Investment Analysis And Portfolio Management

Investment opportunities in Pakistan

The purchase of a financial product or other item of value with an expectation of favourable future returns. In general terms, investment means the use money in the hope of making more money.

What are the reasons to invest in Pakistan

Improved credit position (S&P upgrade to B+, Moodys upgrade to B2) with positive outlook Pakistan has the best liberal investment policy in South Asia. It includes minimum foreign equity which ranges from US $ 0.5 million to US $ 0.3 million and remittance of technology and franchise fee. Pakistan is a country rich with natural resources which make it a profitable place for investments. Pakistan has largely grown domestic market which benefits investors. There are 160 million consumers from different categories and incomes. A number of investors have their chains in Pakistan because of our liberal investment facility. There has been stabilization in policies with regards to reduced fiscal deficit (from 6.6% to 4.5% of GDP), current account deficit eliminated and market-based exchange rate. A large part of the workforce is proficient in English, hardworking and intelligent. Pakistan possesses a large pool of trained and experienced engineers, bankers, lawyers and other professionals with many having substantial international experience. Comparative cost advantage and reduction in trade barriers In key economic sectors in Pakistan there is Liberalization, deregulation and privatization.

Investment Analysis And Portfolio Management

Technological advances and new regulations has resulted in numerous new investment instruments and expanded trading opportunities. Improvements in communication and relaxation of international regulations have made it easier for investor to trade in both domestic and global markets. The investments are divided by asset classes. Fixed-income securities Equity investments Special equity instruments Future contracts Investment companies Low liquidity investments

Fixed Income Securities

An efficient fixed income security market, both government and corporate, is highly satisfying for the quick development of any economy as it leads to the efficient utilization of resources for long-term investment. Investors who acquire fixed-income securities (except preferred stock) are really lenders to the issuers. Specifically, the principle amount is lend to the borrower and the borrower promises to make periodic interest payments and to pay back the principle at the maturity of the loan. Following are the common characteristics of fixed income securities: Fixed maturity period ranging from as low as 91 days to 30 years. Specified coupon or interest rate Generally issued at a discount to face value and the investor profits from the difference in the issue and redeemed price

Saving accounts
A deposit account held at a bank or other financial institution that provides principal security and a modest interest rate. Savings account funds are considered one of the most liquid investments. In contrast to savings accounts, checking accounts allow you to write checks and use electronic debit to access your funds inside the account. Savings accounts are generally for money that you don't intend to use for daily expenses. These investments are considered to be Convenient Liquid Low risk

Investment Analysis And Portfolio Management Low rate of return Flexibility

Capital market instruments

Capital market instruments are fixed income securities traded in the secondary market. Which mean you can buy or sell to other individuals or institutions. Capital market instruments are categories in three ways Government securities Municipal bonds Corporate bonds

Government securities
The investor portfolio of securities (IPS) is necessary to invest in government bonds. Primary dealers/ schedules banks hold securities in IPS accounts on behalf of their customers. Customer is the legal owner of securities in IPS accounts with bank in accordance with instruction of SBP. The types of Government securities that customers can invest through IPS account are: Treasury bills (T bills) Pakistan Investment Bonds (PIBs) Government of Pakistan Ijarah Sukuk (GOP Ijarah Sukuk) Sovereign Bond

Treasury Bills(T-Bills)
Treasury bills are zero coupon instruments issued by the Government of Pakistan and sold through the State Bank of Pakistan via fortnightly auctions. Salient features are: Issued in 3, 6 and 12month tenors Denominations: Multiple of 5,000 Pak rupees Withholding tax is deducted at source @10% by SBP Non-paper instruments Higher return to the investor Negotiable instruments and traded in the secondary market 3

Investment Analysis And Portfolio Management Face Value is guaranteed by the Government of Pakistan The treasury bills are traded in Pakistan by using following two methods Auction System Open market operation. In auction system, the auction is announced by state bank of Pakistan. All the bidders submit their bids after that price is issued of bill. And Treasury bill security is being issued. While in open market operation, the government fixes the discount rate. And when it needs funds it issues the securities.

