the most expensive to build but cheapest to run on a per unit basis.Pakistan’s electricity generation is highly dependent on imported oil as almost $14.5bn worth of oil is imported each year which accounts for around 35% of electricity generation. Comparing Pakistan with India and Bangladesh reveals that Pakistan relies heavily on oil for electricity generation where as India uses coal, a relatively cheaper source for electricity generation and Bangladesh on the other hand allocates 73% of its electricity generation to gas.

Source: Economic Survey report for 2012-2013

With a prominent shift in recent years towards the use of thermal power stations instead of hydropower sources and a reduction in electricity generation from coal, Pakistan’s electricity costs ends up being more expensive than it needs to be and since the government has adopted a policy of uniform tari� across the country the Tari� Di�erential Subsidy owed by the Government of Pakistan on an annual basis has increased substantially.

Circular debt is another major concern hampering the growth of Pakistan’s economy. In simple words circular debt is the amount of

cash shortfall within the Central Power Purchasing Agency (CPPA) that it cannot pay to power supply companies. �is shortfall is the result of (a) the di�erence between the actual cost of providing electricity in relation to revenues realized by the power distribution companies (DISCOs) from sales to customers plus subsidies; and (b) insu�cient payments by the DISCOs to CPPA out of realized revenue as they give priority to their own cash �ow needs. (Source: USAID Report March 2103)

�is revenue shortfall cascades through the entire energy supply chain, from electricity generators to fuel suppliers, re�ners, and producers; resulting in a shortage of fuel supply to the public sector thermal generating companies (GENCOs), a reduction in power generated by Independent Power Producers (IPPs), and an increases in load shedding.

According to the report published by the USAID in March 2013, circular debt amounts to Rs872bn which is actually 4% of GDP. According to Pakistan’s Economic Survey report for 2012-2013, there is a strong relationship between GDP growth rate and electricity growth as shown in the �gure below. It can be easily deduced that periods of low or negative electricity growth have witnessed low GDP growth rate, while periods where electricity growth picked up there is increase in GDP growth rate.

�is comes as no surprise, since industrial output is heavily dependent on the amount of electricity delivered to them. Continuous power breakdowns prevented industries from operating at their full capacity level. �e power outages have obstructed the viability of the textile industry as exporters were unable to meet their

commitments. During July-March 2012-13, foreign exchange earnings through exports of synthetic textile fabrics and woolen industry showing a decline of 25.3% and 5.1% respectively as compared to last year. During the period under review even in quantity term also recorded a decline of 30% and 15.8% respectively.

Coupled with an ine�cient system and expensive fuel mix, power theft is another major issue faced by Pakistanis. It is interesting to note that annual revenue collection e�ciency was estimated to be around 87%; however that 13% of lost e�ciency has a �nancial impact of Rs 86bn which is equivalent to 41 days of furnace oil costs for thermal power plants. �e following �gure shows the percentage of bills that were uncollected in 2012. �e e�ciency of di�erent DISCOs is disproportionate in revenue collection. �is essentially leads to the inclusion of the cost of power theft in the power tari�, meaning that the honest payers also bear the cost of those that steal.

Power theft is not only committed by normal residents but the main defaulters are the government institutions themselves. �e government owns around 51% of the uncollected bills which amounts to Rs 118bn out of the uncollected revenue receipts of Rs 386bn. In my opinion, this the amount which causes the discrepancy between the amount of RS500.3bn to be injected to resolve the circular debt issue and �gure of Rs 872.41bn since the government has a proposal to o�set provisional dues via a �scal adjuster. Due to a growing economy, Pakistan’s energy needs have more than doubled in the past 15 years. Energy shortages have far devastating

e�ects on our economy. Not only does it cause civil disturbances on a small scale but it a�ects our GDP on a larger note. Injecting money into the chain will only resolve the issue on a temporary basis. �ese challenges require a multi-prong approach that would address energy shortages in the immediate future and help the country build longer term energy su�ciency.

�ere needs to be a shift away from thermal power to alternative sources of energy which are not only cheaper but also environmentally friendly. Pakistan has large untapped renewable resources such as water, sun and wind and recently the government has taken keen interest on the development of hydro power projects and Neelum Jhelum Hydroelectric Project is one of the many projects which the new government has started which will approximately add 5.15bn units of electricity annually. Moreover, an e�ective system of governance must be in place to curb theft, recuperate dues and enforce policies.

�e Importance of Asset Allocation in attaining Optimal Returns

By Yamna Hassan, Asst. Manager-Business DevelopmentLakson Investments

“Tis the part of a wise man to keep himself today for tomorrow, and not venture all his eggs in one basket.” – Miguel de Cervantes, Don Quixote de la Mancha, 1605.

�e afore-mentioned quote indicates that along with being a great writer, Cervantes would have also proved to be a wise investor.

Investment related decisions are preceded by de�ning a proper Asset Allocation plan. According to recent research, the Asset Allocation decision is responsible for 91.5 percent of the variation between returns on di�erent portfolios. Given the importance of Asset Allocation, it has attained a center stage in any investment decision.

Asset Allocation is mainly important for two de�nite reasons. �e �rst reason pertains to portfolio design; variation in portfolio designs can lead to some investment decisions being winners while the rest being losers, and it is believed that if a portfolio is thoughtfully constructed and contains an optimal mix of securities that perform di�erently from each other (i.e they have little correlation in between them), chances of this portfolio yielding a more stable return is higher. �is is because if some securities in a portfolio are inconsistent and volatile, other, more stable securities can nullify the inconsistency of the entire portfolio, hence stabilizing the yield pattern.

�e second reason pertains to the vision of the investor. Asset allocation allows an investor to �nancially plan for his long-term and short-term goals and avoid impulsive reactions. We will subsequently discuss this aspect of Asset Allocation.

We can divide the Asset Allocation decision into two simple steps as discussed below:

Step 1: Asset Allocation An Asset Allocation strategy can be devised based on the investor’s risk assessment, �nancial goals and return targets. It is the most fundamental step of an investment decision and involves determining an ideal mix of stocks, bonds, cash and other securities in a way such that the portfolio yields a return which best suits an investor’s need. �ere is always a downside of investing too much in bonds or cash as that might certify stable but lower returns. In the same way, too much investment in stocks might lead to portfolio volatility. �erefore, in order to meet your requirements, or keep pace with in�ation, you need to plan an ideal arrangement of securities for your portfolio.

Step 2: Diversi�cationWhile the �rst step bears upon the idea of portfolio construction, this step is linked to the proper dissemination of your assets in a way such that your portfolio is exposed to many di�erent segments of the market, some of which perform independently of the others. Proper diversi�cation of your portfolio can lead to higher and more stable returns.

As mentioned before, the e�ect of diversi�cation is most noticeable when instruments have very little interrelation between them. However, it was easier to build this sort of a portfolio previously than it is today. �is is because roughly over the past 10 years, �nancial markets have become increasingly interrelated and complex. Let us also not ignore the fact that during the 2008 �nancial trouble, most assets tended to perform similarly, leading us to believe in the proposition that most assets are conducive to a similar behavior in times of crisis and instability. �e �gure below shows ways of diversifying a portfolio and entering into newer and assorted mix of investment vehicles.

FIGURE 1:

Figure shows ways of diversifying a portfolio.

Institutions that do not pay requisite importance to the Asset Allocation decision might end up damaging their returns. Usually, institutions are advised to invest in a 60:40 ratio (Stocks: �xed income instruments) to remain on the safe side. Whereas, individuals are recommended to invest in an investment spectrum ranging from 100 percent stocks to 100 percent bonds depending on their separate variable characteristics. However, the Asset Allocation decision is dependent on several other factors and cannot be generalized for di�erent investors.

Following are a few, newer and e�cient ways that have now been developed and can be used for attaining optimal asset allocation:

Mean Variance Optimization

Mean Variance Optimization is a quantitative technique that can be used to calculate the trade-o� between maximum expected return and risk tolerance. �is technique has gained popularity over time because in recent times, the technique is applied on an asset class level as opposed to being applied only to portfolios of individual stocks previously.

�e development of Mean Variance Optimization has not only bene�tted institutional investors but has resulted in a breakthrough for retail brokerage houses as well, which, prior to this development were restricted on their advisory role to the investors. However, recently, they are proposing a greater degree of passive security and more thoughtful asset allocation recommendations to their investors. �is has become possible by using optimization and aiming to attain a favorable position with maximum expected return, minimal risk, or both.

Moreover, a few re�ned approaches taken from utility theory and behavioral economics can be deployed to develop polls or surveys that can authentically gauge an individual’s risk preferences.

Pension funds have also been familiarized with Optimization. Such funds take into account the reciprocity of both assets and liabilities and not only the assets unlike other funds. �e objective of Asset Allocation for these funds is to amplify the fund surplus i.e liabilities subtracted from assets for a stated degree of risk tolerance.

Tactical Asset AllocationTactical asset allocation is the process of adjusting a particular portfolio based on changes in the market value of assets contained in that portfolio. �e technique is quite dynamic and involves deviation from the strategic asset allocation when an investor’s short-term foresight is not aligned with his long term foresight used to develop a strategic asset allocation plan and precise short-term predictions on part of the investor can lead to better returns.

Pragmatically speaking, Tactical Asset Allocation models tend to recommend contrarian trades, that is, they recommend purchasing an asset as its current market value drops and vice versa. �us, tactical Asset Allocation involves perpetually arranging your portfolio based on your needs and changes in the market. One consequence of Tactical Asset Allocation is that by overweighting certain assets during certain times and underweighting others, the portfolio is riskier because of its reduced diversi�cation. �us, to

o�set this additional risk factor, this strategy would need to generate above market returns. �e notion, whether Tactical Asset Allocation Models have achieved this is still a matter of rumination and study but because the probable returns from successful Tactical Asset Allocation would be large, researchers will keep inspecting, and investors won’t cease to be on the look out for their discoveries.

Insured Asset Allocation�is strategy is similar to a portfolio insurance strategy and is a mirror image of the Tactical Asset Allocation strategy. With this strategy, a base portfolio parameter is �xed and the value of the portfolio is not allowed to fall below this base parameter. As long as the portfolio achieves a return above this parameter, you actively to try to increase the portfolio value as much as possible. If, however, the portfolio ever drops to below the base value, investment in risk-free securities enables the base value to become �xed.

�e main target audiences for this approach are risk-averse investors who desire a certain level of active portfolio management and also covet the protection of �xing a certi�ed minimum return below which the portfolio is not allowed to decline. For instance, this approach is best for an investor who has planned a nominal lifestyle for himself after retirement.

Asset Allocation & Uncertain Times�e importance of active portfolio management and wise asset allocation strategy has been reiterated enough. But at the brink of serious economic uncertainty, expectation for stock market returns is somewhat muted. �erefore, it is believed that in such a situation, a dynamic asset allocation plan should come into play for the advantage of certain clients.

Dynamic Asset Allocation uses a long term strategic Asset Allocation strategy as its foundation. Alternate investments can be added to the core portfolio for the sake of complementing it. It is even better, if these investments include segments which yield a higher return and bear little interdependence, so as to achieve a greater level of diversi�cation.

Besides, dynamic Asset Allocation strategies can also be accompanied by �exible investment strategies; tactical actions that are short-term in nature and aim to bank on perceived market opportunities. If 10-20% of your assets are allocated for such investments, your portfolio can be expected to react better in times of changing trends and conditions.

Asset allocation is evolving past a traditional “purchase and retain” dogma. Whilst this might not suit all clients, exercising a dynamic asset allocation plan can create a portfolio better able to handle uncertain market environments. Not to forget the fact that a solid strategic asset allocation plan remains the core strategy behind any tactical asset allocation strategy.

Asset Allocation & the local scenarioWith interest rates in Pakistan consistently hovering above 10 percent for the past �ve years, anyone would expect Pakistanis to be encouraged enough to save and reap bene�ts of higher returns. However, reality states that Pakistan actually stands out to re�ect one of the lowest savings in the region. Given the fact that majority of Pakistanis are not so keen on investing mainly because their expenditures on necessities do not leave any room for savings or so for other reasons, there is a chunk of people who are inclined in saving for a better future and lifestyle.

With growth of urban nuclear families, educated middle to upper middle class is inspirited to plan properly for a child’s education, health and future life. Reasons for investment in Pakistani society vary from a child’s education to his marriage, from being cushioned against the toils of post-retirement life to maternity expenditures. Young professionals may want to invest as a means to generate seed capital for their potential business idea or to live their dreams of traveling or wayfaring.

Reasons for investing are many. With di�erent individuals and di�erent investment objectives in mind, the asset allocation needs of these investors must be customized accordingly.

Asset Allocation & Financial PlanningOnce you are done with choosing your model for Asset Allocation, the �nal stage is to test this model by contextualizing it with a precise �nancial plan. It might be easy for an investor to choose which Asset Allocation plan will provide him with the best possible returns but the investor should also �gure out a way to determine that expected return and also estimate the trade-o� for that higher return potential.

A well-concocted �nancial plan will guide the investor out of this bewilderment. First, it will determine what level of projected investment return is necessary to allow you to meet your lifestyle goals, which can help lead you to the right mix of stocks, bonds and cash. Second, the plan will evaluate the impact of the portfolio risk associated with that mix.

Traditionally, �nancial planning models focused on expected return and neglected the variability of outcomes that is associated with increased volatility. With the introduction of probability-based planning tools, the investor can foresee the e�ect of risk on their investment portfolios, they can vary the amount of risk and can study their corresponding returns. For example a portfolio bearing higher risk may yield a higher return but it also has a probability of falling far short beneath their targets.

When using an asset allocation approach to designing a portfolio, it is important to not focus just on the expected return of that portfolio. �e risk associated with an increasing, or decreasing, portfolio return is just as important to the success of an investment strategy.

Asset Allocation & �e Future

Most forecasters fall into two divisions. Forecasters in the �rst division are eager to predict that the future will closely mirror the recent past. �eir ideals are those generals who are always preparing to �ght the last war. Forecasters in the second division rely heavily

upon the adage that the only constant is change itself. Proponents of this school of thought usually don’t know what to expect, but are quite sure it will be nothing like anything we’ve seen before. �ese individuals do realize the problems of delineating the future of this area.

We should view the future of asset allocation through lenses borrowed from both divisions. �at is, certain aspects of asset allocation today will continue to be recognizable for the years to come. To be more precise, the goals and importance of asset allocation will not change, but the mechanisms by which investors seek to achieve those goals will be new.

�e goal of the asset allocation decision, was, is, and will be to select a combination of assets that will generate a return su�ciently high and safe so as to o�set some future liability. It is also safe to say that asset allocation decisions will have a continuing large role in explaining portfolio returns.

Industry-wide - Net Assets (PKR million)

Net Assets - Open End Funds (PKR million)

Net Assets - Closed End Funds (PKR million)

Net Assets - Pension Schemes (PKR million)

Sales (PKR million) Redemptions (PKR million) Net Sales (PKR million)

Open End Funds' Return** Closed End Funds' Return**

General Pension Schemes Return**

Islamic Pension Schemes Return**

CONTENT00

mufap quarterly newsletter

01- Meetings of the Board of Directors- Meetings of the Committees- Technical Committee -VPS- Meeting with NCCPL - Meetings with SECP

MUFAP Activities

05-Energy Crisis: Causes and Impacts By Sara Aquil- �e Importance of Asset Allocation in attaining Optimal By Yamna Hassan

Articles

02- Election to elect Directors/ Executive Committee Members of MUFAP for the year 2013-14 - New Board of Directors- Chairman Dr. Amjad Waheed, CFA- Senior Vice Chairman Mr. mohammad Shoaib, CFA - Vice Chairman Mr. Fareed Ahmed Khan, CFA- New CommitteesInformation system

Events

06- Net Assets- Sales- Redemptions- Net Sales- Returns

Statistics

04- Equity Market- Money Market- Debt Market - Mutual Funds Market

Market Developments03

- SECP Forms Shariah Advisory BoardSECP Updates

THE TEAMEditor

Shafaq Khurram

ResearchersSiraj Ali

Zulfiqar Azam

Concept & DesigningSiraj Ali

For any comments and feedbackfeedback@mufap.com.pk

EDITORIAL

page a mufap quarterly newsletter

Dear Readers,

Welcome to the September Edition of our Quarterly e-Newsletter.

�is is certainly true that the e�ective leadership is the backbone to any organization as the performance of any organization is largely re�ected by the commitment and passion of its leadership and management to successfully carry out the mission and business functions of the organization. MUFAP has achieved a great deal recently, and there is much more yet to be done. Our current Board term ends on September 30, 2013 and we would like to o�er thanks to our outgoing Board Members for their outstanding e�orts in o�ering their valued time and talent in working towards the success of MUFAP over the past year.

�e past Board of Directors engaged in various activities designed to promote the continuing success and growth of the mutual fund industry. Some of recent accomplishments include introduction of Commodity as an asset class and as a new category of mutual funds and as a sub-fund in pension funds. MUFAP has also standardized the methodology for valuation of GOP Ijarah Sukuk to determine net assets of Collective Investment Schemes. Furthermore, MUFAP organized a couple of seminars in collaboration with SECP, CDC and OICCI to increase awareness for long-term savings and educate investors about the bene�ts of mutual funds and voluntary pension schemes. Acknowledging the value and bene�t of recreational activities, MUFAP also organized social events such as T-20 hard ball cricket tournament and sponsored theater plays for its members, investors and prospective investors.

Our new Board started its term on October 1, 2013. It is our pleasure to extend a very warm welcome to Dr. Amjad Waheed as Chairman, Mr. Mohammad Shoaib as Senior Vice-Chairman, Mr. Farid Ahmed Khan as Vice-Chairman and new Directors of MUFAP. �e new appointments will allow MUFAP to bene�t from a wide range of industry perspective and I am con�dent that our association will continue to play an integral role in the growth and expansion of mutual fund industry.

Furthermore, we are excited to inform you that MUFAP is all set to release its fourth Yearbook soon. �e Yearbook has been published since 2010,

with the aim of promoting mutual fund industry and providing detailed information and data of mutual funds. �e yearbook features various important facets of the Pakistan mutual fund market, including industry statistics for last ten years in one convenient source and recent developments, useful articles covering industry issues and a detailed performance review of the mutual funds. We hope that this Yearbook continues to serve as a resource for policymakers, researchers, and investors to make more informed decisions as we move forward to another year of progress.

Looking towards the content of this newsletter, we have highlighted the key activities of the MUFA P‘s Board of Directors, its committees and the events that took place during the quarter. Rounding o� this bulletin are two articles, the �rst article ‘�e Importance of Asset Allocation in attaining Optimal Returns’ delves into the need to make active and wise asset allocation strategies, while the second speaks about causes and impacts of Energy Crisis. As usual at the end of this bulletin, we have Industry Statistics section that provides a comprehensive summary of net assets, sales & redemptions and returns for mutual funds.

I hope you enjoy reading this issue and �nd it thought provoking and insightful. I would like to thank my team for working tirelessly in producing this quarterly newsletter and all those who have contributed articles and are critical to the success of this newsletter in one way or another. I would also request the readers to give their valuable feedback for the improvement of newsletter.

Shafaq

Meeting of the Board of Directors

In order to ensure that the Board of Directors ful�ls the duties and responsibilities conferred by the members of MUFAP, the Board conducts meetings on a regular basis to make immediate and prudent decisions. �e Board of Directors held three meetings during the quarter Jul-Sep 2013.

�e activities undertaken by Board are as follows:

Proposed amendments in the de�nition of Related Parties in Restricted List of Code for Distributors

�e Board deliberated in detail on the matter of proposed

amendments in the de�nition of Related Parties in the Restricted List of Code for Distributors. After careful consideration of the impacts that the amendments may entail, it was decided that all individuals (namely employees, directors, sponsors of the RSPs) should be excluded from the de�nition of Related Parties. �e revised de�nition is applicable to all new investments brought in on or after July 16, 2013 and is not applicable to existing investments made by or before July 15, 2013.

Valuation of GOP Ijarah Sukuk

�e Board recommended that AMCs should use ‘PKISRV’ quoted on Reuters as the relevant price to value the GOP Ijarah Sukuks to determine net assets of CIS under their management, which the SECP approved in September.

Meetings of the Committees

MUFAP Committees held many discussions to make important, well planned proposals on behalf of industry. �e following table presents the number of meetings held during the quarter Jul-Sep’13.

Technical Committee - VPS

�e VPS – Technical Committee held extensive discussions to discuss the dissimilar taxation and operational practices being adopted by di�erent VPS Managers. �e VPS Committee constituted a Sub-Committee, involving a representative from each VPS Manager, to draw up recommendations for the tax treatment. �e Committee also engaged Senior Tax expert, Mr. Shabbar Zaidi on the matter and has requested for clari�cation from FBR on one of the matters.

Meeting with NCCPL A meeting was held between operations sta� of AMCs and NCCPL representatives on July 22, 2013 to evaluate the mechanics and possible data sharing from AMCs to NCCPL for netting of CGT. It was decided that NCCPL would develop a concept paper covering brief mechanism of centralized CGT collection to AMCs for their review and comments.

Elections to elect Directors/Executive Committee Members of MUFAP for the year 2013 / 2014

As required under the Trade Organizations Rules, 2007, MUFAP is required to hold its elections each year to elect Directors against the vacancies arising on account of completion of two-year tenure of some Directors. Board members are elected for a two-year term.

�e retiring Directors on the completion of their two year tenure on September 30, 2013 are: 1. Mr. Adnan Siddiqui (Resigned August-2013)2. Mr. Amer Maqbool 3. Mr. Imran Azim 4. Mr. Mir Muhammad Ali 5. Mr. Nihal Cassim

�e continuing Directors of MUFAP for the year 2013/ 2014 are: 1. Dr. Amjad Waheed 2. Mr. Imran Motiwala 3. Mr. Mir Adil Rashid 4. Mr. Rashid Mansur 5. Ms Maheen Rahman6. Ms Hina Ghazanfar (on reserved seat for women)

In addition, Mr. Rehan N. Shaikh will serve on the Board as provided under Rule 23(5)(d) of the Trade Organization Rules, 2007. At the Extra Ordinary General Meeting on September 26, 2013, MUFAP announced the appointment, by virtue of elections, of the following directors to the Board, namely:1. Mr. Farid Ahmed Khan 2. Mr. M. Habib-ur-Rahman 3. Mr. Mohammad Shoaib 4. Mr. Yasir Qadri 5. Mr. Enamullah Khan

New Board of Directors

�e new Board of Directors of MUFAP at its �rst meeting held on October 1, 2013 elected Dr. Amjad Waheed as Chairman, Mr. Mohammad Shoaib as Senior Vice Chairman and Mr. Farid Ahmed Khan as Vice Chairman MUFAP for the year 2013-2014.�e Board of Directors of MUFAP for the 2013-14 term is as follows:

1) Dr. Amjad Waheed - Chairman; 2) Mr. Mohammad Shoaib - Senior Vice Chairman; 3) Mr. Farid Ahmed Khan - Vice Chairman;4) Mr. Rehan N. Shaikh;5) Mr. Rashid Mansur;6) Mr. M. Habib-ur-Rahman;7) Mr. Yasir Qadri8) Mr. Imran Motiwala;9) Ms Hina Ghazanfar;10) Ms Maheen Rahman;11) Mr. Mir Adil Rashid;12) Mr. Enamullah Khan; and13) Ms Mashmooma Z. Majeed - Chief Executive

Chairman Dr. Amjad Waheed, CFA

Dr. Amjad Waheed holds a doctorate in Investments & Finance from Southern Illinois University, USA and is also a Chartered Financial Analyst. For the last 7 years he is CEO of NBP Fullerton Asset Management Ltd (NAFA), which is a subsidiary of National Bank of Pakistan, with Fullerton Fund Management Company of Singapore as the other joint venture partner. NAFA is presently managing fourteen mutual funds and several portfolios with about Rs 45 billion invested in these funds. NAFA is among the largest Asset Management Companies in Pakistan today.

Before joining NAFA, Dr. Waheed was Head of Equity Mutual Funds & Portfolios at Riyad Bank, Saudi Arabia, for about 5 years where he was managing US$ 7.5 billion invested in 22 mutual funds. Prior to that Dr. Waheed was Head of Investments at NIT,

and Chief Operation O�cer of FC-ABN AMRO Equities for several years. Before moving back to Pakistan, Dr. Waheed was Assistant Professor of Finance at Tennessee State University, USA and has published several articles in top journals of the world such as Journal of Banking & Finance and Financial and Financial Management.Dr. Waheed has served on the Board of various companies including Siemens, Nishat Mills, PICIC, Askari Bank, Millat Tractors, Fauji Fertilizer, Pakitstan Tobacco Company, Treet Corporation, Gul Ahmed Textile, Bata Pakistan.

Senior Vice Chairman Mr. Mohammad Shoaib, CFA

Mr. Mohammad Shoaib, CFA is the Chief Executive of Al Meezan Investment Management Ltd. He has played a key role in setting up the company and has been associated with it since inception. He is a highly quali�ed and seasoned professional with 23 years experience in capital markets. He has to his credit many accolades and awards, the most signi�cant of them being the "Most In�uential CFA charter holder" awarded by CFA Institute in 2006.

Mr. Shoaib holds an MBA degree from IBA besides being a Chartered Financial Analyst (CFA) charter holder. He has to his credit the honor of being the founder and �rst president of CFA Association of Pakistan, a member society of CFA Institute. He has been active participant in the Islamic �nance and asset management for the last 10 years. In this respect, he has also actively participated as a speaker and panelist in various international and domestic seminars, conferences and workshops.

Mr. Shoaib has also served in voluntary capacity at di�erent domestic and international institutions. He has served as a Director on the Board of Karachi Stock Exchange and Vice Chairman on the Board of Mutual Funds Association of Pakistan. He is currently serving on the Board of Directors of Pakistan Institute of Corporate Governance and Institute of Capital Markets. He has also served on various global and regional committees of CFA Institute including Asia Paci�c Advocacy Committee, Global Task Force on Corporate

Governance, GIPS Regional Council and Asset Manager Code Advisory Committee. He has also had the honour to represent over 16,000 charterholders in Asia Paci�c Region as their representative on the Presidents' Council of CFA Institute.

Vice Chairman Mr. Farid Ahmed Khan, CFA

Mr. Farid Ahmed Khan, CFA is the CEO of ABL Asset Management. He has been involved with capital markets for over 18 years and has a broad-based, global experience with bulge bracket �rms in Asset Management, Investment Banking, Investment Research and Sales, Business Development & International Project Finance. He joined ABL AMC from Credit Suisse, where he was the Country Manager of Credit Suisse Pakistan. Prior to that, he worked for MCB, initially as Head of Investment Banking Group and later as the CEO of MCB Asset Management. Mr. Khan has extensive experience outside Pakistan, having worked at Morgan Stanley, ING Barings Securities and CLSA Emerging Markets in Kuala Lumpur, London and Istanbul in a variety of senior positions. He holds an MBA in Finance from IBA, Karachi and got his CFA quali�cation in 1998.

New Committees

MUFAP Board elected its Professional Committees, Chairperson and Vice-Chairperson of each Committee for the year 2013-14. �e list of Committees, their Chairperson and Vice-Chairperson is as follows:

SECP forms Shariah Advisory Board

SECP constituted a Shariah Advisory Board (SAB) to harmonize the Shariah interpretations and strengthen the regulatory and supervisory oversight of Islamic �nancial institutions (IFIs) and Islamic capital markets (ICMs) in Pakistan. It will also advise the Commission on the Shariah-compliance aspects of various products launched and or the processes being adopted by the regulated entities. It will also provide guidance for issuance of new laws, rules and regulations for e�ective monitoring and supervision of Islamic Financial Products and to suggest ways and means for development of IFIs and ICMs in the country.

Money Market

To meet the challenges of maintaining stability in the foreign exchange market and controlling high growth in money supply, SBP decided to gradually decrease the outstanding amount of liquidity injections. Since the beginning of FY14, interbank market liquidity conditions have considerably eased primarily due to substantial increase in the pace of government borrowing from the SBP. In fact, SBP mopped up Rs. 1,556.45 billion and injected Rs. 630.70 billion during Q1-FY14.

In terms of controlling growth in money supply, however, SBP’s e�orts of curtailing liquidity injections did not experience much success as these were o�set by an increase in direct �scal borrowings from the SBP. �e increase of Rs. 1,446 billion in budgetary borrowings from the banking system during FY13 was almost Rs. 1 trillion higher than the original target and was even higher than the total expansion in M2. Deviation of this scale has signi�cantly constrained e�ective monetary management, disrupted �nancial intermediation in the economy, and has led to a sharp increase in domestic debt. Showing a growth of 24.6% in FY13, the stock of government’s domestic debt has reached Rs. 9.5 trillion as of end-June 2013. Similarly, a considerable increase in public debt to revenue ratio re�ects weak repayment capacity of the government. �e acceleration in �scal borrowings from the SBP during H2-FY13, Rs. 714 billion, and Q1-FY14 up till 30th August 2013, Rs. 547 billion, is particularly worrisome. �e inability to raise the tax-GDP ratio is the fundamental source of large �scal de�cits, high borrowings, and rising debt. Although there has been a consistent gap between Federal Board of Revenue’s (FBR) budget targets and actual outcomes in the last few years, the gap of Rs. 445 billion in FY13 was exceptionally high. In fact, this is more than the cumulative shortfall of Rs. 349 billion during the last �ve years.

On the external front, stress in the external account has gradually increased with every passing month of 2013 due to shrinking net capital and �nancial �ows and high loan repayments to the IMF.

While the former was only $517 million or 0.2 percent of GDP, the latter increased to $3 billion in FY13. As a result, despite reduction in the external current account de�cit by about half, to $2.3 billion or 1.0 percent of GDP, the SBP’s foreign exchange reserves declined to $6 billion by end-June 2013 from $10.8 billion at the beginning of FY13. �ese stand at $5.2 billion as on 6th September, 2013 after receiving $544.5 million under the new IMF program. Despite pressures and speculations of a drop in the value of the Pak rupee the foreign exchange market has largely remained stable in FY13. However, since the beginning of FY14 the rupee has depreciated by 5.0 percent as of 12th September 2013.

�e year-on-year CPI based in�ation rate was recorded at 8.3% in July 2013, then to 8.55% in August 2013, however dipped down to 7.39% in September 2013.�ough CPI In�ation remained within single digit, however, it witnessed an upward trend as it increased to 7.39 percent in September 2013 compared to 5.85 percent in June 2013 and 6.6 percent in March 2013. �e impact of upward adjustments in energy prices and an increase in the GST together with the removal of certain exemptions put pressure on in�ation.In order to counter in�ationary expectations, SBP raised the discount rate by 50 basis points to 9.5 percent with e�ect from September 16, 2013.

Movement in KIBOR

Treasury Bills:

A total of 6 T-bill auctions were held by SBP during the quarter in which a total amount of Rs. 1,348.88 billion was raised. Since the beginning of FY14, market’s preference for shorter tenor T-Bills has increased as about 83% of the bank’s total o�ers in recent T-Bill auctions were concentrated in 3-month bills.

T-Bill Auctions (Amount in PKR billion; rates in %)

Pakistan Investment Bonds

�e accepted amount in the PIB auctions during Q1-FY14 fell short of the target .

PIB Auctions (Yields in % and Face Value in PKR billion)

Debt Market

�e table below summarizes the TOP 15 trades of TFCs/Sukuk on the basis of Face value during the Q1-FY14:

Equity Market

KSE-100 index made a strong start to the �scal year 2014, as the index gained 826.99 points, or 3.94%, to stand at 21,832.68 points during the �rst three months of FY14. During the period, index struggled to cross the 23,000 points level and made a high of 23,776.22 on a closing basis. Stock market began the �rst month of �scal year 2014 with a strong rally, overcoming jitters stemming from treason proceedings against former president General (retd) Pervez Musharraf and slowdown in global markets. �e government’s successful negotiations with IMF for a $5.3 billion loan, resolution of circular debt by issuing treasury bills and bonds and anticipation of strong corporate earnings for the quarter ended June 30 buoyed investors’ con�dence as the share prices appreciated across the board and index posted a gain of 2.307.09 points, or 10.98% to settle at 23,312.78 level in July.

After posting strong gain in July, KSE-100 faltered in August as investors continued to worry about ever-escalating Syrian crisis and tumbling regional markets. Stock market further pressured by a slew of disappointing and less-than-expected corporate earnings, falling foreign exchange reserves and high in�ation �gures for July. Moreover, concerns on a possible interest rate hike in the upcoming monetary policy announcement, potential spike in oil prices, decline in cement prices due to breakdown in price discipline, heavy foreign net selling and persistent depreciation in the rupee dragged the KSE-100 index down 1,151.93 points, or 4.94%, to 22,160.85 in August. �e index showed a mixed performance in September. In the �rst half of the month, the approval of the $6.64 billion loan package by IMF, the plans to privatize Pakistan International Airlines, strong foreign in�ows and the release of the IMF’s �rst tranche worth of $550 million helped lift the index to 23,639.97 on a closing basis. However, sentiment reversed towards the end of the month after the central bank’s decision to increase the rate of return on savings deposits to 6.5%. Moreover, steep decline in the value of Pakistani

rupee against the US dollar, constant repayments to IMF, a 50 basis points increase in the discount rate and heavy foreign net selling dragged the KSE-100 index down 328.17 points, or 1.48%, to 21,832.68 in September.

Mutual Fund Market:

�e total net assets decreased to Rs. 359.947 billion in the �rst quarter of FY14 versus Rs. 361.668 billion for the Q4FY13, a reduction of 0.48% quarter over quarter. �e open-end funds went up by 0.71% to Rs. 327.594 billion, pension funds went up by 9.67% to Rs. 5.288 billion and closed-end decreased by 14.23% to Rs. 27.064 billion.

Funds launched during the quarter Q1-FY14

Funds matured during the quarter Q1-FY14

Funds with changed structure/other features Energy Crisis: Causes and ImpactsBy Sara Aquil Walji, Research Analyst, HBL Asset Management

Energy is the cornerstone for any economy’s development and growth. �e current situation has worsened in Pakistan over the past few years and likely to continue if measures are not taken to mitigate the issue on a long term basis. �e gap between demand and supply has reached 6000MW resulting in scheduled and unscheduled load shedding, negatively a�ecting our industrial sector, hurting our exports and has even hampered the GDP growth rate by 2%. Subsidies to the power sector have steadily been increasing and form the biggest part of total subsidies amounting to around Rs 349,287mn (95% of the total subsidies) in FY 2012-13. �e new government has allocated Rs. 220,100mn to the power sector for the FY 2013-14 which is 91.5% of the total subsidy budget. (Source: Annual budget 2014) With recent emphasis on matters to resolve energy crisis and develop renewable and non-renewable sources of energy, it is worthwhile to note why energy crisis became as severe as it is now.

�e root of this crisis is that Pakistan’s electricity generation mix is highly skewed towards the most expensive kinds .�ere appears to be an almost inverse relationship between the sources of electricity that are most expensive to set and those that are most expensive to run. �e following chart depicts this relationship:

Source: Express Tribune �is highlights the fact why there is a heavy concentration toward

the construction of thermal power plants since they are relatively cheaper to build than hydropower plants. �e government has not dedicated enough funds for the development of hydropower projects which are the most expensive to build but cheapest to run on a per unit basis.Pakistan’s electricity generation is highly dependent on imported oil as almost $14.5bn worth of oil is imported each year which accounts for around 35% of electricity generation. Comparing Pakistan with India and Bangladesh reveals that Pakistan relies heavily on oil for electricity generation where as India uses coal, a relatively cheaper source for electricity generation and Bangladesh on the other hand allocates 73% of its electricity generation to gas.

Source: Economic Survey report for 2012-2013

With a prominent shift in recent years towards the use of thermal power stations instead of hydropower sources and a reduction in electricity generation from coal, Pakistan’s electricity costs ends up being more expensive than it needs to be and since the government has adopted a policy of uniform tari� across the country the Tari� Di�erential Subsidy owed by the Government of Pakistan on an annual basis has increased substantially.

Circular debt is another major concern hampering the growth of Pakistan’s economy. In simple words circular debt is the amount of

cash shortfall within the Central Power Purchasing Agency (CPPA) that it cannot pay to power supply companies. �is shortfall is the result of (a) the di�erence between the actual cost of providing electricity in relation to revenues realized by the power distribution companies (DISCOs) from sales to customers plus subsidies; and (b) insu�cient payments by the DISCOs to CPPA out of realized revenue as they give priority to their own cash �ow needs. (Source: USAID Report March 2103)

�is revenue shortfall cascades through the entire energy supply chain, from electricity generators to fuel suppliers, re�ners, and producers; resulting in a shortage of fuel supply to the public sector thermal generating companies (GENCOs), a reduction in power generated by Independent Power Producers (IPPs), and an increases in load shedding.

According to the report published by the USAID in March 2013, circular debt amounts to Rs872bn which is actually 4% of GDP. According to Pakistan’s Economic Survey report for 2012-2013, there is a strong relationship between GDP growth rate and electricity growth as shown in the �gure below. It can be easily deduced that periods of low or negative electricity growth have witnessed low GDP growth rate, while periods where electricity growth picked up there is increase in GDP growth rate.

�is comes as no surprise, since industrial output is heavily dependent on the amount of electricity delivered to them. Continuous power breakdowns prevented industries from operating at their full capacity level. �e power outages have obstructed the viability of the textile industry as exporters were unable to meet their

commitments. During July-March 2012-13, foreign exchange earnings through exports of synthetic textile fabrics and woolen industry showing a decline of 25.3% and 5.1% respectively as compared to last year. During the period under review even in quantity term also recorded a decline of 30% and 15.8% respectively.

Coupled with an ine�cient system and expensive fuel mix, power theft is another major issue faced by Pakistanis. It is interesting to note that annual revenue collection e�ciency was estimated to be around 87%; however that 13% of lost e�ciency has a �nancial impact of Rs 86bn which is equivalent to 41 days of furnace oil costs for thermal power plants. �e following �gure shows the percentage of bills that were uncollected in 2012. �e e�ciency of di�erent DISCOs is disproportionate in revenue collection. �is essentially leads to the inclusion of the cost of power theft in the power tari�, meaning that the honest payers also bear the cost of those that steal.

Power theft is not only committed by normal residents but the main defaulters are the government institutions themselves. �e government owns around 51% of the uncollected bills which amounts to Rs 118bn out of the uncollected revenue receipts of Rs 386bn. In my opinion, this the amount which causes the discrepancy between the amount of RS500.3bn to be injected to resolve the circular debt issue and �gure of Rs 872.41bn since the government has a proposal to o�set provisional dues via a �scal adjuster. Due to a growing economy, Pakistan’s energy needs have more than doubled in the past 15 years. Energy shortages have far devastating

e�ects on our economy. Not only does it cause civil disturbances on a small scale but it a�ects our GDP on a larger note. Injecting money into the chain will only resolve the issue on a temporary basis. �ese challenges require a multi-prong approach that would address energy shortages in the immediate future and help the country build longer term energy su�ciency.

�ere needs to be a shift away from thermal power to alternative sources of energy which are not only cheaper but also environmentally friendly. Pakistan has large untapped renewable resources such as water, sun and wind and recently the government has taken keen interest on the development of hydro power projects and Neelum Jhelum Hydroelectric Project is one of the many projects which the new government has started which will approximately add 5.15bn units of electricity annually. Moreover, an e�ective system of governance must be in place to curb theft, recuperate dues and enforce policies.

�e Importance of Asset Allocation in attaining Optimal Returns

By Yamna Hassan, Asst. Manager-Business DevelopmentLakson Investments

“Tis the part of a wise man to keep himself today for tomorrow, and not venture all his eggs in one basket.” – Miguel de Cervantes, Don Quixote de la Mancha, 1605.

�e afore-mentioned quote indicates that along with being a great writer, Cervantes would have also proved to be a wise investor.

Investment related decisions are preceded by de�ning a proper Asset Allocation plan. According to recent research, the Asset Allocation decision is responsible for 91.5 percent of the variation between returns on di�erent portfolios. Given the importance of Asset Allocation, it has attained a center stage in any investment decision.

Asset Allocation is mainly important for two de�nite reasons. �e �rst reason pertains to portfolio design; variation in portfolio designs can lead to some investment decisions being winners while the rest being losers, and it is believed that if a portfolio is thoughtfully constructed and contains an optimal mix of securities that perform di�erently from each other (i.e they have little correlation in between them), chances of this portfolio yielding a more stable return is higher. �is is because if some securities in a portfolio are inconsistent and volatile, other, more stable securities can nullify the inconsistency of the entire portfolio, hence stabilizing the yield pattern.

�e second reason pertains to the vision of the investor. Asset allocation allows an investor to �nancially plan for his long-term and short-term goals and avoid impulsive reactions. We will subsequently discuss this aspect of Asset Allocation.

We can divide the Asset Allocation decision into two simple steps as discussed below:

Step 1: Asset Allocation An Asset Allocation strategy can be devised based on the investor’s risk assessment, �nancial goals and return targets. It is the most fundamental step of an investment decision and involves determining an ideal mix of stocks, bonds, cash and other securities in a way such that the portfolio yields a return which best suits an investor’s need. �ere is always a downside of investing too much in bonds or cash as that might certify stable but lower returns. In the same way, too much investment in stocks might lead to portfolio volatility. �erefore, in order to meet your requirements, or keep pace with in�ation, you need to plan an ideal arrangement of securities for your portfolio.

Step 2: Diversi�cationWhile the �rst step bears upon the idea of portfolio construction, this step is linked to the proper dissemination of your assets in a way such that your portfolio is exposed to many di�erent segments of the market, some of which perform independently of the others. Proper diversi�cation of your portfolio can lead to higher and more stable returns.

As mentioned before, the e�ect of diversi�cation is most noticeable when instruments have very little interrelation between them. However, it was easier to build this sort of a portfolio previously than it is today. �is is because roughly over the past 10 years, �nancial markets have become increasingly interrelated and complex. Let us also not ignore the fact that during the 2008 �nancial trouble, most assets tended to perform similarly, leading us to believe in the proposition that most assets are conducive to a similar behavior in times of crisis and instability. �e �gure below shows ways of diversifying a portfolio and entering into newer and assorted mix of investment vehicles.

FIGURE 1:

Figure shows ways of diversifying a portfolio.

Institutions that do not pay requisite importance to the Asset Allocation decision might end up damaging their returns. Usually, institutions are advised to invest in a 60:40 ratio (Stocks: �xed income instruments) to remain on the safe side. Whereas, individuals are recommended to invest in an investment spectrum ranging from 100 percent stocks to 100 percent bonds depending on their separate variable characteristics. However, the Asset Allocation decision is dependent on several other factors and cannot be generalized for di�erent investors.

Following are a few, newer and e�cient ways that have now been developed and can be used for attaining optimal asset allocation:

Mean Variance Optimization

Mean Variance Optimization is a quantitative technique that can be used to calculate the trade-o� between maximum expected return and risk tolerance. �is technique has gained popularity over time because in recent times, the technique is applied on an asset class level as opposed to being applied only to portfolios of individual stocks previously.

�e development of Mean Variance Optimization has not only bene�tted institutional investors but has resulted in a breakthrough for retail brokerage houses as well, which, prior to this development were restricted on their advisory role to the investors. However, recently, they are proposing a greater degree of passive security and more thoughtful asset allocation recommendations to their investors. �is has become possible by using optimization and aiming to attain a favorable position with maximum expected return, minimal risk, or both.

Moreover, a few re�ned approaches taken from utility theory and behavioral economics can be deployed to develop polls or surveys that can authentically gauge an individual’s risk preferences.

Pension funds have also been familiarized with Optimization. Such funds take into account the reciprocity of both assets and liabilities and not only the assets unlike other funds. �e objective of Asset Allocation for these funds is to amplify the fund surplus i.e liabilities subtracted from assets for a stated degree of risk tolerance.

Tactical Asset AllocationTactical asset allocation is the process of adjusting a particular portfolio based on changes in the market value of assets contained in that portfolio. �e technique is quite dynamic and involves deviation from the strategic asset allocation when an investor’s short-term foresight is not aligned with his long term foresight used to develop a strategic asset allocation plan and precise short-term predictions on part of the investor can lead to better returns.

Pragmatically speaking, Tactical Asset Allocation models tend to recommend contrarian trades, that is, they recommend purchasing an asset as its current market value drops and vice versa. �us, tactical Asset Allocation involves perpetually arranging your portfolio based on your needs and changes in the market. One consequence of Tactical Asset Allocation is that by overweighting certain assets during certain times and underweighting others, the portfolio is riskier because of its reduced diversi�cation. �us, to

o�set this additional risk factor, this strategy would need to generate above market returns. �e notion, whether Tactical Asset Allocation Models have achieved this is still a matter of rumination and study but because the probable returns from successful Tactical Asset Allocation would be large, researchers will keep inspecting, and investors won’t cease to be on the look out for their discoveries.

Insured Asset Allocation�is strategy is similar to a portfolio insurance strategy and is a mirror image of the Tactical Asset Allocation strategy. With this strategy, a base portfolio parameter is �xed and the value of the portfolio is not allowed to fall below this base parameter. As long as the portfolio achieves a return above this parameter, you actively to try to increase the portfolio value as much as possible. If, however, the portfolio ever drops to below the base value, investment in risk-free securities enables the base value to become �xed.

�e main target audiences for this approach are risk-averse investors who desire a certain level of active portfolio management and also covet the protection of �xing a certi�ed minimum return below which the portfolio is not allowed to decline. For instance, this approach is best for an investor who has planned a nominal lifestyle for himself after retirement.

Asset Allocation & Uncertain Times�e importance of active portfolio management and wise asset allocation strategy has been reiterated enough. But at the brink of serious economic uncertainty, expectation for stock market returns is somewhat muted. �erefore, it is believed that in such a situation, a dynamic asset allocation plan should come into play for the advantage of certain clients.

Dynamic Asset Allocation uses a long term strategic Asset Allocation strategy as its foundation. Alternate investments can be added to the core portfolio for the sake of complementing it. It is even better, if these investments include segments which yield a higher return and bear little interdependence, so as to achieve a greater level of diversi�cation.

Besides, dynamic Asset Allocation strategies can also be accompanied by �exible investment strategies; tactical actions that are short-term in nature and aim to bank on perceived market opportunities. If 10-20% of your assets are allocated for such investments, your portfolio can be expected to react better in times of changing trends and conditions.

Asset allocation is evolving past a traditional “purchase and retain” dogma. Whilst this might not suit all clients, exercising a dynamic asset allocation plan can create a portfolio better able to handle uncertain market environments. Not to forget the fact that a solid strategic asset allocation plan remains the core strategy behind any tactical asset allocation strategy.

Asset Allocation & the local scenarioWith interest rates in Pakistan consistently hovering above 10 percent for the past �ve years, anyone would expect Pakistanis to be encouraged enough to save and reap bene�ts of higher returns. However, reality states that Pakistan actually stands out to re�ect one of the lowest savings in the region. Given the fact that majority of Pakistanis are not so keen on investing mainly because their expenditures on necessities do not leave any room for savings or so for other reasons, there is a chunk of people who are inclined in saving for a better future and lifestyle.

With growth of urban nuclear families, educated middle to upper middle class is inspirited to plan properly for a child’s education, health and future life. Reasons for investment in Pakistani society vary from a child’s education to his marriage, from being cushioned against the toils of post-retirement life to maternity expenditures. Young professionals may want to invest as a means to generate seed capital for their potential business idea or to live their dreams of traveling or wayfaring.

Reasons for investing are many. With di�erent individuals and di�erent investment objectives in mind, the asset allocation needs of these investors must be customized accordingly.

Asset Allocation & Financial PlanningOnce you are done with choosing your model for Asset Allocation, the �nal stage is to test this model by contextualizing it with a precise �nancial plan. It might be easy for an investor to choose which Asset Allocation plan will provide him with the best possible returns but the investor should also �gure out a way to determine that expected return and also estimate the trade-o� for that higher return potential.

A well-concocted �nancial plan will guide the investor out of this bewilderment. First, it will determine what level of projected investment return is necessary to allow you to meet your lifestyle goals, which can help lead you to the right mix of stocks, bonds and cash. Second, the plan will evaluate the impact of the portfolio risk associated with that mix.

Traditionally, �nancial planning models focused on expected return and neglected the variability of outcomes that is associated with increased volatility. With the introduction of probability-based planning tools, the investor can foresee the e�ect of risk on their investment portfolios, they can vary the amount of risk and can study their corresponding returns. For example a portfolio bearing higher risk may yield a higher return but it also has a probability of falling far short beneath their targets.

When using an asset allocation approach to designing a portfolio, it is important to not focus just on the expected return of that portfolio. �e risk associated with an increasing, or decreasing, portfolio return is just as important to the success of an investment strategy.

Asset Allocation & �e Future

Most forecasters fall into two divisions. Forecasters in the �rst division are eager to predict that the future will closely mirror the recent past. �eir ideals are those generals who are always preparing to �ght the last war. Forecasters in the second division rely heavily

upon the adage that the only constant is change itself. Proponents of this school of thought usually don’t know what to expect, but are quite sure it will be nothing like anything we’ve seen before. �ese individuals do realize the problems of delineating the future of this area.

We should view the future of asset allocation through lenses borrowed from both divisions. �at is, certain aspects of asset allocation today will continue to be recognizable for the years to come. To be more precise, the goals and importance of asset allocation will not change, but the mechanisms by which investors seek to achieve those goals will be new.

�e goal of the asset allocation decision, was, is, and will be to select a combination of assets that will generate a return su�ciently high and safe so as to o�set some future liability. It is also safe to say that asset allocation decisions will have a continuing large role in explaining portfolio returns.

Industry-wide - Net Assets (PKR million)

Net Assets - Open End Funds (PKR million)

Net Assets - Closed End Funds (PKR million)

Net Assets - Pension Schemes (PKR million)

Sales (PKR million) Redemptions (PKR million) Net Sales (PKR million)

Open End Funds' Return** Closed End Funds' Return**

General Pension Schemes Return**

Islamic Pension Schemes Return**

MUFAP ACTIVITIES - Overview01

page 1 of 24 mufap quarterly newsletter

Meeting of the Board of Directors

In order to ensure that the Board of Directors ful�ls the duties and responsibilities conferred by the members of MUFAP, the Board conducts meetings on a regular basis to make immediate and prudent decisions. �e Board of Directors held three meetings during the quarter Jul-Sep 2013.

�e activities undertaken by Board are as follows:

Proposed amendments in the de�nition of Related Parties in Restricted List of Code for Distributors

�e Board deliberated in detail on the matter of proposed

amendments in the de�nition of Related Parties in the Restricted List of Code for Distributors. After careful consideration of the impacts that the amendments may entail, it was decided that all individuals (namely employees, directors, sponsors of the RSPs) should be excluded from the de�nition of Related Parties. �e revised de�nition is applicable to all new investments brought in on or after July 16, 2013 and is not applicable to existing investments made by or before July 15, 2013.

Valuation of GOP Ijarah Sukuk

�e Board recommended that AMCs should use ‘PKISRV’ quoted on Reuters as the relevant price to value the GOP Ijarah Sukuks to determine net assets of CIS under their management, which the SECP approved in September.

Meetings of the Committees

MUFAP Committees held many discussions to make important, well planned proposals on behalf of industry. �e following table presents the number of meetings held during the quarter Jul-Sep’13.

Technical Committee - VPS

�e VPS – Technical Committee held extensive discussions to discuss the dissimilar taxation and operational practices being adopted by di�erent VPS Managers. �e VPS Committee constituted a Sub-Committee, involving a representative from each VPS Manager, to draw up recommendations for the tax treatment. �e Committee also engaged Senior Tax expert, Mr. Shabbar Zaidi on the matter and has requested for clari�cation from FBR on one of the matters.

Meeting with NCCPL A meeting was held between operations sta� of AMCs and NCCPL representatives on July 22, 2013 to evaluate the mechanics and possible data sharing from AMCs to NCCPL for netting of CGT. It was decided that NCCPL would develop a concept paper covering brief mechanism of centralized CGT collection to AMCs for their review and comments.

Elections to elect Directors/Executive Committee Members of MUFAP for the year 2013 / 2014

As required under the Trade Organizations Rules, 2007, MUFAP is required to hold its elections each year to elect Directors against the vacancies arising on account of completion of two-year tenure of some Directors. Board members are elected for a two-year term.

�e retiring Directors on the completion of their two year tenure on September 30, 2013 are: 1. Mr. Adnan Siddiqui (Resigned August-2013)2. Mr. Amer Maqbool 3. Mr. Imran Azim 4. Mr. Mir Muhammad Ali 5. Mr. Nihal Cassim

�e continuing Directors of MUFAP for the year 2013/ 2014 are: 1. Dr. Amjad Waheed 2. Mr. Imran Motiwala 3. Mr. Mir Adil Rashid 4. Mr. Rashid Mansur 5. Ms Maheen Rahman6. Ms Hina Ghazanfar (on reserved seat for women)

In addition, Mr. Rehan N. Shaikh will serve on the Board as provided under Rule 23(5)(d) of the Trade Organization Rules, 2007. At the Extra Ordinary General Meeting on September 26, 2013, MUFAP announced the appointment, by virtue of elections, of the following directors to the Board, namely:1. Mr. Farid Ahmed Khan 2. Mr. M. Habib-ur-Rahman 3. Mr. Mohammad Shoaib 4. Mr. Yasir Qadri 5. Mr. Enamullah Khan

New Board of Directors

�e new Board of Directors of MUFAP at its �rst meeting held on October 1, 2013 elected Dr. Amjad Waheed as Chairman, Mr. Mohammad Shoaib as Senior Vice Chairman and Mr. Farid Ahmed Khan as Vice Chairman MUFAP for the year 2013-2014.�e Board of Directors of MUFAP for the 2013-14 term is as follows:

1) Dr. Amjad Waheed - Chairman; 2) Mr. Mohammad Shoaib - Senior Vice Chairman; 3) Mr. Farid Ahmed Khan - Vice Chairman;4) Mr. Rehan N. Shaikh;5) Mr. Rashid Mansur;6) Mr. M. Habib-ur-Rahman;7) Mr. Yasir Qadri8) Mr. Imran Motiwala;9) Ms Hina Ghazanfar;10) Ms Maheen Rahman;11) Mr. Mir Adil Rashid;12) Mr. Enamullah Khan; and13) Ms Mashmooma Z. Majeed - Chief Executive

Chairman Dr. Amjad Waheed, CFA

Dr. Amjad Waheed holds a doctorate in Investments & Finance from Southern Illinois University, USA and is also a Chartered Financial Analyst. For the last 7 years he is CEO of NBP Fullerton Asset Management Ltd (NAFA), which is a subsidiary of National Bank of Pakistan, with Fullerton Fund Management Company of Singapore as the other joint venture partner. NAFA is presently managing fourteen mutual funds and several portfolios with about Rs 45 billion invested in these funds. NAFA is among the largest Asset Management Companies in Pakistan today.

Before joining NAFA, Dr. Waheed was Head of Equity Mutual Funds & Portfolios at Riyad Bank, Saudi Arabia, for about 5 years where he was managing US$ 7.5 billion invested in 22 mutual funds. Prior to that Dr. Waheed was Head of Investments at NIT,

and Chief Operation O�cer of FC-ABN AMRO Equities for several years. Before moving back to Pakistan, Dr. Waheed was Assistant Professor of Finance at Tennessee State University, USA and has published several articles in top journals of the world such as Journal of Banking & Finance and Financial and Financial Management.Dr. Waheed has served on the Board of various companies including Siemens, Nishat Mills, PICIC, Askari Bank, Millat Tractors, Fauji Fertilizer, Pakitstan Tobacco Company, Treet Corporation, Gul Ahmed Textile, Bata Pakistan.

Senior Vice Chairman Mr. Mohammad Shoaib, CFA

Mr. Mohammad Shoaib, CFA is the Chief Executive of Al Meezan Investment Management Ltd. He has played a key role in setting up the company and has been associated with it since inception. He is a highly quali�ed and seasoned professional with 23 years experience in capital markets. He has to his credit many accolades and awards, the most signi�cant of them being the "Most In�uential CFA charter holder" awarded by CFA Institute in 2006.

Mr. Shoaib holds an MBA degree from IBA besides being a Chartered Financial Analyst (CFA) charter holder. He has to his credit the honor of being the founder and �rst president of CFA Association of Pakistan, a member society of CFA Institute. He has been active participant in the Islamic �nance and asset management for the last 10 years. In this respect, he has also actively participated as a speaker and panelist in various international and domestic seminars, conferences and workshops.

Mr. Shoaib has also served in voluntary capacity at di�erent domestic and international institutions. He has served as a Director on the Board of Karachi Stock Exchange and Vice Chairman on the Board of Mutual Funds Association of Pakistan. He is currently serving on the Board of Directors of Pakistan Institute of Corporate Governance and Institute of Capital Markets. He has also served on various global and regional committees of CFA Institute including Asia Paci�c Advocacy Committee, Global Task Force on Corporate

Governance, GIPS Regional Council and Asset Manager Code Advisory Committee. He has also had the honour to represent over 16,000 charterholders in Asia Paci�c Region as their representative on the Presidents' Council of CFA Institute.

Vice Chairman Mr. Farid Ahmed Khan, CFA

Mr. Farid Ahmed Khan, CFA is the CEO of ABL Asset Management. He has been involved with capital markets for over 18 years and has a broad-based, global experience with bulge bracket �rms in Asset Management, Investment Banking, Investment Research and Sales, Business Development & International Project Finance. He joined ABL AMC from Credit Suisse, where he was the Country Manager of Credit Suisse Pakistan. Prior to that, he worked for MCB, initially as Head of Investment Banking Group and later as the CEO of MCB Asset Management. Mr. Khan has extensive experience outside Pakistan, having worked at Morgan Stanley, ING Barings Securities and CLSA Emerging Markets in Kuala Lumpur, London and Istanbul in a variety of senior positions. He holds an MBA in Finance from IBA, Karachi and got his CFA quali�cation in 1998.

New Committees

MUFAP Board elected its Professional Committees, Chairperson and Vice-Chairperson of each Committee for the year 2013-14. �e list of Committees, their Chairperson and Vice-Chairperson is as follows:

SECP forms Shariah Advisory Board

SECP constituted a Shariah Advisory Board (SAB) to harmonize the Shariah interpretations and strengthen the regulatory and supervisory oversight of Islamic �nancial institutions (IFIs) and Islamic capital markets (ICMs) in Pakistan. It will also advise the Commission on the Shariah-compliance aspects of various products launched and or the processes being adopted by the regulated entities. It will also provide guidance for issuance of new laws, rules and regulations for e�ective monitoring and supervision of Islamic Financial Products and to suggest ways and means for development of IFIs and ICMs in the country.

Money Market

To meet the challenges of maintaining stability in the foreign exchange market and controlling high growth in money supply, SBP decided to gradually decrease the outstanding amount of liquidity injections. Since the beginning of FY14, interbank market liquidity conditions have considerably eased primarily due to substantial increase in the pace of government borrowing from the SBP. In fact, SBP mopped up Rs. 1,556.45 billion and injected Rs. 630.70 billion during Q1-FY14.

In terms of controlling growth in money supply, however, SBP’s e�orts of curtailing liquidity injections did not experience much success as these were o�set by an increase in direct �scal borrowings from the SBP. �e increase of Rs. 1,446 billion in budgetary borrowings from the banking system during FY13 was almost Rs. 1 trillion higher than the original target and was even higher than the total expansion in M2. Deviation of this scale has signi�cantly constrained e�ective monetary management, disrupted �nancial intermediation in the economy, and has led to a sharp increase in domestic debt. Showing a growth of 24.6% in FY13, the stock of government’s domestic debt has reached Rs. 9.5 trillion as of end-June 2013. Similarly, a considerable increase in public debt to revenue ratio re�ects weak repayment capacity of the government. �e acceleration in �scal borrowings from the SBP during H2-FY13, Rs. 714 billion, and Q1-FY14 up till 30th August 2013, Rs. 547 billion, is particularly worrisome. �e inability to raise the tax-GDP ratio is the fundamental source of large �scal de�cits, high borrowings, and rising debt. Although there has been a consistent gap between Federal Board of Revenue’s (FBR) budget targets and actual outcomes in the last few years, the gap of Rs. 445 billion in FY13 was exceptionally high. In fact, this is more than the cumulative shortfall of Rs. 349 billion during the last �ve years.

On the external front, stress in the external account has gradually increased with every passing month of 2013 due to shrinking net capital and �nancial �ows and high loan repayments to the IMF.

While the former was only $517 million or 0.2 percent of GDP, the latter increased to $3 billion in FY13. As a result, despite reduction in the external current account de�cit by about half, to $2.3 billion or 1.0 percent of GDP, the SBP’s foreign exchange reserves declined to $6 billion by end-June 2013 from $10.8 billion at the beginning of FY13. �ese stand at $5.2 billion as on 6th September, 2013 after receiving $544.5 million under the new IMF program. Despite pressures and speculations of a drop in the value of the Pak rupee the foreign exchange market has largely remained stable in FY13. However, since the beginning of FY14 the rupee has depreciated by 5.0 percent as of 12th September 2013.

�e year-on-year CPI based in�ation rate was recorded at 8.3% in July 2013, then to 8.55% in August 2013, however dipped down to 7.39% in September 2013.�ough CPI In�ation remained within single digit, however, it witnessed an upward trend as it increased to 7.39 percent in September 2013 compared to 5.85 percent in June 2013 and 6.6 percent in March 2013. �e impact of upward adjustments in energy prices and an increase in the GST together with the removal of certain exemptions put pressure on in�ation.In order to counter in�ationary expectations, SBP raised the discount rate by 50 basis points to 9.5 percent with e�ect from September 16, 2013.

Movement in KIBOR

Treasury Bills:

A total of 6 T-bill auctions were held by SBP during the quarter in which a total amount of Rs. 1,348.88 billion was raised. Since the beginning of FY14, market’s preference for shorter tenor T-Bills has increased as about 83% of the bank’s total o�ers in recent T-Bill auctions were concentrated in 3-month bills.

T-Bill Auctions (Amount in PKR billion; rates in %)

Pakistan Investment Bonds

�e accepted amount in the PIB auctions during Q1-FY14 fell short of the target .

PIB Auctions (Yields in % and Face Value in PKR billion)

Debt Market

�e table below summarizes the TOP 15 trades of TFCs/Sukuk on the basis of Face value during the Q1-FY14:

Equity Market

KSE-100 index made a strong start to the �scal year 2014, as the index gained 826.99 points, or 3.94%, to stand at 21,832.68 points during the �rst three months of FY14. During the period, index struggled to cross the 23,000 points level and made a high of 23,776.22 on a closing basis. Stock market began the �rst month of �scal year 2014 with a strong rally, overcoming jitters stemming from treason proceedings against former president General (retd) Pervez Musharraf and slowdown in global markets. �e government’s successful negotiations with IMF for a $5.3 billion loan, resolution of circular debt by issuing treasury bills and bonds and anticipation of strong corporate earnings for the quarter ended June 30 buoyed investors’ con�dence as the share prices appreciated across the board and index posted a gain of 2.307.09 points, or 10.98% to settle at 23,312.78 level in July.

After posting strong gain in July, KSE-100 faltered in August as investors continued to worry about ever-escalating Syrian crisis and tumbling regional markets. Stock market further pressured by a slew of disappointing and less-than-expected corporate earnings, falling foreign exchange reserves and high in�ation �gures for July. Moreover, concerns on a possible interest rate hike in the upcoming monetary policy announcement, potential spike in oil prices, decline in cement prices due to breakdown in price discipline, heavy foreign net selling and persistent depreciation in the rupee dragged the KSE-100 index down 1,151.93 points, or 4.94%, to 22,160.85 in August. �e index showed a mixed performance in September. In the �rst half of the month, the approval of the $6.64 billion loan package by IMF, the plans to privatize Pakistan International Airlines, strong foreign in�ows and the release of the IMF’s �rst tranche worth of $550 million helped lift the index to 23,639.97 on a closing basis. However, sentiment reversed towards the end of the month after the central bank’s decision to increase the rate of return on savings deposits to 6.5%. Moreover, steep decline in the value of Pakistani

rupee against the US dollar, constant repayments to IMF, a 50 basis points increase in the discount rate and heavy foreign net selling dragged the KSE-100 index down 328.17 points, or 1.48%, to 21,832.68 in September.

Mutual Fund Market:

�e total net assets decreased to Rs. 359.947 billion in the �rst quarter of FY14 versus Rs. 361.668 billion for the Q4FY13, a reduction of 0.48% quarter over quarter. �e open-end funds went up by 0.71% to Rs. 327.594 billion, pension funds went up by 9.67% to Rs. 5.288 billion and closed-end decreased by 14.23% to Rs. 27.064 billion.

Funds launched during the quarter Q1-FY14

Funds matured during the quarter Q1-FY14

Funds with changed structure/other features Energy Crisis: Causes and ImpactsBy Sara Aquil Walji, Research Analyst, HBL Asset Management

Energy is the cornerstone for any economy’s development and growth. �e current situation has worsened in Pakistan over the past few years and likely to continue if measures are not taken to mitigate the issue on a long term basis. �e gap between demand and supply has reached 6000MW resulting in scheduled and unscheduled load shedding, negatively a�ecting our industrial sector, hurting our exports and has even hampered the GDP growth rate by 2%. Subsidies to the power sector have steadily been increasing and form the biggest part of total subsidies amounting to around Rs 349,287mn (95% of the total subsidies) in FY 2012-13. �e new government has allocated Rs. 220,100mn to the power sector for the FY 2013-14 which is 91.5% of the total subsidy budget. (Source: Annual budget 2014) With recent emphasis on matters to resolve energy crisis and develop renewable and non-renewable sources of energy, it is worthwhile to note why energy crisis became as severe as it is now.

�e root of this crisis is that Pakistan’s electricity generation mix is highly skewed towards the most expensive kinds .�ere appears to be an almost inverse relationship between the sources of electricity that are most expensive to set and those that are most expensive to run. �e following chart depicts this relationship:

Source: Express Tribune �is highlights the fact why there is a heavy concentration toward

the construction of thermal power plants since they are relatively cheaper to build than hydropower plants. �e government has not dedicated enough funds for the development of hydropower projects which are the most expensive to build but cheapest to run on a per unit basis.Pakistan’s electricity generation is highly dependent on imported oil as almost $14.5bn worth of oil is imported each year which accounts for around 35% of electricity generation. Comparing Pakistan with India and Bangladesh reveals that Pakistan relies heavily on oil for electricity generation where as India uses coal, a relatively cheaper source for electricity generation and Bangladesh on the other hand allocates 73% of its electricity generation to gas.

Source: Economic Survey report for 2012-2013

With a prominent shift in recent years towards the use of thermal power stations instead of hydropower sources and a reduction in electricity generation from coal, Pakistan’s electricity costs ends up being more expensive than it needs to be and since the government has adopted a policy of uniform tari� across the country the Tari� Di�erential Subsidy owed by the Government of Pakistan on an annual basis has increased substantially.

Circular debt is another major concern hampering the growth of Pakistan’s economy. In simple words circular debt is the amount of

cash shortfall within the Central Power Purchasing Agency (CPPA) that it cannot pay to power supply companies. �is shortfall is the result of (a) the di�erence between the actual cost of providing electricity in relation to revenues realized by the power distribution companies (DISCOs) from sales to customers plus subsidies; and (b) insu�cient payments by the DISCOs to CPPA out of realized revenue as they give priority to their own cash �ow needs. (Source: USAID Report March 2103)

�is revenue shortfall cascades through the entire energy supply chain, from electricity generators to fuel suppliers, re�ners, and producers; resulting in a shortage of fuel supply to the public sector thermal generating companies (GENCOs), a reduction in power generated by Independent Power Producers (IPPs), and an increases in load shedding.

According to the report published by the USAID in March 2013, circular debt amounts to Rs872bn which is actually 4% of GDP. According to Pakistan’s Economic Survey report for 2012-2013, there is a strong relationship between GDP growth rate and electricity growth as shown in the �gure below. It can be easily deduced that periods of low or negative electricity growth have witnessed low GDP growth rate, while periods where electricity growth picked up there is increase in GDP growth rate.

�is comes as no surprise, since industrial output is heavily dependent on the amount of electricity delivered to them. Continuous power breakdowns prevented industries from operating at their full capacity level. �e power outages have obstructed the viability of the textile industry as exporters were unable to meet their

commitments. During July-March 2012-13, foreign exchange earnings through exports of synthetic textile fabrics and woolen industry showing a decline of 25.3% and 5.1% respectively as compared to last year. During the period under review even in quantity term also recorded a decline of 30% and 15.8% respectively.

Coupled with an ine�cient system and expensive fuel mix, power theft is another major issue faced by Pakistanis. It is interesting to note that annual revenue collection e�ciency was estimated to be around 87%; however that 13% of lost e�ciency has a �nancial impact of Rs 86bn which is equivalent to 41 days of furnace oil costs for thermal power plants. �e following �gure shows the percentage of bills that were uncollected in 2012. �e e�ciency of di�erent DISCOs is disproportionate in revenue collection. �is essentially leads to the inclusion of the cost of power theft in the power tari�, meaning that the honest payers also bear the cost of those that steal.

Power theft is not only committed by normal residents but the main defaulters are the government institutions themselves. �e government owns around 51% of the uncollected bills which amounts to Rs 118bn out of the uncollected revenue receipts of Rs 386bn. In my opinion, this the amount which causes the discrepancy between the amount of RS500.3bn to be injected to resolve the circular debt issue and �gure of Rs 872.41bn since the government has a proposal to o�set provisional dues via a �scal adjuster. Due to a growing economy, Pakistan’s energy needs have more than doubled in the past 15 years. Energy shortages have far devastating

e�ects on our economy. Not only does it cause civil disturbances on a small scale but it a�ects our GDP on a larger note. Injecting money into the chain will only resolve the issue on a temporary basis. �ese challenges require a multi-prong approach that would address energy shortages in the immediate future and help the country build longer term energy su�ciency.

�ere needs to be a shift away from thermal power to alternative sources of energy which are not only cheaper but also environmentally friendly. Pakistan has large untapped renewable resources such as water, sun and wind and recently the government has taken keen interest on the development of hydro power projects and Neelum Jhelum Hydroelectric Project is one of the many projects which the new government has started which will approximately add 5.15bn units of electricity annually. Moreover, an e�ective system of governance must be in place to curb theft, recuperate dues and enforce policies.

�e Importance of Asset Allocation in attaining Optimal Returns

By Yamna Hassan, Asst. Manager-Business DevelopmentLakson Investments

“Tis the part of a wise man to keep himself today for tomorrow, and not venture all his eggs in one basket.” – Miguel de Cervantes, Don Quixote de la Mancha, 1605.

�e afore-mentioned quote indicates that along with being a great writer, Cervantes would have also proved to be a wise investor.

Investment related decisions are preceded by de�ning a proper Asset Allocation plan. According to recent research, the Asset Allocation decision is responsible for 91.5 percent of the variation between returns on di�erent portfolios. Given the importance of Asset Allocation, it has attained a center stage in any investment decision.

Asset Allocation is mainly important for two de�nite reasons. �e �rst reason pertains to portfolio design; variation in portfolio designs can lead to some investment decisions being winners while the rest being losers, and it is believed that if a portfolio is thoughtfully constructed and contains an optimal mix of securities that perform di�erently from each other (i.e they have little correlation in between them), chances of this portfolio yielding a more stable return is higher. �is is because if some securities in a portfolio are inconsistent and volatile, other, more stable securities can nullify the inconsistency of the entire portfolio, hence stabilizing the yield pattern.

�e second reason pertains to the vision of the investor. Asset allocation allows an investor to �nancially plan for his long-term and short-term goals and avoid impulsive reactions. We will subsequently discuss this aspect of Asset Allocation.

We can divide the Asset Allocation decision into two simple steps as discussed below:

Step 1: Asset Allocation An Asset Allocation strategy can be devised based on the investor’s risk assessment, �nancial goals and return targets. It is the most fundamental step of an investment decision and involves determining an ideal mix of stocks, bonds, cash and other securities in a way such that the portfolio yields a return which best suits an investor’s need. �ere is always a downside of investing too much in bonds or cash as that might certify stable but lower returns. In the same way, too much investment in stocks might lead to portfolio volatility. �erefore, in order to meet your requirements, or keep pace with in�ation, you need to plan an ideal arrangement of securities for your portfolio.

Step 2: Diversi�cationWhile the �rst step bears upon the idea of portfolio construction, this step is linked to the proper dissemination of your assets in a way such that your portfolio is exposed to many di�erent segments of the market, some of which perform independently of the others. Proper diversi�cation of your portfolio can lead to higher and more stable returns.

As mentioned before, the e�ect of diversi�cation is most noticeable when instruments have very little interrelation between them. However, it was easier to build this sort of a portfolio previously than it is today. �is is because roughly over the past 10 years, �nancial markets have become increasingly interrelated and complex. Let us also not ignore the fact that during the 2008 �nancial trouble, most assets tended to perform similarly, leading us to believe in the proposition that most assets are conducive to a similar behavior in times of crisis and instability. �e �gure below shows ways of diversifying a portfolio and entering into newer and assorted mix of investment vehicles.

FIGURE 1:

Figure shows ways of diversifying a portfolio.

Institutions that do not pay requisite importance to the Asset Allocation decision might end up damaging their returns. Usually, institutions are advised to invest in a 60:40 ratio (Stocks: �xed income instruments) to remain on the safe side. Whereas, individuals are recommended to invest in an investment spectrum ranging from 100 percent stocks to 100 percent bonds depending on their separate variable characteristics. However, the Asset Allocation decision is dependent on several other factors and cannot be generalized for di�erent investors.

Following are a few, newer and e�cient ways that have now been developed and can be used for attaining optimal asset allocation:

Mean Variance Optimization

Mean Variance Optimization is a quantitative technique that can be used to calculate the trade-o� between maximum expected return and risk tolerance. �is technique has gained popularity over time because in recent times, the technique is applied on an asset class level as opposed to being applied only to portfolios of individual stocks previously.

�e development of Mean Variance Optimization has not only bene�tted institutional investors but has resulted in a breakthrough for retail brokerage houses as well, which, prior to this development were restricted on their advisory role to the investors. However, recently, they are proposing a greater degree of passive security and more thoughtful asset allocation recommendations to their investors. �is has become possible by using optimization and aiming to attain a favorable position with maximum expected return, minimal risk, or both.

Moreover, a few re�ned approaches taken from utility theory and behavioral economics can be deployed to develop polls or surveys that can authentically gauge an individual’s risk preferences.

Pension funds have also been familiarized with Optimization. Such funds take into account the reciprocity of both assets and liabilities and not only the assets unlike other funds. �e objective of Asset Allocation for these funds is to amplify the fund surplus i.e liabilities subtracted from assets for a stated degree of risk tolerance.

Tactical Asset AllocationTactical asset allocation is the process of adjusting a particular portfolio based on changes in the market value of assets contained in that portfolio. �e technique is quite dynamic and involves deviation from the strategic asset allocation when an investor’s short-term foresight is not aligned with his long term foresight used to develop a strategic asset allocation plan and precise short-term predictions on part of the investor can lead to better returns.

Pragmatically speaking, Tactical Asset Allocation models tend to recommend contrarian trades, that is, they recommend purchasing an asset as its current market value drops and vice versa. �us, tactical Asset Allocation involves perpetually arranging your portfolio based on your needs and changes in the market. One consequence of Tactical Asset Allocation is that by overweighting certain assets during certain times and underweighting others, the portfolio is riskier because of its reduced diversi�cation. �us, to

o�set this additional risk factor, this strategy would need to generate above market returns. �e notion, whether Tactical Asset Allocation Models have achieved this is still a matter of rumination and study but because the probable returns from successful Tactical Asset Allocation would be large, researchers will keep inspecting, and investors won’t cease to be on the look out for their discoveries.

Insured Asset Allocation�is strategy is similar to a portfolio insurance strategy and is a mirror image of the Tactical Asset Allocation strategy. With this strategy, a base portfolio parameter is �xed and the value of the portfolio is not allowed to fall below this base parameter. As long as the portfolio achieves a return above this parameter, you actively to try to increase the portfolio value as much as possible. If, however, the portfolio ever drops to below the base value, investment in risk-free securities enables the base value to become �xed.

�e main target audiences for this approach are risk-averse investors who desire a certain level of active portfolio management and also covet the protection of �xing a certi�ed minimum return below which the portfolio is not allowed to decline. For instance, this approach is best for an investor who has planned a nominal lifestyle for himself after retirement.

Asset Allocation & Uncertain Times�e importance of active portfolio management and wise asset allocation strategy has been reiterated enough. But at the brink of serious economic uncertainty, expectation for stock market returns is somewhat muted. �erefore, it is believed that in such a situation, a dynamic asset allocation plan should come into play for the advantage of certain clients.

Dynamic Asset Allocation uses a long term strategic Asset Allocation strategy as its foundation. Alternate investments can be added to the core portfolio for the sake of complementing it. It is even better, if these investments include segments which yield a higher return and bear little interdependence, so as to achieve a greater level of diversi�cation.

Besides, dynamic Asset Allocation strategies can also be accompanied by �exible investment strategies; tactical actions that are short-term in nature and aim to bank on perceived market opportunities. If 10-20% of your assets are allocated for such investments, your portfolio can be expected to react better in times of changing trends and conditions.

Asset allocation is evolving past a traditional “purchase and retain” dogma. Whilst this might not suit all clients, exercising a dynamic asset allocation plan can create a portfolio better able to handle uncertain market environments. Not to forget the fact that a solid strategic asset allocation plan remains the core strategy behind any tactical asset allocation strategy.

Asset Allocation & the local scenarioWith interest rates in Pakistan consistently hovering above 10 percent for the past �ve years, anyone would expect Pakistanis to be encouraged enough to save and reap bene�ts of higher returns. However, reality states that Pakistan actually stands out to re�ect one of the lowest savings in the region. Given the fact that majority of Pakistanis are not so keen on investing mainly because their expenditures on necessities do not leave any room for savings or so for other reasons, there is a chunk of people who are inclined in saving for a better future and lifestyle.

With growth of urban nuclear families, educated middle to upper middle class is inspirited to plan properly for a child’s education, health and future life. Reasons for investment in Pakistani society vary from a child’s education to his marriage, from being cushioned against the toils of post-retirement life to maternity expenditures. Young professionals may want to invest as a means to generate seed capital for their potential business idea or to live their dreams of traveling or wayfaring.

Reasons for investing are many. With di�erent individuals and di�erent investment objectives in mind, the asset allocation needs of these investors must be customized accordingly.

Asset Allocation & Financial PlanningOnce you are done with choosing your model for Asset Allocation, the �nal stage is to test this model by contextualizing it with a precise �nancial plan. It might be easy for an investor to choose which Asset Allocation plan will provide him with the best possible returns but the investor should also �gure out a way to determine that expected return and also estimate the trade-o� for that higher return potential.

A well-concocted �nancial plan will guide the investor out of this bewilderment. First, it will determine what level of projected investment return is necessary to allow you to meet your lifestyle goals, which can help lead you to the right mix of stocks, bonds and cash. Second, the plan will evaluate the impact of the portfolio risk associated with that mix.

Traditionally, �nancial planning models focused on expected return and neglected the variability of outcomes that is associated with increased volatility. With the introduction of probability-based planning tools, the investor can foresee the e�ect of risk on their investment portfolios, they can vary the amount of risk and can study their corresponding returns. For example a portfolio bearing higher risk may yield a higher return but it also has a probability of falling far short beneath their targets.

When using an asset allocation approach to designing a portfolio, it is important to not focus just on the expected return of that portfolio. �e risk associated with an increasing, or decreasing, portfolio return is just as important to the success of an investment strategy.

Asset Allocation & �e Future

Most forecasters fall into two divisions. Forecasters in the �rst division are eager to predict that the future will closely mirror the recent past. �eir ideals are those generals who are always preparing to �ght the last war. Forecasters in the second division rely heavily

upon the adage that the only constant is change itself. Proponents of this school of thought usually don’t know what to expect, but are quite sure it will be nothing like anything we’ve seen before. �ese individuals do realize the problems of delineating the future of this area.

We should view the future of asset allocation through lenses borrowed from both divisions. �at is, certain aspects of asset allocation today will continue to be recognizable for the years to come. To be more precise, the goals and importance of asset allocation will not change, but the mechanisms by which investors seek to achieve those goals will be new.

�e goal of the asset allocation decision, was, is, and will be to select a combination of assets that will generate a return su�ciently high and safe so as to o�set some future liability. It is also safe to say that asset allocation decisions will have a continuing large role in explaining portfolio returns.

Industry-wide - Net Assets (PKR million)

Net Assets - Open End Funds (PKR million)

Net Assets - Closed End Funds (PKR million)

Net Assets - Pension Schemes (PKR million)

Sales (PKR million) Redemptions (PKR million) Net Sales (PKR million)

Open End Funds' Return** Closed End Funds' Return**

General Pension Schemes Return**

Islamic Pension Schemes Return**

S.No. Name of Directors

Dates Total No. of

Meetings Attended (Out of 3)

15-Jul 20-Aug 27-Sep

1 Mr. Rehan N. Shaikh Yes No Yes 22 Mr. Rashid Mansur Yes Yes No 23 Dr. Amjad Waheed Yes Yes Yes 34 Mr. Adnan Siddiqui No No No 05 Mr. Amer Maqbool No No No 06 Mr. Imran Azim Yes Yes No 27 Mr. Imran Motiwala No Yes Yes 28 Mr. Mir Adil Rashid No No Yes 19 Mr. Mir. Muhammad Ali Yes Yes Yes 3

10 Mr. Nihal Cassim Yes Yes Yes 311 Ms. Hina Ghazanfar No No No 012 Ms. Maheen Rahman Yes No No 113 Ms. Mashmooma Z. Majeed Yes Yes Yes 3

Committee No. of Meetings Held

Accounts & Taxation Committee -MUFAP Codes, Ethics & Corporate Governance Committee -

Pricing Policy, Development & Promotion of Debt Securities Committee -

Public Awareness & Investor Education Commit-tee -

Technical Committee - Mutual Funds -Technical Committee - VPS 2

Meeting of the Board of Directors

In order to ensure that the Board of Directors ful�ls the duties and responsibilities conferred by the members of MUFAP, the Board conducts meetings on a regular basis to make immediate and prudent decisions. �e Board of Directors held three meetings during the quarter Jul-Sep 2013.

�e activities undertaken by Board are as follows:

Proposed amendments in the de�nition of Related Parties in Restricted List of Code for Distributors

�e Board deliberated in detail on the matter of proposed

amendments in the de�nition of Related Parties in the Restricted List of Code for Distributors. After careful consideration of the impacts that the amendments may entail, it was decided that all individuals (namely employees, directors, sponsors of the RSPs) should be excluded from the de�nition of Related Parties. �e revised de�nition is applicable to all new investments brought in on or after July 16, 2013 and is not applicable to existing investments made by or before July 15, 2013.

Valuation of GOP Ijarah Sukuk

�e Board recommended that AMCs should use ‘PKISRV’ quoted on Reuters as the relevant price to value the GOP Ijarah Sukuks to determine net assets of CIS under their management, which the SECP approved in September.

Meetings of the Committees

MUFAP Committees held many discussions to make important, well planned proposals on behalf of industry. �e following table presents the number of meetings held during the quarter Jul-Sep’13.

MUFAP ACTIVITIES - Overview01

page 2 of 24 mufap quarterly newsletter

Technical Committee - VPS

�e VPS – Technical Committee held extensive discussions to discuss the dissimilar taxation and operational practices being adopted by di�erent VPS Managers. �e VPS Committee constituted a Sub-Committee, involving a representative from each VPS Manager, to draw up recommendations for the tax treatment. �e Committee also engaged Senior Tax expert, Mr. Shabbar Zaidi on the matter and has requested for clari�cation from FBR on one of the matters.

Meeting with NCCPL A meeting was held between operations sta� of AMCs and NCCPL representatives on July 22, 2013 to evaluate the mechanics and possible data sharing from AMCs to NCCPL for netting of CGT. It was decided that NCCPL would develop a concept paper covering brief mechanism of centralized CGT collection to AMCs for their review and comments.

Elections to elect Directors/Executive Committee Members of MUFAP for the year 2013 / 2014

As required under the Trade Organizations Rules, 2007, MUFAP is required to hold its elections each year to elect Directors against the vacancies arising on account of completion of two-year tenure of some Directors. Board members are elected for a two-year term.

�e retiring Directors on the completion of their two year tenure on September 30, 2013 are: 1. Mr. Adnan Siddiqui (Resigned August-2013)2. Mr. Amer Maqbool 3. Mr. Imran Azim 4. Mr. Mir Muhammad Ali 5. Mr. Nihal Cassim

�e continuing Directors of MUFAP for the year 2013/ 2014 are: 1. Dr. Amjad Waheed 2. Mr. Imran Motiwala 3. Mr. Mir Adil Rashid 4. Mr. Rashid Mansur 5. Ms Maheen Rahman6. Ms Hina Ghazanfar (on reserved seat for women)

In addition, Mr. Rehan N. Shaikh will serve on the Board as provided under Rule 23(5)(d) of the Trade Organization Rules, 2007. At the Extra Ordinary General Meeting on September 26, 2013, MUFAP announced the appointment, by virtue of elections, of the following directors to the Board, namely:1. Mr. Farid Ahmed Khan 2. Mr. M. Habib-ur-Rahman 3. Mr. Mohammad Shoaib 4. Mr. Yasir Qadri 5. Mr. Enamullah Khan

New Board of Directors

�e new Board of Directors of MUFAP at its �rst meeting held on October 1, 2013 elected Dr. Amjad Waheed as Chairman, Mr. Mohammad Shoaib as Senior Vice Chairman and Mr. Farid Ahmed Khan as Vice Chairman MUFAP for the year 2013-2014.�e Board of Directors of MUFAP for the 2013-14 term is as follows:

1) Dr. Amjad Waheed - Chairman; 2) Mr. Mohammad Shoaib - Senior Vice Chairman; 3) Mr. Farid Ahmed Khan - Vice Chairman;4) Mr. Rehan N. Shaikh;5) Mr. Rashid Mansur;6) Mr. M. Habib-ur-Rahman;7) Mr. Yasir Qadri8) Mr. Imran Motiwala;9) Ms Hina Ghazanfar;10) Ms Maheen Rahman;11) Mr. Mir Adil Rashid;12) Mr. Enamullah Khan; and13) Ms Mashmooma Z. Majeed - Chief Executive

Chairman Dr. Amjad Waheed, CFA

Dr. Amjad Waheed holds a doctorate in Investments & Finance from Southern Illinois University, USA and is also a Chartered Financial Analyst. For the last 7 years he is CEO of NBP Fullerton Asset Management Ltd (NAFA), which is a subsidiary of National Bank of Pakistan, with Fullerton Fund Management Company of Singapore as the other joint venture partner. NAFA is presently managing fourteen mutual funds and several portfolios with about Rs 45 billion invested in these funds. NAFA is among the largest Asset Management Companies in Pakistan today.

Before joining NAFA, Dr. Waheed was Head of Equity Mutual Funds & Portfolios at Riyad Bank, Saudi Arabia, for about 5 years where he was managing US$ 7.5 billion invested in 22 mutual funds. Prior to that Dr. Waheed was Head of Investments at NIT,

and Chief Operation O�cer of FC-ABN AMRO Equities for several years. Before moving back to Pakistan, Dr. Waheed was Assistant Professor of Finance at Tennessee State University, USA and has published several articles in top journals of the world such as Journal of Banking & Finance and Financial and Financial Management.Dr. Waheed has served on the Board of various companies including Siemens, Nishat Mills, PICIC, Askari Bank, Millat Tractors, Fauji Fertilizer, Pakitstan Tobacco Company, Treet Corporation, Gul Ahmed Textile, Bata Pakistan.

Senior Vice Chairman Mr. Mohammad Shoaib, CFA

Mr. Mohammad Shoaib, CFA is the Chief Executive of Al Meezan Investment Management Ltd. He has played a key role in setting up the company and has been associated with it since inception. He is a highly quali�ed and seasoned professional with 23 years experience in capital markets. He has to his credit many accolades and awards, the most signi�cant of them being the "Most In�uential CFA charter holder" awarded by CFA Institute in 2006.

Mr. Shoaib holds an MBA degree from IBA besides being a Chartered Financial Analyst (CFA) charter holder. He has to his credit the honor of being the founder and �rst president of CFA Association of Pakistan, a member society of CFA Institute. He has been active participant in the Islamic �nance and asset management for the last 10 years. In this respect, he has also actively participated as a speaker and panelist in various international and domestic seminars, conferences and workshops.

Mr. Shoaib has also served in voluntary capacity at di�erent domestic and international institutions. He has served as a Director on the Board of Karachi Stock Exchange and Vice Chairman on the Board of Mutual Funds Association of Pakistan. He is currently serving on the Board of Directors of Pakistan Institute of Corporate Governance and Institute of Capital Markets. He has also served on various global and regional committees of CFA Institute including Asia Paci�c Advocacy Committee, Global Task Force on Corporate

Governance, GIPS Regional Council and Asset Manager Code Advisory Committee. He has also had the honour to represent over 16,000 charterholders in Asia Paci�c Region as their representative on the Presidents' Council of CFA Institute.

Vice Chairman Mr. Farid Ahmed Khan, CFA

Mr. Farid Ahmed Khan, CFA is the CEO of ABL Asset Management. He has been involved with capital markets for over 18 years and has a broad-based, global experience with bulge bracket �rms in Asset Management, Investment Banking, Investment Research and Sales, Business Development & International Project Finance. He joined ABL AMC from Credit Suisse, where he was the Country Manager of Credit Suisse Pakistan. Prior to that, he worked for MCB, initially as Head of Investment Banking Group and later as the CEO of MCB Asset Management. Mr. Khan has extensive experience outside Pakistan, having worked at Morgan Stanley, ING Barings Securities and CLSA Emerging Markets in Kuala Lumpur, London and Istanbul in a variety of senior positions. He holds an MBA in Finance from IBA, Karachi and got his CFA quali�cation in 1998.

New Committees

MUFAP Board elected its Professional Committees, Chairperson and Vice-Chairperson of each Committee for the year 2013-14. �e list of Committees, their Chairperson and Vice-Chairperson is as follows:

SECP forms Shariah Advisory Board

SECP constituted a Shariah Advisory Board (SAB) to harmonize the Shariah interpretations and strengthen the regulatory and supervisory oversight of Islamic �nancial institutions (IFIs) and Islamic capital markets (ICMs) in Pakistan. It will also advise the Commission on the Shariah-compliance aspects of various products launched and or the processes being adopted by the regulated entities. It will also provide guidance for issuance of new laws, rules and regulations for e�ective monitoring and supervision of Islamic Financial Products and to suggest ways and means for development of IFIs and ICMs in the country.

Money Market

To meet the challenges of maintaining stability in the foreign exchange market and controlling high growth in money supply, SBP decided to gradually decrease the outstanding amount of liquidity injections. Since the beginning of FY14, interbank market liquidity conditions have considerably eased primarily due to substantial increase in the pace of government borrowing from the SBP. In fact, SBP mopped up Rs. 1,556.45 billion and injected Rs. 630.70 billion during Q1-FY14.

In terms of controlling growth in money supply, however, SBP’s e�orts of curtailing liquidity injections did not experience much success as these were o�set by an increase in direct �scal borrowings from the SBP. �e increase of Rs. 1,446 billion in budgetary borrowings from the banking system during FY13 was almost Rs. 1 trillion higher than the original target and was even higher than the total expansion in M2. Deviation of this scale has signi�cantly constrained e�ective monetary management, disrupted �nancial intermediation in the economy, and has led to a sharp increase in domestic debt. Showing a growth of 24.6% in FY13, the stock of government’s domestic debt has reached Rs. 9.5 trillion as of end-June 2013. Similarly, a considerable increase in public debt to revenue ratio re�ects weak repayment capacity of the government. �e acceleration in �scal borrowings from the SBP during H2-FY13, Rs. 714 billion, and Q1-FY14 up till 30th August 2013, Rs. 547 billion, is particularly worrisome. �e inability to raise the tax-GDP ratio is the fundamental source of large �scal de�cits, high borrowings, and rising debt. Although there has been a consistent gap between Federal Board of Revenue’s (FBR) budget targets and actual outcomes in the last few years, the gap of Rs. 445 billion in FY13 was exceptionally high. In fact, this is more than the cumulative shortfall of Rs. 349 billion during the last �ve years.

On the external front, stress in the external account has gradually increased with every passing month of 2013 due to shrinking net capital and �nancial �ows and high loan repayments to the IMF.

While the former was only $517 million or 0.2 percent of GDP, the latter increased to $3 billion in FY13. As a result, despite reduction in the external current account de�cit by about half, to $2.3 billion or 1.0 percent of GDP, the SBP’s foreign exchange reserves declined to $6 billion by end-June 2013 from $10.8 billion at the beginning of FY13. �ese stand at $5.2 billion as on 6th September, 2013 after receiving $544.5 million under the new IMF program. Despite pressures and speculations of a drop in the value of the Pak rupee the foreign exchange market has largely remained stable in FY13. However, since the beginning of FY14 the rupee has depreciated by 5.0 percent as of 12th September 2013.

�e year-on-year CPI based in�ation rate was recorded at 8.3% in July 2013, then to 8.55% in August 2013, however dipped down to 7.39% in September 2013.�ough CPI In�ation remained within single digit, however, it witnessed an upward trend as it increased to 7.39 percent in September 2013 compared to 5.85 percent in June 2013 and 6.6 percent in March 2013. �e impact of upward adjustments in energy prices and an increase in the GST together with the removal of certain exemptions put pressure on in�ation.In order to counter in�ationary expectations, SBP raised the discount rate by 50 basis points to 9.5 percent with e�ect from September 16, 2013.

Movement in KIBOR

Treasury Bills:

A total of 6 T-bill auctions were held by SBP during the quarter in which a total amount of Rs. 1,348.88 billion was raised. Since the beginning of FY14, market’s preference for shorter tenor T-Bills has increased as about 83% of the bank’s total o�ers in recent T-Bill auctions were concentrated in 3-month bills.

T-Bill Auctions (Amount in PKR billion; rates in %)

Pakistan Investment Bonds

�e accepted amount in the PIB auctions during Q1-FY14 fell short of the target .

PIB Auctions (Yields in % and Face Value in PKR billion)

Debt Market

�e table below summarizes the TOP 15 trades of TFCs/Sukuk on the basis of Face value during the Q1-FY14:

Equity Market

KSE-100 index made a strong start to the �scal year 2014, as the index gained 826.99 points, or 3.94%, to stand at 21,832.68 points during the �rst three months of FY14. During the period, index struggled to cross the 23,000 points level and made a high of 23,776.22 on a closing basis. Stock market began the �rst month of �scal year 2014 with a strong rally, overcoming jitters stemming from treason proceedings against former president General (retd) Pervez Musharraf and slowdown in global markets. �e government’s successful negotiations with IMF for a $5.3 billion loan, resolution of circular debt by issuing treasury bills and bonds and anticipation of strong corporate earnings for the quarter ended June 30 buoyed investors’ con�dence as the share prices appreciated across the board and index posted a gain of 2.307.09 points, or 10.98% to settle at 23,312.78 level in July.

After posting strong gain in July, KSE-100 faltered in August as investors continued to worry about ever-escalating Syrian crisis and tumbling regional markets. Stock market further pressured by a slew of disappointing and less-than-expected corporate earnings, falling foreign exchange reserves and high in�ation �gures for July. Moreover, concerns on a possible interest rate hike in the upcoming monetary policy announcement, potential spike in oil prices, decline in cement prices due to breakdown in price discipline, heavy foreign net selling and persistent depreciation in the rupee dragged the KSE-100 index down 1,151.93 points, or 4.94%, to 22,160.85 in August. �e index showed a mixed performance in September. In the �rst half of the month, the approval of the $6.64 billion loan package by IMF, the plans to privatize Pakistan International Airlines, strong foreign in�ows and the release of the IMF’s �rst tranche worth of $550 million helped lift the index to 23,639.97 on a closing basis. However, sentiment reversed towards the end of the month after the central bank’s decision to increase the rate of return on savings deposits to 6.5%. Moreover, steep decline in the value of Pakistani

rupee against the US dollar, constant repayments to IMF, a 50 basis points increase in the discount rate and heavy foreign net selling dragged the KSE-100 index down 328.17 points, or 1.48%, to 21,832.68 in September.

Mutual Fund Market:

�e total net assets decreased to Rs. 359.947 billion in the �rst quarter of FY14 versus Rs. 361.668 billion for the Q4FY13, a reduction of 0.48% quarter over quarter. �e open-end funds went up by 0.71% to Rs. 327.594 billion, pension funds went up by 9.67% to Rs. 5.288 billion and closed-end decreased by 14.23% to Rs. 27.064 billion.

Funds launched during the quarter Q1-FY14

Funds matured during the quarter Q1-FY14

Funds with changed structure/other features Energy Crisis: Causes and ImpactsBy Sara Aquil Walji, Research Analyst, HBL Asset Management

Energy is the cornerstone for any economy’s development and growth. �e current situation has worsened in Pakistan over the past few years and likely to continue if measures are not taken to mitigate the issue on a long term basis. �e gap between demand and supply has reached 6000MW resulting in scheduled and unscheduled load shedding, negatively a�ecting our industrial sector, hurting our exports and has even hampered the GDP growth rate by 2%. Subsidies to the power sector have steadily been increasing and form the biggest part of total subsidies amounting to around Rs 349,287mn (95% of the total subsidies) in FY 2012-13. �e new government has allocated Rs. 220,100mn to the power sector for the FY 2013-14 which is 91.5% of the total subsidy budget. (Source: Annual budget 2014) With recent emphasis on matters to resolve energy crisis and develop renewable and non-renewable sources of energy, it is worthwhile to note why energy crisis became as severe as it is now.

�e root of this crisis is that Pakistan’s electricity generation mix is highly skewed towards the most expensive kinds .�ere appears to be an almost inverse relationship between the sources of electricity that are most expensive to set and those that are most expensive to run. �e following chart depicts this relationship:

Source: Express Tribune �is highlights the fact why there is a heavy concentration toward

the construction of thermal power plants since they are relatively cheaper to build than hydropower plants. �e government has not dedicated enough funds for the development of hydropower projects which are the most expensive to build but cheapest to run on a per unit basis.Pakistan’s electricity generation is highly dependent on imported oil as almost $14.5bn worth of oil is imported each year which accounts for around 35% of electricity generation. Comparing Pakistan with India and Bangladesh reveals that Pakistan relies heavily on oil for electricity generation where as India uses coal, a relatively cheaper source for electricity generation and Bangladesh on the other hand allocates 73% of its electricity generation to gas.

Source: Economic Survey report for 2012-2013

With a prominent shift in recent years towards the use of thermal power stations instead of hydropower sources and a reduction in electricity generation from coal, Pakistan’s electricity costs ends up being more expensive than it needs to be and since the government has adopted a policy of uniform tari� across the country the Tari� Di�erential Subsidy owed by the Government of Pakistan on an annual basis has increased substantially.

Circular debt is another major concern hampering the growth of Pakistan’s economy. In simple words circular debt is the amount of

cash shortfall within the Central Power Purchasing Agency (CPPA) that it cannot pay to power supply companies. �is shortfall is the result of (a) the di�erence between the actual cost of providing electricity in relation to revenues realized by the power distribution companies (DISCOs) from sales to customers plus subsidies; and (b) insu�cient payments by the DISCOs to CPPA out of realized revenue as they give priority to their own cash �ow needs. (Source: USAID Report March 2103)

�is revenue shortfall cascades through the entire energy supply chain, from electricity generators to fuel suppliers, re�ners, and producers; resulting in a shortage of fuel supply to the public sector thermal generating companies (GENCOs), a reduction in power generated by Independent Power Producers (IPPs), and an increases in load shedding.

According to the report published by the USAID in March 2013, circular debt amounts to Rs872bn which is actually 4% of GDP. According to Pakistan’s Economic Survey report for 2012-2013, there is a strong relationship between GDP growth rate and electricity growth as shown in the �gure below. It can be easily deduced that periods of low or negative electricity growth have witnessed low GDP growth rate, while periods where electricity growth picked up there is increase in GDP growth rate.

�is comes as no surprise, since industrial output is heavily dependent on the amount of electricity delivered to them. Continuous power breakdowns prevented industries from operating at their full capacity level. �e power outages have obstructed the viability of the textile industry as exporters were unable to meet their

commitments. During July-March 2012-13, foreign exchange earnings through exports of synthetic textile fabrics and woolen industry showing a decline of 25.3% and 5.1% respectively as compared to last year. During the period under review even in quantity term also recorded a decline of 30% and 15.8% respectively.

Coupled with an ine�cient system and expensive fuel mix, power theft is another major issue faced by Pakistanis. It is interesting to note that annual revenue collection e�ciency was estimated to be around 87%; however that 13% of lost e�ciency has a �nancial impact of Rs 86bn which is equivalent to 41 days of furnace oil costs for thermal power plants. �e following �gure shows the percentage of bills that were uncollected in 2012. �e e�ciency of di�erent DISCOs is disproportionate in revenue collection. �is essentially leads to the inclusion of the cost of power theft in the power tari�, meaning that the honest payers also bear the cost of those that steal.

