Mutual fund investors in a tight spot as earnings, dividends drop drastically

The mutual fund industry, already struggling with the policy and market adversities amid a poor confidence of investors, is now facing a big dent in their performance, forcing their investors in a tight corner.

Of the 36 listed closed-end mutual funds, only one managed to retain its earnings in 2023 while the others saw their earnings per unit (EPU) dropping by 16% to 97% in a year, according to an EBL Securities compilation of close-end mutual funds' performance.

And, no fund could pay their investors a higher dividend in 2023 while investors, already deprived of exit opportunities due to the floor price in the secondary market, fell into a tight corner due to the poor dividends from most of the funds this year.

For instance, AIBL First Mutual Fund that had an EPU of Tk1 in the previous fiscal year, posted a 95% drop in its earnings this year and its dividend fell to Tk0.06 per Tk10 unit, from Tk1 per unit last year.

Popular Life First Mutual Fund, absorbing a 97% drop in EPU, reduced its dividend to 2.5% from 7%. ICB AMCL Second Mutual Fund halved its dividends this year amid a 95% drop in earnings.

The story is almost similar for a large number of publicly traded closed-end mutual funds, while some managed the drop to a smaller extent in contrast to the eight funds that either cut dividends or did not pay any dividend at all due to the losses incurred in 2023.

Experts blamed a number of adverse factors together.

"Mutual fund earnings declined because of double taxation of the funds and weak stock price performance," said Chartered Financial Analyst Asif Khan, chairman of Edge Asset Management.

The latter was caused by economic stress related to the global commodity cycle as well as higher interest rates, he added.

Surprising the industry, the National Board of Revenue (NBR) in the last fiscal year was collecting taxes on mutual funds' dividend income from portfolio companies, which was historically tax free as the tax authority gets its tax when the mutual funds pay dividends to their investors.

On top of the added tax expense in the last fiscal year, the lower dividend payout by most multinational companies amid their struggle to repatriate dividends abroad due to the dollar crisis also dragged down mutual funds earnings.

Mutual fund returns significantly depended on how the stock market performs in a year as they also earn from realised capital gains in listed securities, said Waqar Ahmad Choudhury, Vice President of Association of Asset Management Companies and Mutual Funds (AAMCMF).

Choudhury who is the managing director of Vanguard Asset Management told TBS mutual funds mostly hold fundamentally sound large cap stocks for a stable long term return for their investors and most of the stocks were stuck at the floor prices.

"Asset managers had rare opportunities to gain anything from the secondary market," he added.

Stock market expert Abu Ahmed, a former professor of economics at the University of Dhaka said the poor performance of the mutual funds was not unexpected at all.

From the ethical point of view and the announcement in their prospectus, it was not possible for mutual fund managers to participate in the manipulated junk stocks that were rallying in the bourses, he said.

"On the other hand, the best stocks to invest in had no performance in the market due to the floor prices."

"Things could have been better for smart asset managers if the capital market regulator did not impose the floor price that deprived the fund managers of manoeuvring opportunities," added Professor Ahmed.

The biggest victim of the listed mutual funds' poor performance is the general public who hold the units.

Only three of the 36 listed mutual funds had buyers above the floor price during the closing bell on Tuesday.

Investors of other listed funds had no exit opportunity, regardless of how badly they needed money.

Some divestment could help investors offset the lower or no dividend income from the listed mutual funds, said Professor Ahmed, adding that the mutual fund industry in Bangladesh would face further confidence crisis if investors' pains remained unaddressed.

Waqar Ahmad Choudhury, initially, felt a relief seeing the new income tax act this year exempted tax on all income of mutual funds. Still, the NBR is asking for tax on the interest income mutual funds earn from their FDR and the industry people keep disputing the tax authority's idea. 

According to the AAMCMF, 41% of the listed mutual fund units were held by the general public, while institutional investors held 39.1%, sponsor directors 19.1% and foreign investors a meagre 0.08%.  

With a small asset under management, 0.24% of the GDP, Bangladesh's mutual fund industry significantly lags behind its global and regional peers.

Of the Tk16,210 crore total assets under management, less than Tk6,000 crore is managed by the asset managers of 36 closed end funds, while the rest are being managed by open end funds that are not listed in the stock exchanges.