Islamic Mutual Funds: Pitfalls of Self-Regulation and a Revolving Door
Is Al Meezan winning CFA Awards for beating irrelevant benchmarks?
In the last post, we noted that Al Meezan finally decided to rectify the error in its reporting and marketing of Al Meezan Sovereign Fund (MSF) by correcting the misleading benchmark most likely because The Profit chose to write a story on it. I presumed that Al Meezan would have learned its lesson and wouldn’t be using such marketing anymore. I was wrong.
More on Irrelevant Benchmark
Al Meezan continues to use irrelevant benchmarks across its other products. See the below Meezan Bank Facebook advertisement which was brought to my attention by Motasim for their fund Meezan Daily Income Plan-I (MDIP-I). For the month of September 2023, the fund has an alpha of almost twice the benchmark.
As we noted in our first post on this topic Islamic Mutual Funds: How Islamic Are Their Benchmarks? (substack.com), the benchmark is provided by MUFAP. For the month of September 2023, MUFAP circular gave the following benchmarks.
Based on the benchmark, one would presume the MDIP-I is doing phenomenally. I visited MUFAP website and sorted the funds based on YTD performance. In the Sharia-compliant income category, MDIP-I is in the middle of the pack. One wouldn’t realize this from the advertisement.
The irrelevance and uselessness of the benchmark are glaring when one looks at the YTD and MTD returns of all the funds. Except for the two funds at the bottom of the list, every fund is generating an MTD alpha that is more than twice the benchmark. Reminds me of the phrase “90% of the drivers think they are above-average drivers”. What is the use of this useless benchmark if everyone is beating and that too by a significant margin? The MDIP-I advertisement calculates the annual benchmark at 6.79%. Thus on an annual basis (using YTD returns as a proxy for returns), every fund is beating the benchmark by its multiple.
Revolving Door
What is SECP doing? Has MUFAP done a regulatory capture of SECP? As you know, I like to find out the name of the individual where the buck stops. In SECP’s case, the commissioner responsible for the Securities Division appears to be Mr. Abdul Rehman Warraich who has previously worked at NBP Fund Management and UBL Fund Managers. Now that he is working for the regulator, he should request the Islamic funds to improve the benchmarks.
Even more irrelevant benchmarks
While searching for material for this post, I also came across Al Meezan's Twitter/X account and saw the following advertisement.
While the fund category is Islamic Money Market, the benchmark is even lower than the first advertisement. Based on the fund manager's report, the benchmark is the three-month average deposit rate of Islamic banks.
I decided to look at the performance of other funds in Al Meezan's portfolio. It turns out that this or similar irrelevant and flawed benchmark is used in many of Al Meezan’s funds. I have put a red dash in the Islamic money market funds of Al Meezan. The benchmark isn’t conveying any useful information.
CFA Society Awards
This is not to say that Al Meezan is the only Sharia Compliant asset manager using these flawed benchmarks. As per Al Meezan's Twitter account, they recently won the award of best asset manager given by the CFA Society of Pakistan as the Best Asset Management Company FY23. I just hope that award wasn’t based on beating the benchmark.
Self Regulation
It is obvious that the benchmarks being used by Sharia-compliant income funds are irrelevant. Why doesn’t MUFAP do anything about it? MUFAP is an association of Mutual Funds of Pakistan and they have no intention of derailing the gravy train despite the fact that it is clear as daylight that this benchmark isn’t conveying any useful information. There 30+ funds in the above Sharia-compliant income funds list representing every notable financial institution or asset manager. They have no interest in rectifying this.
FYI, in the above picture, Mohammad Shoaib CFA is receiving the award on behalf of Al Meezan Investments. Mohammad Shoaib CFA also sits on the board of MUFAP and may explain why MUFAP isn’t in a hurry or doesn’t even feel the need to change the benchmark despite the fact that the benchmark doesn’t convey any useful information.
We have covered a lot of ground in this post. The uselessness of the benchmarks of Islamic money market funds, the pitfalls of revolving door and self-regulation and finally, the irrelevance of CFA and CFA Society Awards.