Power theft is not only committed by normal residents but the main defaulters are the government institutions themselves. �e government owns around 51% of the uncollected bills which amounts to Rs 118bn out of the uncollected revenue receipts of Rs 386bn. In my opinion, this the amount which causes the discrepancy between the amount of RS500.3bn to be injected to resolve the circular debt issue and �gure of Rs 872.41bn since the government has a proposal to o�set provisional dues via a �scal adjuster. Due to a growing economy, Pakistan’s energy needs have more than doubled in the past 15 years. Energy shortages have far devastating

e�ects on our economy. Not only does it cause civil disturbances on a small scale but it a�ects our GDP on a larger note. Injecting money into the chain will only resolve the issue on a temporary basis. �ese challenges require a multi-prong approach that would address energy shortages in the immediate future and help the country build longer term energy su�ciency.

�ere needs to be a shift away from thermal power to alternative sources of energy which are not only cheaper but also environmentally friendly. Pakistan has large untapped renewable resources such as water, sun and wind and recently the government has taken keen interest on the development of hydro power projects and Neelum Jhelum Hydroelectric Project is one of the many projects which the new government has started which will approximately add 5.15bn units of electricity annually. Moreover, an e�ective system of governance must be in place to curb theft, recuperate dues and enforce policies.

�e Importance of Asset Allocation in attaining Optimal Returns

By Yamna Hassan, Asst. Manager-Business DevelopmentLakson Investments

“Tis the part of a wise man to keep himself today for tomorrow, and not venture all his eggs in one basket.” – Miguel de Cervantes, Don Quixote de la Mancha, 1605.

�e afore-mentioned quote indicates that along with being a great writer, Cervantes would have also proved to be a wise investor.

Investment related decisions are preceded by de�ning a proper Asset Allocation plan. According to recent research, the Asset Allocation decision is responsible for 91.5 percent of the variation between returns on di�erent portfolios. Given the importance of Asset Allocation, it has attained a center stage in any investment decision.

Asset Allocation is mainly important for two de�nite reasons. �e �rst reason pertains to portfolio design; variation in portfolio designs can lead to some investment decisions being winners while the rest being losers, and it is believed that if a portfolio is thoughtfully constructed and contains an optimal mix of securities that perform di�erently from each other (i.e they have little correlation in between them), chances of this portfolio yielding a more stable return is higher. �is is because if some securities in a portfolio are inconsistent and volatile, other, more stable securities can nullify the inconsistency of the entire portfolio, hence stabilizing the yield pattern.

�e second reason pertains to the vision of the investor. Asset allocation allows an investor to �nancially plan for his long-term and short-term goals and avoid impulsive reactions. We will subsequently discuss this aspect of Asset Allocation.

We can divide the Asset Allocation decision into two simple steps as discussed below:

Step 1: Asset Allocation An Asset Allocation strategy can be devised based on the investor’s risk assessment, �nancial goals and return targets. It is the most fundamental step of an investment decision and involves determining an ideal mix of stocks, bonds, cash and other securities in a way such that the portfolio yields a return which best suits an investor’s need. �ere is always a downside of investing too much in bonds or cash as that might certify stable but lower returns. In the same way, too much investment in stocks might lead to portfolio volatility. �erefore, in order to meet your requirements, or keep pace with in�ation, you need to plan an ideal arrangement of securities for your portfolio.

Step 2: Diversi�cationWhile the �rst step bears upon the idea of portfolio construction, this step is linked to the proper dissemination of your assets in a way such that your portfolio is exposed to many di�erent segments of the market, some of which perform independently of the others. Proper diversi�cation of your portfolio can lead to higher and more stable returns.

As mentioned before, the e�ect of diversi�cation is most noticeable when instruments have very little interrelation between them. However, it was easier to build this sort of a portfolio previously than it is today. �is is because roughly over the past 10 years, �nancial markets have become increasingly interrelated and complex. Let us also not ignore the fact that during the 2008 �nancial trouble, most assets tended to perform similarly, leading us to believe in the proposition that most assets are conducive to a similar behavior in times of crisis and instability. �e �gure below shows ways of diversifying a portfolio and entering into newer and assorted mix of investment vehicles.

FIGURE 1:

Figure shows ways of diversifying a portfolio.

Institutions that do not pay requisite importance to the Asset Allocation decision might end up damaging their returns. Usually, institutions are advised to invest in a 60:40 ratio (Stocks: �xed income instruments) to remain on the safe side. Whereas, individuals are recommended to invest in an investment spectrum ranging from 100 percent stocks to 100 percent bonds depending on their separate variable characteristics. However, the Asset Allocation decision is dependent on several other factors and cannot be generalized for di�erent investors.

Following are a few, newer and e�cient ways that have now been developed and can be used for attaining optimal asset allocation:

Mean Variance Optimization

Mean Variance Optimization is a quantitative technique that can be used to calculate the trade-o� between maximum expected return and risk tolerance. �is technique has gained popularity over time because in recent times, the technique is applied on an asset class level as opposed to being applied only to portfolios of individual stocks previously.

�e development of Mean Variance Optimization has not only bene�tted institutional investors but has resulted in a breakthrough for retail brokerage houses as well, which, prior to this development were restricted on their advisory role to the investors. However, recently, they are proposing a greater degree of passive security and more thoughtful asset allocation recommendations to their investors. �is has become possible by using optimization and aiming to attain a favorable position with maximum expected return, minimal risk, or both.

Moreover, a few re�ned approaches taken from utility theory and behavioral economics can be deployed to develop polls or surveys that can authentically gauge an individual’s risk preferences.

Pension funds have also been familiarized with Optimization. Such funds take into account the reciprocity of both assets and liabilities and not only the assets unlike other funds. �e objective of Asset Allocation for these funds is to amplify the fund surplus i.e liabilities subtracted from assets for a stated degree of risk tolerance.

Tactical Asset AllocationTactical asset allocation is the process of adjusting a particular portfolio based on changes in the market value of assets contained in that portfolio. �e technique is quite dynamic and involves deviation from the strategic asset allocation when an investor’s short-term foresight is not aligned with his long term foresight used to develop a strategic asset allocation plan and precise short-term predictions on part of the investor can lead to better returns.

Pragmatically speaking, Tactical Asset Allocation models tend to recommend contrarian trades, that is, they recommend purchasing an asset as its current market value drops and vice versa. �us, tactical Asset Allocation involves perpetually arranging your portfolio based on your needs and changes in the market. One consequence of Tactical Asset Allocation is that by overweighting certain assets during certain times and underweighting others, the portfolio is riskier because of its reduced diversi�cation. �us, to

o�set this additional risk factor, this strategy would need to generate above market returns. �e notion, whether Tactical Asset Allocation Models have achieved this is still a matter of rumination and study but because the probable returns from successful Tactical Asset Allocation would be large, researchers will keep inspecting, and investors won’t cease to be on the look out for their discoveries.

Insured Asset Allocation�is strategy is similar to a portfolio insurance strategy and is a mirror image of the Tactical Asset Allocation strategy. With this strategy, a base portfolio parameter is �xed and the value of the portfolio is not allowed to fall below this base parameter. As long as the portfolio achieves a return above this parameter, you actively to try to increase the portfolio value as much as possible. If, however, the portfolio ever drops to below the base value, investment in risk-free securities enables the base value to become �xed.

�e main target audiences for this approach are risk-averse investors who desire a certain level of active portfolio management and also covet the protection of �xing a certi�ed minimum return below which the portfolio is not allowed to decline. For instance, this approach is best for an investor who has planned a nominal lifestyle for himself after retirement.

Asset Allocation & Uncertain Times�e importance of active portfolio management and wise asset allocation strategy has been reiterated enough. But at the brink of serious economic uncertainty, expectation for stock market returns is somewhat muted. �erefore, it is believed that in such a situation, a dynamic asset allocation plan should come into play for the advantage of certain clients.

Dynamic Asset Allocation uses a long term strategic Asset Allocation strategy as its foundation. Alternate investments can be added to the core portfolio for the sake of complementing it. It is even better, if these investments include segments which yield a higher return and bear little interdependence, so as to achieve a greater level of diversi�cation.

Besides, dynamic Asset Allocation strategies can also be accompanied by �exible investment strategies; tactical actions that are short-term in nature and aim to bank on perceived market opportunities. If 10-20% of your assets are allocated for such investments, your portfolio can be expected to react better in times of changing trends and conditions.

Asset allocation is evolving past a traditional “purchase and retain” dogma. Whilst this might not suit all clients, exercising a dynamic asset allocation plan can create a portfolio better able to handle uncertain market environments. Not to forget the fact that a solid strategic asset allocation plan remains the core strategy behind any tactical asset allocation strategy.

Asset Allocation & the local scenarioWith interest rates in Pakistan consistently hovering above 10 percent for the past �ve years, anyone would expect Pakistanis to be encouraged enough to save and reap bene�ts of higher returns. However, reality states that Pakistan actually stands out to re�ect one of the lowest savings in the region. Given the fact that majority of Pakistanis are not so keen on investing mainly because their expenditures on necessities do not leave any room for savings or so for other reasons, there is a chunk of people who are inclined in saving for a better future and lifestyle.

With growth of urban nuclear families, educated middle to upper middle class is inspirited to plan properly for a child’s education, health and future life. Reasons for investment in Pakistani society vary from a child’s education to his marriage, from being cushioned against the toils of post-retirement life to maternity expenditures. Young professionals may want to invest as a means to generate seed capital for their potential business idea or to live their dreams of traveling or wayfaring.

Reasons for investing are many. With di�erent individuals and di�erent investment objectives in mind, the asset allocation needs of these investors must be customized accordingly.

Asset Allocation & Financial PlanningOnce you are done with choosing your model for Asset Allocation, the �nal stage is to test this model by contextualizing it with a precise �nancial plan. It might be easy for an investor to choose which Asset Allocation plan will provide him with the best possible returns but the investor should also �gure out a way to determine that expected return and also estimate the trade-o� for that higher return potential.

A well-concocted �nancial plan will guide the investor out of this bewilderment. First, it will determine what level of projected investment return is necessary to allow you to meet your lifestyle goals, which can help lead you to the right mix of stocks, bonds and cash. Second, the plan will evaluate the impact of the portfolio risk associated with that mix.

Traditionally, �nancial planning models focused on expected return and neglected the variability of outcomes that is associated with increased volatility. With the introduction of probability-based planning tools, the investor can foresee the e�ect of risk on their investment portfolios, they can vary the amount of risk and can study their corresponding returns. For example a portfolio bearing higher risk may yield a higher return but it also has a probability of falling far short beneath their targets.

When using an asset allocation approach to designing a portfolio, it is important to not focus just on the expected return of that portfolio. �e risk associated with an increasing, or decreasing, portfolio return is just as important to the success of an investment strategy.

Asset Allocation & �e Future

Most forecasters fall into two divisions. Forecasters in the �rst division are eager to predict that the future will closely mirror the recent past. �eir ideals are those generals who are always preparing to �ght the last war. Forecasters in the second division rely heavily

upon the adage that the only constant is change itself. Proponents of this school of thought usually don’t know what to expect, but are quite sure it will be nothing like anything we’ve seen before. �ese individuals do realize the problems of delineating the future of this area.

We should view the future of asset allocation through lenses borrowed from both divisions. �at is, certain aspects of asset allocation today will continue to be recognizable for the years to come. To be more precise, the goals and importance of asset allocation will not change, but the mechanisms by which investors seek to achieve those goals will be new.

�e goal of the asset allocation decision, was, is, and will be to select a combination of assets that will generate a return su�ciently high and safe so as to o�set some future liability. It is also safe to say that asset allocation decisions will have a continuing large role in explaining portfolio returns.

Industry-wide - Net Assets (PKR million)

Net Assets - Open End Funds (PKR million)

Net Assets - Closed End Funds (PKR million)

Net Assets - Pension Schemes (PKR million)

Sales (PKR million) Redemptions (PKR million) Net Sales (PKR million)

Open End Funds' Return** Closed End Funds' Return**

General Pension Schemes Return**

Islamic Pension Schemes Return**

Meeting of the Board of Directors

In order to ensure that the Board of Directors ful�ls the duties and responsibilities conferred by the members of MUFAP, the Board conducts meetings on a regular basis to make immediate and prudent decisions. �e Board of Directors held three meetings during the quarter Jul-Sep 2013.

�e activities undertaken by Board are as follows:

Proposed amendments in the de�nition of Related Parties in Restricted List of Code for Distributors

�e Board deliberated in detail on the matter of proposed

amendments in the de�nition of Related Parties in the Restricted List of Code for Distributors. After careful consideration of the impacts that the amendments may entail, it was decided that all individuals (namely employees, directors, sponsors of the RSPs) should be excluded from the de�nition of Related Parties. �e revised de�nition is applicable to all new investments brought in on or after July 16, 2013 and is not applicable to existing investments made by or before July 15, 2013.

Valuation of GOP Ijarah Sukuk

�e Board recommended that AMCs should use ‘PKISRV’ quoted on Reuters as the relevant price to value the GOP Ijarah Sukuks to determine net assets of CIS under their management, which the SECP approved in September.

Meetings of the Committees

MUFAP Committees held many discussions to make important, well planned proposals on behalf of industry. �e following table presents the number of meetings held during the quarter Jul-Sep’13.

Technical Committee - VPS

�e VPS – Technical Committee held extensive discussions to discuss the dissimilar taxation and operational practices being adopted by di�erent VPS Managers. �e VPS Committee constituted a Sub-Committee, involving a representative from each VPS Manager, to draw up recommendations for the tax treatment. �e Committee also engaged Senior Tax expert, Mr. Shabbar Zaidi on the matter and has requested for clari�cation from FBR on one of the matters.

Meeting with NCCPL A meeting was held between operations sta� of AMCs and NCCPL representatives on July 22, 2013 to evaluate the mechanics and possible data sharing from AMCs to NCCPL for netting of CGT. It was decided that NCCPL would develop a concept paper covering brief mechanism of centralized CGT collection to AMCs for their review and comments.

EVENTS02

page 3 of 24 mufap quarterly newsletter

Elections to elect Directors/Executive Committee Members of MUFAP for the year 2013 / 2014

As required under the Trade Organizations Rules, 2007, MUFAP is required to hold its elections each year to elect Directors against the vacancies arising on account of completion of two-year tenure of some Directors. Board members are elected for a two-year term.

�e retiring Directors on the completion of their two year tenure on September 30, 2013 are: 1. Mr. Adnan Siddiqui (Resigned August-2013)2. Mr. Amer Maqbool 3. Mr. Imran Azim 4. Mr. Mir Muhammad Ali 5. Mr. Nihal Cassim

�e continuing Directors of MUFAP for the year 2013/ 2014 are: 1. Dr. Amjad Waheed 2. Mr. Imran Motiwala 3. Mr. Mir Adil Rashid 4. Mr. Rashid Mansur 5. Ms Maheen Rahman6. Ms Hina Ghazanfar (on reserved seat for women)

In addition, Mr. Rehan N. Shaikh will serve on the Board as provided under Rule 23(5)(d) of the Trade Organization Rules, 2007. At the Extra Ordinary General Meeting on September 26, 2013, MUFAP announced the appointment, by virtue of elections, of the following directors to the Board, namely:1. Mr. Farid Ahmed Khan 2. Mr. M. Habib-ur-Rahman 3. Mr. Mohammad Shoaib 4. Mr. Yasir Qadri 5. Mr. Enamullah Khan

New Board of Directors

�e new Board of Directors of MUFAP at its �rst meeting held on October 1, 2013 elected Dr. Amjad Waheed as Chairman, Mr. Mohammad Shoaib as Senior Vice Chairman and Mr. Farid Ahmed Khan as Vice Chairman MUFAP for the year 2013-2014.�e Board of Directors of MUFAP for the 2013-14 term is as follows:

1) Dr. Amjad Waheed - Chairman; 2) Mr. Mohammad Shoaib - Senior Vice Chairman; 3) Mr. Farid Ahmed Khan - Vice Chairman;4) Mr. Rehan N. Shaikh;5) Mr. Rashid Mansur;6) Mr. M. Habib-ur-Rahman;7) Mr. Yasir Qadri8) Mr. Imran Motiwala;9) Ms Hina Ghazanfar;10) Ms Maheen Rahman;11) Mr. Mir Adil Rashid;12) Mr. Enamullah Khan; and13) Ms Mashmooma Z. Majeed - Chief Executive

Chairman Dr. Amjad Waheed, CFA

Dr. Amjad Waheed holds a doctorate in Investments & Finance from Southern Illinois University, USA and is also a Chartered Financial Analyst. For the last 7 years he is CEO of NBP Fullerton Asset Management Ltd (NAFA), which is a subsidiary of National Bank of Pakistan, with Fullerton Fund Management Company of Singapore as the other joint venture partner. NAFA is presently managing fourteen mutual funds and several portfolios with about Rs 45 billion invested in these funds. NAFA is among the largest Asset Management Companies in Pakistan today.

Before joining NAFA, Dr. Waheed was Head of Equity Mutual Funds & Portfolios at Riyad Bank, Saudi Arabia, for about 5 years where he was managing US$ 7.5 billion invested in 22 mutual funds. Prior to that Dr. Waheed was Head of Investments at NIT,

and Chief Operation O�cer of FC-ABN AMRO Equities for several years. Before moving back to Pakistan, Dr. Waheed was Assistant Professor of Finance at Tennessee State University, USA and has published several articles in top journals of the world such as Journal of Banking & Finance and Financial and Financial Management.Dr. Waheed has served on the Board of various companies including Siemens, Nishat Mills, PICIC, Askari Bank, Millat Tractors, Fauji Fertilizer, Pakitstan Tobacco Company, Treet Corporation, Gul Ahmed Textile, Bata Pakistan.

Senior Vice Chairman Mr. Mohammad Shoaib, CFA

Mr. Mohammad Shoaib, CFA is the Chief Executive of Al Meezan Investment Management Ltd. He has played a key role in setting up the company and has been associated with it since inception. He is a highly quali�ed and seasoned professional with 23 years experience in capital markets. He has to his credit many accolades and awards, the most signi�cant of them being the "Most In�uential CFA charter holder" awarded by CFA Institute in 2006.

Mr. Shoaib holds an MBA degree from IBA besides being a Chartered Financial Analyst (CFA) charter holder. He has to his credit the honor of being the founder and �rst president of CFA Association of Pakistan, a member society of CFA Institute. He has been active participant in the Islamic �nance and asset management for the last 10 years. In this respect, he has also actively participated as a speaker and panelist in various international and domestic seminars, conferences and workshops.

Mr. Shoaib has also served in voluntary capacity at di�erent domestic and international institutions. He has served as a Director on the Board of Karachi Stock Exchange and Vice Chairman on the Board of Mutual Funds Association of Pakistan. He is currently serving on the Board of Directors of Pakistan Institute of Corporate Governance and Institute of Capital Markets. He has also served on various global and regional committees of CFA Institute including Asia Paci�c Advocacy Committee, Global Task Force on Corporate

Governance, GIPS Regional Council and Asset Manager Code Advisory Committee. He has also had the honour to represent over 16,000 charterholders in Asia Paci�c Region as their representative on the Presidents' Council of CFA Institute.

Vice Chairman Mr. Farid Ahmed Khan, CFA

Mr. Farid Ahmed Khan, CFA is the CEO of ABL Asset Management. He has been involved with capital markets for over 18 years and has a broad-based, global experience with bulge bracket �rms in Asset Management, Investment Banking, Investment Research and Sales, Business Development & International Project Finance. He joined ABL AMC from Credit Suisse, where he was the Country Manager of Credit Suisse Pakistan. Prior to that, he worked for MCB, initially as Head of Investment Banking Group and later as the CEO of MCB Asset Management. Mr. Khan has extensive experience outside Pakistan, having worked at Morgan Stanley, ING Barings Securities and CLSA Emerging Markets in Kuala Lumpur, London and Istanbul in a variety of senior positions. He holds an MBA in Finance from IBA, Karachi and got his CFA quali�cation in 1998.

New Committees

MUFAP Board elected its Professional Committees, Chairperson and Vice-Chairperson of each Committee for the year 2013-14. �e list of Committees, their Chairperson and Vice-Chairperson is as follows:

SECP forms Shariah Advisory Board

SECP constituted a Shariah Advisory Board (SAB) to harmonize the Shariah interpretations and strengthen the regulatory and supervisory oversight of Islamic �nancial institutions (IFIs) and Islamic capital markets (ICMs) in Pakistan. It will also advise the Commission on the Shariah-compliance aspects of various products launched and or the processes being adopted by the regulated entities. It will also provide guidance for issuance of new laws, rules and regulations for e�ective monitoring and supervision of Islamic Financial Products and to suggest ways and means for development of IFIs and ICMs in the country.

Money Market

To meet the challenges of maintaining stability in the foreign exchange market and controlling high growth in money supply, SBP decided to gradually decrease the outstanding amount of liquidity injections. Since the beginning of FY14, interbank market liquidity conditions have considerably eased primarily due to substantial increase in the pace of government borrowing from the SBP. In fact, SBP mopped up Rs. 1,556.45 billion and injected Rs. 630.70 billion during Q1-FY14.

In terms of controlling growth in money supply, however, SBP’s e�orts of curtailing liquidity injections did not experience much success as these were o�set by an increase in direct �scal borrowings from the SBP. �e increase of Rs. 1,446 billion in budgetary borrowings from the banking system during FY13 was almost Rs. 1 trillion higher than the original target and was even higher than the total expansion in M2. Deviation of this scale has signi�cantly constrained e�ective monetary management, disrupted �nancial intermediation in the economy, and has led to a sharp increase in domestic debt. Showing a growth of 24.6% in FY13, the stock of government’s domestic debt has reached Rs. 9.5 trillion as of end-June 2013. Similarly, a considerable increase in public debt to revenue ratio re�ects weak repayment capacity of the government. �e acceleration in �scal borrowings from the SBP during H2-FY13, Rs. 714 billion, and Q1-FY14 up till 30th August 2013, Rs. 547 billion, is particularly worrisome. �e inability to raise the tax-GDP ratio is the fundamental source of large �scal de�cits, high borrowings, and rising debt. Although there has been a consistent gap between Federal Board of Revenue’s (FBR) budget targets and actual outcomes in the last few years, the gap of Rs. 445 billion in FY13 was exceptionally high. In fact, this is more than the cumulative shortfall of Rs. 349 billion during the last �ve years.

On the external front, stress in the external account has gradually increased with every passing month of 2013 due to shrinking net capital and �nancial �ows and high loan repayments to the IMF.

While the former was only $517 million or 0.2 percent of GDP, the latter increased to $3 billion in FY13. As a result, despite reduction in the external current account de�cit by about half, to $2.3 billion or 1.0 percent of GDP, the SBP’s foreign exchange reserves declined to $6 billion by end-June 2013 from $10.8 billion at the beginning of FY13. �ese stand at $5.2 billion as on 6th September, 2013 after receiving $544.5 million under the new IMF program. Despite pressures and speculations of a drop in the value of the Pak rupee the foreign exchange market has largely remained stable in FY13. However, since the beginning of FY14 the rupee has depreciated by 5.0 percent as of 12th September 2013.

�e year-on-year CPI based in�ation rate was recorded at 8.3% in July 2013, then to 8.55% in August 2013, however dipped down to 7.39% in September 2013.�ough CPI In�ation remained within single digit, however, it witnessed an upward trend as it increased to 7.39 percent in September 2013 compared to 5.85 percent in June 2013 and 6.6 percent in March 2013. �e impact of upward adjustments in energy prices and an increase in the GST together with the removal of certain exemptions put pressure on in�ation.In order to counter in�ationary expectations, SBP raised the discount rate by 50 basis points to 9.5 percent with e�ect from September 16, 2013.

Movement in KIBOR

Treasury Bills:

A total of 6 T-bill auctions were held by SBP during the quarter in which a total amount of Rs. 1,348.88 billion was raised. Since the beginning of FY14, market’s preference for shorter tenor T-Bills has increased as about 83% of the bank’s total o�ers in recent T-Bill auctions were concentrated in 3-month bills.

T-Bill Auctions (Amount in PKR billion; rates in %)

Pakistan Investment Bonds

�e accepted amount in the PIB auctions during Q1-FY14 fell short of the target .

PIB Auctions (Yields in % and Face Value in PKR billion)

Debt Market

�e table below summarizes the TOP 15 trades of TFCs/Sukuk on the basis of Face value during the Q1-FY14:

Equity Market

KSE-100 index made a strong start to the �scal year 2014, as the index gained 826.99 points, or 3.94%, to stand at 21,832.68 points during the �rst three months of FY14. During the period, index struggled to cross the 23,000 points level and made a high of 23,776.22 on a closing basis. Stock market began the �rst month of �scal year 2014 with a strong rally, overcoming jitters stemming from treason proceedings against former president General (retd) Pervez Musharraf and slowdown in global markets. �e government’s successful negotiations with IMF for a $5.3 billion loan, resolution of circular debt by issuing treasury bills and bonds and anticipation of strong corporate earnings for the quarter ended June 30 buoyed investors’ con�dence as the share prices appreciated across the board and index posted a gain of 2.307.09 points, or 10.98% to settle at 23,312.78 level in July.

After posting strong gain in July, KSE-100 faltered in August as investors continued to worry about ever-escalating Syrian crisis and tumbling regional markets. Stock market further pressured by a slew of disappointing and less-than-expected corporate earnings, falling foreign exchange reserves and high in�ation �gures for July. Moreover, concerns on a possible interest rate hike in the upcoming monetary policy announcement, potential spike in oil prices, decline in cement prices due to breakdown in price discipline, heavy foreign net selling and persistent depreciation in the rupee dragged the KSE-100 index down 1,151.93 points, or 4.94%, to 22,160.85 in August. �e index showed a mixed performance in September. In the �rst half of the month, the approval of the $6.64 billion loan package by IMF, the plans to privatize Pakistan International Airlines, strong foreign in�ows and the release of the IMF’s �rst tranche worth of $550 million helped lift the index to 23,639.97 on a closing basis. However, sentiment reversed towards the end of the month after the central bank’s decision to increase the rate of return on savings deposits to 6.5%. Moreover, steep decline in the value of Pakistani

rupee against the US dollar, constant repayments to IMF, a 50 basis points increase in the discount rate and heavy foreign net selling dragged the KSE-100 index down 328.17 points, or 1.48%, to 21,832.68 in September.

Mutual Fund Market:

�e total net assets decreased to Rs. 359.947 billion in the �rst quarter of FY14 versus Rs. 361.668 billion for the Q4FY13, a reduction of 0.48% quarter over quarter. �e open-end funds went up by 0.71% to Rs. 327.594 billion, pension funds went up by 9.67% to Rs. 5.288 billion and closed-end decreased by 14.23% to Rs. 27.064 billion.

Funds launched during the quarter Q1-FY14

Funds matured during the quarter Q1-FY14

Funds with changed structure/other features Energy Crisis: Causes and ImpactsBy Sara Aquil Walji, Research Analyst, HBL Asset Management

Energy is the cornerstone for any economy’s development and growth. �e current situation has worsened in Pakistan over the past few years and likely to continue if measures are not taken to mitigate the issue on a long term basis. �e gap between demand and supply has reached 6000MW resulting in scheduled and unscheduled load shedding, negatively a�ecting our industrial sector, hurting our exports and has even hampered the GDP growth rate by 2%. Subsidies to the power sector have steadily been increasing and form the biggest part of total subsidies amounting to around Rs 349,287mn (95% of the total subsidies) in FY 2012-13. �e new government has allocated Rs. 220,100mn to the power sector for the FY 2013-14 which is 91.5% of the total subsidy budget. (Source: Annual budget 2014) With recent emphasis on matters to resolve energy crisis and develop renewable and non-renewable sources of energy, it is worthwhile to note why energy crisis became as severe as it is now.

�e root of this crisis is that Pakistan’s electricity generation mix is highly skewed towards the most expensive kinds .�ere appears to be an almost inverse relationship between the sources of electricity that are most expensive to set and those that are most expensive to run. �e following chart depicts this relationship:

Source: Express Tribune �is highlights the fact why there is a heavy concentration toward

the construction of thermal power plants since they are relatively cheaper to build than hydropower plants. �e government has not dedicated enough funds for the development of hydropower projects which are the most expensive to build but cheapest to run on a per unit basis.Pakistan’s electricity generation is highly dependent on imported oil as almost $14.5bn worth of oil is imported each year which accounts for around 35% of electricity generation. Comparing Pakistan with India and Bangladesh reveals that Pakistan relies heavily on oil for electricity generation where as India uses coal, a relatively cheaper source for electricity generation and Bangladesh on the other hand allocates 73% of its electricity generation to gas.

Source: Economic Survey report for 2012-2013

With a prominent shift in recent years towards the use of thermal power stations instead of hydropower sources and a reduction in electricity generation from coal, Pakistan’s electricity costs ends up being more expensive than it needs to be and since the government has adopted a policy of uniform tari� across the country the Tari� Di�erential Subsidy owed by the Government of Pakistan on an annual basis has increased substantially.

Circular debt is another major concern hampering the growth of Pakistan’s economy. In simple words circular debt is the amount of

cash shortfall within the Central Power Purchasing Agency (CPPA) that it cannot pay to power supply companies. �is shortfall is the result of (a) the di�erence between the actual cost of providing electricity in relation to revenues realized by the power distribution companies (DISCOs) from sales to customers plus subsidies; and (b) insu�cient payments by the DISCOs to CPPA out of realized revenue as they give priority to their own cash �ow needs. (Source: USAID Report March 2103)

�is revenue shortfall cascades through the entire energy supply chain, from electricity generators to fuel suppliers, re�ners, and producers; resulting in a shortage of fuel supply to the public sector thermal generating companies (GENCOs), a reduction in power generated by Independent Power Producers (IPPs), and an increases in load shedding.

According to the report published by the USAID in March 2013, circular debt amounts to Rs872bn which is actually 4% of GDP. According to Pakistan’s Economic Survey report for 2012-2013, there is a strong relationship between GDP growth rate and electricity growth as shown in the �gure below. It can be easily deduced that periods of low or negative electricity growth have witnessed low GDP growth rate, while periods where electricity growth picked up there is increase in GDP growth rate.

�is comes as no surprise, since industrial output is heavily dependent on the amount of electricity delivered to them. Continuous power breakdowns prevented industries from operating at their full capacity level. �e power outages have obstructed the viability of the textile industry as exporters were unable to meet their

commitments. During July-March 2012-13, foreign exchange earnings through exports of synthetic textile fabrics and woolen industry showing a decline of 25.3% and 5.1% respectively as compared to last year. During the period under review even in quantity term also recorded a decline of 30% and 15.8% respectively.

Coupled with an ine�cient system and expensive fuel mix, power theft is another major issue faced by Pakistanis. It is interesting to note that annual revenue collection e�ciency was estimated to be around 87%; however that 13% of lost e�ciency has a �nancial impact of Rs 86bn which is equivalent to 41 days of furnace oil costs for thermal power plants. �e following �gure shows the percentage of bills that were uncollected in 2012. �e e�ciency of di�erent DISCOs is disproportionate in revenue collection. �is essentially leads to the inclusion of the cost of power theft in the power tari�, meaning that the honest payers also bear the cost of those that steal.

Power theft is not only committed by normal residents but the main defaulters are the government institutions themselves. �e government owns around 51% of the uncollected bills which amounts to Rs 118bn out of the uncollected revenue receipts of Rs 386bn. In my opinion, this the amount which causes the discrepancy between the amount of RS500.3bn to be injected to resolve the circular debt issue and �gure of Rs 872.41bn since the government has a proposal to o�set provisional dues via a �scal adjuster. Due to a growing economy, Pakistan’s energy needs have more than doubled in the past 15 years. Energy shortages have far devastating

e�ects on our economy. Not only does it cause civil disturbances on a small scale but it a�ects our GDP on a larger note. Injecting money into the chain will only resolve the issue on a temporary basis. �ese challenges require a multi-prong approach that would address energy shortages in the immediate future and help the country build longer term energy su�ciency.

�ere needs to be a shift away from thermal power to alternative sources of energy which are not only cheaper but also environmentally friendly. Pakistan has large untapped renewable resources such as water, sun and wind and recently the government has taken keen interest on the development of hydro power projects and Neelum Jhelum Hydroelectric Project is one of the many projects which the new government has started which will approximately add 5.15bn units of electricity annually. Moreover, an e�ective system of governance must be in place to curb theft, recuperate dues and enforce policies.

�e Importance of Asset Allocation in attaining Optimal Returns

By Yamna Hassan, Asst. Manager-Business DevelopmentLakson Investments

“Tis the part of a wise man to keep himself today for tomorrow, and not venture all his eggs in one basket.” – Miguel de Cervantes, Don Quixote de la Mancha, 1605.

�e afore-mentioned quote indicates that along with being a great writer, Cervantes would have also proved to be a wise investor.

Investment related decisions are preceded by de�ning a proper Asset Allocation plan. According to recent research, the Asset Allocation decision is responsible for 91.5 percent of the variation between returns on di�erent portfolios. Given the importance of Asset Allocation, it has attained a center stage in any investment decision.

Asset Allocation is mainly important for two de�nite reasons. �e �rst reason pertains to portfolio design; variation in portfolio designs can lead to some investment decisions being winners while the rest being losers, and it is believed that if a portfolio is thoughtfully constructed and contains an optimal mix of securities that perform di�erently from each other (i.e they have little correlation in between them), chances of this portfolio yielding a more stable return is higher. �is is because if some securities in a portfolio are inconsistent and volatile, other, more stable securities can nullify the inconsistency of the entire portfolio, hence stabilizing the yield pattern.

�e second reason pertains to the vision of the investor. Asset allocation allows an investor to �nancially plan for his long-term and short-term goals and avoid impulsive reactions. We will subsequently discuss this aspect of Asset Allocation.

We can divide the Asset Allocation decision into two simple steps as discussed below:

Step 1: Asset Allocation An Asset Allocation strategy can be devised based on the investor’s risk assessment, �nancial goals and return targets. It is the most fundamental step of an investment decision and involves determining an ideal mix of stocks, bonds, cash and other securities in a way such that the portfolio yields a return which best suits an investor’s need. �ere is always a downside of investing too much in bonds or cash as that might certify stable but lower returns. In the same way, too much investment in stocks might lead to portfolio volatility. �erefore, in order to meet your requirements, or keep pace with in�ation, you need to plan an ideal arrangement of securities for your portfolio.

Step 2: Diversi�cationWhile the �rst step bears upon the idea of portfolio construction, this step is linked to the proper dissemination of your assets in a way such that your portfolio is exposed to many di�erent segments of the market, some of which perform independently of the others. Proper diversi�cation of your portfolio can lead to higher and more stable returns.

As mentioned before, the e�ect of diversi�cation is most noticeable when instruments have very little interrelation between them. However, it was easier to build this sort of a portfolio previously than it is today. �is is because roughly over the past 10 years, �nancial markets have become increasingly interrelated and complex. Let us also not ignore the fact that during the 2008 �nancial trouble, most assets tended to perform similarly, leading us to believe in the proposition that most assets are conducive to a similar behavior in times of crisis and instability. �e �gure below shows ways of diversifying a portfolio and entering into newer and assorted mix of investment vehicles.

FIGURE 1:

Figure shows ways of diversifying a portfolio.

Institutions that do not pay requisite importance to the Asset Allocation decision might end up damaging their returns. Usually, institutions are advised to invest in a 60:40 ratio (Stocks: �xed income instruments) to remain on the safe side. Whereas, individuals are recommended to invest in an investment spectrum ranging from 100 percent stocks to 100 percent bonds depending on their separate variable characteristics. However, the Asset Allocation decision is dependent on several other factors and cannot be generalized for di�erent investors.

Following are a few, newer and e�cient ways that have now been developed and can be used for attaining optimal asset allocation:

Mean Variance Optimization

Mean Variance Optimization is a quantitative technique that can be used to calculate the trade-o� between maximum expected return and risk tolerance. �is technique has gained popularity over time because in recent times, the technique is applied on an asset class level as opposed to being applied only to portfolios of individual stocks previously.

�e development of Mean Variance Optimization has not only bene�tted institutional investors but has resulted in a breakthrough for retail brokerage houses as well, which, prior to this development were restricted on their advisory role to the investors. However, recently, they are proposing a greater degree of passive security and more thoughtful asset allocation recommendations to their investors. �is has become possible by using optimization and aiming to attain a favorable position with maximum expected return, minimal risk, or both.

Moreover, a few re�ned approaches taken from utility theory and behavioral economics can be deployed to develop polls or surveys that can authentically gauge an individual’s risk preferences.

Pension funds have also been familiarized with Optimization. Such funds take into account the reciprocity of both assets and liabilities and not only the assets unlike other funds. �e objective of Asset Allocation for these funds is to amplify the fund surplus i.e liabilities subtracted from assets for a stated degree of risk tolerance.

Tactical Asset AllocationTactical asset allocation is the process of adjusting a particular portfolio based on changes in the market value of assets contained in that portfolio. �e technique is quite dynamic and involves deviation from the strategic asset allocation when an investor’s short-term foresight is not aligned with his long term foresight used to develop a strategic asset allocation plan and precise short-term predictions on part of the investor can lead to better returns.

Pragmatically speaking, Tactical Asset Allocation models tend to recommend contrarian trades, that is, they recommend purchasing an asset as its current market value drops and vice versa. �us, tactical Asset Allocation involves perpetually arranging your portfolio based on your needs and changes in the market. One consequence of Tactical Asset Allocation is that by overweighting certain assets during certain times and underweighting others, the portfolio is riskier because of its reduced diversi�cation. �us, to

o�set this additional risk factor, this strategy would need to generate above market returns. �e notion, whether Tactical Asset Allocation Models have achieved this is still a matter of rumination and study but because the probable returns from successful Tactical Asset Allocation would be large, researchers will keep inspecting, and investors won’t cease to be on the look out for their discoveries.

Insured Asset Allocation�is strategy is similar to a portfolio insurance strategy and is a mirror image of the Tactical Asset Allocation strategy. With this strategy, a base portfolio parameter is �xed and the value of the portfolio is not allowed to fall below this base parameter. As long as the portfolio achieves a return above this parameter, you actively to try to increase the portfolio value as much as possible. If, however, the portfolio ever drops to below the base value, investment in risk-free securities enables the base value to become �xed.

�e main target audiences for this approach are risk-averse investors who desire a certain level of active portfolio management and also covet the protection of �xing a certi�ed minimum return below which the portfolio is not allowed to decline. For instance, this approach is best for an investor who has planned a nominal lifestyle for himself after retirement.

Asset Allocation & Uncertain Times�e importance of active portfolio management and wise asset allocation strategy has been reiterated enough. But at the brink of serious economic uncertainty, expectation for stock market returns is somewhat muted. �erefore, it is believed that in such a situation, a dynamic asset allocation plan should come into play for the advantage of certain clients.

Dynamic Asset Allocation uses a long term strategic Asset Allocation strategy as its foundation. Alternate investments can be added to the core portfolio for the sake of complementing it. It is even better, if these investments include segments which yield a higher return and bear little interdependence, so as to achieve a greater level of diversi�cation.

Besides, dynamic Asset Allocation strategies can also be accompanied by �exible investment strategies; tactical actions that are short-term in nature and aim to bank on perceived market opportunities. If 10-20% of your assets are allocated for such investments, your portfolio can be expected to react better in times of changing trends and conditions.

Asset allocation is evolving past a traditional “purchase and retain” dogma. Whilst this might not suit all clients, exercising a dynamic asset allocation plan can create a portfolio better able to handle uncertain market environments. Not to forget the fact that a solid strategic asset allocation plan remains the core strategy behind any tactical asset allocation strategy.

Asset Allocation & the local scenarioWith interest rates in Pakistan consistently hovering above 10 percent for the past �ve years, anyone would expect Pakistanis to be encouraged enough to save and reap bene�ts of higher returns. However, reality states that Pakistan actually stands out to re�ect one of the lowest savings in the region. Given the fact that majority of Pakistanis are not so keen on investing mainly because their expenditures on necessities do not leave any room for savings or so for other reasons, there is a chunk of people who are inclined in saving for a better future and lifestyle.

With growth of urban nuclear families, educated middle to upper middle class is inspirited to plan properly for a child’s education, health and future life. Reasons for investment in Pakistani society vary from a child’s education to his marriage, from being cushioned against the toils of post-retirement life to maternity expenditures. Young professionals may want to invest as a means to generate seed capital for their potential business idea or to live their dreams of traveling or wayfaring.

Reasons for investing are many. With di�erent individuals and di�erent investment objectives in mind, the asset allocation needs of these investors must be customized accordingly.

Asset Allocation & Financial PlanningOnce you are done with choosing your model for Asset Allocation, the �nal stage is to test this model by contextualizing it with a precise �nancial plan. It might be easy for an investor to choose which Asset Allocation plan will provide him with the best possible returns but the investor should also �gure out a way to determine that expected return and also estimate the trade-o� for that higher return potential.

A well-concocted �nancial plan will guide the investor out of this bewilderment. First, it will determine what level of projected investment return is necessary to allow you to meet your lifestyle goals, which can help lead you to the right mix of stocks, bonds and cash. Second, the plan will evaluate the impact of the portfolio risk associated with that mix.

Traditionally, �nancial planning models focused on expected return and neglected the variability of outcomes that is associated with increased volatility. With the introduction of probability-based planning tools, the investor can foresee the e�ect of risk on their investment portfolios, they can vary the amount of risk and can study their corresponding returns. For example a portfolio bearing higher risk may yield a higher return but it also has a probability of falling far short beneath their targets.

When using an asset allocation approach to designing a portfolio, it is important to not focus just on the expected return of that portfolio. �e risk associated with an increasing, or decreasing, portfolio return is just as important to the success of an investment strategy.

Asset Allocation & �e Future

Most forecasters fall into two divisions. Forecasters in the �rst division are eager to predict that the future will closely mirror the recent past. �eir ideals are those generals who are always preparing to �ght the last war. Forecasters in the second division rely heavily

upon the adage that the only constant is change itself. Proponents of this school of thought usually don’t know what to expect, but are quite sure it will be nothing like anything we’ve seen before. �ese individuals do realize the problems of delineating the future of this area.

We should view the future of asset allocation through lenses borrowed from both divisions. �at is, certain aspects of asset allocation today will continue to be recognizable for the years to come. To be more precise, the goals and importance of asset allocation will not change, but the mechanisms by which investors seek to achieve those goals will be new.

�e goal of the asset allocation decision, was, is, and will be to select a combination of assets that will generate a return su�ciently high and safe so as to o�set some future liability. It is also safe to say that asset allocation decisions will have a continuing large role in explaining portfolio returns.

Industry-wide - Net Assets (PKR million)

Net Assets - Open End Funds (PKR million)

Net Assets - Closed End Funds (PKR million)

Net Assets - Pension Schemes (PKR million)

Sales (PKR million) Redemptions (PKR million) Net Sales (PKR million)

Open End Funds' Return** Closed End Funds' Return**

General Pension Schemes Return**

Islamic Pension Schemes Return**

Meeting of the Board of Directors

In order to ensure that the Board of Directors ful�ls the duties and responsibilities conferred by the members of MUFAP, the Board conducts meetings on a regular basis to make immediate and prudent decisions. �e Board of Directors held three meetings during the quarter Jul-Sep 2013.

�e activities undertaken by Board are as follows:

Proposed amendments in the de�nition of Related Parties in Restricted List of Code for Distributors

�e Board deliberated in detail on the matter of proposed

amendments in the de�nition of Related Parties in the Restricted List of Code for Distributors. After careful consideration of the impacts that the amendments may entail, it was decided that all individuals (namely employees, directors, sponsors of the RSPs) should be excluded from the de�nition of Related Parties. �e revised de�nition is applicable to all new investments brought in on or after July 16, 2013 and is not applicable to existing investments made by or before July 15, 2013.

Valuation of GOP Ijarah Sukuk

�e Board recommended that AMCs should use ‘PKISRV’ quoted on Reuters as the relevant price to value the GOP Ijarah Sukuks to determine net assets of CIS under their management, which the SECP approved in September.

Meetings of the Committees

MUFAP Committees held many discussions to make important, well planned proposals on behalf of industry. �e following table presents the number of meetings held during the quarter Jul-Sep’13.

Technical Committee - VPS

�e VPS – Technical Committee held extensive discussions to discuss the dissimilar taxation and operational practices being adopted by di�erent VPS Managers. �e VPS Committee constituted a Sub-Committee, involving a representative from each VPS Manager, to draw up recommendations for the tax treatment. �e Committee also engaged Senior Tax expert, Mr. Shabbar Zaidi on the matter and has requested for clari�cation from FBR on one of the matters.

Meeting with NCCPL A meeting was held between operations sta� of AMCs and NCCPL representatives on July 22, 2013 to evaluate the mechanics and possible data sharing from AMCs to NCCPL for netting of CGT. It was decided that NCCPL would develop a concept paper covering brief mechanism of centralized CGT collection to AMCs for their review and comments.

Elections to elect Directors/Executive Committee Members of MUFAP for the year 2013 / 2014

As required under the Trade Organizations Rules, 2007, MUFAP is required to hold its elections each year to elect Directors against the vacancies arising on account of completion of two-year tenure of some Directors. Board members are elected for a two-year term.

�e retiring Directors on the completion of their two year tenure on September 30, 2013 are: 1. Mr. Adnan Siddiqui (Resigned August-2013)2. Mr. Amer Maqbool 3. Mr. Imran Azim 4. Mr. Mir Muhammad Ali 5. Mr. Nihal Cassim

�e continuing Directors of MUFAP for the year 2013/ 2014 are: 1. Dr. Amjad Waheed 2. Mr. Imran Motiwala 3. Mr. Mir Adil Rashid 4. Mr. Rashid Mansur 5. Ms Maheen Rahman6. Ms Hina Ghazanfar (on reserved seat for women)

In addition, Mr. Rehan N. Shaikh will serve on the Board as provided under Rule 23(5)(d) of the Trade Organization Rules, 2007. At the Extra Ordinary General Meeting on September 26, 2013, MUFAP announced the appointment, by virtue of elections, of the following directors to the Board, namely:1. Mr. Farid Ahmed Khan 2. Mr. M. Habib-ur-Rahman 3. Mr. Mohammad Shoaib 4. Mr. Yasir Qadri 5. Mr. Enamullah Khan

New Board of Directors

�e new Board of Directors of MUFAP at its �rst meeting held on October 1, 2013 elected Dr. Amjad Waheed as Chairman, Mr. Mohammad Shoaib as Senior Vice Chairman and Mr. Farid Ahmed Khan as Vice Chairman MUFAP for the year 2013-2014.�e Board of Directors of MUFAP for the 2013-14 term is as follows:

1) Dr. Amjad Waheed - Chairman; 2) Mr. Mohammad Shoaib - Senior Vice Chairman; 3) Mr. Farid Ahmed Khan - Vice Chairman;4) Mr. Rehan N. Shaikh;5) Mr. Rashid Mansur;6) Mr. M. Habib-ur-Rahman;7) Mr. Yasir Qadri8) Mr. Imran Motiwala;9) Ms Hina Ghazanfar;10) Ms Maheen Rahman;11) Mr. Mir Adil Rashid;12) Mr. Enamullah Khan; and13) Ms Mashmooma Z. Majeed - Chief Executive

Chairman Dr. Amjad Waheed, CFA

Dr. Amjad Waheed holds a doctorate in Investments & Finance from Southern Illinois University, USA and is also a Chartered Financial Analyst. For the last 7 years he is CEO of NBP Fullerton Asset Management Ltd (NAFA), which is a subsidiary of National Bank of Pakistan, with Fullerton Fund Management Company of Singapore as the other joint venture partner. NAFA is presently managing fourteen mutual funds and several portfolios with about Rs 45 billion invested in these funds. NAFA is among the largest Asset Management Companies in Pakistan today.

Before joining NAFA, Dr. Waheed was Head of Equity Mutual Funds & Portfolios at Riyad Bank, Saudi Arabia, for about 5 years where he was managing US$ 7.5 billion invested in 22 mutual funds. Prior to that Dr. Waheed was Head of Investments at NIT,

EVENTS02

page 4 of 24 mufap quarterly newsletter

and Chief Operation O�cer of FC-ABN AMRO Equities for several years. Before moving back to Pakistan, Dr. Waheed was Assistant Professor of Finance at Tennessee State University, USA and has published several articles in top journals of the world such as Journal of Banking & Finance and Financial and Financial Management.Dr. Waheed has served on the Board of various companies including Siemens, Nishat Mills, PICIC, Askari Bank, Millat Tractors, Fauji Fertilizer, Pakitstan Tobacco Company, Treet Corporation, Gul Ahmed Textile, Bata Pakistan.

Senior Vice Chairman Mr. Mohammad Shoaib, CFA

Mr. Mohammad Shoaib, CFA is the Chief Executive of Al Meezan Investment Management Ltd. He has played a key role in setting up the company and has been associated with it since inception. He is a highly quali�ed and seasoned professional with 23 years experience in capital markets. He has to his credit many accolades and awards, the most signi�cant of them being the "Most In�uential CFA charter holder" awarded by CFA Institute in 2006.

Mr. Shoaib holds an MBA degree from IBA besides being a Chartered Financial Analyst (CFA) charter holder. He has to his credit the honor of being the founder and �rst president of CFA Association of Pakistan, a member society of CFA Institute. He has been active participant in the Islamic �nance and asset management for the last 10 years. In this respect, he has also actively participated as a speaker and panelist in various international and domestic seminars, conferences and workshops.

Mr. Shoaib has also served in voluntary capacity at di�erent domestic and international institutions. He has served as a Director on the Board of Karachi Stock Exchange and Vice Chairman on the Board of Mutual Funds Association of Pakistan. He is currently serving on the Board of Directors of Pakistan Institute of Corporate Governance and Institute of Capital Markets. He has also served on various global and regional committees of CFA Institute including Asia Paci�c Advocacy Committee, Global Task Force on Corporate

Governance, GIPS Regional Council and Asset Manager Code Advisory Committee. He has also had the honour to represent over 16,000 charterholders in Asia Paci�c Region as their representative on the Presidents' Council of CFA Institute.

Vice Chairman Mr. Farid Ahmed Khan, CFA

Mr. Farid Ahmed Khan, CFA is the CEO of ABL Asset Management. He has been involved with capital markets for over 18 years and has a broad-based, global experience with bulge bracket �rms in Asset Management, Investment Banking, Investment Research and Sales, Business Development & International Project Finance. He joined ABL AMC from Credit Suisse, where he was the Country Manager of Credit Suisse Pakistan. Prior to that, he worked for MCB, initially as Head of Investment Banking Group and later as the CEO of MCB Asset Management. Mr. Khan has extensive experience outside Pakistan, having worked at Morgan Stanley, ING Barings Securities and CLSA Emerging Markets in Kuala Lumpur, London and Istanbul in a variety of senior positions. He holds an MBA in Finance from IBA, Karachi and got his CFA quali�cation in 1998.

New Committees

MUFAP Board elected its Professional Committees, Chairperson and Vice-Chairperson of each Committee for the year 2013-14. �e list of Committees, their Chairperson and Vice-Chairperson is as follows:

SECP forms Shariah Advisory Board

SECP constituted a Shariah Advisory Board (SAB) to harmonize the Shariah interpretations and strengthen the regulatory and supervisory oversight of Islamic �nancial institutions (IFIs) and Islamic capital markets (ICMs) in Pakistan. It will also advise the Commission on the Shariah-compliance aspects of various products launched and or the processes being adopted by the regulated entities. It will also provide guidance for issuance of new laws, rules and regulations for e�ective monitoring and supervision of Islamic Financial Products and to suggest ways and means for development of IFIs and ICMs in the country.

Money Market

To meet the challenges of maintaining stability in the foreign exchange market and controlling high growth in money supply, SBP decided to gradually decrease the outstanding amount of liquidity injections. Since the beginning of FY14, interbank market liquidity conditions have considerably eased primarily due to substantial increase in the pace of government borrowing from the SBP. In fact, SBP mopped up Rs. 1,556.45 billion and injected Rs. 630.70 billion during Q1-FY14.

In terms of controlling growth in money supply, however, SBP’s e�orts of curtailing liquidity injections did not experience much success as these were o�set by an increase in direct �scal borrowings from the SBP. �e increase of Rs. 1,446 billion in budgetary borrowings from the banking system during FY13 was almost Rs. 1 trillion higher than the original target and was even higher than the total expansion in M2. Deviation of this scale has signi�cantly constrained e�ective monetary management, disrupted �nancial intermediation in the economy, and has led to a sharp increase in domestic debt. Showing a growth of 24.6% in FY13, the stock of government’s domestic debt has reached Rs. 9.5 trillion as of end-June 2013. Similarly, a considerable increase in public debt to revenue ratio re�ects weak repayment capacity of the government. �e acceleration in �scal borrowings from the SBP during H2-FY13, Rs. 714 billion, and Q1-FY14 up till 30th August 2013, Rs. 547 billion, is particularly worrisome. �e inability to raise the tax-GDP ratio is the fundamental source of large �scal de�cits, high borrowings, and rising debt. Although there has been a consistent gap between Federal Board of Revenue’s (FBR) budget targets and actual outcomes in the last few years, the gap of Rs. 445 billion in FY13 was exceptionally high. In fact, this is more than the cumulative shortfall of Rs. 349 billion during the last �ve years.

On the external front, stress in the external account has gradually increased with every passing month of 2013 due to shrinking net capital and �nancial �ows and high loan repayments to the IMF.

While the former was only $517 million or 0.2 percent of GDP, the latter increased to $3 billion in FY13. As a result, despite reduction in the external current account de�cit by about half, to $2.3 billion or 1.0 percent of GDP, the SBP’s foreign exchange reserves declined to $6 billion by end-June 2013 from $10.8 billion at the beginning of FY13. �ese stand at $5.2 billion as on 6th September, 2013 after receiving $544.5 million under the new IMF program. Despite pressures and speculations of a drop in the value of the Pak rupee the foreign exchange market has largely remained stable in FY13. However, since the beginning of FY14 the rupee has depreciated by 5.0 percent as of 12th September 2013.

�e year-on-year CPI based in�ation rate was recorded at 8.3% in July 2013, then to 8.55% in August 2013, however dipped down to 7.39% in September 2013.�ough CPI In�ation remained within single digit, however, it witnessed an upward trend as it increased to 7.39 percent in September 2013 compared to 5.85 percent in June 2013 and 6.6 percent in March 2013. �e impact of upward adjustments in energy prices and an increase in the GST together with the removal of certain exemptions put pressure on in�ation.In order to counter in�ationary expectations, SBP raised the discount rate by 50 basis points to 9.5 percent with e�ect from September 16, 2013.

Movement in KIBOR

Treasury Bills:

A total of 6 T-bill auctions were held by SBP during the quarter in which a total amount of Rs. 1,348.88 billion was raised. Since the beginning of FY14, market’s preference for shorter tenor T-Bills has increased as about 83% of the bank’s total o�ers in recent T-Bill auctions were concentrated in 3-month bills.

T-Bill Auctions (Amount in PKR billion; rates in %)

Pakistan Investment Bonds

�e accepted amount in the PIB auctions during Q1-FY14 fell short of the target .

PIB Auctions (Yields in % and Face Value in PKR billion)

Debt Market

�e table below summarizes the TOP 15 trades of TFCs/Sukuk on the basis of Face value during the Q1-FY14:

Equity Market

KSE-100 index made a strong start to the �scal year 2014, as the index gained 826.99 points, or 3.94%, to stand at 21,832.68 points during the �rst three months of FY14. During the period, index struggled to cross the 23,000 points level and made a high of 23,776.22 on a closing basis. Stock market began the �rst month of �scal year 2014 with a strong rally, overcoming jitters stemming from treason proceedings against former president General (retd) Pervez Musharraf and slowdown in global markets. �e government’s successful negotiations with IMF for a $5.3 billion loan, resolution of circular debt by issuing treasury bills and bonds and anticipation of strong corporate earnings for the quarter ended June 30 buoyed investors’ con�dence as the share prices appreciated across the board and index posted a gain of 2.307.09 points, or 10.98% to settle at 23,312.78 level in July.

After posting strong gain in July, KSE-100 faltered in August as investors continued to worry about ever-escalating Syrian crisis and tumbling regional markets. Stock market further pressured by a slew of disappointing and less-than-expected corporate earnings, falling foreign exchange reserves and high in�ation �gures for July. Moreover, concerns on a possible interest rate hike in the upcoming monetary policy announcement, potential spike in oil prices, decline in cement prices due to breakdown in price discipline, heavy foreign net selling and persistent depreciation in the rupee dragged the KSE-100 index down 1,151.93 points, or 4.94%, to 22,160.85 in August. �e index showed a mixed performance in September. In the �rst half of the month, the approval of the $6.64 billion loan package by IMF, the plans to privatize Pakistan International Airlines, strong foreign in�ows and the release of the IMF’s �rst tranche worth of $550 million helped lift the index to 23,639.97 on a closing basis. However, sentiment reversed towards the end of the month after the central bank’s decision to increase the rate of return on savings deposits to 6.5%. Moreover, steep decline in the value of Pakistani

rupee against the US dollar, constant repayments to IMF, a 50 basis points increase in the discount rate and heavy foreign net selling dragged the KSE-100 index down 328.17 points, or 1.48%, to 21,832.68 in September.

Mutual Fund Market:

�e total net assets decreased to Rs. 359.947 billion in the �rst quarter of FY14 versus Rs. 361.668 billion for the Q4FY13, a reduction of 0.48% quarter over quarter. �e open-end funds went up by 0.71% to Rs. 327.594 billion, pension funds went up by 9.67% to Rs. 5.288 billion and closed-end decreased by 14.23% to Rs. 27.064 billion.

Funds launched during the quarter Q1-FY14

Funds matured during the quarter Q1-FY14

Funds with changed structure/other features Energy Crisis: Causes and ImpactsBy Sara Aquil Walji, Research Analyst, HBL Asset Management

Energy is the cornerstone for any economy’s development and growth. �e current situation has worsened in Pakistan over the past few years and likely to continue if measures are not taken to mitigate the issue on a long term basis. �e gap between demand and supply has reached 6000MW resulting in scheduled and unscheduled load shedding, negatively a�ecting our industrial sector, hurting our exports and has even hampered the GDP growth rate by 2%. Subsidies to the power sector have steadily been increasing and form the biggest part of total subsidies amounting to around Rs 349,287mn (95% of the total subsidies) in FY 2012-13. �e new government has allocated Rs. 220,100mn to the power sector for the FY 2013-14 which is 91.5% of the total subsidy budget. (Source: Annual budget 2014) With recent emphasis on matters to resolve energy crisis and develop renewable and non-renewable sources of energy, it is worthwhile to note why energy crisis became as severe as it is now.

�e root of this crisis is that Pakistan’s electricity generation mix is highly skewed towards the most expensive kinds .�ere appears to be an almost inverse relationship between the sources of electricity that are most expensive to set and those that are most expensive to run. �e following chart depicts this relationship:

Source: Express Tribune �is highlights the fact why there is a heavy concentration toward

the construction of thermal power plants since they are relatively cheaper to build than hydropower plants. �e government has not dedicated enough funds for the development of hydropower projects which are the most expensive to build but cheapest to run on a per unit basis.Pakistan’s electricity generation is highly dependent on imported oil as almost $14.5bn worth of oil is imported each year which accounts for around 35% of electricity generation. Comparing Pakistan with India and Bangladesh reveals that Pakistan relies heavily on oil for electricity generation where as India uses coal, a relatively cheaper source for electricity generation and Bangladesh on the other hand allocates 73% of its electricity generation to gas.

Source: Economic Survey report for 2012-2013

With a prominent shift in recent years towards the use of thermal power stations instead of hydropower sources and a reduction in electricity generation from coal, Pakistan’s electricity costs ends up being more expensive than it needs to be and since the government has adopted a policy of uniform tari� across the country the Tari� Di�erential Subsidy owed by the Government of Pakistan on an annual basis has increased substantially.

Circular debt is another major concern hampering the growth of Pakistan’s economy. In simple words circular debt is the amount of

cash shortfall within the Central Power Purchasing Agency (CPPA) that it cannot pay to power supply companies. �is shortfall is the result of (a) the di�erence between the actual cost of providing electricity in relation to revenues realized by the power distribution companies (DISCOs) from sales to customers plus subsidies; and (b) insu�cient payments by the DISCOs to CPPA out of realized revenue as they give priority to their own cash �ow needs. (Source: USAID Report March 2103)

�is revenue shortfall cascades through the entire energy supply chain, from electricity generators to fuel suppliers, re�ners, and producers; resulting in a shortage of fuel supply to the public sector thermal generating companies (GENCOs), a reduction in power generated by Independent Power Producers (IPPs), and an increases in load shedding.

According to the report published by the USAID in March 2013, circular debt amounts to Rs872bn which is actually 4% of GDP. According to Pakistan’s Economic Survey report for 2012-2013, there is a strong relationship between GDP growth rate and electricity growth as shown in the �gure below. It can be easily deduced that periods of low or negative electricity growth have witnessed low GDP growth rate, while periods where electricity growth picked up there is increase in GDP growth rate.

�is comes as no surprise, since industrial output is heavily dependent on the amount of electricity delivered to them. Continuous power breakdowns prevented industries from operating at their full capacity level. �e power outages have obstructed the viability of the textile industry as exporters were unable to meet their

commitments. During July-March 2012-13, foreign exchange earnings through exports of synthetic textile fabrics and woolen industry showing a decline of 25.3% and 5.1% respectively as compared to last year. During the period under review even in quantity term also recorded a decline of 30% and 15.8% respectively.

Coupled with an ine�cient system and expensive fuel mix, power theft is another major issue faced by Pakistanis. It is interesting to note that annual revenue collection e�ciency was estimated to be around 87%; however that 13% of lost e�ciency has a �nancial impact of Rs 86bn which is equivalent to 41 days of furnace oil costs for thermal power plants. �e following �gure shows the percentage of bills that were uncollected in 2012. �e e�ciency of di�erent DISCOs is disproportionate in revenue collection. �is essentially leads to the inclusion of the cost of power theft in the power tari�, meaning that the honest payers also bear the cost of those that steal.

Power theft is not only committed by normal residents but the main defaulters are the government institutions themselves. �e government owns around 51% of the uncollected bills which amounts to Rs 118bn out of the uncollected revenue receipts of Rs 386bn. In my opinion, this the amount which causes the discrepancy between the amount of RS500.3bn to be injected to resolve the circular debt issue and �gure of Rs 872.41bn since the government has a proposal to o�set provisional dues via a �scal adjuster. Due to a growing economy, Pakistan’s energy needs have more than doubled in the past 15 years. Energy shortages have far devastating

e�ects on our economy. Not only does it cause civil disturbances on a small scale but it a�ects our GDP on a larger note. Injecting money into the chain will only resolve the issue on a temporary basis. �ese challenges require a multi-prong approach that would address energy shortages in the immediate future and help the country build longer term energy su�ciency.

�ere needs to be a shift away from thermal power to alternative sources of energy which are not only cheaper but also environmentally friendly. Pakistan has large untapped renewable resources such as water, sun and wind and recently the government has taken keen interest on the development of hydro power projects and Neelum Jhelum Hydroelectric Project is one of the many projects which the new government has started which will approximately add 5.15bn units of electricity annually. Moreover, an e�ective system of governance must be in place to curb theft, recuperate dues and enforce policies.

�e Importance of Asset Allocation in attaining Optimal Returns

By Yamna Hassan, Asst. Manager-Business DevelopmentLakson Investments

“Tis the part of a wise man to keep himself today for tomorrow, and not venture all his eggs in one basket.” – Miguel de Cervantes, Don Quixote de la Mancha, 1605.

�e afore-mentioned quote indicates that along with being a great writer, Cervantes would have also proved to be a wise investor.

Investment related decisions are preceded by de�ning a proper Asset Allocation plan. According to recent research, the Asset Allocation decision is responsible for 91.5 percent of the variation between returns on di�erent portfolios. Given the importance of Asset Allocation, it has attained a center stage in any investment decision.

Asset Allocation is mainly important for two de�nite reasons. �e �rst reason pertains to portfolio design; variation in portfolio designs can lead to some investment decisions being winners while the rest being losers, and it is believed that if a portfolio is thoughtfully constructed and contains an optimal mix of securities that perform di�erently from each other (i.e they have little correlation in between them), chances of this portfolio yielding a more stable return is higher. �is is because if some securities in a portfolio are inconsistent and volatile, other, more stable securities can nullify the inconsistency of the entire portfolio, hence stabilizing the yield pattern.

�e second reason pertains to the vision of the investor. Asset allocation allows an investor to �nancially plan for his long-term and short-term goals and avoid impulsive reactions. We will subsequently discuss this aspect of Asset Allocation.

We can divide the Asset Allocation decision into two simple steps as discussed below:

Step 1: Asset Allocation An Asset Allocation strategy can be devised based on the investor’s risk assessment, �nancial goals and return targets. It is the most fundamental step of an investment decision and involves determining an ideal mix of stocks, bonds, cash and other securities in a way such that the portfolio yields a return which best suits an investor’s need. �ere is always a downside of investing too much in bonds or cash as that might certify stable but lower returns. In the same way, too much investment in stocks might lead to portfolio volatility. �erefore, in order to meet your requirements, or keep pace with in�ation, you need to plan an ideal arrangement of securities for your portfolio.

Step 2: Diversi�cationWhile the �rst step bears upon the idea of portfolio construction, this step is linked to the proper dissemination of your assets in a way such that your portfolio is exposed to many di�erent segments of the market, some of which perform independently of the others. Proper diversi�cation of your portfolio can lead to higher and more stable returns.

As mentioned before, the e�ect of diversi�cation is most noticeable when instruments have very little interrelation between them. However, it was easier to build this sort of a portfolio previously than it is today. �is is because roughly over the past 10 years, �nancial markets have become increasingly interrelated and complex. Let us also not ignore the fact that during the 2008 �nancial trouble, most assets tended to perform similarly, leading us to believe in the proposition that most assets are conducive to a similar behavior in times of crisis and instability. �e �gure below shows ways of diversifying a portfolio and entering into newer and assorted mix of investment vehicles.

FIGURE 1:

Figure shows ways of diversifying a portfolio.

Institutions that do not pay requisite importance to the Asset Allocation decision might end up damaging their returns. Usually, institutions are advised to invest in a 60:40 ratio (Stocks: �xed income instruments) to remain on the safe side. Whereas, individuals are recommended to invest in an investment spectrum ranging from 100 percent stocks to 100 percent bonds depending on their separate variable characteristics. However, the Asset Allocation decision is dependent on several other factors and cannot be generalized for di�erent investors.

Following are a few, newer and e�cient ways that have now been developed and can be used for attaining optimal asset allocation:

Mean Variance Optimization

Mean Variance Optimization is a quantitative technique that can be used to calculate the trade-o� between maximum expected return and risk tolerance. �is technique has gained popularity over time because in recent times, the technique is applied on an asset class level as opposed to being applied only to portfolios of individual stocks previously.

�e development of Mean Variance Optimization has not only bene�tted institutional investors but has resulted in a breakthrough for retail brokerage houses as well, which, prior to this development were restricted on their advisory role to the investors. However, recently, they are proposing a greater degree of passive security and more thoughtful asset allocation recommendations to their investors. �is has become possible by using optimization and aiming to attain a favorable position with maximum expected return, minimal risk, or both.

Moreover, a few re�ned approaches taken from utility theory and behavioral economics can be deployed to develop polls or surveys that can authentically gauge an individual’s risk preferences.

Pension funds have also been familiarized with Optimization. Such funds take into account the reciprocity of both assets and liabilities and not only the assets unlike other funds. �e objective of Asset Allocation for these funds is to amplify the fund surplus i.e liabilities subtracted from assets for a stated degree of risk tolerance.

Tactical Asset AllocationTactical asset allocation is the process of adjusting a particular portfolio based on changes in the market value of assets contained in that portfolio. �e technique is quite dynamic and involves deviation from the strategic asset allocation when an investor’s short-term foresight is not aligned with his long term foresight used to develop a strategic asset allocation plan and precise short-term predictions on part of the investor can lead to better returns.

Pragmatically speaking, Tactical Asset Allocation models tend to recommend contrarian trades, that is, they recommend purchasing an asset as its current market value drops and vice versa. �us, tactical Asset Allocation involves perpetually arranging your portfolio based on your needs and changes in the market. One consequence of Tactical Asset Allocation is that by overweighting certain assets during certain times and underweighting others, the portfolio is riskier because of its reduced diversi�cation. �us, to

o�set this additional risk factor, this strategy would need to generate above market returns. �e notion, whether Tactical Asset Allocation Models have achieved this is still a matter of rumination and study but because the probable returns from successful Tactical Asset Allocation would be large, researchers will keep inspecting, and investors won’t cease to be on the look out for their discoveries.

Insured Asset Allocation�is strategy is similar to a portfolio insurance strategy and is a mirror image of the Tactical Asset Allocation strategy. With this strategy, a base portfolio parameter is �xed and the value of the portfolio is not allowed to fall below this base parameter. As long as the portfolio achieves a return above this parameter, you actively to try to increase the portfolio value as much as possible. If, however, the portfolio ever drops to below the base value, investment in risk-free securities enables the base value to become �xed.

�e main target audiences for this approach are risk-averse investors who desire a certain level of active portfolio management and also covet the protection of �xing a certi�ed minimum return below which the portfolio is not allowed to decline. For instance, this approach is best for an investor who has planned a nominal lifestyle for himself after retirement.

Asset Allocation & Uncertain Times�e importance of active portfolio management and wise asset allocation strategy has been reiterated enough. But at the brink of serious economic uncertainty, expectation for stock market returns is somewhat muted. �erefore, it is believed that in such a situation, a dynamic asset allocation plan should come into play for the advantage of certain clients.

Dynamic Asset Allocation uses a long term strategic Asset Allocation strategy as its foundation. Alternate investments can be added to the core portfolio for the sake of complementing it. It is even better, if these investments include segments which yield a higher return and bear little interdependence, so as to achieve a greater level of diversi�cation.

Besides, dynamic Asset Allocation strategies can also be accompanied by �exible investment strategies; tactical actions that are short-term in nature and aim to bank on perceived market opportunities. If 10-20% of your assets are allocated for such investments, your portfolio can be expected to react better in times of changing trends and conditions.

Asset allocation is evolving past a traditional “purchase and retain” dogma. Whilst this might not suit all clients, exercising a dynamic asset allocation plan can create a portfolio better able to handle uncertain market environments. Not to forget the fact that a solid strategic asset allocation plan remains the core strategy behind any tactical asset allocation strategy.

Asset Allocation & the local scenarioWith interest rates in Pakistan consistently hovering above 10 percent for the past �ve years, anyone would expect Pakistanis to be encouraged enough to save and reap bene�ts of higher returns. However, reality states that Pakistan actually stands out to re�ect one of the lowest savings in the region. Given the fact that majority of Pakistanis are not so keen on investing mainly because their expenditures on necessities do not leave any room for savings or so for other reasons, there is a chunk of people who are inclined in saving for a better future and lifestyle.

With growth of urban nuclear families, educated middle to upper middle class is inspirited to plan properly for a child’s education, health and future life. Reasons for investment in Pakistani society vary from a child’s education to his marriage, from being cushioned against the toils of post-retirement life to maternity expenditures. Young professionals may want to invest as a means to generate seed capital for their potential business idea or to live their dreams of traveling or wayfaring.

Reasons for investing are many. With di�erent individuals and di�erent investment objectives in mind, the asset allocation needs of these investors must be customized accordingly.

Asset Allocation & Financial PlanningOnce you are done with choosing your model for Asset Allocation, the �nal stage is to test this model by contextualizing it with a precise �nancial plan. It might be easy for an investor to choose which Asset Allocation plan will provide him with the best possible returns but the investor should also �gure out a way to determine that expected return and also estimate the trade-o� for that higher return potential.

A well-concocted �nancial plan will guide the investor out of this bewilderment. First, it will determine what level of projected investment return is necessary to allow you to meet your lifestyle goals, which can help lead you to the right mix of stocks, bonds and cash. Second, the plan will evaluate the impact of the portfolio risk associated with that mix.

Traditionally, �nancial planning models focused on expected return and neglected the variability of outcomes that is associated with increased volatility. With the introduction of probability-based planning tools, the investor can foresee the e�ect of risk on their investment portfolios, they can vary the amount of risk and can study their corresponding returns. For example a portfolio bearing higher risk may yield a higher return but it also has a probability of falling far short beneath their targets.

When using an asset allocation approach to designing a portfolio, it is important to not focus just on the expected return of that portfolio. �e risk associated with an increasing, or decreasing, portfolio return is just as important to the success of an investment strategy.

Asset Allocation & �e Future

Most forecasters fall into two divisions. Forecasters in the �rst division are eager to predict that the future will closely mirror the recent past. �eir ideals are those generals who are always preparing to �ght the last war. Forecasters in the second division rely heavily

upon the adage that the only constant is change itself. Proponents of this school of thought usually don’t know what to expect, but are quite sure it will be nothing like anything we’ve seen before. �ese individuals do realize the problems of delineating the future of this area.

We should view the future of asset allocation through lenses borrowed from both divisions. �at is, certain aspects of asset allocation today will continue to be recognizable for the years to come. To be more precise, the goals and importance of asset allocation will not change, but the mechanisms by which investors seek to achieve those goals will be new.

�e goal of the asset allocation decision, was, is, and will be to select a combination of assets that will generate a return su�ciently high and safe so as to o�set some future liability. It is also safe to say that asset allocation decisions will have a continuing large role in explaining portfolio returns.

Industry-wide - Net Assets (PKR million)

Net Assets - Open End Funds (PKR million)

Net Assets - Closed End Funds (PKR million)

Net Assets - Pension Schemes (PKR million)

Sales (PKR million) Redemptions (PKR million) Net Sales (PKR million)

Open End Funds' Return** Closed End Funds' Return**

General Pension Schemes Return**

Islamic Pension Schemes Return**

Committees Chairperson Vice-Chairperson

Accounts & Taxation Dr. Amjad Waheed Mr. Imran AzimShariah Compliant Funds Mr. Mohammad Shoaib Mr. Mir Mohammad AliTechnical - Mutual Funds Mr. Yasir Qadri Dr. Amjad WaheedTechnical - Retirement Schemes Mr. M. Habib-ur-Rahman Mr. Rashid Mansur

Meeting of the Board of Directors

In order to ensure that the Board of Directors ful�ls the duties and responsibilities conferred by the members of MUFAP, the Board conducts meetings on a regular basis to make immediate and prudent decisions. �e Board of Directors held three meetings during the quarter Jul-Sep 2013.

�e activities undertaken by Board are as follows:

Proposed amendments in the de�nition of Related Parties in Restricted List of Code for Distributors

�e Board deliberated in detail on the matter of proposed

amendments in the de�nition of Related Parties in the Restricted List of Code for Distributors. After careful consideration of the impacts that the amendments may entail, it was decided that all individuals (namely employees, directors, sponsors of the RSPs) should be excluded from the de�nition of Related Parties. �e revised de�nition is applicable to all new investments brought in on or after July 16, 2013 and is not applicable to existing investments made by or before July 15, 2013.

Valuation of GOP Ijarah Sukuk

�e Board recommended that AMCs should use ‘PKISRV’ quoted on Reuters as the relevant price to value the GOP Ijarah Sukuks to determine net assets of CIS under their management, which the SECP approved in September.

Meetings of the Committees

MUFAP Committees held many discussions to make important, well planned proposals on behalf of industry. �e following table presents the number of meetings held during the quarter Jul-Sep’13.

Technical Committee - VPS

�e VPS – Technical Committee held extensive discussions to discuss the dissimilar taxation and operational practices being adopted by di�erent VPS Managers. �e VPS Committee constituted a Sub-Committee, involving a representative from each VPS Manager, to draw up recommendations for the tax treatment. �e Committee also engaged Senior Tax expert, Mr. Shabbar Zaidi on the matter and has requested for clari�cation from FBR on one of the matters.

Meeting with NCCPL A meeting was held between operations sta� of AMCs and NCCPL representatives on July 22, 2013 to evaluate the mechanics and possible data sharing from AMCs to NCCPL for netting of CGT. It was decided that NCCPL would develop a concept paper covering brief mechanism of centralized CGT collection to AMCs for their review and comments.

Elections to elect Directors/Executive Committee Members of MUFAP for the year 2013 / 2014

As required under the Trade Organizations Rules, 2007, MUFAP is required to hold its elections each year to elect Directors against the vacancies arising on account of completion of two-year tenure of some Directors. Board members are elected for a two-year term.

�e retiring Directors on the completion of their two year tenure on September 30, 2013 are: 1. Mr. Adnan Siddiqui (Resigned August-2013)2. Mr. Amer Maqbool 3. Mr. Imran Azim 4. Mr. Mir Muhammad Ali 5. Mr. Nihal Cassim

�e continuing Directors of MUFAP for the year 2013/ 2014 are: 1. Dr. Amjad Waheed 2. Mr. Imran Motiwala 3. Mr. Mir Adil Rashid 4. Mr. Rashid Mansur 5. Ms Maheen Rahman6. Ms Hina Ghazanfar (on reserved seat for women)

In addition, Mr. Rehan N. Shaikh will serve on the Board as provided under Rule 23(5)(d) of the Trade Organization Rules, 2007. At the Extra Ordinary General Meeting on September 26, 2013, MUFAP announced the appointment, by virtue of elections, of the following directors to the Board, namely:1. Mr. Farid Ahmed Khan 2. Mr. M. Habib-ur-Rahman 3. Mr. Mohammad Shoaib 4. Mr. Yasir Qadri 5. Mr. Enamullah Khan

New Board of Directors

�e new Board of Directors of MUFAP at its �rst meeting held on October 1, 2013 elected Dr. Amjad Waheed as Chairman, Mr. Mohammad Shoaib as Senior Vice Chairman and Mr. Farid Ahmed Khan as Vice Chairman MUFAP for the year 2013-2014.�e Board of Directors of MUFAP for the 2013-14 term is as follows:

1) Dr. Amjad Waheed - Chairman; 2) Mr. Mohammad Shoaib - Senior Vice Chairman; 3) Mr. Farid Ahmed Khan - Vice Chairman;4) Mr. Rehan N. Shaikh;5) Mr. Rashid Mansur;6) Mr. M. Habib-ur-Rahman;7) Mr. Yasir Qadri8) Mr. Imran Motiwala;9) Ms Hina Ghazanfar;10) Ms Maheen Rahman;11) Mr. Mir Adil Rashid;12) Mr. Enamullah Khan; and13) Ms Mashmooma Z. Majeed - Chief Executive

Chairman Dr. Amjad Waheed, CFA

Dr. Amjad Waheed holds a doctorate in Investments & Finance from Southern Illinois University, USA and is also a Chartered Financial Analyst. For the last 7 years he is CEO of NBP Fullerton Asset Management Ltd (NAFA), which is a subsidiary of National Bank of Pakistan, with Fullerton Fund Management Company of Singapore as the other joint venture partner. NAFA is presently managing fourteen mutual funds and several portfolios with about Rs 45 billion invested in these funds. NAFA is among the largest Asset Management Companies in Pakistan today.

Before joining NAFA, Dr. Waheed was Head of Equity Mutual Funds & Portfolios at Riyad Bank, Saudi Arabia, for about 5 years where he was managing US$ 7.5 billion invested in 22 mutual funds. Prior to that Dr. Waheed was Head of Investments at NIT,

EVENTSand Chief Operation O�cer of FC-ABN AMRO Equities for several years. Before moving back to Pakistan, Dr. Waheed was Assistant Professor of Finance at Tennessee State University, USA and has published several articles in top journals of the world such as Journal of Banking & Finance and Financial and Financial Management.Dr. Waheed has served on the Board of various companies including Siemens, Nishat Mills, PICIC, Askari Bank, Millat Tractors, Fauji Fertilizer, Pakitstan Tobacco Company, Treet Corporation, Gul Ahmed Textile, Bata Pakistan.

Senior Vice Chairman Mr. Mohammad Shoaib, CFA

Mr. Mohammad Shoaib, CFA is the Chief Executive of Al Meezan Investment Management Ltd. He has played a key role in setting up the company and has been associated with it since inception. He is a highly quali�ed and seasoned professional with 23 years experience in capital markets. He has to his credit many accolades and awards, the most signi�cant of them being the "Most In�uential CFA charter holder" awarded by CFA Institute in 2006.

Mr. Shoaib holds an MBA degree from IBA besides being a Chartered Financial Analyst (CFA) charter holder. He has to his credit the honor of being the founder and �rst president of CFA Association of Pakistan, a member society of CFA Institute. He has been active participant in the Islamic �nance and asset management for the last 10 years. In this respect, he has also actively participated as a speaker and panelist in various international and domestic seminars, conferences and workshops.

Mr. Shoaib has also served in voluntary capacity at di�erent domestic and international institutions. He has served as a Director on the Board of Karachi Stock Exchange and Vice Chairman on the Board of Mutual Funds Association of Pakistan. He is currently serving on the Board of Directors of Pakistan Institute of Corporate Governance and Institute of Capital Markets. He has also served on various global and regional committees of CFA Institute including Asia Paci�c Advocacy Committee, Global Task Force on Corporate

Governance, GIPS Regional Council and Asset Manager Code Advisory Committee. He has also had the honour to represent over 16,000 charterholders in Asia Paci�c Region as their representative on the Presidents' Council of CFA Institute.

Vice Chairman Mr. Farid Ahmed Khan, CFA

Mr. Farid Ahmed Khan, CFA is the CEO of ABL Asset Management. He has been involved with capital markets for over 18 years and has a broad-based, global experience with bulge bracket �rms in Asset Management, Investment Banking, Investment Research and Sales, Business Development & International Project Finance. He joined ABL AMC from Credit Suisse, where he was the Country Manager of Credit Suisse Pakistan. Prior to that, he worked for MCB, initially as Head of Investment Banking Group and later as the CEO of MCB Asset Management. Mr. Khan has extensive experience outside Pakistan, having worked at Morgan Stanley, ING Barings Securities and CLSA Emerging Markets in Kuala Lumpur, London and Istanbul in a variety of senior positions. He holds an MBA in Finance from IBA, Karachi and got his CFA quali�cation in 1998.

New Committees

MUFAP Board elected its Professional Committees, Chairperson and Vice-Chairperson of each Committee for the year 2013-14. �e list of Committees, their Chairperson and Vice-Chairperson is as follows:

SECP UPDATE03

page 5 of 24 mufap quarterly newsletter

SECP forms Shariah Advisory Board

SECP constituted a Shariah Advisory Board (SAB) to harmonize the Shariah interpretations and strengthen the regulatory and supervisory oversight of Islamic �nancial institutions (IFIs) and Islamic capital markets (ICMs) in Pakistan. It will also advise the Commission on the Shariah-compliance aspects of various products launched and or the processes being adopted by the regulated entities. It will also provide guidance for issuance of new laws, rules and regulations for e�ective monitoring and supervision of Islamic Financial Products and to suggest ways and means for development of IFIs and ICMs in the country.

Money Market

To meet the challenges of maintaining stability in the foreign exchange market and controlling high growth in money supply, SBP decided to gradually decrease the outstanding amount of liquidity injections. Since the beginning of FY14, interbank market liquidity conditions have considerably eased primarily due to substantial increase in the pace of government borrowing from the SBP. In fact, SBP mopped up Rs. 1,556.45 billion and injected Rs. 630.70 billion during Q1-FY14.

In terms of controlling growth in money supply, however, SBP’s e�orts of curtailing liquidity injections did not experience much success as these were o�set by an increase in direct �scal borrowings from the SBP. �e increase of Rs. 1,446 billion in budgetary borrowings from the banking system during FY13 was almost Rs. 1 trillion higher than the original target and was even higher than the total expansion in M2. Deviation of this scale has signi�cantly constrained e�ective monetary management, disrupted �nancial intermediation in the economy, and has led to a sharp increase in domestic debt. Showing a growth of 24.6% in FY13, the stock of government’s domestic debt has reached Rs. 9.5 trillion as of end-June 2013. Similarly, a considerable increase in public debt to revenue ratio re�ects weak repayment capacity of the government. �e acceleration in �scal borrowings from the SBP during H2-FY13, Rs. 714 billion, and Q1-FY14 up till 30th August 2013, Rs. 547 billion, is particularly worrisome. �e inability to raise the tax-GDP ratio is the fundamental source of large �scal de�cits, high borrowings, and rising debt. Although there has been a consistent gap between Federal Board of Revenue’s (FBR) budget targets and actual outcomes in the last few years, the gap of Rs. 445 billion in FY13 was exceptionally high. In fact, this is more than the cumulative shortfall of Rs. 349 billion during the last �ve years.

On the external front, stress in the external account has gradually increased with every passing month of 2013 due to shrinking net capital and �nancial �ows and high loan repayments to the IMF.

While the former was only $517 million or 0.2 percent of GDP, the latter increased to $3 billion in FY13. As a result, despite reduction in the external current account de�cit by about half, to $2.3 billion or 1.0 percent of GDP, the SBP’s foreign exchange reserves declined to $6 billion by end-June 2013 from $10.8 billion at the beginning of FY13. �ese stand at $5.2 billion as on 6th September, 2013 after receiving $544.5 million under the new IMF program. Despite pressures and speculations of a drop in the value of the Pak rupee the foreign exchange market has largely remained stable in FY13. However, since the beginning of FY14 the rupee has depreciated by 5.0 percent as of 12th September 2013.

�e year-on-year CPI based in�ation rate was recorded at 8.3% in July 2013, then to 8.55% in August 2013, however dipped down to 7.39% in September 2013.�ough CPI In�ation remained within single digit, however, it witnessed an upward trend as it increased to 7.39 percent in September 2013 compared to 5.85 percent in June 2013 and 6.6 percent in March 2013. �e impact of upward adjustments in energy prices and an increase in the GST together with the removal of certain exemptions put pressure on in�ation.In order to counter in�ationary expectations, SBP raised the discount rate by 50 basis points to 9.5 percent with e�ect from September 16, 2013.

Movement in KIBOR

Treasury Bills:

A total of 6 T-bill auctions were held by SBP during the quarter in which a total amount of Rs. 1,348.88 billion was raised. Since the beginning of FY14, market’s preference for shorter tenor T-Bills has increased as about 83% of the bank’s total o�ers in recent T-Bill auctions were concentrated in 3-month bills.

T-Bill Auctions (Amount in PKR billion; rates in %)

Pakistan Investment Bonds

�e accepted amount in the PIB auctions during Q1-FY14 fell short of the target .

PIB Auctions (Yields in % and Face Value in PKR billion)

Debt Market

�e table below summarizes the TOP 15 trades of TFCs/Sukuk on the basis of Face value during the Q1-FY14:

Equity Market

KSE-100 index made a strong start to the �scal year 2014, as the index gained 826.99 points, or 3.94%, to stand at 21,832.68 points during the �rst three months of FY14. During the period, index struggled to cross the 23,000 points level and made a high of 23,776.22 on a closing basis. Stock market began the �rst month of �scal year 2014 with a strong rally, overcoming jitters stemming from treason proceedings against former president General (retd) Pervez Musharraf and slowdown in global markets. �e government’s successful negotiations with IMF for a $5.3 billion loan, resolution of circular debt by issuing treasury bills and bonds and anticipation of strong corporate earnings for the quarter ended June 30 buoyed investors’ con�dence as the share prices appreciated across the board and index posted a gain of 2.307.09 points, or 10.98% to settle at 23,312.78 level in July.

After posting strong gain in July, KSE-100 faltered in August as investors continued to worry about ever-escalating Syrian crisis and tumbling regional markets. Stock market further pressured by a slew of disappointing and less-than-expected corporate earnings, falling foreign exchange reserves and high in�ation �gures for July. Moreover, concerns on a possible interest rate hike in the upcoming monetary policy announcement, potential spike in oil prices, decline in cement prices due to breakdown in price discipline, heavy foreign net selling and persistent depreciation in the rupee dragged the KSE-100 index down 1,151.93 points, or 4.94%, to 22,160.85 in August. �e index showed a mixed performance in September. In the �rst half of the month, the approval of the $6.64 billion loan package by IMF, the plans to privatize Pakistan International Airlines, strong foreign in�ows and the release of the IMF’s �rst tranche worth of $550 million helped lift the index to 23,639.97 on a closing basis. However, sentiment reversed towards the end of the month after the central bank’s decision to increase the rate of return on savings deposits to 6.5%. Moreover, steep decline in the value of Pakistani

rupee against the US dollar, constant repayments to IMF, a 50 basis points increase in the discount rate and heavy foreign net selling dragged the KSE-100 index down 328.17 points, or 1.48%, to 21,832.68 in September.

Mutual Fund Market:

�e total net assets decreased to Rs. 359.947 billion in the �rst quarter of FY14 versus Rs. 361.668 billion for the Q4FY13, a reduction of 0.48% quarter over quarter. �e open-end funds went up by 0.71% to Rs. 327.594 billion, pension funds went up by 9.67% to Rs. 5.288 billion and closed-end decreased by 14.23% to Rs. 27.064 billion.

Funds launched during the quarter Q1-FY14

Funds matured during the quarter Q1-FY14

Funds with changed structure/other features Energy Crisis: Causes and ImpactsBy Sara Aquil Walji, Research Analyst, HBL Asset Management

Energy is the cornerstone for any economy’s development and growth. �e current situation has worsened in Pakistan over the past few years and likely to continue if measures are not taken to mitigate the issue on a long term basis. �e gap between demand and supply has reached 6000MW resulting in scheduled and unscheduled load shedding, negatively a�ecting our industrial sector, hurting our exports and has even hampered the GDP growth rate by 2%. Subsidies to the power sector have steadily been increasing and form the biggest part of total subsidies amounting to around Rs 349,287mn (95% of the total subsidies) in FY 2012-13. �e new government has allocated Rs. 220,100mn to the power sector for the FY 2013-14 which is 91.5% of the total subsidy budget. (Source: Annual budget 2014) With recent emphasis on matters to resolve energy crisis and develop renewable and non-renewable sources of energy, it is worthwhile to note why energy crisis became as severe as it is now.

�e root of this crisis is that Pakistan’s electricity generation mix is highly skewed towards the most expensive kinds .�ere appears to be an almost inverse relationship between the sources of electricity that are most expensive to set and those that are most expensive to run. �e following chart depicts this relationship:

Source: Express Tribune �is highlights the fact why there is a heavy concentration toward

the construction of thermal power plants since they are relatively cheaper to build than hydropower plants. �e government has not dedicated enough funds for the development of hydropower projects which are the most expensive to build but cheapest to run on a per unit basis.Pakistan’s electricity generation is highly dependent on imported oil as almost $14.5bn worth of oil is imported each year which accounts for around 35% of electricity generation. Comparing Pakistan with India and Bangladesh reveals that Pakistan relies heavily on oil for electricity generation where as India uses coal, a relatively cheaper source for electricity generation and Bangladesh on the other hand allocates 73% of its electricity generation to gas.

Source: Economic Survey report for 2012-2013

With a prominent shift in recent years towards the use of thermal power stations instead of hydropower sources and a reduction in electricity generation from coal, Pakistan’s electricity costs ends up being more expensive than it needs to be and since the government has adopted a policy of uniform tari� across the country the Tari� Di�erential Subsidy owed by the Government of Pakistan on an annual basis has increased substantially.

Circular debt is another major concern hampering the growth of Pakistan’s economy. In simple words circular debt is the amount of

cash shortfall within the Central Power Purchasing Agency (CPPA) that it cannot pay to power supply companies. �is shortfall is the result of (a) the di�erence between the actual cost of providing electricity in relation to revenues realized by the power distribution companies (DISCOs) from sales to customers plus subsidies; and (b) insu�cient payments by the DISCOs to CPPA out of realized revenue as they give priority to their own cash �ow needs. (Source: USAID Report March 2103)

�is revenue shortfall cascades through the entire energy supply chain, from electricity generators to fuel suppliers, re�ners, and producers; resulting in a shortage of fuel supply to the public sector thermal generating companies (GENCOs), a reduction in power generated by Independent Power Producers (IPPs), and an increases in load shedding.

According to the report published by the USAID in March 2013, circular debt amounts to Rs872bn which is actually 4% of GDP. According to Pakistan’s Economic Survey report for 2012-2013, there is a strong relationship between GDP growth rate and electricity growth as shown in the �gure below. It can be easily deduced that periods of low or negative electricity growth have witnessed low GDP growth rate, while periods where electricity growth picked up there is increase in GDP growth rate.

�is comes as no surprise, since industrial output is heavily dependent on the amount of electricity delivered to them. Continuous power breakdowns prevented industries from operating at their full capacity level. �e power outages have obstructed the viability of the textile industry as exporters were unable to meet their

commitments. During July-March 2012-13, foreign exchange earnings through exports of synthetic textile fabrics and woolen industry showing a decline of 25.3% and 5.1% respectively as compared to last year. During the period under review even in quantity term also recorded a decline of 30% and 15.8% respectively.

Coupled with an ine�cient system and expensive fuel mix, power theft is another major issue faced by Pakistanis. It is interesting to note that annual revenue collection e�ciency was estimated to be around 87%; however that 13% of lost e�ciency has a �nancial impact of Rs 86bn which is equivalent to 41 days of furnace oil costs for thermal power plants. �e following �gure shows the percentage of bills that were uncollected in 2012. �e e�ciency of di�erent DISCOs is disproportionate in revenue collection. �is essentially leads to the inclusion of the cost of power theft in the power tari�, meaning that the honest payers also bear the cost of those that steal.

Power theft is not only committed by normal residents but the main defaulters are the government institutions themselves. �e government owns around 51% of the uncollected bills which amounts to Rs 118bn out of the uncollected revenue receipts of Rs 386bn. In my opinion, this the amount which causes the discrepancy between the amount of RS500.3bn to be injected to resolve the circular debt issue and �gure of Rs 872.41bn since the government has a proposal to o�set provisional dues via a �scal adjuster. Due to a growing economy, Pakistan’s energy needs have more than doubled in the past 15 years. Energy shortages have far devastating

e�ects on our economy. Not only does it cause civil disturbances on a small scale but it a�ects our GDP on a larger note. Injecting money into the chain will only resolve the issue on a temporary basis. �ese challenges require a multi-prong approach that would address energy shortages in the immediate future and help the country build longer term energy su�ciency.

�ere needs to be a shift away from thermal power to alternative sources of energy which are not only cheaper but also environmentally friendly. Pakistan has large untapped renewable resources such as water, sun and wind and recently the government has taken keen interest on the development of hydro power projects and Neelum Jhelum Hydroelectric Project is one of the many projects which the new government has started which will approximately add 5.15bn units of electricity annually. Moreover, an e�ective system of governance must be in place to curb theft, recuperate dues and enforce policies.

�e Importance of Asset Allocation in attaining Optimal Returns

By Yamna Hassan, Asst. Manager-Business DevelopmentLakson Investments

“Tis the part of a wise man to keep himself today for tomorrow, and not venture all his eggs in one basket.” – Miguel de Cervantes, Don Quixote de la Mancha, 1605.

�e afore-mentioned quote indicates that along with being a great writer, Cervantes would have also proved to be a wise investor.

Investment related decisions are preceded by de�ning a proper Asset Allocation plan. According to recent research, the Asset Allocation decision is responsible for 91.5 percent of the variation between returns on di�erent portfolios. Given the importance of Asset Allocation, it has attained a center stage in any investment decision.

Asset Allocation is mainly important for two de�nite reasons. �e �rst reason pertains to portfolio design; variation in portfolio designs can lead to some investment decisions being winners while the rest being losers, and it is believed that if a portfolio is thoughtfully constructed and contains an optimal mix of securities that perform di�erently from each other (i.e they have little correlation in between them), chances of this portfolio yielding a more stable return is higher. �is is because if some securities in a portfolio are inconsistent and volatile, other, more stable securities can nullify the inconsistency of the entire portfolio, hence stabilizing the yield pattern.

�e second reason pertains to the vision of the investor. Asset allocation allows an investor to �nancially plan for his long-term and short-term goals and avoid impulsive reactions. We will subsequently discuss this aspect of Asset Allocation.

We can divide the Asset Allocation decision into two simple steps as discussed below:

Step 1: Asset Allocation An Asset Allocation strategy can be devised based on the investor’s risk assessment, �nancial goals and return targets. It is the most fundamental step of an investment decision and involves determining an ideal mix of stocks, bonds, cash and other securities in a way such that the portfolio yields a return which best suits an investor’s need. �ere is always a downside of investing too much in bonds or cash as that might certify stable but lower returns. In the same way, too much investment in stocks might lead to portfolio volatility. �erefore, in order to meet your requirements, or keep pace with in�ation, you need to plan an ideal arrangement of securities for your portfolio.

Step 2: Diversi�cationWhile the �rst step bears upon the idea of portfolio construction, this step is linked to the proper dissemination of your assets in a way such that your portfolio is exposed to many di�erent segments of the market, some of which perform independently of the others. Proper diversi�cation of your portfolio can lead to higher and more stable returns.

As mentioned before, the e�ect of diversi�cation is most noticeable when instruments have very little interrelation between them. However, it was easier to build this sort of a portfolio previously than it is today. �is is because roughly over the past 10 years, �nancial markets have become increasingly interrelated and complex. Let us also not ignore the fact that during the 2008 �nancial trouble, most assets tended to perform similarly, leading us to believe in the proposition that most assets are conducive to a similar behavior in times of crisis and instability. �e �gure below shows ways of diversifying a portfolio and entering into newer and assorted mix of investment vehicles.

FIGURE 1:

Figure shows ways of diversifying a portfolio.

Institutions that do not pay requisite importance to the Asset Allocation decision might end up damaging their returns. Usually, institutions are advised to invest in a 60:40 ratio (Stocks: �xed income instruments) to remain on the safe side. Whereas, individuals are recommended to invest in an investment spectrum ranging from 100 percent stocks to 100 percent bonds depending on their separate variable characteristics. However, the Asset Allocation decision is dependent on several other factors and cannot be generalized for di�erent investors.

Following are a few, newer and e�cient ways that have now been developed and can be used for attaining optimal asset allocation:

Mean Variance Optimization

Mean Variance Optimization is a quantitative technique that can be used to calculate the trade-o� between maximum expected return and risk tolerance. �is technique has gained popularity over time because in recent times, the technique is applied on an asset class level as opposed to being applied only to portfolios of individual stocks previously.

�e development of Mean Variance Optimization has not only bene�tted institutional investors but has resulted in a breakthrough for retail brokerage houses as well, which, prior to this development were restricted on their advisory role to the investors. However, recently, they are proposing a greater degree of passive security and more thoughtful asset allocation recommendations to their investors. �is has become possible by using optimization and aiming to attain a favorable position with maximum expected return, minimal risk, or both.

Moreover, a few re�ned approaches taken from utility theory and behavioral economics can be deployed to develop polls or surveys that can authentically gauge an individual’s risk preferences.

Pension funds have also been familiarized with Optimization. Such funds take into account the reciprocity of both assets and liabilities and not only the assets unlike other funds. �e objective of Asset Allocation for these funds is to amplify the fund surplus i.e liabilities subtracted from assets for a stated degree of risk tolerance.

Tactical Asset AllocationTactical asset allocation is the process of adjusting a particular portfolio based on changes in the market value of assets contained in that portfolio. �e technique is quite dynamic and involves deviation from the strategic asset allocation when an investor’s short-term foresight is not aligned with his long term foresight used to develop a strategic asset allocation plan and precise short-term predictions on part of the investor can lead to better returns.

Pragmatically speaking, Tactical Asset Allocation models tend to recommend contrarian trades, that is, they recommend purchasing an asset as its current market value drops and vice versa. �us, tactical Asset Allocation involves perpetually arranging your portfolio based on your needs and changes in the market. One consequence of Tactical Asset Allocation is that by overweighting certain assets during certain times and underweighting others, the portfolio is riskier because of its reduced diversi�cation. �us, to

o�set this additional risk factor, this strategy would need to generate above market returns. �e notion, whether Tactical Asset Allocation Models have achieved this is still a matter of rumination and study but because the probable returns from successful Tactical Asset Allocation would be large, researchers will keep inspecting, and investors won’t cease to be on the look out for their discoveries.

Insured Asset Allocation�is strategy is similar to a portfolio insurance strategy and is a mirror image of the Tactical Asset Allocation strategy. With this strategy, a base portfolio parameter is �xed and the value of the portfolio is not allowed to fall below this base parameter. As long as the portfolio achieves a return above this parameter, you actively to try to increase the portfolio value as much as possible. If, however, the portfolio ever drops to below the base value, investment in risk-free securities enables the base value to become �xed.

�e main target audiences for this approach are risk-averse investors who desire a certain level of active portfolio management and also covet the protection of �xing a certi�ed minimum return below which the portfolio is not allowed to decline. For instance, this approach is best for an investor who has planned a nominal lifestyle for himself after retirement.

Asset Allocation & Uncertain Times�e importance of active portfolio management and wise asset allocation strategy has been reiterated enough. But at the brink of serious economic uncertainty, expectation for stock market returns is somewhat muted. �erefore, it is believed that in such a situation, a dynamic asset allocation plan should come into play for the advantage of certain clients.

Dynamic Asset Allocation uses a long term strategic Asset Allocation strategy as its foundation. Alternate investments can be added to the core portfolio for the sake of complementing it. It is even better, if these investments include segments which yield a higher return and bear little interdependence, so as to achieve a greater level of diversi�cation.

Besides, dynamic Asset Allocation strategies can also be accompanied by �exible investment strategies; tactical actions that are short-term in nature and aim to bank on perceived market opportunities. If 10-20% of your assets are allocated for such investments, your portfolio can be expected to react better in times of changing trends and conditions.

Asset allocation is evolving past a traditional “purchase and retain” dogma. Whilst this might not suit all clients, exercising a dynamic asset allocation plan can create a portfolio better able to handle uncertain market environments. Not to forget the fact that a solid strategic asset allocation plan remains the core strategy behind any tactical asset allocation strategy.

