It is hoped that changes to mutual fund rules announced by Bangladesh’s Securities and Exchange Commission (SEC) this month will encourage foreign participation in its $600 million asset management industry and drive scale in its domestic funds sector.
Reaz Islam, managing partner of LR Global Partners, Bangladesh’s only foreign fund manager and second largest overall, went as far as to describe the amendments as “revolutionary”.
To increase retail participation in the mutual funds industry, the SEC has been encouraging fund sponsors to list their funds on the Dhaka Stock Exchange via IPO. Both foreign and local investors can then trade them on exchange.
Significantly, this month the SEC announced amendments to mutual fund rules, which have been in place since 2001.
Effective from this month, the SEC allows all approved foreign fund managers to operate directly as fund sponsors/underwriters, without the need to engage a domestic firm.
Further, the minimum exposure to domestic capital markets (mostly equities) was lowered to 60%, from 70%. This is designed to allow firms to manage risk more effectively in a down market, or to take profits at the right time.
Islam welcomes the move, saying it gives asset managers more latitude to go in and out of the equities market based on market conditions.
“The requirement used to be as high as 70% and that had at times over-exposed us to the market,” he says.
Meanwhile, the SEC also says that mutual funds are free to declare dividends as cash, or bonus shares, or a combination of both as long as such an amount is at least 70% of realised profit.
Previously investors could only get cash as a dividend; now they are expected to benefit as fund managers can pay cash when stock-market valuations get expensive (so the prospect of further upside is limited), or shares if valuations are low.
Multinational corporations are already present in Bangladesh, which is the world’s second biggest exporter of ready-made garments and has enjoyed strong economic growth of around 6% annually for the past 10 years.
US energy giant Chevron is currently the largest foreign investor in Bangladesh, supplying nearly 50% of the natural gas the country needs.
LR Global is the only foreign asset manager in the country. It was set up in 1997 to provide the Rockefeller family and a few other investors with exposure to developing markets.
While it is a locally incorporated firm managing mutual funds distributed through the stock exchange, for foreign investors LR Global operates out of its offshore legal entities.
Until now, such offshore entities could not sponsor mutual funds. But the new rule permitting approved foreign managers to become fund sponsors means players such as LR Global can also sponsor local funds via their offshore entities, and therefore enjoy the benefits that local fund managers are entitled to.