Closed-end funds conversion to open-end structure: AHI safeguards investors' interests

The recent decision by Arif Habib Investments (AHI) to convert their Pakistan Strategic Allocation Fund (PSAF) and Pakistan Premier Fund (PPF) from closed-end schemes into open-end schemes has created quite a stir and many in the industry have questioned the wisdom of such an action specially when there were no pressing statuary requirements to do so.
Further in the absence of any exit load or penalty for redemption by the investors there was a probability that the funds may witness redemptions and the company may lose valuable captive Assets Under Management (AUM) on which fee was earned.
Before we discuss the rationale or merits of such a move, it's important that we understand the structure of these schemes. Closed-end funds issue a finite number of units or shares on an initial public offering (or IPO). Following issuance, these units or shares are typically traded on a stock exchange, often at a discount to Net Asset Value (NAV). If fund is trading at a discount to NAV, the investor is at a loss even if the portfolio is of good quality. While an Asset Management Company is advantaged by accruing management fees on a stable fund size based on NAV (Net Assets/Fixed number of Units), the investor is at a disadvantageous position and can only redeem at a discount to NAV, ie, the market price.
Historically speaking the AHI's closed end funds have traded at an average discount of approx 26 percent in the case of PPFL and 29 percent discount to its NAV for PSAF, we witnessed the largest discount to its NAV for PPFL on 30th December 2008 when the market price was at 76.51 percent discount to its NAV and on 2nd December 2009, PSAF traded at a 64.41 percent discount to its NAV. The following chart depicts this anomaly in pricing and discount.
In order to correct these inconsistencies and in light of Arif Habib Investments (AHI) proactive approach and value systems of treating the customer fairly, it was decided to take steps towards safeguarding our investors' interest by converting all closed-end funds under AHI management into open-end structure in due course.
The decision to convert these schemes was taken on the 17th of June 2010 by the Board of Directors and subsequently relayed to the Karachi Stock Exchange for public announcement. The discount to NAV on the date of announcement was 32.89 percent for PPFL and 28.51 percent for PSAF. The fact that on the day of conversions this inconsistency would be removed, forced the value of the stock to jump up, to the benefit of the investors.
Investors may recall that post March 2005 equity markets crises, their confidence was badly shaken, AHI's decision to convert Pakistan Capital Market Fund (PCM) into an open end scheme on the 22nd November without any exit load was also initiated in the same spirit of safe guarding the best interest of the PCM unit holders.
Although AHI had foreseen some redemptions from investors in the absence of a back-end load to benefit from short-term gains, yet we maintained our stance which speaks volumes about AHI's often stated Treating your Customers Fairly policy. I would like to highlight that some of our peers in the industry had applied back-end load on their conversions to stem such an outflow of captive AUM.
It is reiterated that Arif Habib investments decision to convert the closed-end funds into an open-end scheme was instrumental in removing the discounts in its funds. It is also worth mentioning that the management's decision of not putting a back-end load was also made in the best interest of the investors. Our commitment to serve ethically while acting in the best interest of our investors shall remain a hallmark of Arif Habib Investments.

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PPF                                                        PSAF
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Max Duff (30-Dec-08)                              -76.51%  Max 01ff (2-Dec-09)                             -64.41%
Mm Diff (24-Aug-07)                               16.83%   Min Duff (24-Aug-07)                              1.28%
Avg. Difference                                   -26.03%  Avg. Difference                                 -28.87%
Diff @ first announcement (17-Jun-10)             -32.89%  Diff @ first announcement (17-Jun-10)            28.51%
Difference @ Conversion announcement (7-Dec-10)    -3.25%  Difference @ Conversion announcement (28-Oct-10) -7.74%
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