Asset Allocation & the local scenarioWith interest rates in Pakistan consistently hovering above 10 percent for the past �ve years, anyone would expect Pakistanis to be encouraged enough to save and reap bene�ts of higher returns. However, reality states that Pakistan actually stands out to re�ect one of the lowest savings in the region. Given the fact that majority of Pakistanis are not so keen on investing mainly because their expenditures on necessities do not leave any room for savings or so for other reasons, there is a chunk of people who are inclined in saving for a better future and lifestyle.

With growth of urban nuclear families, educated middle to upper middle class is inspirited to plan properly for a child’s education, health and future life. Reasons for investment in Pakistani society vary from a child’s education to his marriage, from being cushioned against the toils of post-retirement life to maternity expenditures. Young professionals may want to invest as a means to generate seed capital for their potential business idea or to live their dreams of traveling or wayfaring.

Reasons for investing are many. With di�erent individuals and di�erent investment objectives in mind, the asset allocation needs of these investors must be customized accordingly.

Asset Allocation & Financial PlanningOnce you are done with choosing your model for Asset Allocation, the �nal stage is to test this model by contextualizing it with a precise �nancial plan. It might be easy for an investor to choose which Asset Allocation plan will provide him with the best possible returns but the investor should also �gure out a way to determine that expected return and also estimate the trade-o� for that higher return potential.

A well-concocted �nancial plan will guide the investor out of this bewilderment. First, it will determine what level of projected investment return is necessary to allow you to meet your lifestyle goals, which can help lead you to the right mix of stocks, bonds and cash. Second, the plan will evaluate the impact of the portfolio risk associated with that mix.

Traditionally, �nancial planning models focused on expected return and neglected the variability of outcomes that is associated with increased volatility. With the introduction of probability-based planning tools, the investor can foresee the e�ect of risk on their investment portfolios, they can vary the amount of risk and can study their corresponding returns. For example a portfolio bearing higher risk may yield a higher return but it also has a probability of falling far short beneath their targets.

When using an asset allocation approach to designing a portfolio, it is important to not focus just on the expected return of that portfolio. �e risk associated with an increasing, or decreasing, portfolio return is just as important to the success of an investment strategy.

Asset Allocation & �e Future

Most forecasters fall into two divisions. Forecasters in the �rst division are eager to predict that the future will closely mirror the recent past. �eir ideals are those generals who are always preparing to �ght the last war. Forecasters in the second division rely heavily

upon the adage that the only constant is change itself. Proponents of this school of thought usually don’t know what to expect, but are quite sure it will be nothing like anything we’ve seen before. �ese individuals do realize the problems of delineating the future of this area.

We should view the future of asset allocation through lenses borrowed from both divisions. �at is, certain aspects of asset allocation today will continue to be recognizable for the years to come. To be more precise, the goals and importance of asset allocation will not change, but the mechanisms by which investors seek to achieve those goals will be new.

�e goal of the asset allocation decision, was, is, and will be to select a combination of assets that will generate a return su�ciently high and safe so as to o�set some future liability. It is also safe to say that asset allocation decisions will have a continuing large role in explaining portfolio returns.

Industry-wide - Net Assets (PKR million)

Net Assets - Open End Funds (PKR million)

Net Assets - Closed End Funds (PKR million)

Net Assets - Pension Schemes (PKR million)

Sales (PKR million) Redemptions (PKR million) Net Sales (PKR million)

Open End Funds' Return** Closed End Funds' Return**

General Pension Schemes Return**

Islamic Pension Schemes Return**

s

Meeting of the Board of Directors

In order to ensure that the Board of Directors ful�ls the duties and responsibilities conferred by the members of MUFAP, the Board conducts meetings on a regular basis to make immediate and prudent decisions. �e Board of Directors held three meetings during the quarter Jul-Sep 2013.

�e activities undertaken by Board are as follows:

Proposed amendments in the de�nition of Related Parties in Restricted List of Code for Distributors

�e Board deliberated in detail on the matter of proposed

amendments in the de�nition of Related Parties in the Restricted List of Code for Distributors. After careful consideration of the impacts that the amendments may entail, it was decided that all individuals (namely employees, directors, sponsors of the RSPs) should be excluded from the de�nition of Related Parties. �e revised de�nition is applicable to all new investments brought in on or after July 16, 2013 and is not applicable to existing investments made by or before July 15, 2013.

Valuation of GOP Ijarah Sukuk

�e Board recommended that AMCs should use ‘PKISRV’ quoted on Reuters as the relevant price to value the GOP Ijarah Sukuks to determine net assets of CIS under their management, which the SECP approved in September.

Meetings of the Committees

MUFAP Committees held many discussions to make important, well planned proposals on behalf of industry. �e following table presents the number of meetings held during the quarter Jul-Sep’13.

Technical Committee - VPS

�e VPS – Technical Committee held extensive discussions to discuss the dissimilar taxation and operational practices being adopted by di�erent VPS Managers. �e VPS Committee constituted a Sub-Committee, involving a representative from each VPS Manager, to draw up recommendations for the tax treatment. �e Committee also engaged Senior Tax expert, Mr. Shabbar Zaidi on the matter and has requested for clari�cation from FBR on one of the matters.

Meeting with NCCPL A meeting was held between operations sta� of AMCs and NCCPL representatives on July 22, 2013 to evaluate the mechanics and possible data sharing from AMCs to NCCPL for netting of CGT. It was decided that NCCPL would develop a concept paper covering brief mechanism of centralized CGT collection to AMCs for their review and comments.

Elections to elect Directors/Executive Committee Members of MUFAP for the year 2013 / 2014

As required under the Trade Organizations Rules, 2007, MUFAP is required to hold its elections each year to elect Directors against the vacancies arising on account of completion of two-year tenure of some Directors. Board members are elected for a two-year term.

�e retiring Directors on the completion of their two year tenure on September 30, 2013 are: 1. Mr. Adnan Siddiqui (Resigned August-2013)2. Mr. Amer Maqbool 3. Mr. Imran Azim 4. Mr. Mir Muhammad Ali 5. Mr. Nihal Cassim

�e continuing Directors of MUFAP for the year 2013/ 2014 are: 1. Dr. Amjad Waheed 2. Mr. Imran Motiwala 3. Mr. Mir Adil Rashid 4. Mr. Rashid Mansur 5. Ms Maheen Rahman6. Ms Hina Ghazanfar (on reserved seat for women)

In addition, Mr. Rehan N. Shaikh will serve on the Board as provided under Rule 23(5)(d) of the Trade Organization Rules, 2007. At the Extra Ordinary General Meeting on September 26, 2013, MUFAP announced the appointment, by virtue of elections, of the following directors to the Board, namely:1. Mr. Farid Ahmed Khan 2. Mr. M. Habib-ur-Rahman 3. Mr. Mohammad Shoaib 4. Mr. Yasir Qadri 5. Mr. Enamullah Khan

New Board of Directors

�e new Board of Directors of MUFAP at its �rst meeting held on October 1, 2013 elected Dr. Amjad Waheed as Chairman, Mr. Mohammad Shoaib as Senior Vice Chairman and Mr. Farid Ahmed Khan as Vice Chairman MUFAP for the year 2013-2014.�e Board of Directors of MUFAP for the 2013-14 term is as follows:

1) Dr. Amjad Waheed - Chairman; 2) Mr. Mohammad Shoaib - Senior Vice Chairman; 3) Mr. Farid Ahmed Khan - Vice Chairman;4) Mr. Rehan N. Shaikh;5) Mr. Rashid Mansur;6) Mr. M. Habib-ur-Rahman;7) Mr. Yasir Qadri8) Mr. Imran Motiwala;9) Ms Hina Ghazanfar;10) Ms Maheen Rahman;11) Mr. Mir Adil Rashid;12) Mr. Enamullah Khan; and13) Ms Mashmooma Z. Majeed - Chief Executive

Chairman Dr. Amjad Waheed, CFA

Dr. Amjad Waheed holds a doctorate in Investments & Finance from Southern Illinois University, USA and is also a Chartered Financial Analyst. For the last 7 years he is CEO of NBP Fullerton Asset Management Ltd (NAFA), which is a subsidiary of National Bank of Pakistan, with Fullerton Fund Management Company of Singapore as the other joint venture partner. NAFA is presently managing fourteen mutual funds and several portfolios with about Rs 45 billion invested in these funds. NAFA is among the largest Asset Management Companies in Pakistan today.

Before joining NAFA, Dr. Waheed was Head of Equity Mutual Funds & Portfolios at Riyad Bank, Saudi Arabia, for about 5 years where he was managing US$ 7.5 billion invested in 22 mutual funds. Prior to that Dr. Waheed was Head of Investments at NIT,

and Chief Operation O�cer of FC-ABN AMRO Equities for several years. Before moving back to Pakistan, Dr. Waheed was Assistant Professor of Finance at Tennessee State University, USA and has published several articles in top journals of the world such as Journal of Banking & Finance and Financial and Financial Management.Dr. Waheed has served on the Board of various companies including Siemens, Nishat Mills, PICIC, Askari Bank, Millat Tractors, Fauji Fertilizer, Pakitstan Tobacco Company, Treet Corporation, Gul Ahmed Textile, Bata Pakistan.

Senior Vice Chairman Mr. Mohammad Shoaib, CFA

Mr. Mohammad Shoaib, CFA is the Chief Executive of Al Meezan Investment Management Ltd. He has played a key role in setting up the company and has been associated with it since inception. He is a highly quali�ed and seasoned professional with 23 years experience in capital markets. He has to his credit many accolades and awards, the most signi�cant of them being the "Most In�uential CFA charter holder" awarded by CFA Institute in 2006.

Mr. Shoaib holds an MBA degree from IBA besides being a Chartered Financial Analyst (CFA) charter holder. He has to his credit the honor of being the founder and �rst president of CFA Association of Pakistan, a member society of CFA Institute. He has been active participant in the Islamic �nance and asset management for the last 10 years. In this respect, he has also actively participated as a speaker and panelist in various international and domestic seminars, conferences and workshops.

Mr. Shoaib has also served in voluntary capacity at di�erent domestic and international institutions. He has served as a Director on the Board of Karachi Stock Exchange and Vice Chairman on the Board of Mutual Funds Association of Pakistan. He is currently serving on the Board of Directors of Pakistan Institute of Corporate Governance and Institute of Capital Markets. He has also served on various global and regional committees of CFA Institute including Asia Paci�c Advocacy Committee, Global Task Force on Corporate

Governance, GIPS Regional Council and Asset Manager Code Advisory Committee. He has also had the honour to represent over 16,000 charterholders in Asia Paci�c Region as their representative on the Presidents' Council of CFA Institute.

Vice Chairman Mr. Farid Ahmed Khan, CFA

Mr. Farid Ahmed Khan, CFA is the CEO of ABL Asset Management. He has been involved with capital markets for over 18 years and has a broad-based, global experience with bulge bracket �rms in Asset Management, Investment Banking, Investment Research and Sales, Business Development & International Project Finance. He joined ABL AMC from Credit Suisse, where he was the Country Manager of Credit Suisse Pakistan. Prior to that, he worked for MCB, initially as Head of Investment Banking Group and later as the CEO of MCB Asset Management. Mr. Khan has extensive experience outside Pakistan, having worked at Morgan Stanley, ING Barings Securities and CLSA Emerging Markets in Kuala Lumpur, London and Istanbul in a variety of senior positions. He holds an MBA in Finance from IBA, Karachi and got his CFA quali�cation in 1998.

New Committees

MUFAP Board elected its Professional Committees, Chairperson and Vice-Chairperson of each Committee for the year 2013-14. �e list of Committees, their Chairperson and Vice-Chairperson is as follows:

SECP forms Shariah Advisory Board

SECP constituted a Shariah Advisory Board (SAB) to harmonize the Shariah interpretations and strengthen the regulatory and supervisory oversight of Islamic �nancial institutions (IFIs) and Islamic capital markets (ICMs) in Pakistan. It will also advise the Commission on the Shariah-compliance aspects of various products launched and or the processes being adopted by the regulated entities. It will also provide guidance for issuance of new laws, rules and regulations for e�ective monitoring and supervision of Islamic Financial Products and to suggest ways and means for development of IFIs and ICMs in the country.

MARKET UPDATE04

page 6 of 24 mufap quarterly newsletter

Money Market

To meet the challenges of maintaining stability in the foreign exchange market and controlling high growth in money supply, SBP decided to gradually decrease the outstanding amount of liquidity injections. Since the beginning of FY14, interbank market liquidity conditions have considerably eased primarily due to substantial increase in the pace of government borrowing from the SBP. In fact, SBP mopped up Rs. 1,556.45 billion and injected Rs. 630.70 billion during Q1-FY14.

In terms of controlling growth in money supply, however, SBP’s e�orts of curtailing liquidity injections did not experience much success as these were o�set by an increase in direct �scal borrowings from the SBP. �e increase of Rs. 1,446 billion in budgetary borrowings from the banking system during FY13 was almost Rs. 1 trillion higher than the original target and was even higher than the total expansion in M2. Deviation of this scale has signi�cantly constrained e�ective monetary management, disrupted �nancial intermediation in the economy, and has led to a sharp increase in domestic debt. Showing a growth of 24.6% in FY13, the stock of government’s domestic debt has reached Rs. 9.5 trillion as of end-June 2013. Similarly, a considerable increase in public debt to revenue ratio re�ects weak repayment capacity of the government. �e acceleration in �scal borrowings from the SBP during H2-FY13, Rs. 714 billion, and Q1-FY14 up till 30th August 2013, Rs. 547 billion, is particularly worrisome. �e inability to raise the tax-GDP ratio is the fundamental source of large �scal de�cits, high borrowings, and rising debt. Although there has been a consistent gap between Federal Board of Revenue’s (FBR) budget targets and actual outcomes in the last few years, the gap of Rs. 445 billion in FY13 was exceptionally high. In fact, this is more than the cumulative shortfall of Rs. 349 billion during the last �ve years.

On the external front, stress in the external account has gradually increased with every passing month of 2013 due to shrinking net capital and �nancial �ows and high loan repayments to the IMF.

While the former was only $517 million or 0.2 percent of GDP, the latter increased to $3 billion in FY13. As a result, despite reduction in the external current account de�cit by about half, to $2.3 billion or 1.0 percent of GDP, the SBP’s foreign exchange reserves declined to $6 billion by end-June 2013 from $10.8 billion at the beginning of FY13. �ese stand at $5.2 billion as on 6th September, 2013 after receiving $544.5 million under the new IMF program. Despite pressures and speculations of a drop in the value of the Pak rupee the foreign exchange market has largely remained stable in FY13. However, since the beginning of FY14 the rupee has depreciated by 5.0 percent as of 12th September 2013.

�e year-on-year CPI based in�ation rate was recorded at 8.3% in July 2013, then to 8.55% in August 2013, however dipped down to 7.39% in September 2013.�ough CPI In�ation remained within single digit, however, it witnessed an upward trend as it increased to 7.39 percent in September 2013 compared to 5.85 percent in June 2013 and 6.6 percent in March 2013. �e impact of upward adjustments in energy prices and an increase in the GST together with the removal of certain exemptions put pressure on in�ation.In order to counter in�ationary expectations, SBP raised the discount rate by 50 basis points to 9.5 percent with e�ect from September 16, 2013.

Movement in KIBOR

Treasury Bills:

A total of 6 T-bill auctions were held by SBP during the quarter in which a total amount of Rs. 1,348.88 billion was raised. Since the beginning of FY14, market’s preference for shorter tenor T-Bills has increased as about 83% of the bank’s total o�ers in recent T-Bill auctions were concentrated in 3-month bills.

T-Bill Auctions (Amount in PKR billion; rates in %)

Pakistan Investment Bonds

�e accepted amount in the PIB auctions during Q1-FY14 fell short of the target .

PIB Auctions (Yields in % and Face Value in PKR billion)

Debt Market

�e table below summarizes the TOP 15 trades of TFCs/Sukuk on the basis of Face value during the Q1-FY14:

Equity Market

KSE-100 index made a strong start to the �scal year 2014, as the index gained 826.99 points, or 3.94%, to stand at 21,832.68 points during the �rst three months of FY14. During the period, index struggled to cross the 23,000 points level and made a high of 23,776.22 on a closing basis. Stock market began the �rst month of �scal year 2014 with a strong rally, overcoming jitters stemming from treason proceedings against former president General (retd) Pervez Musharraf and slowdown in global markets. �e government’s successful negotiations with IMF for a $5.3 billion loan, resolution of circular debt by issuing treasury bills and bonds and anticipation of strong corporate earnings for the quarter ended June 30 buoyed investors’ con�dence as the share prices appreciated across the board and index posted a gain of 2.307.09 points, or 10.98% to settle at 23,312.78 level in July.

After posting strong gain in July, KSE-100 faltered in August as investors continued to worry about ever-escalating Syrian crisis and tumbling regional markets. Stock market further pressured by a slew of disappointing and less-than-expected corporate earnings, falling foreign exchange reserves and high in�ation �gures for July. Moreover, concerns on a possible interest rate hike in the upcoming monetary policy announcement, potential spike in oil prices, decline in cement prices due to breakdown in price discipline, heavy foreign net selling and persistent depreciation in the rupee dragged the KSE-100 index down 1,151.93 points, or 4.94%, to 22,160.85 in August. �e index showed a mixed performance in September. In the �rst half of the month, the approval of the $6.64 billion loan package by IMF, the plans to privatize Pakistan International Airlines, strong foreign in�ows and the release of the IMF’s �rst tranche worth of $550 million helped lift the index to 23,639.97 on a closing basis. However, sentiment reversed towards the end of the month after the central bank’s decision to increase the rate of return on savings deposits to 6.5%. Moreover, steep decline in the value of Pakistani

rupee against the US dollar, constant repayments to IMF, a 50 basis points increase in the discount rate and heavy foreign net selling dragged the KSE-100 index down 328.17 points, or 1.48%, to 21,832.68 in September.

Mutual Fund Market:

�e total net assets decreased to Rs. 359.947 billion in the �rst quarter of FY14 versus Rs. 361.668 billion for the Q4FY13, a reduction of 0.48% quarter over quarter. �e open-end funds went up by 0.71% to Rs. 327.594 billion, pension funds went up by 9.67% to Rs. 5.288 billion and closed-end decreased by 14.23% to Rs. 27.064 billion.

Funds launched during the quarter Q1-FY14

Funds matured during the quarter Q1-FY14

Funds with changed structure/other features Energy Crisis: Causes and ImpactsBy Sara Aquil Walji, Research Analyst, HBL Asset Management

Energy is the cornerstone for any economy’s development and growth. �e current situation has worsened in Pakistan over the past few years and likely to continue if measures are not taken to mitigate the issue on a long term basis. �e gap between demand and supply has reached 6000MW resulting in scheduled and unscheduled load shedding, negatively a�ecting our industrial sector, hurting our exports and has even hampered the GDP growth rate by 2%. Subsidies to the power sector have steadily been increasing and form the biggest part of total subsidies amounting to around Rs 349,287mn (95% of the total subsidies) in FY 2012-13. �e new government has allocated Rs. 220,100mn to the power sector for the FY 2013-14 which is 91.5% of the total subsidy budget. (Source: Annual budget 2014) With recent emphasis on matters to resolve energy crisis and develop renewable and non-renewable sources of energy, it is worthwhile to note why energy crisis became as severe as it is now.

�e root of this crisis is that Pakistan’s electricity generation mix is highly skewed towards the most expensive kinds .�ere appears to be an almost inverse relationship between the sources of electricity that are most expensive to set and those that are most expensive to run. �e following chart depicts this relationship:

Source: Express Tribune �is highlights the fact why there is a heavy concentration toward

the construction of thermal power plants since they are relatively cheaper to build than hydropower plants. �e government has not dedicated enough funds for the development of hydropower projects which are the most expensive to build but cheapest to run on a per unit basis.Pakistan’s electricity generation is highly dependent on imported oil as almost $14.5bn worth of oil is imported each year which accounts for around 35% of electricity generation. Comparing Pakistan with India and Bangladesh reveals that Pakistan relies heavily on oil for electricity generation where as India uses coal, a relatively cheaper source for electricity generation and Bangladesh on the other hand allocates 73% of its electricity generation to gas.

Source: Economic Survey report for 2012-2013

With a prominent shift in recent years towards the use of thermal power stations instead of hydropower sources and a reduction in electricity generation from coal, Pakistan’s electricity costs ends up being more expensive than it needs to be and since the government has adopted a policy of uniform tari� across the country the Tari� Di�erential Subsidy owed by the Government of Pakistan on an annual basis has increased substantially.

Circular debt is another major concern hampering the growth of Pakistan’s economy. In simple words circular debt is the amount of

cash shortfall within the Central Power Purchasing Agency (CPPA) that it cannot pay to power supply companies. �is shortfall is the result of (a) the di�erence between the actual cost of providing electricity in relation to revenues realized by the power distribution companies (DISCOs) from sales to customers plus subsidies; and (b) insu�cient payments by the DISCOs to CPPA out of realized revenue as they give priority to their own cash �ow needs. (Source: USAID Report March 2103)

�is revenue shortfall cascades through the entire energy supply chain, from electricity generators to fuel suppliers, re�ners, and producers; resulting in a shortage of fuel supply to the public sector thermal generating companies (GENCOs), a reduction in power generated by Independent Power Producers (IPPs), and an increases in load shedding.

According to the report published by the USAID in March 2013, circular debt amounts to Rs872bn which is actually 4% of GDP. According to Pakistan’s Economic Survey report for 2012-2013, there is a strong relationship between GDP growth rate and electricity growth as shown in the �gure below. It can be easily deduced that periods of low or negative electricity growth have witnessed low GDP growth rate, while periods where electricity growth picked up there is increase in GDP growth rate.

�is comes as no surprise, since industrial output is heavily dependent on the amount of electricity delivered to them. Continuous power breakdowns prevented industries from operating at their full capacity level. �e power outages have obstructed the viability of the textile industry as exporters were unable to meet their

commitments. During July-March 2012-13, foreign exchange earnings through exports of synthetic textile fabrics and woolen industry showing a decline of 25.3% and 5.1% respectively as compared to last year. During the period under review even in quantity term also recorded a decline of 30% and 15.8% respectively.

Coupled with an ine�cient system and expensive fuel mix, power theft is another major issue faced by Pakistanis. It is interesting to note that annual revenue collection e�ciency was estimated to be around 87%; however that 13% of lost e�ciency has a �nancial impact of Rs 86bn which is equivalent to 41 days of furnace oil costs for thermal power plants. �e following �gure shows the percentage of bills that were uncollected in 2012. �e e�ciency of di�erent DISCOs is disproportionate in revenue collection. �is essentially leads to the inclusion of the cost of power theft in the power tari�, meaning that the honest payers also bear the cost of those that steal.

Power theft is not only committed by normal residents but the main defaulters are the government institutions themselves. �e government owns around 51% of the uncollected bills which amounts to Rs 118bn out of the uncollected revenue receipts of Rs 386bn. In my opinion, this the amount which causes the discrepancy between the amount of RS500.3bn to be injected to resolve the circular debt issue and �gure of Rs 872.41bn since the government has a proposal to o�set provisional dues via a �scal adjuster. Due to a growing economy, Pakistan’s energy needs have more than doubled in the past 15 years. Energy shortages have far devastating

e�ects on our economy. Not only does it cause civil disturbances on a small scale but it a�ects our GDP on a larger note. Injecting money into the chain will only resolve the issue on a temporary basis. �ese challenges require a multi-prong approach that would address energy shortages in the immediate future and help the country build longer term energy su�ciency.

�ere needs to be a shift away from thermal power to alternative sources of energy which are not only cheaper but also environmentally friendly. Pakistan has large untapped renewable resources such as water, sun and wind and recently the government has taken keen interest on the development of hydro power projects and Neelum Jhelum Hydroelectric Project is one of the many projects which the new government has started which will approximately add 5.15bn units of electricity annually. Moreover, an e�ective system of governance must be in place to curb theft, recuperate dues and enforce policies.

�e Importance of Asset Allocation in attaining Optimal Returns

By Yamna Hassan, Asst. Manager-Business DevelopmentLakson Investments

“Tis the part of a wise man to keep himself today for tomorrow, and not venture all his eggs in one basket.” – Miguel de Cervantes, Don Quixote de la Mancha, 1605.

�e afore-mentioned quote indicates that along with being a great writer, Cervantes would have also proved to be a wise investor.

Investment related decisions are preceded by de�ning a proper Asset Allocation plan. According to recent research, the Asset Allocation decision is responsible for 91.5 percent of the variation between returns on di�erent portfolios. Given the importance of Asset Allocation, it has attained a center stage in any investment decision.

Asset Allocation is mainly important for two de�nite reasons. �e �rst reason pertains to portfolio design; variation in portfolio designs can lead to some investment decisions being winners while the rest being losers, and it is believed that if a portfolio is thoughtfully constructed and contains an optimal mix of securities that perform di�erently from each other (i.e they have little correlation in between them), chances of this portfolio yielding a more stable return is higher. �is is because if some securities in a portfolio are inconsistent and volatile, other, more stable securities can nullify the inconsistency of the entire portfolio, hence stabilizing the yield pattern.

�e second reason pertains to the vision of the investor. Asset allocation allows an investor to �nancially plan for his long-term and short-term goals and avoid impulsive reactions. We will subsequently discuss this aspect of Asset Allocation.

We can divide the Asset Allocation decision into two simple steps as discussed below:

Step 1: Asset Allocation An Asset Allocation strategy can be devised based on the investor’s risk assessment, �nancial goals and return targets. It is the most fundamental step of an investment decision and involves determining an ideal mix of stocks, bonds, cash and other securities in a way such that the portfolio yields a return which best suits an investor’s need. �ere is always a downside of investing too much in bonds or cash as that might certify stable but lower returns. In the same way, too much investment in stocks might lead to portfolio volatility. �erefore, in order to meet your requirements, or keep pace with in�ation, you need to plan an ideal arrangement of securities for your portfolio.

Step 2: Diversi�cationWhile the �rst step bears upon the idea of portfolio construction, this step is linked to the proper dissemination of your assets in a way such that your portfolio is exposed to many di�erent segments of the market, some of which perform independently of the others. Proper diversi�cation of your portfolio can lead to higher and more stable returns.

As mentioned before, the e�ect of diversi�cation is most noticeable when instruments have very little interrelation between them. However, it was easier to build this sort of a portfolio previously than it is today. �is is because roughly over the past 10 years, �nancial markets have become increasingly interrelated and complex. Let us also not ignore the fact that during the 2008 �nancial trouble, most assets tended to perform similarly, leading us to believe in the proposition that most assets are conducive to a similar behavior in times of crisis and instability. �e �gure below shows ways of diversifying a portfolio and entering into newer and assorted mix of investment vehicles.

FIGURE 1:

Figure shows ways of diversifying a portfolio.

Institutions that do not pay requisite importance to the Asset Allocation decision might end up damaging their returns. Usually, institutions are advised to invest in a 60:40 ratio (Stocks: �xed income instruments) to remain on the safe side. Whereas, individuals are recommended to invest in an investment spectrum ranging from 100 percent stocks to 100 percent bonds depending on their separate variable characteristics. However, the Asset Allocation decision is dependent on several other factors and cannot be generalized for di�erent investors.

Following are a few, newer and e�cient ways that have now been developed and can be used for attaining optimal asset allocation:

Mean Variance Optimization

Mean Variance Optimization is a quantitative technique that can be used to calculate the trade-o� between maximum expected return and risk tolerance. �is technique has gained popularity over time because in recent times, the technique is applied on an asset class level as opposed to being applied only to portfolios of individual stocks previously.

�e development of Mean Variance Optimization has not only bene�tted institutional investors but has resulted in a breakthrough for retail brokerage houses as well, which, prior to this development were restricted on their advisory role to the investors. However, recently, they are proposing a greater degree of passive security and more thoughtful asset allocation recommendations to their investors. �is has become possible by using optimization and aiming to attain a favorable position with maximum expected return, minimal risk, or both.

Moreover, a few re�ned approaches taken from utility theory and behavioral economics can be deployed to develop polls or surveys that can authentically gauge an individual’s risk preferences.

Pension funds have also been familiarized with Optimization. Such funds take into account the reciprocity of both assets and liabilities and not only the assets unlike other funds. �e objective of Asset Allocation for these funds is to amplify the fund surplus i.e liabilities subtracted from assets for a stated degree of risk tolerance.

Tactical Asset AllocationTactical asset allocation is the process of adjusting a particular portfolio based on changes in the market value of assets contained in that portfolio. �e technique is quite dynamic and involves deviation from the strategic asset allocation when an investor’s short-term foresight is not aligned with his long term foresight used to develop a strategic asset allocation plan and precise short-term predictions on part of the investor can lead to better returns.

Pragmatically speaking, Tactical Asset Allocation models tend to recommend contrarian trades, that is, they recommend purchasing an asset as its current market value drops and vice versa. �us, tactical Asset Allocation involves perpetually arranging your portfolio based on your needs and changes in the market. One consequence of Tactical Asset Allocation is that by overweighting certain assets during certain times and underweighting others, the portfolio is riskier because of its reduced diversi�cation. �us, to

o�set this additional risk factor, this strategy would need to generate above market returns. �e notion, whether Tactical Asset Allocation Models have achieved this is still a matter of rumination and study but because the probable returns from successful Tactical Asset Allocation would be large, researchers will keep inspecting, and investors won’t cease to be on the look out for their discoveries.

Insured Asset Allocation�is strategy is similar to a portfolio insurance strategy and is a mirror image of the Tactical Asset Allocation strategy. With this strategy, a base portfolio parameter is �xed and the value of the portfolio is not allowed to fall below this base parameter. As long as the portfolio achieves a return above this parameter, you actively to try to increase the portfolio value as much as possible. If, however, the portfolio ever drops to below the base value, investment in risk-free securities enables the base value to become �xed.

�e main target audiences for this approach are risk-averse investors who desire a certain level of active portfolio management and also covet the protection of �xing a certi�ed minimum return below which the portfolio is not allowed to decline. For instance, this approach is best for an investor who has planned a nominal lifestyle for himself after retirement.

Asset Allocation & Uncertain Times�e importance of active portfolio management and wise asset allocation strategy has been reiterated enough. But at the brink of serious economic uncertainty, expectation for stock market returns is somewhat muted. �erefore, it is believed that in such a situation, a dynamic asset allocation plan should come into play for the advantage of certain clients.

Dynamic Asset Allocation uses a long term strategic Asset Allocation strategy as its foundation. Alternate investments can be added to the core portfolio for the sake of complementing it. It is even better, if these investments include segments which yield a higher return and bear little interdependence, so as to achieve a greater level of diversi�cation.

Besides, dynamic Asset Allocation strategies can also be accompanied by �exible investment strategies; tactical actions that are short-term in nature and aim to bank on perceived market opportunities. If 10-20% of your assets are allocated for such investments, your portfolio can be expected to react better in times of changing trends and conditions.

Asset allocation is evolving past a traditional “purchase and retain” dogma. Whilst this might not suit all clients, exercising a dynamic asset allocation plan can create a portfolio better able to handle uncertain market environments. Not to forget the fact that a solid strategic asset allocation plan remains the core strategy behind any tactical asset allocation strategy.

Asset Allocation & the local scenarioWith interest rates in Pakistan consistently hovering above 10 percent for the past �ve years, anyone would expect Pakistanis to be encouraged enough to save and reap bene�ts of higher returns. However, reality states that Pakistan actually stands out to re�ect one of the lowest savings in the region. Given the fact that majority of Pakistanis are not so keen on investing mainly because their expenditures on necessities do not leave any room for savings or so for other reasons, there is a chunk of people who are inclined in saving for a better future and lifestyle.

With growth of urban nuclear families, educated middle to upper middle class is inspirited to plan properly for a child’s education, health and future life. Reasons for investment in Pakistani society vary from a child’s education to his marriage, from being cushioned against the toils of post-retirement life to maternity expenditures. Young professionals may want to invest as a means to generate seed capital for their potential business idea or to live their dreams of traveling or wayfaring.

Reasons for investing are many. With di�erent individuals and di�erent investment objectives in mind, the asset allocation needs of these investors must be customized accordingly.

Asset Allocation & Financial PlanningOnce you are done with choosing your model for Asset Allocation, the �nal stage is to test this model by contextualizing it with a precise �nancial plan. It might be easy for an investor to choose which Asset Allocation plan will provide him with the best possible returns but the investor should also �gure out a way to determine that expected return and also estimate the trade-o� for that higher return potential.

A well-concocted �nancial plan will guide the investor out of this bewilderment. First, it will determine what level of projected investment return is necessary to allow you to meet your lifestyle goals, which can help lead you to the right mix of stocks, bonds and cash. Second, the plan will evaluate the impact of the portfolio risk associated with that mix.

Traditionally, �nancial planning models focused on expected return and neglected the variability of outcomes that is associated with increased volatility. With the introduction of probability-based planning tools, the investor can foresee the e�ect of risk on their investment portfolios, they can vary the amount of risk and can study their corresponding returns. For example a portfolio bearing higher risk may yield a higher return but it also has a probability of falling far short beneath their targets.

When using an asset allocation approach to designing a portfolio, it is important to not focus just on the expected return of that portfolio. �e risk associated with an increasing, or decreasing, portfolio return is just as important to the success of an investment strategy.

Asset Allocation & �e Future

Most forecasters fall into two divisions. Forecasters in the �rst division are eager to predict that the future will closely mirror the recent past. �eir ideals are those generals who are always preparing to �ght the last war. Forecasters in the second division rely heavily

upon the adage that the only constant is change itself. Proponents of this school of thought usually don’t know what to expect, but are quite sure it will be nothing like anything we’ve seen before. �ese individuals do realize the problems of delineating the future of this area.

We should view the future of asset allocation through lenses borrowed from both divisions. �at is, certain aspects of asset allocation today will continue to be recognizable for the years to come. To be more precise, the goals and importance of asset allocation will not change, but the mechanisms by which investors seek to achieve those goals will be new.

�e goal of the asset allocation decision, was, is, and will be to select a combination of assets that will generate a return su�ciently high and safe so as to o�set some future liability. It is also safe to say that asset allocation decisions will have a continuing large role in explaining portfolio returns.

Industry-wide - Net Assets (PKR million)

Net Assets - Open End Funds (PKR million)

Net Assets - Closed End Funds (PKR million)

Net Assets - Pension Schemes (PKR million)

Sales (PKR million) Redemptions (PKR million) Net Sales (PKR million)

Open End Funds' Return** Closed End Funds' Return**

General Pension Schemes Return**

Islamic Pension Schemes Return**

Tenor Q1-FY14 Q2-FY14KIBOR 3-month 9.08%-9.59% 8.89%-9.44%KIBOR 6-month 9.09%-9.62% 8.99%-9.51%KIBOR 12-month 9.39%-9.95% 9.38%-10.00%

Source: SBP

Meeting of the Board of Directors

In order to ensure that the Board of Directors ful�ls the duties and responsibilities conferred by the members of MUFAP, the Board conducts meetings on a regular basis to make immediate and prudent decisions. �e Board of Directors held three meetings during the quarter Jul-Sep 2013.

�e activities undertaken by Board are as follows:

Proposed amendments in the de�nition of Related Parties in Restricted List of Code for Distributors

�e Board deliberated in detail on the matter of proposed

amendments in the de�nition of Related Parties in the Restricted List of Code for Distributors. After careful consideration of the impacts that the amendments may entail, it was decided that all individuals (namely employees, directors, sponsors of the RSPs) should be excluded from the de�nition of Related Parties. �e revised de�nition is applicable to all new investments brought in on or after July 16, 2013 and is not applicable to existing investments made by or before July 15, 2013.

Valuation of GOP Ijarah Sukuk

�e Board recommended that AMCs should use ‘PKISRV’ quoted on Reuters as the relevant price to value the GOP Ijarah Sukuks to determine net assets of CIS under their management, which the SECP approved in September.

Meetings of the Committees

MUFAP Committees held many discussions to make important, well planned proposals on behalf of industry. �e following table presents the number of meetings held during the quarter Jul-Sep’13.

Technical Committee - VPS

�e VPS – Technical Committee held extensive discussions to discuss the dissimilar taxation and operational practices being adopted by di�erent VPS Managers. �e VPS Committee constituted a Sub-Committee, involving a representative from each VPS Manager, to draw up recommendations for the tax treatment. �e Committee also engaged Senior Tax expert, Mr. Shabbar Zaidi on the matter and has requested for clari�cation from FBR on one of the matters.

Meeting with NCCPL A meeting was held between operations sta� of AMCs and NCCPL representatives on July 22, 2013 to evaluate the mechanics and possible data sharing from AMCs to NCCPL for netting of CGT. It was decided that NCCPL would develop a concept paper covering brief mechanism of centralized CGT collection to AMCs for their review and comments.

Elections to elect Directors/Executive Committee Members of MUFAP for the year 2013 / 2014

As required under the Trade Organizations Rules, 2007, MUFAP is required to hold its elections each year to elect Directors against the vacancies arising on account of completion of two-year tenure of some Directors. Board members are elected for a two-year term.

�e retiring Directors on the completion of their two year tenure on September 30, 2013 are: 1. Mr. Adnan Siddiqui (Resigned August-2013)2. Mr. Amer Maqbool 3. Mr. Imran Azim 4. Mr. Mir Muhammad Ali 5. Mr. Nihal Cassim

�e continuing Directors of MUFAP for the year 2013/ 2014 are: 1. Dr. Amjad Waheed 2. Mr. Imran Motiwala 3. Mr. Mir Adil Rashid 4. Mr. Rashid Mansur 5. Ms Maheen Rahman6. Ms Hina Ghazanfar (on reserved seat for women)

In addition, Mr. Rehan N. Shaikh will serve on the Board as provided under Rule 23(5)(d) of the Trade Organization Rules, 2007. At the Extra Ordinary General Meeting on September 26, 2013, MUFAP announced the appointment, by virtue of elections, of the following directors to the Board, namely:1. Mr. Farid Ahmed Khan 2. Mr. M. Habib-ur-Rahman 3. Mr. Mohammad Shoaib 4. Mr. Yasir Qadri 5. Mr. Enamullah Khan

New Board of Directors

�e new Board of Directors of MUFAP at its �rst meeting held on October 1, 2013 elected Dr. Amjad Waheed as Chairman, Mr. Mohammad Shoaib as Senior Vice Chairman and Mr. Farid Ahmed Khan as Vice Chairman MUFAP for the year 2013-2014.�e Board of Directors of MUFAP for the 2013-14 term is as follows:

1) Dr. Amjad Waheed - Chairman; 2) Mr. Mohammad Shoaib - Senior Vice Chairman; 3) Mr. Farid Ahmed Khan - Vice Chairman;4) Mr. Rehan N. Shaikh;5) Mr. Rashid Mansur;6) Mr. M. Habib-ur-Rahman;7) Mr. Yasir Qadri8) Mr. Imran Motiwala;9) Ms Hina Ghazanfar;10) Ms Maheen Rahman;11) Mr. Mir Adil Rashid;12) Mr. Enamullah Khan; and13) Ms Mashmooma Z. Majeed - Chief Executive

Chairman Dr. Amjad Waheed, CFA

Dr. Amjad Waheed holds a doctorate in Investments & Finance from Southern Illinois University, USA and is also a Chartered Financial Analyst. For the last 7 years he is CEO of NBP Fullerton Asset Management Ltd (NAFA), which is a subsidiary of National Bank of Pakistan, with Fullerton Fund Management Company of Singapore as the other joint venture partner. NAFA is presently managing fourteen mutual funds and several portfolios with about Rs 45 billion invested in these funds. NAFA is among the largest Asset Management Companies in Pakistan today.

Before joining NAFA, Dr. Waheed was Head of Equity Mutual Funds & Portfolios at Riyad Bank, Saudi Arabia, for about 5 years where he was managing US$ 7.5 billion invested in 22 mutual funds. Prior to that Dr. Waheed was Head of Investments at NIT,

and Chief Operation O�cer of FC-ABN AMRO Equities for several years. Before moving back to Pakistan, Dr. Waheed was Assistant Professor of Finance at Tennessee State University, USA and has published several articles in top journals of the world such as Journal of Banking & Finance and Financial and Financial Management.Dr. Waheed has served on the Board of various companies including Siemens, Nishat Mills, PICIC, Askari Bank, Millat Tractors, Fauji Fertilizer, Pakitstan Tobacco Company, Treet Corporation, Gul Ahmed Textile, Bata Pakistan.

Senior Vice Chairman Mr. Mohammad Shoaib, CFA

Mr. Mohammad Shoaib, CFA is the Chief Executive of Al Meezan Investment Management Ltd. He has played a key role in setting up the company and has been associated with it since inception. He is a highly quali�ed and seasoned professional with 23 years experience in capital markets. He has to his credit many accolades and awards, the most signi�cant of them being the "Most In�uential CFA charter holder" awarded by CFA Institute in 2006.

Mr. Shoaib holds an MBA degree from IBA besides being a Chartered Financial Analyst (CFA) charter holder. He has to his credit the honor of being the founder and �rst president of CFA Association of Pakistan, a member society of CFA Institute. He has been active participant in the Islamic �nance and asset management for the last 10 years. In this respect, he has also actively participated as a speaker and panelist in various international and domestic seminars, conferences and workshops.

Mr. Shoaib has also served in voluntary capacity at di�erent domestic and international institutions. He has served as a Director on the Board of Karachi Stock Exchange and Vice Chairman on the Board of Mutual Funds Association of Pakistan. He is currently serving on the Board of Directors of Pakistan Institute of Corporate Governance and Institute of Capital Markets. He has also served on various global and regional committees of CFA Institute including Asia Paci�c Advocacy Committee, Global Task Force on Corporate

Governance, GIPS Regional Council and Asset Manager Code Advisory Committee. He has also had the honour to represent over 16,000 charterholders in Asia Paci�c Region as their representative on the Presidents' Council of CFA Institute.

Vice Chairman Mr. Farid Ahmed Khan, CFA

Mr. Farid Ahmed Khan, CFA is the CEO of ABL Asset Management. He has been involved with capital markets for over 18 years and has a broad-based, global experience with bulge bracket �rms in Asset Management, Investment Banking, Investment Research and Sales, Business Development & International Project Finance. He joined ABL AMC from Credit Suisse, where he was the Country Manager of Credit Suisse Pakistan. Prior to that, he worked for MCB, initially as Head of Investment Banking Group and later as the CEO of MCB Asset Management. Mr. Khan has extensive experience outside Pakistan, having worked at Morgan Stanley, ING Barings Securities and CLSA Emerging Markets in Kuala Lumpur, London and Istanbul in a variety of senior positions. He holds an MBA in Finance from IBA, Karachi and got his CFA quali�cation in 1998.

New Committees

MUFAP Board elected its Professional Committees, Chairperson and Vice-Chairperson of each Committee for the year 2013-14. �e list of Committees, their Chairperson and Vice-Chairperson is as follows:

SECP forms Shariah Advisory Board

SECP constituted a Shariah Advisory Board (SAB) to harmonize the Shariah interpretations and strengthen the regulatory and supervisory oversight of Islamic �nancial institutions (IFIs) and Islamic capital markets (ICMs) in Pakistan. It will also advise the Commission on the Shariah-compliance aspects of various products launched and or the processes being adopted by the regulated entities. It will also provide guidance for issuance of new laws, rules and regulations for e�ective monitoring and supervision of Islamic Financial Products and to suggest ways and means for development of IFIs and ICMs in the country.

Money Market

To meet the challenges of maintaining stability in the foreign exchange market and controlling high growth in money supply, SBP decided to gradually decrease the outstanding amount of liquidity injections. Since the beginning of FY14, interbank market liquidity conditions have considerably eased primarily due to substantial increase in the pace of government borrowing from the SBP. In fact, SBP mopped up Rs. 1,556.45 billion and injected Rs. 630.70 billion during Q1-FY14.

In terms of controlling growth in money supply, however, SBP’s e�orts of curtailing liquidity injections did not experience much success as these were o�set by an increase in direct �scal borrowings from the SBP. �e increase of Rs. 1,446 billion in budgetary borrowings from the banking system during FY13 was almost Rs. 1 trillion higher than the original target and was even higher than the total expansion in M2. Deviation of this scale has signi�cantly constrained e�ective monetary management, disrupted �nancial intermediation in the economy, and has led to a sharp increase in domestic debt. Showing a growth of 24.6% in FY13, the stock of government’s domestic debt has reached Rs. 9.5 trillion as of end-June 2013. Similarly, a considerable increase in public debt to revenue ratio re�ects weak repayment capacity of the government. �e acceleration in �scal borrowings from the SBP during H2-FY13, Rs. 714 billion, and Q1-FY14 up till 30th August 2013, Rs. 547 billion, is particularly worrisome. �e inability to raise the tax-GDP ratio is the fundamental source of large �scal de�cits, high borrowings, and rising debt. Although there has been a consistent gap between Federal Board of Revenue’s (FBR) budget targets and actual outcomes in the last few years, the gap of Rs. 445 billion in FY13 was exceptionally high. In fact, this is more than the cumulative shortfall of Rs. 349 billion during the last �ve years.

On the external front, stress in the external account has gradually increased with every passing month of 2013 due to shrinking net capital and �nancial �ows and high loan repayments to the IMF.

While the former was only $517 million or 0.2 percent of GDP, the latter increased to $3 billion in FY13. As a result, despite reduction in the external current account de�cit by about half, to $2.3 billion or 1.0 percent of GDP, the SBP’s foreign exchange reserves declined to $6 billion by end-June 2013 from $10.8 billion at the beginning of FY13. �ese stand at $5.2 billion as on 6th September, 2013 after receiving $544.5 million under the new IMF program. Despite pressures and speculations of a drop in the value of the Pak rupee the foreign exchange market has largely remained stable in FY13. However, since the beginning of FY14 the rupee has depreciated by 5.0 percent as of 12th September 2013.

�e year-on-year CPI based in�ation rate was recorded at 8.3% in July 2013, then to 8.55% in August 2013, however dipped down to 7.39% in September 2013.�ough CPI In�ation remained within single digit, however, it witnessed an upward trend as it increased to 7.39 percent in September 2013 compared to 5.85 percent in June 2013 and 6.6 percent in March 2013. �e impact of upward adjustments in energy prices and an increase in the GST together with the removal of certain exemptions put pressure on in�ation.In order to counter in�ationary expectations, SBP raised the discount rate by 50 basis points to 9.5 percent with e�ect from September 16, 2013.

Movement in KIBOR

Treasury Bills:

A total of 6 T-bill auctions were held by SBP during the quarter in which a total amount of Rs. 1,348.88 billion was raised. Since the beginning of FY14, market’s preference for shorter tenor T-Bills has increased as about 83% of the bank’s total o�ers in recent T-Bill auctions were concentrated in 3-month bills.

MARKET UPDATE04

page 7 of 24 mufap quarterly newsletter

T-Bill Auctions (Amount in PKR billion; rates in %)

Pakistan Investment Bonds

�e accepted amount in the PIB auctions during Q1-FY14 fell short of the target .

PIB Auctions (Yields in % and Face Value in PKR billion)

Debt Market

�e table below summarizes the TOP 15 trades of TFCs/Sukuk on the basis of Face value during the Q1-FY14:

Equity Market

KSE-100 index made a strong start to the �scal year 2014, as the index gained 826.99 points, or 3.94%, to stand at 21,832.68 points during the �rst three months of FY14. During the period, index struggled to cross the 23,000 points level and made a high of 23,776.22 on a closing basis. Stock market began the �rst month of �scal year 2014 with a strong rally, overcoming jitters stemming from treason proceedings against former president General (retd) Pervez Musharraf and slowdown in global markets. �e government’s successful negotiations with IMF for a $5.3 billion loan, resolution of circular debt by issuing treasury bills and bonds and anticipation of strong corporate earnings for the quarter ended June 30 buoyed investors’ con�dence as the share prices appreciated across the board and index posted a gain of 2.307.09 points, or 10.98% to settle at 23,312.78 level in July.

After posting strong gain in July, KSE-100 faltered in August as investors continued to worry about ever-escalating Syrian crisis and tumbling regional markets. Stock market further pressured by a slew of disappointing and less-than-expected corporate earnings, falling foreign exchange reserves and high in�ation �gures for July. Moreover, concerns on a possible interest rate hike in the upcoming monetary policy announcement, potential spike in oil prices, decline in cement prices due to breakdown in price discipline, heavy foreign net selling and persistent depreciation in the rupee dragged the KSE-100 index down 1,151.93 points, or 4.94%, to 22,160.85 in August. �e index showed a mixed performance in September. In the �rst half of the month, the approval of the $6.64 billion loan package by IMF, the plans to privatize Pakistan International Airlines, strong foreign in�ows and the release of the IMF’s �rst tranche worth of $550 million helped lift the index to 23,639.97 on a closing basis. However, sentiment reversed towards the end of the month after the central bank’s decision to increase the rate of return on savings deposits to 6.5%. Moreover, steep decline in the value of Pakistani

rupee against the US dollar, constant repayments to IMF, a 50 basis points increase in the discount rate and heavy foreign net selling dragged the KSE-100 index down 328.17 points, or 1.48%, to 21,832.68 in September.

Mutual Fund Market:

�e total net assets decreased to Rs. 359.947 billion in the �rst quarter of FY14 versus Rs. 361.668 billion for the Q4FY13, a reduction of 0.48% quarter over quarter. �e open-end funds went up by 0.71% to Rs. 327.594 billion, pension funds went up by 9.67% to Rs. 5.288 billion and closed-end decreased by 14.23% to Rs. 27.064 billion.

Funds launched during the quarter Q1-FY14

Funds matured during the quarter Q1-FY14

Funds with changed structure/other features Energy Crisis: Causes and ImpactsBy Sara Aquil Walji, Research Analyst, HBL Asset Management

Energy is the cornerstone for any economy’s development and growth. �e current situation has worsened in Pakistan over the past few years and likely to continue if measures are not taken to mitigate the issue on a long term basis. �e gap between demand and supply has reached 6000MW resulting in scheduled and unscheduled load shedding, negatively a�ecting our industrial sector, hurting our exports and has even hampered the GDP growth rate by 2%. Subsidies to the power sector have steadily been increasing and form the biggest part of total subsidies amounting to around Rs 349,287mn (95% of the total subsidies) in FY 2012-13. �e new government has allocated Rs. 220,100mn to the power sector for the FY 2013-14 which is 91.5% of the total subsidy budget. (Source: Annual budget 2014) With recent emphasis on matters to resolve energy crisis and develop renewable and non-renewable sources of energy, it is worthwhile to note why energy crisis became as severe as it is now.

�e root of this crisis is that Pakistan’s electricity generation mix is highly skewed towards the most expensive kinds .�ere appears to be an almost inverse relationship between the sources of electricity that are most expensive to set and those that are most expensive to run. �e following chart depicts this relationship:

Source: Express Tribune �is highlights the fact why there is a heavy concentration toward

the construction of thermal power plants since they are relatively cheaper to build than hydropower plants. �e government has not dedicated enough funds for the development of hydropower projects which are the most expensive to build but cheapest to run on a per unit basis.Pakistan’s electricity generation is highly dependent on imported oil as almost $14.5bn worth of oil is imported each year which accounts for around 35% of electricity generation. Comparing Pakistan with India and Bangladesh reveals that Pakistan relies heavily on oil for electricity generation where as India uses coal, a relatively cheaper source for electricity generation and Bangladesh on the other hand allocates 73% of its electricity generation to gas.

Source: Economic Survey report for 2012-2013

With a prominent shift in recent years towards the use of thermal power stations instead of hydropower sources and a reduction in electricity generation from coal, Pakistan’s electricity costs ends up being more expensive than it needs to be and since the government has adopted a policy of uniform tari� across the country the Tari� Di�erential Subsidy owed by the Government of Pakistan on an annual basis has increased substantially.

Circular debt is another major concern hampering the growth of Pakistan’s economy. In simple words circular debt is the amount of

cash shortfall within the Central Power Purchasing Agency (CPPA) that it cannot pay to power supply companies. �is shortfall is the result of (a) the di�erence between the actual cost of providing electricity in relation to revenues realized by the power distribution companies (DISCOs) from sales to customers plus subsidies; and (b) insu�cient payments by the DISCOs to CPPA out of realized revenue as they give priority to their own cash �ow needs. (Source: USAID Report March 2103)

�is revenue shortfall cascades through the entire energy supply chain, from electricity generators to fuel suppliers, re�ners, and producers; resulting in a shortage of fuel supply to the public sector thermal generating companies (GENCOs), a reduction in power generated by Independent Power Producers (IPPs), and an increases in load shedding.

According to the report published by the USAID in March 2013, circular debt amounts to Rs872bn which is actually 4% of GDP. According to Pakistan’s Economic Survey report for 2012-2013, there is a strong relationship between GDP growth rate and electricity growth as shown in the �gure below. It can be easily deduced that periods of low or negative electricity growth have witnessed low GDP growth rate, while periods where electricity growth picked up there is increase in GDP growth rate.

�is comes as no surprise, since industrial output is heavily dependent on the amount of electricity delivered to them. Continuous power breakdowns prevented industries from operating at their full capacity level. �e power outages have obstructed the viability of the textile industry as exporters were unable to meet their

commitments. During July-March 2012-13, foreign exchange earnings through exports of synthetic textile fabrics and woolen industry showing a decline of 25.3% and 5.1% respectively as compared to last year. During the period under review even in quantity term also recorded a decline of 30% and 15.8% respectively.

Coupled with an ine�cient system and expensive fuel mix, power theft is another major issue faced by Pakistanis. It is interesting to note that annual revenue collection e�ciency was estimated to be around 87%; however that 13% of lost e�ciency has a �nancial impact of Rs 86bn which is equivalent to 41 days of furnace oil costs for thermal power plants. �e following �gure shows the percentage of bills that were uncollected in 2012. �e e�ciency of di�erent DISCOs is disproportionate in revenue collection. �is essentially leads to the inclusion of the cost of power theft in the power tari�, meaning that the honest payers also bear the cost of those that steal.

Power theft is not only committed by normal residents but the main defaulters are the government institutions themselves. �e government owns around 51% of the uncollected bills which amounts to Rs 118bn out of the uncollected revenue receipts of Rs 386bn. In my opinion, this the amount which causes the discrepancy between the amount of RS500.3bn to be injected to resolve the circular debt issue and �gure of Rs 872.41bn since the government has a proposal to o�set provisional dues via a �scal adjuster. Due to a growing economy, Pakistan’s energy needs have more than doubled in the past 15 years. Energy shortages have far devastating

e�ects on our economy. Not only does it cause civil disturbances on a small scale but it a�ects our GDP on a larger note. Injecting money into the chain will only resolve the issue on a temporary basis. �ese challenges require a multi-prong approach that would address energy shortages in the immediate future and help the country build longer term energy su�ciency.

�ere needs to be a shift away from thermal power to alternative sources of energy which are not only cheaper but also environmentally friendly. Pakistan has large untapped renewable resources such as water, sun and wind and recently the government has taken keen interest on the development of hydro power projects and Neelum Jhelum Hydroelectric Project is one of the many projects which the new government has started which will approximately add 5.15bn units of electricity annually. Moreover, an e�ective system of governance must be in place to curb theft, recuperate dues and enforce policies.

�e Importance of Asset Allocation in attaining Optimal Returns

By Yamna Hassan, Asst. Manager-Business DevelopmentLakson Investments

“Tis the part of a wise man to keep himself today for tomorrow, and not venture all his eggs in one basket.” – Miguel de Cervantes, Don Quixote de la Mancha, 1605.

�e afore-mentioned quote indicates that along with being a great writer, Cervantes would have also proved to be a wise investor.

Investment related decisions are preceded by de�ning a proper Asset Allocation plan. According to recent research, the Asset Allocation decision is responsible for 91.5 percent of the variation between returns on di�erent portfolios. Given the importance of Asset Allocation, it has attained a center stage in any investment decision.

Asset Allocation is mainly important for two de�nite reasons. �e �rst reason pertains to portfolio design; variation in portfolio designs can lead to some investment decisions being winners while the rest being losers, and it is believed that if a portfolio is thoughtfully constructed and contains an optimal mix of securities that perform di�erently from each other (i.e they have little correlation in between them), chances of this portfolio yielding a more stable return is higher. �is is because if some securities in a portfolio are inconsistent and volatile, other, more stable securities can nullify the inconsistency of the entire portfolio, hence stabilizing the yield pattern.

�e second reason pertains to the vision of the investor. Asset allocation allows an investor to �nancially plan for his long-term and short-term goals and avoid impulsive reactions. We will subsequently discuss this aspect of Asset Allocation.

We can divide the Asset Allocation decision into two simple steps as discussed below:

Step 1: Asset Allocation An Asset Allocation strategy can be devised based on the investor’s risk assessment, �nancial goals and return targets. It is the most fundamental step of an investment decision and involves determining an ideal mix of stocks, bonds, cash and other securities in a way such that the portfolio yields a return which best suits an investor’s need. �ere is always a downside of investing too much in bonds or cash as that might certify stable but lower returns. In the same way, too much investment in stocks might lead to portfolio volatility. �erefore, in order to meet your requirements, or keep pace with in�ation, you need to plan an ideal arrangement of securities for your portfolio.

Step 2: Diversi�cationWhile the �rst step bears upon the idea of portfolio construction, this step is linked to the proper dissemination of your assets in a way such that your portfolio is exposed to many di�erent segments of the market, some of which perform independently of the others. Proper diversi�cation of your portfolio can lead to higher and more stable returns.

As mentioned before, the e�ect of diversi�cation is most noticeable when instruments have very little interrelation between them. However, it was easier to build this sort of a portfolio previously than it is today. �is is because roughly over the past 10 years, �nancial markets have become increasingly interrelated and complex. Let us also not ignore the fact that during the 2008 �nancial trouble, most assets tended to perform similarly, leading us to believe in the proposition that most assets are conducive to a similar behavior in times of crisis and instability. �e �gure below shows ways of diversifying a portfolio and entering into newer and assorted mix of investment vehicles.

FIGURE 1:

Figure shows ways of diversifying a portfolio.

Institutions that do not pay requisite importance to the Asset Allocation decision might end up damaging their returns. Usually, institutions are advised to invest in a 60:40 ratio (Stocks: �xed income instruments) to remain on the safe side. Whereas, individuals are recommended to invest in an investment spectrum ranging from 100 percent stocks to 100 percent bonds depending on their separate variable characteristics. However, the Asset Allocation decision is dependent on several other factors and cannot be generalized for di�erent investors.

Following are a few, newer and e�cient ways that have now been developed and can be used for attaining optimal asset allocation:

Mean Variance Optimization

Mean Variance Optimization is a quantitative technique that can be used to calculate the trade-o� between maximum expected return and risk tolerance. �is technique has gained popularity over time because in recent times, the technique is applied on an asset class level as opposed to being applied only to portfolios of individual stocks previously.

�e development of Mean Variance Optimization has not only bene�tted institutional investors but has resulted in a breakthrough for retail brokerage houses as well, which, prior to this development were restricted on their advisory role to the investors. However, recently, they are proposing a greater degree of passive security and more thoughtful asset allocation recommendations to their investors. �is has become possible by using optimization and aiming to attain a favorable position with maximum expected return, minimal risk, or both.

Moreover, a few re�ned approaches taken from utility theory and behavioral economics can be deployed to develop polls or surveys that can authentically gauge an individual’s risk preferences.

Pension funds have also been familiarized with Optimization. Such funds take into account the reciprocity of both assets and liabilities and not only the assets unlike other funds. �e objective of Asset Allocation for these funds is to amplify the fund surplus i.e liabilities subtracted from assets for a stated degree of risk tolerance.

Tactical Asset AllocationTactical asset allocation is the process of adjusting a particular portfolio based on changes in the market value of assets contained in that portfolio. �e technique is quite dynamic and involves deviation from the strategic asset allocation when an investor’s short-term foresight is not aligned with his long term foresight used to develop a strategic asset allocation plan and precise short-term predictions on part of the investor can lead to better returns.

Pragmatically speaking, Tactical Asset Allocation models tend to recommend contrarian trades, that is, they recommend purchasing an asset as its current market value drops and vice versa. �us, tactical Asset Allocation involves perpetually arranging your portfolio based on your needs and changes in the market. One consequence of Tactical Asset Allocation is that by overweighting certain assets during certain times and underweighting others, the portfolio is riskier because of its reduced diversi�cation. �us, to

o�set this additional risk factor, this strategy would need to generate above market returns. �e notion, whether Tactical Asset Allocation Models have achieved this is still a matter of rumination and study but because the probable returns from successful Tactical Asset Allocation would be large, researchers will keep inspecting, and investors won’t cease to be on the look out for their discoveries.

Insured Asset Allocation�is strategy is similar to a portfolio insurance strategy and is a mirror image of the Tactical Asset Allocation strategy. With this strategy, a base portfolio parameter is �xed and the value of the portfolio is not allowed to fall below this base parameter. As long as the portfolio achieves a return above this parameter, you actively to try to increase the portfolio value as much as possible. If, however, the portfolio ever drops to below the base value, investment in risk-free securities enables the base value to become �xed.

�e main target audiences for this approach are risk-averse investors who desire a certain level of active portfolio management and also covet the protection of �xing a certi�ed minimum return below which the portfolio is not allowed to decline. For instance, this approach is best for an investor who has planned a nominal lifestyle for himself after retirement.

Asset Allocation & Uncertain Times�e importance of active portfolio management and wise asset allocation strategy has been reiterated enough. But at the brink of serious economic uncertainty, expectation for stock market returns is somewhat muted. �erefore, it is believed that in such a situation, a dynamic asset allocation plan should come into play for the advantage of certain clients.

Dynamic Asset Allocation uses a long term strategic Asset Allocation strategy as its foundation. Alternate investments can be added to the core portfolio for the sake of complementing it. It is even better, if these investments include segments which yield a higher return and bear little interdependence, so as to achieve a greater level of diversi�cation.

Besides, dynamic Asset Allocation strategies can also be accompanied by �exible investment strategies; tactical actions that are short-term in nature and aim to bank on perceived market opportunities. If 10-20% of your assets are allocated for such investments, your portfolio can be expected to react better in times of changing trends and conditions.

Asset allocation is evolving past a traditional “purchase and retain” dogma. Whilst this might not suit all clients, exercising a dynamic asset allocation plan can create a portfolio better able to handle uncertain market environments. Not to forget the fact that a solid strategic asset allocation plan remains the core strategy behind any tactical asset allocation strategy.

Asset Allocation & the local scenarioWith interest rates in Pakistan consistently hovering above 10 percent for the past �ve years, anyone would expect Pakistanis to be encouraged enough to save and reap bene�ts of higher returns. However, reality states that Pakistan actually stands out to re�ect one of the lowest savings in the region. Given the fact that majority of Pakistanis are not so keen on investing mainly because their expenditures on necessities do not leave any room for savings or so for other reasons, there is a chunk of people who are inclined in saving for a better future and lifestyle.

With growth of urban nuclear families, educated middle to upper middle class is inspirited to plan properly for a child’s education, health and future life. Reasons for investment in Pakistani society vary from a child’s education to his marriage, from being cushioned against the toils of post-retirement life to maternity expenditures. Young professionals may want to invest as a means to generate seed capital for their potential business idea or to live their dreams of traveling or wayfaring.

Reasons for investing are many. With di�erent individuals and di�erent investment objectives in mind, the asset allocation needs of these investors must be customized accordingly.

Asset Allocation & Financial PlanningOnce you are done with choosing your model for Asset Allocation, the �nal stage is to test this model by contextualizing it with a precise �nancial plan. It might be easy for an investor to choose which Asset Allocation plan will provide him with the best possible returns but the investor should also �gure out a way to determine that expected return and also estimate the trade-o� for that higher return potential.

A well-concocted �nancial plan will guide the investor out of this bewilderment. First, it will determine what level of projected investment return is necessary to allow you to meet your lifestyle goals, which can help lead you to the right mix of stocks, bonds and cash. Second, the plan will evaluate the impact of the portfolio risk associated with that mix.

Traditionally, �nancial planning models focused on expected return and neglected the variability of outcomes that is associated with increased volatility. With the introduction of probability-based planning tools, the investor can foresee the e�ect of risk on their investment portfolios, they can vary the amount of risk and can study their corresponding returns. For example a portfolio bearing higher risk may yield a higher return but it also has a probability of falling far short beneath their targets.

When using an asset allocation approach to designing a portfolio, it is important to not focus just on the expected return of that portfolio. �e risk associated with an increasing, or decreasing, portfolio return is just as important to the success of an investment strategy.

Asset Allocation & �e Future

Most forecasters fall into two divisions. Forecasters in the �rst division are eager to predict that the future will closely mirror the recent past. �eir ideals are those generals who are always preparing to �ght the last war. Forecasters in the second division rely heavily

upon the adage that the only constant is change itself. Proponents of this school of thought usually don’t know what to expect, but are quite sure it will be nothing like anything we’ve seen before. �ese individuals do realize the problems of delineating the future of this area.

We should view the future of asset allocation through lenses borrowed from both divisions. �at is, certain aspects of asset allocation today will continue to be recognizable for the years to come. To be more precise, the goals and importance of asset allocation will not change, but the mechanisms by which investors seek to achieve those goals will be new.

�e goal of the asset allocation decision, was, is, and will be to select a combination of assets that will generate a return su�ciently high and safe so as to o�set some future liability. It is also safe to say that asset allocation decisions will have a continuing large role in explaining portfolio returns.

Industry-wide - Net Assets (PKR million)

Net Assets - Open End Funds (PKR million)

Net Assets - Closed End Funds (PKR million)

Net Assets - Pension Schemes (PKR million)

Sales (PKR million) Redemptions (PKR million) Net Sales (PKR million)

Open End Funds' Return** Closed End Funds' Return**

General Pension Schemes Return**

Islamic Pension Schemes Return**

Auction Date

3-Month Yield (Weighted Avg.) Cut-o� Rates Cut-o� Rates

6-Month 12-Month Amount Accepted

10-Jul-13 8.89% 8.94% 8.96% 240.3324-Jul-13 8.95% 8.96% 8.97% 275.5206-Aug-13 8.95% 8.98% - 195.7121-Aug-13 8.96% 8.99% R 33.0804-Sep-13 8.96% - - 88.3018-Sep-13 9.35% 9.45% - 515.9426-Jun-13 8.93% 8.92% 8.96% 153.43

Auction Date 3-Year 5-Year 7-Year 10-Year 15-Year 20-Year 30-Year Total

17-Jul-13

44.01 10.90 - 11.65 - - - - 7.45 6.50 - 5.03 - - - 18.98

Accepted 7.00 5.85 - 4.39 - - - 17.24Target 15.00 15.00 - 15.00 - - - 45.00

22-May-13

11.15 11.65 - 12.00 - - - -11.74 13.91 - 9.22 - - - 34.87

Accepted 11.64 13.56 - 4.60 - - - 29.80Target 15.00 15.00 - 15.00 - - - 45.00

19-Jun-13

11.69 12.15 - 12.60 - - - -13.48 6.60 - 8.81 - - - 28.89

Accepted 5.58 4.35 - 6.16 - - - 16.09Target 15.00 15.00 - 15.00 - - - 45.00

Cut-o� rateO�ered

Cut-o� rateO�ered

Cut-o� rateO�ered

TFCs / Sukuks Face Value (PKR million)

Trade Value (PKR million)

No. of Trans. Trade Price Range

Jahangir Siddiqui & Co. Ltd. (30-10-12) 336.00 341.66 2 101.63 - 101.75Engro Fertilizer Ltd. PRP-1 (18-03-08) 294.35 279.86 14 93.55 - 96.00Bank Alfalah Ltd. (20-02-13) 224.48 228.82 10 101.50 - 102.50Standard Chart. Bank Pakistan (29-06-12) 110.00 109.30 2 99.35 – 99.38Engro Fertilizer Ltd. PRP-11 (18-03-08) 95.00 87.36 4 90.00 - 92.50Pakistan Mobile Comm. Ltd. (28-10-08) 86.00 86.02 6 100.00 – 100.25Security Leasing Corp. Ltd. (01-06-07) 27.19 77.70 1 35.00 – 35.00Bank Alfalah Ltd. Fxd (02-12-09) 71.57 77.67 3 108.12 - 109.55Maple Leaf Cement Factory Ltd. (03-12-07) 65.41 50.17 12 71.00 - 82.00Askari Bank Ltd. (23-12-11) 61.96 66.05 3 103.65 - 108.00Pakistan Mobile Comm. Ltd. (17-09-13) 53.33 53.33 2 100.00 - 100.00Engro Corporation Ltd. (16-09-11) 49.70 49.79 10 100.19 - 100.19NIB Bank Ltd. (05-03-08) 40.38 40.38 1 100.00 - 100.00Engro Corporation Ltd. (01-02-11) 37.47 38.15 8 100.55 -102.10Bank Al-Habib Ltd. (30-06-11) 34.97 38.21 2 109.00 – 109.90

Source: SBP

Source: SBP

Source: MUFAP

Meeting of the Board of Directors

In order to ensure that the Board of Directors ful�ls the duties and responsibilities conferred by the members of MUFAP, the Board conducts meetings on a regular basis to make immediate and prudent decisions. �e Board of Directors held three meetings during the quarter Jul-Sep 2013.

�e activities undertaken by Board are as follows:

Proposed amendments in the de�nition of Related Parties in Restricted List of Code for Distributors

�e Board deliberated in detail on the matter of proposed

amendments in the de�nition of Related Parties in the Restricted List of Code for Distributors. After careful consideration of the impacts that the amendments may entail, it was decided that all individuals (namely employees, directors, sponsors of the RSPs) should be excluded from the de�nition of Related Parties. �e revised de�nition is applicable to all new investments brought in on or after July 16, 2013 and is not applicable to existing investments made by or before July 15, 2013.

Valuation of GOP Ijarah Sukuk

�e Board recommended that AMCs should use ‘PKISRV’ quoted on Reuters as the relevant price to value the GOP Ijarah Sukuks to determine net assets of CIS under their management, which the SECP approved in September.

Meetings of the Committees

MUFAP Committees held many discussions to make important, well planned proposals on behalf of industry. �e following table presents the number of meetings held during the quarter Jul-Sep’13.

Technical Committee - VPS

�e VPS – Technical Committee held extensive discussions to discuss the dissimilar taxation and operational practices being adopted by di�erent VPS Managers. �e VPS Committee constituted a Sub-Committee, involving a representative from each VPS Manager, to draw up recommendations for the tax treatment. �e Committee also engaged Senior Tax expert, Mr. Shabbar Zaidi on the matter and has requested for clari�cation from FBR on one of the matters.

Meeting with NCCPL A meeting was held between operations sta� of AMCs and NCCPL representatives on July 22, 2013 to evaluate the mechanics and possible data sharing from AMCs to NCCPL for netting of CGT. It was decided that NCCPL would develop a concept paper covering brief mechanism of centralized CGT collection to AMCs for their review and comments.

Elections to elect Directors/Executive Committee Members of MUFAP for the year 2013 / 2014

As required under the Trade Organizations Rules, 2007, MUFAP is required to hold its elections each year to elect Directors against the vacancies arising on account of completion of two-year tenure of some Directors. Board members are elected for a two-year term.

�e retiring Directors on the completion of their two year tenure on September 30, 2013 are: 1. Mr. Adnan Siddiqui (Resigned August-2013)2. Mr. Amer Maqbool 3. Mr. Imran Azim 4. Mr. Mir Muhammad Ali 5. Mr. Nihal Cassim

�e continuing Directors of MUFAP for the year 2013/ 2014 are: 1. Dr. Amjad Waheed 2. Mr. Imran Motiwala 3. Mr. Mir Adil Rashid 4. Mr. Rashid Mansur 5. Ms Maheen Rahman6. Ms Hina Ghazanfar (on reserved seat for women)

In addition, Mr. Rehan N. Shaikh will serve on the Board as provided under Rule 23(5)(d) of the Trade Organization Rules, 2007. At the Extra Ordinary General Meeting on September 26, 2013, MUFAP announced the appointment, by virtue of elections, of the following directors to the Board, namely:1. Mr. Farid Ahmed Khan 2. Mr. M. Habib-ur-Rahman 3. Mr. Mohammad Shoaib 4. Mr. Yasir Qadri 5. Mr. Enamullah Khan

New Board of Directors

�e new Board of Directors of MUFAP at its �rst meeting held on October 1, 2013 elected Dr. Amjad Waheed as Chairman, Mr. Mohammad Shoaib as Senior Vice Chairman and Mr. Farid Ahmed Khan as Vice Chairman MUFAP for the year 2013-2014.�e Board of Directors of MUFAP for the 2013-14 term is as follows:

1) Dr. Amjad Waheed - Chairman; 2) Mr. Mohammad Shoaib - Senior Vice Chairman; 3) Mr. Farid Ahmed Khan - Vice Chairman;4) Mr. Rehan N. Shaikh;5) Mr. Rashid Mansur;6) Mr. M. Habib-ur-Rahman;7) Mr. Yasir Qadri8) Mr. Imran Motiwala;9) Ms Hina Ghazanfar;10) Ms Maheen Rahman;11) Mr. Mir Adil Rashid;12) Mr. Enamullah Khan; and13) Ms Mashmooma Z. Majeed - Chief Executive

Chairman Dr. Amjad Waheed, CFA

Dr. Amjad Waheed holds a doctorate in Investments & Finance from Southern Illinois University, USA and is also a Chartered Financial Analyst. For the last 7 years he is CEO of NBP Fullerton Asset Management Ltd (NAFA), which is a subsidiary of National Bank of Pakistan, with Fullerton Fund Management Company of Singapore as the other joint venture partner. NAFA is presently managing fourteen mutual funds and several portfolios with about Rs 45 billion invested in these funds. NAFA is among the largest Asset Management Companies in Pakistan today.

Before joining NAFA, Dr. Waheed was Head of Equity Mutual Funds & Portfolios at Riyad Bank, Saudi Arabia, for about 5 years where he was managing US$ 7.5 billion invested in 22 mutual funds. Prior to that Dr. Waheed was Head of Investments at NIT,

and Chief Operation O�cer of FC-ABN AMRO Equities for several years. Before moving back to Pakistan, Dr. Waheed was Assistant Professor of Finance at Tennessee State University, USA and has published several articles in top journals of the world such as Journal of Banking & Finance and Financial and Financial Management.Dr. Waheed has served on the Board of various companies including Siemens, Nishat Mills, PICIC, Askari Bank, Millat Tractors, Fauji Fertilizer, Pakitstan Tobacco Company, Treet Corporation, Gul Ahmed Textile, Bata Pakistan.

Senior Vice Chairman Mr. Mohammad Shoaib, CFA

Mr. Mohammad Shoaib, CFA is the Chief Executive of Al Meezan Investment Management Ltd. He has played a key role in setting up the company and has been associated with it since inception. He is a highly quali�ed and seasoned professional with 23 years experience in capital markets. He has to his credit many accolades and awards, the most signi�cant of them being the "Most In�uential CFA charter holder" awarded by CFA Institute in 2006.

Mr. Shoaib holds an MBA degree from IBA besides being a Chartered Financial Analyst (CFA) charter holder. He has to his credit the honor of being the founder and �rst president of CFA Association of Pakistan, a member society of CFA Institute. He has been active participant in the Islamic �nance and asset management for the last 10 years. In this respect, he has also actively participated as a speaker and panelist in various international and domestic seminars, conferences and workshops.

Mr. Shoaib has also served in voluntary capacity at di�erent domestic and international institutions. He has served as a Director on the Board of Karachi Stock Exchange and Vice Chairman on the Board of Mutual Funds Association of Pakistan. He is currently serving on the Board of Directors of Pakistan Institute of Corporate Governance and Institute of Capital Markets. He has also served on various global and regional committees of CFA Institute including Asia Paci�c Advocacy Committee, Global Task Force on Corporate

Governance, GIPS Regional Council and Asset Manager Code Advisory Committee. He has also had the honour to represent over 16,000 charterholders in Asia Paci�c Region as their representative on the Presidents' Council of CFA Institute.

Vice Chairman Mr. Farid Ahmed Khan, CFA

Mr. Farid Ahmed Khan, CFA is the CEO of ABL Asset Management. He has been involved with capital markets for over 18 years and has a broad-based, global experience with bulge bracket �rms in Asset Management, Investment Banking, Investment Research and Sales, Business Development & International Project Finance. He joined ABL AMC from Credit Suisse, where he was the Country Manager of Credit Suisse Pakistan. Prior to that, he worked for MCB, initially as Head of Investment Banking Group and later as the CEO of MCB Asset Management. Mr. Khan has extensive experience outside Pakistan, having worked at Morgan Stanley, ING Barings Securities and CLSA Emerging Markets in Kuala Lumpur, London and Istanbul in a variety of senior positions. He holds an MBA in Finance from IBA, Karachi and got his CFA quali�cation in 1998.

New Committees

MUFAP Board elected its Professional Committees, Chairperson and Vice-Chairperson of each Committee for the year 2013-14. �e list of Committees, their Chairperson and Vice-Chairperson is as follows:

SECP forms Shariah Advisory Board

SECP constituted a Shariah Advisory Board (SAB) to harmonize the Shariah interpretations and strengthen the regulatory and supervisory oversight of Islamic �nancial institutions (IFIs) and Islamic capital markets (ICMs) in Pakistan. It will also advise the Commission on the Shariah-compliance aspects of various products launched and or the processes being adopted by the regulated entities. It will also provide guidance for issuance of new laws, rules and regulations for e�ective monitoring and supervision of Islamic Financial Products and to suggest ways and means for development of IFIs and ICMs in the country.

Money Market

To meet the challenges of maintaining stability in the foreign exchange market and controlling high growth in money supply, SBP decided to gradually decrease the outstanding amount of liquidity injections. Since the beginning of FY14, interbank market liquidity conditions have considerably eased primarily due to substantial increase in the pace of government borrowing from the SBP. In fact, SBP mopped up Rs. 1,556.45 billion and injected Rs. 630.70 billion during Q1-FY14.

In terms of controlling growth in money supply, however, SBP’s e�orts of curtailing liquidity injections did not experience much success as these were o�set by an increase in direct �scal borrowings from the SBP. �e increase of Rs. 1,446 billion in budgetary borrowings from the banking system during FY13 was almost Rs. 1 trillion higher than the original target and was even higher than the total expansion in M2. Deviation of this scale has signi�cantly constrained e�ective monetary management, disrupted �nancial intermediation in the economy, and has led to a sharp increase in domestic debt. Showing a growth of 24.6% in FY13, the stock of government’s domestic debt has reached Rs. 9.5 trillion as of end-June 2013. Similarly, a considerable increase in public debt to revenue ratio re�ects weak repayment capacity of the government. �e acceleration in �scal borrowings from the SBP during H2-FY13, Rs. 714 billion, and Q1-FY14 up till 30th August 2013, Rs. 547 billion, is particularly worrisome. �e inability to raise the tax-GDP ratio is the fundamental source of large �scal de�cits, high borrowings, and rising debt. Although there has been a consistent gap between Federal Board of Revenue’s (FBR) budget targets and actual outcomes in the last few years, the gap of Rs. 445 billion in FY13 was exceptionally high. In fact, this is more than the cumulative shortfall of Rs. 349 billion during the last �ve years.

On the external front, stress in the external account has gradually increased with every passing month of 2013 due to shrinking net capital and �nancial �ows and high loan repayments to the IMF.

While the former was only $517 million or 0.2 percent of GDP, the latter increased to $3 billion in FY13. As a result, despite reduction in the external current account de�cit by about half, to $2.3 billion or 1.0 percent of GDP, the SBP’s foreign exchange reserves declined to $6 billion by end-June 2013 from $10.8 billion at the beginning of FY13. �ese stand at $5.2 billion as on 6th September, 2013 after receiving $544.5 million under the new IMF program. Despite pressures and speculations of a drop in the value of the Pak rupee the foreign exchange market has largely remained stable in FY13. However, since the beginning of FY14 the rupee has depreciated by 5.0 percent as of 12th September 2013.

�e year-on-year CPI based in�ation rate was recorded at 8.3% in July 2013, then to 8.55% in August 2013, however dipped down to 7.39% in September 2013.�ough CPI In�ation remained within single digit, however, it witnessed an upward trend as it increased to 7.39 percent in September 2013 compared to 5.85 percent in June 2013 and 6.6 percent in March 2013. �e impact of upward adjustments in energy prices and an increase in the GST together with the removal of certain exemptions put pressure on in�ation.In order to counter in�ationary expectations, SBP raised the discount rate by 50 basis points to 9.5 percent with e�ect from September 16, 2013.

Movement in KIBOR

Treasury Bills:

A total of 6 T-bill auctions were held by SBP during the quarter in which a total amount of Rs. 1,348.88 billion was raised. Since the beginning of FY14, market’s preference for shorter tenor T-Bills has increased as about 83% of the bank’s total o�ers in recent T-Bill auctions were concentrated in 3-month bills.

T-Bill Auctions (Amount in PKR billion; rates in %)

Pakistan Investment Bonds

�e accepted amount in the PIB auctions during Q1-FY14 fell short of the target .

PIB Auctions (Yields in % and Face Value in PKR billion)

Debt Market

�e table below summarizes the TOP 15 trades of TFCs/Sukuk on the basis of Face value during the Q1-FY14:

MARKET UPDATE04

page 8 of 24 mufap quarterly newsletter

Equity Market

KSE-100 index made a strong start to the �scal year 2014, as the index gained 826.99 points, or 3.94%, to stand at 21,832.68 points during the �rst three months of FY14. During the period, index struggled to cross the 23,000 points level and made a high of 23,776.22 on a closing basis. Stock market began the �rst month of �scal year 2014 with a strong rally, overcoming jitters stemming from treason proceedings against former president General (retd) Pervez Musharraf and slowdown in global markets. �e government’s successful negotiations with IMF for a $5.3 billion loan, resolution of circular debt by issuing treasury bills and bonds and anticipation of strong corporate earnings for the quarter ended June 30 buoyed investors’ con�dence as the share prices appreciated across the board and index posted a gain of 2.307.09 points, or 10.98% to settle at 23,312.78 level in July.

After posting strong gain in July, KSE-100 faltered in August as investors continued to worry about ever-escalating Syrian crisis and tumbling regional markets. Stock market further pressured by a slew of disappointing and less-than-expected corporate earnings, falling foreign exchange reserves and high in�ation �gures for July. Moreover, concerns on a possible interest rate hike in the upcoming monetary policy announcement, potential spike in oil prices, decline in cement prices due to breakdown in price discipline, heavy foreign net selling and persistent depreciation in the rupee dragged the KSE-100 index down 1,151.93 points, or 4.94%, to 22,160.85 in August. �e index showed a mixed performance in September. In the �rst half of the month, the approval of the $6.64 billion loan package by IMF, the plans to privatize Pakistan International Airlines, strong foreign in�ows and the release of the IMF’s �rst tranche worth of $550 million helped lift the index to 23,639.97 on a closing basis. However, sentiment reversed towards the end of the month after the central bank’s decision to increase the rate of return on savings deposits to 6.5%. Moreover, steep decline in the value of Pakistani

rupee against the US dollar, constant repayments to IMF, a 50 basis points increase in the discount rate and heavy foreign net selling dragged the KSE-100 index down 328.17 points, or 1.48%, to 21,832.68 in September.

Mutual Fund Market:

�e total net assets decreased to Rs. 359.947 billion in the �rst quarter of FY14 versus Rs. 361.668 billion for the Q4FY13, a reduction of 0.48% quarter over quarter. �e open-end funds went up by 0.71% to Rs. 327.594 billion, pension funds went up by 9.67% to Rs. 5.288 billion and closed-end decreased by 14.23% to Rs. 27.064 billion.

Funds launched during the quarter Q1-FY14

Funds matured during the quarter Q1-FY14

Funds with changed structure/other features Energy Crisis: Causes and ImpactsBy Sara Aquil Walji, Research Analyst, HBL Asset Management

Energy is the cornerstone for any economy’s development and growth. �e current situation has worsened in Pakistan over the past few years and likely to continue if measures are not taken to mitigate the issue on a long term basis. �e gap between demand and supply has reached 6000MW resulting in scheduled and unscheduled load shedding, negatively a�ecting our industrial sector, hurting our exports and has even hampered the GDP growth rate by 2%. Subsidies to the power sector have steadily been increasing and form the biggest part of total subsidies amounting to around Rs 349,287mn (95% of the total subsidies) in FY 2012-13. �e new government has allocated Rs. 220,100mn to the power sector for the FY 2013-14 which is 91.5% of the total subsidy budget. (Source: Annual budget 2014) With recent emphasis on matters to resolve energy crisis and develop renewable and non-renewable sources of energy, it is worthwhile to note why energy crisis became as severe as it is now.

�e root of this crisis is that Pakistan’s electricity generation mix is highly skewed towards the most expensive kinds .�ere appears to be an almost inverse relationship between the sources of electricity that are most expensive to set and those that are most expensive to run. �e following chart depicts this relationship:

Source: Express Tribune �is highlights the fact why there is a heavy concentration toward

the construction of thermal power plants since they are relatively cheaper to build than hydropower plants. �e government has not dedicated enough funds for the development of hydropower projects which are the most expensive to build but cheapest to run on a per unit basis.Pakistan’s electricity generation is highly dependent on imported oil as almost $14.5bn worth of oil is imported each year which accounts for around 35% of electricity generation. Comparing Pakistan with India and Bangladesh reveals that Pakistan relies heavily on oil for electricity generation where as India uses coal, a relatively cheaper source for electricity generation and Bangladesh on the other hand allocates 73% of its electricity generation to gas.

Source: Economic Survey report for 2012-2013

With a prominent shift in recent years towards the use of thermal power stations instead of hydropower sources and a reduction in electricity generation from coal, Pakistan’s electricity costs ends up being more expensive than it needs to be and since the government has adopted a policy of uniform tari� across the country the Tari� Di�erential Subsidy owed by the Government of Pakistan on an annual basis has increased substantially.

Circular debt is another major concern hampering the growth of Pakistan’s economy. In simple words circular debt is the amount of

cash shortfall within the Central Power Purchasing Agency (CPPA) that it cannot pay to power supply companies. �is shortfall is the result of (a) the di�erence between the actual cost of providing electricity in relation to revenues realized by the power distribution companies (DISCOs) from sales to customers plus subsidies; and (b) insu�cient payments by the DISCOs to CPPA out of realized revenue as they give priority to their own cash �ow needs. (Source: USAID Report March 2103)

�is revenue shortfall cascades through the entire energy supply chain, from electricity generators to fuel suppliers, re�ners, and producers; resulting in a shortage of fuel supply to the public sector thermal generating companies (GENCOs), a reduction in power generated by Independent Power Producers (IPPs), and an increases in load shedding.

According to the report published by the USAID in March 2013, circular debt amounts to Rs872bn which is actually 4% of GDP. According to Pakistan’s Economic Survey report for 2012-2013, there is a strong relationship between GDP growth rate and electricity growth as shown in the �gure below. It can be easily deduced that periods of low or negative electricity growth have witnessed low GDP growth rate, while periods where electricity growth picked up there is increase in GDP growth rate.

�is comes as no surprise, since industrial output is heavily dependent on the amount of electricity delivered to them. Continuous power breakdowns prevented industries from operating at their full capacity level. �e power outages have obstructed the viability of the textile industry as exporters were unable to meet their

commitments. During July-March 2012-13, foreign exchange earnings through exports of synthetic textile fabrics and woolen industry showing a decline of 25.3% and 5.1% respectively as compared to last year. During the period under review even in quantity term also recorded a decline of 30% and 15.8% respectively.

Coupled with an ine�cient system and expensive fuel mix, power theft is another major issue faced by Pakistanis. It is interesting to note that annual revenue collection e�ciency was estimated to be around 87%; however that 13% of lost e�ciency has a �nancial impact of Rs 86bn which is equivalent to 41 days of furnace oil costs for thermal power plants. �e following �gure shows the percentage of bills that were uncollected in 2012. �e e�ciency of di�erent DISCOs is disproportionate in revenue collection. �is essentially leads to the inclusion of the cost of power theft in the power tari�, meaning that the honest payers also bear the cost of those that steal.

Power theft is not only committed by normal residents but the main defaulters are the government institutions themselves. �e government owns around 51% of the uncollected bills which amounts to Rs 118bn out of the uncollected revenue receipts of Rs 386bn. In my opinion, this the amount which causes the discrepancy between the amount of RS500.3bn to be injected to resolve the circular debt issue and �gure of Rs 872.41bn since the government has a proposal to o�set provisional dues via a �scal adjuster. Due to a growing economy, Pakistan’s energy needs have more than doubled in the past 15 years. Energy shortages have far devastating

e�ects on our economy. Not only does it cause civil disturbances on a small scale but it a�ects our GDP on a larger note. Injecting money into the chain will only resolve the issue on a temporary basis. �ese challenges require a multi-prong approach that would address energy shortages in the immediate future and help the country build longer term energy su�ciency.

�ere needs to be a shift away from thermal power to alternative sources of energy which are not only cheaper but also environmentally friendly. Pakistan has large untapped renewable resources such as water, sun and wind and recently the government has taken keen interest on the development of hydro power projects and Neelum Jhelum Hydroelectric Project is one of the many projects which the new government has started which will approximately add 5.15bn units of electricity annually. Moreover, an e�ective system of governance must be in place to curb theft, recuperate dues and enforce policies.

�e Importance of Asset Allocation in attaining Optimal Returns

By Yamna Hassan, Asst. Manager-Business DevelopmentLakson Investments

“Tis the part of a wise man to keep himself today for tomorrow, and not venture all his eggs in one basket.” – Miguel de Cervantes, Don Quixote de la Mancha, 1605.

�e afore-mentioned quote indicates that along with being a great writer, Cervantes would have also proved to be a wise investor.

Investment related decisions are preceded by de�ning a proper Asset Allocation plan. According to recent research, the Asset Allocation decision is responsible for 91.5 percent of the variation between returns on di�erent portfolios. Given the importance of Asset Allocation, it has attained a center stage in any investment decision.

Asset Allocation is mainly important for two de�nite reasons. �e �rst reason pertains to portfolio design; variation in portfolio designs can lead to some investment decisions being winners while the rest being losers, and it is believed that if a portfolio is thoughtfully constructed and contains an optimal mix of securities that perform di�erently from each other (i.e they have little correlation in between them), chances of this portfolio yielding a more stable return is higher. �is is because if some securities in a portfolio are inconsistent and volatile, other, more stable securities can nullify the inconsistency of the entire portfolio, hence stabilizing the yield pattern.

�e second reason pertains to the vision of the investor. Asset allocation allows an investor to �nancially plan for his long-term and short-term goals and avoid impulsive reactions. We will subsequently discuss this aspect of Asset Allocation.

We can divide the Asset Allocation decision into two simple steps as discussed below:

Step 1: Asset Allocation An Asset Allocation strategy can be devised based on the investor’s risk assessment, �nancial goals and return targets. It is the most fundamental step of an investment decision and involves determining an ideal mix of stocks, bonds, cash and other securities in a way such that the portfolio yields a return which best suits an investor’s need. �ere is always a downside of investing too much in bonds or cash as that might certify stable but lower returns. In the same way, too much investment in stocks might lead to portfolio volatility. �erefore, in order to meet your requirements, or keep pace with in�ation, you need to plan an ideal arrangement of securities for your portfolio.

Step 2: Diversi�cationWhile the �rst step bears upon the idea of portfolio construction, this step is linked to the proper dissemination of your assets in a way such that your portfolio is exposed to many di�erent segments of the market, some of which perform independently of the others. Proper diversi�cation of your portfolio can lead to higher and more stable returns.

As mentioned before, the e�ect of diversi�cation is most noticeable when instruments have very little interrelation between them. However, it was easier to build this sort of a portfolio previously than it is today. �is is because roughly over the past 10 years, �nancial markets have become increasingly interrelated and complex. Let us also not ignore the fact that during the 2008 �nancial trouble, most assets tended to perform similarly, leading us to believe in the proposition that most assets are conducive to a similar behavior in times of crisis and instability. �e �gure below shows ways of diversifying a portfolio and entering into newer and assorted mix of investment vehicles.

FIGURE 1:

Figure shows ways of diversifying a portfolio.

Institutions that do not pay requisite importance to the Asset Allocation decision might end up damaging their returns. Usually, institutions are advised to invest in a 60:40 ratio (Stocks: �xed income instruments) to remain on the safe side. Whereas, individuals are recommended to invest in an investment spectrum ranging from 100 percent stocks to 100 percent bonds depending on their separate variable characteristics. However, the Asset Allocation decision is dependent on several other factors and cannot be generalized for di�erent investors.

Following are a few, newer and e�cient ways that have now been developed and can be used for attaining optimal asset allocation:

Mean Variance Optimization

Mean Variance Optimization is a quantitative technique that can be used to calculate the trade-o� between maximum expected return and risk tolerance. �is technique has gained popularity over time because in recent times, the technique is applied on an asset class level as opposed to being applied only to portfolios of individual stocks previously.

�e development of Mean Variance Optimization has not only bene�tted institutional investors but has resulted in a breakthrough for retail brokerage houses as well, which, prior to this development were restricted on their advisory role to the investors. However, recently, they are proposing a greater degree of passive security and more thoughtful asset allocation recommendations to their investors. �is has become possible by using optimization and aiming to attain a favorable position with maximum expected return, minimal risk, or both.

Moreover, a few re�ned approaches taken from utility theory and behavioral economics can be deployed to develop polls or surveys that can authentically gauge an individual’s risk preferences.

Pension funds have also been familiarized with Optimization. Such funds take into account the reciprocity of both assets and liabilities and not only the assets unlike other funds. �e objective of Asset Allocation for these funds is to amplify the fund surplus i.e liabilities subtracted from assets for a stated degree of risk tolerance.

Tactical Asset AllocationTactical asset allocation is the process of adjusting a particular portfolio based on changes in the market value of assets contained in that portfolio. �e technique is quite dynamic and involves deviation from the strategic asset allocation when an investor’s short-term foresight is not aligned with his long term foresight used to develop a strategic asset allocation plan and precise short-term predictions on part of the investor can lead to better returns.

Pragmatically speaking, Tactical Asset Allocation models tend to recommend contrarian trades, that is, they recommend purchasing an asset as its current market value drops and vice versa. �us, tactical Asset Allocation involves perpetually arranging your portfolio based on your needs and changes in the market. One consequence of Tactical Asset Allocation is that by overweighting certain assets during certain times and underweighting others, the portfolio is riskier because of its reduced diversi�cation. �us, to

o�set this additional risk factor, this strategy would need to generate above market returns. �e notion, whether Tactical Asset Allocation Models have achieved this is still a matter of rumination and study but because the probable returns from successful Tactical Asset Allocation would be large, researchers will keep inspecting, and investors won’t cease to be on the look out for their discoveries.

Insured Asset Allocation�is strategy is similar to a portfolio insurance strategy and is a mirror image of the Tactical Asset Allocation strategy. With this strategy, a base portfolio parameter is �xed and the value of the portfolio is not allowed to fall below this base parameter. As long as the portfolio achieves a return above this parameter, you actively to try to increase the portfolio value as much as possible. If, however, the portfolio ever drops to below the base value, investment in risk-free securities enables the base value to become �xed.

�e main target audiences for this approach are risk-averse investors who desire a certain level of active portfolio management and also covet the protection of �xing a certi�ed minimum return below which the portfolio is not allowed to decline. For instance, this approach is best for an investor who has planned a nominal lifestyle for himself after retirement.

Asset Allocation & Uncertain Times�e importance of active portfolio management and wise asset allocation strategy has been reiterated enough. But at the brink of serious economic uncertainty, expectation for stock market returns is somewhat muted. �erefore, it is believed that in such a situation, a dynamic asset allocation plan should come into play for the advantage of certain clients.

Dynamic Asset Allocation uses a long term strategic Asset Allocation strategy as its foundation. Alternate investments can be added to the core portfolio for the sake of complementing it. It is even better, if these investments include segments which yield a higher return and bear little interdependence, so as to achieve a greater level of diversi�cation.

Besides, dynamic Asset Allocation strategies can also be accompanied by �exible investment strategies; tactical actions that are short-term in nature and aim to bank on perceived market opportunities. If 10-20% of your assets are allocated for such investments, your portfolio can be expected to react better in times of changing trends and conditions.

Asset allocation is evolving past a traditional “purchase and retain” dogma. Whilst this might not suit all clients, exercising a dynamic asset allocation plan can create a portfolio better able to handle uncertain market environments. Not to forget the fact that a solid strategic asset allocation plan remains the core strategy behind any tactical asset allocation strategy.

Asset Allocation & the local scenarioWith interest rates in Pakistan consistently hovering above 10 percent for the past �ve years, anyone would expect Pakistanis to be encouraged enough to save and reap bene�ts of higher returns. However, reality states that Pakistan actually stands out to re�ect one of the lowest savings in the region. Given the fact that majority of Pakistanis are not so keen on investing mainly because their expenditures on necessities do not leave any room for savings or so for other reasons, there is a chunk of people who are inclined in saving for a better future and lifestyle.

With growth of urban nuclear families, educated middle to upper middle class is inspirited to plan properly for a child’s education, health and future life. Reasons for investment in Pakistani society vary from a child’s education to his marriage, from being cushioned against the toils of post-retirement life to maternity expenditures. Young professionals may want to invest as a means to generate seed capital for their potential business idea or to live their dreams of traveling or wayfaring.

Reasons for investing are many. With di�erent individuals and di�erent investment objectives in mind, the asset allocation needs of these investors must be customized accordingly.

Asset Allocation & Financial PlanningOnce you are done with choosing your model for Asset Allocation, the �nal stage is to test this model by contextualizing it with a precise �nancial plan. It might be easy for an investor to choose which Asset Allocation plan will provide him with the best possible returns but the investor should also �gure out a way to determine that expected return and also estimate the trade-o� for that higher return potential.

A well-concocted �nancial plan will guide the investor out of this bewilderment. First, it will determine what level of projected investment return is necessary to allow you to meet your lifestyle goals, which can help lead you to the right mix of stocks, bonds and cash. Second, the plan will evaluate the impact of the portfolio risk associated with that mix.

Traditionally, �nancial planning models focused on expected return and neglected the variability of outcomes that is associated with increased volatility. With the introduction of probability-based planning tools, the investor can foresee the e�ect of risk on their investment portfolios, they can vary the amount of risk and can study their corresponding returns. For example a portfolio bearing higher risk may yield a higher return but it also has a probability of falling far short beneath their targets.

When using an asset allocation approach to designing a portfolio, it is important to not focus just on the expected return of that portfolio. �e risk associated with an increasing, or decreasing, portfolio return is just as important to the success of an investment strategy.

Asset Allocation & �e Future

Most forecasters fall into two divisions. Forecasters in the �rst division are eager to predict that the future will closely mirror the recent past. �eir ideals are those generals who are always preparing to �ght the last war. Forecasters in the second division rely heavily

upon the adage that the only constant is change itself. Proponents of this school of thought usually don’t know what to expect, but are quite sure it will be nothing like anything we’ve seen before. �ese individuals do realize the problems of delineating the future of this area.

We should view the future of asset allocation through lenses borrowed from both divisions. �at is, certain aspects of asset allocation today will continue to be recognizable for the years to come. To be more precise, the goals and importance of asset allocation will not change, but the mechanisms by which investors seek to achieve those goals will be new.

�e goal of the asset allocation decision, was, is, and will be to select a combination of assets that will generate a return su�ciently high and safe so as to o�set some future liability. It is also safe to say that asset allocation decisions will have a continuing large role in explaining portfolio returns.

Industry-wide - Net Assets (PKR million)

Net Assets - Open End Funds (PKR million)

Net Assets - Closed End Funds (PKR million)

Net Assets - Pension Schemes (PKR million)

Sales (PKR million) Redemptions (PKR million) Net Sales (PKR million)

Open End Funds' Return** Closed End Funds' Return**

General Pension Schemes Return**

Islamic Pension Schemes Return**

Q4-FY13(Apr’13-Jun’13)

Q1-FY14(Jul’13-Sep’13)

Change (%)

KSE-100 Index 21,005.69 21,832.68 3.94%KSE-30 Index 16,207.96 16,580.59 2.30%Market Capitalization (PKR bn) 5,154.74 5,184.96 0.59%

(US $ mn) 341.21 (94.25) -

Avg. daily volume (mn shares) 290.43 222.90 (23.25%)

Net Foreign in�ow

Q4-FY13

(Apr’13-Jun’13)Q1-FY14

(Jul’13-Sep’13)ALL TIME

HIGH

KSE-100(Highest Close)

22,757.72(Jun 13, 13)

23,776.22(Jul 24, 13)

23,776.22(Jul 24, 13)

KSE-30(Highest Close)

17,787.71(Jun 13, 13)

18,617.77(Jul 24, 13)

18,996.33(Apr 17, 08)

Source: KSE

Source: KSE

Meeting of the Board of Directors

In order to ensure that the Board of Directors ful�ls the duties and responsibilities conferred by the members of MUFAP, the Board conducts meetings on a regular basis to make immediate and prudent decisions. �e Board of Directors held three meetings during the quarter Jul-Sep 2013.

�e activities undertaken by Board are as follows:

Proposed amendments in the de�nition of Related Parties in Restricted List of Code for Distributors

�e Board deliberated in detail on the matter of proposed

amendments in the de�nition of Related Parties in the Restricted List of Code for Distributors. After careful consideration of the impacts that the amendments may entail, it was decided that all individuals (namely employees, directors, sponsors of the RSPs) should be excluded from the de�nition of Related Parties. �e revised de�nition is applicable to all new investments brought in on or after July 16, 2013 and is not applicable to existing investments made by or before July 15, 2013.