Pakistan Investment bonds (PIBs)

PIBs are long term bonds issued by the Government of Pakistan and sold through the State Bank of Pakistan via periodic auctions. Salient Features are: The repayment of face vale at maturity and periodical coupon payments are guaranteed by the government of Pakistan. Provide higher returns Denominations: Multiple of 100,000 Pak rupees Maturity period from 3 to 20 years PIBs are acceptable by the banks as collaterals High liquid and traded in secondary market Fixed and semi annuals periodic payments

GOP Ijara Sukuk

GoP Ijarah Sukuks are medium term Shariah compliant bonds issued by the Government of Pakistan and sold through the State Bank of Pakistan via periodic auctions. Salient Features are: Issued in 3 year tenor(currently) Floating rate instrument Denominations: Multiple of 100,000 Pak rupees Semi-annual coupon payments(Currently linked to weighted average 6month T-Bill rate) Withholding tax is deducted at source @10% by SBP Nonpaper instruments Negotiable instruments and traded in the secondary market Both the principal and the coupon payments are guaranteed by the Government of Pakistan. Islamic mode of investment

Sovereign Bond

Investment Analysis And Portfolio Management A debt security issued by a national government within a given country and denominated in a foreign currency. The foreign currency used will most likely be a hard currency, and may represent significantly more risk to the bondholder. The government of a country with an unstable economy will tend to denominate its bonds in the currency of a country with a stable economy. Because of default risk, sovereign bonds tend to be offered at a discount. Brady bonds, which are issued by governments in developing countries, are a popular example of sovereign debt securities. This is one of the many risks that an investor faces when holding forex contracts. Additionally an investor is exposed to interest-rate risk, price risk and liquidity risk amongst others.

How to invest in Government securities?

Customers interested in buying Government of Pakistan Securities, need to follow the steps stated below: In order to open an IPS account, customer must have a bank account. The customers will submit a duly filled IPS Account Opening Form (Form A) along with the required documents to their account maintain branch (Please see the attached List of Required Documents), After the IPS account has been opened, the customers can invest in GOP securities through one of the Following modes: Primary Market (i) Competitive Bid,(ii)Non Competitive Bid (NCB )through filling the Form B; Secondary Market through filling the Form C.

Government Agencies:
Govt. agencies like WAPDA also issue the fixed income securities. The investor has opportunity to invest in bonds in Pakistan. There are many bonds with different time to maturity. The interest payment is fix and assured. In case of non payment of interest after the regular interval the investor/ bond holder could sue the company issuing the bond. At the time of maturity the bond amount as well as interest payment. The bondholder has also the right to convert the bond into cash. Firms like WAPDA, NDFC, BEL, PICIC issue the corporate bonds for public.

Municipal bonds
A debt security issued by a state, or county to finance its capital expenditures. Municipal bonds are exempt from federal taxes and from most state and local taxes, especially if you live in the state in which the bond is issued. Bond issued by a state, city, or local government. Municipalities issue bonds to raise capital for their day-to-day activities and for specific projects that they might be undertaking (usually pertaining to development of local infrastructure such as roads, sewerage, hospitals etc).

Investment Analysis And Portfolio Management Interests on municipal bonds is generally exempt from federal tax. There are two common types of municipal bonds: General obligation Revenue. General Obligation (GO) bonds are unsecured municipal bonds that are simply backed by the full faith and credit of the municipality. Generally, these bonds have maturities of at least 10 years and are paid off with funds from taxes or other fees. Revenue bonds are used to fund projects that will finally create revenue directly, such as a toll road or lease payments for a new building. The revenues from the projects are used to pay off the bonds. In some cases the issuer is not obligated to pay interest unless a certain amount of revenue is generated. Municipal bonds usually come in $5,000 par values and usually require a minimum investment of $25,000 in order to get the best price also called muni.

Corporate bond
A bond issued by a corporation; carries no claim to ownership and pays no dividends but payments to bondholders have priority over payments to stockholders; "a corporate bond is a safer investment than common stock in the same company". Corporate bonds are traded on major exchanges and are taxable.

Corporate bonds are rated as to their risk. The higher the risk, the higher the return the corporation must promise.
They are less safe than government bonds, since there is a chance the company can go bankrupt and default on the bond.

