Is it ethical to allow MF managers to play with naive investors' money?

FE Report (February 27, 2011)

In the market commentary of Financial Express published in February 24 I have found that a fund manager in anonymity had wanted to say that "most mutual funds have already invested their available money in the capital market up to the stipulated limit.

To invest more in the capital market, such funds will need to further augment their paid up capital. For this capital, the market regulator -- Securities and Exchange Commission (SEC) -- will have to amend the existing law."

Its very difficult to verify whether this person is really a fund manager or a mutual fund manipulator or placement grabber. But his/her intention is clear. He/She wants the opportunity to issue right and bonus share for closed end mutual funds and take the benefit of irrational price hike. He/She is looking for bonus not funds to manage and provide liquidity support to ailing market. Because there is another legal vehicle - open end fund where there is no bar to augment capital of the fund.

There are some rare instances where some closed funds in abroad had provided right or bonus but its not a common practices globally. In Bangladesh a small fund recently provided right and bonus. But its reality was different and exception should not be an example. There were enough bitter debates on that issue. So I don't want to go to that point. Rather I want to evaluate performances of some mutual funds.

Even if general index is not the right barometer to measure the performance of the mutual funds but it can give us some insight regarding their performance. During 2010 general index gained 83% but except ICB NRB none of the above mentioned big funds can achieve even 50% of the market return. But during the market crash their performance are almost as bad as that of the market. More alarmingly out of 35 mutual funds currently market NAV of 14 mutual funds are lower than cost NAV. And performance of the first private sector Prime finance open end fund is very poor since inception. So its clear none of the asset managers is able to generate sufficient return during the bull market nor they able to protect their funds or minimize risk during the market downturn. Even they are less good than prudent retail investors. They are unable to protect the interest of investors of their fund. So what service they are actually providing at the expense of high management fee? Because of this they are raising voice to increase quota in IPO. Without free quota in IPOs their performance would be worse.

Recently SEC gave nod to 11 mutual funds that are going to raise huge amount of money from general public. But did SEC check their track record? It's dangerous. It's unethical to give license to play with poor people's money to novice managers. SEC should allow funds case by case after judging the competence of the fund managers.

Now everybody is trying to catch fish blackmailing SEC in troubled time. But SEC as a protector of investors should act stiff. It's not SEC's role to manage liquidity to rescue market. Their duty is to provide regulatory framework and prepare an even playground for all participants.

To bring discipline in mutual funds sector it is a must to overhaul the outdated mutual funds rules. It is necessary so that no player can take unethical advantage. Sponsor's minimum portion in fund should be increased from 10% to at least 25%. Stringent professional examination should be introduced for portfolio managers. Quota on IPO for mutual funds should be abolished. Because its not good to subsidize poor performers rather let them to learn playing in a even play ground.

SEC should monitor risk management methodology of the managers. Introduce a benchmark index to evaluate the performance of all mutual funds. Mutual funds should publish cash ratio on weekly basis to see how much portion of the fund they are actually investing in capital market instruments. SEC should provide license to more competent managers in the industry to increase fair competition. By the side of the mutual funds fund manager should be allowed to manage personal and institutional wealth. So they can provide more services.

Although recent market crash is painful but it has given us a good opportunity to overhaul the capital market system. SEC should not lose their steam rather they should play strict regulatory role to bring back discipline in the market.