Faysal Asset Management Company – Redefining investment

Faysal Asset Management has had a good few years. Back in 2018, it was a relatively small operation with a Rs 7.3 billion fund size that they were responsible for managing. Incorporated in 2003, the company had spent the first 14 years of its existence 30% owned by Faysal Bank Limited. Throughout that time Faysal Asset Management Limited floated by and remained one of the lesser visited asset management companies.

In 2018, Faysal Bank Limited decided to acquire the company in its entirety so it would be able to revamp it. Since the acquisition, the total size of the fund being managed by the company has grown by more than ten times to Rs 76 billion. Their market size has increased from 1.3% to 7.1% and the fund has moved into investments in 28 products.

The size and pace of the company’s growth has been impressive. And perhaps what has got more eyeballs focusing on Faysal Funds is that the company is moving into the venture capital business, more specifically offering local investors the opportunity to put capital into the growing tech startup revolution taking place in Pakistan.

Normally, there are only a few traditional avenues to invest in Pakistan, especially for small investors. You could put the money in the bank and collect interest, or you could try to traverse the murky waters of the Pakistan Stock Exchange (PSX). The third option is to go to an asset management company to invest in mutual funds.

You see, most startups are not even close to being listed on the stock exchange and rely on series round funding. However, individual and angel investors need to come with large amounts to get any attention. Asset management companies offer mutual funds, where a number of small and large investors pool their money into a fund which is then invested in said sector.

While the Faysal Asset Management Limited has been on a high ever since its 2018 acquisition, the CEO of the company, Khaldoon bin Latif, has now given the nod of approval for the company to start entering the VC space in an attempt to get local investors to put money into the largely foreign VC backed startup scene – particularly in the tech sector. The question is, will local investors bite?

Why go to a fund?

To define it very plainly, a mutual fund is a way of investing money alongside other investors in order to benefit from the inherent advantages of working as part of a group such as reducing the risks of the investment by a significant percentage. Essentially, you do not invest in an asset management company, you simply give them your money and they pool that money with other like-minded individual and organisational investors, and then use that pool of money to invest for you.

It also gives the opportunity to single, small to medium sized investors to put their money in high stake businesses in the form of a pool and participate in that part of the economy. Mutual funds do not just cater to individual investors however. They also provide advice to large capital investors on where to park their money, they provide management of excess assets for companies, and also provide a place for companies to put their pension funds. In this way, these funds have a lot of money tied up in their investments both from large and small fish.

There are, of course, plenty of mutual funds and asset management companies in Pakistan. In fact, there are much larger and more prestigious asset management companies here. However, Faysal Funds has two things going for it – the first is that they are trying to strike out and become a vehicle for their investors to put money into Pakistan’s tech scene. The second is that their growth trajectory since being bought out by Faysal Bank Limited has been rapidly climbing. In December 2021, Faysal Funds achieved a new milestone of managing over Rs 70 billion in funds. By December 31st 2021, the final amount of the assets being managed stood at Rs 76 billion. And while that is an impressive sized fund, what has been even more interesting is the pace at which they have gotten there. Back in January 2021, the size of the funds being managed by the company was Rs 50 billion. In a course of six months this jumped to Rs 60 billion by June. The next Rs 10 billion increase came by November 2021, taking only another five months. By the end of the year the fund stood at Rs 76 billion,

The top management at Faysal Bank Limited has been quick to label Khaldoon bin Latif, the CEO of Faysal Funds, as their ace card. “Khaldoon bin Latif is a true hero. He has led from the front and it has been his matchless leadership, along with support of board-members such as Salman A Usmani (Head, Treasury and ECM at Faysal Bank Limited) that he has managed to do this. Well done,” said the CEO and President of Faysal Bank Limited, Yousaf Hussain in a LinkedIn post. For Latif personally, who is a veteran of both local and international industries.

At the time that Latif entered the picture, Faysal Funds had not been doing as well as it should have been. A lot of this was because the company’s relationship with Faysal Bank Limited was uncoordinated. The bank realised, however, that there was a lot of potential in mutual funds and decided to fix the problem by taking over the company and buying out the rest of the shares, and turning it into a wholly owned subsidiary.