Valuation of GOP Ijarah Sukuk

�e Board recommended that AMCs should use ‘PKISRV’ quoted on Reuters as the relevant price to value the GOP Ijarah Sukuks to determine net assets of CIS under their management, which the SECP approved in September.

Meetings of the Committees

MUFAP Committees held many discussions to make important, well planned proposals on behalf of industry. �e following table presents the number of meetings held during the quarter Jul-Sep’13.

Technical Committee - VPS

�e VPS – Technical Committee held extensive discussions to discuss the dissimilar taxation and operational practices being adopted by di�erent VPS Managers. �e VPS Committee constituted a Sub-Committee, involving a representative from each VPS Manager, to draw up recommendations for the tax treatment. �e Committee also engaged Senior Tax expert, Mr. Shabbar Zaidi on the matter and has requested for clari�cation from FBR on one of the matters.

Meeting with NCCPL A meeting was held between operations sta� of AMCs and NCCPL representatives on July 22, 2013 to evaluate the mechanics and possible data sharing from AMCs to NCCPL for netting of CGT. It was decided that NCCPL would develop a concept paper covering brief mechanism of centralized CGT collection to AMCs for their review and comments.

Elections to elect Directors/Executive Committee Members of MUFAP for the year 2013 / 2014

As required under the Trade Organizations Rules, 2007, MUFAP is required to hold its elections each year to elect Directors against the vacancies arising on account of completion of two-year tenure of some Directors. Board members are elected for a two-year term.

�e retiring Directors on the completion of their two year tenure on September 30, 2013 are: 1. Mr. Adnan Siddiqui (Resigned August-2013)2. Mr. Amer Maqbool 3. Mr. Imran Azim 4. Mr. Mir Muhammad Ali 5. Mr. Nihal Cassim

�e continuing Directors of MUFAP for the year 2013/ 2014 are: 1. Dr. Amjad Waheed 2. Mr. Imran Motiwala 3. Mr. Mir Adil Rashid 4. Mr. Rashid Mansur 5. Ms Maheen Rahman6. Ms Hina Ghazanfar (on reserved seat for women)

In addition, Mr. Rehan N. Shaikh will serve on the Board as provided under Rule 23(5)(d) of the Trade Organization Rules, 2007. At the Extra Ordinary General Meeting on September 26, 2013, MUFAP announced the appointment, by virtue of elections, of the following directors to the Board, namely:1. Mr. Farid Ahmed Khan 2. Mr. M. Habib-ur-Rahman 3. Mr. Mohammad Shoaib 4. Mr. Yasir Qadri 5. Mr. Enamullah Khan

New Board of Directors

�e new Board of Directors of MUFAP at its �rst meeting held on October 1, 2013 elected Dr. Amjad Waheed as Chairman, Mr. Mohammad Shoaib as Senior Vice Chairman and Mr. Farid Ahmed Khan as Vice Chairman MUFAP for the year 2013-2014.�e Board of Directors of MUFAP for the 2013-14 term is as follows:

1) Dr. Amjad Waheed - Chairman; 2) Mr. Mohammad Shoaib - Senior Vice Chairman; 3) Mr. Farid Ahmed Khan - Vice Chairman;4) Mr. Rehan N. Shaikh;5) Mr. Rashid Mansur;6) Mr. M. Habib-ur-Rahman;7) Mr. Yasir Qadri8) Mr. Imran Motiwala;9) Ms Hina Ghazanfar;10) Ms Maheen Rahman;11) Mr. Mir Adil Rashid;12) Mr. Enamullah Khan; and13) Ms Mashmooma Z. Majeed - Chief Executive

Chairman Dr. Amjad Waheed, CFA

Dr. Amjad Waheed holds a doctorate in Investments & Finance from Southern Illinois University, USA and is also a Chartered Financial Analyst. For the last 7 years he is CEO of NBP Fullerton Asset Management Ltd (NAFA), which is a subsidiary of National Bank of Pakistan, with Fullerton Fund Management Company of Singapore as the other joint venture partner. NAFA is presently managing fourteen mutual funds and several portfolios with about Rs 45 billion invested in these funds. NAFA is among the largest Asset Management Companies in Pakistan today.

Before joining NAFA, Dr. Waheed was Head of Equity Mutual Funds & Portfolios at Riyad Bank, Saudi Arabia, for about 5 years where he was managing US$ 7.5 billion invested in 22 mutual funds. Prior to that Dr. Waheed was Head of Investments at NIT,

and Chief Operation O�cer of FC-ABN AMRO Equities for several years. Before moving back to Pakistan, Dr. Waheed was Assistant Professor of Finance at Tennessee State University, USA and has published several articles in top journals of the world such as Journal of Banking & Finance and Financial and Financial Management.Dr. Waheed has served on the Board of various companies including Siemens, Nishat Mills, PICIC, Askari Bank, Millat Tractors, Fauji Fertilizer, Pakitstan Tobacco Company, Treet Corporation, Gul Ahmed Textile, Bata Pakistan.

Senior Vice Chairman Mr. Mohammad Shoaib, CFA

Mr. Mohammad Shoaib, CFA is the Chief Executive of Al Meezan Investment Management Ltd. He has played a key role in setting up the company and has been associated with it since inception. He is a highly quali�ed and seasoned professional with 23 years experience in capital markets. He has to his credit many accolades and awards, the most signi�cant of them being the "Most In�uential CFA charter holder" awarded by CFA Institute in 2006.

Mr. Shoaib holds an MBA degree from IBA besides being a Chartered Financial Analyst (CFA) charter holder. He has to his credit the honor of being the founder and �rst president of CFA Association of Pakistan, a member society of CFA Institute. He has been active participant in the Islamic �nance and asset management for the last 10 years. In this respect, he has also actively participated as a speaker and panelist in various international and domestic seminars, conferences and workshops.

Mr. Shoaib has also served in voluntary capacity at di�erent domestic and international institutions. He has served as a Director on the Board of Karachi Stock Exchange and Vice Chairman on the Board of Mutual Funds Association of Pakistan. He is currently serving on the Board of Directors of Pakistan Institute of Corporate Governance and Institute of Capital Markets. He has also served on various global and regional committees of CFA Institute including Asia Paci�c Advocacy Committee, Global Task Force on Corporate

Governance, GIPS Regional Council and Asset Manager Code Advisory Committee. He has also had the honour to represent over 16,000 charterholders in Asia Paci�c Region as their representative on the Presidents' Council of CFA Institute.

Vice Chairman Mr. Farid Ahmed Khan, CFA

Mr. Farid Ahmed Khan, CFA is the CEO of ABL Asset Management. He has been involved with capital markets for over 18 years and has a broad-based, global experience with bulge bracket �rms in Asset Management, Investment Banking, Investment Research and Sales, Business Development & International Project Finance. He joined ABL AMC from Credit Suisse, where he was the Country Manager of Credit Suisse Pakistan. Prior to that, he worked for MCB, initially as Head of Investment Banking Group and later as the CEO of MCB Asset Management. Mr. Khan has extensive experience outside Pakistan, having worked at Morgan Stanley, ING Barings Securities and CLSA Emerging Markets in Kuala Lumpur, London and Istanbul in a variety of senior positions. He holds an MBA in Finance from IBA, Karachi and got his CFA quali�cation in 1998.

New Committees

MUFAP Board elected its Professional Committees, Chairperson and Vice-Chairperson of each Committee for the year 2013-14. �e list of Committees, their Chairperson and Vice-Chairperson is as follows:

SECP forms Shariah Advisory Board

SECP constituted a Shariah Advisory Board (SAB) to harmonize the Shariah interpretations and strengthen the regulatory and supervisory oversight of Islamic �nancial institutions (IFIs) and Islamic capital markets (ICMs) in Pakistan. It will also advise the Commission on the Shariah-compliance aspects of various products launched and or the processes being adopted by the regulated entities. It will also provide guidance for issuance of new laws, rules and regulations for e�ective monitoring and supervision of Islamic Financial Products and to suggest ways and means for development of IFIs and ICMs in the country.

Money Market

To meet the challenges of maintaining stability in the foreign exchange market and controlling high growth in money supply, SBP decided to gradually decrease the outstanding amount of liquidity injections. Since the beginning of FY14, interbank market liquidity conditions have considerably eased primarily due to substantial increase in the pace of government borrowing from the SBP. In fact, SBP mopped up Rs. 1,556.45 billion and injected Rs. 630.70 billion during Q1-FY14.

In terms of controlling growth in money supply, however, SBP’s e�orts of curtailing liquidity injections did not experience much success as these were o�set by an increase in direct �scal borrowings from the SBP. �e increase of Rs. 1,446 billion in budgetary borrowings from the banking system during FY13 was almost Rs. 1 trillion higher than the original target and was even higher than the total expansion in M2. Deviation of this scale has signi�cantly constrained e�ective monetary management, disrupted �nancial intermediation in the economy, and has led to a sharp increase in domestic debt. Showing a growth of 24.6% in FY13, the stock of government’s domestic debt has reached Rs. 9.5 trillion as of end-June 2013. Similarly, a considerable increase in public debt to revenue ratio re�ects weak repayment capacity of the government. �e acceleration in �scal borrowings from the SBP during H2-FY13, Rs. 714 billion, and Q1-FY14 up till 30th August 2013, Rs. 547 billion, is particularly worrisome. �e inability to raise the tax-GDP ratio is the fundamental source of large �scal de�cits, high borrowings, and rising debt. Although there has been a consistent gap between Federal Board of Revenue’s (FBR) budget targets and actual outcomes in the last few years, the gap of Rs. 445 billion in FY13 was exceptionally high. In fact, this is more than the cumulative shortfall of Rs. 349 billion during the last �ve years.

On the external front, stress in the external account has gradually increased with every passing month of 2013 due to shrinking net capital and �nancial �ows and high loan repayments to the IMF.

While the former was only $517 million or 0.2 percent of GDP, the latter increased to $3 billion in FY13. As a result, despite reduction in the external current account de�cit by about half, to $2.3 billion or 1.0 percent of GDP, the SBP’s foreign exchange reserves declined to $6 billion by end-June 2013 from $10.8 billion at the beginning of FY13. �ese stand at $5.2 billion as on 6th September, 2013 after receiving $544.5 million under the new IMF program. Despite pressures and speculations of a drop in the value of the Pak rupee the foreign exchange market has largely remained stable in FY13. However, since the beginning of FY14 the rupee has depreciated by 5.0 percent as of 12th September 2013.

�e year-on-year CPI based in�ation rate was recorded at 8.3% in July 2013, then to 8.55% in August 2013, however dipped down to 7.39% in September 2013.�ough CPI In�ation remained within single digit, however, it witnessed an upward trend as it increased to 7.39 percent in September 2013 compared to 5.85 percent in June 2013 and 6.6 percent in March 2013. �e impact of upward adjustments in energy prices and an increase in the GST together with the removal of certain exemptions put pressure on in�ation.In order to counter in�ationary expectations, SBP raised the discount rate by 50 basis points to 9.5 percent with e�ect from September 16, 2013.

Movement in KIBOR

Treasury Bills:

A total of 6 T-bill auctions were held by SBP during the quarter in which a total amount of Rs. 1,348.88 billion was raised. Since the beginning of FY14, market’s preference for shorter tenor T-Bills has increased as about 83% of the bank’s total o�ers in recent T-Bill auctions were concentrated in 3-month bills.

T-Bill Auctions (Amount in PKR billion; rates in %)

Pakistan Investment Bonds

�e accepted amount in the PIB auctions during Q1-FY14 fell short of the target .

PIB Auctions (Yields in % and Face Value in PKR billion)

Debt Market

�e table below summarizes the TOP 15 trades of TFCs/Sukuk on the basis of Face value during the Q1-FY14:

Equity Market

KSE-100 index made a strong start to the �scal year 2014, as the index gained 826.99 points, or 3.94%, to stand at 21,832.68 points during the �rst three months of FY14. During the period, index struggled to cross the 23,000 points level and made a high of 23,776.22 on a closing basis. Stock market began the �rst month of �scal year 2014 with a strong rally, overcoming jitters stemming from treason proceedings against former president General (retd) Pervez Musharraf and slowdown in global markets. �e government’s successful negotiations with IMF for a $5.3 billion loan, resolution of circular debt by issuing treasury bills and bonds and anticipation of strong corporate earnings for the quarter ended June 30 buoyed investors’ con�dence as the share prices appreciated across the board and index posted a gain of 2.307.09 points, or 10.98% to settle at 23,312.78 level in July.

After posting strong gain in July, KSE-100 faltered in August as investors continued to worry about ever-escalating Syrian crisis and tumbling regional markets. Stock market further pressured by a slew of disappointing and less-than-expected corporate earnings, falling foreign exchange reserves and high in�ation �gures for July. Moreover, concerns on a possible interest rate hike in the upcoming monetary policy announcement, potential spike in oil prices, decline in cement prices due to breakdown in price discipline, heavy foreign net selling and persistent depreciation in the rupee dragged the KSE-100 index down 1,151.93 points, or 4.94%, to 22,160.85 in August. �e index showed a mixed performance in September. In the �rst half of the month, the approval of the $6.64 billion loan package by IMF, the plans to privatize Pakistan International Airlines, strong foreign in�ows and the release of the IMF’s �rst tranche worth of $550 million helped lift the index to 23,639.97 on a closing basis. However, sentiment reversed towards the end of the month after the central bank’s decision to increase the rate of return on savings deposits to 6.5%. Moreover, steep decline in the value of Pakistani

rupee against the US dollar, constant repayments to IMF, a 50 basis points increase in the discount rate and heavy foreign net selling dragged the KSE-100 index down 328.17 points, or 1.48%, to 21,832.68 in September.

MARKET UPDATE04

page 9 of 24 mufap quarterly newsletter

Mutual Fund Market:

�e total net assets decreased to Rs. 359.947 billion in the �rst quarter of FY14 versus Rs. 361.668 billion for the Q4FY13, a reduction of 0.48% quarter over quarter. �e open-end funds went up by 0.71% to Rs. 327.594 billion, pension funds went up by 9.67% to Rs. 5.288 billion and closed-end decreased by 14.23% to Rs. 27.064 billion.

Funds launched during the quarter Q1-FY14

Funds matured during the quarter Q1-FY14

Funds with changed structure/other features Energy Crisis: Causes and ImpactsBy Sara Aquil Walji, Research Analyst, HBL Asset Management

Energy is the cornerstone for any economy’s development and growth. �e current situation has worsened in Pakistan over the past few years and likely to continue if measures are not taken to mitigate the issue on a long term basis. �e gap between demand and supply has reached 6000MW resulting in scheduled and unscheduled load shedding, negatively a�ecting our industrial sector, hurting our exports and has even hampered the GDP growth rate by 2%. Subsidies to the power sector have steadily been increasing and form the biggest part of total subsidies amounting to around Rs 349,287mn (95% of the total subsidies) in FY 2012-13. �e new government has allocated Rs. 220,100mn to the power sector for the FY 2013-14 which is 91.5% of the total subsidy budget. (Source: Annual budget 2014) With recent emphasis on matters to resolve energy crisis and develop renewable and non-renewable sources of energy, it is worthwhile to note why energy crisis became as severe as it is now.

�e root of this crisis is that Pakistan’s electricity generation mix is highly skewed towards the most expensive kinds .�ere appears to be an almost inverse relationship between the sources of electricity that are most expensive to set and those that are most expensive to run. �e following chart depicts this relationship:

Source: Express Tribune �is highlights the fact why there is a heavy concentration toward

the construction of thermal power plants since they are relatively cheaper to build than hydropower plants. �e government has not dedicated enough funds for the development of hydropower projects which are the most expensive to build but cheapest to run on a per unit basis.Pakistan’s electricity generation is highly dependent on imported oil as almost $14.5bn worth of oil is imported each year which accounts for around 35% of electricity generation. Comparing Pakistan with India and Bangladesh reveals that Pakistan relies heavily on oil for electricity generation where as India uses coal, a relatively cheaper source for electricity generation and Bangladesh on the other hand allocates 73% of its electricity generation to gas.

Source: Economic Survey report for 2012-2013

With a prominent shift in recent years towards the use of thermal power stations instead of hydropower sources and a reduction in electricity generation from coal, Pakistan’s electricity costs ends up being more expensive than it needs to be and since the government has adopted a policy of uniform tari� across the country the Tari� Di�erential Subsidy owed by the Government of Pakistan on an annual basis has increased substantially.

Circular debt is another major concern hampering the growth of Pakistan’s economy. In simple words circular debt is the amount of

cash shortfall within the Central Power Purchasing Agency (CPPA) that it cannot pay to power supply companies. �is shortfall is the result of (a) the di�erence between the actual cost of providing electricity in relation to revenues realized by the power distribution companies (DISCOs) from sales to customers plus subsidies; and (b) insu�cient payments by the DISCOs to CPPA out of realized revenue as they give priority to their own cash �ow needs. (Source: USAID Report March 2103)

�is revenue shortfall cascades through the entire energy supply chain, from electricity generators to fuel suppliers, re�ners, and producers; resulting in a shortage of fuel supply to the public sector thermal generating companies (GENCOs), a reduction in power generated by Independent Power Producers (IPPs), and an increases in load shedding.

According to the report published by the USAID in March 2013, circular debt amounts to Rs872bn which is actually 4% of GDP. According to Pakistan’s Economic Survey report for 2012-2013, there is a strong relationship between GDP growth rate and electricity growth as shown in the �gure below. It can be easily deduced that periods of low or negative electricity growth have witnessed low GDP growth rate, while periods where electricity growth picked up there is increase in GDP growth rate.

�is comes as no surprise, since industrial output is heavily dependent on the amount of electricity delivered to them. Continuous power breakdowns prevented industries from operating at their full capacity level. �e power outages have obstructed the viability of the textile industry as exporters were unable to meet their

commitments. During July-March 2012-13, foreign exchange earnings through exports of synthetic textile fabrics and woolen industry showing a decline of 25.3% and 5.1% respectively as compared to last year. During the period under review even in quantity term also recorded a decline of 30% and 15.8% respectively.

Coupled with an ine�cient system and expensive fuel mix, power theft is another major issue faced by Pakistanis. It is interesting to note that annual revenue collection e�ciency was estimated to be around 87%; however that 13% of lost e�ciency has a �nancial impact of Rs 86bn which is equivalent to 41 days of furnace oil costs for thermal power plants. �e following �gure shows the percentage of bills that were uncollected in 2012. �e e�ciency of di�erent DISCOs is disproportionate in revenue collection. �is essentially leads to the inclusion of the cost of power theft in the power tari�, meaning that the honest payers also bear the cost of those that steal.

Power theft is not only committed by normal residents but the main defaulters are the government institutions themselves. �e government owns around 51% of the uncollected bills which amounts to Rs 118bn out of the uncollected revenue receipts of Rs 386bn. In my opinion, this the amount which causes the discrepancy between the amount of RS500.3bn to be injected to resolve the circular debt issue and �gure of Rs 872.41bn since the government has a proposal to o�set provisional dues via a �scal adjuster. Due to a growing economy, Pakistan’s energy needs have more than doubled in the past 15 years. Energy shortages have far devastating

e�ects on our economy. Not only does it cause civil disturbances on a small scale but it a�ects our GDP on a larger note. Injecting money into the chain will only resolve the issue on a temporary basis. �ese challenges require a multi-prong approach that would address energy shortages in the immediate future and help the country build longer term energy su�ciency.

�ere needs to be a shift away from thermal power to alternative sources of energy which are not only cheaper but also environmentally friendly. Pakistan has large untapped renewable resources such as water, sun and wind and recently the government has taken keen interest on the development of hydro power projects and Neelum Jhelum Hydroelectric Project is one of the many projects which the new government has started which will approximately add 5.15bn units of electricity annually. Moreover, an e�ective system of governance must be in place to curb theft, recuperate dues and enforce policies.

�e Importance of Asset Allocation in attaining Optimal Returns

By Yamna Hassan, Asst. Manager-Business DevelopmentLakson Investments

“Tis the part of a wise man to keep himself today for tomorrow, and not venture all his eggs in one basket.” – Miguel de Cervantes, Don Quixote de la Mancha, 1605.

�e afore-mentioned quote indicates that along with being a great writer, Cervantes would have also proved to be a wise investor.

Investment related decisions are preceded by de�ning a proper Asset Allocation plan. According to recent research, the Asset Allocation decision is responsible for 91.5 percent of the variation between returns on di�erent portfolios. Given the importance of Asset Allocation, it has attained a center stage in any investment decision.

Asset Allocation is mainly important for two de�nite reasons. �e �rst reason pertains to portfolio design; variation in portfolio designs can lead to some investment decisions being winners while the rest being losers, and it is believed that if a portfolio is thoughtfully constructed and contains an optimal mix of securities that perform di�erently from each other (i.e they have little correlation in between them), chances of this portfolio yielding a more stable return is higher. �is is because if some securities in a portfolio are inconsistent and volatile, other, more stable securities can nullify the inconsistency of the entire portfolio, hence stabilizing the yield pattern.

�e second reason pertains to the vision of the investor. Asset allocation allows an investor to �nancially plan for his long-term and short-term goals and avoid impulsive reactions. We will subsequently discuss this aspect of Asset Allocation.

We can divide the Asset Allocation decision into two simple steps as discussed below:

Step 1: Asset Allocation An Asset Allocation strategy can be devised based on the investor’s risk assessment, �nancial goals and return targets. It is the most fundamental step of an investment decision and involves determining an ideal mix of stocks, bonds, cash and other securities in a way such that the portfolio yields a return which best suits an investor’s need. �ere is always a downside of investing too much in bonds or cash as that might certify stable but lower returns. In the same way, too much investment in stocks might lead to portfolio volatility. �erefore, in order to meet your requirements, or keep pace with in�ation, you need to plan an ideal arrangement of securities for your portfolio.

Step 2: Diversi�cationWhile the �rst step bears upon the idea of portfolio construction, this step is linked to the proper dissemination of your assets in a way such that your portfolio is exposed to many di�erent segments of the market, some of which perform independently of the others. Proper diversi�cation of your portfolio can lead to higher and more stable returns.

As mentioned before, the e�ect of diversi�cation is most noticeable when instruments have very little interrelation between them. However, it was easier to build this sort of a portfolio previously than it is today. �is is because roughly over the past 10 years, �nancial markets have become increasingly interrelated and complex. Let us also not ignore the fact that during the 2008 �nancial trouble, most assets tended to perform similarly, leading us to believe in the proposition that most assets are conducive to a similar behavior in times of crisis and instability. �e �gure below shows ways of diversifying a portfolio and entering into newer and assorted mix of investment vehicles.

FIGURE 1:

Figure shows ways of diversifying a portfolio.

Institutions that do not pay requisite importance to the Asset Allocation decision might end up damaging their returns. Usually, institutions are advised to invest in a 60:40 ratio (Stocks: �xed income instruments) to remain on the safe side. Whereas, individuals are recommended to invest in an investment spectrum ranging from 100 percent stocks to 100 percent bonds depending on their separate variable characteristics. However, the Asset Allocation decision is dependent on several other factors and cannot be generalized for di�erent investors.

Following are a few, newer and e�cient ways that have now been developed and can be used for attaining optimal asset allocation:

Mean Variance Optimization

Mean Variance Optimization is a quantitative technique that can be used to calculate the trade-o� between maximum expected return and risk tolerance. �is technique has gained popularity over time because in recent times, the technique is applied on an asset class level as opposed to being applied only to portfolios of individual stocks previously.

�e development of Mean Variance Optimization has not only bene�tted institutional investors but has resulted in a breakthrough for retail brokerage houses as well, which, prior to this development were restricted on their advisory role to the investors. However, recently, they are proposing a greater degree of passive security and more thoughtful asset allocation recommendations to their investors. �is has become possible by using optimization and aiming to attain a favorable position with maximum expected return, minimal risk, or both.

Moreover, a few re�ned approaches taken from utility theory and behavioral economics can be deployed to develop polls or surveys that can authentically gauge an individual’s risk preferences.

Pension funds have also been familiarized with Optimization. Such funds take into account the reciprocity of both assets and liabilities and not only the assets unlike other funds. �e objective of Asset Allocation for these funds is to amplify the fund surplus i.e liabilities subtracted from assets for a stated degree of risk tolerance.

Tactical Asset AllocationTactical asset allocation is the process of adjusting a particular portfolio based on changes in the market value of assets contained in that portfolio. �e technique is quite dynamic and involves deviation from the strategic asset allocation when an investor’s short-term foresight is not aligned with his long term foresight used to develop a strategic asset allocation plan and precise short-term predictions on part of the investor can lead to better returns.

Pragmatically speaking, Tactical Asset Allocation models tend to recommend contrarian trades, that is, they recommend purchasing an asset as its current market value drops and vice versa. �us, tactical Asset Allocation involves perpetually arranging your portfolio based on your needs and changes in the market. One consequence of Tactical Asset Allocation is that by overweighting certain assets during certain times and underweighting others, the portfolio is riskier because of its reduced diversi�cation. �us, to

o�set this additional risk factor, this strategy would need to generate above market returns. �e notion, whether Tactical Asset Allocation Models have achieved this is still a matter of rumination and study but because the probable returns from successful Tactical Asset Allocation would be large, researchers will keep inspecting, and investors won’t cease to be on the look out for their discoveries.

Insured Asset Allocation�is strategy is similar to a portfolio insurance strategy and is a mirror image of the Tactical Asset Allocation strategy. With this strategy, a base portfolio parameter is �xed and the value of the portfolio is not allowed to fall below this base parameter. As long as the portfolio achieves a return above this parameter, you actively to try to increase the portfolio value as much as possible. If, however, the portfolio ever drops to below the base value, investment in risk-free securities enables the base value to become �xed.

�e main target audiences for this approach are risk-averse investors who desire a certain level of active portfolio management and also covet the protection of �xing a certi�ed minimum return below which the portfolio is not allowed to decline. For instance, this approach is best for an investor who has planned a nominal lifestyle for himself after retirement.

Asset Allocation & Uncertain Times�e importance of active portfolio management and wise asset allocation strategy has been reiterated enough. But at the brink of serious economic uncertainty, expectation for stock market returns is somewhat muted. �erefore, it is believed that in such a situation, a dynamic asset allocation plan should come into play for the advantage of certain clients.

Dynamic Asset Allocation uses a long term strategic Asset Allocation strategy as its foundation. Alternate investments can be added to the core portfolio for the sake of complementing it. It is even better, if these investments include segments which yield a higher return and bear little interdependence, so as to achieve a greater level of diversi�cation.

Besides, dynamic Asset Allocation strategies can also be accompanied by �exible investment strategies; tactical actions that are short-term in nature and aim to bank on perceived market opportunities. If 10-20% of your assets are allocated for such investments, your portfolio can be expected to react better in times of changing trends and conditions.

Asset allocation is evolving past a traditional “purchase and retain” dogma. Whilst this might not suit all clients, exercising a dynamic asset allocation plan can create a portfolio better able to handle uncertain market environments. Not to forget the fact that a solid strategic asset allocation plan remains the core strategy behind any tactical asset allocation strategy.

Asset Allocation & the local scenarioWith interest rates in Pakistan consistently hovering above 10 percent for the past �ve years, anyone would expect Pakistanis to be encouraged enough to save and reap bene�ts of higher returns. However, reality states that Pakistan actually stands out to re�ect one of the lowest savings in the region. Given the fact that majority of Pakistanis are not so keen on investing mainly because their expenditures on necessities do not leave any room for savings or so for other reasons, there is a chunk of people who are inclined in saving for a better future and lifestyle.

With growth of urban nuclear families, educated middle to upper middle class is inspirited to plan properly for a child’s education, health and future life. Reasons for investment in Pakistani society vary from a child’s education to his marriage, from being cushioned against the toils of post-retirement life to maternity expenditures. Young professionals may want to invest as a means to generate seed capital for their potential business idea or to live their dreams of traveling or wayfaring.

Reasons for investing are many. With di�erent individuals and di�erent investment objectives in mind, the asset allocation needs of these investors must be customized accordingly.

Asset Allocation & Financial PlanningOnce you are done with choosing your model for Asset Allocation, the �nal stage is to test this model by contextualizing it with a precise �nancial plan. It might be easy for an investor to choose which Asset Allocation plan will provide him with the best possible returns but the investor should also �gure out a way to determine that expected return and also estimate the trade-o� for that higher return potential.

A well-concocted �nancial plan will guide the investor out of this bewilderment. First, it will determine what level of projected investment return is necessary to allow you to meet your lifestyle goals, which can help lead you to the right mix of stocks, bonds and cash. Second, the plan will evaluate the impact of the portfolio risk associated with that mix.

Traditionally, �nancial planning models focused on expected return and neglected the variability of outcomes that is associated with increased volatility. With the introduction of probability-based planning tools, the investor can foresee the e�ect of risk on their investment portfolios, they can vary the amount of risk and can study their corresponding returns. For example a portfolio bearing higher risk may yield a higher return but it also has a probability of falling far short beneath their targets.

When using an asset allocation approach to designing a portfolio, it is important to not focus just on the expected return of that portfolio. �e risk associated with an increasing, or decreasing, portfolio return is just as important to the success of an investment strategy.

Asset Allocation & �e Future

Most forecasters fall into two divisions. Forecasters in the �rst division are eager to predict that the future will closely mirror the recent past. �eir ideals are those generals who are always preparing to �ght the last war. Forecasters in the second division rely heavily

upon the adage that the only constant is change itself. Proponents of this school of thought usually don’t know what to expect, but are quite sure it will be nothing like anything we’ve seen before. �ese individuals do realize the problems of delineating the future of this area.

We should view the future of asset allocation through lenses borrowed from both divisions. �at is, certain aspects of asset allocation today will continue to be recognizable for the years to come. To be more precise, the goals and importance of asset allocation will not change, but the mechanisms by which investors seek to achieve those goals will be new.

�e goal of the asset allocation decision, was, is, and will be to select a combination of assets that will generate a return su�ciently high and safe so as to o�set some future liability. It is also safe to say that asset allocation decisions will have a continuing large role in explaining portfolio returns.

Industry-wide - Net Assets (PKR million)

Net Assets - Open End Funds (PKR million)

Net Assets - Closed End Funds (PKR million)

Net Assets - Pension Schemes (PKR million)

Sales (PKR million) Redemptions (PKR million) Net Sales (PKR million)

Open End Funds' Return** Closed End Funds' Return**

General Pension Schemes Return**

Islamic Pension Schemes Return**

Fund Name Maturity Date Type CategoryAtlas Fund of Funds Aug 31, 2013 Close End Fund of Funds

JS Principal Secure Fund I Jun 11, 2012 Open- End Capital Protected

New Fund Name Old Fund Name Date of Change Old Structure New

Structure

First Capital Mutual Fund First Capital Mutual Fund Limited 30-Jul-13 Close End Fund

(Investment Company)Open End Scheme

Asian Stocks Fund Asian Stocks Fund Limited 16-Sep-13 Closed End Fund Open End

Scheme

Safeway Mutual Fund Safeway Mutual Fund Limited 16-Sep-13 Closed End Fund Open End

Scheme

Fund Name Category Inception Date Fund Manager

NAFA Pension Fund Pension Fund July 2, 2013 Mr. Sajjad AnwarNAFA Islamic Pension Fund Islamic Pension Fund July 2, 2013 Mr. Sajjad AnwarFaysal Financial Sector Opportunity Fund Income July 5, 2013 Mr. Syed Shahid Iqbal

Atlas Gold Fund Commodity - Gold July 15, 2013 M. Umar KhanAPF-Gold Sub Fund Pension Fund July 15, 2013 M. Umar KhanUBL Asset Allocation Fund Asset Allocation Aug 20, 2013 Mr. Ali AsgharPIML - Strategic Multi Asset Fund Balanced Fund Aug 23, 2013 Mr. Nazia Nauman

Source: MUFAP

Source: MUFAP

Source: MUFAP

Meeting of the Board of Directors

In order to ensure that the Board of Directors ful�ls the duties and responsibilities conferred by the members of MUFAP, the Board conducts meetings on a regular basis to make immediate and prudent decisions. �e Board of Directors held three meetings during the quarter Jul-Sep 2013.

�e activities undertaken by Board are as follows:

Proposed amendments in the de�nition of Related Parties in Restricted List of Code for Distributors

�e Board deliberated in detail on the matter of proposed

amendments in the de�nition of Related Parties in the Restricted List of Code for Distributors. After careful consideration of the impacts that the amendments may entail, it was decided that all individuals (namely employees, directors, sponsors of the RSPs) should be excluded from the de�nition of Related Parties. �e revised de�nition is applicable to all new investments brought in on or after July 16, 2013 and is not applicable to existing investments made by or before July 15, 2013.

Valuation of GOP Ijarah Sukuk

�e Board recommended that AMCs should use ‘PKISRV’ quoted on Reuters as the relevant price to value the GOP Ijarah Sukuks to determine net assets of CIS under their management, which the SECP approved in September.

Meetings of the Committees

MUFAP Committees held many discussions to make important, well planned proposals on behalf of industry. �e following table presents the number of meetings held during the quarter Jul-Sep’13.

Technical Committee - VPS

�e VPS – Technical Committee held extensive discussions to discuss the dissimilar taxation and operational practices being adopted by di�erent VPS Managers. �e VPS Committee constituted a Sub-Committee, involving a representative from each VPS Manager, to draw up recommendations for the tax treatment. �e Committee also engaged Senior Tax expert, Mr. Shabbar Zaidi on the matter and has requested for clari�cation from FBR on one of the matters.

Meeting with NCCPL A meeting was held between operations sta� of AMCs and NCCPL representatives on July 22, 2013 to evaluate the mechanics and possible data sharing from AMCs to NCCPL for netting of CGT. It was decided that NCCPL would develop a concept paper covering brief mechanism of centralized CGT collection to AMCs for their review and comments.

Elections to elect Directors/Executive Committee Members of MUFAP for the year 2013 / 2014

As required under the Trade Organizations Rules, 2007, MUFAP is required to hold its elections each year to elect Directors against the vacancies arising on account of completion of two-year tenure of some Directors. Board members are elected for a two-year term.

�e retiring Directors on the completion of their two year tenure on September 30, 2013 are: 1. Mr. Adnan Siddiqui (Resigned August-2013)2. Mr. Amer Maqbool 3. Mr. Imran Azim 4. Mr. Mir Muhammad Ali 5. Mr. Nihal Cassim

�e continuing Directors of MUFAP for the year 2013/ 2014 are: 1. Dr. Amjad Waheed 2. Mr. Imran Motiwala 3. Mr. Mir Adil Rashid 4. Mr. Rashid Mansur 5. Ms Maheen Rahman6. Ms Hina Ghazanfar (on reserved seat for women)

In addition, Mr. Rehan N. Shaikh will serve on the Board as provided under Rule 23(5)(d) of the Trade Organization Rules, 2007. At the Extra Ordinary General Meeting on September 26, 2013, MUFAP announced the appointment, by virtue of elections, of the following directors to the Board, namely:1. Mr. Farid Ahmed Khan 2. Mr. M. Habib-ur-Rahman 3. Mr. Mohammad Shoaib 4. Mr. Yasir Qadri 5. Mr. Enamullah Khan

New Board of Directors

�e new Board of Directors of MUFAP at its �rst meeting held on October 1, 2013 elected Dr. Amjad Waheed as Chairman, Mr. Mohammad Shoaib as Senior Vice Chairman and Mr. Farid Ahmed Khan as Vice Chairman MUFAP for the year 2013-2014.�e Board of Directors of MUFAP for the 2013-14 term is as follows:

1) Dr. Amjad Waheed - Chairman; 2) Mr. Mohammad Shoaib - Senior Vice Chairman; 3) Mr. Farid Ahmed Khan - Vice Chairman;4) Mr. Rehan N. Shaikh;5) Mr. Rashid Mansur;6) Mr. M. Habib-ur-Rahman;7) Mr. Yasir Qadri8) Mr. Imran Motiwala;9) Ms Hina Ghazanfar;10) Ms Maheen Rahman;11) Mr. Mir Adil Rashid;12) Mr. Enamullah Khan; and13) Ms Mashmooma Z. Majeed - Chief Executive

Chairman Dr. Amjad Waheed, CFA

Dr. Amjad Waheed holds a doctorate in Investments & Finance from Southern Illinois University, USA and is also a Chartered Financial Analyst. For the last 7 years he is CEO of NBP Fullerton Asset Management Ltd (NAFA), which is a subsidiary of National Bank of Pakistan, with Fullerton Fund Management Company of Singapore as the other joint venture partner. NAFA is presently managing fourteen mutual funds and several portfolios with about Rs 45 billion invested in these funds. NAFA is among the largest Asset Management Companies in Pakistan today.

Before joining NAFA, Dr. Waheed was Head of Equity Mutual Funds & Portfolios at Riyad Bank, Saudi Arabia, for about 5 years where he was managing US$ 7.5 billion invested in 22 mutual funds. Prior to that Dr. Waheed was Head of Investments at NIT,

and Chief Operation O�cer of FC-ABN AMRO Equities for several years. Before moving back to Pakistan, Dr. Waheed was Assistant Professor of Finance at Tennessee State University, USA and has published several articles in top journals of the world such as Journal of Banking & Finance and Financial and Financial Management.Dr. Waheed has served on the Board of various companies including Siemens, Nishat Mills, PICIC, Askari Bank, Millat Tractors, Fauji Fertilizer, Pakitstan Tobacco Company, Treet Corporation, Gul Ahmed Textile, Bata Pakistan.

Senior Vice Chairman Mr. Mohammad Shoaib, CFA

Mr. Mohammad Shoaib, CFA is the Chief Executive of Al Meezan Investment Management Ltd. He has played a key role in setting up the company and has been associated with it since inception. He is a highly quali�ed and seasoned professional with 23 years experience in capital markets. He has to his credit many accolades and awards, the most signi�cant of them being the "Most In�uential CFA charter holder" awarded by CFA Institute in 2006.

Mr. Shoaib holds an MBA degree from IBA besides being a Chartered Financial Analyst (CFA) charter holder. He has to his credit the honor of being the founder and �rst president of CFA Association of Pakistan, a member society of CFA Institute. He has been active participant in the Islamic �nance and asset management for the last 10 years. In this respect, he has also actively participated as a speaker and panelist in various international and domestic seminars, conferences and workshops.

Mr. Shoaib has also served in voluntary capacity at di�erent domestic and international institutions. He has served as a Director on the Board of Karachi Stock Exchange and Vice Chairman on the Board of Mutual Funds Association of Pakistan. He is currently serving on the Board of Directors of Pakistan Institute of Corporate Governance and Institute of Capital Markets. He has also served on various global and regional committees of CFA Institute including Asia Paci�c Advocacy Committee, Global Task Force on Corporate

Governance, GIPS Regional Council and Asset Manager Code Advisory Committee. He has also had the honour to represent over 16,000 charterholders in Asia Paci�c Region as their representative on the Presidents' Council of CFA Institute.

Vice Chairman Mr. Farid Ahmed Khan, CFA

Mr. Farid Ahmed Khan, CFA is the CEO of ABL Asset Management. He has been involved with capital markets for over 18 years and has a broad-based, global experience with bulge bracket �rms in Asset Management, Investment Banking, Investment Research and Sales, Business Development & International Project Finance. He joined ABL AMC from Credit Suisse, where he was the Country Manager of Credit Suisse Pakistan. Prior to that, he worked for MCB, initially as Head of Investment Banking Group and later as the CEO of MCB Asset Management. Mr. Khan has extensive experience outside Pakistan, having worked at Morgan Stanley, ING Barings Securities and CLSA Emerging Markets in Kuala Lumpur, London and Istanbul in a variety of senior positions. He holds an MBA in Finance from IBA, Karachi and got his CFA quali�cation in 1998.

New Committees

MUFAP Board elected its Professional Committees, Chairperson and Vice-Chairperson of each Committee for the year 2013-14. �e list of Committees, their Chairperson and Vice-Chairperson is as follows:

SECP forms Shariah Advisory Board

SECP constituted a Shariah Advisory Board (SAB) to harmonize the Shariah interpretations and strengthen the regulatory and supervisory oversight of Islamic �nancial institutions (IFIs) and Islamic capital markets (ICMs) in Pakistan. It will also advise the Commission on the Shariah-compliance aspects of various products launched and or the processes being adopted by the regulated entities. It will also provide guidance for issuance of new laws, rules and regulations for e�ective monitoring and supervision of Islamic Financial Products and to suggest ways and means for development of IFIs and ICMs in the country.

Money Market

To meet the challenges of maintaining stability in the foreign exchange market and controlling high growth in money supply, SBP decided to gradually decrease the outstanding amount of liquidity injections. Since the beginning of FY14, interbank market liquidity conditions have considerably eased primarily due to substantial increase in the pace of government borrowing from the SBP. In fact, SBP mopped up Rs. 1,556.45 billion and injected Rs. 630.70 billion during Q1-FY14.

In terms of controlling growth in money supply, however, SBP’s e�orts of curtailing liquidity injections did not experience much success as these were o�set by an increase in direct �scal borrowings from the SBP. �e increase of Rs. 1,446 billion in budgetary borrowings from the banking system during FY13 was almost Rs. 1 trillion higher than the original target and was even higher than the total expansion in M2. Deviation of this scale has signi�cantly constrained e�ective monetary management, disrupted �nancial intermediation in the economy, and has led to a sharp increase in domestic debt. Showing a growth of 24.6% in FY13, the stock of government’s domestic debt has reached Rs. 9.5 trillion as of end-June 2013. Similarly, a considerable increase in public debt to revenue ratio re�ects weak repayment capacity of the government. �e acceleration in �scal borrowings from the SBP during H2-FY13, Rs. 714 billion, and Q1-FY14 up till 30th August 2013, Rs. 547 billion, is particularly worrisome. �e inability to raise the tax-GDP ratio is the fundamental source of large �scal de�cits, high borrowings, and rising debt. Although there has been a consistent gap between Federal Board of Revenue’s (FBR) budget targets and actual outcomes in the last few years, the gap of Rs. 445 billion in FY13 was exceptionally high. In fact, this is more than the cumulative shortfall of Rs. 349 billion during the last �ve years.

On the external front, stress in the external account has gradually increased with every passing month of 2013 due to shrinking net capital and �nancial �ows and high loan repayments to the IMF.

While the former was only $517 million or 0.2 percent of GDP, the latter increased to $3 billion in FY13. As a result, despite reduction in the external current account de�cit by about half, to $2.3 billion or 1.0 percent of GDP, the SBP’s foreign exchange reserves declined to $6 billion by end-June 2013 from $10.8 billion at the beginning of FY13. �ese stand at $5.2 billion as on 6th September, 2013 after receiving $544.5 million under the new IMF program. Despite pressures and speculations of a drop in the value of the Pak rupee the foreign exchange market has largely remained stable in FY13. However, since the beginning of FY14 the rupee has depreciated by 5.0 percent as of 12th September 2013.

�e year-on-year CPI based in�ation rate was recorded at 8.3% in July 2013, then to 8.55% in August 2013, however dipped down to 7.39% in September 2013.�ough CPI In�ation remained within single digit, however, it witnessed an upward trend as it increased to 7.39 percent in September 2013 compared to 5.85 percent in June 2013 and 6.6 percent in March 2013. �e impact of upward adjustments in energy prices and an increase in the GST together with the removal of certain exemptions put pressure on in�ation.In order to counter in�ationary expectations, SBP raised the discount rate by 50 basis points to 9.5 percent with e�ect from September 16, 2013.

Movement in KIBOR

Treasury Bills:

A total of 6 T-bill auctions were held by SBP during the quarter in which a total amount of Rs. 1,348.88 billion was raised. Since the beginning of FY14, market’s preference for shorter tenor T-Bills has increased as about 83% of the bank’s total o�ers in recent T-Bill auctions were concentrated in 3-month bills.

T-Bill Auctions (Amount in PKR billion; rates in %)

Pakistan Investment Bonds

�e accepted amount in the PIB auctions during Q1-FY14 fell short of the target .

PIB Auctions (Yields in % and Face Value in PKR billion)

Debt Market

�e table below summarizes the TOP 15 trades of TFCs/Sukuk on the basis of Face value during the Q1-FY14:

Equity Market

KSE-100 index made a strong start to the �scal year 2014, as the index gained 826.99 points, or 3.94%, to stand at 21,832.68 points during the �rst three months of FY14. During the period, index struggled to cross the 23,000 points level and made a high of 23,776.22 on a closing basis. Stock market began the �rst month of �scal year 2014 with a strong rally, overcoming jitters stemming from treason proceedings against former president General (retd) Pervez Musharraf and slowdown in global markets. �e government’s successful negotiations with IMF for a $5.3 billion loan, resolution of circular debt by issuing treasury bills and bonds and anticipation of strong corporate earnings for the quarter ended June 30 buoyed investors’ con�dence as the share prices appreciated across the board and index posted a gain of 2.307.09 points, or 10.98% to settle at 23,312.78 level in July.

After posting strong gain in July, KSE-100 faltered in August as investors continued to worry about ever-escalating Syrian crisis and tumbling regional markets. Stock market further pressured by a slew of disappointing and less-than-expected corporate earnings, falling foreign exchange reserves and high in�ation �gures for July. Moreover, concerns on a possible interest rate hike in the upcoming monetary policy announcement, potential spike in oil prices, decline in cement prices due to breakdown in price discipline, heavy foreign net selling and persistent depreciation in the rupee dragged the KSE-100 index down 1,151.93 points, or 4.94%, to 22,160.85 in August. �e index showed a mixed performance in September. In the �rst half of the month, the approval of the $6.64 billion loan package by IMF, the plans to privatize Pakistan International Airlines, strong foreign in�ows and the release of the IMF’s �rst tranche worth of $550 million helped lift the index to 23,639.97 on a closing basis. However, sentiment reversed towards the end of the month after the central bank’s decision to increase the rate of return on savings deposits to 6.5%. Moreover, steep decline in the value of Pakistani

rupee against the US dollar, constant repayments to IMF, a 50 basis points increase in the discount rate and heavy foreign net selling dragged the KSE-100 index down 328.17 points, or 1.48%, to 21,832.68 in September.

Mutual Fund Market:

�e total net assets decreased to Rs. 359.947 billion in the �rst quarter of FY14 versus Rs. 361.668 billion for the Q4FY13, a reduction of 0.48% quarter over quarter. �e open-end funds went up by 0.71% to Rs. 327.594 billion, pension funds went up by 9.67% to Rs. 5.288 billion and closed-end decreased by 14.23% to Rs. 27.064 billion.

Funds launched during the quarter Q1-FY14

Funds matured during the quarter Q1-FY14

Funds with changed structure/other features

ARTICLES05

page 10 of 24 mufap quarterly newsletter

Energy Crisis: Causes and ImpactsBy Sara Aquil Walji, Research Analyst, HBL Asset Management

Energy is the cornerstone for any economy’s development and growth. �e current situation has worsened in Pakistan over the past few years and likely to continue if measures are not taken to mitigate the issue on a long term basis. �e gap between demand and supply has reached 6000MW resulting in scheduled and unscheduled load shedding, negatively a�ecting our industrial sector, hurting our exports and has even hampered the GDP growth rate by 2%. Subsidies to the power sector have steadily been increasing and form the biggest part of total subsidies amounting to around Rs 349,287mn (95% of the total subsidies) in FY 2012-13. �e new government has allocated Rs. 220,100mn to the power sector for the FY 2013-14 which is 91.5% of the total subsidy budget. (Source: Annual budget 2014) With recent emphasis on matters to resolve energy crisis and develop renewable and non-renewable sources of energy, it is worthwhile to note why energy crisis became as severe as it is now.

�e root of this crisis is that Pakistan’s electricity generation mix is highly skewed towards the most expensive kinds .�ere appears to be an almost inverse relationship between the sources of electricity that are most expensive to set and those that are most expensive to run. �e following chart depicts this relationship:

Source: Express Tribune �is highlights the fact why there is a heavy concentration toward

the construction of thermal power plants since they are relatively cheaper to build than hydropower plants. �e government has not dedicated enough funds for the development of hydropower projects which are the most expensive to build but cheapest to run on a per unit basis.Pakistan’s electricity generation is highly dependent on imported oil as almost $14.5bn worth of oil is imported each year which accounts for around 35% of electricity generation. Comparing Pakistan with India and Bangladesh reveals that Pakistan relies heavily on oil for electricity generation where as India uses coal, a relatively cheaper source for electricity generation and Bangladesh on the other hand allocates 73% of its electricity generation to gas.

Source: Economic Survey report for 2012-2013

With a prominent shift in recent years towards the use of thermal power stations instead of hydropower sources and a reduction in electricity generation from coal, Pakistan’s electricity costs ends up being more expensive than it needs to be and since the government has adopted a policy of uniform tari� across the country the Tari� Di�erential Subsidy owed by the Government of Pakistan on an annual basis has increased substantially.

Circular debt is another major concern hampering the growth of Pakistan’s economy. In simple words circular debt is the amount of

cash shortfall within the Central Power Purchasing Agency (CPPA) that it cannot pay to power supply companies. �is shortfall is the result of (a) the di�erence between the actual cost of providing electricity in relation to revenues realized by the power distribution companies (DISCOs) from sales to customers plus subsidies; and (b) insu�cient payments by the DISCOs to CPPA out of realized revenue as they give priority to their own cash �ow needs. (Source: USAID Report March 2103)

�is revenue shortfall cascades through the entire energy supply chain, from electricity generators to fuel suppliers, re�ners, and producers; resulting in a shortage of fuel supply to the public sector thermal generating companies (GENCOs), a reduction in power generated by Independent Power Producers (IPPs), and an increases in load shedding.

According to the report published by the USAID in March 2013, circular debt amounts to Rs872bn which is actually 4% of GDP. According to Pakistan’s Economic Survey report for 2012-2013, there is a strong relationship between GDP growth rate and electricity growth as shown in the �gure below. It can be easily deduced that periods of low or negative electricity growth have witnessed low GDP growth rate, while periods where electricity growth picked up there is increase in GDP growth rate.

�is comes as no surprise, since industrial output is heavily dependent on the amount of electricity delivered to them. Continuous power breakdowns prevented industries from operating at their full capacity level. �e power outages have obstructed the viability of the textile industry as exporters were unable to meet their

commitments. During July-March 2012-13, foreign exchange earnings through exports of synthetic textile fabrics and woolen industry showing a decline of 25.3% and 5.1% respectively as compared to last year. During the period under review even in quantity term also recorded a decline of 30% and 15.8% respectively.

Coupled with an ine�cient system and expensive fuel mix, power theft is another major issue faced by Pakistanis. It is interesting to note that annual revenue collection e�ciency was estimated to be around 87%; however that 13% of lost e�ciency has a �nancial impact of Rs 86bn which is equivalent to 41 days of furnace oil costs for thermal power plants. �e following �gure shows the percentage of bills that were uncollected in 2012. �e e�ciency of di�erent DISCOs is disproportionate in revenue collection. �is essentially leads to the inclusion of the cost of power theft in the power tari�, meaning that the honest payers also bear the cost of those that steal.

Power theft is not only committed by normal residents but the main defaulters are the government institutions themselves. �e government owns around 51% of the uncollected bills which amounts to Rs 118bn out of the uncollected revenue receipts of Rs 386bn. In my opinion, this the amount which causes the discrepancy between the amount of RS500.3bn to be injected to resolve the circular debt issue and �gure of Rs 872.41bn since the government has a proposal to o�set provisional dues via a �scal adjuster. Due to a growing economy, Pakistan’s energy needs have more than doubled in the past 15 years. Energy shortages have far devastating

e�ects on our economy. Not only does it cause civil disturbances on a small scale but it a�ects our GDP on a larger note. Injecting money into the chain will only resolve the issue on a temporary basis. �ese challenges require a multi-prong approach that would address energy shortages in the immediate future and help the country build longer term energy su�ciency.

�ere needs to be a shift away from thermal power to alternative sources of energy which are not only cheaper but also environmentally friendly. Pakistan has large untapped renewable resources such as water, sun and wind and recently the government has taken keen interest on the development of hydro power projects and Neelum Jhelum Hydroelectric Project is one of the many projects which the new government has started which will approximately add 5.15bn units of electricity annually. Moreover, an e�ective system of governance must be in place to curb theft, recuperate dues and enforce policies.

�e Importance of Asset Allocation in attaining Optimal Returns

By Yamna Hassan, Asst. Manager-Business DevelopmentLakson Investments

“Tis the part of a wise man to keep himself today for tomorrow, and not venture all his eggs in one basket.” – Miguel de Cervantes, Don Quixote de la Mancha, 1605.

�e afore-mentioned quote indicates that along with being a great writer, Cervantes would have also proved to be a wise investor.

Investment related decisions are preceded by de�ning a proper Asset Allocation plan. According to recent research, the Asset Allocation decision is responsible for 91.5 percent of the variation between returns on di�erent portfolios. Given the importance of Asset Allocation, it has attained a center stage in any investment decision.

Asset Allocation is mainly important for two de�nite reasons. �e �rst reason pertains to portfolio design; variation in portfolio designs can lead to some investment decisions being winners while the rest being losers, and it is believed that if a portfolio is thoughtfully constructed and contains an optimal mix of securities that perform di�erently from each other (i.e they have little correlation in between them), chances of this portfolio yielding a more stable return is higher. �is is because if some securities in a portfolio are inconsistent and volatile, other, more stable securities can nullify the inconsistency of the entire portfolio, hence stabilizing the yield pattern.

�e second reason pertains to the vision of the investor. Asset allocation allows an investor to �nancially plan for his long-term and short-term goals and avoid impulsive reactions. We will subsequently discuss this aspect of Asset Allocation.

We can divide the Asset Allocation decision into two simple steps as discussed below:

Step 1: Asset Allocation An Asset Allocation strategy can be devised based on the investor’s risk assessment, �nancial goals and return targets. It is the most fundamental step of an investment decision and involves determining an ideal mix of stocks, bonds, cash and other securities in a way such that the portfolio yields a return which best suits an investor’s need. �ere is always a downside of investing too much in bonds or cash as that might certify stable but lower returns. In the same way, too much investment in stocks might lead to portfolio volatility. �erefore, in order to meet your requirements, or keep pace with in�ation, you need to plan an ideal arrangement of securities for your portfolio.

Step 2: Diversi�cationWhile the �rst step bears upon the idea of portfolio construction, this step is linked to the proper dissemination of your assets in a way such that your portfolio is exposed to many di�erent segments of the market, some of which perform independently of the others. Proper diversi�cation of your portfolio can lead to higher and more stable returns.

As mentioned before, the e�ect of diversi�cation is most noticeable when instruments have very little interrelation between them. However, it was easier to build this sort of a portfolio previously than it is today. �is is because roughly over the past 10 years, �nancial markets have become increasingly interrelated and complex. Let us also not ignore the fact that during the 2008 �nancial trouble, most assets tended to perform similarly, leading us to believe in the proposition that most assets are conducive to a similar behavior in times of crisis and instability. �e �gure below shows ways of diversifying a portfolio and entering into newer and assorted mix of investment vehicles.

FIGURE 1:

Figure shows ways of diversifying a portfolio.

Institutions that do not pay requisite importance to the Asset Allocation decision might end up damaging their returns. Usually, institutions are advised to invest in a 60:40 ratio (Stocks: �xed income instruments) to remain on the safe side. Whereas, individuals are recommended to invest in an investment spectrum ranging from 100 percent stocks to 100 percent bonds depending on their separate variable characteristics. However, the Asset Allocation decision is dependent on several other factors and cannot be generalized for di�erent investors.

Following are a few, newer and e�cient ways that have now been developed and can be used for attaining optimal asset allocation:

Mean Variance Optimization

Mean Variance Optimization is a quantitative technique that can be used to calculate the trade-o� between maximum expected return and risk tolerance. �is technique has gained popularity over time because in recent times, the technique is applied on an asset class level as opposed to being applied only to portfolios of individual stocks previously.

�e development of Mean Variance Optimization has not only bene�tted institutional investors but has resulted in a breakthrough for retail brokerage houses as well, which, prior to this development were restricted on their advisory role to the investors. However, recently, they are proposing a greater degree of passive security and more thoughtful asset allocation recommendations to their investors. �is has become possible by using optimization and aiming to attain a favorable position with maximum expected return, minimal risk, or both.

Moreover, a few re�ned approaches taken from utility theory and behavioral economics can be deployed to develop polls or surveys that can authentically gauge an individual’s risk preferences.

Pension funds have also been familiarized with Optimization. Such funds take into account the reciprocity of both assets and liabilities and not only the assets unlike other funds. �e objective of Asset Allocation for these funds is to amplify the fund surplus i.e liabilities subtracted from assets for a stated degree of risk tolerance.

Tactical Asset AllocationTactical asset allocation is the process of adjusting a particular portfolio based on changes in the market value of assets contained in that portfolio. �e technique is quite dynamic and involves deviation from the strategic asset allocation when an investor’s short-term foresight is not aligned with his long term foresight used to develop a strategic asset allocation plan and precise short-term predictions on part of the investor can lead to better returns.

Pragmatically speaking, Tactical Asset Allocation models tend to recommend contrarian trades, that is, they recommend purchasing an asset as its current market value drops and vice versa. �us, tactical Asset Allocation involves perpetually arranging your portfolio based on your needs and changes in the market. One consequence of Tactical Asset Allocation is that by overweighting certain assets during certain times and underweighting others, the portfolio is riskier because of its reduced diversi�cation. �us, to

o�set this additional risk factor, this strategy would need to generate above market returns. �e notion, whether Tactical Asset Allocation Models have achieved this is still a matter of rumination and study but because the probable returns from successful Tactical Asset Allocation would be large, researchers will keep inspecting, and investors won’t cease to be on the look out for their discoveries.

Insured Asset Allocation�is strategy is similar to a portfolio insurance strategy and is a mirror image of the Tactical Asset Allocation strategy. With this strategy, a base portfolio parameter is �xed and the value of the portfolio is not allowed to fall below this base parameter. As long as the portfolio achieves a return above this parameter, you actively to try to increase the portfolio value as much as possible. If, however, the portfolio ever drops to below the base value, investment in risk-free securities enables the base value to become �xed.

�e main target audiences for this approach are risk-averse investors who desire a certain level of active portfolio management and also covet the protection of �xing a certi�ed minimum return below which the portfolio is not allowed to decline. For instance, this approach is best for an investor who has planned a nominal lifestyle for himself after retirement.

Asset Allocation & Uncertain Times�e importance of active portfolio management and wise asset allocation strategy has been reiterated enough. But at the brink of serious economic uncertainty, expectation for stock market returns is somewhat muted. �erefore, it is believed that in such a situation, a dynamic asset allocation plan should come into play for the advantage of certain clients.

Dynamic Asset Allocation uses a long term strategic Asset Allocation strategy as its foundation. Alternate investments can be added to the core portfolio for the sake of complementing it. It is even better, if these investments include segments which yield a higher return and bear little interdependence, so as to achieve a greater level of diversi�cation.

Besides, dynamic Asset Allocation strategies can also be accompanied by �exible investment strategies; tactical actions that are short-term in nature and aim to bank on perceived market opportunities. If 10-20% of your assets are allocated for such investments, your portfolio can be expected to react better in times of changing trends and conditions.

Asset allocation is evolving past a traditional “purchase and retain” dogma. Whilst this might not suit all clients, exercising a dynamic asset allocation plan can create a portfolio better able to handle uncertain market environments. Not to forget the fact that a solid strategic asset allocation plan remains the core strategy behind any tactical asset allocation strategy.

Asset Allocation & the local scenarioWith interest rates in Pakistan consistently hovering above 10 percent for the past �ve years, anyone would expect Pakistanis to be encouraged enough to save and reap bene�ts of higher returns. However, reality states that Pakistan actually stands out to re�ect one of the lowest savings in the region. Given the fact that majority of Pakistanis are not so keen on investing mainly because their expenditures on necessities do not leave any room for savings or so for other reasons, there is a chunk of people who are inclined in saving for a better future and lifestyle.

With growth of urban nuclear families, educated middle to upper middle class is inspirited to plan properly for a child’s education, health and future life. Reasons for investment in Pakistani society vary from a child’s education to his marriage, from being cushioned against the toils of post-retirement life to maternity expenditures. Young professionals may want to invest as a means to generate seed capital for their potential business idea or to live their dreams of traveling or wayfaring.

Reasons for investing are many. With di�erent individuals and di�erent investment objectives in mind, the asset allocation needs of these investors must be customized accordingly.

Asset Allocation & Financial PlanningOnce you are done with choosing your model for Asset Allocation, the �nal stage is to test this model by contextualizing it with a precise �nancial plan. It might be easy for an investor to choose which Asset Allocation plan will provide him with the best possible returns but the investor should also �gure out a way to determine that expected return and also estimate the trade-o� for that higher return potential.

A well-concocted �nancial plan will guide the investor out of this bewilderment. First, it will determine what level of projected investment return is necessary to allow you to meet your lifestyle goals, which can help lead you to the right mix of stocks, bonds and cash. Second, the plan will evaluate the impact of the portfolio risk associated with that mix.

Traditionally, �nancial planning models focused on expected return and neglected the variability of outcomes that is associated with increased volatility. With the introduction of probability-based planning tools, the investor can foresee the e�ect of risk on their investment portfolios, they can vary the amount of risk and can study their corresponding returns. For example a portfolio bearing higher risk may yield a higher return but it also has a probability of falling far short beneath their targets.

When using an asset allocation approach to designing a portfolio, it is important to not focus just on the expected return of that portfolio. �e risk associated with an increasing, or decreasing, portfolio return is just as important to the success of an investment strategy.

Asset Allocation & �e Future

Most forecasters fall into two divisions. Forecasters in the �rst division are eager to predict that the future will closely mirror the recent past. �eir ideals are those generals who are always preparing to �ght the last war. Forecasters in the second division rely heavily

upon the adage that the only constant is change itself. Proponents of this school of thought usually don’t know what to expect, but are quite sure it will be nothing like anything we’ve seen before. �ese individuals do realize the problems of delineating the future of this area.

We should view the future of asset allocation through lenses borrowed from both divisions. �at is, certain aspects of asset allocation today will continue to be recognizable for the years to come. To be more precise, the goals and importance of asset allocation will not change, but the mechanisms by which investors seek to achieve those goals will be new.

�e goal of the asset allocation decision, was, is, and will be to select a combination of assets that will generate a return su�ciently high and safe so as to o�set some future liability. It is also safe to say that asset allocation decisions will have a continuing large role in explaining portfolio returns.

Industry-wide - Net Assets (PKR million)

Net Assets - Open End Funds (PKR million)

Net Assets - Closed End Funds (PKR million)

Net Assets - Pension Schemes (PKR million)

Sales (PKR million) Redemptions (PKR million) Net Sales (PKR million)

Open End Funds' Return** Closed End Funds' Return**

General Pension Schemes Return**

Islamic Pension Schemes Return**

Source: Pakistan Energy Year Book 2012

Meeting of the Board of Directors

In order to ensure that the Board of Directors ful�ls the duties and responsibilities conferred by the members of MUFAP, the Board conducts meetings on a regular basis to make immediate and prudent decisions. �e Board of Directors held three meetings during the quarter Jul-Sep 2013.

�e activities undertaken by Board are as follows:

Proposed amendments in the de�nition of Related Parties in Restricted List of Code for Distributors

�e Board deliberated in detail on the matter of proposed

amendments in the de�nition of Related Parties in the Restricted List of Code for Distributors. After careful consideration of the impacts that the amendments may entail, it was decided that all individuals (namely employees, directors, sponsors of the RSPs) should be excluded from the de�nition of Related Parties. �e revised de�nition is applicable to all new investments brought in on or after July 16, 2013 and is not applicable to existing investments made by or before July 15, 2013.

Valuation of GOP Ijarah Sukuk

�e Board recommended that AMCs should use ‘PKISRV’ quoted on Reuters as the relevant price to value the GOP Ijarah Sukuks to determine net assets of CIS under their management, which the SECP approved in September.

Meetings of the Committees

MUFAP Committees held many discussions to make important, well planned proposals on behalf of industry. �e following table presents the number of meetings held during the quarter Jul-Sep’13.

Technical Committee - VPS

�e VPS – Technical Committee held extensive discussions to discuss the dissimilar taxation and operational practices being adopted by di�erent VPS Managers. �e VPS Committee constituted a Sub-Committee, involving a representative from each VPS Manager, to draw up recommendations for the tax treatment. �e Committee also engaged Senior Tax expert, Mr. Shabbar Zaidi on the matter and has requested for clari�cation from FBR on one of the matters.

Meeting with NCCPL A meeting was held between operations sta� of AMCs and NCCPL representatives on July 22, 2013 to evaluate the mechanics and possible data sharing from AMCs to NCCPL for netting of CGT. It was decided that NCCPL would develop a concept paper covering brief mechanism of centralized CGT collection to AMCs for their review and comments.

Elections to elect Directors/Executive Committee Members of MUFAP for the year 2013 / 2014

As required under the Trade Organizations Rules, 2007, MUFAP is required to hold its elections each year to elect Directors against the vacancies arising on account of completion of two-year tenure of some Directors. Board members are elected for a two-year term.

�e retiring Directors on the completion of their two year tenure on September 30, 2013 are: 1. Mr. Adnan Siddiqui (Resigned August-2013)2. Mr. Amer Maqbool 3. Mr. Imran Azim 4. Mr. Mir Muhammad Ali 5. Mr. Nihal Cassim

�e continuing Directors of MUFAP for the year 2013/ 2014 are: 1. Dr. Amjad Waheed 2. Mr. Imran Motiwala 3. Mr. Mir Adil Rashid 4. Mr. Rashid Mansur 5. Ms Maheen Rahman6. Ms Hina Ghazanfar (on reserved seat for women)

In addition, Mr. Rehan N. Shaikh will serve on the Board as provided under Rule 23(5)(d) of the Trade Organization Rules, 2007. At the Extra Ordinary General Meeting on September 26, 2013, MUFAP announced the appointment, by virtue of elections, of the following directors to the Board, namely:1. Mr. Farid Ahmed Khan 2. Mr. M. Habib-ur-Rahman 3. Mr. Mohammad Shoaib 4. Mr. Yasir Qadri 5. Mr. Enamullah Khan

New Board of Directors

�e new Board of Directors of MUFAP at its �rst meeting held on October 1, 2013 elected Dr. Amjad Waheed as Chairman, Mr. Mohammad Shoaib as Senior Vice Chairman and Mr. Farid Ahmed Khan as Vice Chairman MUFAP for the year 2013-2014.�e Board of Directors of MUFAP for the 2013-14 term is as follows:

1) Dr. Amjad Waheed - Chairman; 2) Mr. Mohammad Shoaib - Senior Vice Chairman; 3) Mr. Farid Ahmed Khan - Vice Chairman;4) Mr. Rehan N. Shaikh;5) Mr. Rashid Mansur;6) Mr. M. Habib-ur-Rahman;7) Mr. Yasir Qadri8) Mr. Imran Motiwala;9) Ms Hina Ghazanfar;10) Ms Maheen Rahman;11) Mr. Mir Adil Rashid;12) Mr. Enamullah Khan; and13) Ms Mashmooma Z. Majeed - Chief Executive

Chairman Dr. Amjad Waheed, CFA

Dr. Amjad Waheed holds a doctorate in Investments & Finance from Southern Illinois University, USA and is also a Chartered Financial Analyst. For the last 7 years he is CEO of NBP Fullerton Asset Management Ltd (NAFA), which is a subsidiary of National Bank of Pakistan, with Fullerton Fund Management Company of Singapore as the other joint venture partner. NAFA is presently managing fourteen mutual funds and several portfolios with about Rs 45 billion invested in these funds. NAFA is among the largest Asset Management Companies in Pakistan today.

Before joining NAFA, Dr. Waheed was Head of Equity Mutual Funds & Portfolios at Riyad Bank, Saudi Arabia, for about 5 years where he was managing US$ 7.5 billion invested in 22 mutual funds. Prior to that Dr. Waheed was Head of Investments at NIT,

and Chief Operation O�cer of FC-ABN AMRO Equities for several years. Before moving back to Pakistan, Dr. Waheed was Assistant Professor of Finance at Tennessee State University, USA and has published several articles in top journals of the world such as Journal of Banking & Finance and Financial and Financial Management.Dr. Waheed has served on the Board of various companies including Siemens, Nishat Mills, PICIC, Askari Bank, Millat Tractors, Fauji Fertilizer, Pakitstan Tobacco Company, Treet Corporation, Gul Ahmed Textile, Bata Pakistan.

Senior Vice Chairman Mr. Mohammad Shoaib, CFA

Mr. Mohammad Shoaib, CFA is the Chief Executive of Al Meezan Investment Management Ltd. He has played a key role in setting up the company and has been associated with it since inception. He is a highly quali�ed and seasoned professional with 23 years experience in capital markets. He has to his credit many accolades and awards, the most signi�cant of them being the "Most In�uential CFA charter holder" awarded by CFA Institute in 2006.

Mr. Shoaib holds an MBA degree from IBA besides being a Chartered Financial Analyst (CFA) charter holder. He has to his credit the honor of being the founder and �rst president of CFA Association of Pakistan, a member society of CFA Institute. He has been active participant in the Islamic �nance and asset management for the last 10 years. In this respect, he has also actively participated as a speaker and panelist in various international and domestic seminars, conferences and workshops.

Mr. Shoaib has also served in voluntary capacity at di�erent domestic and international institutions. He has served as a Director on the Board of Karachi Stock Exchange and Vice Chairman on the Board of Mutual Funds Association of Pakistan. He is currently serving on the Board of Directors of Pakistan Institute of Corporate Governance and Institute of Capital Markets. He has also served on various global and regional committees of CFA Institute including Asia Paci�c Advocacy Committee, Global Task Force on Corporate

Governance, GIPS Regional Council and Asset Manager Code Advisory Committee. He has also had the honour to represent over 16,000 charterholders in Asia Paci�c Region as their representative on the Presidents' Council of CFA Institute.

Vice Chairman Mr. Farid Ahmed Khan, CFA

Mr. Farid Ahmed Khan, CFA is the CEO of ABL Asset Management. He has been involved with capital markets for over 18 years and has a broad-based, global experience with bulge bracket �rms in Asset Management, Investment Banking, Investment Research and Sales, Business Development & International Project Finance. He joined ABL AMC from Credit Suisse, where he was the Country Manager of Credit Suisse Pakistan. Prior to that, he worked for MCB, initially as Head of Investment Banking Group and later as the CEO of MCB Asset Management. Mr. Khan has extensive experience outside Pakistan, having worked at Morgan Stanley, ING Barings Securities and CLSA Emerging Markets in Kuala Lumpur, London and Istanbul in a variety of senior positions. He holds an MBA in Finance from IBA, Karachi and got his CFA quali�cation in 1998.

New Committees

MUFAP Board elected its Professional Committees, Chairperson and Vice-Chairperson of each Committee for the year 2013-14. �e list of Committees, their Chairperson and Vice-Chairperson is as follows:

SECP forms Shariah Advisory Board

SECP constituted a Shariah Advisory Board (SAB) to harmonize the Shariah interpretations and strengthen the regulatory and supervisory oversight of Islamic �nancial institutions (IFIs) and Islamic capital markets (ICMs) in Pakistan. It will also advise the Commission on the Shariah-compliance aspects of various products launched and or the processes being adopted by the regulated entities. It will also provide guidance for issuance of new laws, rules and regulations for e�ective monitoring and supervision of Islamic Financial Products and to suggest ways and means for development of IFIs and ICMs in the country.

Money Market

To meet the challenges of maintaining stability in the foreign exchange market and controlling high growth in money supply, SBP decided to gradually decrease the outstanding amount of liquidity injections. Since the beginning of FY14, interbank market liquidity conditions have considerably eased primarily due to substantial increase in the pace of government borrowing from the SBP. In fact, SBP mopped up Rs. 1,556.45 billion and injected Rs. 630.70 billion during Q1-FY14.

In terms of controlling growth in money supply, however, SBP’s e�orts of curtailing liquidity injections did not experience much success as these were o�set by an increase in direct �scal borrowings from the SBP. �e increase of Rs. 1,446 billion in budgetary borrowings from the banking system during FY13 was almost Rs. 1 trillion higher than the original target and was even higher than the total expansion in M2. Deviation of this scale has signi�cantly constrained e�ective monetary management, disrupted �nancial intermediation in the economy, and has led to a sharp increase in domestic debt. Showing a growth of 24.6% in FY13, the stock of government’s domestic debt has reached Rs. 9.5 trillion as of end-June 2013. Similarly, a considerable increase in public debt to revenue ratio re�ects weak repayment capacity of the government. �e acceleration in �scal borrowings from the SBP during H2-FY13, Rs. 714 billion, and Q1-FY14 up till 30th August 2013, Rs. 547 billion, is particularly worrisome. �e inability to raise the tax-GDP ratio is the fundamental source of large �scal de�cits, high borrowings, and rising debt. Although there has been a consistent gap between Federal Board of Revenue’s (FBR) budget targets and actual outcomes in the last few years, the gap of Rs. 445 billion in FY13 was exceptionally high. In fact, this is more than the cumulative shortfall of Rs. 349 billion during the last �ve years.

On the external front, stress in the external account has gradually increased with every passing month of 2013 due to shrinking net capital and �nancial �ows and high loan repayments to the IMF.

While the former was only $517 million or 0.2 percent of GDP, the latter increased to $3 billion in FY13. As a result, despite reduction in the external current account de�cit by about half, to $2.3 billion or 1.0 percent of GDP, the SBP’s foreign exchange reserves declined to $6 billion by end-June 2013 from $10.8 billion at the beginning of FY13. �ese stand at $5.2 billion as on 6th September, 2013 after receiving $544.5 million under the new IMF program. Despite pressures and speculations of a drop in the value of the Pak rupee the foreign exchange market has largely remained stable in FY13. However, since the beginning of FY14 the rupee has depreciated by 5.0 percent as of 12th September 2013.

�e year-on-year CPI based in�ation rate was recorded at 8.3% in July 2013, then to 8.55% in August 2013, however dipped down to 7.39% in September 2013.�ough CPI In�ation remained within single digit, however, it witnessed an upward trend as it increased to 7.39 percent in September 2013 compared to 5.85 percent in June 2013 and 6.6 percent in March 2013. �e impact of upward adjustments in energy prices and an increase in the GST together with the removal of certain exemptions put pressure on in�ation.In order to counter in�ationary expectations, SBP raised the discount rate by 50 basis points to 9.5 percent with e�ect from September 16, 2013.

Movement in KIBOR

Treasury Bills:

A total of 6 T-bill auctions were held by SBP during the quarter in which a total amount of Rs. 1,348.88 billion was raised. Since the beginning of FY14, market’s preference for shorter tenor T-Bills has increased as about 83% of the bank’s total o�ers in recent T-Bill auctions were concentrated in 3-month bills.

T-Bill Auctions (Amount in PKR billion; rates in %)

Pakistan Investment Bonds

�e accepted amount in the PIB auctions during Q1-FY14 fell short of the target .

PIB Auctions (Yields in % and Face Value in PKR billion)

Debt Market

�e table below summarizes the TOP 15 trades of TFCs/Sukuk on the basis of Face value during the Q1-FY14:

Equity Market

KSE-100 index made a strong start to the �scal year 2014, as the index gained 826.99 points, or 3.94%, to stand at 21,832.68 points during the �rst three months of FY14. During the period, index struggled to cross the 23,000 points level and made a high of 23,776.22 on a closing basis. Stock market began the �rst month of �scal year 2014 with a strong rally, overcoming jitters stemming from treason proceedings against former president General (retd) Pervez Musharraf and slowdown in global markets. �e government’s successful negotiations with IMF for a $5.3 billion loan, resolution of circular debt by issuing treasury bills and bonds and anticipation of strong corporate earnings for the quarter ended June 30 buoyed investors’ con�dence as the share prices appreciated across the board and index posted a gain of 2.307.09 points, or 10.98% to settle at 23,312.78 level in July.

After posting strong gain in July, KSE-100 faltered in August as investors continued to worry about ever-escalating Syrian crisis and tumbling regional markets. Stock market further pressured by a slew of disappointing and less-than-expected corporate earnings, falling foreign exchange reserves and high in�ation �gures for July. Moreover, concerns on a possible interest rate hike in the upcoming monetary policy announcement, potential spike in oil prices, decline in cement prices due to breakdown in price discipline, heavy foreign net selling and persistent depreciation in the rupee dragged the KSE-100 index down 1,151.93 points, or 4.94%, to 22,160.85 in August. �e index showed a mixed performance in September. In the �rst half of the month, the approval of the $6.64 billion loan package by IMF, the plans to privatize Pakistan International Airlines, strong foreign in�ows and the release of the IMF’s �rst tranche worth of $550 million helped lift the index to 23,639.97 on a closing basis. However, sentiment reversed towards the end of the month after the central bank’s decision to increase the rate of return on savings deposits to 6.5%. Moreover, steep decline in the value of Pakistani

rupee against the US dollar, constant repayments to IMF, a 50 basis points increase in the discount rate and heavy foreign net selling dragged the KSE-100 index down 328.17 points, or 1.48%, to 21,832.68 in September.

Mutual Fund Market:

�e total net assets decreased to Rs. 359.947 billion in the �rst quarter of FY14 versus Rs. 361.668 billion for the Q4FY13, a reduction of 0.48% quarter over quarter. �e open-end funds went up by 0.71% to Rs. 327.594 billion, pension funds went up by 9.67% to Rs. 5.288 billion and closed-end decreased by 14.23% to Rs. 27.064 billion.

Funds launched during the quarter Q1-FY14

Funds matured during the quarter Q1-FY14

Funds with changed structure/other features

ARTICLESEnergy Crisis: Causes and Impacts

By Sara Aquil Walji, Research Analyst, HBL Asset Management

Energy is the cornerstone for any economy’s development and growth. �e current situation has worsened in Pakistan over the past few years and likely to continue if measures are not taken to mitigate the issue on a long term basis. �e gap between demand and supply has reached 6000MW resulting in scheduled and unscheduled load shedding, negatively a�ecting our industrial sector, hurting our exports and has even hampered the GDP growth rate by 2%. Subsidies to the power sector have steadily been increasing and form the biggest part of total subsidies amounting to around Rs 349,287mn (95% of the total subsidies) in FY 2012-13. �e new government has allocated Rs. 220,100mn to the power sector for the FY 2013-14 which is 91.5% of the total subsidy budget. (Source: Annual budget 2014) With recent emphasis on matters to resolve energy crisis and develop renewable and non-renewable sources of energy, it is worthwhile to note why energy crisis became as severe as it is now.

�e root of this crisis is that Pakistan’s electricity generation mix is highly skewed towards the most expensive kinds .�ere appears to be an almost inverse relationship between the sources of electricity that are most expensive to set and those that are most expensive to run. �e following chart depicts this relationship:

Source: Express Tribune �is highlights the fact why there is a heavy concentration toward

the construction of thermal power plants since they are relatively cheaper to build than hydropower plants. �e government has not dedicated enough funds for the development of hydropower projects which are the most expensive to build but cheapest to run on a per unit basis.Pakistan’s electricity generation is highly dependent on imported oil as almost $14.5bn worth of oil is imported each year which accounts for around 35% of electricity generation. Comparing Pakistan with India and Bangladesh reveals that Pakistan relies heavily on oil for electricity generation where as India uses coal, a relatively cheaper source for electricity generation and Bangladesh on the other hand allocates 73% of its electricity generation to gas.

Source: Economic Survey report for 2012-2013

With a prominent shift in recent years towards the use of thermal power stations instead of hydropower sources and a reduction in electricity generation from coal, Pakistan’s electricity costs ends up being more expensive than it needs to be and since the government has adopted a policy of uniform tari� across the country the Tari� Di�erential Subsidy owed by the Government of Pakistan on an annual basis has increased substantially.

Circular debt is another major concern hampering the growth of Pakistan’s economy. In simple words circular debt is the amount of

ARTICLES05

page 11 of 24 mufap quarterly newsletter

cash shortfall within the Central Power Purchasing Agency (CPPA) that it cannot pay to power supply companies. �is shortfall is the result of (a) the di�erence between the actual cost of providing electricity in relation to revenues realized by the power distribution companies (DISCOs) from sales to customers plus subsidies; and (b) insu�cient payments by the DISCOs to CPPA out of realized revenue as they give priority to their own cash �ow needs. (Source: USAID Report March 2103)

�is revenue shortfall cascades through the entire energy supply chain, from electricity generators to fuel suppliers, re�ners, and producers; resulting in a shortage of fuel supply to the public sector thermal generating companies (GENCOs), a reduction in power generated by Independent Power Producers (IPPs), and an increases in load shedding.

According to the report published by the USAID in March 2013, circular debt amounts to Rs872bn which is actually 4% of GDP. According to Pakistan’s Economic Survey report for 2012-2013, there is a strong relationship between GDP growth rate and electricity growth as shown in the �gure below. It can be easily deduced that periods of low or negative electricity growth have witnessed low GDP growth rate, while periods where electricity growth picked up there is increase in GDP growth rate.

�is comes as no surprise, since industrial output is heavily dependent on the amount of electricity delivered to them. Continuous power breakdowns prevented industries from operating at their full capacity level. �e power outages have obstructed the viability of the textile industry as exporters were unable to meet their

commitments. During July-March 2012-13, foreign exchange earnings through exports of synthetic textile fabrics and woolen industry showing a decline of 25.3% and 5.1% respectively as compared to last year. During the period under review even in quantity term also recorded a decline of 30% and 15.8% respectively.

Coupled with an ine�cient system and expensive fuel mix, power theft is another major issue faced by Pakistanis. It is interesting to note that annual revenue collection e�ciency was estimated to be around 87%; however that 13% of lost e�ciency has a �nancial impact of Rs 86bn which is equivalent to 41 days of furnace oil costs for thermal power plants. �e following �gure shows the percentage of bills that were uncollected in 2012. �e e�ciency of di�erent DISCOs is disproportionate in revenue collection. �is essentially leads to the inclusion of the cost of power theft in the power tari�, meaning that the honest payers also bear the cost of those that steal.

Power theft is not only committed by normal residents but the main defaulters are the government institutions themselves. �e government owns around 51% of the uncollected bills which amounts to Rs 118bn out of the uncollected revenue receipts of Rs 386bn. In my opinion, this the amount which causes the discrepancy between the amount of RS500.3bn to be injected to resolve the circular debt issue and �gure of Rs 872.41bn since the government has a proposal to o�set provisional dues via a �scal adjuster. Due to a growing economy, Pakistan’s energy needs have more than doubled in the past 15 years. Energy shortages have far devastating

e�ects on our economy. Not only does it cause civil disturbances on a small scale but it a�ects our GDP on a larger note. Injecting money into the chain will only resolve the issue on a temporary basis. �ese challenges require a multi-prong approach that would address energy shortages in the immediate future and help the country build longer term energy su�ciency.

�ere needs to be a shift away from thermal power to alternative sources of energy which are not only cheaper but also environmentally friendly. Pakistan has large untapped renewable resources such as water, sun and wind and recently the government has taken keen interest on the development of hydro power projects and Neelum Jhelum Hydroelectric Project is one of the many projects which the new government has started which will approximately add 5.15bn units of electricity annually. Moreover, an e�ective system of governance must be in place to curb theft, recuperate dues and enforce policies.

�e Importance of Asset Allocation in attaining Optimal Returns

By Yamna Hassan, Asst. Manager-Business DevelopmentLakson Investments

“Tis the part of a wise man to keep himself today for tomorrow, and not venture all his eggs in one basket.” – Miguel de Cervantes, Don Quixote de la Mancha, 1605.

�e afore-mentioned quote indicates that along with being a great writer, Cervantes would have also proved to be a wise investor.

Investment related decisions are preceded by de�ning a proper Asset Allocation plan. According to recent research, the Asset Allocation decision is responsible for 91.5 percent of the variation between returns on di�erent portfolios. Given the importance of Asset Allocation, it has attained a center stage in any investment decision.

Asset Allocation is mainly important for two de�nite reasons. �e �rst reason pertains to portfolio design; variation in portfolio designs can lead to some investment decisions being winners while the rest being losers, and it is believed that if a portfolio is thoughtfully constructed and contains an optimal mix of securities that perform di�erently from each other (i.e they have little correlation in between them), chances of this portfolio yielding a more stable return is higher. �is is because if some securities in a portfolio are inconsistent and volatile, other, more stable securities can nullify the inconsistency of the entire portfolio, hence stabilizing the yield pattern.

�e second reason pertains to the vision of the investor. Asset allocation allows an investor to �nancially plan for his long-term and short-term goals and avoid impulsive reactions. We will subsequently discuss this aspect of Asset Allocation.

We can divide the Asset Allocation decision into two simple steps as discussed below:

Step 1: Asset Allocation An Asset Allocation strategy can be devised based on the investor’s risk assessment, �nancial goals and return targets. It is the most fundamental step of an investment decision and involves determining an ideal mix of stocks, bonds, cash and other securities in a way such that the portfolio yields a return which best suits an investor’s need. �ere is always a downside of investing too much in bonds or cash as that might certify stable but lower returns. In the same way, too much investment in stocks might lead to portfolio volatility. �erefore, in order to meet your requirements, or keep pace with in�ation, you need to plan an ideal arrangement of securities for your portfolio.

Step 2: Diversi�cationWhile the �rst step bears upon the idea of portfolio construction, this step is linked to the proper dissemination of your assets in a way such that your portfolio is exposed to many di�erent segments of the market, some of which perform independently of the others. Proper diversi�cation of your portfolio can lead to higher and more stable returns.

As mentioned before, the e�ect of diversi�cation is most noticeable when instruments have very little interrelation between them. However, it was easier to build this sort of a portfolio previously than it is today. �is is because roughly over the past 10 years, �nancial markets have become increasingly interrelated and complex. Let us also not ignore the fact that during the 2008 �nancial trouble, most assets tended to perform similarly, leading us to believe in the proposition that most assets are conducive to a similar behavior in times of crisis and instability. �e �gure below shows ways of diversifying a portfolio and entering into newer and assorted mix of investment vehicles.

FIGURE 1:

Figure shows ways of diversifying a portfolio.

Institutions that do not pay requisite importance to the Asset Allocation decision might end up damaging their returns. Usually, institutions are advised to invest in a 60:40 ratio (Stocks: �xed income instruments) to remain on the safe side. Whereas, individuals are recommended to invest in an investment spectrum ranging from 100 percent stocks to 100 percent bonds depending on their separate variable characteristics. However, the Asset Allocation decision is dependent on several other factors and cannot be generalized for di�erent investors.

Following are a few, newer and e�cient ways that have now been developed and can be used for attaining optimal asset allocation:

Mean Variance Optimization

Mean Variance Optimization is a quantitative technique that can be used to calculate the trade-o� between maximum expected return and risk tolerance. �is technique has gained popularity over time because in recent times, the technique is applied on an asset class level as opposed to being applied only to portfolios of individual stocks previously.

�e development of Mean Variance Optimization has not only bene�tted institutional investors but has resulted in a breakthrough for retail brokerage houses as well, which, prior to this development were restricted on their advisory role to the investors. However, recently, they are proposing a greater degree of passive security and more thoughtful asset allocation recommendations to their investors. �is has become possible by using optimization and aiming to attain a favorable position with maximum expected return, minimal risk, or both.

Moreover, a few re�ned approaches taken from utility theory and behavioral economics can be deployed to develop polls or surveys that can authentically gauge an individual’s risk preferences.

Pension funds have also been familiarized with Optimization. Such funds take into account the reciprocity of both assets and liabilities and not only the assets unlike other funds. �e objective of Asset Allocation for these funds is to amplify the fund surplus i.e liabilities subtracted from assets for a stated degree of risk tolerance.

Tactical Asset AllocationTactical asset allocation is the process of adjusting a particular portfolio based on changes in the market value of assets contained in that portfolio. �e technique is quite dynamic and involves deviation from the strategic asset allocation when an investor’s short-term foresight is not aligned with his long term foresight used to develop a strategic asset allocation plan and precise short-term predictions on part of the investor can lead to better returns.

Pragmatically speaking, Tactical Asset Allocation models tend to recommend contrarian trades, that is, they recommend purchasing an asset as its current market value drops and vice versa. �us, tactical Asset Allocation involves perpetually arranging your portfolio based on your needs and changes in the market. One consequence of Tactical Asset Allocation is that by overweighting certain assets during certain times and underweighting others, the portfolio is riskier because of its reduced diversi�cation. �us, to

o�set this additional risk factor, this strategy would need to generate above market returns. �e notion, whether Tactical Asset Allocation Models have achieved this is still a matter of rumination and study but because the probable returns from successful Tactical Asset Allocation would be large, researchers will keep inspecting, and investors won’t cease to be on the look out for their discoveries.

Insured Asset Allocation�is strategy is similar to a portfolio insurance strategy and is a mirror image of the Tactical Asset Allocation strategy. With this strategy, a base portfolio parameter is �xed and the value of the portfolio is not allowed to fall below this base parameter. As long as the portfolio achieves a return above this parameter, you actively to try to increase the portfolio value as much as possible. If, however, the portfolio ever drops to below the base value, investment in risk-free securities enables the base value to become �xed.

�e main target audiences for this approach are risk-averse investors who desire a certain level of active portfolio management and also covet the protection of �xing a certi�ed minimum return below which the portfolio is not allowed to decline. For instance, this approach is best for an investor who has planned a nominal lifestyle for himself after retirement.

Asset Allocation & Uncertain Times�e importance of active portfolio management and wise asset allocation strategy has been reiterated enough. But at the brink of serious economic uncertainty, expectation for stock market returns is somewhat muted. �erefore, it is believed that in such a situation, a dynamic asset allocation plan should come into play for the advantage of certain clients.

Dynamic Asset Allocation uses a long term strategic Asset Allocation strategy as its foundation. Alternate investments can be added to the core portfolio for the sake of complementing it. It is even better, if these investments include segments which yield a higher return and bear little interdependence, so as to achieve a greater level of diversi�cation.

Besides, dynamic Asset Allocation strategies can also be accompanied by �exible investment strategies; tactical actions that are short-term in nature and aim to bank on perceived market opportunities. If 10-20% of your assets are allocated for such investments, your portfolio can be expected to react better in times of changing trends and conditions.

Asset allocation is evolving past a traditional “purchase and retain” dogma. Whilst this might not suit all clients, exercising a dynamic asset allocation plan can create a portfolio better able to handle uncertain market environments. Not to forget the fact that a solid strategic asset allocation plan remains the core strategy behind any tactical asset allocation strategy.

Asset Allocation & the local scenarioWith interest rates in Pakistan consistently hovering above 10 percent for the past �ve years, anyone would expect Pakistanis to be encouraged enough to save and reap bene�ts of higher returns. However, reality states that Pakistan actually stands out to re�ect one of the lowest savings in the region. Given the fact that majority of Pakistanis are not so keen on investing mainly because their expenditures on necessities do not leave any room for savings or so for other reasons, there is a chunk of people who are inclined in saving for a better future and lifestyle.

With growth of urban nuclear families, educated middle to upper middle class is inspirited to plan properly for a child’s education, health and future life. Reasons for investment in Pakistani society vary from a child’s education to his marriage, from being cushioned against the toils of post-retirement life to maternity expenditures. Young professionals may want to invest as a means to generate seed capital for their potential business idea or to live their dreams of traveling or wayfaring.

Reasons for investing are many. With di�erent individuals and di�erent investment objectives in mind, the asset allocation needs of these investors must be customized accordingly.

Asset Allocation & Financial PlanningOnce you are done with choosing your model for Asset Allocation, the �nal stage is to test this model by contextualizing it with a precise �nancial plan. It might be easy for an investor to choose which Asset Allocation plan will provide him with the best possible returns but the investor should also �gure out a way to determine that expected return and also estimate the trade-o� for that higher return potential.

A well-concocted �nancial plan will guide the investor out of this bewilderment. First, it will determine what level of projected investment return is necessary to allow you to meet your lifestyle goals, which can help lead you to the right mix of stocks, bonds and cash. Second, the plan will evaluate the impact of the portfolio risk associated with that mix.

Traditionally, �nancial planning models focused on expected return and neglected the variability of outcomes that is associated with increased volatility. With the introduction of probability-based planning tools, the investor can foresee the e�ect of risk on their investment portfolios, they can vary the amount of risk and can study their corresponding returns. For example a portfolio bearing higher risk may yield a higher return but it also has a probability of falling far short beneath their targets.

When using an asset allocation approach to designing a portfolio, it is important to not focus just on the expected return of that portfolio. �e risk associated with an increasing, or decreasing, portfolio return is just as important to the success of an investment strategy.

Asset Allocation & �e Future

Most forecasters fall into two divisions. Forecasters in the �rst division are eager to predict that the future will closely mirror the recent past. �eir ideals are those generals who are always preparing to �ght the last war. Forecasters in the second division rely heavily

upon the adage that the only constant is change itself. Proponents of this school of thought usually don’t know what to expect, but are quite sure it will be nothing like anything we’ve seen before. �ese individuals do realize the problems of delineating the future of this area.

We should view the future of asset allocation through lenses borrowed from both divisions. �at is, certain aspects of asset allocation today will continue to be recognizable for the years to come. To be more precise, the goals and importance of asset allocation will not change, but the mechanisms by which investors seek to achieve those goals will be new.

�e goal of the asset allocation decision, was, is, and will be to select a combination of assets that will generate a return su�ciently high and safe so as to o�set some future liability. It is also safe to say that asset allocation decisions will have a continuing large role in explaining portfolio returns.

Industry-wide - Net Assets (PKR million)

Net Assets - Open End Funds (PKR million)

Net Assets - Closed End Funds (PKR million)

Net Assets - Pension Schemes (PKR million)

Sales (PKR million) Redemptions (PKR million) Net Sales (PKR million)

Open End Funds' Return** Closed End Funds' Return**

General Pension Schemes Return**

Islamic Pension Schemes Return**

Meeting of the Board of Directors

In order to ensure that the Board of Directors ful�ls the duties and responsibilities conferred by the members of MUFAP, the Board conducts meetings on a regular basis to make immediate and prudent decisions. �e Board of Directors held three meetings during the quarter Jul-Sep 2013.

�e activities undertaken by Board are as follows:

Proposed amendments in the de�nition of Related Parties in Restricted List of Code for Distributors

�e Board deliberated in detail on the matter of proposed

amendments in the de�nition of Related Parties in the Restricted List of Code for Distributors. After careful consideration of the impacts that the amendments may entail, it was decided that all individuals (namely employees, directors, sponsors of the RSPs) should be excluded from the de�nition of Related Parties. �e revised de�nition is applicable to all new investments brought in on or after July 16, 2013 and is not applicable to existing investments made by or before July 15, 2013.

Valuation of GOP Ijarah Sukuk

�e Board recommended that AMCs should use ‘PKISRV’ quoted on Reuters as the relevant price to value the GOP Ijarah Sukuks to determine net assets of CIS under their management, which the SECP approved in September.

Meetings of the Committees

MUFAP Committees held many discussions to make important, well planned proposals on behalf of industry. �e following table presents the number of meetings held during the quarter Jul-Sep’13.

Technical Committee - VPS

�e VPS – Technical Committee held extensive discussions to discuss the dissimilar taxation and operational practices being adopted by di�erent VPS Managers. �e VPS Committee constituted a Sub-Committee, involving a representative from each VPS Manager, to draw up recommendations for the tax treatment. �e Committee also engaged Senior Tax expert, Mr. Shabbar Zaidi on the matter and has requested for clari�cation from FBR on one of the matters.

Meeting with NCCPL A meeting was held between operations sta� of AMCs and NCCPL representatives on July 22, 2013 to evaluate the mechanics and possible data sharing from AMCs to NCCPL for netting of CGT. It was decided that NCCPL would develop a concept paper covering brief mechanism of centralized CGT collection to AMCs for their review and comments.

Elections to elect Directors/Executive Committee Members of MUFAP for the year 2013 / 2014

As required under the Trade Organizations Rules, 2007, MUFAP is required to hold its elections each year to elect Directors against the vacancies arising on account of completion of two-year tenure of some Directors. Board members are elected for a two-year term.

�e retiring Directors on the completion of their two year tenure on September 30, 2013 are: 1. Mr. Adnan Siddiqui (Resigned August-2013)2. Mr. Amer Maqbool 3. Mr. Imran Azim 4. Mr. Mir Muhammad Ali 5. Mr. Nihal Cassim

�e continuing Directors of MUFAP for the year 2013/ 2014 are: 1. Dr. Amjad Waheed 2. Mr. Imran Motiwala 3. Mr. Mir Adil Rashid 4. Mr. Rashid Mansur 5. Ms Maheen Rahman6. Ms Hina Ghazanfar (on reserved seat for women)

In addition, Mr. Rehan N. Shaikh will serve on the Board as provided under Rule 23(5)(d) of the Trade Organization Rules, 2007. At the Extra Ordinary General Meeting on September 26, 2013, MUFAP announced the appointment, by virtue of elections, of the following directors to the Board, namely:1. Mr. Farid Ahmed Khan 2. Mr. M. Habib-ur-Rahman 3. Mr. Mohammad Shoaib 4. Mr. Yasir Qadri 5. Mr. Enamullah Khan

New Board of Directors

�e new Board of Directors of MUFAP at its �rst meeting held on October 1, 2013 elected Dr. Amjad Waheed as Chairman, Mr. Mohammad Shoaib as Senior Vice Chairman and Mr. Farid Ahmed Khan as Vice Chairman MUFAP for the year 2013-2014.�e Board of Directors of MUFAP for the 2013-14 term is as follows:

1) Dr. Amjad Waheed - Chairman; 2) Mr. Mohammad Shoaib - Senior Vice Chairman; 3) Mr. Farid Ahmed Khan - Vice Chairman;4) Mr. Rehan N. Shaikh;5) Mr. Rashid Mansur;6) Mr. M. Habib-ur-Rahman;7) Mr. Yasir Qadri8) Mr. Imran Motiwala;9) Ms Hina Ghazanfar;10) Ms Maheen Rahman;11) Mr. Mir Adil Rashid;12) Mr. Enamullah Khan; and13) Ms Mashmooma Z. Majeed - Chief Executive

Chairman Dr. Amjad Waheed, CFA

Dr. Amjad Waheed holds a doctorate in Investments & Finance from Southern Illinois University, USA and is also a Chartered Financial Analyst. For the last 7 years he is CEO of NBP Fullerton Asset Management Ltd (NAFA), which is a subsidiary of National Bank of Pakistan, with Fullerton Fund Management Company of Singapore as the other joint venture partner. NAFA is presently managing fourteen mutual funds and several portfolios with about Rs 45 billion invested in these funds. NAFA is among the largest Asset Management Companies in Pakistan today.

Before joining NAFA, Dr. Waheed was Head of Equity Mutual Funds & Portfolios at Riyad Bank, Saudi Arabia, for about 5 years where he was managing US$ 7.5 billion invested in 22 mutual funds. Prior to that Dr. Waheed was Head of Investments at NIT,

and Chief Operation O�cer of FC-ABN AMRO Equities for several years. Before moving back to Pakistan, Dr. Waheed was Assistant Professor of Finance at Tennessee State University, USA and has published several articles in top journals of the world such as Journal of Banking & Finance and Financial and Financial Management.Dr. Waheed has served on the Board of various companies including Siemens, Nishat Mills, PICIC, Askari Bank, Millat Tractors, Fauji Fertilizer, Pakitstan Tobacco Company, Treet Corporation, Gul Ahmed Textile, Bata Pakistan.

Senior Vice Chairman Mr. Mohammad Shoaib, CFA

Mr. Mohammad Shoaib, CFA is the Chief Executive of Al Meezan Investment Management Ltd. He has played a key role in setting up the company and has been associated with it since inception. He is a highly quali�ed and seasoned professional with 23 years experience in capital markets. He has to his credit many accolades and awards, the most signi�cant of them being the "Most In�uential CFA charter holder" awarded by CFA Institute in 2006.

Mr. Shoaib holds an MBA degree from IBA besides being a Chartered Financial Analyst (CFA) charter holder. He has to his credit the honor of being the founder and �rst president of CFA Association of Pakistan, a member society of CFA Institute. He has been active participant in the Islamic �nance and asset management for the last 10 years. In this respect, he has also actively participated as a speaker and panelist in various international and domestic seminars, conferences and workshops.

Mr. Shoaib has also served in voluntary capacity at di�erent domestic and international institutions. He has served as a Director on the Board of Karachi Stock Exchange and Vice Chairman on the Board of Mutual Funds Association of Pakistan. He is currently serving on the Board of Directors of Pakistan Institute of Corporate Governance and Institute of Capital Markets. He has also served on various global and regional committees of CFA Institute including Asia Paci�c Advocacy Committee, Global Task Force on Corporate

Governance, GIPS Regional Council and Asset Manager Code Advisory Committee. He has also had the honour to represent over 16,000 charterholders in Asia Paci�c Region as their representative on the Presidents' Council of CFA Institute.

Vice Chairman Mr. Farid Ahmed Khan, CFA

Mr. Farid Ahmed Khan, CFA is the CEO of ABL Asset Management. He has been involved with capital markets for over 18 years and has a broad-based, global experience with bulge bracket �rms in Asset Management, Investment Banking, Investment Research and Sales, Business Development & International Project Finance. He joined ABL AMC from Credit Suisse, where he was the Country Manager of Credit Suisse Pakistan. Prior to that, he worked for MCB, initially as Head of Investment Banking Group and later as the CEO of MCB Asset Management. Mr. Khan has extensive experience outside Pakistan, having worked at Morgan Stanley, ING Barings Securities and CLSA Emerging Markets in Kuala Lumpur, London and Istanbul in a variety of senior positions. He holds an MBA in Finance from IBA, Karachi and got his CFA quali�cation in 1998.

