IMAGE: MAX LOFFLER/WSJ
MUTUAL-FUND managers in Nepal appear to be doing something right, at first glance. In the month that ended in mid-January, the net asset value (NAV) of the Siddhartha Equity Fund leapt by 11.2%. Dozens of other funds posted solid gains. The total assets managed by the country’s 54 schemes leapt to Rs55.8bn, a bump of more than 5% from the previous month. A burgeoning middle class is investing, and a new fund, Machhapuchchhre SIP Yojana, has just opened its doors. The industry is growing with confident speed.
Look closer, however, and this confidence shows a troubling uniformity. Nepali fund managers are all running in a tight pack, on a dangerously narrow track.
The growth in assets under management was driven almost entirely by increased investment in equities, which rose by Rs5.7bn. Cash holdings fell. The appetite for shares is obvious. What is less obvious is whether there is enough worthwhile stock to buy. The Nepal Stock Exchange is small. So fund managers are all crowding into the same few companies. The data for Poush (which runs from mid-December to mid-January) show an overwhelming sectoral concentration. Commercial banks claim 18.5% of total mutual-fund investment. Hydropower firms take 13%. Life insurers account for 12.1%. Just three sectors swallow nearly half the industry’s allocated capital.
Within those sectors the herd moves together. In commercial banking, Everest Bank and Sanima Bank are the top picks. In hydropower it is Mountain Energy Nepal. In life insurance, National Life Insurance Company leads. The list continues with minimal variation across fund houses. This is not the result of deep, independent analysis converging on the same brilliant ideas. It is a symptom of a shallow pool. When the market offers limited liquid stocks, everyone clambers into the same few boats.
That creates a pair of intertwined risks. First, it amplifies market volatility. Heavy mutual-fund buying of a small set of stocks inflates their prices, which in turn boosts the NAVs of the funds holding them. This looks like strong performance, attracting more investors. But the valuation is built on circular demand from funds themselves, rather than on underlying business prospects. Should sentiment turn, the rush to exit through the same narrow door could cause a punishing crash. Second, it negates the core purpose of a mutual fund: diversification. Domestic investors are not buying a slice of a professionally managed, risk-spreading portfolio. They are buying a highly leveraged bet on a handful of local sectors.
Regulators have encouraged the industry’s expansion, hoping to deepen the country’s capital markets. The unintended consequence is a system where growth has outpaced opportunity. Fund managers, facing pressure to deploy cash, have few places to go. The result is a market that moves in lockstep, where success is less about stock-picking skill and more about participating in the collective march.
The march is upward for now. The NAVs are rising, and new money flows in. The test will come when the trail turns downhill. A market where everyone owns the same things is a market where no one can easily sell. Nepal’s funds are climbing high but they are all roped together on the same slope. ■