Quick realisations

Things changed after the buyout. Latif was very brazen about it, saying that the scenario is very different when a financial institution truly stands behind an asset management company. It can perform and in turn unleash a lot of potential. There were some very detailed discussions with the board at that time, and the understanding was that this was a fantastic opportunity to set the right strategy and actually have a real shot at implementing it.

And there was and is a lot of potential in Pakistan’s mutual funds industry. Very basically, if you invest in mutual funds you can earn through dividend payments. Essentially when you invest in a fund that earns its income in the form of dividend and interest on the securities, you receive that income with a deduction. The deduction is the fund charging you for their services. Another way you can earn is through capital gains. This is possible when the net assets value goes up when the market value increases. As a result you get a capital gain. As an investor you could choose to go low risk, medium risk, or high risk. In this way, mutual funds work for a wide range of investors.

“In my view Pakistan’s mutual fund industry is just starting to explode. Currently it stands at just over 2% of GDP and 5% of total banking deposits with only around 300,000 investors. These numbers compared to any other economy of our size are insignificant, indicating a huge untapped local potential in Pakistan,” says Latif. “Now with product innovation, focused technological adoption and integration with digital platforms, the asset management companies are opening up new channels for investors’ greater accessibility, convenience and serviceability. This trend I believe will start a new phase of development
and expansion for the overall industry having such objectives as financial inclusion and increase in the number of investors at its core.”

As an Investment manager, Faysal Funds offers a variety of products. There are three equity investment schemes, three asset allocation schemes, five income schemes, one sovereign income scheme, four money market schemes, one capital protected scheme, three fund of fund schemes, two voluntary pension schemes, and 10 CPPI plans. In addition to the schemes and plans, the company is also in the business of advisory, providing investment strategies and managing portfolios. A huge part of getting these options and diversification was aligning the goal of the company with the goals of the parent company. This was the other major realisation – that both the parent company and the subsidiary had to be on the same page.

The problem is that funds have existed in the past and they will continue to exist in the future. That has not been enough to mobilise investors to put in their money. That is why for Faysal Funds, the question is about making sure that local venture capital money also goes into the startups. Small investors, however, cannot invest as these are high-risk ventures and only qualified HNI’s with certain net-worth are allowed to invest under Private Funds Regulations.

The industry needs you to save

There has been a lot of talk about this being the right time for mutual funds to tap uncharted potential in Pakistan and to get more investors on board. And yes, people have shown an interest in investing. But it is important to know where they want to invest more than anything else. In order for people to invest in mutual funds, they should essentially have a mindset which allows them to save or defer consumption. The growth of the industry has been impacted by the low propensity to save locally.

“The Industry has frankly grown quite aggressively over the last five years. But to be honest, before we look at industry growth, what we really have to see are our savings as a percentage of the GDP. So on the wider economy, savings have not grown, as has been in other emerging markets. So as a consequence, this industry has not performed,” says Latif. As he explains it, macroeconomic policies haven’t really incentivized savings owing to the consumption-led growth that has been chimed for countless years.

“If you look at the macroeconomic policies, we have had a history where real returns have been negative. So we have always penalised savers and we have incentivized spending. This has been the case since the early 2000s. We have been in an economy which has tried to drive its growth through consumption related strategies and bulk of this consumption has been financed by external borrowings. So that has been a key cause of this disconnection, where we have been continuously borrowing internationally and driving domestic growth and the domestic savers have been penalised as a consequence.” However, it’s not all doom and gloom and he feels that the likelihood to save will increase now that there is more awareness towards the drawbacks of consumption-fueled growth.

This is where Faysal Funds has wanted to and been trying to challenge norms. They have realised that there is a need to move beyond the traditional norms when it comes to investing. “Apart from asset management and investment advisory, we are also licensed by the SECP to carry out Real Estate Investment Trust (REIT), Private Equity (PE) and Venture Capital (VC) services,” says Latif.

Under PFM licence, Faysal Funds aims to launch Private Equity Funds to cater to qualified investors’ need to provide funding / capital to high potential businesses with a long term horizon to undertake higher risk and generate higher return than public markets.

The company is also in the process of building a specialist team for managing REIT business that holds huge potential in Pakistan with recent regulatory changes and Govt. focus on real estate sector development. The aim is to offer small retail investors an opportunity to participate and own high growth real estate assets to be able to finance their future property needs.

Why venture capital?