New Committees

MUFAP Board elected its Professional Committees, Chairperson and Vice-Chairperson of each Committee for the year 2013-14. �e list of Committees, their Chairperson and Vice-Chairperson is as follows:

SECP forms Shariah Advisory Board

SECP constituted a Shariah Advisory Board (SAB) to harmonize the Shariah interpretations and strengthen the regulatory and supervisory oversight of Islamic �nancial institutions (IFIs) and Islamic capital markets (ICMs) in Pakistan. It will also advise the Commission on the Shariah-compliance aspects of various products launched and or the processes being adopted by the regulated entities. It will also provide guidance for issuance of new laws, rules and regulations for e�ective monitoring and supervision of Islamic Financial Products and to suggest ways and means for development of IFIs and ICMs in the country.

Money Market

To meet the challenges of maintaining stability in the foreign exchange market and controlling high growth in money supply, SBP decided to gradually decrease the outstanding amount of liquidity injections. Since the beginning of FY14, interbank market liquidity conditions have considerably eased primarily due to substantial increase in the pace of government borrowing from the SBP. In fact, SBP mopped up Rs. 1,556.45 billion and injected Rs. 630.70 billion during Q1-FY14.

In terms of controlling growth in money supply, however, SBP’s e�orts of curtailing liquidity injections did not experience much success as these were o�set by an increase in direct �scal borrowings from the SBP. �e increase of Rs. 1,446 billion in budgetary borrowings from the banking system during FY13 was almost Rs. 1 trillion higher than the original target and was even higher than the total expansion in M2. Deviation of this scale has signi�cantly constrained e�ective monetary management, disrupted �nancial intermediation in the economy, and has led to a sharp increase in domestic debt. Showing a growth of 24.6% in FY13, the stock of government’s domestic debt has reached Rs. 9.5 trillion as of end-June 2013. Similarly, a considerable increase in public debt to revenue ratio re�ects weak repayment capacity of the government. �e acceleration in �scal borrowings from the SBP during H2-FY13, Rs. 714 billion, and Q1-FY14 up till 30th August 2013, Rs. 547 billion, is particularly worrisome. �e inability to raise the tax-GDP ratio is the fundamental source of large �scal de�cits, high borrowings, and rising debt. Although there has been a consistent gap between Federal Board of Revenue’s (FBR) budget targets and actual outcomes in the last few years, the gap of Rs. 445 billion in FY13 was exceptionally high. In fact, this is more than the cumulative shortfall of Rs. 349 billion during the last �ve years.

On the external front, stress in the external account has gradually increased with every passing month of 2013 due to shrinking net capital and �nancial �ows and high loan repayments to the IMF.

While the former was only $517 million or 0.2 percent of GDP, the latter increased to $3 billion in FY13. As a result, despite reduction in the external current account de�cit by about half, to $2.3 billion or 1.0 percent of GDP, the SBP’s foreign exchange reserves declined to $6 billion by end-June 2013 from $10.8 billion at the beginning of FY13. �ese stand at $5.2 billion as on 6th September, 2013 after receiving $544.5 million under the new IMF program. Despite pressures and speculations of a drop in the value of the Pak rupee the foreign exchange market has largely remained stable in FY13. However, since the beginning of FY14 the rupee has depreciated by 5.0 percent as of 12th September 2013.

�e year-on-year CPI based in�ation rate was recorded at 8.3% in July 2013, then to 8.55% in August 2013, however dipped down to 7.39% in September 2013.�ough CPI In�ation remained within single digit, however, it witnessed an upward trend as it increased to 7.39 percent in September 2013 compared to 5.85 percent in June 2013 and 6.6 percent in March 2013. �e impact of upward adjustments in energy prices and an increase in the GST together with the removal of certain exemptions put pressure on in�ation.In order to counter in�ationary expectations, SBP raised the discount rate by 50 basis points to 9.5 percent with e�ect from September 16, 2013.

Movement in KIBOR

Treasury Bills:

A total of 6 T-bill auctions were held by SBP during the quarter in which a total amount of Rs. 1,348.88 billion was raised. Since the beginning of FY14, market’s preference for shorter tenor T-Bills has increased as about 83% of the bank’s total o�ers in recent T-Bill auctions were concentrated in 3-month bills.

T-Bill Auctions (Amount in PKR billion; rates in %)

Pakistan Investment Bonds

�e accepted amount in the PIB auctions during Q1-FY14 fell short of the target .

PIB Auctions (Yields in % and Face Value in PKR billion)

Debt Market

�e table below summarizes the TOP 15 trades of TFCs/Sukuk on the basis of Face value during the Q1-FY14:

Equity Market

KSE-100 index made a strong start to the �scal year 2014, as the index gained 826.99 points, or 3.94%, to stand at 21,832.68 points during the �rst three months of FY14. During the period, index struggled to cross the 23,000 points level and made a high of 23,776.22 on a closing basis. Stock market began the �rst month of �scal year 2014 with a strong rally, overcoming jitters stemming from treason proceedings against former president General (retd) Pervez Musharraf and slowdown in global markets. �e government’s successful negotiations with IMF for a $5.3 billion loan, resolution of circular debt by issuing treasury bills and bonds and anticipation of strong corporate earnings for the quarter ended June 30 buoyed investors’ con�dence as the share prices appreciated across the board and index posted a gain of 2.307.09 points, or 10.98% to settle at 23,312.78 level in July.

After posting strong gain in July, KSE-100 faltered in August as investors continued to worry about ever-escalating Syrian crisis and tumbling regional markets. Stock market further pressured by a slew of disappointing and less-than-expected corporate earnings, falling foreign exchange reserves and high in�ation �gures for July. Moreover, concerns on a possible interest rate hike in the upcoming monetary policy announcement, potential spike in oil prices, decline in cement prices due to breakdown in price discipline, heavy foreign net selling and persistent depreciation in the rupee dragged the KSE-100 index down 1,151.93 points, or 4.94%, to 22,160.85 in August. �e index showed a mixed performance in September. In the �rst half of the month, the approval of the $6.64 billion loan package by IMF, the plans to privatize Pakistan International Airlines, strong foreign in�ows and the release of the IMF’s �rst tranche worth of $550 million helped lift the index to 23,639.97 on a closing basis. However, sentiment reversed towards the end of the month after the central bank’s decision to increase the rate of return on savings deposits to 6.5%. Moreover, steep decline in the value of Pakistani

rupee against the US dollar, constant repayments to IMF, a 50 basis points increase in the discount rate and heavy foreign net selling dragged the KSE-100 index down 328.17 points, or 1.48%, to 21,832.68 in September.

Mutual Fund Market:

�e total net assets decreased to Rs. 359.947 billion in the �rst quarter of FY14 versus Rs. 361.668 billion for the Q4FY13, a reduction of 0.48% quarter over quarter. �e open-end funds went up by 0.71% to Rs. 327.594 billion, pension funds went up by 9.67% to Rs. 5.288 billion and closed-end decreased by 14.23% to Rs. 27.064 billion.

Funds launched during the quarter Q1-FY14

Funds matured during the quarter Q1-FY14

Funds with changed structure/other features Energy Crisis: Causes and ImpactsBy Sara Aquil Walji, Research Analyst, HBL Asset Management

Energy is the cornerstone for any economy’s development and growth. �e current situation has worsened in Pakistan over the past few years and likely to continue if measures are not taken to mitigate the issue on a long term basis. �e gap between demand and supply has reached 6000MW resulting in scheduled and unscheduled load shedding, negatively a�ecting our industrial sector, hurting our exports and has even hampered the GDP growth rate by 2%. Subsidies to the power sector have steadily been increasing and form the biggest part of total subsidies amounting to around Rs 349,287mn (95% of the total subsidies) in FY 2012-13. �e new government has allocated Rs. 220,100mn to the power sector for the FY 2013-14 which is 91.5% of the total subsidy budget. (Source: Annual budget 2014) With recent emphasis on matters to resolve energy crisis and develop renewable and non-renewable sources of energy, it is worthwhile to note why energy crisis became as severe as it is now.

�e root of this crisis is that Pakistan’s electricity generation mix is highly skewed towards the most expensive kinds .�ere appears to be an almost inverse relationship between the sources of electricity that are most expensive to set and those that are most expensive to run. �e following chart depicts this relationship:

Source: Express Tribune �is highlights the fact why there is a heavy concentration toward

the construction of thermal power plants since they are relatively cheaper to build than hydropower plants. �e government has not dedicated enough funds for the development of hydropower projects which are the most expensive to build but cheapest to run on a per unit basis.Pakistan’s electricity generation is highly dependent on imported oil as almost $14.5bn worth of oil is imported each year which accounts for around 35% of electricity generation. Comparing Pakistan with India and Bangladesh reveals that Pakistan relies heavily on oil for electricity generation where as India uses coal, a relatively cheaper source for electricity generation and Bangladesh on the other hand allocates 73% of its electricity generation to gas.

Source: Economic Survey report for 2012-2013

With a prominent shift in recent years towards the use of thermal power stations instead of hydropower sources and a reduction in electricity generation from coal, Pakistan’s electricity costs ends up being more expensive than it needs to be and since the government has adopted a policy of uniform tari� across the country the Tari� Di�erential Subsidy owed by the Government of Pakistan on an annual basis has increased substantially.

Circular debt is another major concern hampering the growth of Pakistan’s economy. In simple words circular debt is the amount of

ARTICLEScash shortfall within the Central Power Purchasing Agency (CPPA) that it cannot pay to power supply companies. �is shortfall is the result of (a) the di�erence between the actual cost of providing electricity in relation to revenues realized by the power distribution companies (DISCOs) from sales to customers plus subsidies; and (b) insu�cient payments by the DISCOs to CPPA out of realized revenue as they give priority to their own cash �ow needs. (Source: USAID Report March 2103)

�is revenue shortfall cascades through the entire energy supply chain, from electricity generators to fuel suppliers, re�ners, and producers; resulting in a shortage of fuel supply to the public sector thermal generating companies (GENCOs), a reduction in power generated by Independent Power Producers (IPPs), and an increases in load shedding.

According to the report published by the USAID in March 2013, circular debt amounts to Rs872bn which is actually 4% of GDP. According to Pakistan’s Economic Survey report for 2012-2013, there is a strong relationship between GDP growth rate and electricity growth as shown in the �gure below. It can be easily deduced that periods of low or negative electricity growth have witnessed low GDP growth rate, while periods where electricity growth picked up there is increase in GDP growth rate.

�is comes as no surprise, since industrial output is heavily dependent on the amount of electricity delivered to them. Continuous power breakdowns prevented industries from operating at their full capacity level. �e power outages have obstructed the viability of the textile industry as exporters were unable to meet their

commitments. During July-March 2012-13, foreign exchange earnings through exports of synthetic textile fabrics and woolen industry showing a decline of 25.3% and 5.1% respectively as compared to last year. During the period under review even in quantity term also recorded a decline of 30% and 15.8% respectively.

Coupled with an ine�cient system and expensive fuel mix, power theft is another major issue faced by Pakistanis. It is interesting to note that annual revenue collection e�ciency was estimated to be around 87%; however that 13% of lost e�ciency has a �nancial impact of Rs 86bn which is equivalent to 41 days of furnace oil costs for thermal power plants. �e following �gure shows the percentage of bills that were uncollected in 2012. �e e�ciency of di�erent DISCOs is disproportionate in revenue collection. �is essentially leads to the inclusion of the cost of power theft in the power tari�, meaning that the honest payers also bear the cost of those that steal.

Power theft is not only committed by normal residents but the main defaulters are the government institutions themselves. �e government owns around 51% of the uncollected bills which amounts to Rs 118bn out of the uncollected revenue receipts of Rs 386bn. In my opinion, this the amount which causes the discrepancy between the amount of RS500.3bn to be injected to resolve the circular debt issue and �gure of Rs 872.41bn since the government has a proposal to o�set provisional dues via a �scal adjuster. Due to a growing economy, Pakistan’s energy needs have more than doubled in the past 15 years. Energy shortages have far devastating

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page 12 of 24 mufap quarterly newsletter

e�ects on our economy. Not only does it cause civil disturbances on a small scale but it a�ects our GDP on a larger note. Injecting money into the chain will only resolve the issue on a temporary basis. �ese challenges require a multi-prong approach that would address energy shortages in the immediate future and help the country build longer term energy su�ciency.

�ere needs to be a shift away from thermal power to alternative sources of energy which are not only cheaper but also environmentally friendly. Pakistan has large untapped renewable resources such as water, sun and wind and recently the government has taken keen interest on the development of hydro power projects and Neelum Jhelum Hydroelectric Project is one of the many projects which the new government has started which will approximately add 5.15bn units of electricity annually. Moreover, an e�ective system of governance must be in place to curb theft, recuperate dues and enforce policies.

�e Importance of Asset Allocation in attaining Optimal Returns

By Yamna Hassan, Asst. Manager-Business DevelopmentLakson Investments

“Tis the part of a wise man to keep himself today for tomorrow, and not venture all his eggs in one basket.” – Miguel de Cervantes, Don Quixote de la Mancha, 1605.

�e afore-mentioned quote indicates that along with being a great writer, Cervantes would have also proved to be a wise investor.

Investment related decisions are preceded by de�ning a proper Asset Allocation plan. According to recent research, the Asset Allocation decision is responsible for 91.5 percent of the variation between returns on di�erent portfolios. Given the importance of Asset Allocation, it has attained a center stage in any investment decision.

Asset Allocation is mainly important for two de�nite reasons. �e �rst reason pertains to portfolio design; variation in portfolio designs can lead to some investment decisions being winners while the rest being losers, and it is believed that if a portfolio is thoughtfully constructed and contains an optimal mix of securities that perform di�erently from each other (i.e they have little correlation in between them), chances of this portfolio yielding a more stable return is higher. �is is because if some securities in a portfolio are inconsistent and volatile, other, more stable securities can nullify the inconsistency of the entire portfolio, hence stabilizing the yield pattern.

�e second reason pertains to the vision of the investor. Asset allocation allows an investor to �nancially plan for his long-term and short-term goals and avoid impulsive reactions. We will subsequently discuss this aspect of Asset Allocation.

We can divide the Asset Allocation decision into two simple steps as discussed below:

Step 1: Asset Allocation An Asset Allocation strategy can be devised based on the investor’s risk assessment, �nancial goals and return targets. It is the most fundamental step of an investment decision and involves determining an ideal mix of stocks, bonds, cash and other securities in a way such that the portfolio yields a return which best suits an investor’s need. �ere is always a downside of investing too much in bonds or cash as that might certify stable but lower returns. In the same way, too much investment in stocks might lead to portfolio volatility. �erefore, in order to meet your requirements, or keep pace with in�ation, you need to plan an ideal arrangement of securities for your portfolio.

Step 2: Diversi�cationWhile the �rst step bears upon the idea of portfolio construction, this step is linked to the proper dissemination of your assets in a way such that your portfolio is exposed to many di�erent segments of the market, some of which perform independently of the others. Proper diversi�cation of your portfolio can lead to higher and more stable returns.

As mentioned before, the e�ect of diversi�cation is most noticeable when instruments have very little interrelation between them. However, it was easier to build this sort of a portfolio previously than it is today. �is is because roughly over the past 10 years, �nancial markets have become increasingly interrelated and complex. Let us also not ignore the fact that during the 2008 �nancial trouble, most assets tended to perform similarly, leading us to believe in the proposition that most assets are conducive to a similar behavior in times of crisis and instability. �e �gure below shows ways of diversifying a portfolio and entering into newer and assorted mix of investment vehicles.

FIGURE 1:

Figure shows ways of diversifying a portfolio.

Institutions that do not pay requisite importance to the Asset Allocation decision might end up damaging their returns. Usually, institutions are advised to invest in a 60:40 ratio (Stocks: �xed income instruments) to remain on the safe side. Whereas, individuals are recommended to invest in an investment spectrum ranging from 100 percent stocks to 100 percent bonds depending on their separate variable characteristics. However, the Asset Allocation decision is dependent on several other factors and cannot be generalized for di�erent investors.

Following are a few, newer and e�cient ways that have now been developed and can be used for attaining optimal asset allocation:

Mean Variance Optimization

Mean Variance Optimization is a quantitative technique that can be used to calculate the trade-o� between maximum expected return and risk tolerance. �is technique has gained popularity over time because in recent times, the technique is applied on an asset class level as opposed to being applied only to portfolios of individual stocks previously.

�e development of Mean Variance Optimization has not only bene�tted institutional investors but has resulted in a breakthrough for retail brokerage houses as well, which, prior to this development were restricted on their advisory role to the investors. However, recently, they are proposing a greater degree of passive security and more thoughtful asset allocation recommendations to their investors. �is has become possible by using optimization and aiming to attain a favorable position with maximum expected return, minimal risk, or both.

Moreover, a few re�ned approaches taken from utility theory and behavioral economics can be deployed to develop polls or surveys that can authentically gauge an individual’s risk preferences.

Pension funds have also been familiarized with Optimization. Such funds take into account the reciprocity of both assets and liabilities and not only the assets unlike other funds. �e objective of Asset Allocation for these funds is to amplify the fund surplus i.e liabilities subtracted from assets for a stated degree of risk tolerance.

Tactical Asset AllocationTactical asset allocation is the process of adjusting a particular portfolio based on changes in the market value of assets contained in that portfolio. �e technique is quite dynamic and involves deviation from the strategic asset allocation when an investor’s short-term foresight is not aligned with his long term foresight used to develop a strategic asset allocation plan and precise short-term predictions on part of the investor can lead to better returns.

Pragmatically speaking, Tactical Asset Allocation models tend to recommend contrarian trades, that is, they recommend purchasing an asset as its current market value drops and vice versa. �us, tactical Asset Allocation involves perpetually arranging your portfolio based on your needs and changes in the market. One consequence of Tactical Asset Allocation is that by overweighting certain assets during certain times and underweighting others, the portfolio is riskier because of its reduced diversi�cation. �us, to

o�set this additional risk factor, this strategy would need to generate above market returns. �e notion, whether Tactical Asset Allocation Models have achieved this is still a matter of rumination and study but because the probable returns from successful Tactical Asset Allocation would be large, researchers will keep inspecting, and investors won’t cease to be on the look out for their discoveries.

Insured Asset Allocation�is strategy is similar to a portfolio insurance strategy and is a mirror image of the Tactical Asset Allocation strategy. With this strategy, a base portfolio parameter is �xed and the value of the portfolio is not allowed to fall below this base parameter. As long as the portfolio achieves a return above this parameter, you actively to try to increase the portfolio value as much as possible. If, however, the portfolio ever drops to below the base value, investment in risk-free securities enables the base value to become �xed.

�e main target audiences for this approach are risk-averse investors who desire a certain level of active portfolio management and also covet the protection of �xing a certi�ed minimum return below which the portfolio is not allowed to decline. For instance, this approach is best for an investor who has planned a nominal lifestyle for himself after retirement.

Asset Allocation & Uncertain Times�e importance of active portfolio management and wise asset allocation strategy has been reiterated enough. But at the brink of serious economic uncertainty, expectation for stock market returns is somewhat muted. �erefore, it is believed that in such a situation, a dynamic asset allocation plan should come into play for the advantage of certain clients.

Dynamic Asset Allocation uses a long term strategic Asset Allocation strategy as its foundation. Alternate investments can be added to the core portfolio for the sake of complementing it. It is even better, if these investments include segments which yield a higher return and bear little interdependence, so as to achieve a greater level of diversi�cation.

Besides, dynamic Asset Allocation strategies can also be accompanied by �exible investment strategies; tactical actions that are short-term in nature and aim to bank on perceived market opportunities. If 10-20% of your assets are allocated for such investments, your portfolio can be expected to react better in times of changing trends and conditions.

Asset allocation is evolving past a traditional “purchase and retain” dogma. Whilst this might not suit all clients, exercising a dynamic asset allocation plan can create a portfolio better able to handle uncertain market environments. Not to forget the fact that a solid strategic asset allocation plan remains the core strategy behind any tactical asset allocation strategy.

Asset Allocation & the local scenarioWith interest rates in Pakistan consistently hovering above 10 percent for the past �ve years, anyone would expect Pakistanis to be encouraged enough to save and reap bene�ts of higher returns. However, reality states that Pakistan actually stands out to re�ect one of the lowest savings in the region. Given the fact that majority of Pakistanis are not so keen on investing mainly because their expenditures on necessities do not leave any room for savings or so for other reasons, there is a chunk of people who are inclined in saving for a better future and lifestyle.

With growth of urban nuclear families, educated middle to upper middle class is inspirited to plan properly for a child’s education, health and future life. Reasons for investment in Pakistani society vary from a child’s education to his marriage, from being cushioned against the toils of post-retirement life to maternity expenditures. Young professionals may want to invest as a means to generate seed capital for their potential business idea or to live their dreams of traveling or wayfaring.

Reasons for investing are many. With di�erent individuals and di�erent investment objectives in mind, the asset allocation needs of these investors must be customized accordingly.

Asset Allocation & Financial PlanningOnce you are done with choosing your model for Asset Allocation, the �nal stage is to test this model by contextualizing it with a precise �nancial plan. It might be easy for an investor to choose which Asset Allocation plan will provide him with the best possible returns but the investor should also �gure out a way to determine that expected return and also estimate the trade-o� for that higher return potential.

A well-concocted �nancial plan will guide the investor out of this bewilderment. First, it will determine what level of projected investment return is necessary to allow you to meet your lifestyle goals, which can help lead you to the right mix of stocks, bonds and cash. Second, the plan will evaluate the impact of the portfolio risk associated with that mix.

Traditionally, �nancial planning models focused on expected return and neglected the variability of outcomes that is associated with increased volatility. With the introduction of probability-based planning tools, the investor can foresee the e�ect of risk on their investment portfolios, they can vary the amount of risk and can study their corresponding returns. For example a portfolio bearing higher risk may yield a higher return but it also has a probability of falling far short beneath their targets.

When using an asset allocation approach to designing a portfolio, it is important to not focus just on the expected return of that portfolio. �e risk associated with an increasing, or decreasing, portfolio return is just as important to the success of an investment strategy.

Asset Allocation & �e Future

Most forecasters fall into two divisions. Forecasters in the �rst division are eager to predict that the future will closely mirror the recent past. �eir ideals are those generals who are always preparing to �ght the last war. Forecasters in the second division rely heavily

upon the adage that the only constant is change itself. Proponents of this school of thought usually don’t know what to expect, but are quite sure it will be nothing like anything we’ve seen before. �ese individuals do realize the problems of delineating the future of this area.

We should view the future of asset allocation through lenses borrowed from both divisions. �at is, certain aspects of asset allocation today will continue to be recognizable for the years to come. To be more precise, the goals and importance of asset allocation will not change, but the mechanisms by which investors seek to achieve those goals will be new.

�e goal of the asset allocation decision, was, is, and will be to select a combination of assets that will generate a return su�ciently high and safe so as to o�set some future liability. It is also safe to say that asset allocation decisions will have a continuing large role in explaining portfolio returns.

Industry-wide - Net Assets (PKR million)

Net Assets - Open End Funds (PKR million)

Net Assets - Closed End Funds (PKR million)

Net Assets - Pension Schemes (PKR million)

Sales (PKR million) Redemptions (PKR million) Net Sales (PKR million)

Open End Funds' Return** Closed End Funds' Return**

General Pension Schemes Return**

Islamic Pension Schemes Return**

Meeting of the Board of Directors

In order to ensure that the Board of Directors ful�ls the duties and responsibilities conferred by the members of MUFAP, the Board conducts meetings on a regular basis to make immediate and prudent decisions. �e Board of Directors held three meetings during the quarter Jul-Sep 2013.

�e activities undertaken by Board are as follows:

Proposed amendments in the de�nition of Related Parties in Restricted List of Code for Distributors

�e Board deliberated in detail on the matter of proposed

amendments in the de�nition of Related Parties in the Restricted List of Code for Distributors. After careful consideration of the impacts that the amendments may entail, it was decided that all individuals (namely employees, directors, sponsors of the RSPs) should be excluded from the de�nition of Related Parties. �e revised de�nition is applicable to all new investments brought in on or after July 16, 2013 and is not applicable to existing investments made by or before July 15, 2013.

Valuation of GOP Ijarah Sukuk

�e Board recommended that AMCs should use ‘PKISRV’ quoted on Reuters as the relevant price to value the GOP Ijarah Sukuks to determine net assets of CIS under their management, which the SECP approved in September.

Meetings of the Committees

MUFAP Committees held many discussions to make important, well planned proposals on behalf of industry. �e following table presents the number of meetings held during the quarter Jul-Sep’13.

Technical Committee - VPS

�e VPS – Technical Committee held extensive discussions to discuss the dissimilar taxation and operational practices being adopted by di�erent VPS Managers. �e VPS Committee constituted a Sub-Committee, involving a representative from each VPS Manager, to draw up recommendations for the tax treatment. �e Committee also engaged Senior Tax expert, Mr. Shabbar Zaidi on the matter and has requested for clari�cation from FBR on one of the matters.

Meeting with NCCPL A meeting was held between operations sta� of AMCs and NCCPL representatives on July 22, 2013 to evaluate the mechanics and possible data sharing from AMCs to NCCPL for netting of CGT. It was decided that NCCPL would develop a concept paper covering brief mechanism of centralized CGT collection to AMCs for their review and comments.

Elections to elect Directors/Executive Committee Members of MUFAP for the year 2013 / 2014

As required under the Trade Organizations Rules, 2007, MUFAP is required to hold its elections each year to elect Directors against the vacancies arising on account of completion of two-year tenure of some Directors. Board members are elected for a two-year term.

�e retiring Directors on the completion of their two year tenure on September 30, 2013 are: 1. Mr. Adnan Siddiqui (Resigned August-2013)2. Mr. Amer Maqbool 3. Mr. Imran Azim 4. Mr. Mir Muhammad Ali 5. Mr. Nihal Cassim

�e continuing Directors of MUFAP for the year 2013/ 2014 are: 1. Dr. Amjad Waheed 2. Mr. Imran Motiwala 3. Mr. Mir Adil Rashid 4. Mr. Rashid Mansur 5. Ms Maheen Rahman6. Ms Hina Ghazanfar (on reserved seat for women)

In addition, Mr. Rehan N. Shaikh will serve on the Board as provided under Rule 23(5)(d) of the Trade Organization Rules, 2007. At the Extra Ordinary General Meeting on September 26, 2013, MUFAP announced the appointment, by virtue of elections, of the following directors to the Board, namely:1. Mr. Farid Ahmed Khan 2. Mr. M. Habib-ur-Rahman 3. Mr. Mohammad Shoaib 4. Mr. Yasir Qadri 5. Mr. Enamullah Khan

New Board of Directors

�e new Board of Directors of MUFAP at its �rst meeting held on October 1, 2013 elected Dr. Amjad Waheed as Chairman, Mr. Mohammad Shoaib as Senior Vice Chairman and Mr. Farid Ahmed Khan as Vice Chairman MUFAP for the year 2013-2014.�e Board of Directors of MUFAP for the 2013-14 term is as follows:

1) Dr. Amjad Waheed - Chairman; 2) Mr. Mohammad Shoaib - Senior Vice Chairman; 3) Mr. Farid Ahmed Khan - Vice Chairman;4) Mr. Rehan N. Shaikh;5) Mr. Rashid Mansur;6) Mr. M. Habib-ur-Rahman;7) Mr. Yasir Qadri8) Mr. Imran Motiwala;9) Ms Hina Ghazanfar;10) Ms Maheen Rahman;11) Mr. Mir Adil Rashid;12) Mr. Enamullah Khan; and13) Ms Mashmooma Z. Majeed - Chief Executive

Chairman Dr. Amjad Waheed, CFA

Dr. Amjad Waheed holds a doctorate in Investments & Finance from Southern Illinois University, USA and is also a Chartered Financial Analyst. For the last 7 years he is CEO of NBP Fullerton Asset Management Ltd (NAFA), which is a subsidiary of National Bank of Pakistan, with Fullerton Fund Management Company of Singapore as the other joint venture partner. NAFA is presently managing fourteen mutual funds and several portfolios with about Rs 45 billion invested in these funds. NAFA is among the largest Asset Management Companies in Pakistan today.

Before joining NAFA, Dr. Waheed was Head of Equity Mutual Funds & Portfolios at Riyad Bank, Saudi Arabia, for about 5 years where he was managing US$ 7.5 billion invested in 22 mutual funds. Prior to that Dr. Waheed was Head of Investments at NIT,

and Chief Operation O�cer of FC-ABN AMRO Equities for several years. Before moving back to Pakistan, Dr. Waheed was Assistant Professor of Finance at Tennessee State University, USA and has published several articles in top journals of the world such as Journal of Banking & Finance and Financial and Financial Management.Dr. Waheed has served on the Board of various companies including Siemens, Nishat Mills, PICIC, Askari Bank, Millat Tractors, Fauji Fertilizer, Pakitstan Tobacco Company, Treet Corporation, Gul Ahmed Textile, Bata Pakistan.

Senior Vice Chairman Mr. Mohammad Shoaib, CFA

Mr. Mohammad Shoaib, CFA is the Chief Executive of Al Meezan Investment Management Ltd. He has played a key role in setting up the company and has been associated with it since inception. He is a highly quali�ed and seasoned professional with 23 years experience in capital markets. He has to his credit many accolades and awards, the most signi�cant of them being the "Most In�uential CFA charter holder" awarded by CFA Institute in 2006.

Mr. Shoaib holds an MBA degree from IBA besides being a Chartered Financial Analyst (CFA) charter holder. He has to his credit the honor of being the founder and �rst president of CFA Association of Pakistan, a member society of CFA Institute. He has been active participant in the Islamic �nance and asset management for the last 10 years. In this respect, he has also actively participated as a speaker and panelist in various international and domestic seminars, conferences and workshops.

Mr. Shoaib has also served in voluntary capacity at di�erent domestic and international institutions. He has served as a Director on the Board of Karachi Stock Exchange and Vice Chairman on the Board of Mutual Funds Association of Pakistan. He is currently serving on the Board of Directors of Pakistan Institute of Corporate Governance and Institute of Capital Markets. He has also served on various global and regional committees of CFA Institute including Asia Paci�c Advocacy Committee, Global Task Force on Corporate

Governance, GIPS Regional Council and Asset Manager Code Advisory Committee. He has also had the honour to represent over 16,000 charterholders in Asia Paci�c Region as their representative on the Presidents' Council of CFA Institute.

Vice Chairman Mr. Farid Ahmed Khan, CFA

Mr. Farid Ahmed Khan, CFA is the CEO of ABL Asset Management. He has been involved with capital markets for over 18 years and has a broad-based, global experience with bulge bracket �rms in Asset Management, Investment Banking, Investment Research and Sales, Business Development & International Project Finance. He joined ABL AMC from Credit Suisse, where he was the Country Manager of Credit Suisse Pakistan. Prior to that, he worked for MCB, initially as Head of Investment Banking Group and later as the CEO of MCB Asset Management. Mr. Khan has extensive experience outside Pakistan, having worked at Morgan Stanley, ING Barings Securities and CLSA Emerging Markets in Kuala Lumpur, London and Istanbul in a variety of senior positions. He holds an MBA in Finance from IBA, Karachi and got his CFA quali�cation in 1998.

New Committees

MUFAP Board elected its Professional Committees, Chairperson and Vice-Chairperson of each Committee for the year 2013-14. �e list of Committees, their Chairperson and Vice-Chairperson is as follows:

SECP forms Shariah Advisory Board

SECP constituted a Shariah Advisory Board (SAB) to harmonize the Shariah interpretations and strengthen the regulatory and supervisory oversight of Islamic �nancial institutions (IFIs) and Islamic capital markets (ICMs) in Pakistan. It will also advise the Commission on the Shariah-compliance aspects of various products launched and or the processes being adopted by the regulated entities. It will also provide guidance for issuance of new laws, rules and regulations for e�ective monitoring and supervision of Islamic Financial Products and to suggest ways and means for development of IFIs and ICMs in the country.

Money Market

To meet the challenges of maintaining stability in the foreign exchange market and controlling high growth in money supply, SBP decided to gradually decrease the outstanding amount of liquidity injections. Since the beginning of FY14, interbank market liquidity conditions have considerably eased primarily due to substantial increase in the pace of government borrowing from the SBP. In fact, SBP mopped up Rs. 1,556.45 billion and injected Rs. 630.70 billion during Q1-FY14.

In terms of controlling growth in money supply, however, SBP’s e�orts of curtailing liquidity injections did not experience much success as these were o�set by an increase in direct �scal borrowings from the SBP. �e increase of Rs. 1,446 billion in budgetary borrowings from the banking system during FY13 was almost Rs. 1 trillion higher than the original target and was even higher than the total expansion in M2. Deviation of this scale has signi�cantly constrained e�ective monetary management, disrupted �nancial intermediation in the economy, and has led to a sharp increase in domestic debt. Showing a growth of 24.6% in FY13, the stock of government’s domestic debt has reached Rs. 9.5 trillion as of end-June 2013. Similarly, a considerable increase in public debt to revenue ratio re�ects weak repayment capacity of the government. �e acceleration in �scal borrowings from the SBP during H2-FY13, Rs. 714 billion, and Q1-FY14 up till 30th August 2013, Rs. 547 billion, is particularly worrisome. �e inability to raise the tax-GDP ratio is the fundamental source of large �scal de�cits, high borrowings, and rising debt. Although there has been a consistent gap between Federal Board of Revenue’s (FBR) budget targets and actual outcomes in the last few years, the gap of Rs. 445 billion in FY13 was exceptionally high. In fact, this is more than the cumulative shortfall of Rs. 349 billion during the last �ve years.

On the external front, stress in the external account has gradually increased with every passing month of 2013 due to shrinking net capital and �nancial �ows and high loan repayments to the IMF.

While the former was only $517 million or 0.2 percent of GDP, the latter increased to $3 billion in FY13. As a result, despite reduction in the external current account de�cit by about half, to $2.3 billion or 1.0 percent of GDP, the SBP’s foreign exchange reserves declined to $6 billion by end-June 2013 from $10.8 billion at the beginning of FY13. �ese stand at $5.2 billion as on 6th September, 2013 after receiving $544.5 million under the new IMF program. Despite pressures and speculations of a drop in the value of the Pak rupee the foreign exchange market has largely remained stable in FY13. However, since the beginning of FY14 the rupee has depreciated by 5.0 percent as of 12th September 2013.

�e year-on-year CPI based in�ation rate was recorded at 8.3% in July 2013, then to 8.55% in August 2013, however dipped down to 7.39% in September 2013.�ough CPI In�ation remained within single digit, however, it witnessed an upward trend as it increased to 7.39 percent in September 2013 compared to 5.85 percent in June 2013 and 6.6 percent in March 2013. �e impact of upward adjustments in energy prices and an increase in the GST together with the removal of certain exemptions put pressure on in�ation.In order to counter in�ationary expectations, SBP raised the discount rate by 50 basis points to 9.5 percent with e�ect from September 16, 2013.

Movement in KIBOR

Treasury Bills:

A total of 6 T-bill auctions were held by SBP during the quarter in which a total amount of Rs. 1,348.88 billion was raised. Since the beginning of FY14, market’s preference for shorter tenor T-Bills has increased as about 83% of the bank’s total o�ers in recent T-Bill auctions were concentrated in 3-month bills.

T-Bill Auctions (Amount in PKR billion; rates in %)

Pakistan Investment Bonds

�e accepted amount in the PIB auctions during Q1-FY14 fell short of the target .

PIB Auctions (Yields in % and Face Value in PKR billion)

Debt Market

�e table below summarizes the TOP 15 trades of TFCs/Sukuk on the basis of Face value during the Q1-FY14:

Equity Market

KSE-100 index made a strong start to the �scal year 2014, as the index gained 826.99 points, or 3.94%, to stand at 21,832.68 points during the �rst three months of FY14. During the period, index struggled to cross the 23,000 points level and made a high of 23,776.22 on a closing basis. Stock market began the �rst month of �scal year 2014 with a strong rally, overcoming jitters stemming from treason proceedings against former president General (retd) Pervez Musharraf and slowdown in global markets. �e government’s successful negotiations with IMF for a $5.3 billion loan, resolution of circular debt by issuing treasury bills and bonds and anticipation of strong corporate earnings for the quarter ended June 30 buoyed investors’ con�dence as the share prices appreciated across the board and index posted a gain of 2.307.09 points, or 10.98% to settle at 23,312.78 level in July.

After posting strong gain in July, KSE-100 faltered in August as investors continued to worry about ever-escalating Syrian crisis and tumbling regional markets. Stock market further pressured by a slew of disappointing and less-than-expected corporate earnings, falling foreign exchange reserves and high in�ation �gures for July. Moreover, concerns on a possible interest rate hike in the upcoming monetary policy announcement, potential spike in oil prices, decline in cement prices due to breakdown in price discipline, heavy foreign net selling and persistent depreciation in the rupee dragged the KSE-100 index down 1,151.93 points, or 4.94%, to 22,160.85 in August. �e index showed a mixed performance in September. In the �rst half of the month, the approval of the $6.64 billion loan package by IMF, the plans to privatize Pakistan International Airlines, strong foreign in�ows and the release of the IMF’s �rst tranche worth of $550 million helped lift the index to 23,639.97 on a closing basis. However, sentiment reversed towards the end of the month after the central bank’s decision to increase the rate of return on savings deposits to 6.5%. Moreover, steep decline in the value of Pakistani

rupee against the US dollar, constant repayments to IMF, a 50 basis points increase in the discount rate and heavy foreign net selling dragged the KSE-100 index down 328.17 points, or 1.48%, to 21,832.68 in September.

Mutual Fund Market:

�e total net assets decreased to Rs. 359.947 billion in the �rst quarter of FY14 versus Rs. 361.668 billion for the Q4FY13, a reduction of 0.48% quarter over quarter. �e open-end funds went up by 0.71% to Rs. 327.594 billion, pension funds went up by 9.67% to Rs. 5.288 billion and closed-end decreased by 14.23% to Rs. 27.064 billion.

Funds launched during the quarter Q1-FY14

Funds matured during the quarter Q1-FY14

Funds with changed structure/other features Energy Crisis: Causes and ImpactsBy Sara Aquil Walji, Research Analyst, HBL Asset Management

Energy is the cornerstone for any economy’s development and growth. �e current situation has worsened in Pakistan over the past few years and likely to continue if measures are not taken to mitigate the issue on a long term basis. �e gap between demand and supply has reached 6000MW resulting in scheduled and unscheduled load shedding, negatively a�ecting our industrial sector, hurting our exports and has even hampered the GDP growth rate by 2%. Subsidies to the power sector have steadily been increasing and form the biggest part of total subsidies amounting to around Rs 349,287mn (95% of the total subsidies) in FY 2012-13. �e new government has allocated Rs. 220,100mn to the power sector for the FY 2013-14 which is 91.5% of the total subsidy budget. (Source: Annual budget 2014) With recent emphasis on matters to resolve energy crisis and develop renewable and non-renewable sources of energy, it is worthwhile to note why energy crisis became as severe as it is now.

�e root of this crisis is that Pakistan’s electricity generation mix is highly skewed towards the most expensive kinds .�ere appears to be an almost inverse relationship between the sources of electricity that are most expensive to set and those that are most expensive to run. �e following chart depicts this relationship:

Source: Express Tribune �is highlights the fact why there is a heavy concentration toward

the construction of thermal power plants since they are relatively cheaper to build than hydropower plants. �e government has not dedicated enough funds for the development of hydropower projects which are the most expensive to build but cheapest to run on a per unit basis.Pakistan’s electricity generation is highly dependent on imported oil as almost $14.5bn worth of oil is imported each year which accounts for around 35% of electricity generation. Comparing Pakistan with India and Bangladesh reveals that Pakistan relies heavily on oil for electricity generation where as India uses coal, a relatively cheaper source for electricity generation and Bangladesh on the other hand allocates 73% of its electricity generation to gas.

Source: Economic Survey report for 2012-2013

With a prominent shift in recent years towards the use of thermal power stations instead of hydropower sources and a reduction in electricity generation from coal, Pakistan’s electricity costs ends up being more expensive than it needs to be and since the government has adopted a policy of uniform tari� across the country the Tari� Di�erential Subsidy owed by the Government of Pakistan on an annual basis has increased substantially.

Circular debt is another major concern hampering the growth of Pakistan’s economy. In simple words circular debt is the amount of

cash shortfall within the Central Power Purchasing Agency (CPPA) that it cannot pay to power supply companies. �is shortfall is the result of (a) the di�erence between the actual cost of providing electricity in relation to revenues realized by the power distribution companies (DISCOs) from sales to customers plus subsidies; and (b) insu�cient payments by the DISCOs to CPPA out of realized revenue as they give priority to their own cash �ow needs. (Source: USAID Report March 2103)

�is revenue shortfall cascades through the entire energy supply chain, from electricity generators to fuel suppliers, re�ners, and producers; resulting in a shortage of fuel supply to the public sector thermal generating companies (GENCOs), a reduction in power generated by Independent Power Producers (IPPs), and an increases in load shedding.

According to the report published by the USAID in March 2013, circular debt amounts to Rs872bn which is actually 4% of GDP. According to Pakistan’s Economic Survey report for 2012-2013, there is a strong relationship between GDP growth rate and electricity growth as shown in the �gure below. It can be easily deduced that periods of low or negative electricity growth have witnessed low GDP growth rate, while periods where electricity growth picked up there is increase in GDP growth rate.

�is comes as no surprise, since industrial output is heavily dependent on the amount of electricity delivered to them. Continuous power breakdowns prevented industries from operating at their full capacity level. �e power outages have obstructed the viability of the textile industry as exporters were unable to meet their

commitments. During July-March 2012-13, foreign exchange earnings through exports of synthetic textile fabrics and woolen industry showing a decline of 25.3% and 5.1% respectively as compared to last year. During the period under review even in quantity term also recorded a decline of 30% and 15.8% respectively.

Coupled with an ine�cient system and expensive fuel mix, power theft is another major issue faced by Pakistanis. It is interesting to note that annual revenue collection e�ciency was estimated to be around 87%; however that 13% of lost e�ciency has a �nancial impact of Rs 86bn which is equivalent to 41 days of furnace oil costs for thermal power plants. �e following �gure shows the percentage of bills that were uncollected in 2012. �e e�ciency of di�erent DISCOs is disproportionate in revenue collection. �is essentially leads to the inclusion of the cost of power theft in the power tari�, meaning that the honest payers also bear the cost of those that steal.

Power theft is not only committed by normal residents but the main defaulters are the government institutions themselves. �e government owns around 51% of the uncollected bills which amounts to Rs 118bn out of the uncollected revenue receipts of Rs 386bn. In my opinion, this the amount which causes the discrepancy between the amount of RS500.3bn to be injected to resolve the circular debt issue and �gure of Rs 872.41bn since the government has a proposal to o�set provisional dues via a �scal adjuster. Due to a growing economy, Pakistan’s energy needs have more than doubled in the past 15 years. Energy shortages have far devastating

e�ects on our economy. Not only does it cause civil disturbances on a small scale but it a�ects our GDP on a larger note. Injecting money into the chain will only resolve the issue on a temporary basis. �ese challenges require a multi-prong approach that would address energy shortages in the immediate future and help the country build longer term energy su�ciency.

�ere needs to be a shift away from thermal power to alternative sources of energy which are not only cheaper but also environmentally friendly. Pakistan has large untapped renewable resources such as water, sun and wind and recently the government has taken keen interest on the development of hydro power projects and Neelum Jhelum Hydroelectric Project is one of the many projects which the new government has started which will approximately add 5.15bn units of electricity annually. Moreover, an e�ective system of governance must be in place to curb theft, recuperate dues and enforce policies.

�e Importance of Asset Allocation in attaining Optimal Returns

By Yamna Hassan, Asst. Manager-Business DevelopmentLakson Investments

“Tis the part of a wise man to keep himself today for tomorrow, and not venture all his eggs in one basket.” – Miguel de Cervantes, Don Quixote de la Mancha, 1605.

�e afore-mentioned quote indicates that along with being a great writer, Cervantes would have also proved to be a wise investor.

Investment related decisions are preceded by de�ning a proper Asset Allocation plan. According to recent research, the Asset Allocation decision is responsible for 91.5 percent of the variation between returns on di�erent portfolios. Given the importance of Asset Allocation, it has attained a center stage in any investment decision.

Asset Allocation is mainly important for two de�nite reasons. �e �rst reason pertains to portfolio design; variation in portfolio designs can lead to some investment decisions being winners while the rest being losers, and it is believed that if a portfolio is thoughtfully constructed and contains an optimal mix of securities that perform di�erently from each other (i.e they have little correlation in between them), chances of this portfolio yielding a more stable return is higher. �is is because if some securities in a portfolio are inconsistent and volatile, other, more stable securities can nullify the inconsistency of the entire portfolio, hence stabilizing the yield pattern.

�e second reason pertains to the vision of the investor. Asset allocation allows an investor to �nancially plan for his long-term and short-term goals and avoid impulsive reactions. We will subsequently discuss this aspect of Asset Allocation.

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page 13 of 24 mufap quarterly newsletter

We can divide the Asset Allocation decision into two simple steps as discussed below:

Step 1: Asset Allocation An Asset Allocation strategy can be devised based on the investor’s risk assessment, �nancial goals and return targets. It is the most fundamental step of an investment decision and involves determining an ideal mix of stocks, bonds, cash and other securities in a way such that the portfolio yields a return which best suits an investor’s need. �ere is always a downside of investing too much in bonds or cash as that might certify stable but lower returns. In the same way, too much investment in stocks might lead to portfolio volatility. �erefore, in order to meet your requirements, or keep pace with in�ation, you need to plan an ideal arrangement of securities for your portfolio.

Step 2: Diversi�cationWhile the �rst step bears upon the idea of portfolio construction, this step is linked to the proper dissemination of your assets in a way such that your portfolio is exposed to many di�erent segments of the market, some of which perform independently of the others. Proper diversi�cation of your portfolio can lead to higher and more stable returns.

As mentioned before, the e�ect of diversi�cation is most noticeable when instruments have very little interrelation between them. However, it was easier to build this sort of a portfolio previously than it is today. �is is because roughly over the past 10 years, �nancial markets have become increasingly interrelated and complex. Let us also not ignore the fact that during the 2008 �nancial trouble, most assets tended to perform similarly, leading us to believe in the proposition that most assets are conducive to a similar behavior in times of crisis and instability. �e �gure below shows ways of diversifying a portfolio and entering into newer and assorted mix of investment vehicles.

FIGURE 1:

Figure shows ways of diversifying a portfolio.

Institutions that do not pay requisite importance to the Asset Allocation decision might end up damaging their returns. Usually, institutions are advised to invest in a 60:40 ratio (Stocks: �xed income instruments) to remain on the safe side. Whereas, individuals are recommended to invest in an investment spectrum ranging from 100 percent stocks to 100 percent bonds depending on their separate variable characteristics. However, the Asset Allocation decision is dependent on several other factors and cannot be generalized for di�erent investors.

Following are a few, newer and e�cient ways that have now been developed and can be used for attaining optimal asset allocation:

Mean Variance Optimization

Mean Variance Optimization is a quantitative technique that can be used to calculate the trade-o� between maximum expected return and risk tolerance. �is technique has gained popularity over time because in recent times, the technique is applied on an asset class level as opposed to being applied only to portfolios of individual stocks previously.

�e development of Mean Variance Optimization has not only bene�tted institutional investors but has resulted in a breakthrough for retail brokerage houses as well, which, prior to this development were restricted on their advisory role to the investors. However, recently, they are proposing a greater degree of passive security and more thoughtful asset allocation recommendations to their investors. �is has become possible by using optimization and aiming to attain a favorable position with maximum expected return, minimal risk, or both.

Moreover, a few re�ned approaches taken from utility theory and behavioral economics can be deployed to develop polls or surveys that can authentically gauge an individual’s risk preferences.

Pension funds have also been familiarized with Optimization. Such funds take into account the reciprocity of both assets and liabilities and not only the assets unlike other funds. �e objective of Asset Allocation for these funds is to amplify the fund surplus i.e liabilities subtracted from assets for a stated degree of risk tolerance.

Tactical Asset AllocationTactical asset allocation is the process of adjusting a particular portfolio based on changes in the market value of assets contained in that portfolio. �e technique is quite dynamic and involves deviation from the strategic asset allocation when an investor’s short-term foresight is not aligned with his long term foresight used to develop a strategic asset allocation plan and precise short-term predictions on part of the investor can lead to better returns.

Pragmatically speaking, Tactical Asset Allocation models tend to recommend contrarian trades, that is, they recommend purchasing an asset as its current market value drops and vice versa. �us, tactical Asset Allocation involves perpetually arranging your portfolio based on your needs and changes in the market. One consequence of Tactical Asset Allocation is that by overweighting certain assets during certain times and underweighting others, the portfolio is riskier because of its reduced diversi�cation. �us, to

o�set this additional risk factor, this strategy would need to generate above market returns. �e notion, whether Tactical Asset Allocation Models have achieved this is still a matter of rumination and study but because the probable returns from successful Tactical Asset Allocation would be large, researchers will keep inspecting, and investors won’t cease to be on the look out for their discoveries.

Insured Asset Allocation�is strategy is similar to a portfolio insurance strategy and is a mirror image of the Tactical Asset Allocation strategy. With this strategy, a base portfolio parameter is �xed and the value of the portfolio is not allowed to fall below this base parameter. As long as the portfolio achieves a return above this parameter, you actively to try to increase the portfolio value as much as possible. If, however, the portfolio ever drops to below the base value, investment in risk-free securities enables the base value to become �xed.

�e main target audiences for this approach are risk-averse investors who desire a certain level of active portfolio management and also covet the protection of �xing a certi�ed minimum return below which the portfolio is not allowed to decline. For instance, this approach is best for an investor who has planned a nominal lifestyle for himself after retirement.

Asset Allocation & Uncertain Times�e importance of active portfolio management and wise asset allocation strategy has been reiterated enough. But at the brink of serious economic uncertainty, expectation for stock market returns is somewhat muted. �erefore, it is believed that in such a situation, a dynamic asset allocation plan should come into play for the advantage of certain clients.

Dynamic Asset Allocation uses a long term strategic Asset Allocation strategy as its foundation. Alternate investments can be added to the core portfolio for the sake of complementing it. It is even better, if these investments include segments which yield a higher return and bear little interdependence, so as to achieve a greater level of diversi�cation.

Besides, dynamic Asset Allocation strategies can also be accompanied by �exible investment strategies; tactical actions that are short-term in nature and aim to bank on perceived market opportunities. If 10-20% of your assets are allocated for such investments, your portfolio can be expected to react better in times of changing trends and conditions.

Asset allocation is evolving past a traditional “purchase and retain” dogma. Whilst this might not suit all clients, exercising a dynamic asset allocation plan can create a portfolio better able to handle uncertain market environments. Not to forget the fact that a solid strategic asset allocation plan remains the core strategy behind any tactical asset allocation strategy.

Asset Allocation & the local scenarioWith interest rates in Pakistan consistently hovering above 10 percent for the past �ve years, anyone would expect Pakistanis to be encouraged enough to save and reap bene�ts of higher returns. However, reality states that Pakistan actually stands out to re�ect one of the lowest savings in the region. Given the fact that majority of Pakistanis are not so keen on investing mainly because their expenditures on necessities do not leave any room for savings or so for other reasons, there is a chunk of people who are inclined in saving for a better future and lifestyle.

With growth of urban nuclear families, educated middle to upper middle class is inspirited to plan properly for a child’s education, health and future life. Reasons for investment in Pakistani society vary from a child’s education to his marriage, from being cushioned against the toils of post-retirement life to maternity expenditures. Young professionals may want to invest as a means to generate seed capital for their potential business idea or to live their dreams of traveling or wayfaring.

Reasons for investing are many. With di�erent individuals and di�erent investment objectives in mind, the asset allocation needs of these investors must be customized accordingly.

Asset Allocation & Financial PlanningOnce you are done with choosing your model for Asset Allocation, the �nal stage is to test this model by contextualizing it with a precise �nancial plan. It might be easy for an investor to choose which Asset Allocation plan will provide him with the best possible returns but the investor should also �gure out a way to determine that expected return and also estimate the trade-o� for that higher return potential.

A well-concocted �nancial plan will guide the investor out of this bewilderment. First, it will determine what level of projected investment return is necessary to allow you to meet your lifestyle goals, which can help lead you to the right mix of stocks, bonds and cash. Second, the plan will evaluate the impact of the portfolio risk associated with that mix.

Traditionally, �nancial planning models focused on expected return and neglected the variability of outcomes that is associated with increased volatility. With the introduction of probability-based planning tools, the investor can foresee the e�ect of risk on their investment portfolios, they can vary the amount of risk and can study their corresponding returns. For example a portfolio bearing higher risk may yield a higher return but it also has a probability of falling far short beneath their targets.

When using an asset allocation approach to designing a portfolio, it is important to not focus just on the expected return of that portfolio. �e risk associated with an increasing, or decreasing, portfolio return is just as important to the success of an investment strategy.

Asset Allocation & �e Future

Most forecasters fall into two divisions. Forecasters in the �rst division are eager to predict that the future will closely mirror the recent past. �eir ideals are those generals who are always preparing to �ght the last war. Forecasters in the second division rely heavily

upon the adage that the only constant is change itself. Proponents of this school of thought usually don’t know what to expect, but are quite sure it will be nothing like anything we’ve seen before. �ese individuals do realize the problems of delineating the future of this area.

We should view the future of asset allocation through lenses borrowed from both divisions. �at is, certain aspects of asset allocation today will continue to be recognizable for the years to come. To be more precise, the goals and importance of asset allocation will not change, but the mechanisms by which investors seek to achieve those goals will be new.

�e goal of the asset allocation decision, was, is, and will be to select a combination of assets that will generate a return su�ciently high and safe so as to o�set some future liability. It is also safe to say that asset allocation decisions will have a continuing large role in explaining portfolio returns.

Industry-wide - Net Assets (PKR million)

Net Assets - Open End Funds (PKR million)

Net Assets - Closed End Funds (PKR million)

Net Assets - Pension Schemes (PKR million)

Sales (PKR million) Redemptions (PKR million) Net Sales (PKR million)

Open End Funds' Return** Closed End Funds' Return**

General Pension Schemes Return**

Islamic Pension Schemes Return**

Basic Asset Allocation

T-Bills, Cash, TDRs

Traditional Asset Allocation

Large Capital Stocks, Small/Mid cap Stocks, TFCs, Commercial Paper, MTS.

Expanded Investments

Alternative Mutual Funds, Private equity.

Meeting of the Board of Directors

In order to ensure that the Board of Directors ful�ls the duties and responsibilities conferred by the members of MUFAP, the Board conducts meetings on a regular basis to make immediate and prudent decisions. �e Board of Directors held three meetings during the quarter Jul-Sep 2013.

�e activities undertaken by Board are as follows:

Proposed amendments in the de�nition of Related Parties in Restricted List of Code for Distributors

�e Board deliberated in detail on the matter of proposed

amendments in the de�nition of Related Parties in the Restricted List of Code for Distributors. After careful consideration of the impacts that the amendments may entail, it was decided that all individuals (namely employees, directors, sponsors of the RSPs) should be excluded from the de�nition of Related Parties. �e revised de�nition is applicable to all new investments brought in on or after July 16, 2013 and is not applicable to existing investments made by or before July 15, 2013.

Valuation of GOP Ijarah Sukuk

�e Board recommended that AMCs should use ‘PKISRV’ quoted on Reuters as the relevant price to value the GOP Ijarah Sukuks to determine net assets of CIS under their management, which the SECP approved in September.

Meetings of the Committees

MUFAP Committees held many discussions to make important, well planned proposals on behalf of industry. �e following table presents the number of meetings held during the quarter Jul-Sep’13.

Technical Committee - VPS

�e VPS – Technical Committee held extensive discussions to discuss the dissimilar taxation and operational practices being adopted by di�erent VPS Managers. �e VPS Committee constituted a Sub-Committee, involving a representative from each VPS Manager, to draw up recommendations for the tax treatment. �e Committee also engaged Senior Tax expert, Mr. Shabbar Zaidi on the matter and has requested for clari�cation from FBR on one of the matters.

Meeting with NCCPL A meeting was held between operations sta� of AMCs and NCCPL representatives on July 22, 2013 to evaluate the mechanics and possible data sharing from AMCs to NCCPL for netting of CGT. It was decided that NCCPL would develop a concept paper covering brief mechanism of centralized CGT collection to AMCs for their review and comments.

Elections to elect Directors/Executive Committee Members of MUFAP for the year 2013 / 2014

As required under the Trade Organizations Rules, 2007, MUFAP is required to hold its elections each year to elect Directors against the vacancies arising on account of completion of two-year tenure of some Directors. Board members are elected for a two-year term.

�e retiring Directors on the completion of their two year tenure on September 30, 2013 are: 1. Mr. Adnan Siddiqui (Resigned August-2013)2. Mr. Amer Maqbool 3. Mr. Imran Azim 4. Mr. Mir Muhammad Ali 5. Mr. Nihal Cassim

�e continuing Directors of MUFAP for the year 2013/ 2014 are: 1. Dr. Amjad Waheed 2. Mr. Imran Motiwala 3. Mr. Mir Adil Rashid 4. Mr. Rashid Mansur 5. Ms Maheen Rahman6. Ms Hina Ghazanfar (on reserved seat for women)

In addition, Mr. Rehan N. Shaikh will serve on the Board as provided under Rule 23(5)(d) of the Trade Organization Rules, 2007. At the Extra Ordinary General Meeting on September 26, 2013, MUFAP announced the appointment, by virtue of elections, of the following directors to the Board, namely:1. Mr. Farid Ahmed Khan 2. Mr. M. Habib-ur-Rahman 3. Mr. Mohammad Shoaib 4. Mr. Yasir Qadri 5. Mr. Enamullah Khan

New Board of Directors

�e new Board of Directors of MUFAP at its �rst meeting held on October 1, 2013 elected Dr. Amjad Waheed as Chairman, Mr. Mohammad Shoaib as Senior Vice Chairman and Mr. Farid Ahmed Khan as Vice Chairman MUFAP for the year 2013-2014.�e Board of Directors of MUFAP for the 2013-14 term is as follows:

1) Dr. Amjad Waheed - Chairman; 2) Mr. Mohammad Shoaib - Senior Vice Chairman; 3) Mr. Farid Ahmed Khan - Vice Chairman;4) Mr. Rehan N. Shaikh;5) Mr. Rashid Mansur;6) Mr. M. Habib-ur-Rahman;7) Mr. Yasir Qadri8) Mr. Imran Motiwala;9) Ms Hina Ghazanfar;10) Ms Maheen Rahman;11) Mr. Mir Adil Rashid;12) Mr. Enamullah Khan; and13) Ms Mashmooma Z. Majeed - Chief Executive

Chairman Dr. Amjad Waheed, CFA

Dr. Amjad Waheed holds a doctorate in Investments & Finance from Southern Illinois University, USA and is also a Chartered Financial Analyst. For the last 7 years he is CEO of NBP Fullerton Asset Management Ltd (NAFA), which is a subsidiary of National Bank of Pakistan, with Fullerton Fund Management Company of Singapore as the other joint venture partner. NAFA is presently managing fourteen mutual funds and several portfolios with about Rs 45 billion invested in these funds. NAFA is among the largest Asset Management Companies in Pakistan today.

Before joining NAFA, Dr. Waheed was Head of Equity Mutual Funds & Portfolios at Riyad Bank, Saudi Arabia, for about 5 years where he was managing US$ 7.5 billion invested in 22 mutual funds. Prior to that Dr. Waheed was Head of Investments at NIT,

and Chief Operation O�cer of FC-ABN AMRO Equities for several years. Before moving back to Pakistan, Dr. Waheed was Assistant Professor of Finance at Tennessee State University, USA and has published several articles in top journals of the world such as Journal of Banking & Finance and Financial and Financial Management.Dr. Waheed has served on the Board of various companies including Siemens, Nishat Mills, PICIC, Askari Bank, Millat Tractors, Fauji Fertilizer, Pakitstan Tobacco Company, Treet Corporation, Gul Ahmed Textile, Bata Pakistan.

Senior Vice Chairman Mr. Mohammad Shoaib, CFA

Mr. Mohammad Shoaib, CFA is the Chief Executive of Al Meezan Investment Management Ltd. He has played a key role in setting up the company and has been associated with it since inception. He is a highly quali�ed and seasoned professional with 23 years experience in capital markets. He has to his credit many accolades and awards, the most signi�cant of them being the "Most In�uential CFA charter holder" awarded by CFA Institute in 2006.

Mr. Shoaib holds an MBA degree from IBA besides being a Chartered Financial Analyst (CFA) charter holder. He has to his credit the honor of being the founder and �rst president of CFA Association of Pakistan, a member society of CFA Institute. He has been active participant in the Islamic �nance and asset management for the last 10 years. In this respect, he has also actively participated as a speaker and panelist in various international and domestic seminars, conferences and workshops.

Mr. Shoaib has also served in voluntary capacity at di�erent domestic and international institutions. He has served as a Director on the Board of Karachi Stock Exchange and Vice Chairman on the Board of Mutual Funds Association of Pakistan. He is currently serving on the Board of Directors of Pakistan Institute of Corporate Governance and Institute of Capital Markets. He has also served on various global and regional committees of CFA Institute including Asia Paci�c Advocacy Committee, Global Task Force on Corporate

Governance, GIPS Regional Council and Asset Manager Code Advisory Committee. He has also had the honour to represent over 16,000 charterholders in Asia Paci�c Region as their representative on the Presidents' Council of CFA Institute.

Vice Chairman Mr. Farid Ahmed Khan, CFA

Mr. Farid Ahmed Khan, CFA is the CEO of ABL Asset Management. He has been involved with capital markets for over 18 years and has a broad-based, global experience with bulge bracket �rms in Asset Management, Investment Banking, Investment Research and Sales, Business Development & International Project Finance. He joined ABL AMC from Credit Suisse, where he was the Country Manager of Credit Suisse Pakistan. Prior to that, he worked for MCB, initially as Head of Investment Banking Group and later as the CEO of MCB Asset Management. Mr. Khan has extensive experience outside Pakistan, having worked at Morgan Stanley, ING Barings Securities and CLSA Emerging Markets in Kuala Lumpur, London and Istanbul in a variety of senior positions. He holds an MBA in Finance from IBA, Karachi and got his CFA quali�cation in 1998.

New Committees

MUFAP Board elected its Professional Committees, Chairperson and Vice-Chairperson of each Committee for the year 2013-14. �e list of Committees, their Chairperson and Vice-Chairperson is as follows:

SECP forms Shariah Advisory Board

SECP constituted a Shariah Advisory Board (SAB) to harmonize the Shariah interpretations and strengthen the regulatory and supervisory oversight of Islamic �nancial institutions (IFIs) and Islamic capital markets (ICMs) in Pakistan. It will also advise the Commission on the Shariah-compliance aspects of various products launched and or the processes being adopted by the regulated entities. It will also provide guidance for issuance of new laws, rules and regulations for e�ective monitoring and supervision of Islamic Financial Products and to suggest ways and means for development of IFIs and ICMs in the country.

Money Market

To meet the challenges of maintaining stability in the foreign exchange market and controlling high growth in money supply, SBP decided to gradually decrease the outstanding amount of liquidity injections. Since the beginning of FY14, interbank market liquidity conditions have considerably eased primarily due to substantial increase in the pace of government borrowing from the SBP. In fact, SBP mopped up Rs. 1,556.45 billion and injected Rs. 630.70 billion during Q1-FY14.

In terms of controlling growth in money supply, however, SBP’s e�orts of curtailing liquidity injections did not experience much success as these were o�set by an increase in direct �scal borrowings from the SBP. �e increase of Rs. 1,446 billion in budgetary borrowings from the banking system during FY13 was almost Rs. 1 trillion higher than the original target and was even higher than the total expansion in M2. Deviation of this scale has signi�cantly constrained e�ective monetary management, disrupted �nancial intermediation in the economy, and has led to a sharp increase in domestic debt. Showing a growth of 24.6% in FY13, the stock of government’s domestic debt has reached Rs. 9.5 trillion as of end-June 2013. Similarly, a considerable increase in public debt to revenue ratio re�ects weak repayment capacity of the government. �e acceleration in �scal borrowings from the SBP during H2-FY13, Rs. 714 billion, and Q1-FY14 up till 30th August 2013, Rs. 547 billion, is particularly worrisome. �e inability to raise the tax-GDP ratio is the fundamental source of large �scal de�cits, high borrowings, and rising debt. Although there has been a consistent gap between Federal Board of Revenue’s (FBR) budget targets and actual outcomes in the last few years, the gap of Rs. 445 billion in FY13 was exceptionally high. In fact, this is more than the cumulative shortfall of Rs. 349 billion during the last �ve years.

On the external front, stress in the external account has gradually increased with every passing month of 2013 due to shrinking net capital and �nancial �ows and high loan repayments to the IMF.

While the former was only $517 million or 0.2 percent of GDP, the latter increased to $3 billion in FY13. As a result, despite reduction in the external current account de�cit by about half, to $2.3 billion or 1.0 percent of GDP, the SBP’s foreign exchange reserves declined to $6 billion by end-June 2013 from $10.8 billion at the beginning of FY13. �ese stand at $5.2 billion as on 6th September, 2013 after receiving $544.5 million under the new IMF program. Despite pressures and speculations of a drop in the value of the Pak rupee the foreign exchange market has largely remained stable in FY13. However, since the beginning of FY14 the rupee has depreciated by 5.0 percent as of 12th September 2013.

�e year-on-year CPI based in�ation rate was recorded at 8.3% in July 2013, then to 8.55% in August 2013, however dipped down to 7.39% in September 2013.�ough CPI In�ation remained within single digit, however, it witnessed an upward trend as it increased to 7.39 percent in September 2013 compared to 5.85 percent in June 2013 and 6.6 percent in March 2013. �e impact of upward adjustments in energy prices and an increase in the GST together with the removal of certain exemptions put pressure on in�ation.In order to counter in�ationary expectations, SBP raised the discount rate by 50 basis points to 9.5 percent with e�ect from September 16, 2013.

Movement in KIBOR

Treasury Bills:

A total of 6 T-bill auctions were held by SBP during the quarter in which a total amount of Rs. 1,348.88 billion was raised. Since the beginning of FY14, market’s preference for shorter tenor T-Bills has increased as about 83% of the bank’s total o�ers in recent T-Bill auctions were concentrated in 3-month bills.

T-Bill Auctions (Amount in PKR billion; rates in %)

Pakistan Investment Bonds

�e accepted amount in the PIB auctions during Q1-FY14 fell short of the target .

PIB Auctions (Yields in % and Face Value in PKR billion)

Debt Market

�e table below summarizes the TOP 15 trades of TFCs/Sukuk on the basis of Face value during the Q1-FY14:

Equity Market

KSE-100 index made a strong start to the �scal year 2014, as the index gained 826.99 points, or 3.94%, to stand at 21,832.68 points during the �rst three months of FY14. During the period, index struggled to cross the 23,000 points level and made a high of 23,776.22 on a closing basis. Stock market began the �rst month of �scal year 2014 with a strong rally, overcoming jitters stemming from treason proceedings against former president General (retd) Pervez Musharraf and slowdown in global markets. �e government’s successful negotiations with IMF for a $5.3 billion loan, resolution of circular debt by issuing treasury bills and bonds and anticipation of strong corporate earnings for the quarter ended June 30 buoyed investors’ con�dence as the share prices appreciated across the board and index posted a gain of 2.307.09 points, or 10.98% to settle at 23,312.78 level in July.

After posting strong gain in July, KSE-100 faltered in August as investors continued to worry about ever-escalating Syrian crisis and tumbling regional markets. Stock market further pressured by a slew of disappointing and less-than-expected corporate earnings, falling foreign exchange reserves and high in�ation �gures for July. Moreover, concerns on a possible interest rate hike in the upcoming monetary policy announcement, potential spike in oil prices, decline in cement prices due to breakdown in price discipline, heavy foreign net selling and persistent depreciation in the rupee dragged the KSE-100 index down 1,151.93 points, or 4.94%, to 22,160.85 in August. �e index showed a mixed performance in September. In the �rst half of the month, the approval of the $6.64 billion loan package by IMF, the plans to privatize Pakistan International Airlines, strong foreign in�ows and the release of the IMF’s �rst tranche worth of $550 million helped lift the index to 23,639.97 on a closing basis. However, sentiment reversed towards the end of the month after the central bank’s decision to increase the rate of return on savings deposits to 6.5%. Moreover, steep decline in the value of Pakistani

rupee against the US dollar, constant repayments to IMF, a 50 basis points increase in the discount rate and heavy foreign net selling dragged the KSE-100 index down 328.17 points, or 1.48%, to 21,832.68 in September.

Mutual Fund Market:

�e total net assets decreased to Rs. 359.947 billion in the �rst quarter of FY14 versus Rs. 361.668 billion for the Q4FY13, a reduction of 0.48% quarter over quarter. �e open-end funds went up by 0.71% to Rs. 327.594 billion, pension funds went up by 9.67% to Rs. 5.288 billion and closed-end decreased by 14.23% to Rs. 27.064 billion.

Funds launched during the quarter Q1-FY14

Funds matured during the quarter Q1-FY14

Funds with changed structure/other features Energy Crisis: Causes and ImpactsBy Sara Aquil Walji, Research Analyst, HBL Asset Management

Energy is the cornerstone for any economy’s development and growth. �e current situation has worsened in Pakistan over the past few years and likely to continue if measures are not taken to mitigate the issue on a long term basis. �e gap between demand and supply has reached 6000MW resulting in scheduled and unscheduled load shedding, negatively a�ecting our industrial sector, hurting our exports and has even hampered the GDP growth rate by 2%. Subsidies to the power sector have steadily been increasing and form the biggest part of total subsidies amounting to around Rs 349,287mn (95% of the total subsidies) in FY 2012-13. �e new government has allocated Rs. 220,100mn to the power sector for the FY 2013-14 which is 91.5% of the total subsidy budget. (Source: Annual budget 2014) With recent emphasis on matters to resolve energy crisis and develop renewable and non-renewable sources of energy, it is worthwhile to note why energy crisis became as severe as it is now.

�e root of this crisis is that Pakistan’s electricity generation mix is highly skewed towards the most expensive kinds .�ere appears to be an almost inverse relationship between the sources of electricity that are most expensive to set and those that are most expensive to run. �e following chart depicts this relationship:

Source: Express Tribune �is highlights the fact why there is a heavy concentration toward

the construction of thermal power plants since they are relatively cheaper to build than hydropower plants. �e government has not dedicated enough funds for the development of hydropower projects which are the most expensive to build but cheapest to run on a per unit basis.Pakistan’s electricity generation is highly dependent on imported oil as almost $14.5bn worth of oil is imported each year which accounts for around 35% of electricity generation. Comparing Pakistan with India and Bangladesh reveals that Pakistan relies heavily on oil for electricity generation where as India uses coal, a relatively cheaper source for electricity generation and Bangladesh on the other hand allocates 73% of its electricity generation to gas.

Source: Economic Survey report for 2012-2013

With a prominent shift in recent years towards the use of thermal power stations instead of hydropower sources and a reduction in electricity generation from coal, Pakistan’s electricity costs ends up being more expensive than it needs to be and since the government has adopted a policy of uniform tari� across the country the Tari� Di�erential Subsidy owed by the Government of Pakistan on an annual basis has increased substantially.

Circular debt is another major concern hampering the growth of Pakistan’s economy. In simple words circular debt is the amount of

cash shortfall within the Central Power Purchasing Agency (CPPA) that it cannot pay to power supply companies. �is shortfall is the result of (a) the di�erence between the actual cost of providing electricity in relation to revenues realized by the power distribution companies (DISCOs) from sales to customers plus subsidies; and (b) insu�cient payments by the DISCOs to CPPA out of realized revenue as they give priority to their own cash �ow needs. (Source: USAID Report March 2103)

�is revenue shortfall cascades through the entire energy supply chain, from electricity generators to fuel suppliers, re�ners, and producers; resulting in a shortage of fuel supply to the public sector thermal generating companies (GENCOs), a reduction in power generated by Independent Power Producers (IPPs), and an increases in load shedding.

According to the report published by the USAID in March 2013, circular debt amounts to Rs872bn which is actually 4% of GDP. According to Pakistan’s Economic Survey report for 2012-2013, there is a strong relationship between GDP growth rate and electricity growth as shown in the �gure below. It can be easily deduced that periods of low or negative electricity growth have witnessed low GDP growth rate, while periods where electricity growth picked up there is increase in GDP growth rate.

�is comes as no surprise, since industrial output is heavily dependent on the amount of electricity delivered to them. Continuous power breakdowns prevented industries from operating at their full capacity level. �e power outages have obstructed the viability of the textile industry as exporters were unable to meet their

commitments. During July-March 2012-13, foreign exchange earnings through exports of synthetic textile fabrics and woolen industry showing a decline of 25.3% and 5.1% respectively as compared to last year. During the period under review even in quantity term also recorded a decline of 30% and 15.8% respectively.

Coupled with an ine�cient system and expensive fuel mix, power theft is another major issue faced by Pakistanis. It is interesting to note that annual revenue collection e�ciency was estimated to be around 87%; however that 13% of lost e�ciency has a �nancial impact of Rs 86bn which is equivalent to 41 days of furnace oil costs for thermal power plants. �e following �gure shows the percentage of bills that were uncollected in 2012. �e e�ciency of di�erent DISCOs is disproportionate in revenue collection. �is essentially leads to the inclusion of the cost of power theft in the power tari�, meaning that the honest payers also bear the cost of those that steal.

Power theft is not only committed by normal residents but the main defaulters are the government institutions themselves. �e government owns around 51% of the uncollected bills which amounts to Rs 118bn out of the uncollected revenue receipts of Rs 386bn. In my opinion, this the amount which causes the discrepancy between the amount of RS500.3bn to be injected to resolve the circular debt issue and �gure of Rs 872.41bn since the government has a proposal to o�set provisional dues via a �scal adjuster. Due to a growing economy, Pakistan’s energy needs have more than doubled in the past 15 years. Energy shortages have far devastating

e�ects on our economy. Not only does it cause civil disturbances on a small scale but it a�ects our GDP on a larger note. Injecting money into the chain will only resolve the issue on a temporary basis. �ese challenges require a multi-prong approach that would address energy shortages in the immediate future and help the country build longer term energy su�ciency.

�ere needs to be a shift away from thermal power to alternative sources of energy which are not only cheaper but also environmentally friendly. Pakistan has large untapped renewable resources such as water, sun and wind and recently the government has taken keen interest on the development of hydro power projects and Neelum Jhelum Hydroelectric Project is one of the many projects which the new government has started which will approximately add 5.15bn units of electricity annually. Moreover, an e�ective system of governance must be in place to curb theft, recuperate dues and enforce policies.

�e Importance of Asset Allocation in attaining Optimal Returns

By Yamna Hassan, Asst. Manager-Business DevelopmentLakson Investments

“Tis the part of a wise man to keep himself today for tomorrow, and not venture all his eggs in one basket.” – Miguel de Cervantes, Don Quixote de la Mancha, 1605.

�e afore-mentioned quote indicates that along with being a great writer, Cervantes would have also proved to be a wise investor.

Investment related decisions are preceded by de�ning a proper Asset Allocation plan. According to recent research, the Asset Allocation decision is responsible for 91.5 percent of the variation between returns on di�erent portfolios. Given the importance of Asset Allocation, it has attained a center stage in any investment decision.

Asset Allocation is mainly important for two de�nite reasons. �e �rst reason pertains to portfolio design; variation in portfolio designs can lead to some investment decisions being winners while the rest being losers, and it is believed that if a portfolio is thoughtfully constructed and contains an optimal mix of securities that perform di�erently from each other (i.e they have little correlation in between them), chances of this portfolio yielding a more stable return is higher. �is is because if some securities in a portfolio are inconsistent and volatile, other, more stable securities can nullify the inconsistency of the entire portfolio, hence stabilizing the yield pattern.

�e second reason pertains to the vision of the investor. Asset allocation allows an investor to �nancially plan for his long-term and short-term goals and avoid impulsive reactions. We will subsequently discuss this aspect of Asset Allocation.

We can divide the Asset Allocation decision into two simple steps as discussed below:

Step 1: Asset Allocation An Asset Allocation strategy can be devised based on the investor’s risk assessment, �nancial goals and return targets. It is the most fundamental step of an investment decision and involves determining an ideal mix of stocks, bonds, cash and other securities in a way such that the portfolio yields a return which best suits an investor’s need. �ere is always a downside of investing too much in bonds or cash as that might certify stable but lower returns. In the same way, too much investment in stocks might lead to portfolio volatility. �erefore, in order to meet your requirements, or keep pace with in�ation, you need to plan an ideal arrangement of securities for your portfolio.

Step 2: Diversi�cationWhile the �rst step bears upon the idea of portfolio construction, this step is linked to the proper dissemination of your assets in a way such that your portfolio is exposed to many di�erent segments of the market, some of which perform independently of the others. Proper diversi�cation of your portfolio can lead to higher and more stable returns.

As mentioned before, the e�ect of diversi�cation is most noticeable when instruments have very little interrelation between them. However, it was easier to build this sort of a portfolio previously than it is today. �is is because roughly over the past 10 years, �nancial markets have become increasingly interrelated and complex. Let us also not ignore the fact that during the 2008 �nancial trouble, most assets tended to perform similarly, leading us to believe in the proposition that most assets are conducive to a similar behavior in times of crisis and instability. �e �gure below shows ways of diversifying a portfolio and entering into newer and assorted mix of investment vehicles.

FIGURE 1:

Figure shows ways of diversifying a portfolio.

Institutions that do not pay requisite importance to the Asset Allocation decision might end up damaging their returns. Usually, institutions are advised to invest in a 60:40 ratio (Stocks: �xed income instruments) to remain on the safe side. Whereas, individuals are recommended to invest in an investment spectrum ranging from 100 percent stocks to 100 percent bonds depending on their separate variable characteristics. However, the Asset Allocation decision is dependent on several other factors and cannot be generalized for di�erent investors.

Following are a few, newer and e�cient ways that have now been developed and can be used for attaining optimal asset allocation:

Mean Variance Optimization

Mean Variance Optimization is a quantitative technique that can be used to calculate the trade-o� between maximum expected return and risk tolerance. �is technique has gained popularity over time because in recent times, the technique is applied on an asset class level as opposed to being applied only to portfolios of individual stocks previously.

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page 14 of 24 mufap quarterly newsletter

�e development of Mean Variance Optimization has not only bene�tted institutional investors but has resulted in a breakthrough for retail brokerage houses as well, which, prior to this development were restricted on their advisory role to the investors. However, recently, they are proposing a greater degree of passive security and more thoughtful asset allocation recommendations to their investors. �is has become possible by using optimization and aiming to attain a favorable position with maximum expected return, minimal risk, or both.

Moreover, a few re�ned approaches taken from utility theory and behavioral economics can be deployed to develop polls or surveys that can authentically gauge an individual’s risk preferences.

Pension funds have also been familiarized with Optimization. Such funds take into account the reciprocity of both assets and liabilities and not only the assets unlike other funds. �e objective of Asset Allocation for these funds is to amplify the fund surplus i.e liabilities subtracted from assets for a stated degree of risk tolerance.

Tactical Asset AllocationTactical asset allocation is the process of adjusting a particular portfolio based on changes in the market value of assets contained in that portfolio. �e technique is quite dynamic and involves deviation from the strategic asset allocation when an investor’s short-term foresight is not aligned with his long term foresight used to develop a strategic asset allocation plan and precise short-term predictions on part of the investor can lead to better returns.

Pragmatically speaking, Tactical Asset Allocation models tend to recommend contrarian trades, that is, they recommend purchasing an asset as its current market value drops and vice versa. �us, tactical Asset Allocation involves perpetually arranging your portfolio based on your needs and changes in the market. One consequence of Tactical Asset Allocation is that by overweighting certain assets during certain times and underweighting others, the portfolio is riskier because of its reduced diversi�cation. �us, to

o�set this additional risk factor, this strategy would need to generate above market returns. �e notion, whether Tactical Asset Allocation Models have achieved this is still a matter of rumination and study but because the probable returns from successful Tactical Asset Allocation would be large, researchers will keep inspecting, and investors won’t cease to be on the look out for their discoveries.

Insured Asset Allocation�is strategy is similar to a portfolio insurance strategy and is a mirror image of the Tactical Asset Allocation strategy. With this strategy, a base portfolio parameter is �xed and the value of the portfolio is not allowed to fall below this base parameter. As long as the portfolio achieves a return above this parameter, you actively to try to increase the portfolio value as much as possible. If, however, the portfolio ever drops to below the base value, investment in risk-free securities enables the base value to become �xed.

�e main target audiences for this approach are risk-averse investors who desire a certain level of active portfolio management and also covet the protection of �xing a certi�ed minimum return below which the portfolio is not allowed to decline. For instance, this approach is best for an investor who has planned a nominal lifestyle for himself after retirement.

Asset Allocation & Uncertain Times�e importance of active portfolio management and wise asset allocation strategy has been reiterated enough. But at the brink of serious economic uncertainty, expectation for stock market returns is somewhat muted. �erefore, it is believed that in such a situation, a dynamic asset allocation plan should come into play for the advantage of certain clients.

Dynamic Asset Allocation uses a long term strategic Asset Allocation strategy as its foundation. Alternate investments can be added to the core portfolio for the sake of complementing it. It is even better, if these investments include segments which yield a higher return and bear little interdependence, so as to achieve a greater level of diversi�cation.

Besides, dynamic Asset Allocation strategies can also be accompanied by �exible investment strategies; tactical actions that are short-term in nature and aim to bank on perceived market opportunities. If 10-20% of your assets are allocated for such investments, your portfolio can be expected to react better in times of changing trends and conditions.

Asset allocation is evolving past a traditional “purchase and retain” dogma. Whilst this might not suit all clients, exercising a dynamic asset allocation plan can create a portfolio better able to handle uncertain market environments. Not to forget the fact that a solid strategic asset allocation plan remains the core strategy behind any tactical asset allocation strategy.

Asset Allocation & the local scenarioWith interest rates in Pakistan consistently hovering above 10 percent for the past �ve years, anyone would expect Pakistanis to be encouraged enough to save and reap bene�ts of higher returns. However, reality states that Pakistan actually stands out to re�ect one of the lowest savings in the region. Given the fact that majority of Pakistanis are not so keen on investing mainly because their expenditures on necessities do not leave any room for savings or so for other reasons, there is a chunk of people who are inclined in saving for a better future and lifestyle.

With growth of urban nuclear families, educated middle to upper middle class is inspirited to plan properly for a child’s education, health and future life. Reasons for investment in Pakistani society vary from a child’s education to his marriage, from being cushioned against the toils of post-retirement life to maternity expenditures. Young professionals may want to invest as a means to generate seed capital for their potential business idea or to live their dreams of traveling or wayfaring.

Reasons for investing are many. With di�erent individuals and di�erent investment objectives in mind, the asset allocation needs of these investors must be customized accordingly.

Asset Allocation & Financial PlanningOnce you are done with choosing your model for Asset Allocation, the �nal stage is to test this model by contextualizing it with a precise �nancial plan. It might be easy for an investor to choose which Asset Allocation plan will provide him with the best possible returns but the investor should also �gure out a way to determine that expected return and also estimate the trade-o� for that higher return potential.

A well-concocted �nancial plan will guide the investor out of this bewilderment. First, it will determine what level of projected investment return is necessary to allow you to meet your lifestyle goals, which can help lead you to the right mix of stocks, bonds and cash. Second, the plan will evaluate the impact of the portfolio risk associated with that mix.

Traditionally, �nancial planning models focused on expected return and neglected the variability of outcomes that is associated with increased volatility. With the introduction of probability-based planning tools, the investor can foresee the e�ect of risk on their investment portfolios, they can vary the amount of risk and can study their corresponding returns. For example a portfolio bearing higher risk may yield a higher return but it also has a probability of falling far short beneath their targets.

When using an asset allocation approach to designing a portfolio, it is important to not focus just on the expected return of that portfolio. �e risk associated with an increasing, or decreasing, portfolio return is just as important to the success of an investment strategy.

Asset Allocation & �e Future

Most forecasters fall into two divisions. Forecasters in the �rst division are eager to predict that the future will closely mirror the recent past. �eir ideals are those generals who are always preparing to �ght the last war. Forecasters in the second division rely heavily

upon the adage that the only constant is change itself. Proponents of this school of thought usually don’t know what to expect, but are quite sure it will be nothing like anything we’ve seen before. �ese individuals do realize the problems of delineating the future of this area.

We should view the future of asset allocation through lenses borrowed from both divisions. �at is, certain aspects of asset allocation today will continue to be recognizable for the years to come. To be more precise, the goals and importance of asset allocation will not change, but the mechanisms by which investors seek to achieve those goals will be new.

�e goal of the asset allocation decision, was, is, and will be to select a combination of assets that will generate a return su�ciently high and safe so as to o�set some future liability. It is also safe to say that asset allocation decisions will have a continuing large role in explaining portfolio returns.

Industry-wide - Net Assets (PKR million)

Net Assets - Open End Funds (PKR million)

Net Assets - Closed End Funds (PKR million)

Net Assets - Pension Schemes (PKR million)

Sales (PKR million) Redemptions (PKR million) Net Sales (PKR million)

Open End Funds' Return** Closed End Funds' Return**

General Pension Schemes Return**

Islamic Pension Schemes Return**

Meeting of the Board of Directors

In order to ensure that the Board of Directors ful�ls the duties and responsibilities conferred by the members of MUFAP, the Board conducts meetings on a regular basis to make immediate and prudent decisions. �e Board of Directors held three meetings during the quarter Jul-Sep 2013.

�e activities undertaken by Board are as follows:

Proposed amendments in the de�nition of Related Parties in Restricted List of Code for Distributors

�e Board deliberated in detail on the matter of proposed

amendments in the de�nition of Related Parties in the Restricted List of Code for Distributors. After careful consideration of the impacts that the amendments may entail, it was decided that all individuals (namely employees, directors, sponsors of the RSPs) should be excluded from the de�nition of Related Parties. �e revised de�nition is applicable to all new investments brought in on or after July 16, 2013 and is not applicable to existing investments made by or before July 15, 2013.

Valuation of GOP Ijarah Sukuk

�e Board recommended that AMCs should use ‘PKISRV’ quoted on Reuters as the relevant price to value the GOP Ijarah Sukuks to determine net assets of CIS under their management, which the SECP approved in September.

Meetings of the Committees

MUFAP Committees held many discussions to make important, well planned proposals on behalf of industry. �e following table presents the number of meetings held during the quarter Jul-Sep’13.

Technical Committee - VPS

�e VPS – Technical Committee held extensive discussions to discuss the dissimilar taxation and operational practices being adopted by di�erent VPS Managers. �e VPS Committee constituted a Sub-Committee, involving a representative from each VPS Manager, to draw up recommendations for the tax treatment. �e Committee also engaged Senior Tax expert, Mr. Shabbar Zaidi on the matter and has requested for clari�cation from FBR on one of the matters.

Meeting with NCCPL A meeting was held between operations sta� of AMCs and NCCPL representatives on July 22, 2013 to evaluate the mechanics and possible data sharing from AMCs to NCCPL for netting of CGT. It was decided that NCCPL would develop a concept paper covering brief mechanism of centralized CGT collection to AMCs for their review and comments.

Elections to elect Directors/Executive Committee Members of MUFAP for the year 2013 / 2014

As required under the Trade Organizations Rules, 2007, MUFAP is required to hold its elections each year to elect Directors against the vacancies arising on account of completion of two-year tenure of some Directors. Board members are elected for a two-year term.

�e retiring Directors on the completion of their two year tenure on September 30, 2013 are: 1. Mr. Adnan Siddiqui (Resigned August-2013)2. Mr. Amer Maqbool 3. Mr. Imran Azim 4. Mr. Mir Muhammad Ali 5. Mr. Nihal Cassim

�e continuing Directors of MUFAP for the year 2013/ 2014 are: 1. Dr. Amjad Waheed 2. Mr. Imran Motiwala 3. Mr. Mir Adil Rashid 4. Mr. Rashid Mansur 5. Ms Maheen Rahman6. Ms Hina Ghazanfar (on reserved seat for women)

In addition, Mr. Rehan N. Shaikh will serve on the Board as provided under Rule 23(5)(d) of the Trade Organization Rules, 2007. At the Extra Ordinary General Meeting on September 26, 2013, MUFAP announced the appointment, by virtue of elections, of the following directors to the Board, namely:1. Mr. Farid Ahmed Khan 2. Mr. M. Habib-ur-Rahman 3. Mr. Mohammad Shoaib 4. Mr. Yasir Qadri 5. Mr. Enamullah Khan

New Board of Directors

�e new Board of Directors of MUFAP at its �rst meeting held on October 1, 2013 elected Dr. Amjad Waheed as Chairman, Mr. Mohammad Shoaib as Senior Vice Chairman and Mr. Farid Ahmed Khan as Vice Chairman MUFAP for the year 2013-2014.�e Board of Directors of MUFAP for the 2013-14 term is as follows:

1) Dr. Amjad Waheed - Chairman; 2) Mr. Mohammad Shoaib - Senior Vice Chairman; 3) Mr. Farid Ahmed Khan - Vice Chairman;4) Mr. Rehan N. Shaikh;5) Mr. Rashid Mansur;6) Mr. M. Habib-ur-Rahman;7) Mr. Yasir Qadri8) Mr. Imran Motiwala;9) Ms Hina Ghazanfar;10) Ms Maheen Rahman;11) Mr. Mir Adil Rashid;12) Mr. Enamullah Khan; and13) Ms Mashmooma Z. Majeed - Chief Executive

Chairman Dr. Amjad Waheed, CFA

Dr. Amjad Waheed holds a doctorate in Investments & Finance from Southern Illinois University, USA and is also a Chartered Financial Analyst. For the last 7 years he is CEO of NBP Fullerton Asset Management Ltd (NAFA), which is a subsidiary of National Bank of Pakistan, with Fullerton Fund Management Company of Singapore as the other joint venture partner. NAFA is presently managing fourteen mutual funds and several portfolios with about Rs 45 billion invested in these funds. NAFA is among the largest Asset Management Companies in Pakistan today.

Before joining NAFA, Dr. Waheed was Head of Equity Mutual Funds & Portfolios at Riyad Bank, Saudi Arabia, for about 5 years where he was managing US$ 7.5 billion invested in 22 mutual funds. Prior to that Dr. Waheed was Head of Investments at NIT,

and Chief Operation O�cer of FC-ABN AMRO Equities for several years. Before moving back to Pakistan, Dr. Waheed was Assistant Professor of Finance at Tennessee State University, USA and has published several articles in top journals of the world such as Journal of Banking & Finance and Financial and Financial Management.Dr. Waheed has served on the Board of various companies including Siemens, Nishat Mills, PICIC, Askari Bank, Millat Tractors, Fauji Fertilizer, Pakitstan Tobacco Company, Treet Corporation, Gul Ahmed Textile, Bata Pakistan.

Senior Vice Chairman Mr. Mohammad Shoaib, CFA

Mr. Mohammad Shoaib, CFA is the Chief Executive of Al Meezan Investment Management Ltd. He has played a key role in setting up the company and has been associated with it since inception. He is a highly quali�ed and seasoned professional with 23 years experience in capital markets. He has to his credit many accolades and awards, the most signi�cant of them being the "Most In�uential CFA charter holder" awarded by CFA Institute in 2006.

Mr. Shoaib holds an MBA degree from IBA besides being a Chartered Financial Analyst (CFA) charter holder. He has to his credit the honor of being the founder and �rst president of CFA Association of Pakistan, a member society of CFA Institute. He has been active participant in the Islamic �nance and asset management for the last 10 years. In this respect, he has also actively participated as a speaker and panelist in various international and domestic seminars, conferences and workshops.

Mr. Shoaib has also served in voluntary capacity at di�erent domestic and international institutions. He has served as a Director on the Board of Karachi Stock Exchange and Vice Chairman on the Board of Mutual Funds Association of Pakistan. He is currently serving on the Board of Directors of Pakistan Institute of Corporate Governance and Institute of Capital Markets. He has also served on various global and regional committees of CFA Institute including Asia Paci�c Advocacy Committee, Global Task Force on Corporate

Governance, GIPS Regional Council and Asset Manager Code Advisory Committee. He has also had the honour to represent over 16,000 charterholders in Asia Paci�c Region as their representative on the Presidents' Council of CFA Institute.

Vice Chairman Mr. Farid Ahmed Khan, CFA

Mr. Farid Ahmed Khan, CFA is the CEO of ABL Asset Management. He has been involved with capital markets for over 18 years and has a broad-based, global experience with bulge bracket �rms in Asset Management, Investment Banking, Investment Research and Sales, Business Development & International Project Finance. He joined ABL AMC from Credit Suisse, where he was the Country Manager of Credit Suisse Pakistan. Prior to that, he worked for MCB, initially as Head of Investment Banking Group and later as the CEO of MCB Asset Management. Mr. Khan has extensive experience outside Pakistan, having worked at Morgan Stanley, ING Barings Securities and CLSA Emerging Markets in Kuala Lumpur, London and Istanbul in a variety of senior positions. He holds an MBA in Finance from IBA, Karachi and got his CFA quali�cation in 1998.

New Committees

MUFAP Board elected its Professional Committees, Chairperson and Vice-Chairperson of each Committee for the year 2013-14. �e list of Committees, their Chairperson and Vice-Chairperson is as follows:

SECP forms Shariah Advisory Board

SECP constituted a Shariah Advisory Board (SAB) to harmonize the Shariah interpretations and strengthen the regulatory and supervisory oversight of Islamic �nancial institutions (IFIs) and Islamic capital markets (ICMs) in Pakistan. It will also advise the Commission on the Shariah-compliance aspects of various products launched and or the processes being adopted by the regulated entities. It will also provide guidance for issuance of new laws, rules and regulations for e�ective monitoring and supervision of Islamic Financial Products and to suggest ways and means for development of IFIs and ICMs in the country.

Money Market

To meet the challenges of maintaining stability in the foreign exchange market and controlling high growth in money supply, SBP decided to gradually decrease the outstanding amount of liquidity injections. Since the beginning of FY14, interbank market liquidity conditions have considerably eased primarily due to substantial increase in the pace of government borrowing from the SBP. In fact, SBP mopped up Rs. 1,556.45 billion and injected Rs. 630.70 billion during Q1-FY14.

In terms of controlling growth in money supply, however, SBP’s e�orts of curtailing liquidity injections did not experience much success as these were o�set by an increase in direct �scal borrowings from the SBP. �e increase of Rs. 1,446 billion in budgetary borrowings from the banking system during FY13 was almost Rs. 1 trillion higher than the original target and was even higher than the total expansion in M2. Deviation of this scale has signi�cantly constrained e�ective monetary management, disrupted �nancial intermediation in the economy, and has led to a sharp increase in domestic debt. Showing a growth of 24.6% in FY13, the stock of government’s domestic debt has reached Rs. 9.5 trillion as of end-June 2013. Similarly, a considerable increase in public debt to revenue ratio re�ects weak repayment capacity of the government. �e acceleration in �scal borrowings from the SBP during H2-FY13, Rs. 714 billion, and Q1-FY14 up till 30th August 2013, Rs. 547 billion, is particularly worrisome. �e inability to raise the tax-GDP ratio is the fundamental source of large �scal de�cits, high borrowings, and rising debt. Although there has been a consistent gap between Federal Board of Revenue’s (FBR) budget targets and actual outcomes in the last few years, the gap of Rs. 445 billion in FY13 was exceptionally high. In fact, this is more than the cumulative shortfall of Rs. 349 billion during the last �ve years.

On the external front, stress in the external account has gradually increased with every passing month of 2013 due to shrinking net capital and �nancial �ows and high loan repayments to the IMF.

While the former was only $517 million or 0.2 percent of GDP, the latter increased to $3 billion in FY13. As a result, despite reduction in the external current account de�cit by about half, to $2.3 billion or 1.0 percent of GDP, the SBP’s foreign exchange reserves declined to $6 billion by end-June 2013 from $10.8 billion at the beginning of FY13. �ese stand at $5.2 billion as on 6th September, 2013 after receiving $544.5 million under the new IMF program. Despite pressures and speculations of a drop in the value of the Pak rupee the foreign exchange market has largely remained stable in FY13. However, since the beginning of FY14 the rupee has depreciated by 5.0 percent as of 12th September 2013.

�e year-on-year CPI based in�ation rate was recorded at 8.3% in July 2013, then to 8.55% in August 2013, however dipped down to 7.39% in September 2013.�ough CPI In�ation remained within single digit, however, it witnessed an upward trend as it increased to 7.39 percent in September 2013 compared to 5.85 percent in June 2013 and 6.6 percent in March 2013. �e impact of upward adjustments in energy prices and an increase in the GST together with the removal of certain exemptions put pressure on in�ation.In order to counter in�ationary expectations, SBP raised the discount rate by 50 basis points to 9.5 percent with e�ect from September 16, 2013.

Movement in KIBOR

Treasury Bills:

A total of 6 T-bill auctions were held by SBP during the quarter in which a total amount of Rs. 1,348.88 billion was raised. Since the beginning of FY14, market’s preference for shorter tenor T-Bills has increased as about 83% of the bank’s total o�ers in recent T-Bill auctions were concentrated in 3-month bills.

T-Bill Auctions (Amount in PKR billion; rates in %)

Pakistan Investment Bonds

�e accepted amount in the PIB auctions during Q1-FY14 fell short of the target .

PIB Auctions (Yields in % and Face Value in PKR billion)

Debt Market

�e table below summarizes the TOP 15 trades of TFCs/Sukuk on the basis of Face value during the Q1-FY14:

Equity Market

KSE-100 index made a strong start to the �scal year 2014, as the index gained 826.99 points, or 3.94%, to stand at 21,832.68 points during the �rst three months of FY14. During the period, index struggled to cross the 23,000 points level and made a high of 23,776.22 on a closing basis. Stock market began the �rst month of �scal year 2014 with a strong rally, overcoming jitters stemming from treason proceedings against former president General (retd) Pervez Musharraf and slowdown in global markets. �e government’s successful negotiations with IMF for a $5.3 billion loan, resolution of circular debt by issuing treasury bills and bonds and anticipation of strong corporate earnings for the quarter ended June 30 buoyed investors’ con�dence as the share prices appreciated across the board and index posted a gain of 2.307.09 points, or 10.98% to settle at 23,312.78 level in July.

After posting strong gain in July, KSE-100 faltered in August as investors continued to worry about ever-escalating Syrian crisis and tumbling regional markets. Stock market further pressured by a slew of disappointing and less-than-expected corporate earnings, falling foreign exchange reserves and high in�ation �gures for July. Moreover, concerns on a possible interest rate hike in the upcoming monetary policy announcement, potential spike in oil prices, decline in cement prices due to breakdown in price discipline, heavy foreign net selling and persistent depreciation in the rupee dragged the KSE-100 index down 1,151.93 points, or 4.94%, to 22,160.85 in August. �e index showed a mixed performance in September. In the �rst half of the month, the approval of the $6.64 billion loan package by IMF, the plans to privatize Pakistan International Airlines, strong foreign in�ows and the release of the IMF’s �rst tranche worth of $550 million helped lift the index to 23,639.97 on a closing basis. However, sentiment reversed towards the end of the month after the central bank’s decision to increase the rate of return on savings deposits to 6.5%. Moreover, steep decline in the value of Pakistani

rupee against the US dollar, constant repayments to IMF, a 50 basis points increase in the discount rate and heavy foreign net selling dragged the KSE-100 index down 328.17 points, or 1.48%, to 21,832.68 in September.

Mutual Fund Market:

�e total net assets decreased to Rs. 359.947 billion in the �rst quarter of FY14 versus Rs. 361.668 billion for the Q4FY13, a reduction of 0.48% quarter over quarter. �e open-end funds went up by 0.71% to Rs. 327.594 billion, pension funds went up by 9.67% to Rs. 5.288 billion and closed-end decreased by 14.23% to Rs. 27.064 billion.

Funds launched during the quarter Q1-FY14

Funds matured during the quarter Q1-FY14

Funds with changed structure/other features Energy Crisis: Causes and ImpactsBy Sara Aquil Walji, Research Analyst, HBL Asset Management

Energy is the cornerstone for any economy’s development and growth. �e current situation has worsened in Pakistan over the past few years and likely to continue if measures are not taken to mitigate the issue on a long term basis. �e gap between demand and supply has reached 6000MW resulting in scheduled and unscheduled load shedding, negatively a�ecting our industrial sector, hurting our exports and has even hampered the GDP growth rate by 2%. Subsidies to the power sector have steadily been increasing and form the biggest part of total subsidies amounting to around Rs 349,287mn (95% of the total subsidies) in FY 2012-13. �e new government has allocated Rs. 220,100mn to the power sector for the FY 2013-14 which is 91.5% of the total subsidy budget. (Source: Annual budget 2014) With recent emphasis on matters to resolve energy crisis and develop renewable and non-renewable sources of energy, it is worthwhile to note why energy crisis became as severe as it is now.

