Mr. Salman Haider has over 20 years of Investment Management experience, including almost 10 years on Wall Street, New York. He started his career with Merrill Lynch in 1996 and worked with Janney and Wachovia-Wells Fargo. He has held series 7 and series 63 licenses and life & health insurance licenses of NASD in New York to develop and invest in diverse investment products including securities, debentures, futures & options, commodities and annuitized insurance investment plans. He was CEO Faysal Asset Management Ltd in Pakistan from 2005 till 2012, during this period the profits of the company grew by over 600% and asset base from PKR 1 Billion to PKR 13 Billion.
Najma Minhas, GVS Managing Editor, recently sat down with him to explore how he is utilizing his vast experience in Pakistan’s investment landscape.
GVS: What role do investment funds play in Pakistan?
Salman Haider: We play a small role for a number of reasons. First in Pakistan, if you look at the overall savings rate, it is one of the lowest in the region and in comparison to western countries as well. The lower levels of disposable income leads to lower savings rate in our economy as well.
By analyzing comparative data, majority of savings is parked in the national savings schemes and then in the banking system. Number two, people don’t understand the investment options. And that is maybe something that we, as investment companies have to invest in.
SECP as a regulator is helping us to increase the market share of attracting that money – through educational seminars and schemes. Having said that and I think it’s our job as investment companies to collectively and individually increase the number of investors in the market. Currently, I think we have less than 250,000 investors in the entire mutual fund industry, which has a size of over Rs700 billion.
So, the individual’s money is coming into the investment companies through the institutional channel rather than directly. And I think the most significant portion that can help this is the retirement plan and new products like private equity funds, real estate funds, and insurance led saving plans for a family’s life cycle needs.
GVS: How big is the investment sector in Pakistan and comparatively in the region?
Salman Haider: Pakistan, as I said, it’s between Rs700 and 800 billion of the total size, this is less than 5% of the banking sector deposits. In India, I don’t currently know the exact number, but it used to be 31 to 32%.
In America, it is 130% of the banking deposits. So, there’s more money sitting in America, and, in the developed world in investments than in banks.
GVS: And why is that?
Salman Haider: Because the rate of return in America on a CD, for example, what many people call as the term deposit in Pakistan, is maybe 1%. And the mutual funds on the money market side are maybe giving about 1.75-2%, and on the fixed-income side from 2.5-3%.
On the equity side, people know that in the longer term, if you need to save enough money for your children’s education, for your retirement, you need to have equity exposure. And those returns are in double digits. And that is a mature market.
GVS: Do you see this as something that the investment industry itself should be marketing or do you need the government to formulate certain policies.
Salman Haider: I had a meeting with the SECP recently and I asked them that you are trying to bring about real estate funds for the last 15 years without much success. And they said to me, on three different occasions, we have given out incentives to the investment companies.
However, I stated the obvious to them, that you haven’t given enough incentives to the investors. They are the ones putting in money. If you look at the life insurance companies in Pakistan, they have built a more significant base than the asset management companies in the last seven or eight years.
The government has no money, the government has no cheque writing ability tomorrow, and they’ll default on Rs3,500 billion of the nation’s money. They need to have assets. It’s like talking about the Social Security program of the US, which may go bankrupt in 20 years because they’ll run out of the assets to pay against those liabilities.
They did this through the help of the banking channel distribution. In the asset management companies or investment companies sector, they are trying to build their own channels or branches, and that is a very expensive model – one for which most don’t have capital for. The capital requirement for these companies is Rs230 million for the entire company, while the banking sector has tens of billions of capital required.
They can own, open branches and go towards the retail network because it requires substantial investment. So, from the government side we need incentivization and policy formulation to encourage people to start saving more and more through investment institutions.
GVS: When you say policy formulation from the government side, what kind of policies do you think the government could make?
