Q.1 Why has it been such a long time since Himalayan Capital issued a mutual fund under its belt? In the past 10 years, around 15 merchant banks have launched 50 Mutual Fund Schemes, 35 of which are listed on NEPSE. Considering all these facts, why do you believe there has been a delay in Mutual Fund Issuance by Himalayan Capital?
Ans: If we examine the time frame it took for us to introduce this Mutual Fund (MF), it amounts to approximately 2-2/5 years. This duration aligns with our peers in the market since our inception in November 2019. There are a couple of reasons that could explain this delay. Firstly, obtaining the necessary licenses consumed some time. For mutual funds, banks are required to secure a mutual fund sponsor license before applying for a specific scheme. The process of acquiring a sponsor license was time-intensive. Additionally, we were concurrently navigating a merger with our parent company, NIB, which already had its own funds. Had the merger proceeded as planned, we could have utilized the existing funds instead of creating two separate funds.
Moreover, the changing leadership at the helm of the Securities Board of Nepal (SEBON) caused intermittent disruptions in bureaucratic processes, contributing to delays. However, I contend that this shouldn't be viewed solely as a delay in Mutual Fund scheme issuance. Prior to launching an MF, it's imperative to comprehend Nepal's investment landscape, including its depth and liquidity. As fund managers, acquiring this understanding requires a certain amount of time investment. Over the past years, we've successfully managed numerous portfolios, employing a data-driven approach for this Mutual Fund Scheme.
Our stock selection is guided by predetermined parameters rather than personal preferences. Hence, refining this strategy necessitated a considerable amount of time. Over the span of 3 and a half years, we've conducted various mock portfolios, employing diverse investment modalities. This collective learning informed the introduction of the Himalayan 80-20 Fund, built on the same foundational principles.
We exercise extreme prudence since we're managing public funds. Rushing the MF issuance process without the capability to distribute dividends to unit holders could tarnish the reputation and brand of Himalayan Bank. A historical examination of other mutual fund issuances reveals that most companies took around 2 to 2.5 years to secure approvals. While subsequent fund introductions by established companies might have been expedited, the initial issuance of a Mutual Fund universally demands time.
Q. 2 Even today, investors perceive mutual fund schemes as ‘safe’ investments rather than lucrative ones. Do you think this perception is valid? And, if you have a different opinion, how do you convince people to invest in MFs when there are alternative investment options?
Ans: Firstly, the concept of a ‘safe’ investment is subjective, as it hinges on the comparison being made. What's considered secure for one individual might not be the same for another, depending on their risk tolerance. Mutual Fund Schemes predominantly channel funds into the stock market, placing them in the same asset category as stock investments. To a Bitcoin investor, MF schemes might appear safer, whereas, to someone solely invested in Fixed Deposits, they might seem riskier.
It's crucial to assess this on a spectrum, considering the substantial stock market involvement. Retail investors often show less interest in MFs; interestingly, institutional investors largely hold MF scheme positions, despite these schemes being designed for retail participation. The reasoning behind this contrast is that real estate investments require significant funds, while stock market investments demand time and knowledge—a luxury not all investors possess. MF schemes act as a bridge to stock investments.
Globally, the majority of MFs are open-ended, yet Nepal is in its nascent stages, of introducing closed-ended funds. Retail investors are slowly recognizing MFs, although there's still progress to be made in attracting them. Our focus is on retail investors rather than institutions, a challenge given the latter's resources. As Himalayan Bank sponsors the funds and we (Capital) manage them, we're leveraging the bank's customer base.
Q. 3 How do you plan on attracting retail investors considering Himalayan 80-20 is your first-ever MF, implying a lack of experience in MF management?
Ans: When it comes to experience, everyone starts somewhere, and I can't pinpoint exactly how inexperience might impact us. However, I'd like to emphasize two points. Firstly, we've successfully managed substantial funds and have even outperformed NEPSE statistically during downward market trends over our 3.5 years of operation. So, the experience might not be lacking as much as it seems. Our past learning has culminated in the design of the 80-20 scheme.
Moreover, our rating on ICRA Nepal's website speaks to our prowess as a Fund Manager. It's noteworthy that for the first time in five years, they've acknowledged that Capital Management has consistently outperformed NEPSE. This, I believe, is our strength, bolstered by our experienced team.
