Mega Capital's First Mutual Fund Opening Today; Exclusive Interview With CEO on Fund's Unique Investment Approach

Fri, Aug 20, 2021 5:25 AM on Mutual Fund, Interview, Exclusive,

The public issue of "Mega Mutual Fund 1" is opening from today, i.e. 4th Bhadra. The issue will close on 10th Bhadra, 2078. If not subscribed fully by the early closing date, the issue can be extended till Bhadra 18.

10 crore units will be issued at a par value of Rs. 10 per unit. 15% of the total units have been allocated to the fund promoter Mega Bank. "Mega Mutual Fund 1" is a closed-end fund, meaning it can be traded in NEPSE. The fund has a maturity period of 10 years. Applicants can apply for a minimum of 100 units to a maximum of 1 crore units.

Offer Letter

To inform potential investors about the fund and the fund manager, Sharesansar interviewed Mr. Sabir Bade Shrestha, CEO at Mega Capital. This is a transcribed version of the interview.

Backdrop

There are a total of 24 closed-end and 3 open-ended mutual funds in Nepal. All mutual funds are issued at a par value of Rs. 10 per share. A mutual fund is a professionally managed pool of money collected from investors to invest in securities. Securities mean investment assets like stocks, bonds, money market instruments, etc. Thus, after the collection of the fund, the fund managers invest in stocks, debentures, IPOs, and fixed deposits.

Based on the performance of their investment, the NAV of the funds is determined. 

Moreover, there is another measure of a mutual fund's performance: its LTP. Investors closely observe the investment areas of the funds and the profitability. They then determine the market price of the fund via a free-market mechanism of supply and demand.

Interviewer:

Thank you for welcoming us, Sabir sir. To break the ice, tell us the story of the mutual fund's inception. Why did the capital decide to issue the fund at this point in time?

CEO:

Mega Bank has never sponsored a mutual fund before, although it has invested in various companies' funds successfully. The subsidiary (Mega Capital) itself was registered 3.5 years ago, started its operations 2.5 years ago. We are young chronologically but have taken strides in performance, whether it be the number of registered Demat accounts (1 lakh new accounts in the last year), Rs. 80 crores assets under management (AUM) in portfolio management. The management, myself included is managing 5 funds between us. Thus, the team is well-seasoned for portfolio management, and it made sense . . . looking at the management, the maturity of the parent company. Thus, we were well-equipped to come up with a close-ended mutual fund.

We felt this was the right time to issue a mutual fund, which will hopefully be the first of many, not just from the NEPSE index point of view, but the capability of the team.

Interviewer:

I like that you mentioned that the time was right not just from the NEPSE index point of view, but the capability of the team. Talking about your stock selection strategies, is there a reason the fund is unique from the existing mutual funds in any way?

CEO:

Yes, we've put a lot of thought into how we can make this different. We don't want to be the new one out of many. To make it more market-relevant rather than being an idle fund, we'll try to allocate around 30-35% in speculative investments as well. Traditionally, mutual funds have only traded once in six months. But the funds have realized the benefit of being flexible and quicker. This makes the fund better prepared to deal with the volatility.

What I would like to add to that, the market has been more speculative now than ever. We as fund managers can't just say we are "value investing" for the "long term." Because in the long term, everyone's dead. *Interviewer chuckles*

You can't just switch from trading to investing for the long term just because your stocks went down. We have to get along with the market too. To a certain extent, we believe the mutual fund can also go into speculative investing and react quicker to market events. At the same time, we'll make sure to not trigger a market event out of the blue, which is a point to consider for a big investor whose move affects the market.

At the same time, we do invest in bluechip stocks and dividend companies. Nonetheless, we really want to avoid the notion that mutual funds only follow the index like an index fund. We don't want to be over-diversified. Over diversification is self-defeating. The path we're taking is tricky, but I'm sure there are benefits.

Interviewer:

With the public money, you will obviously be a big fish in the capital market. However, from what I understand, you don't want to be a bold sluggish investor, you want to be quick in your decisions. Can we put it that way?

CEO:

Yes, obviously. The approach would be to always be flexible and able to take cash out of the market when needed. Nonetheless, we are ready to be the defacto market maker when needed, a role that mutual funds have traditionally played.

Interviewer:

Being quick is synonymous with trend reading. And trend reading is synonymous with technical analysis. We want to talk about your team that is equipped to do that.

CEO:

We have two Chartered Accountants, a finalist, and a full member. I myself am an ACCA, fully qualified. We are in the process of shortlisting the best scheme manager. There is a senior management team, and there is a research team already. We're hiring research personnel and a scheme manager.

Our cosponsor Mega Bank will also expect the full attention of the senior management team on the fund in the days to come. Like I already said, the experience we have gained among us managing the 5 funds, taking the right strategies, not panicking during market frenzies, helping each other with our personal biases, will all be handy here. There's that level of hierarchy and scrutiny required, but we have also tried to keep our investment approach flat.

There will be 3 levels of check and balance. The management has the pressure to perform well at all times because we will literally have to face the giants of the Nepalese economy, the members of Mega Bank. There is no excuse for us to fail. Thus, the check and balance transcend from the higher level to the grassroots level.

Interviewer:

We are in the middle of a bull market, Sabir sir. Everything feels hyped up. But the upcoming issue will have a maturity period of 10 years. How does the fund manager see the scenario of Nepal's capital market in the next 10 years when viewed from an investment perspective? How will the fund move forward and tackle uncertainties?