�e root of this crisis is that Pakistan’s electricity generation mix is highly skewed towards the most expensive kinds .�ere appears to be an almost inverse relationship between the sources of electricity that are most expensive to set and those that are most expensive to run. �e following chart depicts this relationship:

Source: Express Tribune �is highlights the fact why there is a heavy concentration toward

the construction of thermal power plants since they are relatively cheaper to build than hydropower plants. �e government has not dedicated enough funds for the development of hydropower projects which are the most expensive to build but cheapest to run on a per unit basis.Pakistan’s electricity generation is highly dependent on imported oil as almost $14.5bn worth of oil is imported each year which accounts for around 35% of electricity generation. Comparing Pakistan with India and Bangladesh reveals that Pakistan relies heavily on oil for electricity generation where as India uses coal, a relatively cheaper source for electricity generation and Bangladesh on the other hand allocates 73% of its electricity generation to gas.

Source: Economic Survey report for 2012-2013

With a prominent shift in recent years towards the use of thermal power stations instead of hydropower sources and a reduction in electricity generation from coal, Pakistan’s electricity costs ends up being more expensive than it needs to be and since the government has adopted a policy of uniform tari� across the country the Tari� Di�erential Subsidy owed by the Government of Pakistan on an annual basis has increased substantially.

Circular debt is another major concern hampering the growth of Pakistan’s economy. In simple words circular debt is the amount of

cash shortfall within the Central Power Purchasing Agency (CPPA) that it cannot pay to power supply companies. �is shortfall is the result of (a) the di�erence between the actual cost of providing electricity in relation to revenues realized by the power distribution companies (DISCOs) from sales to customers plus subsidies; and (b) insu�cient payments by the DISCOs to CPPA out of realized revenue as they give priority to their own cash �ow needs. (Source: USAID Report March 2103)

�is revenue shortfall cascades through the entire energy supply chain, from electricity generators to fuel suppliers, re�ners, and producers; resulting in a shortage of fuel supply to the public sector thermal generating companies (GENCOs), a reduction in power generated by Independent Power Producers (IPPs), and an increases in load shedding.

According to the report published by the USAID in March 2013, circular debt amounts to Rs872bn which is actually 4% of GDP. According to Pakistan’s Economic Survey report for 2012-2013, there is a strong relationship between GDP growth rate and electricity growth as shown in the �gure below. It can be easily deduced that periods of low or negative electricity growth have witnessed low GDP growth rate, while periods where electricity growth picked up there is increase in GDP growth rate.

�is comes as no surprise, since industrial output is heavily dependent on the amount of electricity delivered to them. Continuous power breakdowns prevented industries from operating at their full capacity level. �e power outages have obstructed the viability of the textile industry as exporters were unable to meet their

commitments. During July-March 2012-13, foreign exchange earnings through exports of synthetic textile fabrics and woolen industry showing a decline of 25.3% and 5.1% respectively as compared to last year. During the period under review even in quantity term also recorded a decline of 30% and 15.8% respectively.

Coupled with an ine�cient system and expensive fuel mix, power theft is another major issue faced by Pakistanis. It is interesting to note that annual revenue collection e�ciency was estimated to be around 87%; however that 13% of lost e�ciency has a �nancial impact of Rs 86bn which is equivalent to 41 days of furnace oil costs for thermal power plants. �e following �gure shows the percentage of bills that were uncollected in 2012. �e e�ciency of di�erent DISCOs is disproportionate in revenue collection. �is essentially leads to the inclusion of the cost of power theft in the power tari�, meaning that the honest payers also bear the cost of those that steal.

Power theft is not only committed by normal residents but the main defaulters are the government institutions themselves. �e government owns around 51% of the uncollected bills which amounts to Rs 118bn out of the uncollected revenue receipts of Rs 386bn. In my opinion, this the amount which causes the discrepancy between the amount of RS500.3bn to be injected to resolve the circular debt issue and �gure of Rs 872.41bn since the government has a proposal to o�set provisional dues via a �scal adjuster. Due to a growing economy, Pakistan’s energy needs have more than doubled in the past 15 years. Energy shortages have far devastating

e�ects on our economy. Not only does it cause civil disturbances on a small scale but it a�ects our GDP on a larger note. Injecting money into the chain will only resolve the issue on a temporary basis. �ese challenges require a multi-prong approach that would address energy shortages in the immediate future and help the country build longer term energy su�ciency.

�ere needs to be a shift away from thermal power to alternative sources of energy which are not only cheaper but also environmentally friendly. Pakistan has large untapped renewable resources such as water, sun and wind and recently the government has taken keen interest on the development of hydro power projects and Neelum Jhelum Hydroelectric Project is one of the many projects which the new government has started which will approximately add 5.15bn units of electricity annually. Moreover, an e�ective system of governance must be in place to curb theft, recuperate dues and enforce policies.

�e Importance of Asset Allocation in attaining Optimal Returns

By Yamna Hassan, Asst. Manager-Business DevelopmentLakson Investments

“Tis the part of a wise man to keep himself today for tomorrow, and not venture all his eggs in one basket.” – Miguel de Cervantes, Don Quixote de la Mancha, 1605.

�e afore-mentioned quote indicates that along with being a great writer, Cervantes would have also proved to be a wise investor.

Investment related decisions are preceded by de�ning a proper Asset Allocation plan. According to recent research, the Asset Allocation decision is responsible for 91.5 percent of the variation between returns on di�erent portfolios. Given the importance of Asset Allocation, it has attained a center stage in any investment decision.

Asset Allocation is mainly important for two de�nite reasons. �e �rst reason pertains to portfolio design; variation in portfolio designs can lead to some investment decisions being winners while the rest being losers, and it is believed that if a portfolio is thoughtfully constructed and contains an optimal mix of securities that perform di�erently from each other (i.e they have little correlation in between them), chances of this portfolio yielding a more stable return is higher. �is is because if some securities in a portfolio are inconsistent and volatile, other, more stable securities can nullify the inconsistency of the entire portfolio, hence stabilizing the yield pattern.

�e second reason pertains to the vision of the investor. Asset allocation allows an investor to �nancially plan for his long-term and short-term goals and avoid impulsive reactions. We will subsequently discuss this aspect of Asset Allocation.

We can divide the Asset Allocation decision into two simple steps as discussed below:

Step 1: Asset Allocation An Asset Allocation strategy can be devised based on the investor’s risk assessment, �nancial goals and return targets. It is the most fundamental step of an investment decision and involves determining an ideal mix of stocks, bonds, cash and other securities in a way such that the portfolio yields a return which best suits an investor’s need. �ere is always a downside of investing too much in bonds or cash as that might certify stable but lower returns. In the same way, too much investment in stocks might lead to portfolio volatility. �erefore, in order to meet your requirements, or keep pace with in�ation, you need to plan an ideal arrangement of securities for your portfolio.

Step 2: Diversi�cationWhile the �rst step bears upon the idea of portfolio construction, this step is linked to the proper dissemination of your assets in a way such that your portfolio is exposed to many di�erent segments of the market, some of which perform independently of the others. Proper diversi�cation of your portfolio can lead to higher and more stable returns.

As mentioned before, the e�ect of diversi�cation is most noticeable when instruments have very little interrelation between them. However, it was easier to build this sort of a portfolio previously than it is today. �is is because roughly over the past 10 years, �nancial markets have become increasingly interrelated and complex. Let us also not ignore the fact that during the 2008 �nancial trouble, most assets tended to perform similarly, leading us to believe in the proposition that most assets are conducive to a similar behavior in times of crisis and instability. �e �gure below shows ways of diversifying a portfolio and entering into newer and assorted mix of investment vehicles.

FIGURE 1:

Figure shows ways of diversifying a portfolio.

Institutions that do not pay requisite importance to the Asset Allocation decision might end up damaging their returns. Usually, institutions are advised to invest in a 60:40 ratio (Stocks: �xed income instruments) to remain on the safe side. Whereas, individuals are recommended to invest in an investment spectrum ranging from 100 percent stocks to 100 percent bonds depending on their separate variable characteristics. However, the Asset Allocation decision is dependent on several other factors and cannot be generalized for di�erent investors.

Following are a few, newer and e�cient ways that have now been developed and can be used for attaining optimal asset allocation:

Mean Variance Optimization

Mean Variance Optimization is a quantitative technique that can be used to calculate the trade-o� between maximum expected return and risk tolerance. �is technique has gained popularity over time because in recent times, the technique is applied on an asset class level as opposed to being applied only to portfolios of individual stocks previously.

ARTICLES�e development of Mean Variance Optimization has not only bene�tted institutional investors but has resulted in a breakthrough for retail brokerage houses as well, which, prior to this development were restricted on their advisory role to the investors. However, recently, they are proposing a greater degree of passive security and more thoughtful asset allocation recommendations to their investors. �is has become possible by using optimization and aiming to attain a favorable position with maximum expected return, minimal risk, or both.

Moreover, a few re�ned approaches taken from utility theory and behavioral economics can be deployed to develop polls or surveys that can authentically gauge an individual’s risk preferences.

Pension funds have also been familiarized with Optimization. Such funds take into account the reciprocity of both assets and liabilities and not only the assets unlike other funds. �e objective of Asset Allocation for these funds is to amplify the fund surplus i.e liabilities subtracted from assets for a stated degree of risk tolerance.

Tactical Asset AllocationTactical asset allocation is the process of adjusting a particular portfolio based on changes in the market value of assets contained in that portfolio. �e technique is quite dynamic and involves deviation from the strategic asset allocation when an investor’s short-term foresight is not aligned with his long term foresight used to develop a strategic asset allocation plan and precise short-term predictions on part of the investor can lead to better returns.

Pragmatically speaking, Tactical Asset Allocation models tend to recommend contrarian trades, that is, they recommend purchasing an asset as its current market value drops and vice versa. �us, tactical Asset Allocation involves perpetually arranging your portfolio based on your needs and changes in the market. One consequence of Tactical Asset Allocation is that by overweighting certain assets during certain times and underweighting others, the portfolio is riskier because of its reduced diversi�cation. �us, to

o�set this additional risk factor, this strategy would need to generate above market returns. �e notion, whether Tactical Asset Allocation Models have achieved this is still a matter of rumination and study but because the probable returns from successful Tactical Asset Allocation would be large, researchers will keep inspecting, and investors won’t cease to be on the look out for their discoveries.

Insured Asset Allocation�is strategy is similar to a portfolio insurance strategy and is a mirror image of the Tactical Asset Allocation strategy. With this strategy, a base portfolio parameter is �xed and the value of the portfolio is not allowed to fall below this base parameter. As long as the portfolio achieves a return above this parameter, you actively to try to increase the portfolio value as much as possible. If, however, the portfolio ever drops to below the base value, investment in risk-free securities enables the base value to become �xed.

�e main target audiences for this approach are risk-averse investors who desire a certain level of active portfolio management and also covet the protection of �xing a certi�ed minimum return below which the portfolio is not allowed to decline. For instance, this approach is best for an investor who has planned a nominal lifestyle for himself after retirement.

Asset Allocation & Uncertain Times�e importance of active portfolio management and wise asset allocation strategy has been reiterated enough. But at the brink of serious economic uncertainty, expectation for stock market returns is somewhat muted. �erefore, it is believed that in such a situation, a dynamic asset allocation plan should come into play for the advantage of certain clients.

Dynamic Asset Allocation uses a long term strategic Asset Allocation strategy as its foundation. Alternate investments can be added to the core portfolio for the sake of complementing it. It is even better, if these investments include segments which yield a higher return and bear little interdependence, so as to achieve a greater level of diversi�cation.

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page 15 of 24 mufap quarterly newsletter

Besides, dynamic Asset Allocation strategies can also be accompanied by �exible investment strategies; tactical actions that are short-term in nature and aim to bank on perceived market opportunities. If 10-20% of your assets are allocated for such investments, your portfolio can be expected to react better in times of changing trends and conditions.

Asset allocation is evolving past a traditional “purchase and retain” dogma. Whilst this might not suit all clients, exercising a dynamic asset allocation plan can create a portfolio better able to handle uncertain market environments. Not to forget the fact that a solid strategic asset allocation plan remains the core strategy behind any tactical asset allocation strategy.

Asset Allocation & the local scenarioWith interest rates in Pakistan consistently hovering above 10 percent for the past �ve years, anyone would expect Pakistanis to be encouraged enough to save and reap bene�ts of higher returns. However, reality states that Pakistan actually stands out to re�ect one of the lowest savings in the region. Given the fact that majority of Pakistanis are not so keen on investing mainly because their expenditures on necessities do not leave any room for savings or so for other reasons, there is a chunk of people who are inclined in saving for a better future and lifestyle.

With growth of urban nuclear families, educated middle to upper middle class is inspirited to plan properly for a child’s education, health and future life. Reasons for investment in Pakistani society vary from a child’s education to his marriage, from being cushioned against the toils of post-retirement life to maternity expenditures. Young professionals may want to invest as a means to generate seed capital for their potential business idea or to live their dreams of traveling or wayfaring.

Reasons for investing are many. With di�erent individuals and di�erent investment objectives in mind, the asset allocation needs of these investors must be customized accordingly.

Asset Allocation & Financial PlanningOnce you are done with choosing your model for Asset Allocation, the �nal stage is to test this model by contextualizing it with a precise �nancial plan. It might be easy for an investor to choose which Asset Allocation plan will provide him with the best possible returns but the investor should also �gure out a way to determine that expected return and also estimate the trade-o� for that higher return potential.

A well-concocted �nancial plan will guide the investor out of this bewilderment. First, it will determine what level of projected investment return is necessary to allow you to meet your lifestyle goals, which can help lead you to the right mix of stocks, bonds and cash. Second, the plan will evaluate the impact of the portfolio risk associated with that mix.

Traditionally, �nancial planning models focused on expected return and neglected the variability of outcomes that is associated with increased volatility. With the introduction of probability-based planning tools, the investor can foresee the e�ect of risk on their investment portfolios, they can vary the amount of risk and can study their corresponding returns. For example a portfolio bearing higher risk may yield a higher return but it also has a probability of falling far short beneath their targets.

When using an asset allocation approach to designing a portfolio, it is important to not focus just on the expected return of that portfolio. �e risk associated with an increasing, or decreasing, portfolio return is just as important to the success of an investment strategy.

Asset Allocation & �e Future

Most forecasters fall into two divisions. Forecasters in the �rst division are eager to predict that the future will closely mirror the recent past. �eir ideals are those generals who are always preparing to �ght the last war. Forecasters in the second division rely heavily

upon the adage that the only constant is change itself. Proponents of this school of thought usually don’t know what to expect, but are quite sure it will be nothing like anything we’ve seen before. �ese individuals do realize the problems of delineating the future of this area.

We should view the future of asset allocation through lenses borrowed from both divisions. �at is, certain aspects of asset allocation today will continue to be recognizable for the years to come. To be more precise, the goals and importance of asset allocation will not change, but the mechanisms by which investors seek to achieve those goals will be new.

�e goal of the asset allocation decision, was, is, and will be to select a combination of assets that will generate a return su�ciently high and safe so as to o�set some future liability. It is also safe to say that asset allocation decisions will have a continuing large role in explaining portfolio returns.

Industry-wide - Net Assets (PKR million)

Net Assets - Open End Funds (PKR million)

Net Assets - Closed End Funds (PKR million)

Net Assets - Pension Schemes (PKR million)

Sales (PKR million) Redemptions (PKR million) Net Sales (PKR million)

Open End Funds' Return** Closed End Funds' Return**

General Pension Schemes Return**

Islamic Pension Schemes Return**

Meeting of the Board of Directors

In order to ensure that the Board of Directors ful�ls the duties and responsibilities conferred by the members of MUFAP, the Board conducts meetings on a regular basis to make immediate and prudent decisions. �e Board of Directors held three meetings during the quarter Jul-Sep 2013.

�e activities undertaken by Board are as follows:

Proposed amendments in the de�nition of Related Parties in Restricted List of Code for Distributors

�e Board deliberated in detail on the matter of proposed

amendments in the de�nition of Related Parties in the Restricted List of Code for Distributors. After careful consideration of the impacts that the amendments may entail, it was decided that all individuals (namely employees, directors, sponsors of the RSPs) should be excluded from the de�nition of Related Parties. �e revised de�nition is applicable to all new investments brought in on or after July 16, 2013 and is not applicable to existing investments made by or before July 15, 2013.

Valuation of GOP Ijarah Sukuk

�e Board recommended that AMCs should use ‘PKISRV’ quoted on Reuters as the relevant price to value the GOP Ijarah Sukuks to determine net assets of CIS under their management, which the SECP approved in September.

Meetings of the Committees

MUFAP Committees held many discussions to make important, well planned proposals on behalf of industry. �e following table presents the number of meetings held during the quarter Jul-Sep’13.

Technical Committee - VPS

�e VPS – Technical Committee held extensive discussions to discuss the dissimilar taxation and operational practices being adopted by di�erent VPS Managers. �e VPS Committee constituted a Sub-Committee, involving a representative from each VPS Manager, to draw up recommendations for the tax treatment. �e Committee also engaged Senior Tax expert, Mr. Shabbar Zaidi on the matter and has requested for clari�cation from FBR on one of the matters.

Meeting with NCCPL A meeting was held between operations sta� of AMCs and NCCPL representatives on July 22, 2013 to evaluate the mechanics and possible data sharing from AMCs to NCCPL for netting of CGT. It was decided that NCCPL would develop a concept paper covering brief mechanism of centralized CGT collection to AMCs for their review and comments.

Elections to elect Directors/Executive Committee Members of MUFAP for the year 2013 / 2014

As required under the Trade Organizations Rules, 2007, MUFAP is required to hold its elections each year to elect Directors against the vacancies arising on account of completion of two-year tenure of some Directors. Board members are elected for a two-year term.

�e retiring Directors on the completion of their two year tenure on September 30, 2013 are: 1. Mr. Adnan Siddiqui (Resigned August-2013)2. Mr. Amer Maqbool 3. Mr. Imran Azim 4. Mr. Mir Muhammad Ali 5. Mr. Nihal Cassim

�e continuing Directors of MUFAP for the year 2013/ 2014 are: 1. Dr. Amjad Waheed 2. Mr. Imran Motiwala 3. Mr. Mir Adil Rashid 4. Mr. Rashid Mansur 5. Ms Maheen Rahman6. Ms Hina Ghazanfar (on reserved seat for women)

In addition, Mr. Rehan N. Shaikh will serve on the Board as provided under Rule 23(5)(d) of the Trade Organization Rules, 2007. At the Extra Ordinary General Meeting on September 26, 2013, MUFAP announced the appointment, by virtue of elections, of the following directors to the Board, namely:1. Mr. Farid Ahmed Khan 2. Mr. M. Habib-ur-Rahman 3. Mr. Mohammad Shoaib 4. Mr. Yasir Qadri 5. Mr. Enamullah Khan

New Board of Directors

�e new Board of Directors of MUFAP at its �rst meeting held on October 1, 2013 elected Dr. Amjad Waheed as Chairman, Mr. Mohammad Shoaib as Senior Vice Chairman and Mr. Farid Ahmed Khan as Vice Chairman MUFAP for the year 2013-2014.�e Board of Directors of MUFAP for the 2013-14 term is as follows:

1) Dr. Amjad Waheed - Chairman; 2) Mr. Mohammad Shoaib - Senior Vice Chairman; 3) Mr. Farid Ahmed Khan - Vice Chairman;4) Mr. Rehan N. Shaikh;5) Mr. Rashid Mansur;6) Mr. M. Habib-ur-Rahman;7) Mr. Yasir Qadri8) Mr. Imran Motiwala;9) Ms Hina Ghazanfar;10) Ms Maheen Rahman;11) Mr. Mir Adil Rashid;12) Mr. Enamullah Khan; and13) Ms Mashmooma Z. Majeed - Chief Executive

Chairman Dr. Amjad Waheed, CFA

Dr. Amjad Waheed holds a doctorate in Investments & Finance from Southern Illinois University, USA and is also a Chartered Financial Analyst. For the last 7 years he is CEO of NBP Fullerton Asset Management Ltd (NAFA), which is a subsidiary of National Bank of Pakistan, with Fullerton Fund Management Company of Singapore as the other joint venture partner. NAFA is presently managing fourteen mutual funds and several portfolios with about Rs 45 billion invested in these funds. NAFA is among the largest Asset Management Companies in Pakistan today.

Before joining NAFA, Dr. Waheed was Head of Equity Mutual Funds & Portfolios at Riyad Bank, Saudi Arabia, for about 5 years where he was managing US$ 7.5 billion invested in 22 mutual funds. Prior to that Dr. Waheed was Head of Investments at NIT,

and Chief Operation O�cer of FC-ABN AMRO Equities for several years. Before moving back to Pakistan, Dr. Waheed was Assistant Professor of Finance at Tennessee State University, USA and has published several articles in top journals of the world such as Journal of Banking & Finance and Financial and Financial Management.Dr. Waheed has served on the Board of various companies including Siemens, Nishat Mills, PICIC, Askari Bank, Millat Tractors, Fauji Fertilizer, Pakitstan Tobacco Company, Treet Corporation, Gul Ahmed Textile, Bata Pakistan.

Senior Vice Chairman Mr. Mohammad Shoaib, CFA

Mr. Mohammad Shoaib, CFA is the Chief Executive of Al Meezan Investment Management Ltd. He has played a key role in setting up the company and has been associated with it since inception. He is a highly quali�ed and seasoned professional with 23 years experience in capital markets. He has to his credit many accolades and awards, the most signi�cant of them being the "Most In�uential CFA charter holder" awarded by CFA Institute in 2006.

Mr. Shoaib holds an MBA degree from IBA besides being a Chartered Financial Analyst (CFA) charter holder. He has to his credit the honor of being the founder and �rst president of CFA Association of Pakistan, a member society of CFA Institute. He has been active participant in the Islamic �nance and asset management for the last 10 years. In this respect, he has also actively participated as a speaker and panelist in various international and domestic seminars, conferences and workshops.

Mr. Shoaib has also served in voluntary capacity at di�erent domestic and international institutions. He has served as a Director on the Board of Karachi Stock Exchange and Vice Chairman on the Board of Mutual Funds Association of Pakistan. He is currently serving on the Board of Directors of Pakistan Institute of Corporate Governance and Institute of Capital Markets. He has also served on various global and regional committees of CFA Institute including Asia Paci�c Advocacy Committee, Global Task Force on Corporate

Governance, GIPS Regional Council and Asset Manager Code Advisory Committee. He has also had the honour to represent over 16,000 charterholders in Asia Paci�c Region as their representative on the Presidents' Council of CFA Institute.

Vice Chairman Mr. Farid Ahmed Khan, CFA

Mr. Farid Ahmed Khan, CFA is the CEO of ABL Asset Management. He has been involved with capital markets for over 18 years and has a broad-based, global experience with bulge bracket �rms in Asset Management, Investment Banking, Investment Research and Sales, Business Development & International Project Finance. He joined ABL AMC from Credit Suisse, where he was the Country Manager of Credit Suisse Pakistan. Prior to that, he worked for MCB, initially as Head of Investment Banking Group and later as the CEO of MCB Asset Management. Mr. Khan has extensive experience outside Pakistan, having worked at Morgan Stanley, ING Barings Securities and CLSA Emerging Markets in Kuala Lumpur, London and Istanbul in a variety of senior positions. He holds an MBA in Finance from IBA, Karachi and got his CFA quali�cation in 1998.

New Committees

MUFAP Board elected its Professional Committees, Chairperson and Vice-Chairperson of each Committee for the year 2013-14. �e list of Committees, their Chairperson and Vice-Chairperson is as follows:

SECP forms Shariah Advisory Board

SECP constituted a Shariah Advisory Board (SAB) to harmonize the Shariah interpretations and strengthen the regulatory and supervisory oversight of Islamic �nancial institutions (IFIs) and Islamic capital markets (ICMs) in Pakistan. It will also advise the Commission on the Shariah-compliance aspects of various products launched and or the processes being adopted by the regulated entities. It will also provide guidance for issuance of new laws, rules and regulations for e�ective monitoring and supervision of Islamic Financial Products and to suggest ways and means for development of IFIs and ICMs in the country.

Money Market

To meet the challenges of maintaining stability in the foreign exchange market and controlling high growth in money supply, SBP decided to gradually decrease the outstanding amount of liquidity injections. Since the beginning of FY14, interbank market liquidity conditions have considerably eased primarily due to substantial increase in the pace of government borrowing from the SBP. In fact, SBP mopped up Rs. 1,556.45 billion and injected Rs. 630.70 billion during Q1-FY14.

In terms of controlling growth in money supply, however, SBP’s e�orts of curtailing liquidity injections did not experience much success as these were o�set by an increase in direct �scal borrowings from the SBP. �e increase of Rs. 1,446 billion in budgetary borrowings from the banking system during FY13 was almost Rs. 1 trillion higher than the original target and was even higher than the total expansion in M2. Deviation of this scale has signi�cantly constrained e�ective monetary management, disrupted �nancial intermediation in the economy, and has led to a sharp increase in domestic debt. Showing a growth of 24.6% in FY13, the stock of government’s domestic debt has reached Rs. 9.5 trillion as of end-June 2013. Similarly, a considerable increase in public debt to revenue ratio re�ects weak repayment capacity of the government. �e acceleration in �scal borrowings from the SBP during H2-FY13, Rs. 714 billion, and Q1-FY14 up till 30th August 2013, Rs. 547 billion, is particularly worrisome. �e inability to raise the tax-GDP ratio is the fundamental source of large �scal de�cits, high borrowings, and rising debt. Although there has been a consistent gap between Federal Board of Revenue’s (FBR) budget targets and actual outcomes in the last few years, the gap of Rs. 445 billion in FY13 was exceptionally high. In fact, this is more than the cumulative shortfall of Rs. 349 billion during the last �ve years.

On the external front, stress in the external account has gradually increased with every passing month of 2013 due to shrinking net capital and �nancial �ows and high loan repayments to the IMF.

While the former was only $517 million or 0.2 percent of GDP, the latter increased to $3 billion in FY13. As a result, despite reduction in the external current account de�cit by about half, to $2.3 billion or 1.0 percent of GDP, the SBP’s foreign exchange reserves declined to $6 billion by end-June 2013 from $10.8 billion at the beginning of FY13. �ese stand at $5.2 billion as on 6th September, 2013 after receiving $544.5 million under the new IMF program. Despite pressures and speculations of a drop in the value of the Pak rupee the foreign exchange market has largely remained stable in FY13. However, since the beginning of FY14 the rupee has depreciated by 5.0 percent as of 12th September 2013.

�e year-on-year CPI based in�ation rate was recorded at 8.3% in July 2013, then to 8.55% in August 2013, however dipped down to 7.39% in September 2013.�ough CPI In�ation remained within single digit, however, it witnessed an upward trend as it increased to 7.39 percent in September 2013 compared to 5.85 percent in June 2013 and 6.6 percent in March 2013. �e impact of upward adjustments in energy prices and an increase in the GST together with the removal of certain exemptions put pressure on in�ation.In order to counter in�ationary expectations, SBP raised the discount rate by 50 basis points to 9.5 percent with e�ect from September 16, 2013.

Movement in KIBOR

Treasury Bills:

A total of 6 T-bill auctions were held by SBP during the quarter in which a total amount of Rs. 1,348.88 billion was raised. Since the beginning of FY14, market’s preference for shorter tenor T-Bills has increased as about 83% of the bank’s total o�ers in recent T-Bill auctions were concentrated in 3-month bills.

T-Bill Auctions (Amount in PKR billion; rates in %)

Pakistan Investment Bonds

�e accepted amount in the PIB auctions during Q1-FY14 fell short of the target .

PIB Auctions (Yields in % and Face Value in PKR billion)

Debt Market

�e table below summarizes the TOP 15 trades of TFCs/Sukuk on the basis of Face value during the Q1-FY14:

Equity Market

KSE-100 index made a strong start to the �scal year 2014, as the index gained 826.99 points, or 3.94%, to stand at 21,832.68 points during the �rst three months of FY14. During the period, index struggled to cross the 23,000 points level and made a high of 23,776.22 on a closing basis. Stock market began the �rst month of �scal year 2014 with a strong rally, overcoming jitters stemming from treason proceedings against former president General (retd) Pervez Musharraf and slowdown in global markets. �e government’s successful negotiations with IMF for a $5.3 billion loan, resolution of circular debt by issuing treasury bills and bonds and anticipation of strong corporate earnings for the quarter ended June 30 buoyed investors’ con�dence as the share prices appreciated across the board and index posted a gain of 2.307.09 points, or 10.98% to settle at 23,312.78 level in July.

After posting strong gain in July, KSE-100 faltered in August as investors continued to worry about ever-escalating Syrian crisis and tumbling regional markets. Stock market further pressured by a slew of disappointing and less-than-expected corporate earnings, falling foreign exchange reserves and high in�ation �gures for July. Moreover, concerns on a possible interest rate hike in the upcoming monetary policy announcement, potential spike in oil prices, decline in cement prices due to breakdown in price discipline, heavy foreign net selling and persistent depreciation in the rupee dragged the KSE-100 index down 1,151.93 points, or 4.94%, to 22,160.85 in August. �e index showed a mixed performance in September. In the �rst half of the month, the approval of the $6.64 billion loan package by IMF, the plans to privatize Pakistan International Airlines, strong foreign in�ows and the release of the IMF’s �rst tranche worth of $550 million helped lift the index to 23,639.97 on a closing basis. However, sentiment reversed towards the end of the month after the central bank’s decision to increase the rate of return on savings deposits to 6.5%. Moreover, steep decline in the value of Pakistani

rupee against the US dollar, constant repayments to IMF, a 50 basis points increase in the discount rate and heavy foreign net selling dragged the KSE-100 index down 328.17 points, or 1.48%, to 21,832.68 in September.

Mutual Fund Market:

�e total net assets decreased to Rs. 359.947 billion in the �rst quarter of FY14 versus Rs. 361.668 billion for the Q4FY13, a reduction of 0.48% quarter over quarter. �e open-end funds went up by 0.71% to Rs. 327.594 billion, pension funds went up by 9.67% to Rs. 5.288 billion and closed-end decreased by 14.23% to Rs. 27.064 billion.

Funds launched during the quarter Q1-FY14

Funds matured during the quarter Q1-FY14

Funds with changed structure/other features Energy Crisis: Causes and ImpactsBy Sara Aquil Walji, Research Analyst, HBL Asset Management

Energy is the cornerstone for any economy’s development and growth. �e current situation has worsened in Pakistan over the past few years and likely to continue if measures are not taken to mitigate the issue on a long term basis. �e gap between demand and supply has reached 6000MW resulting in scheduled and unscheduled load shedding, negatively a�ecting our industrial sector, hurting our exports and has even hampered the GDP growth rate by 2%. Subsidies to the power sector have steadily been increasing and form the biggest part of total subsidies amounting to around Rs 349,287mn (95% of the total subsidies) in FY 2012-13. �e new government has allocated Rs. 220,100mn to the power sector for the FY 2013-14 which is 91.5% of the total subsidy budget. (Source: Annual budget 2014) With recent emphasis on matters to resolve energy crisis and develop renewable and non-renewable sources of energy, it is worthwhile to note why energy crisis became as severe as it is now.

�e root of this crisis is that Pakistan’s electricity generation mix is highly skewed towards the most expensive kinds .�ere appears to be an almost inverse relationship between the sources of electricity that are most expensive to set and those that are most expensive to run. �e following chart depicts this relationship:

Source: Express Tribune �is highlights the fact why there is a heavy concentration toward

the construction of thermal power plants since they are relatively cheaper to build than hydropower plants. �e government has not dedicated enough funds for the development of hydropower projects which are the most expensive to build but cheapest to run on a per unit basis.Pakistan’s electricity generation is highly dependent on imported oil as almost $14.5bn worth of oil is imported each year which accounts for around 35% of electricity generation. Comparing Pakistan with India and Bangladesh reveals that Pakistan relies heavily on oil for electricity generation where as India uses coal, a relatively cheaper source for electricity generation and Bangladesh on the other hand allocates 73% of its electricity generation to gas.

Source: Economic Survey report for 2012-2013

With a prominent shift in recent years towards the use of thermal power stations instead of hydropower sources and a reduction in electricity generation from coal, Pakistan’s electricity costs ends up being more expensive than it needs to be and since the government has adopted a policy of uniform tari� across the country the Tari� Di�erential Subsidy owed by the Government of Pakistan on an annual basis has increased substantially.

Circular debt is another major concern hampering the growth of Pakistan’s economy. In simple words circular debt is the amount of

cash shortfall within the Central Power Purchasing Agency (CPPA) that it cannot pay to power supply companies. �is shortfall is the result of (a) the di�erence between the actual cost of providing electricity in relation to revenues realized by the power distribution companies (DISCOs) from sales to customers plus subsidies; and (b) insu�cient payments by the DISCOs to CPPA out of realized revenue as they give priority to their own cash �ow needs. (Source: USAID Report March 2103)

�is revenue shortfall cascades through the entire energy supply chain, from electricity generators to fuel suppliers, re�ners, and producers; resulting in a shortage of fuel supply to the public sector thermal generating companies (GENCOs), a reduction in power generated by Independent Power Producers (IPPs), and an increases in load shedding.

According to the report published by the USAID in March 2013, circular debt amounts to Rs872bn which is actually 4% of GDP. According to Pakistan’s Economic Survey report for 2012-2013, there is a strong relationship between GDP growth rate and electricity growth as shown in the �gure below. It can be easily deduced that periods of low or negative electricity growth have witnessed low GDP growth rate, while periods where electricity growth picked up there is increase in GDP growth rate.

�is comes as no surprise, since industrial output is heavily dependent on the amount of electricity delivered to them. Continuous power breakdowns prevented industries from operating at their full capacity level. �e power outages have obstructed the viability of the textile industry as exporters were unable to meet their

commitments. During July-March 2012-13, foreign exchange earnings through exports of synthetic textile fabrics and woolen industry showing a decline of 25.3% and 5.1% respectively as compared to last year. During the period under review even in quantity term also recorded a decline of 30% and 15.8% respectively.

Coupled with an ine�cient system and expensive fuel mix, power theft is another major issue faced by Pakistanis. It is interesting to note that annual revenue collection e�ciency was estimated to be around 87%; however that 13% of lost e�ciency has a �nancial impact of Rs 86bn which is equivalent to 41 days of furnace oil costs for thermal power plants. �e following �gure shows the percentage of bills that were uncollected in 2012. �e e�ciency of di�erent DISCOs is disproportionate in revenue collection. �is essentially leads to the inclusion of the cost of power theft in the power tari�, meaning that the honest payers also bear the cost of those that steal.

Power theft is not only committed by normal residents but the main defaulters are the government institutions themselves. �e government owns around 51% of the uncollected bills which amounts to Rs 118bn out of the uncollected revenue receipts of Rs 386bn. In my opinion, this the amount which causes the discrepancy between the amount of RS500.3bn to be injected to resolve the circular debt issue and �gure of Rs 872.41bn since the government has a proposal to o�set provisional dues via a �scal adjuster. Due to a growing economy, Pakistan’s energy needs have more than doubled in the past 15 years. Energy shortages have far devastating

e�ects on our economy. Not only does it cause civil disturbances on a small scale but it a�ects our GDP on a larger note. Injecting money into the chain will only resolve the issue on a temporary basis. �ese challenges require a multi-prong approach that would address energy shortages in the immediate future and help the country build longer term energy su�ciency.

�ere needs to be a shift away from thermal power to alternative sources of energy which are not only cheaper but also environmentally friendly. Pakistan has large untapped renewable resources such as water, sun and wind and recently the government has taken keen interest on the development of hydro power projects and Neelum Jhelum Hydroelectric Project is one of the many projects which the new government has started which will approximately add 5.15bn units of electricity annually. Moreover, an e�ective system of governance must be in place to curb theft, recuperate dues and enforce policies.

�e Importance of Asset Allocation in attaining Optimal Returns

By Yamna Hassan, Asst. Manager-Business DevelopmentLakson Investments

“Tis the part of a wise man to keep himself today for tomorrow, and not venture all his eggs in one basket.” – Miguel de Cervantes, Don Quixote de la Mancha, 1605.

�e afore-mentioned quote indicates that along with being a great writer, Cervantes would have also proved to be a wise investor.

Investment related decisions are preceded by de�ning a proper Asset Allocation plan. According to recent research, the Asset Allocation decision is responsible for 91.5 percent of the variation between returns on di�erent portfolios. Given the importance of Asset Allocation, it has attained a center stage in any investment decision.

Asset Allocation is mainly important for two de�nite reasons. �e �rst reason pertains to portfolio design; variation in portfolio designs can lead to some investment decisions being winners while the rest being losers, and it is believed that if a portfolio is thoughtfully constructed and contains an optimal mix of securities that perform di�erently from each other (i.e they have little correlation in between them), chances of this portfolio yielding a more stable return is higher. �is is because if some securities in a portfolio are inconsistent and volatile, other, more stable securities can nullify the inconsistency of the entire portfolio, hence stabilizing the yield pattern.

�e second reason pertains to the vision of the investor. Asset allocation allows an investor to �nancially plan for his long-term and short-term goals and avoid impulsive reactions. We will subsequently discuss this aspect of Asset Allocation.

We can divide the Asset Allocation decision into two simple steps as discussed below:

Step 1: Asset Allocation An Asset Allocation strategy can be devised based on the investor’s risk assessment, �nancial goals and return targets. It is the most fundamental step of an investment decision and involves determining an ideal mix of stocks, bonds, cash and other securities in a way such that the portfolio yields a return which best suits an investor’s need. �ere is always a downside of investing too much in bonds or cash as that might certify stable but lower returns. In the same way, too much investment in stocks might lead to portfolio volatility. �erefore, in order to meet your requirements, or keep pace with in�ation, you need to plan an ideal arrangement of securities for your portfolio.

Step 2: Diversi�cationWhile the �rst step bears upon the idea of portfolio construction, this step is linked to the proper dissemination of your assets in a way such that your portfolio is exposed to many di�erent segments of the market, some of which perform independently of the others. Proper diversi�cation of your portfolio can lead to higher and more stable returns.

As mentioned before, the e�ect of diversi�cation is most noticeable when instruments have very little interrelation between them. However, it was easier to build this sort of a portfolio previously than it is today. �is is because roughly over the past 10 years, �nancial markets have become increasingly interrelated and complex. Let us also not ignore the fact that during the 2008 �nancial trouble, most assets tended to perform similarly, leading us to believe in the proposition that most assets are conducive to a similar behavior in times of crisis and instability. �e �gure below shows ways of diversifying a portfolio and entering into newer and assorted mix of investment vehicles.

FIGURE 1:

Figure shows ways of diversifying a portfolio.

Institutions that do not pay requisite importance to the Asset Allocation decision might end up damaging their returns. Usually, institutions are advised to invest in a 60:40 ratio (Stocks: �xed income instruments) to remain on the safe side. Whereas, individuals are recommended to invest in an investment spectrum ranging from 100 percent stocks to 100 percent bonds depending on their separate variable characteristics. However, the Asset Allocation decision is dependent on several other factors and cannot be generalized for di�erent investors.

Following are a few, newer and e�cient ways that have now been developed and can be used for attaining optimal asset allocation:

Mean Variance Optimization

Mean Variance Optimization is a quantitative technique that can be used to calculate the trade-o� between maximum expected return and risk tolerance. �is technique has gained popularity over time because in recent times, the technique is applied on an asset class level as opposed to being applied only to portfolios of individual stocks previously.

�e development of Mean Variance Optimization has not only bene�tted institutional investors but has resulted in a breakthrough for retail brokerage houses as well, which, prior to this development were restricted on their advisory role to the investors. However, recently, they are proposing a greater degree of passive security and more thoughtful asset allocation recommendations to their investors. �is has become possible by using optimization and aiming to attain a favorable position with maximum expected return, minimal risk, or both.

Moreover, a few re�ned approaches taken from utility theory and behavioral economics can be deployed to develop polls or surveys that can authentically gauge an individual’s risk preferences.

Pension funds have also been familiarized with Optimization. Such funds take into account the reciprocity of both assets and liabilities and not only the assets unlike other funds. �e objective of Asset Allocation for these funds is to amplify the fund surplus i.e liabilities subtracted from assets for a stated degree of risk tolerance.

Tactical Asset AllocationTactical asset allocation is the process of adjusting a particular portfolio based on changes in the market value of assets contained in that portfolio. �e technique is quite dynamic and involves deviation from the strategic asset allocation when an investor’s short-term foresight is not aligned with his long term foresight used to develop a strategic asset allocation plan and precise short-term predictions on part of the investor can lead to better returns.

Pragmatically speaking, Tactical Asset Allocation models tend to recommend contrarian trades, that is, they recommend purchasing an asset as its current market value drops and vice versa. �us, tactical Asset Allocation involves perpetually arranging your portfolio based on your needs and changes in the market. One consequence of Tactical Asset Allocation is that by overweighting certain assets during certain times and underweighting others, the portfolio is riskier because of its reduced diversi�cation. �us, to

o�set this additional risk factor, this strategy would need to generate above market returns. �e notion, whether Tactical Asset Allocation Models have achieved this is still a matter of rumination and study but because the probable returns from successful Tactical Asset Allocation would be large, researchers will keep inspecting, and investors won’t cease to be on the look out for their discoveries.

Insured Asset Allocation�is strategy is similar to a portfolio insurance strategy and is a mirror image of the Tactical Asset Allocation strategy. With this strategy, a base portfolio parameter is �xed and the value of the portfolio is not allowed to fall below this base parameter. As long as the portfolio achieves a return above this parameter, you actively to try to increase the portfolio value as much as possible. If, however, the portfolio ever drops to below the base value, investment in risk-free securities enables the base value to become �xed.

�e main target audiences for this approach are risk-averse investors who desire a certain level of active portfolio management and also covet the protection of �xing a certi�ed minimum return below which the portfolio is not allowed to decline. For instance, this approach is best for an investor who has planned a nominal lifestyle for himself after retirement.

Asset Allocation & Uncertain Times�e importance of active portfolio management and wise asset allocation strategy has been reiterated enough. But at the brink of serious economic uncertainty, expectation for stock market returns is somewhat muted. �erefore, it is believed that in such a situation, a dynamic asset allocation plan should come into play for the advantage of certain clients.

Dynamic Asset Allocation uses a long term strategic Asset Allocation strategy as its foundation. Alternate investments can be added to the core portfolio for the sake of complementing it. It is even better, if these investments include segments which yield a higher return and bear little interdependence, so as to achieve a greater level of diversi�cation.

ARTICLESBesides, dynamic Asset Allocation strategies can also be accompanied by �exible investment strategies; tactical actions that are short-term in nature and aim to bank on perceived market opportunities. If 10-20% of your assets are allocated for such investments, your portfolio can be expected to react better in times of changing trends and conditions.

Asset allocation is evolving past a traditional “purchase and retain” dogma. Whilst this might not suit all clients, exercising a dynamic asset allocation plan can create a portfolio better able to handle uncertain market environments. Not to forget the fact that a solid strategic asset allocation plan remains the core strategy behind any tactical asset allocation strategy.

Asset Allocation & the local scenarioWith interest rates in Pakistan consistently hovering above 10 percent for the past �ve years, anyone would expect Pakistanis to be encouraged enough to save and reap bene�ts of higher returns. However, reality states that Pakistan actually stands out to re�ect one of the lowest savings in the region. Given the fact that majority of Pakistanis are not so keen on investing mainly because their expenditures on necessities do not leave any room for savings or so for other reasons, there is a chunk of people who are inclined in saving for a better future and lifestyle.

With growth of urban nuclear families, educated middle to upper middle class is inspirited to plan properly for a child’s education, health and future life. Reasons for investment in Pakistani society vary from a child’s education to his marriage, from being cushioned against the toils of post-retirement life to maternity expenditures. Young professionals may want to invest as a means to generate seed capital for their potential business idea or to live their dreams of traveling or wayfaring.

Reasons for investing are many. With di�erent individuals and di�erent investment objectives in mind, the asset allocation needs of these investors must be customized accordingly.

Asset Allocation & Financial PlanningOnce you are done with choosing your model for Asset Allocation, the �nal stage is to test this model by contextualizing it with a precise �nancial plan. It might be easy for an investor to choose which Asset Allocation plan will provide him with the best possible returns but the investor should also �gure out a way to determine that expected return and also estimate the trade-o� for that higher return potential.

A well-concocted �nancial plan will guide the investor out of this bewilderment. First, it will determine what level of projected investment return is necessary to allow you to meet your lifestyle goals, which can help lead you to the right mix of stocks, bonds and cash. Second, the plan will evaluate the impact of the portfolio risk associated with that mix.

Traditionally, �nancial planning models focused on expected return and neglected the variability of outcomes that is associated with increased volatility. With the introduction of probability-based planning tools, the investor can foresee the e�ect of risk on their investment portfolios, they can vary the amount of risk and can study their corresponding returns. For example a portfolio bearing higher risk may yield a higher return but it also has a probability of falling far short beneath their targets.

When using an asset allocation approach to designing a portfolio, it is important to not focus just on the expected return of that portfolio. �e risk associated with an increasing, or decreasing, portfolio return is just as important to the success of an investment strategy.

Asset Allocation & �e Future

Most forecasters fall into two divisions. Forecasters in the �rst division are eager to predict that the future will closely mirror the recent past. �eir ideals are those generals who are always preparing to �ght the last war. Forecasters in the second division rely heavily

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page 16 of 24 mufap quarterly newsletter

upon the adage that the only constant is change itself. Proponents of this school of thought usually don’t know what to expect, but are quite sure it will be nothing like anything we’ve seen before. �ese individuals do realize the problems of delineating the future of this area.

We should view the future of asset allocation through lenses borrowed from both divisions. �at is, certain aspects of asset allocation today will continue to be recognizable for the years to come. To be more precise, the goals and importance of asset allocation will not change, but the mechanisms by which investors seek to achieve those goals will be new.

�e goal of the asset allocation decision, was, is, and will be to select a combination of assets that will generate a return su�ciently high and safe so as to o�set some future liability. It is also safe to say that asset allocation decisions will have a continuing large role in explaining portfolio returns.

Industry-wide - Net Assets (PKR million)

Net Assets - Open End Funds (PKR million)

Net Assets - Closed End Funds (PKR million)

Net Assets - Pension Schemes (PKR million)

Sales (PKR million) Redemptions (PKR million) Net Sales (PKR million)

Open End Funds' Return** Closed End Funds' Return**

General Pension Schemes Return**

Islamic Pension Schemes Return**

Meeting of the Board of Directors

In order to ensure that the Board of Directors ful�ls the duties and responsibilities conferred by the members of MUFAP, the Board conducts meetings on a regular basis to make immediate and prudent decisions. �e Board of Directors held three meetings during the quarter Jul-Sep 2013.

�e activities undertaken by Board are as follows:

Proposed amendments in the de�nition of Related Parties in Restricted List of Code for Distributors

�e Board deliberated in detail on the matter of proposed

amendments in the de�nition of Related Parties in the Restricted List of Code for Distributors. After careful consideration of the impacts that the amendments may entail, it was decided that all individuals (namely employees, directors, sponsors of the RSPs) should be excluded from the de�nition of Related Parties. �e revised de�nition is applicable to all new investments brought in on or after July 16, 2013 and is not applicable to existing investments made by or before July 15, 2013.

Valuation of GOP Ijarah Sukuk

�e Board recommended that AMCs should use ‘PKISRV’ quoted on Reuters as the relevant price to value the GOP Ijarah Sukuks to determine net assets of CIS under their management, which the SECP approved in September.

Meetings of the Committees

MUFAP Committees held many discussions to make important, well planned proposals on behalf of industry. �e following table presents the number of meetings held during the quarter Jul-Sep’13.

Technical Committee - VPS

�e VPS – Technical Committee held extensive discussions to discuss the dissimilar taxation and operational practices being adopted by di�erent VPS Managers. �e VPS Committee constituted a Sub-Committee, involving a representative from each VPS Manager, to draw up recommendations for the tax treatment. �e Committee also engaged Senior Tax expert, Mr. Shabbar Zaidi on the matter and has requested for clari�cation from FBR on one of the matters.

Meeting with NCCPL A meeting was held between operations sta� of AMCs and NCCPL representatives on July 22, 2013 to evaluate the mechanics and possible data sharing from AMCs to NCCPL for netting of CGT. It was decided that NCCPL would develop a concept paper covering brief mechanism of centralized CGT collection to AMCs for their review and comments.

Elections to elect Directors/Executive Committee Members of MUFAP for the year 2013 / 2014

As required under the Trade Organizations Rules, 2007, MUFAP is required to hold its elections each year to elect Directors against the vacancies arising on account of completion of two-year tenure of some Directors. Board members are elected for a two-year term.

�e retiring Directors on the completion of their two year tenure on September 30, 2013 are: 1. Mr. Adnan Siddiqui (Resigned August-2013)2. Mr. Amer Maqbool 3. Mr. Imran Azim 4. Mr. Mir Muhammad Ali 5. Mr. Nihal Cassim

�e continuing Directors of MUFAP for the year 2013/ 2014 are: 1. Dr. Amjad Waheed 2. Mr. Imran Motiwala 3. Mr. Mir Adil Rashid 4. Mr. Rashid Mansur 5. Ms Maheen Rahman6. Ms Hina Ghazanfar (on reserved seat for women)

In addition, Mr. Rehan N. Shaikh will serve on the Board as provided under Rule 23(5)(d) of the Trade Organization Rules, 2007. At the Extra Ordinary General Meeting on September 26, 2013, MUFAP announced the appointment, by virtue of elections, of the following directors to the Board, namely:1. Mr. Farid Ahmed Khan 2. Mr. M. Habib-ur-Rahman 3. Mr. Mohammad Shoaib 4. Mr. Yasir Qadri 5. Mr. Enamullah Khan

New Board of Directors

�e new Board of Directors of MUFAP at its �rst meeting held on October 1, 2013 elected Dr. Amjad Waheed as Chairman, Mr. Mohammad Shoaib as Senior Vice Chairman and Mr. Farid Ahmed Khan as Vice Chairman MUFAP for the year 2013-2014.�e Board of Directors of MUFAP for the 2013-14 term is as follows:

1) Dr. Amjad Waheed - Chairman; 2) Mr. Mohammad Shoaib - Senior Vice Chairman; 3) Mr. Farid Ahmed Khan - Vice Chairman;4) Mr. Rehan N. Shaikh;5) Mr. Rashid Mansur;6) Mr. M. Habib-ur-Rahman;7) Mr. Yasir Qadri8) Mr. Imran Motiwala;9) Ms Hina Ghazanfar;10) Ms Maheen Rahman;11) Mr. Mir Adil Rashid;12) Mr. Enamullah Khan; and13) Ms Mashmooma Z. Majeed - Chief Executive

Chairman Dr. Amjad Waheed, CFA

Dr. Amjad Waheed holds a doctorate in Investments & Finance from Southern Illinois University, USA and is also a Chartered Financial Analyst. For the last 7 years he is CEO of NBP Fullerton Asset Management Ltd (NAFA), which is a subsidiary of National Bank of Pakistan, with Fullerton Fund Management Company of Singapore as the other joint venture partner. NAFA is presently managing fourteen mutual funds and several portfolios with about Rs 45 billion invested in these funds. NAFA is among the largest Asset Management Companies in Pakistan today.

Before joining NAFA, Dr. Waheed was Head of Equity Mutual Funds & Portfolios at Riyad Bank, Saudi Arabia, for about 5 years where he was managing US$ 7.5 billion invested in 22 mutual funds. Prior to that Dr. Waheed was Head of Investments at NIT,

and Chief Operation O�cer of FC-ABN AMRO Equities for several years. Before moving back to Pakistan, Dr. Waheed was Assistant Professor of Finance at Tennessee State University, USA and has published several articles in top journals of the world such as Journal of Banking & Finance and Financial and Financial Management.Dr. Waheed has served on the Board of various companies including Siemens, Nishat Mills, PICIC, Askari Bank, Millat Tractors, Fauji Fertilizer, Pakitstan Tobacco Company, Treet Corporation, Gul Ahmed Textile, Bata Pakistan.

Senior Vice Chairman Mr. Mohammad Shoaib, CFA

Mr. Mohammad Shoaib, CFA is the Chief Executive of Al Meezan Investment Management Ltd. He has played a key role in setting up the company and has been associated with it since inception. He is a highly quali�ed and seasoned professional with 23 years experience in capital markets. He has to his credit many accolades and awards, the most signi�cant of them being the "Most In�uential CFA charter holder" awarded by CFA Institute in 2006.

Mr. Shoaib holds an MBA degree from IBA besides being a Chartered Financial Analyst (CFA) charter holder. He has to his credit the honor of being the founder and �rst president of CFA Association of Pakistan, a member society of CFA Institute. He has been active participant in the Islamic �nance and asset management for the last 10 years. In this respect, he has also actively participated as a speaker and panelist in various international and domestic seminars, conferences and workshops.

Mr. Shoaib has also served in voluntary capacity at di�erent domestic and international institutions. He has served as a Director on the Board of Karachi Stock Exchange and Vice Chairman on the Board of Mutual Funds Association of Pakistan. He is currently serving on the Board of Directors of Pakistan Institute of Corporate Governance and Institute of Capital Markets. He has also served on various global and regional committees of CFA Institute including Asia Paci�c Advocacy Committee, Global Task Force on Corporate

Governance, GIPS Regional Council and Asset Manager Code Advisory Committee. He has also had the honour to represent over 16,000 charterholders in Asia Paci�c Region as their representative on the Presidents' Council of CFA Institute.

Vice Chairman Mr. Farid Ahmed Khan, CFA

Mr. Farid Ahmed Khan, CFA is the CEO of ABL Asset Management. He has been involved with capital markets for over 18 years and has a broad-based, global experience with bulge bracket �rms in Asset Management, Investment Banking, Investment Research and Sales, Business Development & International Project Finance. He joined ABL AMC from Credit Suisse, where he was the Country Manager of Credit Suisse Pakistan. Prior to that, he worked for MCB, initially as Head of Investment Banking Group and later as the CEO of MCB Asset Management. Mr. Khan has extensive experience outside Pakistan, having worked at Morgan Stanley, ING Barings Securities and CLSA Emerging Markets in Kuala Lumpur, London and Istanbul in a variety of senior positions. He holds an MBA in Finance from IBA, Karachi and got his CFA quali�cation in 1998.

New Committees

MUFAP Board elected its Professional Committees, Chairperson and Vice-Chairperson of each Committee for the year 2013-14. �e list of Committees, their Chairperson and Vice-Chairperson is as follows:

SECP forms Shariah Advisory Board

SECP constituted a Shariah Advisory Board (SAB) to harmonize the Shariah interpretations and strengthen the regulatory and supervisory oversight of Islamic �nancial institutions (IFIs) and Islamic capital markets (ICMs) in Pakistan. It will also advise the Commission on the Shariah-compliance aspects of various products launched and or the processes being adopted by the regulated entities. It will also provide guidance for issuance of new laws, rules and regulations for e�ective monitoring and supervision of Islamic Financial Products and to suggest ways and means for development of IFIs and ICMs in the country.

Money Market

To meet the challenges of maintaining stability in the foreign exchange market and controlling high growth in money supply, SBP decided to gradually decrease the outstanding amount of liquidity injections. Since the beginning of FY14, interbank market liquidity conditions have considerably eased primarily due to substantial increase in the pace of government borrowing from the SBP. In fact, SBP mopped up Rs. 1,556.45 billion and injected Rs. 630.70 billion during Q1-FY14.

In terms of controlling growth in money supply, however, SBP’s e�orts of curtailing liquidity injections did not experience much success as these were o�set by an increase in direct �scal borrowings from the SBP. �e increase of Rs. 1,446 billion in budgetary borrowings from the banking system during FY13 was almost Rs. 1 trillion higher than the original target and was even higher than the total expansion in M2. Deviation of this scale has signi�cantly constrained e�ective monetary management, disrupted �nancial intermediation in the economy, and has led to a sharp increase in domestic debt. Showing a growth of 24.6% in FY13, the stock of government’s domestic debt has reached Rs. 9.5 trillion as of end-June 2013. Similarly, a considerable increase in public debt to revenue ratio re�ects weak repayment capacity of the government. �e acceleration in �scal borrowings from the SBP during H2-FY13, Rs. 714 billion, and Q1-FY14 up till 30th August 2013, Rs. 547 billion, is particularly worrisome. �e inability to raise the tax-GDP ratio is the fundamental source of large �scal de�cits, high borrowings, and rising debt. Although there has been a consistent gap between Federal Board of Revenue’s (FBR) budget targets and actual outcomes in the last few years, the gap of Rs. 445 billion in FY13 was exceptionally high. In fact, this is more than the cumulative shortfall of Rs. 349 billion during the last �ve years.

On the external front, stress in the external account has gradually increased with every passing month of 2013 due to shrinking net capital and �nancial �ows and high loan repayments to the IMF.

While the former was only $517 million or 0.2 percent of GDP, the latter increased to $3 billion in FY13. As a result, despite reduction in the external current account de�cit by about half, to $2.3 billion or 1.0 percent of GDP, the SBP’s foreign exchange reserves declined to $6 billion by end-June 2013 from $10.8 billion at the beginning of FY13. �ese stand at $5.2 billion as on 6th September, 2013 after receiving $544.5 million under the new IMF program. Despite pressures and speculations of a drop in the value of the Pak rupee the foreign exchange market has largely remained stable in FY13. However, since the beginning of FY14 the rupee has depreciated by 5.0 percent as of 12th September 2013.

�e year-on-year CPI based in�ation rate was recorded at 8.3% in July 2013, then to 8.55% in August 2013, however dipped down to 7.39% in September 2013.�ough CPI In�ation remained within single digit, however, it witnessed an upward trend as it increased to 7.39 percent in September 2013 compared to 5.85 percent in June 2013 and 6.6 percent in March 2013. �e impact of upward adjustments in energy prices and an increase in the GST together with the removal of certain exemptions put pressure on in�ation.In order to counter in�ationary expectations, SBP raised the discount rate by 50 basis points to 9.5 percent with e�ect from September 16, 2013.

Movement in KIBOR

Treasury Bills:

A total of 6 T-bill auctions were held by SBP during the quarter in which a total amount of Rs. 1,348.88 billion was raised. Since the beginning of FY14, market’s preference for shorter tenor T-Bills has increased as about 83% of the bank’s total o�ers in recent T-Bill auctions were concentrated in 3-month bills.

T-Bill Auctions (Amount in PKR billion; rates in %)

Pakistan Investment Bonds

�e accepted amount in the PIB auctions during Q1-FY14 fell short of the target .

PIB Auctions (Yields in % and Face Value in PKR billion)

Debt Market

�e table below summarizes the TOP 15 trades of TFCs/Sukuk on the basis of Face value during the Q1-FY14:

Equity Market

KSE-100 index made a strong start to the �scal year 2014, as the index gained 826.99 points, or 3.94%, to stand at 21,832.68 points during the �rst three months of FY14. During the period, index struggled to cross the 23,000 points level and made a high of 23,776.22 on a closing basis. Stock market began the �rst month of �scal year 2014 with a strong rally, overcoming jitters stemming from treason proceedings against former president General (retd) Pervez Musharraf and slowdown in global markets. �e government’s successful negotiations with IMF for a $5.3 billion loan, resolution of circular debt by issuing treasury bills and bonds and anticipation of strong corporate earnings for the quarter ended June 30 buoyed investors’ con�dence as the share prices appreciated across the board and index posted a gain of 2.307.09 points, or 10.98% to settle at 23,312.78 level in July.

After posting strong gain in July, KSE-100 faltered in August as investors continued to worry about ever-escalating Syrian crisis and tumbling regional markets. Stock market further pressured by a slew of disappointing and less-than-expected corporate earnings, falling foreign exchange reserves and high in�ation �gures for July. Moreover, concerns on a possible interest rate hike in the upcoming monetary policy announcement, potential spike in oil prices, decline in cement prices due to breakdown in price discipline, heavy foreign net selling and persistent depreciation in the rupee dragged the KSE-100 index down 1,151.93 points, or 4.94%, to 22,160.85 in August. �e index showed a mixed performance in September. In the �rst half of the month, the approval of the $6.64 billion loan package by IMF, the plans to privatize Pakistan International Airlines, strong foreign in�ows and the release of the IMF’s �rst tranche worth of $550 million helped lift the index to 23,639.97 on a closing basis. However, sentiment reversed towards the end of the month after the central bank’s decision to increase the rate of return on savings deposits to 6.5%. Moreover, steep decline in the value of Pakistani

rupee against the US dollar, constant repayments to IMF, a 50 basis points increase in the discount rate and heavy foreign net selling dragged the KSE-100 index down 328.17 points, or 1.48%, to 21,832.68 in September.

Mutual Fund Market:

�e total net assets decreased to Rs. 359.947 billion in the �rst quarter of FY14 versus Rs. 361.668 billion for the Q4FY13, a reduction of 0.48% quarter over quarter. �e open-end funds went up by 0.71% to Rs. 327.594 billion, pension funds went up by 9.67% to Rs. 5.288 billion and closed-end decreased by 14.23% to Rs. 27.064 billion.

Funds launched during the quarter Q1-FY14

Funds matured during the quarter Q1-FY14

Funds with changed structure/other features Energy Crisis: Causes and ImpactsBy Sara Aquil Walji, Research Analyst, HBL Asset Management

Energy is the cornerstone for any economy’s development and growth. �e current situation has worsened in Pakistan over the past few years and likely to continue if measures are not taken to mitigate the issue on a long term basis. �e gap between demand and supply has reached 6000MW resulting in scheduled and unscheduled load shedding, negatively a�ecting our industrial sector, hurting our exports and has even hampered the GDP growth rate by 2%. Subsidies to the power sector have steadily been increasing and form the biggest part of total subsidies amounting to around Rs 349,287mn (95% of the total subsidies) in FY 2012-13. �e new government has allocated Rs. 220,100mn to the power sector for the FY 2013-14 which is 91.5% of the total subsidy budget. (Source: Annual budget 2014) With recent emphasis on matters to resolve energy crisis and develop renewable and non-renewable sources of energy, it is worthwhile to note why energy crisis became as severe as it is now.

�e root of this crisis is that Pakistan’s electricity generation mix is highly skewed towards the most expensive kinds .�ere appears to be an almost inverse relationship between the sources of electricity that are most expensive to set and those that are most expensive to run. �e following chart depicts this relationship:

Source: Express Tribune �is highlights the fact why there is a heavy concentration toward

the construction of thermal power plants since they are relatively cheaper to build than hydropower plants. �e government has not dedicated enough funds for the development of hydropower projects which are the most expensive to build but cheapest to run on a per unit basis.Pakistan’s electricity generation is highly dependent on imported oil as almost $14.5bn worth of oil is imported each year which accounts for around 35% of electricity generation. Comparing Pakistan with India and Bangladesh reveals that Pakistan relies heavily on oil for electricity generation where as India uses coal, a relatively cheaper source for electricity generation and Bangladesh on the other hand allocates 73% of its electricity generation to gas.

Source: Economic Survey report for 2012-2013

With a prominent shift in recent years towards the use of thermal power stations instead of hydropower sources and a reduction in electricity generation from coal, Pakistan’s electricity costs ends up being more expensive than it needs to be and since the government has adopted a policy of uniform tari� across the country the Tari� Di�erential Subsidy owed by the Government of Pakistan on an annual basis has increased substantially.

Circular debt is another major concern hampering the growth of Pakistan’s economy. In simple words circular debt is the amount of

cash shortfall within the Central Power Purchasing Agency (CPPA) that it cannot pay to power supply companies. �is shortfall is the result of (a) the di�erence between the actual cost of providing electricity in relation to revenues realized by the power distribution companies (DISCOs) from sales to customers plus subsidies; and (b) insu�cient payments by the DISCOs to CPPA out of realized revenue as they give priority to their own cash �ow needs. (Source: USAID Report March 2103)

�is revenue shortfall cascades through the entire energy supply chain, from electricity generators to fuel suppliers, re�ners, and producers; resulting in a shortage of fuel supply to the public sector thermal generating companies (GENCOs), a reduction in power generated by Independent Power Producers (IPPs), and an increases in load shedding.

According to the report published by the USAID in March 2013, circular debt amounts to Rs872bn which is actually 4% of GDP. According to Pakistan’s Economic Survey report for 2012-2013, there is a strong relationship between GDP growth rate and electricity growth as shown in the �gure below. It can be easily deduced that periods of low or negative electricity growth have witnessed low GDP growth rate, while periods where electricity growth picked up there is increase in GDP growth rate.

�is comes as no surprise, since industrial output is heavily dependent on the amount of electricity delivered to them. Continuous power breakdowns prevented industries from operating at their full capacity level. �e power outages have obstructed the viability of the textile industry as exporters were unable to meet their

commitments. During July-March 2012-13, foreign exchange earnings through exports of synthetic textile fabrics and woolen industry showing a decline of 25.3% and 5.1% respectively as compared to last year. During the period under review even in quantity term also recorded a decline of 30% and 15.8% respectively.

Coupled with an ine�cient system and expensive fuel mix, power theft is another major issue faced by Pakistanis. It is interesting to note that annual revenue collection e�ciency was estimated to be around 87%; however that 13% of lost e�ciency has a �nancial impact of Rs 86bn which is equivalent to 41 days of furnace oil costs for thermal power plants. �e following �gure shows the percentage of bills that were uncollected in 2012. �e e�ciency of di�erent DISCOs is disproportionate in revenue collection. �is essentially leads to the inclusion of the cost of power theft in the power tari�, meaning that the honest payers also bear the cost of those that steal.

Power theft is not only committed by normal residents but the main defaulters are the government institutions themselves. �e government owns around 51% of the uncollected bills which amounts to Rs 118bn out of the uncollected revenue receipts of Rs 386bn. In my opinion, this the amount which causes the discrepancy between the amount of RS500.3bn to be injected to resolve the circular debt issue and �gure of Rs 872.41bn since the government has a proposal to o�set provisional dues via a �scal adjuster. Due to a growing economy, Pakistan’s energy needs have more than doubled in the past 15 years. Energy shortages have far devastating

e�ects on our economy. Not only does it cause civil disturbances on a small scale but it a�ects our GDP on a larger note. Injecting money into the chain will only resolve the issue on a temporary basis. �ese challenges require a multi-prong approach that would address energy shortages in the immediate future and help the country build longer term energy su�ciency.

�ere needs to be a shift away from thermal power to alternative sources of energy which are not only cheaper but also environmentally friendly. Pakistan has large untapped renewable resources such as water, sun and wind and recently the government has taken keen interest on the development of hydro power projects and Neelum Jhelum Hydroelectric Project is one of the many projects which the new government has started which will approximately add 5.15bn units of electricity annually. Moreover, an e�ective system of governance must be in place to curb theft, recuperate dues and enforce policies.

�e Importance of Asset Allocation in attaining Optimal Returns

By Yamna Hassan, Asst. Manager-Business DevelopmentLakson Investments

“Tis the part of a wise man to keep himself today for tomorrow, and not venture all his eggs in one basket.” – Miguel de Cervantes, Don Quixote de la Mancha, 1605.

�e afore-mentioned quote indicates that along with being a great writer, Cervantes would have also proved to be a wise investor.

Investment related decisions are preceded by de�ning a proper Asset Allocation plan. According to recent research, the Asset Allocation decision is responsible for 91.5 percent of the variation between returns on di�erent portfolios. Given the importance of Asset Allocation, it has attained a center stage in any investment decision.

Asset Allocation is mainly important for two de�nite reasons. �e �rst reason pertains to portfolio design; variation in portfolio designs can lead to some investment decisions being winners while the rest being losers, and it is believed that if a portfolio is thoughtfully constructed and contains an optimal mix of securities that perform di�erently from each other (i.e they have little correlation in between them), chances of this portfolio yielding a more stable return is higher. �is is because if some securities in a portfolio are inconsistent and volatile, other, more stable securities can nullify the inconsistency of the entire portfolio, hence stabilizing the yield pattern.

�e second reason pertains to the vision of the investor. Asset allocation allows an investor to �nancially plan for his long-term and short-term goals and avoid impulsive reactions. We will subsequently discuss this aspect of Asset Allocation.

We can divide the Asset Allocation decision into two simple steps as discussed below:

Step 1: Asset Allocation An Asset Allocation strategy can be devised based on the investor’s risk assessment, �nancial goals and return targets. It is the most fundamental step of an investment decision and involves determining an ideal mix of stocks, bonds, cash and other securities in a way such that the portfolio yields a return which best suits an investor’s need. �ere is always a downside of investing too much in bonds or cash as that might certify stable but lower returns. In the same way, too much investment in stocks might lead to portfolio volatility. �erefore, in order to meet your requirements, or keep pace with in�ation, you need to plan an ideal arrangement of securities for your portfolio.

Step 2: Diversi�cationWhile the �rst step bears upon the idea of portfolio construction, this step is linked to the proper dissemination of your assets in a way such that your portfolio is exposed to many di�erent segments of the market, some of which perform independently of the others. Proper diversi�cation of your portfolio can lead to higher and more stable returns.

As mentioned before, the e�ect of diversi�cation is most noticeable when instruments have very little interrelation between them. However, it was easier to build this sort of a portfolio previously than it is today. �is is because roughly over the past 10 years, �nancial markets have become increasingly interrelated and complex. Let us also not ignore the fact that during the 2008 �nancial trouble, most assets tended to perform similarly, leading us to believe in the proposition that most assets are conducive to a similar behavior in times of crisis and instability. �e �gure below shows ways of diversifying a portfolio and entering into newer and assorted mix of investment vehicles.

FIGURE 1:

Figure shows ways of diversifying a portfolio.

Institutions that do not pay requisite importance to the Asset Allocation decision might end up damaging their returns. Usually, institutions are advised to invest in a 60:40 ratio (Stocks: �xed income instruments) to remain on the safe side. Whereas, individuals are recommended to invest in an investment spectrum ranging from 100 percent stocks to 100 percent bonds depending on their separate variable characteristics. However, the Asset Allocation decision is dependent on several other factors and cannot be generalized for di�erent investors.

Following are a few, newer and e�cient ways that have now been developed and can be used for attaining optimal asset allocation:

Mean Variance Optimization

Mean Variance Optimization is a quantitative technique that can be used to calculate the trade-o� between maximum expected return and risk tolerance. �is technique has gained popularity over time because in recent times, the technique is applied on an asset class level as opposed to being applied only to portfolios of individual stocks previously.

�e development of Mean Variance Optimization has not only bene�tted institutional investors but has resulted in a breakthrough for retail brokerage houses as well, which, prior to this development were restricted on their advisory role to the investors. However, recently, they are proposing a greater degree of passive security and more thoughtful asset allocation recommendations to their investors. �is has become possible by using optimization and aiming to attain a favorable position with maximum expected return, minimal risk, or both.

Moreover, a few re�ned approaches taken from utility theory and behavioral economics can be deployed to develop polls or surveys that can authentically gauge an individual’s risk preferences.

Pension funds have also been familiarized with Optimization. Such funds take into account the reciprocity of both assets and liabilities and not only the assets unlike other funds. �e objective of Asset Allocation for these funds is to amplify the fund surplus i.e liabilities subtracted from assets for a stated degree of risk tolerance.

Tactical Asset AllocationTactical asset allocation is the process of adjusting a particular portfolio based on changes in the market value of assets contained in that portfolio. �e technique is quite dynamic and involves deviation from the strategic asset allocation when an investor’s short-term foresight is not aligned with his long term foresight used to develop a strategic asset allocation plan and precise short-term predictions on part of the investor can lead to better returns.

Pragmatically speaking, Tactical Asset Allocation models tend to recommend contrarian trades, that is, they recommend purchasing an asset as its current market value drops and vice versa. �us, tactical Asset Allocation involves perpetually arranging your portfolio based on your needs and changes in the market. One consequence of Tactical Asset Allocation is that by overweighting certain assets during certain times and underweighting others, the portfolio is riskier because of its reduced diversi�cation. �us, to

o�set this additional risk factor, this strategy would need to generate above market returns. �e notion, whether Tactical Asset Allocation Models have achieved this is still a matter of rumination and study but because the probable returns from successful Tactical Asset Allocation would be large, researchers will keep inspecting, and investors won’t cease to be on the look out for their discoveries.

Insured Asset Allocation�is strategy is similar to a portfolio insurance strategy and is a mirror image of the Tactical Asset Allocation strategy. With this strategy, a base portfolio parameter is �xed and the value of the portfolio is not allowed to fall below this base parameter. As long as the portfolio achieves a return above this parameter, you actively to try to increase the portfolio value as much as possible. If, however, the portfolio ever drops to below the base value, investment in risk-free securities enables the base value to become �xed.

�e main target audiences for this approach are risk-averse investors who desire a certain level of active portfolio management and also covet the protection of �xing a certi�ed minimum return below which the portfolio is not allowed to decline. For instance, this approach is best for an investor who has planned a nominal lifestyle for himself after retirement.

Asset Allocation & Uncertain Times�e importance of active portfolio management and wise asset allocation strategy has been reiterated enough. But at the brink of serious economic uncertainty, expectation for stock market returns is somewhat muted. �erefore, it is believed that in such a situation, a dynamic asset allocation plan should come into play for the advantage of certain clients.

Dynamic Asset Allocation uses a long term strategic Asset Allocation strategy as its foundation. Alternate investments can be added to the core portfolio for the sake of complementing it. It is even better, if these investments include segments which yield a higher return and bear little interdependence, so as to achieve a greater level of diversi�cation.

Besides, dynamic Asset Allocation strategies can also be accompanied by �exible investment strategies; tactical actions that are short-term in nature and aim to bank on perceived market opportunities. If 10-20% of your assets are allocated for such investments, your portfolio can be expected to react better in times of changing trends and conditions.

Asset allocation is evolving past a traditional “purchase and retain” dogma. Whilst this might not suit all clients, exercising a dynamic asset allocation plan can create a portfolio better able to handle uncertain market environments. Not to forget the fact that a solid strategic asset allocation plan remains the core strategy behind any tactical asset allocation strategy.

Asset Allocation & the local scenarioWith interest rates in Pakistan consistently hovering above 10 percent for the past �ve years, anyone would expect Pakistanis to be encouraged enough to save and reap bene�ts of higher returns. However, reality states that Pakistan actually stands out to re�ect one of the lowest savings in the region. Given the fact that majority of Pakistanis are not so keen on investing mainly because their expenditures on necessities do not leave any room for savings or so for other reasons, there is a chunk of people who are inclined in saving for a better future and lifestyle.

With growth of urban nuclear families, educated middle to upper middle class is inspirited to plan properly for a child’s education, health and future life. Reasons for investment in Pakistani society vary from a child’s education to his marriage, from being cushioned against the toils of post-retirement life to maternity expenditures. Young professionals may want to invest as a means to generate seed capital for their potential business idea or to live their dreams of traveling or wayfaring.

Reasons for investing are many. With di�erent individuals and di�erent investment objectives in mind, the asset allocation needs of these investors must be customized accordingly.

Asset Allocation & Financial PlanningOnce you are done with choosing your model for Asset Allocation, the �nal stage is to test this model by contextualizing it with a precise �nancial plan. It might be easy for an investor to choose which Asset Allocation plan will provide him with the best possible returns but the investor should also �gure out a way to determine that expected return and also estimate the trade-o� for that higher return potential.

A well-concocted �nancial plan will guide the investor out of this bewilderment. First, it will determine what level of projected investment return is necessary to allow you to meet your lifestyle goals, which can help lead you to the right mix of stocks, bonds and cash. Second, the plan will evaluate the impact of the portfolio risk associated with that mix.

Traditionally, �nancial planning models focused on expected return and neglected the variability of outcomes that is associated with increased volatility. With the introduction of probability-based planning tools, the investor can foresee the e�ect of risk on their investment portfolios, they can vary the amount of risk and can study their corresponding returns. For example a portfolio bearing higher risk may yield a higher return but it also has a probability of falling far short beneath their targets.

When using an asset allocation approach to designing a portfolio, it is important to not focus just on the expected return of that portfolio. �e risk associated with an increasing, or decreasing, portfolio return is just as important to the success of an investment strategy.

Asset Allocation & �e Future

Most forecasters fall into two divisions. Forecasters in the �rst division are eager to predict that the future will closely mirror the recent past. �eir ideals are those generals who are always preparing to �ght the last war. Forecasters in the second division rely heavily

ATICLESupon the adage that the only constant is change itself. Proponents of this school of thought usually don’t know what to expect, but are quite sure it will be nothing like anything we’ve seen before. �ese individuals do realize the problems of delineating the future of this area.

We should view the future of asset allocation through lenses borrowed from both divisions. �at is, certain aspects of asset allocation today will continue to be recognizable for the years to come. To be more precise, the goals and importance of asset allocation will not change, but the mechanisms by which investors seek to achieve those goals will be new.

�e goal of the asset allocation decision, was, is, and will be to select a combination of assets that will generate a return su�ciently high and safe so as to o�set some future liability. It is also safe to say that asset allocation decisions will have a continuing large role in explaining portfolio returns.

STATISTICS06

page 17 of 24 mufap quarterly newsletter

Industry-wide - Net Assets (PKR million)

Net Assets - Open End Funds (PKR million)

Net Assets - Closed End Funds (PKR million)

Net Assets - Pension Schemes (PKR million)

Sales (PKR million) Redemptions (PKR million) Net Sales (PKR million)

Open End Funds' Return** Closed End Funds' Return**

General Pension Schemes Return**

Islamic Pension Schemes Return**

Schemes FY09 FY10 FY11 FY12 FY13 FY14Q1

Open End Funds 175,433 167,462 222,366 354,278 325,292 327,594 Closed End Funds 28,394 30,723 23,917 23,486 31,554 27,064 Pension 878 1,301 1,558 2,742 4,822 5,289 Total 204,706 199,486 247,841 380,505 361,668 359,947

Schemes FY09 FY10 FY11 FY12 FY13Q1 FY14Q1

Equity 61,223 39,150 52,084 52,249 61,711 59,660 Income 52,079 46,481 37,988 86,441 55,299 51,620 Money Market 3,282 32,046 77,304 150,508 120,575 130,829 Aggressive Income 26,287 15,003 9,344 7,862 10,130 9,675 Asset Allocation 1,790 1,552 2,277 3,145 4,289 4,897 Balanced 7,100 5,182 3,525 2,861 3,150 3,281 Capital Protected 6,194 7,147 3,368 853 605 612 Commodity - - - - 140 386 Fund of Funds 717 837 789 867 641 1,476 Index Tracker 319 223 375 343 315 320 Islamic Equity 4,501 4,601 5,320 8,103 15,349 15,585 Islamic Income 5,350 5,930 20,885 29,942 39,807 36,247 Islamic Money Market 624 5,224 6,353 7,762 7,538 7,187 Islamic Aggressive Income 2,504 1,360 725 688 1,178 1,144 Islamic Asset Allocation 1,520 1,178 1,263 1,120 870 849Islamic Balanced 1,358 911 767 799 791 840 Islamic Capital Protected 582 637 - 443 506 490Islamic Fund of Funds - - - - 1,497 1,613 Islamic Index Tracker - - - 289 901 885Total 175,433 167,462 222,366 354,278 325,292 327,594

Source: MUFAP

Source: MUFAP

Meeting of the Board of Directors

In order to ensure that the Board of Directors ful�ls the duties and responsibilities conferred by the members of MUFAP, the Board conducts meetings on a regular basis to make immediate and prudent decisions. �e Board of Directors held three meetings during the quarter Jul-Sep 2013.

�e activities undertaken by Board are as follows:

Proposed amendments in the de�nition of Related Parties in Restricted List of Code for Distributors

�e Board deliberated in detail on the matter of proposed

amendments in the de�nition of Related Parties in the Restricted List of Code for Distributors. After careful consideration of the impacts that the amendments may entail, it was decided that all individuals (namely employees, directors, sponsors of the RSPs) should be excluded from the de�nition of Related Parties. �e revised de�nition is applicable to all new investments brought in on or after July 16, 2013 and is not applicable to existing investments made by or before July 15, 2013.

Valuation of GOP Ijarah Sukuk

�e Board recommended that AMCs should use ‘PKISRV’ quoted on Reuters as the relevant price to value the GOP Ijarah Sukuks to determine net assets of CIS under their management, which the SECP approved in September.

Meetings of the Committees

MUFAP Committees held many discussions to make important, well planned proposals on behalf of industry. �e following table presents the number of meetings held during the quarter Jul-Sep’13.

Technical Committee - VPS

�e VPS – Technical Committee held extensive discussions to discuss the dissimilar taxation and operational practices being adopted by di�erent VPS Managers. �e VPS Committee constituted a Sub-Committee, involving a representative from each VPS Manager, to draw up recommendations for the tax treatment. �e Committee also engaged Senior Tax expert, Mr. Shabbar Zaidi on the matter and has requested for clari�cation from FBR on one of the matters.

Meeting with NCCPL A meeting was held between operations sta� of AMCs and NCCPL representatives on July 22, 2013 to evaluate the mechanics and possible data sharing from AMCs to NCCPL for netting of CGT. It was decided that NCCPL would develop a concept paper covering brief mechanism of centralized CGT collection to AMCs for their review and comments.

Elections to elect Directors/Executive Committee Members of MUFAP for the year 2013 / 2014

As required under the Trade Organizations Rules, 2007, MUFAP is required to hold its elections each year to elect Directors against the vacancies arising on account of completion of two-year tenure of some Directors. Board members are elected for a two-year term.

�e retiring Directors on the completion of their two year tenure on September 30, 2013 are: 1. Mr. Adnan Siddiqui (Resigned August-2013)2. Mr. Amer Maqbool 3. Mr. Imran Azim 4. Mr. Mir Muhammad Ali 5. Mr. Nihal Cassim

�e continuing Directors of MUFAP for the year 2013/ 2014 are: 1. Dr. Amjad Waheed 2. Mr. Imran Motiwala 3. Mr. Mir Adil Rashid 4. Mr. Rashid Mansur 5. Ms Maheen Rahman6. Ms Hina Ghazanfar (on reserved seat for women)

In addition, Mr. Rehan N. Shaikh will serve on the Board as provided under Rule 23(5)(d) of the Trade Organization Rules, 2007. At the Extra Ordinary General Meeting on September 26, 2013, MUFAP announced the appointment, by virtue of elections, of the following directors to the Board, namely:1. Mr. Farid Ahmed Khan 2. Mr. M. Habib-ur-Rahman 3. Mr. Mohammad Shoaib 4. Mr. Yasir Qadri 5. Mr. Enamullah Khan

New Board of Directors

�e new Board of Directors of MUFAP at its �rst meeting held on October 1, 2013 elected Dr. Amjad Waheed as Chairman, Mr. Mohammad Shoaib as Senior Vice Chairman and Mr. Farid Ahmed Khan as Vice Chairman MUFAP for the year 2013-2014.�e Board of Directors of MUFAP for the 2013-14 term is as follows:

1) Dr. Amjad Waheed - Chairman; 2) Mr. Mohammad Shoaib - Senior Vice Chairman; 3) Mr. Farid Ahmed Khan - Vice Chairman;4) Mr. Rehan N. Shaikh;5) Mr. Rashid Mansur;6) Mr. M. Habib-ur-Rahman;7) Mr. Yasir Qadri8) Mr. Imran Motiwala;9) Ms Hina Ghazanfar;10) Ms Maheen Rahman;11) Mr. Mir Adil Rashid;12) Mr. Enamullah Khan; and13) Ms Mashmooma Z. Majeed - Chief Executive

Chairman Dr. Amjad Waheed, CFA

Dr. Amjad Waheed holds a doctorate in Investments & Finance from Southern Illinois University, USA and is also a Chartered Financial Analyst. For the last 7 years he is CEO of NBP Fullerton Asset Management Ltd (NAFA), which is a subsidiary of National Bank of Pakistan, with Fullerton Fund Management Company of Singapore as the other joint venture partner. NAFA is presently managing fourteen mutual funds and several portfolios with about Rs 45 billion invested in these funds. NAFA is among the largest Asset Management Companies in Pakistan today.

Before joining NAFA, Dr. Waheed was Head of Equity Mutual Funds & Portfolios at Riyad Bank, Saudi Arabia, for about 5 years where he was managing US$ 7.5 billion invested in 22 mutual funds. Prior to that Dr. Waheed was Head of Investments at NIT,

and Chief Operation O�cer of FC-ABN AMRO Equities for several years. Before moving back to Pakistan, Dr. Waheed was Assistant Professor of Finance at Tennessee State University, USA and has published several articles in top journals of the world such as Journal of Banking & Finance and Financial and Financial Management.Dr. Waheed has served on the Board of various companies including Siemens, Nishat Mills, PICIC, Askari Bank, Millat Tractors, Fauji Fertilizer, Pakitstan Tobacco Company, Treet Corporation, Gul Ahmed Textile, Bata Pakistan.

Senior Vice Chairman Mr. Mohammad Shoaib, CFA

Mr. Mohammad Shoaib, CFA is the Chief Executive of Al Meezan Investment Management Ltd. He has played a key role in setting up the company and has been associated with it since inception. He is a highly quali�ed and seasoned professional with 23 years experience in capital markets. He has to his credit many accolades and awards, the most signi�cant of them being the "Most In�uential CFA charter holder" awarded by CFA Institute in 2006.

Mr. Shoaib holds an MBA degree from IBA besides being a Chartered Financial Analyst (CFA) charter holder. He has to his credit the honor of being the founder and �rst president of CFA Association of Pakistan, a member society of CFA Institute. He has been active participant in the Islamic �nance and asset management for the last 10 years. In this respect, he has also actively participated as a speaker and panelist in various international and domestic seminars, conferences and workshops.

Mr. Shoaib has also served in voluntary capacity at di�erent domestic and international institutions. He has served as a Director on the Board of Karachi Stock Exchange and Vice Chairman on the Board of Mutual Funds Association of Pakistan. He is currently serving on the Board of Directors of Pakistan Institute of Corporate Governance and Institute of Capital Markets. He has also served on various global and regional committees of CFA Institute including Asia Paci�c Advocacy Committee, Global Task Force on Corporate

Governance, GIPS Regional Council and Asset Manager Code Advisory Committee. He has also had the honour to represent over 16,000 charterholders in Asia Paci�c Region as their representative on the Presidents' Council of CFA Institute.

Vice Chairman Mr. Farid Ahmed Khan, CFA

Mr. Farid Ahmed Khan, CFA is the CEO of ABL Asset Management. He has been involved with capital markets for over 18 years and has a broad-based, global experience with bulge bracket �rms in Asset Management, Investment Banking, Investment Research and Sales, Business Development & International Project Finance. He joined ABL AMC from Credit Suisse, where he was the Country Manager of Credit Suisse Pakistan. Prior to that, he worked for MCB, initially as Head of Investment Banking Group and later as the CEO of MCB Asset Management. Mr. Khan has extensive experience outside Pakistan, having worked at Morgan Stanley, ING Barings Securities and CLSA Emerging Markets in Kuala Lumpur, London and Istanbul in a variety of senior positions. He holds an MBA in Finance from IBA, Karachi and got his CFA quali�cation in 1998.

New Committees

MUFAP Board elected its Professional Committees, Chairperson and Vice-Chairperson of each Committee for the year 2013-14. �e list of Committees, their Chairperson and Vice-Chairperson is as follows:

SECP forms Shariah Advisory Board

SECP constituted a Shariah Advisory Board (SAB) to harmonize the Shariah interpretations and strengthen the regulatory and supervisory oversight of Islamic �nancial institutions (IFIs) and Islamic capital markets (ICMs) in Pakistan. It will also advise the Commission on the Shariah-compliance aspects of various products launched and or the processes being adopted by the regulated entities. It will also provide guidance for issuance of new laws, rules and regulations for e�ective monitoring and supervision of Islamic Financial Products and to suggest ways and means for development of IFIs and ICMs in the country.

Money Market

To meet the challenges of maintaining stability in the foreign exchange market and controlling high growth in money supply, SBP decided to gradually decrease the outstanding amount of liquidity injections. Since the beginning of FY14, interbank market liquidity conditions have considerably eased primarily due to substantial increase in the pace of government borrowing from the SBP. In fact, SBP mopped up Rs. 1,556.45 billion and injected Rs. 630.70 billion during Q1-FY14.

In terms of controlling growth in money supply, however, SBP’s e�orts of curtailing liquidity injections did not experience much success as these were o�set by an increase in direct �scal borrowings from the SBP. �e increase of Rs. 1,446 billion in budgetary borrowings from the banking system during FY13 was almost Rs. 1 trillion higher than the original target and was even higher than the total expansion in M2. Deviation of this scale has signi�cantly constrained e�ective monetary management, disrupted �nancial intermediation in the economy, and has led to a sharp increase in domestic debt. Showing a growth of 24.6% in FY13, the stock of government’s domestic debt has reached Rs. 9.5 trillion as of end-June 2013. Similarly, a considerable increase in public debt to revenue ratio re�ects weak repayment capacity of the government. �e acceleration in �scal borrowings from the SBP during H2-FY13, Rs. 714 billion, and Q1-FY14 up till 30th August 2013, Rs. 547 billion, is particularly worrisome. �e inability to raise the tax-GDP ratio is the fundamental source of large �scal de�cits, high borrowings, and rising debt. Although there has been a consistent gap between Federal Board of Revenue’s (FBR) budget targets and actual outcomes in the last few years, the gap of Rs. 445 billion in FY13 was exceptionally high. In fact, this is more than the cumulative shortfall of Rs. 349 billion during the last �ve years.

On the external front, stress in the external account has gradually increased with every passing month of 2013 due to shrinking net capital and �nancial �ows and high loan repayments to the IMF.

While the former was only $517 million or 0.2 percent of GDP, the latter increased to $3 billion in FY13. As a result, despite reduction in the external current account de�cit by about half, to $2.3 billion or 1.0 percent of GDP, the SBP’s foreign exchange reserves declined to $6 billion by end-June 2013 from $10.8 billion at the beginning of FY13. �ese stand at $5.2 billion as on 6th September, 2013 after receiving $544.5 million under the new IMF program. Despite pressures and speculations of a drop in the value of the Pak rupee the foreign exchange market has largely remained stable in FY13. However, since the beginning of FY14 the rupee has depreciated by 5.0 percent as of 12th September 2013.

�e year-on-year CPI based in�ation rate was recorded at 8.3% in July 2013, then to 8.55% in August 2013, however dipped down to 7.39% in September 2013.�ough CPI In�ation remained within single digit, however, it witnessed an upward trend as it increased to 7.39 percent in September 2013 compared to 5.85 percent in June 2013 and 6.6 percent in March 2013. �e impact of upward adjustments in energy prices and an increase in the GST together with the removal of certain exemptions put pressure on in�ation.In order to counter in�ationary expectations, SBP raised the discount rate by 50 basis points to 9.5 percent with e�ect from September 16, 2013.

Movement in KIBOR

Treasury Bills:

A total of 6 T-bill auctions were held by SBP during the quarter in which a total amount of Rs. 1,348.88 billion was raised. Since the beginning of FY14, market’s preference for shorter tenor T-Bills has increased as about 83% of the bank’s total o�ers in recent T-Bill auctions were concentrated in 3-month bills.

T-Bill Auctions (Amount in PKR billion; rates in %)

Pakistan Investment Bonds

�e accepted amount in the PIB auctions during Q1-FY14 fell short of the target .

PIB Auctions (Yields in % and Face Value in PKR billion)

Debt Market

�e table below summarizes the TOP 15 trades of TFCs/Sukuk on the basis of Face value during the Q1-FY14:

Equity Market

KSE-100 index made a strong start to the �scal year 2014, as the index gained 826.99 points, or 3.94%, to stand at 21,832.68 points during the �rst three months of FY14. During the period, index struggled to cross the 23,000 points level and made a high of 23,776.22 on a closing basis. Stock market began the �rst month of �scal year 2014 with a strong rally, overcoming jitters stemming from treason proceedings against former president General (retd) Pervez Musharraf and slowdown in global markets. �e government’s successful negotiations with IMF for a $5.3 billion loan, resolution of circular debt by issuing treasury bills and bonds and anticipation of strong corporate earnings for the quarter ended June 30 buoyed investors’ con�dence as the share prices appreciated across the board and index posted a gain of 2.307.09 points, or 10.98% to settle at 23,312.78 level in July.

After posting strong gain in July, KSE-100 faltered in August as investors continued to worry about ever-escalating Syrian crisis and tumbling regional markets. Stock market further pressured by a slew of disappointing and less-than-expected corporate earnings, falling foreign exchange reserves and high in�ation �gures for July. Moreover, concerns on a possible interest rate hike in the upcoming monetary policy announcement, potential spike in oil prices, decline in cement prices due to breakdown in price discipline, heavy foreign net selling and persistent depreciation in the rupee dragged the KSE-100 index down 1,151.93 points, or 4.94%, to 22,160.85 in August. �e index showed a mixed performance in September. In the �rst half of the month, the approval of the $6.64 billion loan package by IMF, the plans to privatize Pakistan International Airlines, strong foreign in�ows and the release of the IMF’s �rst tranche worth of $550 million helped lift the index to 23,639.97 on a closing basis. However, sentiment reversed towards the end of the month after the central bank’s decision to increase the rate of return on savings deposits to 6.5%. Moreover, steep decline in the value of Pakistani

rupee against the US dollar, constant repayments to IMF, a 50 basis points increase in the discount rate and heavy foreign net selling dragged the KSE-100 index down 328.17 points, or 1.48%, to 21,832.68 in September.

Mutual Fund Market:

�e total net assets decreased to Rs. 359.947 billion in the �rst quarter of FY14 versus Rs. 361.668 billion for the Q4FY13, a reduction of 0.48% quarter over quarter. �e open-end funds went up by 0.71% to Rs. 327.594 billion, pension funds went up by 9.67% to Rs. 5.288 billion and closed-end decreased by 14.23% to Rs. 27.064 billion.

Funds launched during the quarter Q1-FY14

Funds matured during the quarter Q1-FY14

Funds with changed structure/other features Energy Crisis: Causes and ImpactsBy Sara Aquil Walji, Research Analyst, HBL Asset Management

Energy is the cornerstone for any economy’s development and growth. �e current situation has worsened in Pakistan over the past few years and likely to continue if measures are not taken to mitigate the issue on a long term basis. �e gap between demand and supply has reached 6000MW resulting in scheduled and unscheduled load shedding, negatively a�ecting our industrial sector, hurting our exports and has even hampered the GDP growth rate by 2%. Subsidies to the power sector have steadily been increasing and form the biggest part of total subsidies amounting to around Rs 349,287mn (95% of the total subsidies) in FY 2012-13. �e new government has allocated Rs. 220,100mn to the power sector for the FY 2013-14 which is 91.5% of the total subsidy budget. (Source: Annual budget 2014) With recent emphasis on matters to resolve energy crisis and develop renewable and non-renewable sources of energy, it is worthwhile to note why energy crisis became as severe as it is now.

�e root of this crisis is that Pakistan’s electricity generation mix is highly skewed towards the most expensive kinds .�ere appears to be an almost inverse relationship between the sources of electricity that are most expensive to set and those that are most expensive to run. �e following chart depicts this relationship:

Source: Express Tribune �is highlights the fact why there is a heavy concentration toward

the construction of thermal power plants since they are relatively cheaper to build than hydropower plants. �e government has not dedicated enough funds for the development of hydropower projects which are the most expensive to build but cheapest to run on a per unit basis.Pakistan’s electricity generation is highly dependent on imported oil as almost $14.5bn worth of oil is imported each year which accounts for around 35% of electricity generation. Comparing Pakistan with India and Bangladesh reveals that Pakistan relies heavily on oil for electricity generation where as India uses coal, a relatively cheaper source for electricity generation and Bangladesh on the other hand allocates 73% of its electricity generation to gas.

Source: Economic Survey report for 2012-2013

With a prominent shift in recent years towards the use of thermal power stations instead of hydropower sources and a reduction in electricity generation from coal, Pakistan’s electricity costs ends up being more expensive than it needs to be and since the government has adopted a policy of uniform tari� across the country the Tari� Di�erential Subsidy owed by the Government of Pakistan on an annual basis has increased substantially.

Circular debt is another major concern hampering the growth of Pakistan’s economy. In simple words circular debt is the amount of

cash shortfall within the Central Power Purchasing Agency (CPPA) that it cannot pay to power supply companies. �is shortfall is the result of (a) the di�erence between the actual cost of providing electricity in relation to revenues realized by the power distribution companies (DISCOs) from sales to customers plus subsidies; and (b) insu�cient payments by the DISCOs to CPPA out of realized revenue as they give priority to their own cash �ow needs. (Source: USAID Report March 2103)

�is revenue shortfall cascades through the entire energy supply chain, from electricity generators to fuel suppliers, re�ners, and producers; resulting in a shortage of fuel supply to the public sector thermal generating companies (GENCOs), a reduction in power generated by Independent Power Producers (IPPs), and an increases in load shedding.

According to the report published by the USAID in March 2013, circular debt amounts to Rs872bn which is actually 4% of GDP. According to Pakistan’s Economic Survey report for 2012-2013, there is a strong relationship between GDP growth rate and electricity growth as shown in the �gure below. It can be easily deduced that periods of low or negative electricity growth have witnessed low GDP growth rate, while periods where electricity growth picked up there is increase in GDP growth rate.

�is comes as no surprise, since industrial output is heavily dependent on the amount of electricity delivered to them. Continuous power breakdowns prevented industries from operating at their full capacity level. �e power outages have obstructed the viability of the textile industry as exporters were unable to meet their

commitments. During July-March 2012-13, foreign exchange earnings through exports of synthetic textile fabrics and woolen industry showing a decline of 25.3% and 5.1% respectively as compared to last year. During the period under review even in quantity term also recorded a decline of 30% and 15.8% respectively.

Coupled with an ine�cient system and expensive fuel mix, power theft is another major issue faced by Pakistanis. It is interesting to note that annual revenue collection e�ciency was estimated to be around 87%; however that 13% of lost e�ciency has a �nancial impact of Rs 86bn which is equivalent to 41 days of furnace oil costs for thermal power plants. �e following �gure shows the percentage of bills that were uncollected in 2012. �e e�ciency of di�erent DISCOs is disproportionate in revenue collection. �is essentially leads to the inclusion of the cost of power theft in the power tari�, meaning that the honest payers also bear the cost of those that steal.

Power theft is not only committed by normal residents but the main defaulters are the government institutions themselves. �e government owns around 51% of the uncollected bills which amounts to Rs 118bn out of the uncollected revenue receipts of Rs 386bn. In my opinion, this the amount which causes the discrepancy between the amount of RS500.3bn to be injected to resolve the circular debt issue and �gure of Rs 872.41bn since the government has a proposal to o�set provisional dues via a �scal adjuster. Due to a growing economy, Pakistan’s energy needs have more than doubled in the past 15 years. Energy shortages have far devastating

e�ects on our economy. Not only does it cause civil disturbances on a small scale but it a�ects our GDP on a larger note. Injecting money into the chain will only resolve the issue on a temporary basis. �ese challenges require a multi-prong approach that would address energy shortages in the immediate future and help the country build longer term energy su�ciency.

�ere needs to be a shift away from thermal power to alternative sources of energy which are not only cheaper but also environmentally friendly. Pakistan has large untapped renewable resources such as water, sun and wind and recently the government has taken keen interest on the development of hydro power projects and Neelum Jhelum Hydroelectric Project is one of the many projects which the new government has started which will approximately add 5.15bn units of electricity annually. Moreover, an e�ective system of governance must be in place to curb theft, recuperate dues and enforce policies.

�e Importance of Asset Allocation in attaining Optimal Returns

By Yamna Hassan, Asst. Manager-Business DevelopmentLakson Investments

“Tis the part of a wise man to keep himself today for tomorrow, and not venture all his eggs in one basket.” – Miguel de Cervantes, Don Quixote de la Mancha, 1605.

�e afore-mentioned quote indicates that along with being a great writer, Cervantes would have also proved to be a wise investor.

Investment related decisions are preceded by de�ning a proper Asset Allocation plan. According to recent research, the Asset Allocation decision is responsible for 91.5 percent of the variation between returns on di�erent portfolios. Given the importance of Asset Allocation, it has attained a center stage in any investment decision.

Asset Allocation is mainly important for two de�nite reasons. �e �rst reason pertains to portfolio design; variation in portfolio designs can lead to some investment decisions being winners while the rest being losers, and it is believed that if a portfolio is thoughtfully constructed and contains an optimal mix of securities that perform di�erently from each other (i.e they have little correlation in between them), chances of this portfolio yielding a more stable return is higher. �is is because if some securities in a portfolio are inconsistent and volatile, other, more stable securities can nullify the inconsistency of the entire portfolio, hence stabilizing the yield pattern.

�e second reason pertains to the vision of the investor. Asset allocation allows an investor to �nancially plan for his long-term and short-term goals and avoid impulsive reactions. We will subsequently discuss this aspect of Asset Allocation.

We can divide the Asset Allocation decision into two simple steps as discussed below:

Step 1: Asset Allocation An Asset Allocation strategy can be devised based on the investor’s risk assessment, �nancial goals and return targets. It is the most fundamental step of an investment decision and involves determining an ideal mix of stocks, bonds, cash and other securities in a way such that the portfolio yields a return which best suits an investor’s need. �ere is always a downside of investing too much in bonds or cash as that might certify stable but lower returns. In the same way, too much investment in stocks might lead to portfolio volatility. �erefore, in order to meet your requirements, or keep pace with in�ation, you need to plan an ideal arrangement of securities for your portfolio.

Step 2: Diversi�cationWhile the �rst step bears upon the idea of portfolio construction, this step is linked to the proper dissemination of your assets in a way such that your portfolio is exposed to many di�erent segments of the market, some of which perform independently of the others. Proper diversi�cation of your portfolio can lead to higher and more stable returns.