Term Finance Certificates

The corporate bond market exists in Pakistan in the form of Term Finance Certificates. TFCs are based on legislation enacted in 1984, which authorized the issuance of redeemable capital securities. As a debt instrument, the TFC is slightly different from the traditional corporate bond because it was specifically designed to comply with Sharia Law. The key difference is that the TFC substitutes the words "expected profit rate" for "interest rate." Following are some featured of term finance certificates Secured or un-secured Short Term (Maturity/ life up to 12 months) Long Term (Maturity/ life beyond 12 months) Role-over at maturity (containing call and put option) Bullet payment i.e. repayment of principle amount in lump sum.

Investment Analysis And Portfolio Management

Commercial Paper
Commercial paper issued by corporations to finance various aspects of operations. Commercial paper has a maximum maturity period of nine months and generally has higher denominations compared to Treasury bills and CDs. Commercial paper, as a security, is considered a safe investment as the financial health of the issuing corporation .

Short Term Savings Certificates

The Government of Pakistan introduced Short Term Savings Certificate scheme in the year 2012. The scheme has specifically been designed to meet the short term requirements of the depositors. This is 3 Months, 6 Months and 1 year maturity scheme. These certificates are available in the denominations of Rs.10,000, Rs.50,000, Rs.100,000, Rs.500,000, Rs.1,000,000/-, Rs.5,000,000/- and Rs.10,000,000/=. Following are the features of short term saving certificates These certificates are pledge-able. The minimum investment limit is Rs.10,000/ These Certificates shall be encashable at office of issue but not earlier than one month from the date of issue Profit is paid on maturity of respective maturity period i.e. 3 months, 6 months and 1 year At @8.85%, 8.90% and 8.95% respectively.

Convertible Bond
A bond that can be converted into a predetermined amount of the company's equity at certain times during its life, usually at the discretion of the bondholder. From the investor's perspective, a convertible bond has a value-added component built into it. It is essentially a bond with a stock option hidden inside. Thus, it tends to offer a lower rate of return in exchange for the value of the option to trade the bond into stock. An alternative to convertible bond is a debenture with warrants attached. The warrant is like as an option that allows the bondholder to purchase the firms common stock from

Investment Analysis And Portfolio Management the firm at a specified price for a given time period. The warrants make the debenture more desirable which lowers its require yield.

Zero Coupon Bond

Zero coupon bonds is bought at a price below its face value, and the face value is repaid at the maturity date. As its name mention zero coupon bond it does not make any interest payment it just pays off the face value.

Subordinate Bond
A subordinate bond may be an unsecured bond, which has no collateral. Should the issuer be liquidated, all secured bonds and similar debts must be repaid before the subordinated bond is repaid. A subordinate bond carries higher risk, but also pays higher returns than other classes. Subordinate bonds are similar to debentures, but in the case of default, subordinated bondholders have claim to the asset of the firm only after the firm has satisfied the claim of all senior secured and debenture bondholders. Subordinated bonds are categories in senior subordinated, subordinated and junior subordinated bonds. Junior subordinated bonds have the weakest claim of all bondholders.

Preferred Stock
A class of ownership in a corporation that has a higher claim on the assets and earnings than common stock. Preferred stock generally has a dividend that must be paid out before dividends to common stockholders and the shares usually do not have voting rights. Preferred stock have become attractive investments for financial corporations. Because corporations can exclude 80 percent of inter company dividends from taxable income. For example: corporations that owns preferred stock of another firm and receipts RS. 100 in dividends can exclude 80% of this amount and pay taxes on only 20% of it (RS 20) Assuming a 40% tax rate, the tax would only be RS 8 or 8% versus 40% on other investment income. Due to this tax benefit, the yield on high-grade preferred stock is typically lower than that on high rate bonds.

Risks in Fixed Income Securities

Interest Rate Risk Reinvestment Risk Credit Risk Event Risk Inflation Risk

Investment Analysis And Portfolio Management

Equity Instrument
Common Stock
A security that represents ownership in a corporation. Holders of common stock exercise control by electing a board of directors and voting on corporate policy. Common stockholders are on the bottom of the priority ladder for ownership structure. In the event of liquidation, common shareholders have rights to a company's assets only after bondholders, preferred shareholders and other debt holders have been paid in full. If the company goes bankrupt, the common stockholders will not receive their money until the creditors and preferred shareholders have received. This makes common stock riskier than debt or preferred shares.