Salman Haider: For example, in Pakistan, if you look at the culture and society, we don’t have a long-term approach as a nation. So even when the SECP as a regulator facilitated voluntary pension schemes, we haven’t seen the growth in those pension schemes in the last ten years.
We’ve hardly seen maybe Rs20 or 30 billion building up during that period. And that’s peanuts when compared with the population size and the number of people working. The retirement and pension funds already in existence should be streamlined with the investment fund options of the industry for efficient long term growth.
The incentive is tax-free growth. And then annuitize the tax-free payments after somebody retires. It would help if you gave them incentives today so that they understand that tomorrow their savings will be utilized efficiently. I will relate that to the national savings where the government provides 2 percent extra to borrow money from the public to use it as a borrowing arm.
Instead, the government can incentivize investment companies, in a similar fashion, which they are not doing, by giving the incentive to the public through their pension schemes to get long-term savings for their next generation.
GVS: Have you suggested this idea to the government?
Salman Haider: Absolutely. The problem is that the government doesn’t have the funds. Now the government is raising money through the state bank as well as the national savings and every other borrowing arm they can leverage, whether it is the international sukuk bond, whether it is the local sukuk bond, or it is the energy-sector bonds.
The government has been bankrupt, for a very long time. So, they borrow money from whichever avenue they can borrow. All I’m saying is that if they are offering a 2 percent extra as an incentive on the nation’s saving scheme, why can’t they translate that into building a savings base?
GVS: One element of the government is to help you by building a bigger population savings base but what are the other feasible ways that they can help you in terms of policy direction?
Salman Haider: Even a few extra percentage points can make much difference especially if they incentivize individuals saving for their retirement. Such schemes would enable the government to use these as cheaper borrowing for other schemes.
For example, if the current government wants to launch the scheme of five million low-income houses, and if these people had enough savings, or enough salaries, they could have used those plans against low-cost loans to pay for mortgages. Mortgages at the current rate of 13.25% discount rate, means a mortgage at 16, 17, or 18% – which realistically not many can afford. So that plan is a failure to begin with unless you can incentivize.
You know, going towards a welfare state and you want to talk about five million homes for low-income families, you have to start from a point where it’s doable at 17-18%, it’s not feasible. Even if they can dish out a few billion rupees, that will not translate into five million homes and may not translate into the economic growth that the government is looking for from the construction sector.
GVS: If I am looking at it from the perspective of an individual; what difference does it make to me if I invest in the national savings scheme and I get 14%, or I invest in a much riskier product on the stock market and get 14%, I am better off going with the national savings. So how do you make the argument that I shouldn’t or the government should persuade me to go into the equity sector or the investment sector?
Salman Haider: Fair enough, I will give a very blunt answer. When somebody gives us investments, that’s our liability, and we create an asset against it. It’s a basic simple phenomenon of the asset versus liability, and there’s no mismatch.
If there’s a mismatch, as you have seen it the Asian financial crisis of 1997 or the 2005 subprime mortgage crisis in America, which led to the bankruptcy of 200 plus commercial banks in America; it was merely an asset-liability mismatch. Now coming to the answer, national savings has 3,500 billion rupees of investments. The industry has 700 billion worth of investments. While the industry has dollar for dollar or rupee for rupee assets against the liabilities, national saving has no assets.
GVS: There is a no need to, it is backed by sovereign guarantee.
Salman Haider: The government has no money, the government has no cheque writing ability tomorrow, and they’ll default on Rs3,500 billion of the nation’s money. They need to have assets. It’s like talking about the Social Security program of the US, which may go bankrupt in 20 years because they’ll run out of the assets to pay against those liabilities.
last year was a negative year for the industry and the year before that when we had growth back-to-back 75% and 130% of our assets. So, 200% growth in two years is pretty decent in this market. Again, we are poised to grow another 150% this year from this base. So, 100% percent growth on average only takes place only in the IT industry, in startups.