CEO:

Sure, we've divided it into more of a 3-year period chunks. We have anticipated the supply that this bull market will create, especially with bonuses and right shares. A 3-year balance would give us a broader picture. It's a good horizon for us to take the trading strategy as well. The period will also be divided into quarterly strategies. Anything beyond 3 years at a time would be too far-fetched in my team's point of view. The 3-year period is a neat period to take account of macro and micro trends while also analyzing changes in regulatory provision.

Interviewer:

This is a subjection question, sir. You're allowed to say "We don't know." *CEO chuckles*. Will the fund outperform the index in both the bull market and the bear market? What gives the fund a standing edge?

CEO:

I can confidently say we can. We have done that in the past with investment in other companies' funds. When the market basically crashed from 1,880 to the bearish period of the 1,100s, most funds, including the ones I managed, were down by 10-15%, max. Meanwhile, the index itself fell 40-45%, from when we took position to when we exited.

This does not get highlighted very much, but that is still beating the market, thanks to diversification. There were years when we (as a sector) could not give dividends, but the funds have averaged about 20-25% in returns, certainly higher than the reasonable rate of returns. The stats are with us, speaking sector-wise.

Interviewer:

Things have been bright for public issues and mutual funds in the last year or so. But a significant majority of the investors' circle is still wary to invest in mutual funds. This can be attributed to a belief that is widespread among investors that a huge chunk of profit by mutual funds is lost in operational and management fees. How does the fund manager interpret this scenario? Can the fund manager provide unique insight on the matter?

CEO:

Yes, there is that argument. But it has been revised from a maximum of 2.5% to only 1.5% in management fees. This has been reduced, just like the brokerage fees.

At the same time, we can't simply cut down the cost of management, the scheme managers, and the research team. Because of shortage of expertise in this sector, we have to spend higher, and also the expenses in specialized software. The current fee structure, I think, is fair. However, if fees are menial, the attention would not be nationwide, and due diligence would not be given. We are in a sweet spot, and the fee structure is enough motivation to focus primarily on fund management rather than other revenue streams.

Interviewer:

Being in the shoes of a fund manager, is the fee structure sufficient to afford good researchers and technology so you produce market-beating returns.

CEO:

The affordability of HR is certainly a challenge. We do not intend to compromise on the quality of HR, to be very honest. With the current fee structure, we can definitely employ and afford the resources that will make ourselves confident.

Interviewer:

So, it's just right, in your opinion.

CEO:

It's just right. Nonetheless, where we (as a sector) have had to compromise is software. The analytics software that we would like to purchase would eat into the revenue of mutual funds. It's hard to focus on both costs and quality. Introducing international technology companies would instill competition among our national software providers, which have not really evolved for the last few years.

Interviewer:

Although trying to predict the future is a futile game, Sabir sir, some fund managers come up with expected yearly dividends or returns. Do you have anything as such?

CEO:

Yeah, we've publicly projected 23% average annual returns over 10 years. This is with the assumption that the market will simply be stable. We do not need the market to be on a continuous bull run for this.

The high dividends distributed by other mutual funds at this time are a result of accumulated profits, and some have not really beaten the market if I have to be harsh towards the fund management sector.

We don't assume the impossible and ride on that horse. Even if the market stabilizes, our strategy would enable us to still maintain 23% average annual returns over 10 years. We'll start with a 12% first-year dividend,13.5% in the second year, and we'll have to grow to 30-40% to attain the average figure.

Only 10% of our fund goes to debentures and FD, compared to the traditional 30%. Thus, we are confident we will make the returns.

Interviewer:

Thank you so much, Sabir sir.

CEO:

Thank you. Good questions.

Interviewer:

Do you have any final remarks for the upcoming mutual fund issue, and to new investors who have recently entered the market?

CEO:

There has been a lot of confusion, overconfidence, and subdue fear even among the veteran investors about where the index is headed, or where the next fall is due.

Mutual funds come as a vehicle to start afresh in the capital market with a clean slate. One can subscribe to the fund at a minimal price of Rs. 10 per unit and study how the best in the industry utilize the fund.

The message I want to bring home is, it's not fair for a mutual fund to be compared with one scrip. Also, if you're an investor who also invests in FDs, it may be time to take a step back and diversify to also invest a part of the matured deposits in mutual funds, so you don't miss out on good and bad times. That way, you get the best of both.

Interviewer:

As a fun game of foretelling, how many days do you think will it take for the fund to be fully subscribed?

CEO:

We've had really good feedback from institutions and the public alike. We are hopeful they'll put their money where their mouth is. *CEO chuckles*.

There's no denying that other funds proposing attractive dividends at this time have added to investor optimism about mutual funds. We expect the fund to be subscribed fully within the early closing date. At the same time, I don't want to sound too cocky. *interviewer chuckles*

Even if we have to extend the deadline, we will give our best to bring the awareness program to more people, which we have started doing.

Interviewer:

With all your insightful answers, we'd love to keep learning more from you, Sabir sir. But I'll have to call it the end of this interview. Sharesansar wishes you good luck. We hope the fund will be oversubscribed and resized to 125% of its initial size.

CEO:

Thank you. Great questions.

Interview supervised by Rachit Agrawal, Executive Chairman, Sharesansar.

Interview led by Samin Gurung, Media Officer, Sharesansar. Article crafted and compiled by Samin Gurung.

Technical support from Samyak Shakya.