As mentioned before, the e�ect of diversi�cation is most noticeable when instruments have very little interrelation between them. However, it was easier to build this sort of a portfolio previously than it is today. �is is because roughly over the past 10 years, �nancial markets have become increasingly interrelated and complex. Let us also not ignore the fact that during the 2008 �nancial trouble, most assets tended to perform similarly, leading us to believe in the proposition that most assets are conducive to a similar behavior in times of crisis and instability. �e �gure below shows ways of diversifying a portfolio and entering into newer and assorted mix of investment vehicles.

FIGURE 1:

Figure shows ways of diversifying a portfolio.

Institutions that do not pay requisite importance to the Asset Allocation decision might end up damaging their returns. Usually, institutions are advised to invest in a 60:40 ratio (Stocks: �xed income instruments) to remain on the safe side. Whereas, individuals are recommended to invest in an investment spectrum ranging from 100 percent stocks to 100 percent bonds depending on their separate variable characteristics. However, the Asset Allocation decision is dependent on several other factors and cannot be generalized for di�erent investors.

Following are a few, newer and e�cient ways that have now been developed and can be used for attaining optimal asset allocation:

Mean Variance Optimization

Mean Variance Optimization is a quantitative technique that can be used to calculate the trade-o� between maximum expected return and risk tolerance. �is technique has gained popularity over time because in recent times, the technique is applied on an asset class level as opposed to being applied only to portfolios of individual stocks previously.

�e development of Mean Variance Optimization has not only bene�tted institutional investors but has resulted in a breakthrough for retail brokerage houses as well, which, prior to this development were restricted on their advisory role to the investors. However, recently, they are proposing a greater degree of passive security and more thoughtful asset allocation recommendations to their investors. �is has become possible by using optimization and aiming to attain a favorable position with maximum expected return, minimal risk, or both.

Moreover, a few re�ned approaches taken from utility theory and behavioral economics can be deployed to develop polls or surveys that can authentically gauge an individual’s risk preferences.

Pension funds have also been familiarized with Optimization. Such funds take into account the reciprocity of both assets and liabilities and not only the assets unlike other funds. �e objective of Asset Allocation for these funds is to amplify the fund surplus i.e liabilities subtracted from assets for a stated degree of risk tolerance.

Tactical Asset AllocationTactical asset allocation is the process of adjusting a particular portfolio based on changes in the market value of assets contained in that portfolio. �e technique is quite dynamic and involves deviation from the strategic asset allocation when an investor’s short-term foresight is not aligned with his long term foresight used to develop a strategic asset allocation plan and precise short-term predictions on part of the investor can lead to better returns.

Pragmatically speaking, Tactical Asset Allocation models tend to recommend contrarian trades, that is, they recommend purchasing an asset as its current market value drops and vice versa. �us, tactical Asset Allocation involves perpetually arranging your portfolio based on your needs and changes in the market. One consequence of Tactical Asset Allocation is that by overweighting certain assets during certain times and underweighting others, the portfolio is riskier because of its reduced diversi�cation. �us, to

o�set this additional risk factor, this strategy would need to generate above market returns. �e notion, whether Tactical Asset Allocation Models have achieved this is still a matter of rumination and study but because the probable returns from successful Tactical Asset Allocation would be large, researchers will keep inspecting, and investors won’t cease to be on the look out for their discoveries.

Insured Asset Allocation�is strategy is similar to a portfolio insurance strategy and is a mirror image of the Tactical Asset Allocation strategy. With this strategy, a base portfolio parameter is �xed and the value of the portfolio is not allowed to fall below this base parameter. As long as the portfolio achieves a return above this parameter, you actively to try to increase the portfolio value as much as possible. If, however, the portfolio ever drops to below the base value, investment in risk-free securities enables the base value to become �xed.

�e main target audiences for this approach are risk-averse investors who desire a certain level of active portfolio management and also covet the protection of �xing a certi�ed minimum return below which the portfolio is not allowed to decline. For instance, this approach is best for an investor who has planned a nominal lifestyle for himself after retirement.

Asset Allocation & Uncertain Times�e importance of active portfolio management and wise asset allocation strategy has been reiterated enough. But at the brink of serious economic uncertainty, expectation for stock market returns is somewhat muted. �erefore, it is believed that in such a situation, a dynamic asset allocation plan should come into play for the advantage of certain clients.

Dynamic Asset Allocation uses a long term strategic Asset Allocation strategy as its foundation. Alternate investments can be added to the core portfolio for the sake of complementing it. It is even better, if these investments include segments which yield a higher return and bear little interdependence, so as to achieve a greater level of diversi�cation.

Besides, dynamic Asset Allocation strategies can also be accompanied by �exible investment strategies; tactical actions that are short-term in nature and aim to bank on perceived market opportunities. If 10-20% of your assets are allocated for such investments, your portfolio can be expected to react better in times of changing trends and conditions.

Asset allocation is evolving past a traditional “purchase and retain” dogma. Whilst this might not suit all clients, exercising a dynamic asset allocation plan can create a portfolio better able to handle uncertain market environments. Not to forget the fact that a solid strategic asset allocation plan remains the core strategy behind any tactical asset allocation strategy.

Asset Allocation & the local scenarioWith interest rates in Pakistan consistently hovering above 10 percent for the past �ve years, anyone would expect Pakistanis to be encouraged enough to save and reap bene�ts of higher returns. However, reality states that Pakistan actually stands out to re�ect one of the lowest savings in the region. Given the fact that majority of Pakistanis are not so keen on investing mainly because their expenditures on necessities do not leave any room for savings or so for other reasons, there is a chunk of people who are inclined in saving for a better future and lifestyle.

With growth of urban nuclear families, educated middle to upper middle class is inspirited to plan properly for a child’s education, health and future life. Reasons for investment in Pakistani society vary from a child’s education to his marriage, from being cushioned against the toils of post-retirement life to maternity expenditures. Young professionals may want to invest as a means to generate seed capital for their potential business idea or to live their dreams of traveling or wayfaring.

Reasons for investing are many. With di�erent individuals and di�erent investment objectives in mind, the asset allocation needs of these investors must be customized accordingly.

Asset Allocation & Financial PlanningOnce you are done with choosing your model for Asset Allocation, the �nal stage is to test this model by contextualizing it with a precise �nancial plan. It might be easy for an investor to choose which Asset Allocation plan will provide him with the best possible returns but the investor should also �gure out a way to determine that expected return and also estimate the trade-o� for that higher return potential.

A well-concocted �nancial plan will guide the investor out of this bewilderment. First, it will determine what level of projected investment return is necessary to allow you to meet your lifestyle goals, which can help lead you to the right mix of stocks, bonds and cash. Second, the plan will evaluate the impact of the portfolio risk associated with that mix.

Traditionally, �nancial planning models focused on expected return and neglected the variability of outcomes that is associated with increased volatility. With the introduction of probability-based planning tools, the investor can foresee the e�ect of risk on their investment portfolios, they can vary the amount of risk and can study their corresponding returns. For example a portfolio bearing higher risk may yield a higher return but it also has a probability of falling far short beneath their targets.

When using an asset allocation approach to designing a portfolio, it is important to not focus just on the expected return of that portfolio. �e risk associated with an increasing, or decreasing, portfolio return is just as important to the success of an investment strategy.

Asset Allocation & �e Future

Most forecasters fall into two divisions. Forecasters in the �rst division are eager to predict that the future will closely mirror the recent past. �eir ideals are those generals who are always preparing to �ght the last war. Forecasters in the second division rely heavily

upon the adage that the only constant is change itself. Proponents of this school of thought usually don’t know what to expect, but are quite sure it will be nothing like anything we’ve seen before. �ese individuals do realize the problems of delineating the future of this area.

We should view the future of asset allocation through lenses borrowed from both divisions. �at is, certain aspects of asset allocation today will continue to be recognizable for the years to come. To be more precise, the goals and importance of asset allocation will not change, but the mechanisms by which investors seek to achieve those goals will be new.

�e goal of the asset allocation decision, was, is, and will be to select a combination of assets that will generate a return su�ciently high and safe so as to o�set some future liability. It is also safe to say that asset allocation decisions will have a continuing large role in explaining portfolio returns.

STATISTICSIndustry-wide - Net Assets (PKR million)

Net Assets - Open End Funds (PKR million)

STATISTICS06

page 18 of 24 mufap quarterly newsletter

Net Assets - Closed End Funds (PKR million)

Net Assets - Pension Schemes (PKR million)

Sales (PKR million) Redemptions (PKR million) Net Sales (PKR million)

Open End Funds' Return** Closed End Funds' Return**

General Pension Schemes Return**

Islamic Pension Schemes Return**

Schemes FY09 FY10 FY11 FY12 FY13 FY14Q1

Equity 22,171 24,036 17,810 19,099 27,191 23,476 Income 1,084 1,111 1,125 1,142 1,125 1,138 Money Market - - - - - - Aggressive Income - - - - - - Asset Allocation - - - - - - Balanced 1,243 1,144 1,317 1,286 942 875 Capital Protected 1,297 1,404 - - - - Commodity - - Fund of Funds 283 345 435 424 549 - Index Tracker - - - - - - Islamic Equity 1,174 1,404 1,707 - - - Islamic Income - - - - - - Islamic Money Market - - - - - - Islamic Aggressive Income - - - - - - Islamic Asset Allocation - - - - - - Islamic Balanced 1,143 1,278 1,523 1,535 1,747 1,576 Islamic Capital Protected - - - - - - Islamic Index Tracker - - - - - - Total 28,394 30,723 23,917 23,486 31,554 27,064

Schemes FY09 FY10 FY11 FY12 FY13 FY14Q1 Pension 349 572 655 1,101 1,865 2,147 Islamic Pension 530 729 902 1,641 2,958 3,142 Total 878 1,301 1,558 2,742 4,822 5,289

Source: MUFAP

Source: MUFAP

Meeting of the Board of Directors

In order to ensure that the Board of Directors ful�ls the duties and responsibilities conferred by the members of MUFAP, the Board conducts meetings on a regular basis to make immediate and prudent decisions. �e Board of Directors held three meetings during the quarter Jul-Sep 2013.

�e activities undertaken by Board are as follows:

Proposed amendments in the de�nition of Related Parties in Restricted List of Code for Distributors

�e Board deliberated in detail on the matter of proposed

amendments in the de�nition of Related Parties in the Restricted List of Code for Distributors. After careful consideration of the impacts that the amendments may entail, it was decided that all individuals (namely employees, directors, sponsors of the RSPs) should be excluded from the de�nition of Related Parties. �e revised de�nition is applicable to all new investments brought in on or after July 16, 2013 and is not applicable to existing investments made by or before July 15, 2013.

Valuation of GOP Ijarah Sukuk

�e Board recommended that AMCs should use ‘PKISRV’ quoted on Reuters as the relevant price to value the GOP Ijarah Sukuks to determine net assets of CIS under their management, which the SECP approved in September.

Meetings of the Committees

MUFAP Committees held many discussions to make important, well planned proposals on behalf of industry. �e following table presents the number of meetings held during the quarter Jul-Sep’13.

Technical Committee - VPS

�e VPS – Technical Committee held extensive discussions to discuss the dissimilar taxation and operational practices being adopted by di�erent VPS Managers. �e VPS Committee constituted a Sub-Committee, involving a representative from each VPS Manager, to draw up recommendations for the tax treatment. �e Committee also engaged Senior Tax expert, Mr. Shabbar Zaidi on the matter and has requested for clari�cation from FBR on one of the matters.

Meeting with NCCPL A meeting was held between operations sta� of AMCs and NCCPL representatives on July 22, 2013 to evaluate the mechanics and possible data sharing from AMCs to NCCPL for netting of CGT. It was decided that NCCPL would develop a concept paper covering brief mechanism of centralized CGT collection to AMCs for their review and comments.

Elections to elect Directors/Executive Committee Members of MUFAP for the year 2013 / 2014

As required under the Trade Organizations Rules, 2007, MUFAP is required to hold its elections each year to elect Directors against the vacancies arising on account of completion of two-year tenure of some Directors. Board members are elected for a two-year term.

�e retiring Directors on the completion of their two year tenure on September 30, 2013 are: 1. Mr. Adnan Siddiqui (Resigned August-2013)2. Mr. Amer Maqbool 3. Mr. Imran Azim 4. Mr. Mir Muhammad Ali 5. Mr. Nihal Cassim

�e continuing Directors of MUFAP for the year 2013/ 2014 are: 1. Dr. Amjad Waheed 2. Mr. Imran Motiwala 3. Mr. Mir Adil Rashid 4. Mr. Rashid Mansur 5. Ms Maheen Rahman6. Ms Hina Ghazanfar (on reserved seat for women)

In addition, Mr. Rehan N. Shaikh will serve on the Board as provided under Rule 23(5)(d) of the Trade Organization Rules, 2007. At the Extra Ordinary General Meeting on September 26, 2013, MUFAP announced the appointment, by virtue of elections, of the following directors to the Board, namely:1. Mr. Farid Ahmed Khan 2. Mr. M. Habib-ur-Rahman 3. Mr. Mohammad Shoaib 4. Mr. Yasir Qadri 5. Mr. Enamullah Khan

New Board of Directors

�e new Board of Directors of MUFAP at its �rst meeting held on October 1, 2013 elected Dr. Amjad Waheed as Chairman, Mr. Mohammad Shoaib as Senior Vice Chairman and Mr. Farid Ahmed Khan as Vice Chairman MUFAP for the year 2013-2014.�e Board of Directors of MUFAP for the 2013-14 term is as follows:

1) Dr. Amjad Waheed - Chairman; 2) Mr. Mohammad Shoaib - Senior Vice Chairman; 3) Mr. Farid Ahmed Khan - Vice Chairman;4) Mr. Rehan N. Shaikh;5) Mr. Rashid Mansur;6) Mr. M. Habib-ur-Rahman;7) Mr. Yasir Qadri8) Mr. Imran Motiwala;9) Ms Hina Ghazanfar;10) Ms Maheen Rahman;11) Mr. Mir Adil Rashid;12) Mr. Enamullah Khan; and13) Ms Mashmooma Z. Majeed - Chief Executive

Chairman Dr. Amjad Waheed, CFA

Dr. Amjad Waheed holds a doctorate in Investments & Finance from Southern Illinois University, USA and is also a Chartered Financial Analyst. For the last 7 years he is CEO of NBP Fullerton Asset Management Ltd (NAFA), which is a subsidiary of National Bank of Pakistan, with Fullerton Fund Management Company of Singapore as the other joint venture partner. NAFA is presently managing fourteen mutual funds and several portfolios with about Rs 45 billion invested in these funds. NAFA is among the largest Asset Management Companies in Pakistan today.

Before joining NAFA, Dr. Waheed was Head of Equity Mutual Funds & Portfolios at Riyad Bank, Saudi Arabia, for about 5 years where he was managing US$ 7.5 billion invested in 22 mutual funds. Prior to that Dr. Waheed was Head of Investments at NIT,

and Chief Operation O�cer of FC-ABN AMRO Equities for several years. Before moving back to Pakistan, Dr. Waheed was Assistant Professor of Finance at Tennessee State University, USA and has published several articles in top journals of the world such as Journal of Banking & Finance and Financial and Financial Management.Dr. Waheed has served on the Board of various companies including Siemens, Nishat Mills, PICIC, Askari Bank, Millat Tractors, Fauji Fertilizer, Pakitstan Tobacco Company, Treet Corporation, Gul Ahmed Textile, Bata Pakistan.

Senior Vice Chairman Mr. Mohammad Shoaib, CFA

Mr. Mohammad Shoaib, CFA is the Chief Executive of Al Meezan Investment Management Ltd. He has played a key role in setting up the company and has been associated with it since inception. He is a highly quali�ed and seasoned professional with 23 years experience in capital markets. He has to his credit many accolades and awards, the most signi�cant of them being the "Most In�uential CFA charter holder" awarded by CFA Institute in 2006.

Mr. Shoaib holds an MBA degree from IBA besides being a Chartered Financial Analyst (CFA) charter holder. He has to his credit the honor of being the founder and �rst president of CFA Association of Pakistan, a member society of CFA Institute. He has been active participant in the Islamic �nance and asset management for the last 10 years. In this respect, he has also actively participated as a speaker and panelist in various international and domestic seminars, conferences and workshops.

Mr. Shoaib has also served in voluntary capacity at di�erent domestic and international institutions. He has served as a Director on the Board of Karachi Stock Exchange and Vice Chairman on the Board of Mutual Funds Association of Pakistan. He is currently serving on the Board of Directors of Pakistan Institute of Corporate Governance and Institute of Capital Markets. He has also served on various global and regional committees of CFA Institute including Asia Paci�c Advocacy Committee, Global Task Force on Corporate

Governance, GIPS Regional Council and Asset Manager Code Advisory Committee. He has also had the honour to represent over 16,000 charterholders in Asia Paci�c Region as their representative on the Presidents' Council of CFA Institute.

Vice Chairman Mr. Farid Ahmed Khan, CFA

Mr. Farid Ahmed Khan, CFA is the CEO of ABL Asset Management. He has been involved with capital markets for over 18 years and has a broad-based, global experience with bulge bracket �rms in Asset Management, Investment Banking, Investment Research and Sales, Business Development & International Project Finance. He joined ABL AMC from Credit Suisse, where he was the Country Manager of Credit Suisse Pakistan. Prior to that, he worked for MCB, initially as Head of Investment Banking Group and later as the CEO of MCB Asset Management. Mr. Khan has extensive experience outside Pakistan, having worked at Morgan Stanley, ING Barings Securities and CLSA Emerging Markets in Kuala Lumpur, London and Istanbul in a variety of senior positions. He holds an MBA in Finance from IBA, Karachi and got his CFA quali�cation in 1998.

New Committees

MUFAP Board elected its Professional Committees, Chairperson and Vice-Chairperson of each Committee for the year 2013-14. �e list of Committees, their Chairperson and Vice-Chairperson is as follows:

SECP forms Shariah Advisory Board

SECP constituted a Shariah Advisory Board (SAB) to harmonize the Shariah interpretations and strengthen the regulatory and supervisory oversight of Islamic �nancial institutions (IFIs) and Islamic capital markets (ICMs) in Pakistan. It will also advise the Commission on the Shariah-compliance aspects of various products launched and or the processes being adopted by the regulated entities. It will also provide guidance for issuance of new laws, rules and regulations for e�ective monitoring and supervision of Islamic Financial Products and to suggest ways and means for development of IFIs and ICMs in the country.

Money Market

To meet the challenges of maintaining stability in the foreign exchange market and controlling high growth in money supply, SBP decided to gradually decrease the outstanding amount of liquidity injections. Since the beginning of FY14, interbank market liquidity conditions have considerably eased primarily due to substantial increase in the pace of government borrowing from the SBP. In fact, SBP mopped up Rs. 1,556.45 billion and injected Rs. 630.70 billion during Q1-FY14.

In terms of controlling growth in money supply, however, SBP’s e�orts of curtailing liquidity injections did not experience much success as these were o�set by an increase in direct �scal borrowings from the SBP. �e increase of Rs. 1,446 billion in budgetary borrowings from the banking system during FY13 was almost Rs. 1 trillion higher than the original target and was even higher than the total expansion in M2. Deviation of this scale has signi�cantly constrained e�ective monetary management, disrupted �nancial intermediation in the economy, and has led to a sharp increase in domestic debt. Showing a growth of 24.6% in FY13, the stock of government’s domestic debt has reached Rs. 9.5 trillion as of end-June 2013. Similarly, a considerable increase in public debt to revenue ratio re�ects weak repayment capacity of the government. �e acceleration in �scal borrowings from the SBP during H2-FY13, Rs. 714 billion, and Q1-FY14 up till 30th August 2013, Rs. 547 billion, is particularly worrisome. �e inability to raise the tax-GDP ratio is the fundamental source of large �scal de�cits, high borrowings, and rising debt. Although there has been a consistent gap between Federal Board of Revenue’s (FBR) budget targets and actual outcomes in the last few years, the gap of Rs. 445 billion in FY13 was exceptionally high. In fact, this is more than the cumulative shortfall of Rs. 349 billion during the last �ve years.

On the external front, stress in the external account has gradually increased with every passing month of 2013 due to shrinking net capital and �nancial �ows and high loan repayments to the IMF.

While the former was only $517 million or 0.2 percent of GDP, the latter increased to $3 billion in FY13. As a result, despite reduction in the external current account de�cit by about half, to $2.3 billion or 1.0 percent of GDP, the SBP’s foreign exchange reserves declined to $6 billion by end-June 2013 from $10.8 billion at the beginning of FY13. �ese stand at $5.2 billion as on 6th September, 2013 after receiving $544.5 million under the new IMF program. Despite pressures and speculations of a drop in the value of the Pak rupee the foreign exchange market has largely remained stable in FY13. However, since the beginning of FY14 the rupee has depreciated by 5.0 percent as of 12th September 2013.

�e year-on-year CPI based in�ation rate was recorded at 8.3% in July 2013, then to 8.55% in August 2013, however dipped down to 7.39% in September 2013.�ough CPI In�ation remained within single digit, however, it witnessed an upward trend as it increased to 7.39 percent in September 2013 compared to 5.85 percent in June 2013 and 6.6 percent in March 2013. �e impact of upward adjustments in energy prices and an increase in the GST together with the removal of certain exemptions put pressure on in�ation.In order to counter in�ationary expectations, SBP raised the discount rate by 50 basis points to 9.5 percent with e�ect from September 16, 2013.

Movement in KIBOR

Treasury Bills:

A total of 6 T-bill auctions were held by SBP during the quarter in which a total amount of Rs. 1,348.88 billion was raised. Since the beginning of FY14, market’s preference for shorter tenor T-Bills has increased as about 83% of the bank’s total o�ers in recent T-Bill auctions were concentrated in 3-month bills.

T-Bill Auctions (Amount in PKR billion; rates in %)

Pakistan Investment Bonds

�e accepted amount in the PIB auctions during Q1-FY14 fell short of the target .

PIB Auctions (Yields in % and Face Value in PKR billion)

Debt Market

�e table below summarizes the TOP 15 trades of TFCs/Sukuk on the basis of Face value during the Q1-FY14:

Equity Market

KSE-100 index made a strong start to the �scal year 2014, as the index gained 826.99 points, or 3.94%, to stand at 21,832.68 points during the �rst three months of FY14. During the period, index struggled to cross the 23,000 points level and made a high of 23,776.22 on a closing basis. Stock market began the �rst month of �scal year 2014 with a strong rally, overcoming jitters stemming from treason proceedings against former president General (retd) Pervez Musharraf and slowdown in global markets. �e government’s successful negotiations with IMF for a $5.3 billion loan, resolution of circular debt by issuing treasury bills and bonds and anticipation of strong corporate earnings for the quarter ended June 30 buoyed investors’ con�dence as the share prices appreciated across the board and index posted a gain of 2.307.09 points, or 10.98% to settle at 23,312.78 level in July.

After posting strong gain in July, KSE-100 faltered in August as investors continued to worry about ever-escalating Syrian crisis and tumbling regional markets. Stock market further pressured by a slew of disappointing and less-than-expected corporate earnings, falling foreign exchange reserves and high in�ation �gures for July. Moreover, concerns on a possible interest rate hike in the upcoming monetary policy announcement, potential spike in oil prices, decline in cement prices due to breakdown in price discipline, heavy foreign net selling and persistent depreciation in the rupee dragged the KSE-100 index down 1,151.93 points, or 4.94%, to 22,160.85 in August. �e index showed a mixed performance in September. In the �rst half of the month, the approval of the $6.64 billion loan package by IMF, the plans to privatize Pakistan International Airlines, strong foreign in�ows and the release of the IMF’s �rst tranche worth of $550 million helped lift the index to 23,639.97 on a closing basis. However, sentiment reversed towards the end of the month after the central bank’s decision to increase the rate of return on savings deposits to 6.5%. Moreover, steep decline in the value of Pakistani

rupee against the US dollar, constant repayments to IMF, a 50 basis points increase in the discount rate and heavy foreign net selling dragged the KSE-100 index down 328.17 points, or 1.48%, to 21,832.68 in September.

Mutual Fund Market:

�e total net assets decreased to Rs. 359.947 billion in the �rst quarter of FY14 versus Rs. 361.668 billion for the Q4FY13, a reduction of 0.48% quarter over quarter. �e open-end funds went up by 0.71% to Rs. 327.594 billion, pension funds went up by 9.67% to Rs. 5.288 billion and closed-end decreased by 14.23% to Rs. 27.064 billion.

Funds launched during the quarter Q1-FY14

Funds matured during the quarter Q1-FY14

Funds with changed structure/other features Energy Crisis: Causes and ImpactsBy Sara Aquil Walji, Research Analyst, HBL Asset Management

Energy is the cornerstone for any economy’s development and growth. �e current situation has worsened in Pakistan over the past few years and likely to continue if measures are not taken to mitigate the issue on a long term basis. �e gap between demand and supply has reached 6000MW resulting in scheduled and unscheduled load shedding, negatively a�ecting our industrial sector, hurting our exports and has even hampered the GDP growth rate by 2%. Subsidies to the power sector have steadily been increasing and form the biggest part of total subsidies amounting to around Rs 349,287mn (95% of the total subsidies) in FY 2012-13. �e new government has allocated Rs. 220,100mn to the power sector for the FY 2013-14 which is 91.5% of the total subsidy budget. (Source: Annual budget 2014) With recent emphasis on matters to resolve energy crisis and develop renewable and non-renewable sources of energy, it is worthwhile to note why energy crisis became as severe as it is now.

�e root of this crisis is that Pakistan’s electricity generation mix is highly skewed towards the most expensive kinds .�ere appears to be an almost inverse relationship between the sources of electricity that are most expensive to set and those that are most expensive to run. �e following chart depicts this relationship:

Source: Express Tribune �is highlights the fact why there is a heavy concentration toward

the construction of thermal power plants since they are relatively cheaper to build than hydropower plants. �e government has not dedicated enough funds for the development of hydropower projects which are the most expensive to build but cheapest to run on a per unit basis.Pakistan’s electricity generation is highly dependent on imported oil as almost $14.5bn worth of oil is imported each year which accounts for around 35% of electricity generation. Comparing Pakistan with India and Bangladesh reveals that Pakistan relies heavily on oil for electricity generation where as India uses coal, a relatively cheaper source for electricity generation and Bangladesh on the other hand allocates 73% of its electricity generation to gas.

Source: Economic Survey report for 2012-2013

With a prominent shift in recent years towards the use of thermal power stations instead of hydropower sources and a reduction in electricity generation from coal, Pakistan’s electricity costs ends up being more expensive than it needs to be and since the government has adopted a policy of uniform tari� across the country the Tari� Di�erential Subsidy owed by the Government of Pakistan on an annual basis has increased substantially.

Circular debt is another major concern hampering the growth of Pakistan’s economy. In simple words circular debt is the amount of

cash shortfall within the Central Power Purchasing Agency (CPPA) that it cannot pay to power supply companies. �is shortfall is the result of (a) the di�erence between the actual cost of providing electricity in relation to revenues realized by the power distribution companies (DISCOs) from sales to customers plus subsidies; and (b) insu�cient payments by the DISCOs to CPPA out of realized revenue as they give priority to their own cash �ow needs. (Source: USAID Report March 2103)

�is revenue shortfall cascades through the entire energy supply chain, from electricity generators to fuel suppliers, re�ners, and producers; resulting in a shortage of fuel supply to the public sector thermal generating companies (GENCOs), a reduction in power generated by Independent Power Producers (IPPs), and an increases in load shedding.

According to the report published by the USAID in March 2013, circular debt amounts to Rs872bn which is actually 4% of GDP. According to Pakistan’s Economic Survey report for 2012-2013, there is a strong relationship between GDP growth rate and electricity growth as shown in the �gure below. It can be easily deduced that periods of low or negative electricity growth have witnessed low GDP growth rate, while periods where electricity growth picked up there is increase in GDP growth rate.

�is comes as no surprise, since industrial output is heavily dependent on the amount of electricity delivered to them. Continuous power breakdowns prevented industries from operating at their full capacity level. �e power outages have obstructed the viability of the textile industry as exporters were unable to meet their

commitments. During July-March 2012-13, foreign exchange earnings through exports of synthetic textile fabrics and woolen industry showing a decline of 25.3% and 5.1% respectively as compared to last year. During the period under review even in quantity term also recorded a decline of 30% and 15.8% respectively.

Coupled with an ine�cient system and expensive fuel mix, power theft is another major issue faced by Pakistanis. It is interesting to note that annual revenue collection e�ciency was estimated to be around 87%; however that 13% of lost e�ciency has a �nancial impact of Rs 86bn which is equivalent to 41 days of furnace oil costs for thermal power plants. �e following �gure shows the percentage of bills that were uncollected in 2012. �e e�ciency of di�erent DISCOs is disproportionate in revenue collection. �is essentially leads to the inclusion of the cost of power theft in the power tari�, meaning that the honest payers also bear the cost of those that steal.

Power theft is not only committed by normal residents but the main defaulters are the government institutions themselves. �e government owns around 51% of the uncollected bills which amounts to Rs 118bn out of the uncollected revenue receipts of Rs 386bn. In my opinion, this the amount which causes the discrepancy between the amount of RS500.3bn to be injected to resolve the circular debt issue and �gure of Rs 872.41bn since the government has a proposal to o�set provisional dues via a �scal adjuster. Due to a growing economy, Pakistan’s energy needs have more than doubled in the past 15 years. Energy shortages have far devastating

e�ects on our economy. Not only does it cause civil disturbances on a small scale but it a�ects our GDP on a larger note. Injecting money into the chain will only resolve the issue on a temporary basis. �ese challenges require a multi-prong approach that would address energy shortages in the immediate future and help the country build longer term energy su�ciency.

�ere needs to be a shift away from thermal power to alternative sources of energy which are not only cheaper but also environmentally friendly. Pakistan has large untapped renewable resources such as water, sun and wind and recently the government has taken keen interest on the development of hydro power projects and Neelum Jhelum Hydroelectric Project is one of the many projects which the new government has started which will approximately add 5.15bn units of electricity annually. Moreover, an e�ective system of governance must be in place to curb theft, recuperate dues and enforce policies.

�e Importance of Asset Allocation in attaining Optimal Returns

By Yamna Hassan, Asst. Manager-Business DevelopmentLakson Investments

“Tis the part of a wise man to keep himself today for tomorrow, and not venture all his eggs in one basket.” – Miguel de Cervantes, Don Quixote de la Mancha, 1605.

�e afore-mentioned quote indicates that along with being a great writer, Cervantes would have also proved to be a wise investor.

Investment related decisions are preceded by de�ning a proper Asset Allocation plan. According to recent research, the Asset Allocation decision is responsible for 91.5 percent of the variation between returns on di�erent portfolios. Given the importance of Asset Allocation, it has attained a center stage in any investment decision.

Asset Allocation is mainly important for two de�nite reasons. �e �rst reason pertains to portfolio design; variation in portfolio designs can lead to some investment decisions being winners while the rest being losers, and it is believed that if a portfolio is thoughtfully constructed and contains an optimal mix of securities that perform di�erently from each other (i.e they have little correlation in between them), chances of this portfolio yielding a more stable return is higher. �is is because if some securities in a portfolio are inconsistent and volatile, other, more stable securities can nullify the inconsistency of the entire portfolio, hence stabilizing the yield pattern.

�e second reason pertains to the vision of the investor. Asset allocation allows an investor to �nancially plan for his long-term and short-term goals and avoid impulsive reactions. We will subsequently discuss this aspect of Asset Allocation.

We can divide the Asset Allocation decision into two simple steps as discussed below:

Step 1: Asset Allocation An Asset Allocation strategy can be devised based on the investor’s risk assessment, �nancial goals and return targets. It is the most fundamental step of an investment decision and involves determining an ideal mix of stocks, bonds, cash and other securities in a way such that the portfolio yields a return which best suits an investor’s need. �ere is always a downside of investing too much in bonds or cash as that might certify stable but lower returns. In the same way, too much investment in stocks might lead to portfolio volatility. �erefore, in order to meet your requirements, or keep pace with in�ation, you need to plan an ideal arrangement of securities for your portfolio.

Step 2: Diversi�cationWhile the �rst step bears upon the idea of portfolio construction, this step is linked to the proper dissemination of your assets in a way such that your portfolio is exposed to many di�erent segments of the market, some of which perform independently of the others. Proper diversi�cation of your portfolio can lead to higher and more stable returns.

As mentioned before, the e�ect of diversi�cation is most noticeable when instruments have very little interrelation between them. However, it was easier to build this sort of a portfolio previously than it is today. �is is because roughly over the past 10 years, �nancial markets have become increasingly interrelated and complex. Let us also not ignore the fact that during the 2008 �nancial trouble, most assets tended to perform similarly, leading us to believe in the proposition that most assets are conducive to a similar behavior in times of crisis and instability. �e �gure below shows ways of diversifying a portfolio and entering into newer and assorted mix of investment vehicles.

FIGURE 1:

Figure shows ways of diversifying a portfolio.

Institutions that do not pay requisite importance to the Asset Allocation decision might end up damaging their returns. Usually, institutions are advised to invest in a 60:40 ratio (Stocks: �xed income instruments) to remain on the safe side. Whereas, individuals are recommended to invest in an investment spectrum ranging from 100 percent stocks to 100 percent bonds depending on their separate variable characteristics. However, the Asset Allocation decision is dependent on several other factors and cannot be generalized for di�erent investors.

Following are a few, newer and e�cient ways that have now been developed and can be used for attaining optimal asset allocation:

Mean Variance Optimization

Mean Variance Optimization is a quantitative technique that can be used to calculate the trade-o� between maximum expected return and risk tolerance. �is technique has gained popularity over time because in recent times, the technique is applied on an asset class level as opposed to being applied only to portfolios of individual stocks previously.

�e development of Mean Variance Optimization has not only bene�tted institutional investors but has resulted in a breakthrough for retail brokerage houses as well, which, prior to this development were restricted on their advisory role to the investors. However, recently, they are proposing a greater degree of passive security and more thoughtful asset allocation recommendations to their investors. �is has become possible by using optimization and aiming to attain a favorable position with maximum expected return, minimal risk, or both.

Moreover, a few re�ned approaches taken from utility theory and behavioral economics can be deployed to develop polls or surveys that can authentically gauge an individual’s risk preferences.

Pension funds have also been familiarized with Optimization. Such funds take into account the reciprocity of both assets and liabilities and not only the assets unlike other funds. �e objective of Asset Allocation for these funds is to amplify the fund surplus i.e liabilities subtracted from assets for a stated degree of risk tolerance.

Tactical Asset AllocationTactical asset allocation is the process of adjusting a particular portfolio based on changes in the market value of assets contained in that portfolio. �e technique is quite dynamic and involves deviation from the strategic asset allocation when an investor’s short-term foresight is not aligned with his long term foresight used to develop a strategic asset allocation plan and precise short-term predictions on part of the investor can lead to better returns.

Pragmatically speaking, Tactical Asset Allocation models tend to recommend contrarian trades, that is, they recommend purchasing an asset as its current market value drops and vice versa. �us, tactical Asset Allocation involves perpetually arranging your portfolio based on your needs and changes in the market. One consequence of Tactical Asset Allocation is that by overweighting certain assets during certain times and underweighting others, the portfolio is riskier because of its reduced diversi�cation. �us, to

o�set this additional risk factor, this strategy would need to generate above market returns. �e notion, whether Tactical Asset Allocation Models have achieved this is still a matter of rumination and study but because the probable returns from successful Tactical Asset Allocation would be large, researchers will keep inspecting, and investors won’t cease to be on the look out for their discoveries.

Insured Asset Allocation�is strategy is similar to a portfolio insurance strategy and is a mirror image of the Tactical Asset Allocation strategy. With this strategy, a base portfolio parameter is �xed and the value of the portfolio is not allowed to fall below this base parameter. As long as the portfolio achieves a return above this parameter, you actively to try to increase the portfolio value as much as possible. If, however, the portfolio ever drops to below the base value, investment in risk-free securities enables the base value to become �xed.

�e main target audiences for this approach are risk-averse investors who desire a certain level of active portfolio management and also covet the protection of �xing a certi�ed minimum return below which the portfolio is not allowed to decline. For instance, this approach is best for an investor who has planned a nominal lifestyle for himself after retirement.

Asset Allocation & Uncertain Times�e importance of active portfolio management and wise asset allocation strategy has been reiterated enough. But at the brink of serious economic uncertainty, expectation for stock market returns is somewhat muted. �erefore, it is believed that in such a situation, a dynamic asset allocation plan should come into play for the advantage of certain clients.

Dynamic Asset Allocation uses a long term strategic Asset Allocation strategy as its foundation. Alternate investments can be added to the core portfolio for the sake of complementing it. It is even better, if these investments include segments which yield a higher return and bear little interdependence, so as to achieve a greater level of diversi�cation.

Besides, dynamic Asset Allocation strategies can also be accompanied by �exible investment strategies; tactical actions that are short-term in nature and aim to bank on perceived market opportunities. If 10-20% of your assets are allocated for such investments, your portfolio can be expected to react better in times of changing trends and conditions.

Asset allocation is evolving past a traditional “purchase and retain” dogma. Whilst this might not suit all clients, exercising a dynamic asset allocation plan can create a portfolio better able to handle uncertain market environments. Not to forget the fact that a solid strategic asset allocation plan remains the core strategy behind any tactical asset allocation strategy.

Asset Allocation & the local scenarioWith interest rates in Pakistan consistently hovering above 10 percent for the past �ve years, anyone would expect Pakistanis to be encouraged enough to save and reap bene�ts of higher returns. However, reality states that Pakistan actually stands out to re�ect one of the lowest savings in the region. Given the fact that majority of Pakistanis are not so keen on investing mainly because their expenditures on necessities do not leave any room for savings or so for other reasons, there is a chunk of people who are inclined in saving for a better future and lifestyle.

With growth of urban nuclear families, educated middle to upper middle class is inspirited to plan properly for a child’s education, health and future life. Reasons for investment in Pakistani society vary from a child’s education to his marriage, from being cushioned against the toils of post-retirement life to maternity expenditures. Young professionals may want to invest as a means to generate seed capital for their potential business idea or to live their dreams of traveling or wayfaring.

Reasons for investing are many. With di�erent individuals and di�erent investment objectives in mind, the asset allocation needs of these investors must be customized accordingly.

Asset Allocation & Financial PlanningOnce you are done with choosing your model for Asset Allocation, the �nal stage is to test this model by contextualizing it with a precise �nancial plan. It might be easy for an investor to choose which Asset Allocation plan will provide him with the best possible returns but the investor should also �gure out a way to determine that expected return and also estimate the trade-o� for that higher return potential.

A well-concocted �nancial plan will guide the investor out of this bewilderment. First, it will determine what level of projected investment return is necessary to allow you to meet your lifestyle goals, which can help lead you to the right mix of stocks, bonds and cash. Second, the plan will evaluate the impact of the portfolio risk associated with that mix.

Traditionally, �nancial planning models focused on expected return and neglected the variability of outcomes that is associated with increased volatility. With the introduction of probability-based planning tools, the investor can foresee the e�ect of risk on their investment portfolios, they can vary the amount of risk and can study their corresponding returns. For example a portfolio bearing higher risk may yield a higher return but it also has a probability of falling far short beneath their targets.

When using an asset allocation approach to designing a portfolio, it is important to not focus just on the expected return of that portfolio. �e risk associated with an increasing, or decreasing, portfolio return is just as important to the success of an investment strategy.

Asset Allocation & �e Future

Most forecasters fall into two divisions. Forecasters in the �rst division are eager to predict that the future will closely mirror the recent past. �eir ideals are those generals who are always preparing to �ght the last war. Forecasters in the second division rely heavily

upon the adage that the only constant is change itself. Proponents of this school of thought usually don’t know what to expect, but are quite sure it will be nothing like anything we’ve seen before. �ese individuals do realize the problems of delineating the future of this area.

We should view the future of asset allocation through lenses borrowed from both divisions. �at is, certain aspects of asset allocation today will continue to be recognizable for the years to come. To be more precise, the goals and importance of asset allocation will not change, but the mechanisms by which investors seek to achieve those goals will be new.

�e goal of the asset allocation decision, was, is, and will be to select a combination of assets that will generate a return su�ciently high and safe so as to o�set some future liability. It is also safe to say that asset allocation decisions will have a continuing large role in explaining portfolio returns.

Industry-wide - Net Assets (PKR million)

Net Assets - Open End Funds (PKR million)

Net Assets - Closed End Funds (PKR million)

Net Assets - Pension Schemes (PKR million)

STATISTICS06

page 19 of 24 mufap quarterly newsletter

Sales (PKR million) Redemptions (PKR million) Net Sales (PKR million)

Open End Funds' Return** Closed End Funds' Return**

General Pension Schemes Return**

Islamic Pension Schemes Return**

Schemes FY08 FY09 FY10 FY11 FY12 FY13 FY14Q1

Equity 38,879 14,546 11,774 13,146 13,796 15,822 4,337 Income 284,870 90,760 87,514 42,014 117,494 208,127 10,932 Money Market 115 4,813 84,831 133,516 275,029 226,538 53,389 Aggressive Income 100,946 37,755 25,008 3,596 2,451 7,736 1,242 Asset Allocation 5,101 376 204 851 2,402 3,674 2,249 Balanced 9,585 827 627 165 263 335 566 Capital Protected 2,591 2,951 2,848 0 381 - 202 Commodity - - - - - 260 255 Fund of Funds 1,437 472 257 20 358 165 857 Index Tracker 701 92 52 141 67 129 47 Islamic Equity 4,934 931 764 1,167 2,294 8,874 3,764 Islamic Income 14,393 9,305 7,356 35,007 38,205 58,779 7,414 Islamic Money Market - 676 13,094 5,352 12,829 9,467 3,583 Islamic Aggressive Income 7,895 5,290 1,753 85 60 676 354 Islamic Asset Allocation 2,049 458 387 154 204 485 154 Islamic Balanced 2,507 255 526 123 64 577 195 Islamic Capital Protected 581 9 - - 396 - - Islamic Index Tracker - - - - 297 759 60 Pension 302 67 42 153 400 1,280 694 Islamic Pension 453 92 86 160 623 1,573 341 Total 476,585 169,518 236,996 235,337 466,591 542,403 90,634

Source: MUFAP

Meeting of the Board of Directors

In order to ensure that the Board of Directors ful�ls the duties and responsibilities conferred by the members of MUFAP, the Board conducts meetings on a regular basis to make immediate and prudent decisions. �e Board of Directors held three meetings during the quarter Jul-Sep 2013.

�e activities undertaken by Board are as follows:

Proposed amendments in the de�nition of Related Parties in Restricted List of Code for Distributors

�e Board deliberated in detail on the matter of proposed

amendments in the de�nition of Related Parties in the Restricted List of Code for Distributors. After careful consideration of the impacts that the amendments may entail, it was decided that all individuals (namely employees, directors, sponsors of the RSPs) should be excluded from the de�nition of Related Parties. �e revised de�nition is applicable to all new investments brought in on or after July 16, 2013 and is not applicable to existing investments made by or before July 15, 2013.

Valuation of GOP Ijarah Sukuk

�e Board recommended that AMCs should use ‘PKISRV’ quoted on Reuters as the relevant price to value the GOP Ijarah Sukuks to determine net assets of CIS under their management, which the SECP approved in September.

Meetings of the Committees

MUFAP Committees held many discussions to make important, well planned proposals on behalf of industry. �e following table presents the number of meetings held during the quarter Jul-Sep’13.

Technical Committee - VPS

�e VPS – Technical Committee held extensive discussions to discuss the dissimilar taxation and operational practices being adopted by di�erent VPS Managers. �e VPS Committee constituted a Sub-Committee, involving a representative from each VPS Manager, to draw up recommendations for the tax treatment. �e Committee also engaged Senior Tax expert, Mr. Shabbar Zaidi on the matter and has requested for clari�cation from FBR on one of the matters.

Meeting with NCCPL A meeting was held between operations sta� of AMCs and NCCPL representatives on July 22, 2013 to evaluate the mechanics and possible data sharing from AMCs to NCCPL for netting of CGT. It was decided that NCCPL would develop a concept paper covering brief mechanism of centralized CGT collection to AMCs for their review and comments.

Elections to elect Directors/Executive Committee Members of MUFAP for the year 2013 / 2014

As required under the Trade Organizations Rules, 2007, MUFAP is required to hold its elections each year to elect Directors against the vacancies arising on account of completion of two-year tenure of some Directors. Board members are elected for a two-year term.

�e retiring Directors on the completion of their two year tenure on September 30, 2013 are: 1. Mr. Adnan Siddiqui (Resigned August-2013)2. Mr. Amer Maqbool 3. Mr. Imran Azim 4. Mr. Mir Muhammad Ali 5. Mr. Nihal Cassim

�e continuing Directors of MUFAP for the year 2013/ 2014 are: 1. Dr. Amjad Waheed 2. Mr. Imran Motiwala 3. Mr. Mir Adil Rashid 4. Mr. Rashid Mansur 5. Ms Maheen Rahman6. Ms Hina Ghazanfar (on reserved seat for women)

In addition, Mr. Rehan N. Shaikh will serve on the Board as provided under Rule 23(5)(d) of the Trade Organization Rules, 2007. At the Extra Ordinary General Meeting on September 26, 2013, MUFAP announced the appointment, by virtue of elections, of the following directors to the Board, namely:1. Mr. Farid Ahmed Khan 2. Mr. M. Habib-ur-Rahman 3. Mr. Mohammad Shoaib 4. Mr. Yasir Qadri 5. Mr. Enamullah Khan

New Board of Directors

�e new Board of Directors of MUFAP at its �rst meeting held on October 1, 2013 elected Dr. Amjad Waheed as Chairman, Mr. Mohammad Shoaib as Senior Vice Chairman and Mr. Farid Ahmed Khan as Vice Chairman MUFAP for the year 2013-2014.�e Board of Directors of MUFAP for the 2013-14 term is as follows:

1) Dr. Amjad Waheed - Chairman; 2) Mr. Mohammad Shoaib - Senior Vice Chairman; 3) Mr. Farid Ahmed Khan - Vice Chairman;4) Mr. Rehan N. Shaikh;5) Mr. Rashid Mansur;6) Mr. M. Habib-ur-Rahman;7) Mr. Yasir Qadri8) Mr. Imran Motiwala;9) Ms Hina Ghazanfar;10) Ms Maheen Rahman;11) Mr. Mir Adil Rashid;12) Mr. Enamullah Khan; and13) Ms Mashmooma Z. Majeed - Chief Executive

Chairman Dr. Amjad Waheed, CFA

Dr. Amjad Waheed holds a doctorate in Investments & Finance from Southern Illinois University, USA and is also a Chartered Financial Analyst. For the last 7 years he is CEO of NBP Fullerton Asset Management Ltd (NAFA), which is a subsidiary of National Bank of Pakistan, with Fullerton Fund Management Company of Singapore as the other joint venture partner. NAFA is presently managing fourteen mutual funds and several portfolios with about Rs 45 billion invested in these funds. NAFA is among the largest Asset Management Companies in Pakistan today.

Before joining NAFA, Dr. Waheed was Head of Equity Mutual Funds & Portfolios at Riyad Bank, Saudi Arabia, for about 5 years where he was managing US$ 7.5 billion invested in 22 mutual funds. Prior to that Dr. Waheed was Head of Investments at NIT,

and Chief Operation O�cer of FC-ABN AMRO Equities for several years. Before moving back to Pakistan, Dr. Waheed was Assistant Professor of Finance at Tennessee State University, USA and has published several articles in top journals of the world such as Journal of Banking & Finance and Financial and Financial Management.Dr. Waheed has served on the Board of various companies including Siemens, Nishat Mills, PICIC, Askari Bank, Millat Tractors, Fauji Fertilizer, Pakitstan Tobacco Company, Treet Corporation, Gul Ahmed Textile, Bata Pakistan.

Senior Vice Chairman Mr. Mohammad Shoaib, CFA

Mr. Mohammad Shoaib, CFA is the Chief Executive of Al Meezan Investment Management Ltd. He has played a key role in setting up the company and has been associated with it since inception. He is a highly quali�ed and seasoned professional with 23 years experience in capital markets. He has to his credit many accolades and awards, the most signi�cant of them being the "Most In�uential CFA charter holder" awarded by CFA Institute in 2006.

Mr. Shoaib holds an MBA degree from IBA besides being a Chartered Financial Analyst (CFA) charter holder. He has to his credit the honor of being the founder and �rst president of CFA Association of Pakistan, a member society of CFA Institute. He has been active participant in the Islamic �nance and asset management for the last 10 years. In this respect, he has also actively participated as a speaker and panelist in various international and domestic seminars, conferences and workshops.

Mr. Shoaib has also served in voluntary capacity at di�erent domestic and international institutions. He has served as a Director on the Board of Karachi Stock Exchange and Vice Chairman on the Board of Mutual Funds Association of Pakistan. He is currently serving on the Board of Directors of Pakistan Institute of Corporate Governance and Institute of Capital Markets. He has also served on various global and regional committees of CFA Institute including Asia Paci�c Advocacy Committee, Global Task Force on Corporate

Governance, GIPS Regional Council and Asset Manager Code Advisory Committee. He has also had the honour to represent over 16,000 charterholders in Asia Paci�c Region as their representative on the Presidents' Council of CFA Institute.

Vice Chairman Mr. Farid Ahmed Khan, CFA

Mr. Farid Ahmed Khan, CFA is the CEO of ABL Asset Management. He has been involved with capital markets for over 18 years and has a broad-based, global experience with bulge bracket �rms in Asset Management, Investment Banking, Investment Research and Sales, Business Development & International Project Finance. He joined ABL AMC from Credit Suisse, where he was the Country Manager of Credit Suisse Pakistan. Prior to that, he worked for MCB, initially as Head of Investment Banking Group and later as the CEO of MCB Asset Management. Mr. Khan has extensive experience outside Pakistan, having worked at Morgan Stanley, ING Barings Securities and CLSA Emerging Markets in Kuala Lumpur, London and Istanbul in a variety of senior positions. He holds an MBA in Finance from IBA, Karachi and got his CFA quali�cation in 1998.

New Committees

MUFAP Board elected its Professional Committees, Chairperson and Vice-Chairperson of each Committee for the year 2013-14. �e list of Committees, their Chairperson and Vice-Chairperson is as follows:

SECP forms Shariah Advisory Board

SECP constituted a Shariah Advisory Board (SAB) to harmonize the Shariah interpretations and strengthen the regulatory and supervisory oversight of Islamic �nancial institutions (IFIs) and Islamic capital markets (ICMs) in Pakistan. It will also advise the Commission on the Shariah-compliance aspects of various products launched and or the processes being adopted by the regulated entities. It will also provide guidance for issuance of new laws, rules and regulations for e�ective monitoring and supervision of Islamic Financial Products and to suggest ways and means for development of IFIs and ICMs in the country.

Money Market

To meet the challenges of maintaining stability in the foreign exchange market and controlling high growth in money supply, SBP decided to gradually decrease the outstanding amount of liquidity injections. Since the beginning of FY14, interbank market liquidity conditions have considerably eased primarily due to substantial increase in the pace of government borrowing from the SBP. In fact, SBP mopped up Rs. 1,556.45 billion and injected Rs. 630.70 billion during Q1-FY14.

In terms of controlling growth in money supply, however, SBP’s e�orts of curtailing liquidity injections did not experience much success as these were o�set by an increase in direct �scal borrowings from the SBP. �e increase of Rs. 1,446 billion in budgetary borrowings from the banking system during FY13 was almost Rs. 1 trillion higher than the original target and was even higher than the total expansion in M2. Deviation of this scale has signi�cantly constrained e�ective monetary management, disrupted �nancial intermediation in the economy, and has led to a sharp increase in domestic debt. Showing a growth of 24.6% in FY13, the stock of government’s domestic debt has reached Rs. 9.5 trillion as of end-June 2013. Similarly, a considerable increase in public debt to revenue ratio re�ects weak repayment capacity of the government. �e acceleration in �scal borrowings from the SBP during H2-FY13, Rs. 714 billion, and Q1-FY14 up till 30th August 2013, Rs. 547 billion, is particularly worrisome. �e inability to raise the tax-GDP ratio is the fundamental source of large �scal de�cits, high borrowings, and rising debt. Although there has been a consistent gap between Federal Board of Revenue’s (FBR) budget targets and actual outcomes in the last few years, the gap of Rs. 445 billion in FY13 was exceptionally high. In fact, this is more than the cumulative shortfall of Rs. 349 billion during the last �ve years.

On the external front, stress in the external account has gradually increased with every passing month of 2013 due to shrinking net capital and �nancial �ows and high loan repayments to the IMF.

While the former was only $517 million or 0.2 percent of GDP, the latter increased to $3 billion in FY13. As a result, despite reduction in the external current account de�cit by about half, to $2.3 billion or 1.0 percent of GDP, the SBP’s foreign exchange reserves declined to $6 billion by end-June 2013 from $10.8 billion at the beginning of FY13. �ese stand at $5.2 billion as on 6th September, 2013 after receiving $544.5 million under the new IMF program. Despite pressures and speculations of a drop in the value of the Pak rupee the foreign exchange market has largely remained stable in FY13. However, since the beginning of FY14 the rupee has depreciated by 5.0 percent as of 12th September 2013.

�e year-on-year CPI based in�ation rate was recorded at 8.3% in July 2013, then to 8.55% in August 2013, however dipped down to 7.39% in September 2013.�ough CPI In�ation remained within single digit, however, it witnessed an upward trend as it increased to 7.39 percent in September 2013 compared to 5.85 percent in June 2013 and 6.6 percent in March 2013. �e impact of upward adjustments in energy prices and an increase in the GST together with the removal of certain exemptions put pressure on in�ation.In order to counter in�ationary expectations, SBP raised the discount rate by 50 basis points to 9.5 percent with e�ect from September 16, 2013.

Movement in KIBOR

Treasury Bills:

A total of 6 T-bill auctions were held by SBP during the quarter in which a total amount of Rs. 1,348.88 billion was raised. Since the beginning of FY14, market’s preference for shorter tenor T-Bills has increased as about 83% of the bank’s total o�ers in recent T-Bill auctions were concentrated in 3-month bills.

T-Bill Auctions (Amount in PKR billion; rates in %)

Pakistan Investment Bonds

�e accepted amount in the PIB auctions during Q1-FY14 fell short of the target .

PIB Auctions (Yields in % and Face Value in PKR billion)

Debt Market

�e table below summarizes the TOP 15 trades of TFCs/Sukuk on the basis of Face value during the Q1-FY14:

Equity Market

KSE-100 index made a strong start to the �scal year 2014, as the index gained 826.99 points, or 3.94%, to stand at 21,832.68 points during the �rst three months of FY14. During the period, index struggled to cross the 23,000 points level and made a high of 23,776.22 on a closing basis. Stock market began the �rst month of �scal year 2014 with a strong rally, overcoming jitters stemming from treason proceedings against former president General (retd) Pervez Musharraf and slowdown in global markets. �e government’s successful negotiations with IMF for a $5.3 billion loan, resolution of circular debt by issuing treasury bills and bonds and anticipation of strong corporate earnings for the quarter ended June 30 buoyed investors’ con�dence as the share prices appreciated across the board and index posted a gain of 2.307.09 points, or 10.98% to settle at 23,312.78 level in July.

After posting strong gain in July, KSE-100 faltered in August as investors continued to worry about ever-escalating Syrian crisis and tumbling regional markets. Stock market further pressured by a slew of disappointing and less-than-expected corporate earnings, falling foreign exchange reserves and high in�ation �gures for July. Moreover, concerns on a possible interest rate hike in the upcoming monetary policy announcement, potential spike in oil prices, decline in cement prices due to breakdown in price discipline, heavy foreign net selling and persistent depreciation in the rupee dragged the KSE-100 index down 1,151.93 points, or 4.94%, to 22,160.85 in August. �e index showed a mixed performance in September. In the �rst half of the month, the approval of the $6.64 billion loan package by IMF, the plans to privatize Pakistan International Airlines, strong foreign in�ows and the release of the IMF’s �rst tranche worth of $550 million helped lift the index to 23,639.97 on a closing basis. However, sentiment reversed towards the end of the month after the central bank’s decision to increase the rate of return on savings deposits to 6.5%. Moreover, steep decline in the value of Pakistani

rupee against the US dollar, constant repayments to IMF, a 50 basis points increase in the discount rate and heavy foreign net selling dragged the KSE-100 index down 328.17 points, or 1.48%, to 21,832.68 in September.

Mutual Fund Market:

�e total net assets decreased to Rs. 359.947 billion in the �rst quarter of FY14 versus Rs. 361.668 billion for the Q4FY13, a reduction of 0.48% quarter over quarter. �e open-end funds went up by 0.71% to Rs. 327.594 billion, pension funds went up by 9.67% to Rs. 5.288 billion and closed-end decreased by 14.23% to Rs. 27.064 billion.

Funds launched during the quarter Q1-FY14

Funds matured during the quarter Q1-FY14

Funds with changed structure/other features Energy Crisis: Causes and ImpactsBy Sara Aquil Walji, Research Analyst, HBL Asset Management

Energy is the cornerstone for any economy’s development and growth. �e current situation has worsened in Pakistan over the past few years and likely to continue if measures are not taken to mitigate the issue on a long term basis. �e gap between demand and supply has reached 6000MW resulting in scheduled and unscheduled load shedding, negatively a�ecting our industrial sector, hurting our exports and has even hampered the GDP growth rate by 2%. Subsidies to the power sector have steadily been increasing and form the biggest part of total subsidies amounting to around Rs 349,287mn (95% of the total subsidies) in FY 2012-13. �e new government has allocated Rs. 220,100mn to the power sector for the FY 2013-14 which is 91.5% of the total subsidy budget. (Source: Annual budget 2014) With recent emphasis on matters to resolve energy crisis and develop renewable and non-renewable sources of energy, it is worthwhile to note why energy crisis became as severe as it is now.

�e root of this crisis is that Pakistan’s electricity generation mix is highly skewed towards the most expensive kinds .�ere appears to be an almost inverse relationship between the sources of electricity that are most expensive to set and those that are most expensive to run. �e following chart depicts this relationship:

Source: Express Tribune �is highlights the fact why there is a heavy concentration toward

the construction of thermal power plants since they are relatively cheaper to build than hydropower plants. �e government has not dedicated enough funds for the development of hydropower projects which are the most expensive to build but cheapest to run on a per unit basis.Pakistan’s electricity generation is highly dependent on imported oil as almost $14.5bn worth of oil is imported each year which accounts for around 35% of electricity generation. Comparing Pakistan with India and Bangladesh reveals that Pakistan relies heavily on oil for electricity generation where as India uses coal, a relatively cheaper source for electricity generation and Bangladesh on the other hand allocates 73% of its electricity generation to gas.

Source: Economic Survey report for 2012-2013

With a prominent shift in recent years towards the use of thermal power stations instead of hydropower sources and a reduction in electricity generation from coal, Pakistan’s electricity costs ends up being more expensive than it needs to be and since the government has adopted a policy of uniform tari� across the country the Tari� Di�erential Subsidy owed by the Government of Pakistan on an annual basis has increased substantially.

Circular debt is another major concern hampering the growth of Pakistan’s economy. In simple words circular debt is the amount of

cash shortfall within the Central Power Purchasing Agency (CPPA) that it cannot pay to power supply companies. �is shortfall is the result of (a) the di�erence between the actual cost of providing electricity in relation to revenues realized by the power distribution companies (DISCOs) from sales to customers plus subsidies; and (b) insu�cient payments by the DISCOs to CPPA out of realized revenue as they give priority to their own cash �ow needs. (Source: USAID Report March 2103)

�is revenue shortfall cascades through the entire energy supply chain, from electricity generators to fuel suppliers, re�ners, and producers; resulting in a shortage of fuel supply to the public sector thermal generating companies (GENCOs), a reduction in power generated by Independent Power Producers (IPPs), and an increases in load shedding.

According to the report published by the USAID in March 2013, circular debt amounts to Rs872bn which is actually 4% of GDP. According to Pakistan’s Economic Survey report for 2012-2013, there is a strong relationship between GDP growth rate and electricity growth as shown in the �gure below. It can be easily deduced that periods of low or negative electricity growth have witnessed low GDP growth rate, while periods where electricity growth picked up there is increase in GDP growth rate.

�is comes as no surprise, since industrial output is heavily dependent on the amount of electricity delivered to them. Continuous power breakdowns prevented industries from operating at their full capacity level. �e power outages have obstructed the viability of the textile industry as exporters were unable to meet their

commitments. During July-March 2012-13, foreign exchange earnings through exports of synthetic textile fabrics and woolen industry showing a decline of 25.3% and 5.1% respectively as compared to last year. During the period under review even in quantity term also recorded a decline of 30% and 15.8% respectively.

Coupled with an ine�cient system and expensive fuel mix, power theft is another major issue faced by Pakistanis. It is interesting to note that annual revenue collection e�ciency was estimated to be around 87%; however that 13% of lost e�ciency has a �nancial impact of Rs 86bn which is equivalent to 41 days of furnace oil costs for thermal power plants. �e following �gure shows the percentage of bills that were uncollected in 2012. �e e�ciency of di�erent DISCOs is disproportionate in revenue collection. �is essentially leads to the inclusion of the cost of power theft in the power tari�, meaning that the honest payers also bear the cost of those that steal.

Power theft is not only committed by normal residents but the main defaulters are the government institutions themselves. �e government owns around 51% of the uncollected bills which amounts to Rs 118bn out of the uncollected revenue receipts of Rs 386bn. In my opinion, this the amount which causes the discrepancy between the amount of RS500.3bn to be injected to resolve the circular debt issue and �gure of Rs 872.41bn since the government has a proposal to o�set provisional dues via a �scal adjuster. Due to a growing economy, Pakistan’s energy needs have more than doubled in the past 15 years. Energy shortages have far devastating

e�ects on our economy. Not only does it cause civil disturbances on a small scale but it a�ects our GDP on a larger note. Injecting money into the chain will only resolve the issue on a temporary basis. �ese challenges require a multi-prong approach that would address energy shortages in the immediate future and help the country build longer term energy su�ciency.

�ere needs to be a shift away from thermal power to alternative sources of energy which are not only cheaper but also environmentally friendly. Pakistan has large untapped renewable resources such as water, sun and wind and recently the government has taken keen interest on the development of hydro power projects and Neelum Jhelum Hydroelectric Project is one of the many projects which the new government has started which will approximately add 5.15bn units of electricity annually. Moreover, an e�ective system of governance must be in place to curb theft, recuperate dues and enforce policies.

�e Importance of Asset Allocation in attaining Optimal Returns

By Yamna Hassan, Asst. Manager-Business DevelopmentLakson Investments

“Tis the part of a wise man to keep himself today for tomorrow, and not venture all his eggs in one basket.” – Miguel de Cervantes, Don Quixote de la Mancha, 1605.

�e afore-mentioned quote indicates that along with being a great writer, Cervantes would have also proved to be a wise investor.

Investment related decisions are preceded by de�ning a proper Asset Allocation plan. According to recent research, the Asset Allocation decision is responsible for 91.5 percent of the variation between returns on di�erent portfolios. Given the importance of Asset Allocation, it has attained a center stage in any investment decision.

Asset Allocation is mainly important for two de�nite reasons. �e �rst reason pertains to portfolio design; variation in portfolio designs can lead to some investment decisions being winners while the rest being losers, and it is believed that if a portfolio is thoughtfully constructed and contains an optimal mix of securities that perform di�erently from each other (i.e they have little correlation in between them), chances of this portfolio yielding a more stable return is higher. �is is because if some securities in a portfolio are inconsistent and volatile, other, more stable securities can nullify the inconsistency of the entire portfolio, hence stabilizing the yield pattern.

�e second reason pertains to the vision of the investor. Asset allocation allows an investor to �nancially plan for his long-term and short-term goals and avoid impulsive reactions. We will subsequently discuss this aspect of Asset Allocation.

We can divide the Asset Allocation decision into two simple steps as discussed below:

Step 1: Asset Allocation An Asset Allocation strategy can be devised based on the investor’s risk assessment, �nancial goals and return targets. It is the most fundamental step of an investment decision and involves determining an ideal mix of stocks, bonds, cash and other securities in a way such that the portfolio yields a return which best suits an investor’s need. �ere is always a downside of investing too much in bonds or cash as that might certify stable but lower returns. In the same way, too much investment in stocks might lead to portfolio volatility. �erefore, in order to meet your requirements, or keep pace with in�ation, you need to plan an ideal arrangement of securities for your portfolio.

Step 2: Diversi�cationWhile the �rst step bears upon the idea of portfolio construction, this step is linked to the proper dissemination of your assets in a way such that your portfolio is exposed to many di�erent segments of the market, some of which perform independently of the others. Proper diversi�cation of your portfolio can lead to higher and more stable returns.

As mentioned before, the e�ect of diversi�cation is most noticeable when instruments have very little interrelation between them. However, it was easier to build this sort of a portfolio previously than it is today. �is is because roughly over the past 10 years, �nancial markets have become increasingly interrelated and complex. Let us also not ignore the fact that during the 2008 �nancial trouble, most assets tended to perform similarly, leading us to believe in the proposition that most assets are conducive to a similar behavior in times of crisis and instability. �e �gure below shows ways of diversifying a portfolio and entering into newer and assorted mix of investment vehicles.

FIGURE 1:

Figure shows ways of diversifying a portfolio.

Institutions that do not pay requisite importance to the Asset Allocation decision might end up damaging their returns. Usually, institutions are advised to invest in a 60:40 ratio (Stocks: �xed income instruments) to remain on the safe side. Whereas, individuals are recommended to invest in an investment spectrum ranging from 100 percent stocks to 100 percent bonds depending on their separate variable characteristics. However, the Asset Allocation decision is dependent on several other factors and cannot be generalized for di�erent investors.

Following are a few, newer and e�cient ways that have now been developed and can be used for attaining optimal asset allocation:

Mean Variance Optimization

Mean Variance Optimization is a quantitative technique that can be used to calculate the trade-o� between maximum expected return and risk tolerance. �is technique has gained popularity over time because in recent times, the technique is applied on an asset class level as opposed to being applied only to portfolios of individual stocks previously.

�e development of Mean Variance Optimization has not only bene�tted institutional investors but has resulted in a breakthrough for retail brokerage houses as well, which, prior to this development were restricted on their advisory role to the investors. However, recently, they are proposing a greater degree of passive security and more thoughtful asset allocation recommendations to their investors. �is has become possible by using optimization and aiming to attain a favorable position with maximum expected return, minimal risk, or both.

Moreover, a few re�ned approaches taken from utility theory and behavioral economics can be deployed to develop polls or surveys that can authentically gauge an individual’s risk preferences.

Pension funds have also been familiarized with Optimization. Such funds take into account the reciprocity of both assets and liabilities and not only the assets unlike other funds. �e objective of Asset Allocation for these funds is to amplify the fund surplus i.e liabilities subtracted from assets for a stated degree of risk tolerance.

Tactical Asset AllocationTactical asset allocation is the process of adjusting a particular portfolio based on changes in the market value of assets contained in that portfolio. �e technique is quite dynamic and involves deviation from the strategic asset allocation when an investor’s short-term foresight is not aligned with his long term foresight used to develop a strategic asset allocation plan and precise short-term predictions on part of the investor can lead to better returns.

Pragmatically speaking, Tactical Asset Allocation models tend to recommend contrarian trades, that is, they recommend purchasing an asset as its current market value drops and vice versa. �us, tactical Asset Allocation involves perpetually arranging your portfolio based on your needs and changes in the market. One consequence of Tactical Asset Allocation is that by overweighting certain assets during certain times and underweighting others, the portfolio is riskier because of its reduced diversi�cation. �us, to

o�set this additional risk factor, this strategy would need to generate above market returns. �e notion, whether Tactical Asset Allocation Models have achieved this is still a matter of rumination and study but because the probable returns from successful Tactical Asset Allocation would be large, researchers will keep inspecting, and investors won’t cease to be on the look out for their discoveries.

Insured Asset Allocation�is strategy is similar to a portfolio insurance strategy and is a mirror image of the Tactical Asset Allocation strategy. With this strategy, a base portfolio parameter is �xed and the value of the portfolio is not allowed to fall below this base parameter. As long as the portfolio achieves a return above this parameter, you actively to try to increase the portfolio value as much as possible. If, however, the portfolio ever drops to below the base value, investment in risk-free securities enables the base value to become �xed.

�e main target audiences for this approach are risk-averse investors who desire a certain level of active portfolio management and also covet the protection of �xing a certi�ed minimum return below which the portfolio is not allowed to decline. For instance, this approach is best for an investor who has planned a nominal lifestyle for himself after retirement.

Asset Allocation & Uncertain Times�e importance of active portfolio management and wise asset allocation strategy has been reiterated enough. But at the brink of serious economic uncertainty, expectation for stock market returns is somewhat muted. �erefore, it is believed that in such a situation, a dynamic asset allocation plan should come into play for the advantage of certain clients.

Dynamic Asset Allocation uses a long term strategic Asset Allocation strategy as its foundation. Alternate investments can be added to the core portfolio for the sake of complementing it. It is even better, if these investments include segments which yield a higher return and bear little interdependence, so as to achieve a greater level of diversi�cation.

Besides, dynamic Asset Allocation strategies can also be accompanied by �exible investment strategies; tactical actions that are short-term in nature and aim to bank on perceived market opportunities. If 10-20% of your assets are allocated for such investments, your portfolio can be expected to react better in times of changing trends and conditions.

Asset allocation is evolving past a traditional “purchase and retain” dogma. Whilst this might not suit all clients, exercising a dynamic asset allocation plan can create a portfolio better able to handle uncertain market environments. Not to forget the fact that a solid strategic asset allocation plan remains the core strategy behind any tactical asset allocation strategy.

Asset Allocation & the local scenarioWith interest rates in Pakistan consistently hovering above 10 percent for the past �ve years, anyone would expect Pakistanis to be encouraged enough to save and reap bene�ts of higher returns. However, reality states that Pakistan actually stands out to re�ect one of the lowest savings in the region. Given the fact that majority of Pakistanis are not so keen on investing mainly because their expenditures on necessities do not leave any room for savings or so for other reasons, there is a chunk of people who are inclined in saving for a better future and lifestyle.

With growth of urban nuclear families, educated middle to upper middle class is inspirited to plan properly for a child’s education, health and future life. Reasons for investment in Pakistani society vary from a child’s education to his marriage, from being cushioned against the toils of post-retirement life to maternity expenditures. Young professionals may want to invest as a means to generate seed capital for their potential business idea or to live their dreams of traveling or wayfaring.

Reasons for investing are many. With di�erent individuals and di�erent investment objectives in mind, the asset allocation needs of these investors must be customized accordingly.

Asset Allocation & Financial PlanningOnce you are done with choosing your model for Asset Allocation, the �nal stage is to test this model by contextualizing it with a precise �nancial plan. It might be easy for an investor to choose which Asset Allocation plan will provide him with the best possible returns but the investor should also �gure out a way to determine that expected return and also estimate the trade-o� for that higher return potential.

A well-concocted �nancial plan will guide the investor out of this bewilderment. First, it will determine what level of projected investment return is necessary to allow you to meet your lifestyle goals, which can help lead you to the right mix of stocks, bonds and cash. Second, the plan will evaluate the impact of the portfolio risk associated with that mix.

Traditionally, �nancial planning models focused on expected return and neglected the variability of outcomes that is associated with increased volatility. With the introduction of probability-based planning tools, the investor can foresee the e�ect of risk on their investment portfolios, they can vary the amount of risk and can study their corresponding returns. For example a portfolio bearing higher risk may yield a higher return but it also has a probability of falling far short beneath their targets.

When using an asset allocation approach to designing a portfolio, it is important to not focus just on the expected return of that portfolio. �e risk associated with an increasing, or decreasing, portfolio return is just as important to the success of an investment strategy.

Asset Allocation & �e Future

Most forecasters fall into two divisions. Forecasters in the �rst division are eager to predict that the future will closely mirror the recent past. �eir ideals are those generals who are always preparing to �ght the last war. Forecasters in the second division rely heavily

upon the adage that the only constant is change itself. Proponents of this school of thought usually don’t know what to expect, but are quite sure it will be nothing like anything we’ve seen before. �ese individuals do realize the problems of delineating the future of this area.

We should view the future of asset allocation through lenses borrowed from both divisions. �at is, certain aspects of asset allocation today will continue to be recognizable for the years to come. To be more precise, the goals and importance of asset allocation will not change, but the mechanisms by which investors seek to achieve those goals will be new.

�e goal of the asset allocation decision, was, is, and will be to select a combination of assets that will generate a return su�ciently high and safe so as to o�set some future liability. It is also safe to say that asset allocation decisions will have a continuing large role in explaining portfolio returns.

Industry-wide - Net Assets (PKR million)

Net Assets - Open End Funds (PKR million)

Net Assets - Closed End Funds (PKR million)

Net Assets - Pension Schemes (PKR million)

Sales (PKR million)

STATISTICS06

page 20 of 24 mufap quarterly newsletter

Redemptions (PKR million) Net Sales (PKR million)

Open End Funds' Return** Closed End Funds' Return**

General Pension Schemes Return**

Islamic Pension Schemes Return**

Schemes FY09 FY10 FY11 FY12 FY13 FY14Q1

Equity 13,024 15,556 15,217 13,991 26,730 6,375 Income 124,130 95,972 53,150 71,120 241,163 14,638 Money Market 1,683 57,790 101,027 211,461 276,193 49,319 Aggressive Income 56,419 37,270 9,435 3,863 5,717 1,841 Asset Allocation 1,471 929 659 1,699 3,103 1,564 Balanced 2,934 3,605 1,918 1,272 993 168 Capital Protected 806 233 3,540 750 75 242 Commodity - - - - 91 20 Fund of Funds 695 236 293 535 580 31 Index Tracker 79 242 63 120 246 6 Islamic Equity 1,615 1,984 2,038 2,334 6,767 3,488 Islamic Income 10,055 7,092 12,337 30,540 56,450 8,155 Islamic Money Market 54 8,812 5,130 12,031 9,886 4,074 Islamic Aggressive Income 6,132 2,908 698 110 232 400 Islamic Asset Allocation 634 795 366 292 790 116 Islamic Balanced 505 1,213 440 128 185 106 Islamic Capital Protected 10 26 1,532 5 4 20 Islamic Index Tracker - - - 1 315 77 Pension 21 29 118 80 611 536 Islamic Pension 36 49 40 152 675 273 Total 220,245 234,663 207,843 350,252 629,522 91,449

Source: MUFAP

Meeting of the Board of Directors

In order to ensure that the Board of Directors ful�ls the duties and responsibilities conferred by the members of MUFAP, the Board conducts meetings on a regular basis to make immediate and prudent decisions. �e Board of Directors held three meetings during the quarter Jul-Sep 2013.

�e activities undertaken by Board are as follows:

Proposed amendments in the de�nition of Related Parties in Restricted List of Code for Distributors

�e Board deliberated in detail on the matter of proposed

amendments in the de�nition of Related Parties in the Restricted List of Code for Distributors. After careful consideration of the impacts that the amendments may entail, it was decided that all individuals (namely employees, directors, sponsors of the RSPs) should be excluded from the de�nition of Related Parties. �e revised de�nition is applicable to all new investments brought in on or after July 16, 2013 and is not applicable to existing investments made by or before July 15, 2013.

Valuation of GOP Ijarah Sukuk

�e Board recommended that AMCs should use ‘PKISRV’ quoted on Reuters as the relevant price to value the GOP Ijarah Sukuks to determine net assets of CIS under their management, which the SECP approved in September.

Meetings of the Committees

MUFAP Committees held many discussions to make important, well planned proposals on behalf of industry. �e following table presents the number of meetings held during the quarter Jul-Sep’13.

Technical Committee - VPS

�e VPS – Technical Committee held extensive discussions to discuss the dissimilar taxation and operational practices being adopted by di�erent VPS Managers. �e VPS Committee constituted a Sub-Committee, involving a representative from each VPS Manager, to draw up recommendations for the tax treatment. �e Committee also engaged Senior Tax expert, Mr. Shabbar Zaidi on the matter and has requested for clari�cation from FBR on one of the matters.

Meeting with NCCPL A meeting was held between operations sta� of AMCs and NCCPL representatives on July 22, 2013 to evaluate the mechanics and possible data sharing from AMCs to NCCPL for netting of CGT. It was decided that NCCPL would develop a concept paper covering brief mechanism of centralized CGT collection to AMCs for their review and comments.

Elections to elect Directors/Executive Committee Members of MUFAP for the year 2013 / 2014

As required under the Trade Organizations Rules, 2007, MUFAP is required to hold its elections each year to elect Directors against the vacancies arising on account of completion of two-year tenure of some Directors. Board members are elected for a two-year term.

�e retiring Directors on the completion of their two year tenure on September 30, 2013 are: 1. Mr. Adnan Siddiqui (Resigned August-2013)2. Mr. Amer Maqbool 3. Mr. Imran Azim 4. Mr. Mir Muhammad Ali 5. Mr. Nihal Cassim

�e continuing Directors of MUFAP for the year 2013/ 2014 are: 1. Dr. Amjad Waheed 2. Mr. Imran Motiwala 3. Mr. Mir Adil Rashid 4. Mr. Rashid Mansur 5. Ms Maheen Rahman6. Ms Hina Ghazanfar (on reserved seat for women)

In addition, Mr. Rehan N. Shaikh will serve on the Board as provided under Rule 23(5)(d) of the Trade Organization Rules, 2007. At the Extra Ordinary General Meeting on September 26, 2013, MUFAP announced the appointment, by virtue of elections, of the following directors to the Board, namely:1. Mr. Farid Ahmed Khan 2. Mr. M. Habib-ur-Rahman 3. Mr. Mohammad Shoaib 4. Mr. Yasir Qadri 5. Mr. Enamullah Khan

New Board of Directors

�e new Board of Directors of MUFAP at its �rst meeting held on October 1, 2013 elected Dr. Amjad Waheed as Chairman, Mr. Mohammad Shoaib as Senior Vice Chairman and Mr. Farid Ahmed Khan as Vice Chairman MUFAP for the year 2013-2014.�e Board of Directors of MUFAP for the 2013-14 term is as follows:

1) Dr. Amjad Waheed - Chairman; 2) Mr. Mohammad Shoaib - Senior Vice Chairman; 3) Mr. Farid Ahmed Khan - Vice Chairman;4) Mr. Rehan N. Shaikh;5) Mr. Rashid Mansur;6) Mr. M. Habib-ur-Rahman;7) Mr. Yasir Qadri8) Mr. Imran Motiwala;9) Ms Hina Ghazanfar;10) Ms Maheen Rahman;11) Mr. Mir Adil Rashid;12) Mr. Enamullah Khan; and13) Ms Mashmooma Z. Majeed - Chief Executive

Chairman Dr. Amjad Waheed, CFA

Dr. Amjad Waheed holds a doctorate in Investments & Finance from Southern Illinois University, USA and is also a Chartered Financial Analyst. For the last 7 years he is CEO of NBP Fullerton Asset Management Ltd (NAFA), which is a subsidiary of National Bank of Pakistan, with Fullerton Fund Management Company of Singapore as the other joint venture partner. NAFA is presently managing fourteen mutual funds and several portfolios with about Rs 45 billion invested in these funds. NAFA is among the largest Asset Management Companies in Pakistan today.

Before joining NAFA, Dr. Waheed was Head of Equity Mutual Funds & Portfolios at Riyad Bank, Saudi Arabia, for about 5 years where he was managing US$ 7.5 billion invested in 22 mutual funds. Prior to that Dr. Waheed was Head of Investments at NIT,

and Chief Operation O�cer of FC-ABN AMRO Equities for several years. Before moving back to Pakistan, Dr. Waheed was Assistant Professor of Finance at Tennessee State University, USA and has published several articles in top journals of the world such as Journal of Banking & Finance and Financial and Financial Management.Dr. Waheed has served on the Board of various companies including Siemens, Nishat Mills, PICIC, Askari Bank, Millat Tractors, Fauji Fertilizer, Pakitstan Tobacco Company, Treet Corporation, Gul Ahmed Textile, Bata Pakistan.

Senior Vice Chairman Mr. Mohammad Shoaib, CFA

Mr. Mohammad Shoaib, CFA is the Chief Executive of Al Meezan Investment Management Ltd. He has played a key role in setting up the company and has been associated with it since inception. He is a highly quali�ed and seasoned professional with 23 years experience in capital markets. He has to his credit many accolades and awards, the most signi�cant of them being the "Most In�uential CFA charter holder" awarded by CFA Institute in 2006.

Mr. Shoaib holds an MBA degree from IBA besides being a Chartered Financial Analyst (CFA) charter holder. He has to his credit the honor of being the founder and �rst president of CFA Association of Pakistan, a member society of CFA Institute. He has been active participant in the Islamic �nance and asset management for the last 10 years. In this respect, he has also actively participated as a speaker and panelist in various international and domestic seminars, conferences and workshops.

Mr. Shoaib has also served in voluntary capacity at di�erent domestic and international institutions. He has served as a Director on the Board of Karachi Stock Exchange and Vice Chairman on the Board of Mutual Funds Association of Pakistan. He is currently serving on the Board of Directors of Pakistan Institute of Corporate Governance and Institute of Capital Markets. He has also served on various global and regional committees of CFA Institute including Asia Paci�c Advocacy Committee, Global Task Force on Corporate

Governance, GIPS Regional Council and Asset Manager Code Advisory Committee. He has also had the honour to represent over 16,000 charterholders in Asia Paci�c Region as their representative on the Presidents' Council of CFA Institute.

Vice Chairman Mr. Farid Ahmed Khan, CFA

Mr. Farid Ahmed Khan, CFA is the CEO of ABL Asset Management. He has been involved with capital markets for over 18 years and has a broad-based, global experience with bulge bracket �rms in Asset Management, Investment Banking, Investment Research and Sales, Business Development & International Project Finance. He joined ABL AMC from Credit Suisse, where he was the Country Manager of Credit Suisse Pakistan. Prior to that, he worked for MCB, initially as Head of Investment Banking Group and later as the CEO of MCB Asset Management. Mr. Khan has extensive experience outside Pakistan, having worked at Morgan Stanley, ING Barings Securities and CLSA Emerging Markets in Kuala Lumpur, London and Istanbul in a variety of senior positions. He holds an MBA in Finance from IBA, Karachi and got his CFA quali�cation in 1998.

New Committees

MUFAP Board elected its Professional Committees, Chairperson and Vice-Chairperson of each Committee for the year 2013-14. �e list of Committees, their Chairperson and Vice-Chairperson is as follows:

SECP forms Shariah Advisory Board

SECP constituted a Shariah Advisory Board (SAB) to harmonize the Shariah interpretations and strengthen the regulatory and supervisory oversight of Islamic �nancial institutions (IFIs) and Islamic capital markets (ICMs) in Pakistan. It will also advise the Commission on the Shariah-compliance aspects of various products launched and or the processes being adopted by the regulated entities. It will also provide guidance for issuance of new laws, rules and regulations for e�ective monitoring and supervision of Islamic Financial Products and to suggest ways and means for development of IFIs and ICMs in the country.

Money Market

To meet the challenges of maintaining stability in the foreign exchange market and controlling high growth in money supply, SBP decided to gradually decrease the outstanding amount of liquidity injections. Since the beginning of FY14, interbank market liquidity conditions have considerably eased primarily due to substantial increase in the pace of government borrowing from the SBP. In fact, SBP mopped up Rs. 1,556.45 billion and injected Rs. 630.70 billion during Q1-FY14.

In terms of controlling growth in money supply, however, SBP’s e�orts of curtailing liquidity injections did not experience much success as these were o�set by an increase in direct �scal borrowings from the SBP. �e increase of Rs. 1,446 billion in budgetary borrowings from the banking system during FY13 was almost Rs. 1 trillion higher than the original target and was even higher than the total expansion in M2. Deviation of this scale has signi�cantly constrained e�ective monetary management, disrupted �nancial intermediation in the economy, and has led to a sharp increase in domestic debt. Showing a growth of 24.6% in FY13, the stock of government’s domestic debt has reached Rs. 9.5 trillion as of end-June 2013. Similarly, a considerable increase in public debt to revenue ratio re�ects weak repayment capacity of the government. �e acceleration in �scal borrowings from the SBP during H2-FY13, Rs. 714 billion, and Q1-FY14 up till 30th August 2013, Rs. 547 billion, is particularly worrisome. �e inability to raise the tax-GDP ratio is the fundamental source of large �scal de�cits, high borrowings, and rising debt. Although there has been a consistent gap between Federal Board of Revenue’s (FBR) budget targets and actual outcomes in the last few years, the gap of Rs. 445 billion in FY13 was exceptionally high. In fact, this is more than the cumulative shortfall of Rs. 349 billion during the last �ve years.

On the external front, stress in the external account has gradually increased with every passing month of 2013 due to shrinking net capital and �nancial �ows and high loan repayments to the IMF.

While the former was only $517 million or 0.2 percent of GDP, the latter increased to $3 billion in FY13. As a result, despite reduction in the external current account de�cit by about half, to $2.3 billion or 1.0 percent of GDP, the SBP’s foreign exchange reserves declined to $6 billion by end-June 2013 from $10.8 billion at the beginning of FY13. �ese stand at $5.2 billion as on 6th September, 2013 after receiving $544.5 million under the new IMF program. Despite pressures and speculations of a drop in the value of the Pak rupee the foreign exchange market has largely remained stable in FY13. However, since the beginning of FY14 the rupee has depreciated by 5.0 percent as of 12th September 2013.

�e year-on-year CPI based in�ation rate was recorded at 8.3% in July 2013, then to 8.55% in August 2013, however dipped down to 7.39% in September 2013.�ough CPI In�ation remained within single digit, however, it witnessed an upward trend as it increased to 7.39 percent in September 2013 compared to 5.85 percent in June 2013 and 6.6 percent in March 2013. �e impact of upward adjustments in energy prices and an increase in the GST together with the removal of certain exemptions put pressure on in�ation.In order to counter in�ationary expectations, SBP raised the discount rate by 50 basis points to 9.5 percent with e�ect from September 16, 2013.

Movement in KIBOR

Treasury Bills:

A total of 6 T-bill auctions were held by SBP during the quarter in which a total amount of Rs. 1,348.88 billion was raised. Since the beginning of FY14, market’s preference for shorter tenor T-Bills has increased as about 83% of the bank’s total o�ers in recent T-Bill auctions were concentrated in 3-month bills.

T-Bill Auctions (Amount in PKR billion; rates in %)

Pakistan Investment Bonds

�e accepted amount in the PIB auctions during Q1-FY14 fell short of the target .

PIB Auctions (Yields in % and Face Value in PKR billion)

Debt Market

�e table below summarizes the TOP 15 trades of TFCs/Sukuk on the basis of Face value during the Q1-FY14:

Equity Market

KSE-100 index made a strong start to the �scal year 2014, as the index gained 826.99 points, or 3.94%, to stand at 21,832.68 points during the �rst three months of FY14. During the period, index struggled to cross the 23,000 points level and made a high of 23,776.22 on a closing basis. Stock market began the �rst month of �scal year 2014 with a strong rally, overcoming jitters stemming from treason proceedings against former president General (retd) Pervez Musharraf and slowdown in global markets. �e government’s successful negotiations with IMF for a $5.3 billion loan, resolution of circular debt by issuing treasury bills and bonds and anticipation of strong corporate earnings for the quarter ended June 30 buoyed investors’ con�dence as the share prices appreciated across the board and index posted a gain of 2.307.09 points, or 10.98% to settle at 23,312.78 level in July.

After posting strong gain in July, KSE-100 faltered in August as investors continued to worry about ever-escalating Syrian crisis and tumbling regional markets. Stock market further pressured by a slew of disappointing and less-than-expected corporate earnings, falling foreign exchange reserves and high in�ation �gures for July. Moreover, concerns on a possible interest rate hike in the upcoming monetary policy announcement, potential spike in oil prices, decline in cement prices due to breakdown in price discipline, heavy foreign net selling and persistent depreciation in the rupee dragged the KSE-100 index down 1,151.93 points, or 4.94%, to 22,160.85 in August. �e index showed a mixed performance in September. In the �rst half of the month, the approval of the $6.64 billion loan package by IMF, the plans to privatize Pakistan International Airlines, strong foreign in�ows and the release of the IMF’s �rst tranche worth of $550 million helped lift the index to 23,639.97 on a closing basis. However, sentiment reversed towards the end of the month after the central bank’s decision to increase the rate of return on savings deposits to 6.5%. Moreover, steep decline in the value of Pakistani

rupee against the US dollar, constant repayments to IMF, a 50 basis points increase in the discount rate and heavy foreign net selling dragged the KSE-100 index down 328.17 points, or 1.48%, to 21,832.68 in September.

Mutual Fund Market:

�e total net assets decreased to Rs. 359.947 billion in the �rst quarter of FY14 versus Rs. 361.668 billion for the Q4FY13, a reduction of 0.48% quarter over quarter. �e open-end funds went up by 0.71% to Rs. 327.594 billion, pension funds went up by 9.67% to Rs. 5.288 billion and closed-end decreased by 14.23% to Rs. 27.064 billion.

Funds launched during the quarter Q1-FY14

Funds matured during the quarter Q1-FY14

Funds with changed structure/other features Energy Crisis: Causes and ImpactsBy Sara Aquil Walji, Research Analyst, HBL Asset Management

Energy is the cornerstone for any economy’s development and growth. �e current situation has worsened in Pakistan over the past few years and likely to continue if measures are not taken to mitigate the issue on a long term basis. �e gap between demand and supply has reached 6000MW resulting in scheduled and unscheduled load shedding, negatively a�ecting our industrial sector, hurting our exports and has even hampered the GDP growth rate by 2%. Subsidies to the power sector have steadily been increasing and form the biggest part of total subsidies amounting to around Rs 349,287mn (95% of the total subsidies) in FY 2012-13. �e new government has allocated Rs. 220,100mn to the power sector for the FY 2013-14 which is 91.5% of the total subsidy budget. (Source: Annual budget 2014) With recent emphasis on matters to resolve energy crisis and develop renewable and non-renewable sources of energy, it is worthwhile to note why energy crisis became as severe as it is now.

�e root of this crisis is that Pakistan’s electricity generation mix is highly skewed towards the most expensive kinds .�ere appears to be an almost inverse relationship between the sources of electricity that are most expensive to set and those that are most expensive to run. �e following chart depicts this relationship:

Source: Express Tribune �is highlights the fact why there is a heavy concentration toward

the construction of thermal power plants since they are relatively cheaper to build than hydropower plants. �e government has not dedicated enough funds for the development of hydropower projects which are the most expensive to build but cheapest to run on a per unit basis.Pakistan’s electricity generation is highly dependent on imported oil as almost $14.5bn worth of oil is imported each year which accounts for around 35% of electricity generation. Comparing Pakistan with India and Bangladesh reveals that Pakistan relies heavily on oil for electricity generation where as India uses coal, a relatively cheaper source for electricity generation and Bangladesh on the other hand allocates 73% of its electricity generation to gas.

Source: Economic Survey report for 2012-2013

With a prominent shift in recent years towards the use of thermal power stations instead of hydropower sources and a reduction in electricity generation from coal, Pakistan’s electricity costs ends up being more expensive than it needs to be and since the government has adopted a policy of uniform tari� across the country the Tari� Di�erential Subsidy owed by the Government of Pakistan on an annual basis has increased substantially.

Circular debt is another major concern hampering the growth of Pakistan’s economy. In simple words circular debt is the amount of

cash shortfall within the Central Power Purchasing Agency (CPPA) that it cannot pay to power supply companies. �is shortfall is the result of (a) the di�erence between the actual cost of providing electricity in relation to revenues realized by the power distribution companies (DISCOs) from sales to customers plus subsidies; and (b) insu�cient payments by the DISCOs to CPPA out of realized revenue as they give priority to their own cash �ow needs. (Source: USAID Report March 2103)

�is revenue shortfall cascades through the entire energy supply chain, from electricity generators to fuel suppliers, re�ners, and producers; resulting in a shortage of fuel supply to the public sector thermal generating companies (GENCOs), a reduction in power generated by Independent Power Producers (IPPs), and an increases in load shedding.

According to the report published by the USAID in March 2013, circular debt amounts to Rs872bn which is actually 4% of GDP. According to Pakistan’s Economic Survey report for 2012-2013, there is a strong relationship between GDP growth rate and electricity growth as shown in the �gure below. It can be easily deduced that periods of low or negative electricity growth have witnessed low GDP growth rate, while periods where electricity growth picked up there is increase in GDP growth rate.

�is comes as no surprise, since industrial output is heavily dependent on the amount of electricity delivered to them. Continuous power breakdowns prevented industries from operating at their full capacity level. �e power outages have obstructed the viability of the textile industry as exporters were unable to meet their

commitments. During July-March 2012-13, foreign exchange earnings through exports of synthetic textile fabrics and woolen industry showing a decline of 25.3% and 5.1% respectively as compared to last year. During the period under review even in quantity term also recorded a decline of 30% and 15.8% respectively.

Coupled with an ine�cient system and expensive fuel mix, power theft is another major issue faced by Pakistanis. It is interesting to note that annual revenue collection e�ciency was estimated to be around 87%; however that 13% of lost e�ciency has a �nancial impact of Rs 86bn which is equivalent to 41 days of furnace oil costs for thermal power plants. �e following �gure shows the percentage of bills that were uncollected in 2012. �e e�ciency of di�erent DISCOs is disproportionate in revenue collection. �is essentially leads to the inclusion of the cost of power theft in the power tari�, meaning that the honest payers also bear the cost of those that steal.

Power theft is not only committed by normal residents but the main defaulters are the government institutions themselves. �e government owns around 51% of the uncollected bills which amounts to Rs 118bn out of the uncollected revenue receipts of Rs 386bn. In my opinion, this the amount which causes the discrepancy between the amount of RS500.3bn to be injected to resolve the circular debt issue and �gure of Rs 872.41bn since the government has a proposal to o�set provisional dues via a �scal adjuster. Due to a growing economy, Pakistan’s energy needs have more than doubled in the past 15 years. Energy shortages have far devastating

e�ects on our economy. Not only does it cause civil disturbances on a small scale but it a�ects our GDP on a larger note. Injecting money into the chain will only resolve the issue on a temporary basis. �ese challenges require a multi-prong approach that would address energy shortages in the immediate future and help the country build longer term energy su�ciency.

�ere needs to be a shift away from thermal power to alternative sources of energy which are not only cheaper but also environmentally friendly. Pakistan has large untapped renewable resources such as water, sun and wind and recently the government has taken keen interest on the development of hydro power projects and Neelum Jhelum Hydroelectric Project is one of the many projects which the new government has started which will approximately add 5.15bn units of electricity annually. Moreover, an e�ective system of governance must be in place to curb theft, recuperate dues and enforce policies.

�e Importance of Asset Allocation in attaining Optimal Returns

By Yamna Hassan, Asst. Manager-Business DevelopmentLakson Investments

“Tis the part of a wise man to keep himself today for tomorrow, and not venture all his eggs in one basket.” – Miguel de Cervantes, Don Quixote de la Mancha, 1605.

�e afore-mentioned quote indicates that along with being a great writer, Cervantes would have also proved to be a wise investor.

Investment related decisions are preceded by de�ning a proper Asset Allocation plan. According to recent research, the Asset Allocation decision is responsible for 91.5 percent of the variation between returns on di�erent portfolios. Given the importance of Asset Allocation, it has attained a center stage in any investment decision.

Asset Allocation is mainly important for two de�nite reasons. �e �rst reason pertains to portfolio design; variation in portfolio designs can lead to some investment decisions being winners while the rest being losers, and it is believed that if a portfolio is thoughtfully constructed and contains an optimal mix of securities that perform di�erently from each other (i.e they have little correlation in between them), chances of this portfolio yielding a more stable return is higher. �is is because if some securities in a portfolio are inconsistent and volatile, other, more stable securities can nullify the inconsistency of the entire portfolio, hence stabilizing the yield pattern.

�e second reason pertains to the vision of the investor. Asset allocation allows an investor to �nancially plan for his long-term and short-term goals and avoid impulsive reactions. We will subsequently discuss this aspect of Asset Allocation.

We can divide the Asset Allocation decision into two simple steps as discussed below:

Step 1: Asset Allocation An Asset Allocation strategy can be devised based on the investor’s risk assessment, �nancial goals and return targets. It is the most fundamental step of an investment decision and involves determining an ideal mix of stocks, bonds, cash and other securities in a way such that the portfolio yields a return which best suits an investor’s need. �ere is always a downside of investing too much in bonds or cash as that might certify stable but lower returns. In the same way, too much investment in stocks might lead to portfolio volatility. �erefore, in order to meet your requirements, or keep pace with in�ation, you need to plan an ideal arrangement of securities for your portfolio.

Step 2: Diversi�cationWhile the �rst step bears upon the idea of portfolio construction, this step is linked to the proper dissemination of your assets in a way such that your portfolio is exposed to many di�erent segments of the market, some of which perform independently of the others. Proper diversi�cation of your portfolio can lead to higher and more stable returns.

As mentioned before, the e�ect of diversi�cation is most noticeable when instruments have very little interrelation between them. However, it was easier to build this sort of a portfolio previously than it is today. �is is because roughly over the past 10 years, �nancial markets have become increasingly interrelated and complex. Let us also not ignore the fact that during the 2008 �nancial trouble, most assets tended to perform similarly, leading us to believe in the proposition that most assets are conducive to a similar behavior in times of crisis and instability. �e �gure below shows ways of diversifying a portfolio and entering into newer and assorted mix of investment vehicles.

FIGURE 1:

Figure shows ways of diversifying a portfolio.

Institutions that do not pay requisite importance to the Asset Allocation decision might end up damaging their returns. Usually, institutions are advised to invest in a 60:40 ratio (Stocks: �xed income instruments) to remain on the safe side. Whereas, individuals are recommended to invest in an investment spectrum ranging from 100 percent stocks to 100 percent bonds depending on their separate variable characteristics. However, the Asset Allocation decision is dependent on several other factors and cannot be generalized for di�erent investors.

Following are a few, newer and e�cient ways that have now been developed and can be used for attaining optimal asset allocation:

Mean Variance Optimization

Mean Variance Optimization is a quantitative technique that can be used to calculate the trade-o� between maximum expected return and risk tolerance. �is technique has gained popularity over time because in recent times, the technique is applied on an asset class level as opposed to being applied only to portfolios of individual stocks previously.

�e development of Mean Variance Optimization has not only bene�tted institutional investors but has resulted in a breakthrough for retail brokerage houses as well, which, prior to this development were restricted on their advisory role to the investors. However, recently, they are proposing a greater degree of passive security and more thoughtful asset allocation recommendations to their investors. �is has become possible by using optimization and aiming to attain a favorable position with maximum expected return, minimal risk, or both.

Moreover, a few re�ned approaches taken from utility theory and behavioral economics can be deployed to develop polls or surveys that can authentically gauge an individual’s risk preferences.

Pension funds have also been familiarized with Optimization. Such funds take into account the reciprocity of both assets and liabilities and not only the assets unlike other funds. �e objective of Asset Allocation for these funds is to amplify the fund surplus i.e liabilities subtracted from assets for a stated degree of risk tolerance.

Tactical Asset AllocationTactical asset allocation is the process of adjusting a particular portfolio based on changes in the market value of assets contained in that portfolio. �e technique is quite dynamic and involves deviation from the strategic asset allocation when an investor’s short-term foresight is not aligned with his long term foresight used to develop a strategic asset allocation plan and precise short-term predictions on part of the investor can lead to better returns.

Pragmatically speaking, Tactical Asset Allocation models tend to recommend contrarian trades, that is, they recommend purchasing an asset as its current market value drops and vice versa. �us, tactical Asset Allocation involves perpetually arranging your portfolio based on your needs and changes in the market. One consequence of Tactical Asset Allocation is that by overweighting certain assets during certain times and underweighting others, the portfolio is riskier because of its reduced diversi�cation. �us, to

o�set this additional risk factor, this strategy would need to generate above market returns. �e notion, whether Tactical Asset Allocation Models have achieved this is still a matter of rumination and study but because the probable returns from successful Tactical Asset Allocation would be large, researchers will keep inspecting, and investors won’t cease to be on the look out for their discoveries.

Insured Asset Allocation�is strategy is similar to a portfolio insurance strategy and is a mirror image of the Tactical Asset Allocation strategy. With this strategy, a base portfolio parameter is �xed and the value of the portfolio is not allowed to fall below this base parameter. As long as the portfolio achieves a return above this parameter, you actively to try to increase the portfolio value as much as possible. If, however, the portfolio ever drops to below the base value, investment in risk-free securities enables the base value to become �xed.

�e main target audiences for this approach are risk-averse investors who desire a certain level of active portfolio management and also covet the protection of �xing a certi�ed minimum return below which the portfolio is not allowed to decline. For instance, this approach is best for an investor who has planned a nominal lifestyle for himself after retirement.

Asset Allocation & Uncertain Times�e importance of active portfolio management and wise asset allocation strategy has been reiterated enough. But at the brink of serious economic uncertainty, expectation for stock market returns is somewhat muted. �erefore, it is believed that in such a situation, a dynamic asset allocation plan should come into play for the advantage of certain clients.

Dynamic Asset Allocation uses a long term strategic Asset Allocation strategy as its foundation. Alternate investments can be added to the core portfolio for the sake of complementing it. It is even better, if these investments include segments which yield a higher return and bear little interdependence, so as to achieve a greater level of diversi�cation.

Besides, dynamic Asset Allocation strategies can also be accompanied by �exible investment strategies; tactical actions that are short-term in nature and aim to bank on perceived market opportunities. If 10-20% of your assets are allocated for such investments, your portfolio can be expected to react better in times of changing trends and conditions.