Similarly, every pension plan or every long-term savings plan must have an asset to back their liabilities. This is one of the most significant factors that people don’t know. If the public knew that there was no asset to pay against their Rs3,500 billions of liabilities, I don’t think they would put their money in national savings even if that rate of return was 2% higher.
Some of the corporate bonds are paying plus 3% & plus 4%, but we don’t put our money there, we put our money into safer instruments because we know that these corporates may not be able to pay us back. As simple as that. It’s a very blunt answer.
GVS: That’s fine. I actually disagree because we all know that the government can print money, and that is why it’s not going to go bankrupt.
Salman Haider: Yes, but that has caused inflation, and that’s what will create bankruptcy in the economy. The government should not have the right to print endlessly. Parliament has a law that states that there is a certain amount of debt you can carry as a government. The last government surpassed that.
So, the government does not have the capacity. Number two, even if you can print money, if you print money and become like Zimbabwe, your money is going to be worthless anyway, leading to demonetization and everything else.
GVS: In 2008 when the mutual fund sector was closed for trading for several months, it created a crisis in confidence amongst the investors as well. Has the industry gotten over that? What have you done to ensure that something like that doesn’t happen again?
Salman Haider: I was heading up Faysal Bank’s Investment Company, and we were the only company with growth that year. We were the only company that was not shut down in terms of their redemptions – we had zero redemptions even from the smallest investor. I was sitting on 98 percent cash and cash equivalents in all our 6-7 funds with more than ten billion rupees of liquid assets.
We forecasted the economy and the markets; if we do our job well, we ensure that our funds perform. The industry lost 70% assets that year, but we were the only company that had growth in 2008. Overall we had a 700% growth in assets in six years. We had deployed the best risk management models as per the Basel II requirements, which in 2008, even some of the Pakistani banking institutions had not yet employed.
The investment industry has come up from those levels quite a bit. The confidence has come back. However, the recent crises of the last two years in the stock market and overall equity funds managed by some of the large asset management companies have again created some doubt, but this is part and parcel of the industry.
You know, the equity funds carry a certain amount of risk, and the fixed income funds and the money markets carry a much lower risk. And that is where the focus has been for AWT Investments, and that is where we are building our company.
GVS: AWT Investments has a greater focus on fixed income funds. Why do you have that focus? How have you performed in the past couple of years?
Salman Haider: I think in the last year, we were one of the best performing funds in the market, and we are one of the best performing income funds in the market as well. We are creating a brand. The brand is built on three to five years of superior performance. This is our second year of excellent performance and we are now in our third year of the company’s operations.
So, if we can build a brand over three to five years as the best-fixed income fund manager in the country, just like PIMCO has done as a bond manager in the US, I think that’s what we need to create. At the same time, we have made considerable headway in our investment advisory business.
That is where we take one customer at a time, provident funds, gratuity funds, NGOs, corporate cash flows and then you manage their funds in the fixed income and money market instruments, giving them a higher yield by at least 1, 2 or 3% than the market, which is enormous.
In the money market & the fixed-income market, we have given over 19% yield to our investors of the fixed-income fund in the last three months, which is 600 basis points higher than the current average of 13% in the market. So, that is where I think we are building a brand, and that’s where the more significant market is. If you look at the mutual funds’ size in terms of equity versus fixed income, fixed income carries a much larger weight.
GVS: So, do you have funds with equity shares as well?
Salman Haider: Yes, we have. We have a money market fund, a fixed-income fund, and an Islamic fixed-income fund, but 90% is in our fixed-income funds.
GVS: 90% of your assets are in your fixed-income fund. Now, you’ve done well in the past couple of years because the interest-rate market is going up and stock market collapsing. What happens in years when the stock market is going up, for example, it was in 2016 when we saw the highs of 53,000 plus.
Salman Haider: Fair enough. We have three stock funds; one is a pure conventional stock fund. One is an absolute Islamic stock fund, and one is an asset allocation fund where the fund manager can go up to 100% in equities & up to 100% on the fixed income side, as per the forecast of the market and the investment committee’s decisions.