We're also utilizing social media platforms to market our products to retail investors, despite the incurred cost. This approach has yielded results, reaching around 350,000 investors, a trend we intend to continue. While I acknowledge the practical market landscape, I will also engage with institutional investors, but our main thrust remains to penetrate the retail investor segment.
Q.4 Please elucidate the concept of the 'Himalayan 80-20' scheme, where 80 represents passive assets and 20 denotes active assets.
Ans: The 'Himalayan 80-20' scheme is a closed-end, equity-focused initiative with a fixed maturity span of 10 years. Our fund's size is set at one billion, extendable up to 1.25 billion if oversubscribed. Our fund managers are carefully chosen from diverse financial fields, boasting 30 to 35 years of experience in their respective domains. During the meticulous selection process, we sought individuals who could challenge our decisions to prevent oversight of mistakes that might burden unit holders.
We've devised the 'Himalayan Equity Optimizer,' a three-part stock selection mechanism encompassing generic factors, sector-specific elements, and valuations. Our investments are aligned with this strategy, allowing us to engage with as many stocks as warranted. The bulk, or 80 percent, of our investments, are directed towards passive assets, fostering compounded growth over time.
Conversely, the remaining 20 percent comprises the trading component, aimed at capitalizing on short-term market fluctuations anticipated over the next 1 to 1.5 years, as analyzed from the NEPSE trends. This active segment ensures NAV maintenance for facilitating dividend distribution.
Q. 5 Why do you believe retail investors are hesitant to buy mutual fund units even far below their NAVs? Additionally, what policies do you suggest regulatory bodies implement to enhance the attractiveness of MF schemes?
Ans: I think this hesitation is partly due to a lack of positive sentiment towards the capital market, a perception that needs transformation. Viewing it from an investment diversification perspective is crucial. Traditionally, our investment culture leans towards real estate and gold. Limited awareness about alternative investment avenues, coupled with financial institutions not effectively conveying these options, also contributes to this trend.
Regulatory bodies need to play an active role in encouraging retail investor engagement. It's essential for investors to grasp that Mutual Fund schemes are long-term investments, driven by compounding and annual payouts. As industry participants, we must educate retail investors about the benefits of sustained MF scheme holding. Notably, MF returns statistically outperform Fixed Deposit returns, a message we should impart to newcomers in the stock market.
Mutual Fund schemes are instrumental for market growth. Prioritizing open-end funds could catalyze market expansion, tapping into the untapped potential if real estate and gold investors redirected their funds toward the capital market.
While I'm optimistic about the future of MF schemes, the challenge lies in bridging the gap with retail investors, a task that financial institutions need to embrace proactively.
Q.6 Do you have intentions to introduce additional MF schemes under Himalayan Capital's management?
Ans: Indeed, we do. However, our approach won't involve numerous schemes. Following this launch, we have plans to introduce one closed-end and another open-end scheme. Our emphasis is on open-end schemes, and we're considering a maximum of two more schemes; we won't extend beyond that.
Q. 7 What are your short-term and long-term predictions for the capital market?
Ans: Our annual meeting extensively deliberated on the tenure for mutual fund schemes, settling on a 10-year duration. This decision aligns with the anticipation that over the coming decade, the market will likely undergo two bull cycles. The near-term cycle, possibly within 2-3 years, could lead to the market approaching or slightly surpassing the previous all-time high, constituting an intermediate phase. Subsequently, in the 7th, 8th, and 9th years, it seems the market is primed for a longer-term bull run, potentially exceeding the prior peak.
I maintain the perspective that the market remains cyclical, with growth impetus still lacking. Market participation isn't at the desired level due to factors like banking liquidity, a major consideration. Our economic trajectory is intertwined with credit cycles—rising credit cycles elevate diverse sectors from gold to real estate, stock market, imports, and consumption, and vice versa. While real estate has surged over the past two years, stock market participation remains modest. Gradually, investors will recognize the importance of including stocks in their portfolios.
IPOs have undeniably boosted market participation, yet efforts should encourage investments in secondary markets as well. Mutual funds (MFs) are an excellent tool. I'm not insisting on purchasing my scheme, but incorporating MF schemes into portfolios is wise. Historically, MFs have outperformed Fixed Deposit returns, and this trend is likely to continue in the future.