Depository receipts
A depositary receipt is a negotiable financial instrument issued by a bank to represent a foreign company's publicly traded securities. The depositary receipt trades on a local stock exchange. DR investors will be able to gather the benefits of these usually higher risks, higher return equities
Negotiable (transferable) financial security DR is in the form of equity

physical certificate

Special Equity Instruments/Options

In addition to common stock investment, it is also possible to invest in special equity instruments, which are securities that have a claim on common stock of a firm. This would include options rights to buy or sell common stock at a specified price for a stated period of time Two kinds of options instruments are Warrant Puts and calls

Warrants
A warrant is an option issued by a corporation that gives the holder the right to acquire of a firms common stock from the company at the specified price with in a predefined time period. The warrant does not represent ownership of the stock , only the option to buy the stock.

Puts and Calls

Investment Analysis And Portfolio Management A call option is different from warrant because it is not issued by the company but another investor who is willing to assume the other side of transaction . options are typically valid for a shorter time period. Call options are generally valid for less than one year. The holder of put option has a right to sell a given stock at a specified price during a selected time period. Puts are useful to investors who own the stock and want protection from a price decline.

Future contracts
Futures contracts are also used as an investment alternative. This also related to the purchase or sale of securities but at some future date but the price fixed today. Future date is according to normally within one calendar month. Every six months on the base of eligibility criteria approved by the SECP at the futures counter the numbers and the names of companies are traded to be determined. These contracts expire in less than one year.

Investment companies
Normally investments are made by acquiring securities from government entity, a corporation, or another individual. Investment also made indirectly by buying shares in an investment company also called mutual funds. Distinguished between investment companies by the types of investment instrument they acquire

Money Market Fund

Money market fund is a mutual fund that invests its assets only in the most liquid of money instruments. They are the safest for the beginner investor. They are the easiest, least
complicated to follow and understand. Money market funds represent an investment tool for the beginning investor. They are the most basic and conservative of all the mutual funds available.

Safety of principal, through diversification and stability of the short-term portfolio investments Total and immediate liquidity, by telephone or letter Better yields than offered by banks, 1% to 3% higher Low minimum investment, some as low as $100 Generally, no purchase or redemption fees, no-load funds

Income Funds
The objective of income mutual funds is to seek a high level of current income appropriate with each portfolio's risk potential. In other words, the greater the risk, the

10

Investment Analysis And Portfolio Management greater the potential for giving income yields, but the greater the risk of principal loss as well. The risk is very low when the fund is invested in government obligations, blue chip corporations, and short-term agency securities. The risk is high when a fund seeks higher yields by investing in long-term corporate bonds, offered by new, undercapitalized, risky companies.

Income and Growth Funds

The primary purposes of income and growth funds are to provide a steady source of income and reasonable growth. Such funds are ideal for retirees needing a supplement source of income without leaving growth entirely.

Growth and Income Funds

The primary objectives of growth and income funds are to seek long-term growth of principal and reasonable current income. By investing in a portfolio of stocks believed to offer growth potential plus market or above - market dividend income, the fund expects to investors seeking growth of capital and moderate income over the long term (at least five years) would consider growth and income funds.

Balanced Funds
The basic objectives of balanced funds are to generate income as well as long-term growth of principal. These funds generally have portfolios consisting of bonds, preferred stocks, and common stocks. They have fairly limited price rise potential, but do have a high degree of safety, and moderate to high income potential. Investors who desire a fund with a combination of securities in a single portfolio, and who seek some current income and moderate growth with low-level risk, would do well to invest in balanced mutual funds.

Growth Funds
Growth funds are offered by every investment company. The primary objective of such funds is to seek long-term appreciation (growth of capital). The secondary objective is to make one's capital investment grow faster than the rate of inflation. D Growth funds are best suited for investors interested primarily in seeing their principal grow and are therefore to be considered as long-term investments - held for at least three to five years. Candidates likely to participate in growth funds are those willing to accept moderate to high risk in order to attain growth of their capital and those investors who characterize their investment as "fairly aggressive."

Index Funds
The intent of an index fund is basically to track the performance of the stock market. If the overall market advances, a good index fund follows the rise. When the market 11

Investment Analysis And Portfolio Management declines, the index fund also declines . Index funds' portfolios consist of securities listed on the popular stock market indices. It is also the intent of an index fund to materially reduce expenses by eliminating the fund portfolio manager. The securities in an index mutual fund are identical to those listed by the index it tracks, thus, there is little or no need for any great turnover of the portfolio of securities. An index mutual fund may never outperform the market but it should not lag far behind it either. The reduction of administrative cost in the management of an index fund also adds to its profitability.