Asset allocation is evolving past a traditional “purchase and retain” dogma. Whilst this might not suit all clients, exercising a dynamic asset allocation plan can create a portfolio better able to handle uncertain market environments. Not to forget the fact that a solid strategic asset allocation plan remains the core strategy behind any tactical asset allocation strategy.

Asset Allocation & the local scenarioWith interest rates in Pakistan consistently hovering above 10 percent for the past �ve years, anyone would expect Pakistanis to be encouraged enough to save and reap bene�ts of higher returns. However, reality states that Pakistan actually stands out to re�ect one of the lowest savings in the region. Given the fact that majority of Pakistanis are not so keen on investing mainly because their expenditures on necessities do not leave any room for savings or so for other reasons, there is a chunk of people who are inclined in saving for a better future and lifestyle.

With growth of urban nuclear families, educated middle to upper middle class is inspirited to plan properly for a child’s education, health and future life. Reasons for investment in Pakistani society vary from a child’s education to his marriage, from being cushioned against the toils of post-retirement life to maternity expenditures. Young professionals may want to invest as a means to generate seed capital for their potential business idea or to live their dreams of traveling or wayfaring.

Reasons for investing are many. With di�erent individuals and di�erent investment objectives in mind, the asset allocation needs of these investors must be customized accordingly.

Asset Allocation & Financial PlanningOnce you are done with choosing your model for Asset Allocation, the �nal stage is to test this model by contextualizing it with a precise �nancial plan. It might be easy for an investor to choose which Asset Allocation plan will provide him with the best possible returns but the investor should also �gure out a way to determine that expected return and also estimate the trade-o� for that higher return potential.

A well-concocted �nancial plan will guide the investor out of this bewilderment. First, it will determine what level of projected investment return is necessary to allow you to meet your lifestyle goals, which can help lead you to the right mix of stocks, bonds and cash. Second, the plan will evaluate the impact of the portfolio risk associated with that mix.

Traditionally, �nancial planning models focused on expected return and neglected the variability of outcomes that is associated with increased volatility. With the introduction of probability-based planning tools, the investor can foresee the e�ect of risk on their investment portfolios, they can vary the amount of risk and can study their corresponding returns. For example a portfolio bearing higher risk may yield a higher return but it also has a probability of falling far short beneath their targets.

When using an asset allocation approach to designing a portfolio, it is important to not focus just on the expected return of that portfolio. �e risk associated with an increasing, or decreasing, portfolio return is just as important to the success of an investment strategy.

Asset Allocation & �e Future

Most forecasters fall into two divisions. Forecasters in the �rst division are eager to predict that the future will closely mirror the recent past. �eir ideals are those generals who are always preparing to �ght the last war. Forecasters in the second division rely heavily

upon the adage that the only constant is change itself. Proponents of this school of thought usually don’t know what to expect, but are quite sure it will be nothing like anything we’ve seen before. �ese individuals do realize the problems of delineating the future of this area.

We should view the future of asset allocation through lenses borrowed from both divisions. �at is, certain aspects of asset allocation today will continue to be recognizable for the years to come. To be more precise, the goals and importance of asset allocation will not change, but the mechanisms by which investors seek to achieve those goals will be new.

�e goal of the asset allocation decision, was, is, and will be to select a combination of assets that will generate a return su�ciently high and safe so as to o�set some future liability. It is also safe to say that asset allocation decisions will have a continuing large role in explaining portfolio returns.

Industry-wide - Net Assets (PKR million)

Net Assets - Open End Funds (PKR million)

Net Assets - Closed End Funds (PKR million)

Net Assets - Pension Schemes (PKR million)

Sales (PKR million) Redemptions (PKR million)

STATISTICS06

page 21 of 24 mufap quarterly newsletter

Net Sales (PKR million)

Open End Funds' Return** Closed End Funds' Return**

General Pension Schemes Return**

Islamic Pension Schemes Return**

Schemes FY09 FY10 FY11 FY12 FY13 FY14Q1

Equity 1,522 (3,783) (2,072) (195) (10,908) (2,038)Income (33,369) (8,458) (11,136) 46,374 (33,036) (3,706)Money Market 3,129 27,042 32,489 63,568 (49,655) 4,070 Aggressive Income (18,664) (12,261) (5,839) (1,412) 2,019 (599)Asset Allocation (1,095) (725) 192 703 571 685 Balanced (2,108) (2,978) (1,753) (1,009) (658) 398 Capital Protected 2,145 2,614 (3,540) (370) (75) (39)Commodity - - - - 168 234 Fund of Funds (222) 21 (273) (177) (415) 825 Index Tracker 13 (190) 77 (53) (117) 41 Islamic Equity (684) (1,219) (870) (40) 2,107 275 Islamic Income (750) 264 22,670 7,666 2,328 (741)Islamic Money Market 622 4,282 222 798 (419) (491)Islamic Aggressive Income (842) (1,156) (613) (50) 444 (46)Islamic Asset Allocation (175) (407) (213) (88) (306) 38 Islamic Balanced (249) (687) (317) (65) 392 90 Islamic Capital Protected (1) (26) (1,532) 391 (4) (20)Islamic Index Tracker - - - 296 444 (17)Pension 46 13 36 320 669 158 Islamic Pension 55 37 121 471 898 68 Total (50,727) 2,333 27,493 116,339 (87,119) (815)

Source: MUFAP

Meeting of the Board of Directors

In order to ensure that the Board of Directors ful�ls the duties and responsibilities conferred by the members of MUFAP, the Board conducts meetings on a regular basis to make immediate and prudent decisions. �e Board of Directors held three meetings during the quarter Jul-Sep 2013.

�e activities undertaken by Board are as follows:

Proposed amendments in the de�nition of Related Parties in Restricted List of Code for Distributors

�e Board deliberated in detail on the matter of proposed

amendments in the de�nition of Related Parties in the Restricted List of Code for Distributors. After careful consideration of the impacts that the amendments may entail, it was decided that all individuals (namely employees, directors, sponsors of the RSPs) should be excluded from the de�nition of Related Parties. �e revised de�nition is applicable to all new investments brought in on or after July 16, 2013 and is not applicable to existing investments made by or before July 15, 2013.

Valuation of GOP Ijarah Sukuk

�e Board recommended that AMCs should use ‘PKISRV’ quoted on Reuters as the relevant price to value the GOP Ijarah Sukuks to determine net assets of CIS under their management, which the SECP approved in September.

Meetings of the Committees

MUFAP Committees held many discussions to make important, well planned proposals on behalf of industry. �e following table presents the number of meetings held during the quarter Jul-Sep’13.

Technical Committee - VPS

�e VPS – Technical Committee held extensive discussions to discuss the dissimilar taxation and operational practices being adopted by di�erent VPS Managers. �e VPS Committee constituted a Sub-Committee, involving a representative from each VPS Manager, to draw up recommendations for the tax treatment. �e Committee also engaged Senior Tax expert, Mr. Shabbar Zaidi on the matter and has requested for clari�cation from FBR on one of the matters.

Meeting with NCCPL A meeting was held between operations sta� of AMCs and NCCPL representatives on July 22, 2013 to evaluate the mechanics and possible data sharing from AMCs to NCCPL for netting of CGT. It was decided that NCCPL would develop a concept paper covering brief mechanism of centralized CGT collection to AMCs for their review and comments.

Elections to elect Directors/Executive Committee Members of MUFAP for the year 2013 / 2014

As required under the Trade Organizations Rules, 2007, MUFAP is required to hold its elections each year to elect Directors against the vacancies arising on account of completion of two-year tenure of some Directors. Board members are elected for a two-year term.

�e retiring Directors on the completion of their two year tenure on September 30, 2013 are: 1. Mr. Adnan Siddiqui (Resigned August-2013)2. Mr. Amer Maqbool 3. Mr. Imran Azim 4. Mr. Mir Muhammad Ali 5. Mr. Nihal Cassim

�e continuing Directors of MUFAP for the year 2013/ 2014 are: 1. Dr. Amjad Waheed 2. Mr. Imran Motiwala 3. Mr. Mir Adil Rashid 4. Mr. Rashid Mansur 5. Ms Maheen Rahman6. Ms Hina Ghazanfar (on reserved seat for women)

In addition, Mr. Rehan N. Shaikh will serve on the Board as provided under Rule 23(5)(d) of the Trade Organization Rules, 2007. At the Extra Ordinary General Meeting on September 26, 2013, MUFAP announced the appointment, by virtue of elections, of the following directors to the Board, namely:1. Mr. Farid Ahmed Khan 2. Mr. M. Habib-ur-Rahman 3. Mr. Mohammad Shoaib 4. Mr. Yasir Qadri 5. Mr. Enamullah Khan

New Board of Directors

�e new Board of Directors of MUFAP at its �rst meeting held on October 1, 2013 elected Dr. Amjad Waheed as Chairman, Mr. Mohammad Shoaib as Senior Vice Chairman and Mr. Farid Ahmed Khan as Vice Chairman MUFAP for the year 2013-2014.�e Board of Directors of MUFAP for the 2013-14 term is as follows:

1) Dr. Amjad Waheed - Chairman; 2) Mr. Mohammad Shoaib - Senior Vice Chairman; 3) Mr. Farid Ahmed Khan - Vice Chairman;4) Mr. Rehan N. Shaikh;5) Mr. Rashid Mansur;6) Mr. M. Habib-ur-Rahman;7) Mr. Yasir Qadri8) Mr. Imran Motiwala;9) Ms Hina Ghazanfar;10) Ms Maheen Rahman;11) Mr. Mir Adil Rashid;12) Mr. Enamullah Khan; and13) Ms Mashmooma Z. Majeed - Chief Executive

Chairman Dr. Amjad Waheed, CFA

Dr. Amjad Waheed holds a doctorate in Investments & Finance from Southern Illinois University, USA and is also a Chartered Financial Analyst. For the last 7 years he is CEO of NBP Fullerton Asset Management Ltd (NAFA), which is a subsidiary of National Bank of Pakistan, with Fullerton Fund Management Company of Singapore as the other joint venture partner. NAFA is presently managing fourteen mutual funds and several portfolios with about Rs 45 billion invested in these funds. NAFA is among the largest Asset Management Companies in Pakistan today.

Before joining NAFA, Dr. Waheed was Head of Equity Mutual Funds & Portfolios at Riyad Bank, Saudi Arabia, for about 5 years where he was managing US$ 7.5 billion invested in 22 mutual funds. Prior to that Dr. Waheed was Head of Investments at NIT,

and Chief Operation O�cer of FC-ABN AMRO Equities for several years. Before moving back to Pakistan, Dr. Waheed was Assistant Professor of Finance at Tennessee State University, USA and has published several articles in top journals of the world such as Journal of Banking & Finance and Financial and Financial Management.Dr. Waheed has served on the Board of various companies including Siemens, Nishat Mills, PICIC, Askari Bank, Millat Tractors, Fauji Fertilizer, Pakitstan Tobacco Company, Treet Corporation, Gul Ahmed Textile, Bata Pakistan.

Senior Vice Chairman Mr. Mohammad Shoaib, CFA

Mr. Mohammad Shoaib, CFA is the Chief Executive of Al Meezan Investment Management Ltd. He has played a key role in setting up the company and has been associated with it since inception. He is a highly quali�ed and seasoned professional with 23 years experience in capital markets. He has to his credit many accolades and awards, the most signi�cant of them being the "Most In�uential CFA charter holder" awarded by CFA Institute in 2006.

Mr. Shoaib holds an MBA degree from IBA besides being a Chartered Financial Analyst (CFA) charter holder. He has to his credit the honor of being the founder and �rst president of CFA Association of Pakistan, a member society of CFA Institute. He has been active participant in the Islamic �nance and asset management for the last 10 years. In this respect, he has also actively participated as a speaker and panelist in various international and domestic seminars, conferences and workshops.

Mr. Shoaib has also served in voluntary capacity at di�erent domestic and international institutions. He has served as a Director on the Board of Karachi Stock Exchange and Vice Chairman on the Board of Mutual Funds Association of Pakistan. He is currently serving on the Board of Directors of Pakistan Institute of Corporate Governance and Institute of Capital Markets. He has also served on various global and regional committees of CFA Institute including Asia Paci�c Advocacy Committee, Global Task Force on Corporate

Governance, GIPS Regional Council and Asset Manager Code Advisory Committee. He has also had the honour to represent over 16,000 charterholders in Asia Paci�c Region as their representative on the Presidents' Council of CFA Institute.

Vice Chairman Mr. Farid Ahmed Khan, CFA

Mr. Farid Ahmed Khan, CFA is the CEO of ABL Asset Management. He has been involved with capital markets for over 18 years and has a broad-based, global experience with bulge bracket �rms in Asset Management, Investment Banking, Investment Research and Sales, Business Development & International Project Finance. He joined ABL AMC from Credit Suisse, where he was the Country Manager of Credit Suisse Pakistan. Prior to that, he worked for MCB, initially as Head of Investment Banking Group and later as the CEO of MCB Asset Management. Mr. Khan has extensive experience outside Pakistan, having worked at Morgan Stanley, ING Barings Securities and CLSA Emerging Markets in Kuala Lumpur, London and Istanbul in a variety of senior positions. He holds an MBA in Finance from IBA, Karachi and got his CFA quali�cation in 1998.

New Committees

MUFAP Board elected its Professional Committees, Chairperson and Vice-Chairperson of each Committee for the year 2013-14. �e list of Committees, their Chairperson and Vice-Chairperson is as follows:

SECP forms Shariah Advisory Board

SECP constituted a Shariah Advisory Board (SAB) to harmonize the Shariah interpretations and strengthen the regulatory and supervisory oversight of Islamic �nancial institutions (IFIs) and Islamic capital markets (ICMs) in Pakistan. It will also advise the Commission on the Shariah-compliance aspects of various products launched and or the processes being adopted by the regulated entities. It will also provide guidance for issuance of new laws, rules and regulations for e�ective monitoring and supervision of Islamic Financial Products and to suggest ways and means for development of IFIs and ICMs in the country.

Money Market

To meet the challenges of maintaining stability in the foreign exchange market and controlling high growth in money supply, SBP decided to gradually decrease the outstanding amount of liquidity injections. Since the beginning of FY14, interbank market liquidity conditions have considerably eased primarily due to substantial increase in the pace of government borrowing from the SBP. In fact, SBP mopped up Rs. 1,556.45 billion and injected Rs. 630.70 billion during Q1-FY14.

In terms of controlling growth in money supply, however, SBP’s e�orts of curtailing liquidity injections did not experience much success as these were o�set by an increase in direct �scal borrowings from the SBP. �e increase of Rs. 1,446 billion in budgetary borrowings from the banking system during FY13 was almost Rs. 1 trillion higher than the original target and was even higher than the total expansion in M2. Deviation of this scale has signi�cantly constrained e�ective monetary management, disrupted �nancial intermediation in the economy, and has led to a sharp increase in domestic debt. Showing a growth of 24.6% in FY13, the stock of government’s domestic debt has reached Rs. 9.5 trillion as of end-June 2013. Similarly, a considerable increase in public debt to revenue ratio re�ects weak repayment capacity of the government. �e acceleration in �scal borrowings from the SBP during H2-FY13, Rs. 714 billion, and Q1-FY14 up till 30th August 2013, Rs. 547 billion, is particularly worrisome. �e inability to raise the tax-GDP ratio is the fundamental source of large �scal de�cits, high borrowings, and rising debt. Although there has been a consistent gap between Federal Board of Revenue’s (FBR) budget targets and actual outcomes in the last few years, the gap of Rs. 445 billion in FY13 was exceptionally high. In fact, this is more than the cumulative shortfall of Rs. 349 billion during the last �ve years.

On the external front, stress in the external account has gradually increased with every passing month of 2013 due to shrinking net capital and �nancial �ows and high loan repayments to the IMF.

While the former was only $517 million or 0.2 percent of GDP, the latter increased to $3 billion in FY13. As a result, despite reduction in the external current account de�cit by about half, to $2.3 billion or 1.0 percent of GDP, the SBP’s foreign exchange reserves declined to $6 billion by end-June 2013 from $10.8 billion at the beginning of FY13. �ese stand at $5.2 billion as on 6th September, 2013 after receiving $544.5 million under the new IMF program. Despite pressures and speculations of a drop in the value of the Pak rupee the foreign exchange market has largely remained stable in FY13. However, since the beginning of FY14 the rupee has depreciated by 5.0 percent as of 12th September 2013.

�e year-on-year CPI based in�ation rate was recorded at 8.3% in July 2013, then to 8.55% in August 2013, however dipped down to 7.39% in September 2013.�ough CPI In�ation remained within single digit, however, it witnessed an upward trend as it increased to 7.39 percent in September 2013 compared to 5.85 percent in June 2013 and 6.6 percent in March 2013. �e impact of upward adjustments in energy prices and an increase in the GST together with the removal of certain exemptions put pressure on in�ation.In order to counter in�ationary expectations, SBP raised the discount rate by 50 basis points to 9.5 percent with e�ect from September 16, 2013.

Movement in KIBOR

Treasury Bills:

A total of 6 T-bill auctions were held by SBP during the quarter in which a total amount of Rs. 1,348.88 billion was raised. Since the beginning of FY14, market’s preference for shorter tenor T-Bills has increased as about 83% of the bank’s total o�ers in recent T-Bill auctions were concentrated in 3-month bills.

T-Bill Auctions (Amount in PKR billion; rates in %)

Pakistan Investment Bonds

�e accepted amount in the PIB auctions during Q1-FY14 fell short of the target .

PIB Auctions (Yields in % and Face Value in PKR billion)

Debt Market

�e table below summarizes the TOP 15 trades of TFCs/Sukuk on the basis of Face value during the Q1-FY14:

Equity Market

KSE-100 index made a strong start to the �scal year 2014, as the index gained 826.99 points, or 3.94%, to stand at 21,832.68 points during the �rst three months of FY14. During the period, index struggled to cross the 23,000 points level and made a high of 23,776.22 on a closing basis. Stock market began the �rst month of �scal year 2014 with a strong rally, overcoming jitters stemming from treason proceedings against former president General (retd) Pervez Musharraf and slowdown in global markets. �e government’s successful negotiations with IMF for a $5.3 billion loan, resolution of circular debt by issuing treasury bills and bonds and anticipation of strong corporate earnings for the quarter ended June 30 buoyed investors’ con�dence as the share prices appreciated across the board and index posted a gain of 2.307.09 points, or 10.98% to settle at 23,312.78 level in July.

After posting strong gain in July, KSE-100 faltered in August as investors continued to worry about ever-escalating Syrian crisis and tumbling regional markets. Stock market further pressured by a slew of disappointing and less-than-expected corporate earnings, falling foreign exchange reserves and high in�ation �gures for July. Moreover, concerns on a possible interest rate hike in the upcoming monetary policy announcement, potential spike in oil prices, decline in cement prices due to breakdown in price discipline, heavy foreign net selling and persistent depreciation in the rupee dragged the KSE-100 index down 1,151.93 points, or 4.94%, to 22,160.85 in August. �e index showed a mixed performance in September. In the �rst half of the month, the approval of the $6.64 billion loan package by IMF, the plans to privatize Pakistan International Airlines, strong foreign in�ows and the release of the IMF’s �rst tranche worth of $550 million helped lift the index to 23,639.97 on a closing basis. However, sentiment reversed towards the end of the month after the central bank’s decision to increase the rate of return on savings deposits to 6.5%. Moreover, steep decline in the value of Pakistani

rupee against the US dollar, constant repayments to IMF, a 50 basis points increase in the discount rate and heavy foreign net selling dragged the KSE-100 index down 328.17 points, or 1.48%, to 21,832.68 in September.

Mutual Fund Market:

�e total net assets decreased to Rs. 359.947 billion in the �rst quarter of FY14 versus Rs. 361.668 billion for the Q4FY13, a reduction of 0.48% quarter over quarter. �e open-end funds went up by 0.71% to Rs. 327.594 billion, pension funds went up by 9.67% to Rs. 5.288 billion and closed-end decreased by 14.23% to Rs. 27.064 billion.

Funds launched during the quarter Q1-FY14

Funds matured during the quarter Q1-FY14

Funds with changed structure/other features Energy Crisis: Causes and ImpactsBy Sara Aquil Walji, Research Analyst, HBL Asset Management

Energy is the cornerstone for any economy’s development and growth. �e current situation has worsened in Pakistan over the past few years and likely to continue if measures are not taken to mitigate the issue on a long term basis. �e gap between demand and supply has reached 6000MW resulting in scheduled and unscheduled load shedding, negatively a�ecting our industrial sector, hurting our exports and has even hampered the GDP growth rate by 2%. Subsidies to the power sector have steadily been increasing and form the biggest part of total subsidies amounting to around Rs 349,287mn (95% of the total subsidies) in FY 2012-13. �e new government has allocated Rs. 220,100mn to the power sector for the FY 2013-14 which is 91.5% of the total subsidy budget. (Source: Annual budget 2014) With recent emphasis on matters to resolve energy crisis and develop renewable and non-renewable sources of energy, it is worthwhile to note why energy crisis became as severe as it is now.

�e root of this crisis is that Pakistan’s electricity generation mix is highly skewed towards the most expensive kinds .�ere appears to be an almost inverse relationship between the sources of electricity that are most expensive to set and those that are most expensive to run. �e following chart depicts this relationship:

Source: Express Tribune �is highlights the fact why there is a heavy concentration toward

the construction of thermal power plants since they are relatively cheaper to build than hydropower plants. �e government has not dedicated enough funds for the development of hydropower projects which are the most expensive to build but cheapest to run on a per unit basis.Pakistan’s electricity generation is highly dependent on imported oil as almost $14.5bn worth of oil is imported each year which accounts for around 35% of electricity generation. Comparing Pakistan with India and Bangladesh reveals that Pakistan relies heavily on oil for electricity generation where as India uses coal, a relatively cheaper source for electricity generation and Bangladesh on the other hand allocates 73% of its electricity generation to gas.

Source: Economic Survey report for 2012-2013

With a prominent shift in recent years towards the use of thermal power stations instead of hydropower sources and a reduction in electricity generation from coal, Pakistan’s electricity costs ends up being more expensive than it needs to be and since the government has adopted a policy of uniform tari� across the country the Tari� Di�erential Subsidy owed by the Government of Pakistan on an annual basis has increased substantially.

Circular debt is another major concern hampering the growth of Pakistan’s economy. In simple words circular debt is the amount of

cash shortfall within the Central Power Purchasing Agency (CPPA) that it cannot pay to power supply companies. �is shortfall is the result of (a) the di�erence between the actual cost of providing electricity in relation to revenues realized by the power distribution companies (DISCOs) from sales to customers plus subsidies; and (b) insu�cient payments by the DISCOs to CPPA out of realized revenue as they give priority to their own cash �ow needs. (Source: USAID Report March 2103)

�is revenue shortfall cascades through the entire energy supply chain, from electricity generators to fuel suppliers, re�ners, and producers; resulting in a shortage of fuel supply to the public sector thermal generating companies (GENCOs), a reduction in power generated by Independent Power Producers (IPPs), and an increases in load shedding.

According to the report published by the USAID in March 2013, circular debt amounts to Rs872bn which is actually 4% of GDP. According to Pakistan’s Economic Survey report for 2012-2013, there is a strong relationship between GDP growth rate and electricity growth as shown in the �gure below. It can be easily deduced that periods of low or negative electricity growth have witnessed low GDP growth rate, while periods where electricity growth picked up there is increase in GDP growth rate.

�is comes as no surprise, since industrial output is heavily dependent on the amount of electricity delivered to them. Continuous power breakdowns prevented industries from operating at their full capacity level. �e power outages have obstructed the viability of the textile industry as exporters were unable to meet their

commitments. During July-March 2012-13, foreign exchange earnings through exports of synthetic textile fabrics and woolen industry showing a decline of 25.3% and 5.1% respectively as compared to last year. During the period under review even in quantity term also recorded a decline of 30% and 15.8% respectively.

Coupled with an ine�cient system and expensive fuel mix, power theft is another major issue faced by Pakistanis. It is interesting to note that annual revenue collection e�ciency was estimated to be around 87%; however that 13% of lost e�ciency has a �nancial impact of Rs 86bn which is equivalent to 41 days of furnace oil costs for thermal power plants. �e following �gure shows the percentage of bills that were uncollected in 2012. �e e�ciency of di�erent DISCOs is disproportionate in revenue collection. �is essentially leads to the inclusion of the cost of power theft in the power tari�, meaning that the honest payers also bear the cost of those that steal.

Power theft is not only committed by normal residents but the main defaulters are the government institutions themselves. �e government owns around 51% of the uncollected bills which amounts to Rs 118bn out of the uncollected revenue receipts of Rs 386bn. In my opinion, this the amount which causes the discrepancy between the amount of RS500.3bn to be injected to resolve the circular debt issue and �gure of Rs 872.41bn since the government has a proposal to o�set provisional dues via a �scal adjuster. Due to a growing economy, Pakistan’s energy needs have more than doubled in the past 15 years. Energy shortages have far devastating

e�ects on our economy. Not only does it cause civil disturbances on a small scale but it a�ects our GDP on a larger note. Injecting money into the chain will only resolve the issue on a temporary basis. �ese challenges require a multi-prong approach that would address energy shortages in the immediate future and help the country build longer term energy su�ciency.

�ere needs to be a shift away from thermal power to alternative sources of energy which are not only cheaper but also environmentally friendly. Pakistan has large untapped renewable resources such as water, sun and wind and recently the government has taken keen interest on the development of hydro power projects and Neelum Jhelum Hydroelectric Project is one of the many projects which the new government has started which will approximately add 5.15bn units of electricity annually. Moreover, an e�ective system of governance must be in place to curb theft, recuperate dues and enforce policies.

�e Importance of Asset Allocation in attaining Optimal Returns

By Yamna Hassan, Asst. Manager-Business DevelopmentLakson Investments

“Tis the part of a wise man to keep himself today for tomorrow, and not venture all his eggs in one basket.” – Miguel de Cervantes, Don Quixote de la Mancha, 1605.

�e afore-mentioned quote indicates that along with being a great writer, Cervantes would have also proved to be a wise investor.

Investment related decisions are preceded by de�ning a proper Asset Allocation plan. According to recent research, the Asset Allocation decision is responsible for 91.5 percent of the variation between returns on di�erent portfolios. Given the importance of Asset Allocation, it has attained a center stage in any investment decision.

Asset Allocation is mainly important for two de�nite reasons. �e �rst reason pertains to portfolio design; variation in portfolio designs can lead to some investment decisions being winners while the rest being losers, and it is believed that if a portfolio is thoughtfully constructed and contains an optimal mix of securities that perform di�erently from each other (i.e they have little correlation in between them), chances of this portfolio yielding a more stable return is higher. �is is because if some securities in a portfolio are inconsistent and volatile, other, more stable securities can nullify the inconsistency of the entire portfolio, hence stabilizing the yield pattern.

�e second reason pertains to the vision of the investor. Asset allocation allows an investor to �nancially plan for his long-term and short-term goals and avoid impulsive reactions. We will subsequently discuss this aspect of Asset Allocation.

We can divide the Asset Allocation decision into two simple steps as discussed below:

Step 1: Asset Allocation An Asset Allocation strategy can be devised based on the investor’s risk assessment, �nancial goals and return targets. It is the most fundamental step of an investment decision and involves determining an ideal mix of stocks, bonds, cash and other securities in a way such that the portfolio yields a return which best suits an investor’s need. �ere is always a downside of investing too much in bonds or cash as that might certify stable but lower returns. In the same way, too much investment in stocks might lead to portfolio volatility. �erefore, in order to meet your requirements, or keep pace with in�ation, you need to plan an ideal arrangement of securities for your portfolio.

Step 2: Diversi�cationWhile the �rst step bears upon the idea of portfolio construction, this step is linked to the proper dissemination of your assets in a way such that your portfolio is exposed to many di�erent segments of the market, some of which perform independently of the others. Proper diversi�cation of your portfolio can lead to higher and more stable returns.

As mentioned before, the e�ect of diversi�cation is most noticeable when instruments have very little interrelation between them. However, it was easier to build this sort of a portfolio previously than it is today. �is is because roughly over the past 10 years, �nancial markets have become increasingly interrelated and complex. Let us also not ignore the fact that during the 2008 �nancial trouble, most assets tended to perform similarly, leading us to believe in the proposition that most assets are conducive to a similar behavior in times of crisis and instability. �e �gure below shows ways of diversifying a portfolio and entering into newer and assorted mix of investment vehicles.

FIGURE 1:

Figure shows ways of diversifying a portfolio.

Institutions that do not pay requisite importance to the Asset Allocation decision might end up damaging their returns. Usually, institutions are advised to invest in a 60:40 ratio (Stocks: �xed income instruments) to remain on the safe side. Whereas, individuals are recommended to invest in an investment spectrum ranging from 100 percent stocks to 100 percent bonds depending on their separate variable characteristics. However, the Asset Allocation decision is dependent on several other factors and cannot be generalized for di�erent investors.

Following are a few, newer and e�cient ways that have now been developed and can be used for attaining optimal asset allocation:

Mean Variance Optimization

Mean Variance Optimization is a quantitative technique that can be used to calculate the trade-o� between maximum expected return and risk tolerance. �is technique has gained popularity over time because in recent times, the technique is applied on an asset class level as opposed to being applied only to portfolios of individual stocks previously.

�e development of Mean Variance Optimization has not only bene�tted institutional investors but has resulted in a breakthrough for retail brokerage houses as well, which, prior to this development were restricted on their advisory role to the investors. However, recently, they are proposing a greater degree of passive security and more thoughtful asset allocation recommendations to their investors. �is has become possible by using optimization and aiming to attain a favorable position with maximum expected return, minimal risk, or both.

Moreover, a few re�ned approaches taken from utility theory and behavioral economics can be deployed to develop polls or surveys that can authentically gauge an individual’s risk preferences.

Pension funds have also been familiarized with Optimization. Such funds take into account the reciprocity of both assets and liabilities and not only the assets unlike other funds. �e objective of Asset Allocation for these funds is to amplify the fund surplus i.e liabilities subtracted from assets for a stated degree of risk tolerance.

Tactical Asset AllocationTactical asset allocation is the process of adjusting a particular portfolio based on changes in the market value of assets contained in that portfolio. �e technique is quite dynamic and involves deviation from the strategic asset allocation when an investor’s short-term foresight is not aligned with his long term foresight used to develop a strategic asset allocation plan and precise short-term predictions on part of the investor can lead to better returns.

Pragmatically speaking, Tactical Asset Allocation models tend to recommend contrarian trades, that is, they recommend purchasing an asset as its current market value drops and vice versa. �us, tactical Asset Allocation involves perpetually arranging your portfolio based on your needs and changes in the market. One consequence of Tactical Asset Allocation is that by overweighting certain assets during certain times and underweighting others, the portfolio is riskier because of its reduced diversi�cation. �us, to

o�set this additional risk factor, this strategy would need to generate above market returns. �e notion, whether Tactical Asset Allocation Models have achieved this is still a matter of rumination and study but because the probable returns from successful Tactical Asset Allocation would be large, researchers will keep inspecting, and investors won’t cease to be on the look out for their discoveries.

Insured Asset Allocation�is strategy is similar to a portfolio insurance strategy and is a mirror image of the Tactical Asset Allocation strategy. With this strategy, a base portfolio parameter is �xed and the value of the portfolio is not allowed to fall below this base parameter. As long as the portfolio achieves a return above this parameter, you actively to try to increase the portfolio value as much as possible. If, however, the portfolio ever drops to below the base value, investment in risk-free securities enables the base value to become �xed.

�e main target audiences for this approach are risk-averse investors who desire a certain level of active portfolio management and also covet the protection of �xing a certi�ed minimum return below which the portfolio is not allowed to decline. For instance, this approach is best for an investor who has planned a nominal lifestyle for himself after retirement.

Asset Allocation & Uncertain Times�e importance of active portfolio management and wise asset allocation strategy has been reiterated enough. But at the brink of serious economic uncertainty, expectation for stock market returns is somewhat muted. �erefore, it is believed that in such a situation, a dynamic asset allocation plan should come into play for the advantage of certain clients.

Dynamic Asset Allocation uses a long term strategic Asset Allocation strategy as its foundation. Alternate investments can be added to the core portfolio for the sake of complementing it. It is even better, if these investments include segments which yield a higher return and bear little interdependence, so as to achieve a greater level of diversi�cation.

Besides, dynamic Asset Allocation strategies can also be accompanied by �exible investment strategies; tactical actions that are short-term in nature and aim to bank on perceived market opportunities. If 10-20% of your assets are allocated for such investments, your portfolio can be expected to react better in times of changing trends and conditions.

Asset allocation is evolving past a traditional “purchase and retain” dogma. Whilst this might not suit all clients, exercising a dynamic asset allocation plan can create a portfolio better able to handle uncertain market environments. Not to forget the fact that a solid strategic asset allocation plan remains the core strategy behind any tactical asset allocation strategy.

Asset Allocation & the local scenarioWith interest rates in Pakistan consistently hovering above 10 percent for the past �ve years, anyone would expect Pakistanis to be encouraged enough to save and reap bene�ts of higher returns. However, reality states that Pakistan actually stands out to re�ect one of the lowest savings in the region. Given the fact that majority of Pakistanis are not so keen on investing mainly because their expenditures on necessities do not leave any room for savings or so for other reasons, there is a chunk of people who are inclined in saving for a better future and lifestyle.

With growth of urban nuclear families, educated middle to upper middle class is inspirited to plan properly for a child’s education, health and future life. Reasons for investment in Pakistani society vary from a child’s education to his marriage, from being cushioned against the toils of post-retirement life to maternity expenditures. Young professionals may want to invest as a means to generate seed capital for their potential business idea or to live their dreams of traveling or wayfaring.

Reasons for investing are many. With di�erent individuals and di�erent investment objectives in mind, the asset allocation needs of these investors must be customized accordingly.

Asset Allocation & Financial PlanningOnce you are done with choosing your model for Asset Allocation, the �nal stage is to test this model by contextualizing it with a precise �nancial plan. It might be easy for an investor to choose which Asset Allocation plan will provide him with the best possible returns but the investor should also �gure out a way to determine that expected return and also estimate the trade-o� for that higher return potential.

A well-concocted �nancial plan will guide the investor out of this bewilderment. First, it will determine what level of projected investment return is necessary to allow you to meet your lifestyle goals, which can help lead you to the right mix of stocks, bonds and cash. Second, the plan will evaluate the impact of the portfolio risk associated with that mix.

Traditionally, �nancial planning models focused on expected return and neglected the variability of outcomes that is associated with increased volatility. With the introduction of probability-based planning tools, the investor can foresee the e�ect of risk on their investment portfolios, they can vary the amount of risk and can study their corresponding returns. For example a portfolio bearing higher risk may yield a higher return but it also has a probability of falling far short beneath their targets.

When using an asset allocation approach to designing a portfolio, it is important to not focus just on the expected return of that portfolio. �e risk associated with an increasing, or decreasing, portfolio return is just as important to the success of an investment strategy.

Asset Allocation & �e Future

Most forecasters fall into two divisions. Forecasters in the �rst division are eager to predict that the future will closely mirror the recent past. �eir ideals are those generals who are always preparing to �ght the last war. Forecasters in the second division rely heavily

upon the adage that the only constant is change itself. Proponents of this school of thought usually don’t know what to expect, but are quite sure it will be nothing like anything we’ve seen before. �ese individuals do realize the problems of delineating the future of this area.

We should view the future of asset allocation through lenses borrowed from both divisions. �at is, certain aspects of asset allocation today will continue to be recognizable for the years to come. To be more precise, the goals and importance of asset allocation will not change, but the mechanisms by which investors seek to achieve those goals will be new.

�e goal of the asset allocation decision, was, is, and will be to select a combination of assets that will generate a return su�ciently high and safe so as to o�set some future liability. It is also safe to say that asset allocation decisions will have a continuing large role in explaining portfolio returns.

Industry-wide - Net Assets (PKR million)

Net Assets - Open End Funds (PKR million)

Net Assets - Closed End Funds (PKR million)

Net Assets - Pension Schemes (PKR million)

Sales (PKR million) Redemptions (PKR million) Net Sales (PKR million)

STATISTICS06

page 22 of 24 mufap quarterly newsletter

Open End Funds' Return** Closed End Funds' Return**

General Pension Schemes Return**

Islamic Pension Schemes Return**

Schemes FY09 FY10 FY11 FY12 FY13 FY14Q1

Equity -39.30% 18.87% 24.53% 9.12% 56.29% 4.15%Income 8.78% 9.70% 9.35% 11.05% 9.33% 6.57%Money Market 10.33% 10.68% 10.28% 11.15% 8.87% 7.29%Aggressive Income 5.49% 6.78% -2.12% 1.45% 7.33% 9.15%Asset Allocation -20.94% 6.66% 9.14% 6.75% 23.42% 1.62%Balanced -25.01% 14.24% 16.38% 13.40% 36.65% 0.35%Capital Protected 14.67% 8.96% 11.49% 3.27% 8.34% 1.57%Commodity - - - - -17.14% 2.65%Fund of Funds -25.80% 13.99% 31.70% 14.08% 35.93% 2.45%Index Tracker -42.16% 29.80% 22.45% 7.33% 44.78% 3.34%Islamic Equity -30.12% 29.34% 37.23% 19.97% 48.07% 0.10%Islamic Income 10.56% 6.34% 11.25% 10.98% 9.32% 6.82%Islamic Money Market 7.79% 10.10% 10.98% 10.69% 7.97% 7.29%Islamic Aggressive Income 2.72% 2.61% -0.53% 10.19% 7.81% 7.58%Islamic Asset Allocation -2.63% 6.93% 13.82% 8.33% 30.80% 0.42%Islamic Balanced -15.11% 16.83% 25.93% 16.24% 25.00% -0.22%Islamic Capital Protected 0.76% 13.62% - 13.52% 15.19% 1.00%Islamic Fund of Funds - - - - 6.90% 2.61%Islamic Index Tracker - - - -2.34% 49.64% 0.00%

Source: MUFAP

** Average for the Industry

Meeting of the Board of Directors

In order to ensure that the Board of Directors ful�ls the duties and responsibilities conferred by the members of MUFAP, the Board conducts meetings on a regular basis to make immediate and prudent decisions. �e Board of Directors held three meetings during the quarter Jul-Sep 2013.

�e activities undertaken by Board are as follows:

Proposed amendments in the de�nition of Related Parties in Restricted List of Code for Distributors

�e Board deliberated in detail on the matter of proposed

amendments in the de�nition of Related Parties in the Restricted List of Code for Distributors. After careful consideration of the impacts that the amendments may entail, it was decided that all individuals (namely employees, directors, sponsors of the RSPs) should be excluded from the de�nition of Related Parties. �e revised de�nition is applicable to all new investments brought in on or after July 16, 2013 and is not applicable to existing investments made by or before July 15, 2013.

Valuation of GOP Ijarah Sukuk

�e Board recommended that AMCs should use ‘PKISRV’ quoted on Reuters as the relevant price to value the GOP Ijarah Sukuks to determine net assets of CIS under their management, which the SECP approved in September.

Meetings of the Committees

MUFAP Committees held many discussions to make important, well planned proposals on behalf of industry. �e following table presents the number of meetings held during the quarter Jul-Sep’13.

Technical Committee - VPS

�e VPS – Technical Committee held extensive discussions to discuss the dissimilar taxation and operational practices being adopted by di�erent VPS Managers. �e VPS Committee constituted a Sub-Committee, involving a representative from each VPS Manager, to draw up recommendations for the tax treatment. �e Committee also engaged Senior Tax expert, Mr. Shabbar Zaidi on the matter and has requested for clari�cation from FBR on one of the matters.

Meeting with NCCPL A meeting was held between operations sta� of AMCs and NCCPL representatives on July 22, 2013 to evaluate the mechanics and possible data sharing from AMCs to NCCPL for netting of CGT. It was decided that NCCPL would develop a concept paper covering brief mechanism of centralized CGT collection to AMCs for their review and comments.

Elections to elect Directors/Executive Committee Members of MUFAP for the year 2013 / 2014

As required under the Trade Organizations Rules, 2007, MUFAP is required to hold its elections each year to elect Directors against the vacancies arising on account of completion of two-year tenure of some Directors. Board members are elected for a two-year term.

�e retiring Directors on the completion of their two year tenure on September 30, 2013 are: 1. Mr. Adnan Siddiqui (Resigned August-2013)2. Mr. Amer Maqbool 3. Mr. Imran Azim 4. Mr. Mir Muhammad Ali 5. Mr. Nihal Cassim

�e continuing Directors of MUFAP for the year 2013/ 2014 are: 1. Dr. Amjad Waheed 2. Mr. Imran Motiwala 3. Mr. Mir Adil Rashid 4. Mr. Rashid Mansur 5. Ms Maheen Rahman6. Ms Hina Ghazanfar (on reserved seat for women)

In addition, Mr. Rehan N. Shaikh will serve on the Board as provided under Rule 23(5)(d) of the Trade Organization Rules, 2007. At the Extra Ordinary General Meeting on September 26, 2013, MUFAP announced the appointment, by virtue of elections, of the following directors to the Board, namely:1. Mr. Farid Ahmed Khan 2. Mr. M. Habib-ur-Rahman 3. Mr. Mohammad Shoaib 4. Mr. Yasir Qadri 5. Mr. Enamullah Khan

New Board of Directors

�e new Board of Directors of MUFAP at its �rst meeting held on October 1, 2013 elected Dr. Amjad Waheed as Chairman, Mr. Mohammad Shoaib as Senior Vice Chairman and Mr. Farid Ahmed Khan as Vice Chairman MUFAP for the year 2013-2014.�e Board of Directors of MUFAP for the 2013-14 term is as follows:

1) Dr. Amjad Waheed - Chairman; 2) Mr. Mohammad Shoaib - Senior Vice Chairman; 3) Mr. Farid Ahmed Khan - Vice Chairman;4) Mr. Rehan N. Shaikh;5) Mr. Rashid Mansur;6) Mr. M. Habib-ur-Rahman;7) Mr. Yasir Qadri8) Mr. Imran Motiwala;9) Ms Hina Ghazanfar;10) Ms Maheen Rahman;11) Mr. Mir Adil Rashid;12) Mr. Enamullah Khan; and13) Ms Mashmooma Z. Majeed - Chief Executive

Chairman Dr. Amjad Waheed, CFA

Dr. Amjad Waheed holds a doctorate in Investments & Finance from Southern Illinois University, USA and is also a Chartered Financial Analyst. For the last 7 years he is CEO of NBP Fullerton Asset Management Ltd (NAFA), which is a subsidiary of National Bank of Pakistan, with Fullerton Fund Management Company of Singapore as the other joint venture partner. NAFA is presently managing fourteen mutual funds and several portfolios with about Rs 45 billion invested in these funds. NAFA is among the largest Asset Management Companies in Pakistan today.

Before joining NAFA, Dr. Waheed was Head of Equity Mutual Funds & Portfolios at Riyad Bank, Saudi Arabia, for about 5 years where he was managing US$ 7.5 billion invested in 22 mutual funds. Prior to that Dr. Waheed was Head of Investments at NIT,

and Chief Operation O�cer of FC-ABN AMRO Equities for several years. Before moving back to Pakistan, Dr. Waheed was Assistant Professor of Finance at Tennessee State University, USA and has published several articles in top journals of the world such as Journal of Banking & Finance and Financial and Financial Management.Dr. Waheed has served on the Board of various companies including Siemens, Nishat Mills, PICIC, Askari Bank, Millat Tractors, Fauji Fertilizer, Pakitstan Tobacco Company, Treet Corporation, Gul Ahmed Textile, Bata Pakistan.

Senior Vice Chairman Mr. Mohammad Shoaib, CFA

Mr. Mohammad Shoaib, CFA is the Chief Executive of Al Meezan Investment Management Ltd. He has played a key role in setting up the company and has been associated with it since inception. He is a highly quali�ed and seasoned professional with 23 years experience in capital markets. He has to his credit many accolades and awards, the most signi�cant of them being the "Most In�uential CFA charter holder" awarded by CFA Institute in 2006.

Mr. Shoaib holds an MBA degree from IBA besides being a Chartered Financial Analyst (CFA) charter holder. He has to his credit the honor of being the founder and �rst president of CFA Association of Pakistan, a member society of CFA Institute. He has been active participant in the Islamic �nance and asset management for the last 10 years. In this respect, he has also actively participated as a speaker and panelist in various international and domestic seminars, conferences and workshops.

Mr. Shoaib has also served in voluntary capacity at di�erent domestic and international institutions. He has served as a Director on the Board of Karachi Stock Exchange and Vice Chairman on the Board of Mutual Funds Association of Pakistan. He is currently serving on the Board of Directors of Pakistan Institute of Corporate Governance and Institute of Capital Markets. He has also served on various global and regional committees of CFA Institute including Asia Paci�c Advocacy Committee, Global Task Force on Corporate

Governance, GIPS Regional Council and Asset Manager Code Advisory Committee. He has also had the honour to represent over 16,000 charterholders in Asia Paci�c Region as their representative on the Presidents' Council of CFA Institute.

Vice Chairman Mr. Farid Ahmed Khan, CFA

Mr. Farid Ahmed Khan, CFA is the CEO of ABL Asset Management. He has been involved with capital markets for over 18 years and has a broad-based, global experience with bulge bracket �rms in Asset Management, Investment Banking, Investment Research and Sales, Business Development & International Project Finance. He joined ABL AMC from Credit Suisse, where he was the Country Manager of Credit Suisse Pakistan. Prior to that, he worked for MCB, initially as Head of Investment Banking Group and later as the CEO of MCB Asset Management. Mr. Khan has extensive experience outside Pakistan, having worked at Morgan Stanley, ING Barings Securities and CLSA Emerging Markets in Kuala Lumpur, London and Istanbul in a variety of senior positions. He holds an MBA in Finance from IBA, Karachi and got his CFA quali�cation in 1998.

New Committees

MUFAP Board elected its Professional Committees, Chairperson and Vice-Chairperson of each Committee for the year 2013-14. �e list of Committees, their Chairperson and Vice-Chairperson is as follows:

SECP forms Shariah Advisory Board

SECP constituted a Shariah Advisory Board (SAB) to harmonize the Shariah interpretations and strengthen the regulatory and supervisory oversight of Islamic �nancial institutions (IFIs) and Islamic capital markets (ICMs) in Pakistan. It will also advise the Commission on the Shariah-compliance aspects of various products launched and or the processes being adopted by the regulated entities. It will also provide guidance for issuance of new laws, rules and regulations for e�ective monitoring and supervision of Islamic Financial Products and to suggest ways and means for development of IFIs and ICMs in the country.

Money Market

To meet the challenges of maintaining stability in the foreign exchange market and controlling high growth in money supply, SBP decided to gradually decrease the outstanding amount of liquidity injections. Since the beginning of FY14, interbank market liquidity conditions have considerably eased primarily due to substantial increase in the pace of government borrowing from the SBP. In fact, SBP mopped up Rs. 1,556.45 billion and injected Rs. 630.70 billion during Q1-FY14.

In terms of controlling growth in money supply, however, SBP’s e�orts of curtailing liquidity injections did not experience much success as these were o�set by an increase in direct �scal borrowings from the SBP. �e increase of Rs. 1,446 billion in budgetary borrowings from the banking system during FY13 was almost Rs. 1 trillion higher than the original target and was even higher than the total expansion in M2. Deviation of this scale has signi�cantly constrained e�ective monetary management, disrupted �nancial intermediation in the economy, and has led to a sharp increase in domestic debt. Showing a growth of 24.6% in FY13, the stock of government’s domestic debt has reached Rs. 9.5 trillion as of end-June 2013. Similarly, a considerable increase in public debt to revenue ratio re�ects weak repayment capacity of the government. �e acceleration in �scal borrowings from the SBP during H2-FY13, Rs. 714 billion, and Q1-FY14 up till 30th August 2013, Rs. 547 billion, is particularly worrisome. �e inability to raise the tax-GDP ratio is the fundamental source of large �scal de�cits, high borrowings, and rising debt. Although there has been a consistent gap between Federal Board of Revenue’s (FBR) budget targets and actual outcomes in the last few years, the gap of Rs. 445 billion in FY13 was exceptionally high. In fact, this is more than the cumulative shortfall of Rs. 349 billion during the last �ve years.

On the external front, stress in the external account has gradually increased with every passing month of 2013 due to shrinking net capital and �nancial �ows and high loan repayments to the IMF.

While the former was only $517 million or 0.2 percent of GDP, the latter increased to $3 billion in FY13. As a result, despite reduction in the external current account de�cit by about half, to $2.3 billion or 1.0 percent of GDP, the SBP’s foreign exchange reserves declined to $6 billion by end-June 2013 from $10.8 billion at the beginning of FY13. �ese stand at $5.2 billion as on 6th September, 2013 after receiving $544.5 million under the new IMF program. Despite pressures and speculations of a drop in the value of the Pak rupee the foreign exchange market has largely remained stable in FY13. However, since the beginning of FY14 the rupee has depreciated by 5.0 percent as of 12th September 2013.

�e year-on-year CPI based in�ation rate was recorded at 8.3% in July 2013, then to 8.55% in August 2013, however dipped down to 7.39% in September 2013.�ough CPI In�ation remained within single digit, however, it witnessed an upward trend as it increased to 7.39 percent in September 2013 compared to 5.85 percent in June 2013 and 6.6 percent in March 2013. �e impact of upward adjustments in energy prices and an increase in the GST together with the removal of certain exemptions put pressure on in�ation.In order to counter in�ationary expectations, SBP raised the discount rate by 50 basis points to 9.5 percent with e�ect from September 16, 2013.

Movement in KIBOR

Treasury Bills:

A total of 6 T-bill auctions were held by SBP during the quarter in which a total amount of Rs. 1,348.88 billion was raised. Since the beginning of FY14, market’s preference for shorter tenor T-Bills has increased as about 83% of the bank’s total o�ers in recent T-Bill auctions were concentrated in 3-month bills.

T-Bill Auctions (Amount in PKR billion; rates in %)

Pakistan Investment Bonds

�e accepted amount in the PIB auctions during Q1-FY14 fell short of the target .

PIB Auctions (Yields in % and Face Value in PKR billion)

Debt Market

�e table below summarizes the TOP 15 trades of TFCs/Sukuk on the basis of Face value during the Q1-FY14:

Equity Market

KSE-100 index made a strong start to the �scal year 2014, as the index gained 826.99 points, or 3.94%, to stand at 21,832.68 points during the �rst three months of FY14. During the period, index struggled to cross the 23,000 points level and made a high of 23,776.22 on a closing basis. Stock market began the �rst month of �scal year 2014 with a strong rally, overcoming jitters stemming from treason proceedings against former president General (retd) Pervez Musharraf and slowdown in global markets. �e government’s successful negotiations with IMF for a $5.3 billion loan, resolution of circular debt by issuing treasury bills and bonds and anticipation of strong corporate earnings for the quarter ended June 30 buoyed investors’ con�dence as the share prices appreciated across the board and index posted a gain of 2.307.09 points, or 10.98% to settle at 23,312.78 level in July.

After posting strong gain in July, KSE-100 faltered in August as investors continued to worry about ever-escalating Syrian crisis and tumbling regional markets. Stock market further pressured by a slew of disappointing and less-than-expected corporate earnings, falling foreign exchange reserves and high in�ation �gures for July. Moreover, concerns on a possible interest rate hike in the upcoming monetary policy announcement, potential spike in oil prices, decline in cement prices due to breakdown in price discipline, heavy foreign net selling and persistent depreciation in the rupee dragged the KSE-100 index down 1,151.93 points, or 4.94%, to 22,160.85 in August. �e index showed a mixed performance in September. In the �rst half of the month, the approval of the $6.64 billion loan package by IMF, the plans to privatize Pakistan International Airlines, strong foreign in�ows and the release of the IMF’s �rst tranche worth of $550 million helped lift the index to 23,639.97 on a closing basis. However, sentiment reversed towards the end of the month after the central bank’s decision to increase the rate of return on savings deposits to 6.5%. Moreover, steep decline in the value of Pakistani

rupee against the US dollar, constant repayments to IMF, a 50 basis points increase in the discount rate and heavy foreign net selling dragged the KSE-100 index down 328.17 points, or 1.48%, to 21,832.68 in September.

Mutual Fund Market:

�e total net assets decreased to Rs. 359.947 billion in the �rst quarter of FY14 versus Rs. 361.668 billion for the Q4FY13, a reduction of 0.48% quarter over quarter. �e open-end funds went up by 0.71% to Rs. 327.594 billion, pension funds went up by 9.67% to Rs. 5.288 billion and closed-end decreased by 14.23% to Rs. 27.064 billion.

Funds launched during the quarter Q1-FY14

Funds matured during the quarter Q1-FY14

Funds with changed structure/other features Energy Crisis: Causes and ImpactsBy Sara Aquil Walji, Research Analyst, HBL Asset Management

Energy is the cornerstone for any economy’s development and growth. �e current situation has worsened in Pakistan over the past few years and likely to continue if measures are not taken to mitigate the issue on a long term basis. �e gap between demand and supply has reached 6000MW resulting in scheduled and unscheduled load shedding, negatively a�ecting our industrial sector, hurting our exports and has even hampered the GDP growth rate by 2%. Subsidies to the power sector have steadily been increasing and form the biggest part of total subsidies amounting to around Rs 349,287mn (95% of the total subsidies) in FY 2012-13. �e new government has allocated Rs. 220,100mn to the power sector for the FY 2013-14 which is 91.5% of the total subsidy budget. (Source: Annual budget 2014) With recent emphasis on matters to resolve energy crisis and develop renewable and non-renewable sources of energy, it is worthwhile to note why energy crisis became as severe as it is now.

�e root of this crisis is that Pakistan’s electricity generation mix is highly skewed towards the most expensive kinds .�ere appears to be an almost inverse relationship between the sources of electricity that are most expensive to set and those that are most expensive to run. �e following chart depicts this relationship:

Source: Express Tribune �is highlights the fact why there is a heavy concentration toward

the construction of thermal power plants since they are relatively cheaper to build than hydropower plants. �e government has not dedicated enough funds for the development of hydropower projects which are the most expensive to build but cheapest to run on a per unit basis.Pakistan’s electricity generation is highly dependent on imported oil as almost $14.5bn worth of oil is imported each year which accounts for around 35% of electricity generation. Comparing Pakistan with India and Bangladesh reveals that Pakistan relies heavily on oil for electricity generation where as India uses coal, a relatively cheaper source for electricity generation and Bangladesh on the other hand allocates 73% of its electricity generation to gas.

Source: Economic Survey report for 2012-2013

With a prominent shift in recent years towards the use of thermal power stations instead of hydropower sources and a reduction in electricity generation from coal, Pakistan’s electricity costs ends up being more expensive than it needs to be and since the government has adopted a policy of uniform tari� across the country the Tari� Di�erential Subsidy owed by the Government of Pakistan on an annual basis has increased substantially.

Circular debt is another major concern hampering the growth of Pakistan’s economy. In simple words circular debt is the amount of

cash shortfall within the Central Power Purchasing Agency (CPPA) that it cannot pay to power supply companies. �is shortfall is the result of (a) the di�erence between the actual cost of providing electricity in relation to revenues realized by the power distribution companies (DISCOs) from sales to customers plus subsidies; and (b) insu�cient payments by the DISCOs to CPPA out of realized revenue as they give priority to their own cash �ow needs. (Source: USAID Report March 2103)

�is revenue shortfall cascades through the entire energy supply chain, from electricity generators to fuel suppliers, re�ners, and producers; resulting in a shortage of fuel supply to the public sector thermal generating companies (GENCOs), a reduction in power generated by Independent Power Producers (IPPs), and an increases in load shedding.

According to the report published by the USAID in March 2013, circular debt amounts to Rs872bn which is actually 4% of GDP. According to Pakistan’s Economic Survey report for 2012-2013, there is a strong relationship between GDP growth rate and electricity growth as shown in the �gure below. It can be easily deduced that periods of low or negative electricity growth have witnessed low GDP growth rate, while periods where electricity growth picked up there is increase in GDP growth rate.

�is comes as no surprise, since industrial output is heavily dependent on the amount of electricity delivered to them. Continuous power breakdowns prevented industries from operating at their full capacity level. �e power outages have obstructed the viability of the textile industry as exporters were unable to meet their

commitments. During July-March 2012-13, foreign exchange earnings through exports of synthetic textile fabrics and woolen industry showing a decline of 25.3% and 5.1% respectively as compared to last year. During the period under review even in quantity term also recorded a decline of 30% and 15.8% respectively.

Coupled with an ine�cient system and expensive fuel mix, power theft is another major issue faced by Pakistanis. It is interesting to note that annual revenue collection e�ciency was estimated to be around 87%; however that 13% of lost e�ciency has a �nancial impact of Rs 86bn which is equivalent to 41 days of furnace oil costs for thermal power plants. �e following �gure shows the percentage of bills that were uncollected in 2012. �e e�ciency of di�erent DISCOs is disproportionate in revenue collection. �is essentially leads to the inclusion of the cost of power theft in the power tari�, meaning that the honest payers also bear the cost of those that steal.

Power theft is not only committed by normal residents but the main defaulters are the government institutions themselves. �e government owns around 51% of the uncollected bills which amounts to Rs 118bn out of the uncollected revenue receipts of Rs 386bn. In my opinion, this the amount which causes the discrepancy between the amount of RS500.3bn to be injected to resolve the circular debt issue and �gure of Rs 872.41bn since the government has a proposal to o�set provisional dues via a �scal adjuster. Due to a growing economy, Pakistan’s energy needs have more than doubled in the past 15 years. Energy shortages have far devastating

e�ects on our economy. Not only does it cause civil disturbances on a small scale but it a�ects our GDP on a larger note. Injecting money into the chain will only resolve the issue on a temporary basis. �ese challenges require a multi-prong approach that would address energy shortages in the immediate future and help the country build longer term energy su�ciency.

�ere needs to be a shift away from thermal power to alternative sources of energy which are not only cheaper but also environmentally friendly. Pakistan has large untapped renewable resources such as water, sun and wind and recently the government has taken keen interest on the development of hydro power projects and Neelum Jhelum Hydroelectric Project is one of the many projects which the new government has started which will approximately add 5.15bn units of electricity annually. Moreover, an e�ective system of governance must be in place to curb theft, recuperate dues and enforce policies.

�e Importance of Asset Allocation in attaining Optimal Returns

By Yamna Hassan, Asst. Manager-Business DevelopmentLakson Investments

“Tis the part of a wise man to keep himself today for tomorrow, and not venture all his eggs in one basket.” – Miguel de Cervantes, Don Quixote de la Mancha, 1605.

�e afore-mentioned quote indicates that along with being a great writer, Cervantes would have also proved to be a wise investor.

Investment related decisions are preceded by de�ning a proper Asset Allocation plan. According to recent research, the Asset Allocation decision is responsible for 91.5 percent of the variation between returns on di�erent portfolios. Given the importance of Asset Allocation, it has attained a center stage in any investment decision.

Asset Allocation is mainly important for two de�nite reasons. �e �rst reason pertains to portfolio design; variation in portfolio designs can lead to some investment decisions being winners while the rest being losers, and it is believed that if a portfolio is thoughtfully constructed and contains an optimal mix of securities that perform di�erently from each other (i.e they have little correlation in between them), chances of this portfolio yielding a more stable return is higher. �is is because if some securities in a portfolio are inconsistent and volatile, other, more stable securities can nullify the inconsistency of the entire portfolio, hence stabilizing the yield pattern.

�e second reason pertains to the vision of the investor. Asset allocation allows an investor to �nancially plan for his long-term and short-term goals and avoid impulsive reactions. We will subsequently discuss this aspect of Asset Allocation.

We can divide the Asset Allocation decision into two simple steps as discussed below:

Step 1: Asset Allocation An Asset Allocation strategy can be devised based on the investor’s risk assessment, �nancial goals and return targets. It is the most fundamental step of an investment decision and involves determining an ideal mix of stocks, bonds, cash and other securities in a way such that the portfolio yields a return which best suits an investor’s need. �ere is always a downside of investing too much in bonds or cash as that might certify stable but lower returns. In the same way, too much investment in stocks might lead to portfolio volatility. �erefore, in order to meet your requirements, or keep pace with in�ation, you need to plan an ideal arrangement of securities for your portfolio.

Step 2: Diversi�cationWhile the �rst step bears upon the idea of portfolio construction, this step is linked to the proper dissemination of your assets in a way such that your portfolio is exposed to many di�erent segments of the market, some of which perform independently of the others. Proper diversi�cation of your portfolio can lead to higher and more stable returns.

As mentioned before, the e�ect of diversi�cation is most noticeable when instruments have very little interrelation between them. However, it was easier to build this sort of a portfolio previously than it is today. �is is because roughly over the past 10 years, �nancial markets have become increasingly interrelated and complex. Let us also not ignore the fact that during the 2008 �nancial trouble, most assets tended to perform similarly, leading us to believe in the proposition that most assets are conducive to a similar behavior in times of crisis and instability. �e �gure below shows ways of diversifying a portfolio and entering into newer and assorted mix of investment vehicles.

FIGURE 1:

Figure shows ways of diversifying a portfolio.

Institutions that do not pay requisite importance to the Asset Allocation decision might end up damaging their returns. Usually, institutions are advised to invest in a 60:40 ratio (Stocks: �xed income instruments) to remain on the safe side. Whereas, individuals are recommended to invest in an investment spectrum ranging from 100 percent stocks to 100 percent bonds depending on their separate variable characteristics. However, the Asset Allocation decision is dependent on several other factors and cannot be generalized for di�erent investors.

Following are a few, newer and e�cient ways that have now been developed and can be used for attaining optimal asset allocation:

Mean Variance Optimization

Mean Variance Optimization is a quantitative technique that can be used to calculate the trade-o� between maximum expected return and risk tolerance. �is technique has gained popularity over time because in recent times, the technique is applied on an asset class level as opposed to being applied only to portfolios of individual stocks previously.

�e development of Mean Variance Optimization has not only bene�tted institutional investors but has resulted in a breakthrough for retail brokerage houses as well, which, prior to this development were restricted on their advisory role to the investors. However, recently, they are proposing a greater degree of passive security and more thoughtful asset allocation recommendations to their investors. �is has become possible by using optimization and aiming to attain a favorable position with maximum expected return, minimal risk, or both.

Moreover, a few re�ned approaches taken from utility theory and behavioral economics can be deployed to develop polls or surveys that can authentically gauge an individual’s risk preferences.

Pension funds have also been familiarized with Optimization. Such funds take into account the reciprocity of both assets and liabilities and not only the assets unlike other funds. �e objective of Asset Allocation for these funds is to amplify the fund surplus i.e liabilities subtracted from assets for a stated degree of risk tolerance.

Tactical Asset AllocationTactical asset allocation is the process of adjusting a particular portfolio based on changes in the market value of assets contained in that portfolio. �e technique is quite dynamic and involves deviation from the strategic asset allocation when an investor’s short-term foresight is not aligned with his long term foresight used to develop a strategic asset allocation plan and precise short-term predictions on part of the investor can lead to better returns.

Pragmatically speaking, Tactical Asset Allocation models tend to recommend contrarian trades, that is, they recommend purchasing an asset as its current market value drops and vice versa. �us, tactical Asset Allocation involves perpetually arranging your portfolio based on your needs and changes in the market. One consequence of Tactical Asset Allocation is that by overweighting certain assets during certain times and underweighting others, the portfolio is riskier because of its reduced diversi�cation. �us, to

o�set this additional risk factor, this strategy would need to generate above market returns. �e notion, whether Tactical Asset Allocation Models have achieved this is still a matter of rumination and study but because the probable returns from successful Tactical Asset Allocation would be large, researchers will keep inspecting, and investors won’t cease to be on the look out for their discoveries.

Insured Asset Allocation�is strategy is similar to a portfolio insurance strategy and is a mirror image of the Tactical Asset Allocation strategy. With this strategy, a base portfolio parameter is �xed and the value of the portfolio is not allowed to fall below this base parameter. As long as the portfolio achieves a return above this parameter, you actively to try to increase the portfolio value as much as possible. If, however, the portfolio ever drops to below the base value, investment in risk-free securities enables the base value to become �xed.

�e main target audiences for this approach are risk-averse investors who desire a certain level of active portfolio management and also covet the protection of �xing a certi�ed minimum return below which the portfolio is not allowed to decline. For instance, this approach is best for an investor who has planned a nominal lifestyle for himself after retirement.

Asset Allocation & Uncertain Times�e importance of active portfolio management and wise asset allocation strategy has been reiterated enough. But at the brink of serious economic uncertainty, expectation for stock market returns is somewhat muted. �erefore, it is believed that in such a situation, a dynamic asset allocation plan should come into play for the advantage of certain clients.

Dynamic Asset Allocation uses a long term strategic Asset Allocation strategy as its foundation. Alternate investments can be added to the core portfolio for the sake of complementing it. It is even better, if these investments include segments which yield a higher return and bear little interdependence, so as to achieve a greater level of diversi�cation.

Besides, dynamic Asset Allocation strategies can also be accompanied by �exible investment strategies; tactical actions that are short-term in nature and aim to bank on perceived market opportunities. If 10-20% of your assets are allocated for such investments, your portfolio can be expected to react better in times of changing trends and conditions.

Asset allocation is evolving past a traditional “purchase and retain” dogma. Whilst this might not suit all clients, exercising a dynamic asset allocation plan can create a portfolio better able to handle uncertain market environments. Not to forget the fact that a solid strategic asset allocation plan remains the core strategy behind any tactical asset allocation strategy.

Asset Allocation & the local scenarioWith interest rates in Pakistan consistently hovering above 10 percent for the past �ve years, anyone would expect Pakistanis to be encouraged enough to save and reap bene�ts of higher returns. However, reality states that Pakistan actually stands out to re�ect one of the lowest savings in the region. Given the fact that majority of Pakistanis are not so keen on investing mainly because their expenditures on necessities do not leave any room for savings or so for other reasons, there is a chunk of people who are inclined in saving for a better future and lifestyle.

With growth of urban nuclear families, educated middle to upper middle class is inspirited to plan properly for a child’s education, health and future life. Reasons for investment in Pakistani society vary from a child’s education to his marriage, from being cushioned against the toils of post-retirement life to maternity expenditures. Young professionals may want to invest as a means to generate seed capital for their potential business idea or to live their dreams of traveling or wayfaring.

Reasons for investing are many. With di�erent individuals and di�erent investment objectives in mind, the asset allocation needs of these investors must be customized accordingly.

Asset Allocation & Financial PlanningOnce you are done with choosing your model for Asset Allocation, the �nal stage is to test this model by contextualizing it with a precise �nancial plan. It might be easy for an investor to choose which Asset Allocation plan will provide him with the best possible returns but the investor should also �gure out a way to determine that expected return and also estimate the trade-o� for that higher return potential.

A well-concocted �nancial plan will guide the investor out of this bewilderment. First, it will determine what level of projected investment return is necessary to allow you to meet your lifestyle goals, which can help lead you to the right mix of stocks, bonds and cash. Second, the plan will evaluate the impact of the portfolio risk associated with that mix.

Traditionally, �nancial planning models focused on expected return and neglected the variability of outcomes that is associated with increased volatility. With the introduction of probability-based planning tools, the investor can foresee the e�ect of risk on their investment portfolios, they can vary the amount of risk and can study their corresponding returns. For example a portfolio bearing higher risk may yield a higher return but it also has a probability of falling far short beneath their targets.

When using an asset allocation approach to designing a portfolio, it is important to not focus just on the expected return of that portfolio. �e risk associated with an increasing, or decreasing, portfolio return is just as important to the success of an investment strategy.

Asset Allocation & �e Future

Most forecasters fall into two divisions. Forecasters in the �rst division are eager to predict that the future will closely mirror the recent past. �eir ideals are those generals who are always preparing to �ght the last war. Forecasters in the second division rely heavily

upon the adage that the only constant is change itself. Proponents of this school of thought usually don’t know what to expect, but are quite sure it will be nothing like anything we’ve seen before. �ese individuals do realize the problems of delineating the future of this area.

We should view the future of asset allocation through lenses borrowed from both divisions. �at is, certain aspects of asset allocation today will continue to be recognizable for the years to come. To be more precise, the goals and importance of asset allocation will not change, but the mechanisms by which investors seek to achieve those goals will be new.

�e goal of the asset allocation decision, was, is, and will be to select a combination of assets that will generate a return su�ciently high and safe so as to o�set some future liability. It is also safe to say that asset allocation decisions will have a continuing large role in explaining portfolio returns.

Industry-wide - Net Assets (PKR million)

Net Assets - Open End Funds (PKR million)

Net Assets - Closed End Funds (PKR million)

Net Assets - Pension Schemes (PKR million)

Sales (PKR million) Redemptions (PKR million) Net Sales (PKR million)

Open End Funds' Return**

STATISTICS06

page 23 of 24 mufap quarterly newsletter

Closed End Funds' Return**

General Pension Schemes Return**

Islamic Pension Schemes Return**

Schemes FY09 FY10 FY11 FY12 FY13 FY14Q1 Equity -37.80% 13.30% 18.38% 10.97% 57.71% -2.48%Income 5.76% 12.46% 11.67% 11.23% 7.84% 6.53%Money Market - - Aggressive Income - - Asset Allocation - - Balanced -29.19% 0.12% 13.15% 1.29% 20.86% -4.23%Capital Protected -1.13% 8.16% - - Commodity - - Fund of Funds -45.64% 26.44% 42.46% 21.34% 41.02% - Index Tracker - - Islamic Equity -31.63% 31.40% 0.00% - - Islamic Income - - Islamic Money Market - - Islamic Aggressive Income - - Islamic Asset Allocation - - Islamic Balanced -10.86% 22.81% 25.37% 16.81% 31.75% 0.10%Islamic Capital Protected - - Islamic Index Tracker - -

Schemes FY09 FY10 FY11 FY12 FY13 FY14Q1 Equity -26.78% 20.32% 26.63% 17.56% 60.16% 3.20%Debt 12.67% 7.67% 10.68% 10.98% 9.79% 2.19%Money Market 10.00% 3.54% 10.90% 10.92% 8.75% 6.00%

Schemes FY09 FY10 FY11 FY12 FY13 FY14Q1 Islamic Equity -15.22% 23.13% 33.17% 17.00% 52.70% -0.04%Islamic Debt 9.91% 8.87% 9.08% 8.66% 8.05% 6.82%Islamic Money Market 9.17% 6.69% 8.57% 10.22% 7.54% 6.31%

Source: MUFAP

Source: MUFAP

Source: MUFAP** Average for the Industry

Meeting of the Board of Directors

In order to ensure that the Board of Directors ful�ls the duties and responsibilities conferred by the members of MUFAP, the Board conducts meetings on a regular basis to make immediate and prudent decisions. �e Board of Directors held three meetings during the quarter Jul-Sep 2013.

�e activities undertaken by Board are as follows:

Proposed amendments in the de�nition of Related Parties in Restricted List of Code for Distributors

�e Board deliberated in detail on the matter of proposed

amendments in the de�nition of Related Parties in the Restricted List of Code for Distributors. After careful consideration of the impacts that the amendments may entail, it was decided that all individuals (namely employees, directors, sponsors of the RSPs) should be excluded from the de�nition of Related Parties. �e revised de�nition is applicable to all new investments brought in on or after July 16, 2013 and is not applicable to existing investments made by or before July 15, 2013.

Valuation of GOP Ijarah Sukuk

�e Board recommended that AMCs should use ‘PKISRV’ quoted on Reuters as the relevant price to value the GOP Ijarah Sukuks to determine net assets of CIS under their management, which the SECP approved in September.

Meetings of the Committees

MUFAP Committees held many discussions to make important, well planned proposals on behalf of industry. �e following table presents the number of meetings held during the quarter Jul-Sep’13.

Technical Committee - VPS

�e VPS – Technical Committee held extensive discussions to discuss the dissimilar taxation and operational practices being adopted by di�erent VPS Managers. �e VPS Committee constituted a Sub-Committee, involving a representative from each VPS Manager, to draw up recommendations for the tax treatment. �e Committee also engaged Senior Tax expert, Mr. Shabbar Zaidi on the matter and has requested for clari�cation from FBR on one of the matters.

Meeting with NCCPL A meeting was held between operations sta� of AMCs and NCCPL representatives on July 22, 2013 to evaluate the mechanics and possible data sharing from AMCs to NCCPL for netting of CGT. It was decided that NCCPL would develop a concept paper covering brief mechanism of centralized CGT collection to AMCs for their review and comments.

Elections to elect Directors/Executive Committee Members of MUFAP for the year 2013 / 2014

As required under the Trade Organizations Rules, 2007, MUFAP is required to hold its elections each year to elect Directors against the vacancies arising on account of completion of two-year tenure of some Directors. Board members are elected for a two-year term.

�e retiring Directors on the completion of their two year tenure on September 30, 2013 are: 1. Mr. Adnan Siddiqui (Resigned August-2013)2. Mr. Amer Maqbool 3. Mr. Imran Azim 4. Mr. Mir Muhammad Ali 5. Mr. Nihal Cassim

�e continuing Directors of MUFAP for the year 2013/ 2014 are: 1. Dr. Amjad Waheed 2. Mr. Imran Motiwala 3. Mr. Mir Adil Rashid 4. Mr. Rashid Mansur 5. Ms Maheen Rahman6. Ms Hina Ghazanfar (on reserved seat for women)

In addition, Mr. Rehan N. Shaikh will serve on the Board as provided under Rule 23(5)(d) of the Trade Organization Rules, 2007. At the Extra Ordinary General Meeting on September 26, 2013, MUFAP announced the appointment, by virtue of elections, of the following directors to the Board, namely:1. Mr. Farid Ahmed Khan 2. Mr. M. Habib-ur-Rahman 3. Mr. Mohammad Shoaib 4. Mr. Yasir Qadri 5. Mr. Enamullah Khan

New Board of Directors

�e new Board of Directors of MUFAP at its �rst meeting held on October 1, 2013 elected Dr. Amjad Waheed as Chairman, Mr. Mohammad Shoaib as Senior Vice Chairman and Mr. Farid Ahmed Khan as Vice Chairman MUFAP for the year 2013-2014.�e Board of Directors of MUFAP for the 2013-14 term is as follows:

1) Dr. Amjad Waheed - Chairman; 2) Mr. Mohammad Shoaib - Senior Vice Chairman; 3) Mr. Farid Ahmed Khan - Vice Chairman;4) Mr. Rehan N. Shaikh;5) Mr. Rashid Mansur;6) Mr. M. Habib-ur-Rahman;7) Mr. Yasir Qadri8) Mr. Imran Motiwala;9) Ms Hina Ghazanfar;10) Ms Maheen Rahman;11) Mr. Mir Adil Rashid;12) Mr. Enamullah Khan; and13) Ms Mashmooma Z. Majeed - Chief Executive

Chairman Dr. Amjad Waheed, CFA

Dr. Amjad Waheed holds a doctorate in Investments & Finance from Southern Illinois University, USA and is also a Chartered Financial Analyst. For the last 7 years he is CEO of NBP Fullerton Asset Management Ltd (NAFA), which is a subsidiary of National Bank of Pakistan, with Fullerton Fund Management Company of Singapore as the other joint venture partner. NAFA is presently managing fourteen mutual funds and several portfolios with about Rs 45 billion invested in these funds. NAFA is among the largest Asset Management Companies in Pakistan today.

Before joining NAFA, Dr. Waheed was Head of Equity Mutual Funds & Portfolios at Riyad Bank, Saudi Arabia, for about 5 years where he was managing US$ 7.5 billion invested in 22 mutual funds. Prior to that Dr. Waheed was Head of Investments at NIT,

COMICS07

page 24 of 24 mufap quarterly newsletter

and Chief Operation O�cer of FC-ABN AMRO Equities for several years. Before moving back to Pakistan, Dr. Waheed was Assistant Professor of Finance at Tennessee State University, USA and has published several articles in top journals of the world such as Journal of Banking & Finance and Financial and Financial Management.Dr. Waheed has served on the Board of various companies including Siemens, Nishat Mills, PICIC, Askari Bank, Millat Tractors, Fauji Fertilizer, Pakitstan Tobacco Company, Treet Corporation, Gul Ahmed Textile, Bata Pakistan.

Senior Vice Chairman Mr. Mohammad Shoaib, CFA

Mr. Mohammad Shoaib, CFA is the Chief Executive of Al Meezan Investment Management Ltd. He has played a key role in setting up the company and has been associated with it since inception. He is a highly quali�ed and seasoned professional with 23 years experience in capital markets. He has to his credit many accolades and awards, the most signi�cant of them being the "Most In�uential CFA charter holder" awarded by CFA Institute in 2006.

Mr. Shoaib holds an MBA degree from IBA besides being a Chartered Financial Analyst (CFA) charter holder. He has to his credit the honor of being the founder and �rst president of CFA Association of Pakistan, a member society of CFA Institute. He has been active participant in the Islamic �nance and asset management for the last 10 years. In this respect, he has also actively participated as a speaker and panelist in various international and domestic seminars, conferences and workshops.

Mr. Shoaib has also served in voluntary capacity at di�erent domestic and international institutions. He has served as a Director on the Board of Karachi Stock Exchange and Vice Chairman on the Board of Mutual Funds Association of Pakistan. He is currently serving on the Board of Directors of Pakistan Institute of Corporate Governance and Institute of Capital Markets. He has also served on various global and regional committees of CFA Institute including Asia Paci�c Advocacy Committee, Global Task Force on Corporate

Governance, GIPS Regional Council and Asset Manager Code Advisory Committee. He has also had the honour to represent over 16,000 charterholders in Asia Paci�c Region as their representative on the Presidents' Council of CFA Institute.

Vice Chairman Mr. Farid Ahmed Khan, CFA

Mr. Farid Ahmed Khan, CFA is the CEO of ABL Asset Management. He has been involved with capital markets for over 18 years and has a broad-based, global experience with bulge bracket �rms in Asset Management, Investment Banking, Investment Research and Sales, Business Development & International Project Finance. He joined ABL AMC from Credit Suisse, where he was the Country Manager of Credit Suisse Pakistan. Prior to that, he worked for MCB, initially as Head of Investment Banking Group and later as the CEO of MCB Asset Management. Mr. Khan has extensive experience outside Pakistan, having worked at Morgan Stanley, ING Barings Securities and CLSA Emerging Markets in Kuala Lumpur, London and Istanbul in a variety of senior positions. He holds an MBA in Finance from IBA, Karachi and got his CFA quali�cation in 1998.

New Committees

MUFAP Board elected its Professional Committees, Chairperson and Vice-Chairperson of each Committee for the year 2013-14. �e list of Committees, their Chairperson and Vice-Chairperson is as follows:

SECP forms Shariah Advisory Board

SECP constituted a Shariah Advisory Board (SAB) to harmonize the Shariah interpretations and strengthen the regulatory and supervisory oversight of Islamic �nancial institutions (IFIs) and Islamic capital markets (ICMs) in Pakistan. It will also advise the Commission on the Shariah-compliance aspects of various products launched and or the processes being adopted by the regulated entities. It will also provide guidance for issuance of new laws, rules and regulations for e�ective monitoring and supervision of Islamic Financial Products and to suggest ways and means for development of IFIs and ICMs in the country.

Money Market

To meet the challenges of maintaining stability in the foreign exchange market and controlling high growth in money supply, SBP decided to gradually decrease the outstanding amount of liquidity injections. Since the beginning of FY14, interbank market liquidity conditions have considerably eased primarily due to substantial increase in the pace of government borrowing from the SBP. In fact, SBP mopped up Rs. 1,556.45 billion and injected Rs. 630.70 billion during Q1-FY14.

In terms of controlling growth in money supply, however, SBP’s e�orts of curtailing liquidity injections did not experience much success as these were o�set by an increase in direct �scal borrowings from the SBP. �e increase of Rs. 1,446 billion in budgetary borrowings from the banking system during FY13 was almost Rs. 1 trillion higher than the original target and was even higher than the total expansion in M2. Deviation of this scale has signi�cantly constrained e�ective monetary management, disrupted �nancial intermediation in the economy, and has led to a sharp increase in domestic debt. Showing a growth of 24.6% in FY13, the stock of government’s domestic debt has reached Rs. 9.5 trillion as of end-June 2013. Similarly, a considerable increase in public debt to revenue ratio re�ects weak repayment capacity of the government. �e acceleration in �scal borrowings from the SBP during H2-FY13, Rs. 714 billion, and Q1-FY14 up till 30th August 2013, Rs. 547 billion, is particularly worrisome. �e inability to raise the tax-GDP ratio is the fundamental source of large �scal de�cits, high borrowings, and rising debt. Although there has been a consistent gap between Federal Board of Revenue’s (FBR) budget targets and actual outcomes in the last few years, the gap of Rs. 445 billion in FY13 was exceptionally high. In fact, this is more than the cumulative shortfall of Rs. 349 billion during the last �ve years.

On the external front, stress in the external account has gradually increased with every passing month of 2013 due to shrinking net capital and �nancial �ows and high loan repayments to the IMF.

While the former was only $517 million or 0.2 percent of GDP, the latter increased to $3 billion in FY13. As a result, despite reduction in the external current account de�cit by about half, to $2.3 billion or 1.0 percent of GDP, the SBP’s foreign exchange reserves declined to $6 billion by end-June 2013 from $10.8 billion at the beginning of FY13. �ese stand at $5.2 billion as on 6th September, 2013 after receiving $544.5 million under the new IMF program. Despite pressures and speculations of a drop in the value of the Pak rupee the foreign exchange market has largely remained stable in FY13. However, since the beginning of FY14 the rupee has depreciated by 5.0 percent as of 12th September 2013.

�e year-on-year CPI based in�ation rate was recorded at 8.3% in July 2013, then to 8.55% in August 2013, however dipped down to 7.39% in September 2013.�ough CPI In�ation remained within single digit, however, it witnessed an upward trend as it increased to 7.39 percent in September 2013 compared to 5.85 percent in June 2013 and 6.6 percent in March 2013. �e impact of upward adjustments in energy prices and an increase in the GST together with the removal of certain exemptions put pressure on in�ation.In order to counter in�ationary expectations, SBP raised the discount rate by 50 basis points to 9.5 percent with e�ect from September 16, 2013.

Movement in KIBOR

Treasury Bills:

A total of 6 T-bill auctions were held by SBP during the quarter in which a total amount of Rs. 1,348.88 billion was raised. Since the beginning of FY14, market’s preference for shorter tenor T-Bills has increased as about 83% of the bank’s total o�ers in recent T-Bill auctions were concentrated in 3-month bills.

T-Bill Auctions (Amount in PKR billion; rates in %)

Pakistan Investment Bonds

�e accepted amount in the PIB auctions during Q1-FY14 fell short of the target .

PIB Auctions (Yields in % and Face Value in PKR billion)

Debt Market

�e table below summarizes the TOP 15 trades of TFCs/Sukuk on the basis of Face value during the Q1-FY14:

Equity Market

KSE-100 index made a strong start to the �scal year 2014, as the index gained 826.99 points, or 3.94%, to stand at 21,832.68 points during the �rst three months of FY14. During the period, index struggled to cross the 23,000 points level and made a high of 23,776.22 on a closing basis. Stock market began the �rst month of �scal year 2014 with a strong rally, overcoming jitters stemming from treason proceedings against former president General (retd) Pervez Musharraf and slowdown in global markets. �e government’s successful negotiations with IMF for a $5.3 billion loan, resolution of circular debt by issuing treasury bills and bonds and anticipation of strong corporate earnings for the quarter ended June 30 buoyed investors’ con�dence as the share prices appreciated across the board and index posted a gain of 2.307.09 points, or 10.98% to settle at 23,312.78 level in July.

After posting strong gain in July, KSE-100 faltered in August as investors continued to worry about ever-escalating Syrian crisis and tumbling regional markets. Stock market further pressured by a slew of disappointing and less-than-expected corporate earnings, falling foreign exchange reserves and high in�ation �gures for July. Moreover, concerns on a possible interest rate hike in the upcoming monetary policy announcement, potential spike in oil prices, decline in cement prices due to breakdown in price discipline, heavy foreign net selling and persistent depreciation in the rupee dragged the KSE-100 index down 1,151.93 points, or 4.94%, to 22,160.85 in August. �e index showed a mixed performance in September. In the �rst half of the month, the approval of the $6.64 billion loan package by IMF, the plans to privatize Pakistan International Airlines, strong foreign in�ows and the release of the IMF’s �rst tranche worth of $550 million helped lift the index to 23,639.97 on a closing basis. However, sentiment reversed towards the end of the month after the central bank’s decision to increase the rate of return on savings deposits to 6.5%. Moreover, steep decline in the value of Pakistani

rupee against the US dollar, constant repayments to IMF, a 50 basis points increase in the discount rate and heavy foreign net selling dragged the KSE-100 index down 328.17 points, or 1.48%, to 21,832.68 in September.

Mutual Fund Market:

�e total net assets decreased to Rs. 359.947 billion in the �rst quarter of FY14 versus Rs. 361.668 billion for the Q4FY13, a reduction of 0.48% quarter over quarter. �e open-end funds went up by 0.71% to Rs. 327.594 billion, pension funds went up by 9.67% to Rs. 5.288 billion and closed-end decreased by 14.23% to Rs. 27.064 billion.

Funds launched during the quarter Q1-FY14

Funds matured during the quarter Q1-FY14

Funds with changed structure/other features Energy Crisis: Causes and ImpactsBy Sara Aquil Walji, Research Analyst, HBL Asset Management

Energy is the cornerstone for any economy’s development and growth. �e current situation has worsened in Pakistan over the past few years and likely to continue if measures are not taken to mitigate the issue on a long term basis. �e gap between demand and supply has reached 6000MW resulting in scheduled and unscheduled load shedding, negatively a�ecting our industrial sector, hurting our exports and has even hampered the GDP growth rate by 2%. Subsidies to the power sector have steadily been increasing and form the biggest part of total subsidies amounting to around Rs 349,287mn (95% of the total subsidies) in FY 2012-13. �e new government has allocated Rs. 220,100mn to the power sector for the FY 2013-14 which is 91.5% of the total subsidy budget. (Source: Annual budget 2014) With recent emphasis on matters to resolve energy crisis and develop renewable and non-renewable sources of energy, it is worthwhile to note why energy crisis became as severe as it is now.

�e root of this crisis is that Pakistan’s electricity generation mix is highly skewed towards the most expensive kinds .�ere appears to be an almost inverse relationship between the sources of electricity that are most expensive to set and those that are most expensive to run. �e following chart depicts this relationship:

Source: Express Tribune �is highlights the fact why there is a heavy concentration toward

the construction of thermal power plants since they are relatively cheaper to build than hydropower plants. �e government has not dedicated enough funds for the development of hydropower projects which are the most expensive to build but cheapest to run on a per unit basis.Pakistan’s electricity generation is highly dependent on imported oil as almost $14.5bn worth of oil is imported each year which accounts for around 35% of electricity generation. Comparing Pakistan with India and Bangladesh reveals that Pakistan relies heavily on oil for electricity generation where as India uses coal, a relatively cheaper source for electricity generation and Bangladesh on the other hand allocates 73% of its electricity generation to gas.

Source: Economic Survey report for 2012-2013

With a prominent shift in recent years towards the use of thermal power stations instead of hydropower sources and a reduction in electricity generation from coal, Pakistan’s electricity costs ends up being more expensive than it needs to be and since the government has adopted a policy of uniform tari� across the country the Tari� Di�erential Subsidy owed by the Government of Pakistan on an annual basis has increased substantially.

Circular debt is another major concern hampering the growth of Pakistan’s economy. In simple words circular debt is the amount of

cash shortfall within the Central Power Purchasing Agency (CPPA) that it cannot pay to power supply companies. �is shortfall is the result of (a) the di�erence between the actual cost of providing electricity in relation to revenues realized by the power distribution companies (DISCOs) from sales to customers plus subsidies; and (b) insu�cient payments by the DISCOs to CPPA out of realized revenue as they give priority to their own cash �ow needs. (Source: USAID Report March 2103)

�is revenue shortfall cascades through the entire energy supply chain, from electricity generators to fuel suppliers, re�ners, and producers; resulting in a shortage of fuel supply to the public sector thermal generating companies (GENCOs), a reduction in power generated by Independent Power Producers (IPPs), and an increases in load shedding.

According to the report published by the USAID in March 2013, circular debt amounts to Rs872bn which is actually 4% of GDP. According to Pakistan’s Economic Survey report for 2012-2013, there is a strong relationship between GDP growth rate and electricity growth as shown in the �gure below. It can be easily deduced that periods of low or negative electricity growth have witnessed low GDP growth rate, while periods where electricity growth picked up there is increase in GDP growth rate.

�is comes as no surprise, since industrial output is heavily dependent on the amount of electricity delivered to them. Continuous power breakdowns prevented industries from operating at their full capacity level. �e power outages have obstructed the viability of the textile industry as exporters were unable to meet their

commitments. During July-March 2012-13, foreign exchange earnings through exports of synthetic textile fabrics and woolen industry showing a decline of 25.3% and 5.1% respectively as compared to last year. During the period under review even in quantity term also recorded a decline of 30% and 15.8% respectively.

Coupled with an ine�cient system and expensive fuel mix, power theft is another major issue faced by Pakistanis. It is interesting to note that annual revenue collection e�ciency was estimated to be around 87%; however that 13% of lost e�ciency has a �nancial impact of Rs 86bn which is equivalent to 41 days of furnace oil costs for thermal power plants. �e following �gure shows the percentage of bills that were uncollected in 2012. �e e�ciency of di�erent DISCOs is disproportionate in revenue collection. �is essentially leads to the inclusion of the cost of power theft in the power tari�, meaning that the honest payers also bear the cost of those that steal.

Power theft is not only committed by normal residents but the main defaulters are the government institutions themselves. �e government owns around 51% of the uncollected bills which amounts to Rs 118bn out of the uncollected revenue receipts of Rs 386bn. In my opinion, this the amount which causes the discrepancy between the amount of RS500.3bn to be injected to resolve the circular debt issue and �gure of Rs 872.41bn since the government has a proposal to o�set provisional dues via a �scal adjuster. Due to a growing economy, Pakistan’s energy needs have more than doubled in the past 15 years. Energy shortages have far devastating

e�ects on our economy. Not only does it cause civil disturbances on a small scale but it a�ects our GDP on a larger note. Injecting money into the chain will only resolve the issue on a temporary basis. �ese challenges require a multi-prong approach that would address energy shortages in the immediate future and help the country build longer term energy su�ciency.

�ere needs to be a shift away from thermal power to alternative sources of energy which are not only cheaper but also environmentally friendly. Pakistan has large untapped renewable resources such as water, sun and wind and recently the government has taken keen interest on the development of hydro power projects and Neelum Jhelum Hydroelectric Project is one of the many projects which the new government has started which will approximately add 5.15bn units of electricity annually. Moreover, an e�ective system of governance must be in place to curb theft, recuperate dues and enforce policies.

�e Importance of Asset Allocation in attaining Optimal Returns

By Yamna Hassan, Asst. Manager-Business DevelopmentLakson Investments

“Tis the part of a wise man to keep himself today for tomorrow, and not venture all his eggs in one basket.” – Miguel de Cervantes, Don Quixote de la Mancha, 1605.

�e afore-mentioned quote indicates that along with being a great writer, Cervantes would have also proved to be a wise investor.

Investment related decisions are preceded by de�ning a proper Asset Allocation plan. According to recent research, the Asset Allocation decision is responsible for 91.5 percent of the variation between returns on di�erent portfolios. Given the importance of Asset Allocation, it has attained a center stage in any investment decision.

Asset Allocation is mainly important for two de�nite reasons. �e �rst reason pertains to portfolio design; variation in portfolio designs can lead to some investment decisions being winners while the rest being losers, and it is believed that if a portfolio is thoughtfully constructed and contains an optimal mix of securities that perform di�erently from each other (i.e they have little correlation in between them), chances of this portfolio yielding a more stable return is higher. �is is because if some securities in a portfolio are inconsistent and volatile, other, more stable securities can nullify the inconsistency of the entire portfolio, hence stabilizing the yield pattern.

�e second reason pertains to the vision of the investor. Asset allocation allows an investor to �nancially plan for his long-term and short-term goals and avoid impulsive reactions. We will subsequently discuss this aspect of Asset Allocation.

We can divide the Asset Allocation decision into two simple steps as discussed below:

Step 1: Asset Allocation An Asset Allocation strategy can be devised based on the investor’s risk assessment, �nancial goals and return targets. It is the most fundamental step of an investment decision and involves determining an ideal mix of stocks, bonds, cash and other securities in a way such that the portfolio yields a return which best suits an investor’s need. �ere is always a downside of investing too much in bonds or cash as that might certify stable but lower returns. In the same way, too much investment in stocks might lead to portfolio volatility. �erefore, in order to meet your requirements, or keep pace with in�ation, you need to plan an ideal arrangement of securities for your portfolio.

Step 2: Diversi�cationWhile the �rst step bears upon the idea of portfolio construction, this step is linked to the proper dissemination of your assets in a way such that your portfolio is exposed to many di�erent segments of the market, some of which perform independently of the others. Proper diversi�cation of your portfolio can lead to higher and more stable returns.

As mentioned before, the e�ect of diversi�cation is most noticeable when instruments have very little interrelation between them. However, it was easier to build this sort of a portfolio previously than it is today. �is is because roughly over the past 10 years, �nancial markets have become increasingly interrelated and complex. Let us also not ignore the fact that during the 2008 �nancial trouble, most assets tended to perform similarly, leading us to believe in the proposition that most assets are conducive to a similar behavior in times of crisis and instability. �e �gure below shows ways of diversifying a portfolio and entering into newer and assorted mix of investment vehicles.

FIGURE 1:

Figure shows ways of diversifying a portfolio.

Institutions that do not pay requisite importance to the Asset Allocation decision might end up damaging their returns. Usually, institutions are advised to invest in a 60:40 ratio (Stocks: �xed income instruments) to remain on the safe side. Whereas, individuals are recommended to invest in an investment spectrum ranging from 100 percent stocks to 100 percent bonds depending on their separate variable characteristics. However, the Asset Allocation decision is dependent on several other factors and cannot be generalized for di�erent investors.

Following are a few, newer and e�cient ways that have now been developed and can be used for attaining optimal asset allocation:

Mean Variance Optimization

Mean Variance Optimization is a quantitative technique that can be used to calculate the trade-o� between maximum expected return and risk tolerance. �is technique has gained popularity over time because in recent times, the technique is applied on an asset class level as opposed to being applied only to portfolios of individual stocks previously.

�e development of Mean Variance Optimization has not only bene�tted institutional investors but has resulted in a breakthrough for retail brokerage houses as well, which, prior to this development were restricted on their advisory role to the investors. However, recently, they are proposing a greater degree of passive security and more thoughtful asset allocation recommendations to their investors. �is has become possible by using optimization and aiming to attain a favorable position with maximum expected return, minimal risk, or both.

Moreover, a few re�ned approaches taken from utility theory and behavioral economics can be deployed to develop polls or surveys that can authentically gauge an individual’s risk preferences.

Pension funds have also been familiarized with Optimization. Such funds take into account the reciprocity of both assets and liabilities and not only the assets unlike other funds. �e objective of Asset Allocation for these funds is to amplify the fund surplus i.e liabilities subtracted from assets for a stated degree of risk tolerance.

Tactical Asset AllocationTactical asset allocation is the process of adjusting a particular portfolio based on changes in the market value of assets contained in that portfolio. �e technique is quite dynamic and involves deviation from the strategic asset allocation when an investor’s short-term foresight is not aligned with his long term foresight used to develop a strategic asset allocation plan and precise short-term predictions on part of the investor can lead to better returns.

Pragmatically speaking, Tactical Asset Allocation models tend to recommend contrarian trades, that is, they recommend purchasing an asset as its current market value drops and vice versa. �us, tactical Asset Allocation involves perpetually arranging your portfolio based on your needs and changes in the market. One consequence of Tactical Asset Allocation is that by overweighting certain assets during certain times and underweighting others, the portfolio is riskier because of its reduced diversi�cation. �us, to

o�set this additional risk factor, this strategy would need to generate above market returns. �e notion, whether Tactical Asset Allocation Models have achieved this is still a matter of rumination and study but because the probable returns from successful Tactical Asset Allocation would be large, researchers will keep inspecting, and investors won’t cease to be on the look out for their discoveries.

Insured Asset Allocation�is strategy is similar to a portfolio insurance strategy and is a mirror image of the Tactical Asset Allocation strategy. With this strategy, a base portfolio parameter is �xed and the value of the portfolio is not allowed to fall below this base parameter. As long as the portfolio achieves a return above this parameter, you actively to try to increase the portfolio value as much as possible. If, however, the portfolio ever drops to below the base value, investment in risk-free securities enables the base value to become �xed.

�e main target audiences for this approach are risk-averse investors who desire a certain level of active portfolio management and also covet the protection of �xing a certi�ed minimum return below which the portfolio is not allowed to decline. For instance, this approach is best for an investor who has planned a nominal lifestyle for himself after retirement.

Asset Allocation & Uncertain Times�e importance of active portfolio management and wise asset allocation strategy has been reiterated enough. But at the brink of serious economic uncertainty, expectation for stock market returns is somewhat muted. �erefore, it is believed that in such a situation, a dynamic asset allocation plan should come into play for the advantage of certain clients.

Dynamic Asset Allocation uses a long term strategic Asset Allocation strategy as its foundation. Alternate investments can be added to the core portfolio for the sake of complementing it. It is even better, if these investments include segments which yield a higher return and bear little interdependence, so as to achieve a greater level of diversi�cation.

Besides, dynamic Asset Allocation strategies can also be accompanied by �exible investment strategies; tactical actions that are short-term in nature and aim to bank on perceived market opportunities. If 10-20% of your assets are allocated for such investments, your portfolio can be expected to react better in times of changing trends and conditions.

Asset allocation is evolving past a traditional “purchase and retain” dogma. Whilst this might not suit all clients, exercising a dynamic asset allocation plan can create a portfolio better able to handle uncertain market environments. Not to forget the fact that a solid strategic asset allocation plan remains the core strategy behind any tactical asset allocation strategy.

Asset Allocation & the local scenarioWith interest rates in Pakistan consistently hovering above 10 percent for the past �ve years, anyone would expect Pakistanis to be encouraged enough to save and reap bene�ts of higher returns. However, reality states that Pakistan actually stands out to re�ect one of the lowest savings in the region. Given the fact that majority of Pakistanis are not so keen on investing mainly because their expenditures on necessities do not leave any room for savings or so for other reasons, there is a chunk of people who are inclined in saving for a better future and lifestyle.

With growth of urban nuclear families, educated middle to upper middle class is inspirited to plan properly for a child’s education, health and future life. Reasons for investment in Pakistani society vary from a child’s education to his marriage, from being cushioned against the toils of post-retirement life to maternity expenditures. Young professionals may want to invest as a means to generate seed capital for their potential business idea or to live their dreams of traveling or wayfaring.

Reasons for investing are many. With di�erent individuals and di�erent investment objectives in mind, the asset allocation needs of these investors must be customized accordingly.

Asset Allocation & Financial PlanningOnce you are done with choosing your model for Asset Allocation, the �nal stage is to test this model by contextualizing it with a precise �nancial plan. It might be easy for an investor to choose which Asset Allocation plan will provide him with the best possible returns but the investor should also �gure out a way to determine that expected return and also estimate the trade-o� for that higher return potential.

A well-concocted �nancial plan will guide the investor out of this bewilderment. First, it will determine what level of projected investment return is necessary to allow you to meet your lifestyle goals, which can help lead you to the right mix of stocks, bonds and cash. Second, the plan will evaluate the impact of the portfolio risk associated with that mix.

Traditionally, �nancial planning models focused on expected return and neglected the variability of outcomes that is associated with increased volatility. With the introduction of probability-based planning tools, the investor can foresee the e�ect of risk on their investment portfolios, they can vary the amount of risk and can study their corresponding returns. For example a portfolio bearing higher risk may yield a higher return but it also has a probability of falling far short beneath their targets.

When using an asset allocation approach to designing a portfolio, it is important to not focus just on the expected return of that portfolio. �e risk associated with an increasing, or decreasing, portfolio return is just as important to the success of an investment strategy.

Asset Allocation & �e Future

Most forecasters fall into two divisions. Forecasters in the �rst division are eager to predict that the future will closely mirror the recent past. �eir ideals are those generals who are always preparing to �ght the last war. Forecasters in the second division rely heavily

upon the adage that the only constant is change itself. Proponents of this school of thought usually don’t know what to expect, but are quite sure it will be nothing like anything we’ve seen before. �ese individuals do realize the problems of delineating the future of this area.

We should view the future of asset allocation through lenses borrowed from both divisions. �at is, certain aspects of asset allocation today will continue to be recognizable for the years to come. To be more precise, the goals and importance of asset allocation will not change, but the mechanisms by which investors seek to achieve those goals will be new.

�e goal of the asset allocation decision, was, is, and will be to select a combination of assets that will generate a return su�ciently high and safe so as to o�set some future liability. It is also safe to say that asset allocation decisions will have a continuing large role in explaining portfolio returns.

Industry-wide - Net Assets (PKR million)

Net Assets - Open End Funds (PKR million)

Net Assets - Closed End Funds (PKR million)

Net Assets - Pension Schemes (PKR million)

Sales (PKR million) Redemptions (PKR million) Net Sales (PKR million)

Open End Funds' Return** Closed End Funds' Return**

General Pension Schemes Return**

Islamic Pension Schemes Return**