Dismal March for mutual funds

Fixed income funds are not happy anymore! Recall that it wasn’t long ago when fixed income investors were basking in double-digit returns. But times are now changing while the returns are already in single-digit territory.
Somehow, what’s happening with international oil prices is affecting the yields on government bonds. Let’s take it this way: if international oil price rises, price in the domestic market also picks up, thus resulting in higher inflation. With increasing inflation, continuation of monetary easing stance proves to be cumbersome thus influencing bond price movements. Case in point here is the recent rebound in international prices, after it touched its lowest level of $43 per barrel, which helped the long term bond yields to appreciate by approximately 20-30bps.
Unfortunately, the sudden jump in bond prices disfavoured the returns as fund managers had invested aggressively in long term bonds in anticipation of declining yields. Resultantly, the returns on aggressive income funds fell by a hefty 400bps to 5.73 percent during the month.
With oil prices dictating the bond prices, much depends on the progress on the ongoing crisis in Yemen. Experts say that a peaceful resolution will result in a win-win situation where returns on income funds can be expected to be in a better position. It’s because inflation is expected to stay subdued in coming months, while the real interest rate can go wider by 6-6.5 percent. At that point, a case can be built for further monetary easing, according to fixed income specialists. However, any harsh move would result in ultimately hurting the returns of these funds.
Returns on money market funds also inched down a tad during the month. This is attributable to participants expecting a higher interest cut of 100bps, whereby the SBP actually opted for a more cautious approach by slashing 50bps in this MPS. Hence, the yields are now bouncing back to align with the interest rates. Coming to April, money managers expect further hits in money market funds as it’s usually the time when liquidity pressures and quarter end closing compel investors to sell short-term papers, thus raising the yields on t-bills.
On the side of income funds, there is still further juice left, according to a senior fixed income fund manager. So, investors looking for good returns can invest in income funds. However, for risk-averse investors, the remedy is to stay in money market funds until the uncertainty settles down.
Besides, equity funds weren’t any better. Here, the free-falling stock market is to be blamed. The downfall was initially triggered by selling pressures from a foreign fund whereby the trend of foreign selling continued its momentum. As on March 30, 2015, average monthly industry return of the equity fund category was down by over 13 percent, being much in line with the decline in the benchmark KSE100 index over the same period.

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Mutual Funds Monthly Performance Trend

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Mutual Fund Classification                           YTD15*  Mar15**  Feb15  Jan15   Dec14

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Fixed Income Funds (%)

Aggressive Fixed Income (Annualized Return)          12.50     5.73      9.97   19.61     19.37

Income (Annualized Return)                           17.49     8.84      8.37   17.01     18.66

Money Market (Annualized Return)                      8.60     7.33      7.51    9.60      8.82

Islamic Income (Annualized Return)                    7.23     7.05      6.36    9.89      7.45

Islamic Money Market (Annualized Return)              6.95     6.22      6.21    7.64      2.88

Islamic Aggressive Fixed Income (Annualized Return)   6.61     3.75      4.87    2.90      5.77

Equity Funds (%)

Equity (Absolute Return)                              1.21   -13.59     -2.33    6.78      4.11

Islamic Equity (Absolute Return)                      2.31   -13.02     -1.73    7.95      2.07

Index Tracker (Absolute Return)                      -5.80   -14.14     -2.18    6.94      2.53

Islamic Index Tracker (Absolute Return)              -2.64   -11.90     -0.63    5.98      1.27

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