Sector Funds
In the case of sector funds, the portfolios consist of investment from only one sector of the economy. Sector funds concentrate in one specific market segment; for example, energy, transportation, precious metals, health sciences, utilities, leisure industries, etc. In other words, they are very narrowly based. Investors in sector funds must be prepared to accept the rather high level of risk natural in funds that are not particularly diversified. Any measure of diversification that may exist in sector funds is attained through a variety of securities. Substantial profits are attainable by investors enough to identify which market sector is ready for growth.

Specialized Funds
Specialized funds is similar to sector funds in most respects. The major difference is the type of securities that make up the fund's portfolio. For example, the portfolio may consist of common stocks only, foreign securities only, bonds only, new stock issues only, over - the - counter securities only, and so on. Those who are still novices in the investment are should avoid both specialized and sector funds or the time being and concentrate on the more traditional, diversified mutual funds instead.

Islamic Funds
In case of Islamic Funds, the investment made in different instruments is to be in line with the Islamic Shariah Rules. The Fund is generally to be governed by an Islamic Shariah Board. And then there is a purification process that needs to be followed, as some of the money lying in reserve may gain interest, which is not desirable in case of Islamic investments.

Direct Real Estate Investment

More investor view real estate investment as an interesting and profitable investment alternative. The most common type of direct real estate investment is the purchase of home. Today it is considered most profitable investment. Different types of direct real estate investment are Raw land 12

Investment Analysis And Portfolio Management Land development Rental property Agriculture

Raw land
Another direct real estate investment is the purchase of raw land with the intention of selling it in future at profit. It provides more return on investment and has a low chances of risk in the form of losses.

Land development
Land development can involve buying raw land, dividing it into individual lots, and building houses on it or building a shopping mall. This is a practical form of investment but requires a substantial commitment of capital, time and expertise. Risk can be higher in the commitment of time and capital, the rate of return also higher in form of successful housing or commercial development.

Agriculture
In some ways, farmland is even better than gold or silver. At least farmland is an basically useful thing. It provides a tangible yield in the form of good things from the earth. Investment has gone in Animal husbandry and livestock development, Dairy farming, Poultry birds-raising, Meat processing, Preservation of shelf lives of fruits and vegetables, Ginning and rice milling, etc.

Rental property
Many investors with an interest in real estate investing acquire apartment building and houses with low down payments, with the intention of deriving enough income from the rents to pay the expenses of structure, including mortgage payments. Rental property provide a cash flow and an opportunity to profit from the sale of the property.

Low-Liquidity Investment
These investments have very poor liquidity and financial institutions do not prefer them because of the illiquidity and high transaction cost compared to stocks and bond. Many of these assets are sold at auction. Transaction costs are high because there is generally no

13

Investment Analysis And Portfolio Management market for these investments, so local dealer must be compensated for added carrying costs and the cost of searching for buyers or sellers. Some low liquidity investments are following Antiques Art Coins and stamps Diamonds

Antiques
The greatest returns from antiques are earned by dealers who acquire them at estate sales or auctions to redecorate and to sell at a profit. Many serious collectors enjoy good rates of return. The high transaction cost and liquidity of antiques is the cause of low profit that the individual may expect to earned when selling these pieces

Art
Investing in art typically requires good knowledge of art and the art world. A large amount of capital to acquire the work of well known artists, patience and ability to absorb high transaction cost. It is difficult for small investors to get returns that compensate for the uncertainty and liquidity. Some paintings have increased significant in value and thereby generated large rates of return for their owners.

Coins and Stamps

Many individual enjoy collecting coins and stamps as a hobby and as an investment. The market for coins and stamps is fragmented compared to stock market but it is more liquid then the market for art and antiques.

Diamonds
Diamonds are also considered as a good and beneficial investment in Pakistan for the investors from many periods. Diamond great feature is that it is used for years

14

Investment Analysis And Portfolio Management without decrease in its value. Diamonds are considered as the most liquid investment.Profit on retail sale diamond is high so try to sale it on retail bases.

15