We have three different funds for the investors to choose from, and two of those funds are actually leading the entire market today for the full year to date. But again, I reiterate, that is not where we are building the business plan of the company, because if we increase the size of this asset class – equities, which is a very volatile asset class, then we won’t have a long-term business plan. It will be an unstable company to begin with, which we don’t like.
We want a strong shareholding structure. We want our profits to grow at a steady pace. We don’t want negative years. I’ve never had a negative year in any company that I’ve been managing. And again, as I said last year was a negative year for the industry and the year before that when we had growth back-to-back 75% and 130% of our assets.
So, 200% growth in two years is pretty decent in this market. Again, we are poised to grow another 150% this year from this base. So, 100% percent growth on average only takes place only in the IT industry, in startups. In the financial sector, it can happen in Pakistan.
GVS: How big is the Islamic portfolio?
Salman Haider: We are currently building the Islamic portfolio. It’s not as big as the conventional portfolio, but it’s building up. There’s a massive demand from the captive client base of this institution, as well as the market overall.
If you look at the last five to 10 years, Islamic deposits and Islamic investments have risen at a far greater pace than the conventional type. Now we are launching a separate Islamic sales force and an Islamic fund sales force as a distribution team.
GVS: Who are your target clients for the Islamic portfolio?
Salman Haider: Majority individuals, high-net-worth individuals. Many people have put their money into Islamic banks and Islamic instruments at a 0 percent interest rate. While our Islamic fund is yielding 11% plus, and Islamic Advisory accounts are generating 13% plus. So those are good returns that people should take advantage of, and for that reason, we are building a new separate distribution team.
You know, when you come across an Islamic investor, and they look at you selling both (conventional and Islamic products) on one brochure, I think that’s not a good strategy. So, we are trying to separate the sales teams.
GVS: How do you sell your products to the general public?
Salman Haider: We have a distribution team, and we have a wholesale unit, which is a proper team, then we have an institutional team and a retail team. In this company, we opened up 11 branches in our first year. If you look at the two models that the asset management companies have deployed, one is the bank-owned asset management where companies have the banking channel through bank branches that they sell.
Since we don’t own a bank, we don’t have that model. The other is that they open up their franchise locations, which is a very high-cost venture. And it becomes cost-efficient over 5 -10 years. Being a part of this organization and this institution, we can leverage very low-cost distribution networks all over the country.
We opened up 11 branches in the first year covering North Pakistan, starting from Kohat to Azad Kashmir, and from Pindi to Multan, our central region, the South Region is Karachi, Hyderabad, and so on. We want to go up to 30 branches in the next two years. I don’t think there are any asset management companies with that large a network of their own. And that is where we can also capitalize.
GVS: You mentioned earlier, it isn’t the most sensible distribution strategy by spending on setting up expensive fixed assets, such as branches? So why are you going down that lane?
Salman Haider: It’s not, because it is a very high-cost initiative for all the other companies. However, being a part of this institution of the Army Welfare Trust and their network, with their 46 years of history and 18 companies network from across the country, we can leverage our network with very little cost and it gives us an efficient distribution network for the retail market.
And we can be profitable in 12-24 months in that model, while the other companies may not be. So that is why we say it is much more feasible for us, and we create a larger retail brand than maybe some of the other companies have done in their lifespan. We have had three years; some of the companies have been around for 15 to 20 years.
GVS: You are part of AWT, and one of the mandates is to look after the Shuhada. How has that affected your business? I mean, do you have a specific focus, and if so, in what way?
Salman Haider: We do. The first thing we did when we acquired this asset management company, we started seven investment saving plans. The first plan we launched was for the families of the Shuhada. The families get a lump-sum payment when a loved one gives their life for the nation. We sit with them individually and restructure their income plan for the entire family.