One has to wonder why startups. But then again, why not startups? They have been making the big headlines after all. Every other day some new startup has raised some new massive amount of funding. As an ordinary person, you often wonder to yourself how you could potentially be part of it all. Faysal Funds wants to drive domestic investment into these startups so the bulk of it doesn’t come in from abroad.

“There has been a massive investment in this space. More than $300 million to put a number on it last year alone. That is more than the last six years combined. The problem we saw was that all of this came from venture capitalists and foreign investors. The local investors have all been channelizing their investments on their own. We also saw this problem as an opportunity. Our desire was to create a vehicle that pools money and gives access to a structured product to the market, offering the same opportunity like the foreigners were.”

This makes sense. Banks have to be careful considering the sudden moves in the startup space. Fintechs are popping up and hoping to challenge old school banks. If you’re an early investor in fintechs, they’re not really your competition. This leads to new synergies being created which is exactly what the fund is also trying to do.

“Some of these fintechs are likely to disrupt banking the way it is done. So our parent company has come in and offered us a sizable seed capital for this venture capital fund, because one of our desires was to channelize our investment into the fintech space, so that if there is any disruption, we are part of it as opposed to being the ones disrupted. That was our desire.”

The unique thing about this, however, is, that the fund will be Shariah-Compliant with its investment in startups. “Our parent company is becoming Shariah-Compliant. So our desire was to make sure that in this space, which is unlocking massive amounts of value that we have a Shariah-Compliance vision and laying the seeds now for these companies of the future.”

“You see most of these startups are equity oriented. There is hardly any leverage. There is no venture debt available in Pakistan at the moment. So all of it is predominantly Shariah-Compliant except for some. There are models for startups such as, you have got consumer related loan models. For us, they are non-compliant. However, the Shariah-Compliant versions can also be created. We plan to encourage those kinds of opportunities, and push capital towards them. There is a lot of asset shortfall in Shariah compliant space. So we are also trying to feed into that demand for Shariah-Compliant assets. We want to create them and then eventually take them all the way to the secondary markets. We want to be present in the entire ecosystem from the start to the secondary market, to the post market. So we, as an institution, want to support them throughout their different stages.”

“Faysal Funds right now is both conventional and Shariah-Compliant, but since the company has become Shariah-Compliant in all eventuality, we do not have a predefining timeline, but eventually we will also become a Shariah-Compliant institution. This is why we are making sure that throughout our investment strategy, we have a lot of weight in terms of Shariah-Compliance. The VC fund will be entirely Shariah- Compliant. However, we are still launching conventional products as well, but we are launching Shariah Compliant products far more than the conventional ones.”

Riding the tech wave

“If you look at S&P 500 from say early 2000 too, to 2020, you see a massive transformation, the composition of the top 10 companies were widely different from what you have now. It is mostly technology companies, the Googles, the Apples, and the Teslas. So we saw that there was a massive trend globally in terms of the technology. When COVID happened, we had understood that it is going to accelerate the pace of development. We saw the markets were accelerating and we realised that it is
going to open a floodgate of opportunity for all technology exporting countries in the world.”

To contextualise this, Latif had an example. This year, he explained, tech as a sector gained up 895 points, followed by commercial banks with a positive 783 points. Systems limited was a winner this year with a positive contribution of 732 points making 82% of the contribution in the Tech sector. For the month of November, Technology exports have increased 38% for the fiscal year and have risen 13% month on month earning $221 million.

“Valuations are also factoring in higher growth prospects as PEG for the listed Pakistani IT sector is at 0.9x vs average 0.45x in frontier markets. Higher PEG reflects resilient business models, growth & scale of operations for the domestic IT industry. The price discovery is also being driven by foreign portfolio investment which is gradually shifting away from traditional index heavy stocks to the technology sector (now accounts for 7% of the KSE100 in terms of market cap).”

“We have been in the forefront in the capital markets in terms of participating in technology firms, which were listed on the exchange. We have been very effective in terms of capturing these means and offering it to our investors. However, the opportunities are very limited. There were a few companies that were listed on the exchange. And our desire was to now expand the market to give greater depths. So we have now decided to enter into the venture capital space.”

*All investments in mutual funds are subject to market risks. Past performance is not necessarily indicative of future results. Please read the Offering Document to understand the investment policies, taxation policies and risks involved.

Additional reporting by Saad Tanvir.