Education plan was the second thing we launched for their kids. Next, we plan for their life savings & growth plans, if they want to do anything else or save for something else. We have a plan where people can save to purchase a home, for the marriage of their children, for their Hajj and Umrah plans, or for any other large ticket purchase.
GVS: Do you have any discounted element for these?
Salman Haider: This Shuhada plan has no fee so we give up all our fees. And the return goes up by at least 1% more than the market. And then our returns are superior to the majority of the other players in the market as well. If somebody on the fixed-income side can give a spread of the 2-3%, it adds to their monthly income.
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GVS: Where do you see the biggest growth areas for yourself as a company?
Salman Haider: We have a business plan, which is not just focused on mutual fund and advisory business, but also private equity business and the real estate fund. We are seeking licenses for these business plans from SECP, and the good thing is that they now allow this to the asset management companies.
We are structuring the real estate funds and private equity, for example, energy and infrastructure funds, and we believe that we are one of the most suitable companies sitting in the right place to capitalize on the infrastructure and the energy sector and industrial growth.
In Western markets, if you look at the more significant funds, there is the pension funds, and then there is real estate, and there are other asset classes. In Pakistan, we are only focusing on the stock market and money markets. We need to focus on real estate, which is the largest asset class in Pakistan.
We are sitting here with captive real estate from our parent institution and our affiliated institutions, we have a huge pipeline. And in the next five years, if we capitalize on creating those funds, converting them into earning assets, we will be the largest company in this segment.
GVS: What is the needed to create viable REIT funds?
Salman Haider: Okay. There are two types of REITs, one is a developmental REIT, and one is a rental REIT. The rental REIT currently does not make much sense because the yield on the fixed-income fund is 12-14%, and the rental properties are not paying that much in Pakistan.
And the taxation on the rental REITs is higher than the developmental REITs. But if we allow anybody to go into a developmental real estate project where the returns are triple-digit returns over three to five years, where the individuals do not have the option to invest, I think that is where the growth will be coming from. And that’s what we’re focusing on.
GVS: What differentiates the AWT from its competitors?
Salman Haider: Number one, we are customer-focused, client-centric — one customer at a time. But you know, this is something which I can boast as a CEO here, over the seven years that I headed the last company and the three years that I’ve been here, I can tell you that there was not a single redemption sitting even when the SECP froze the funds in the 2008 crisis.
That speaks volumes. Similar is the approach here. We want to do business with the right people at the right cost and at the right service-quality level. We’re not looking to build a business in a haphazard format, without assessing the risk and without forecasting all our investors accurately.
So, if you go through our fund manager reports, this is reflected from our investments. We carry one of the lowest risks in the market with the highest returns. That is something that comes in through collective wisdom. There is a decision-making process in this company, where the investment advisory committee, the risk management committee, and the HR committee have the voting rights.
And I carry one vote, just like everybody else. We’ve enforced that. And that collective wisdom needs us to give better returns – better risk-adjusted returns. That’s our job. Not just to provide returns. In a good market, you must have seen ads of asset management companies of this year; we gave a 45% return on the stock fund.
But the next year when they’re down 25%, they’re not highlighting it. That’s not a company we are building; we are making a long-term strong stable company that must give superior returns over the life of the company. And the majority of the assets of the individuals in Pakistan or internationally are of a fixed income nature. So, that is where we are building the institution.
As I said, it’s not just customer-focused but customer-centred – everything starts from there. Yes, we have funds that are geared towards a broader audience. But our business growth has come in where we have brought in individual accounts and individual clients. Out of the 200% growth in the last two years that we have seen in other assets, I think 90% growth has come in from the individual client and assets. So that also speaks volumes that we must be giving some service.
I’ll give you another example. Our investment advisory business is 15 months old, and we have over 70 accounts – 70 institutional, provident funds, guarantee funds, NGO, and large corporates. I think I don’t have the data in the market because it’s not available. However, it must be one of the largest in the country in 15 months. But some of the companies have been operating for two decades. So that validates my point of a customer-centric approach.