Mutual funds

Outline

The first Egyptian mutual fund was launched in 1994. Since that time, the industry has evolved slowly. There are nearly 100 funds operating under the supervision of the Egyptian Financial Services Authority (EFSA) at present. There are specialised funds in a number of different asset classes, including 26 equity, 14 sharia-compliant, eight fixed income, 26 money market, 10 balanced and even a US dollar and euro-denominated money market fund. The EFSA has always been at the forefront of evolving and modernising the industry. The executive regulations of Law No. 95 of 1992 regarding Egyptian mutual funds were completely revamped in 2007 and then again 2014.

Egyptian funds have a high degree of transparency and are supervised by several bodies. There is an oversight committee appointed by the fund issuer or sponsor with a majority of independent members. Certain changes to the prospectus require the fund shareholders to approve them, and two different auditors registered with the EFSA have to vet each fund’s financial statements on a quarterly basis. In addition, fund service companies responsible for shareholder registers and periodic value calculations have to be independent. These measures have given Egyptian mutual funds a good reputation. Compulsory legal limits on asset allocation coupled with limited legal ability to take excessive risks have practically saved each fund in the industry from facing any major crises.

Until now Egyptian funds have mainly been launched by commercial banks – only a handful of funds have not been sponsored by them. There are 35 fund managers licensed by the EFSA, with only 22 actually managing funds. Collectively they managed around LE40bn ( equivalent to $2.1bn as of December 2016) in mutual funds as of the end of June 2016. Money market funds constitute the majority in terms of size, although the law only allows banks and insurance companies to launch them. The Central Bank of Egypt (CBE) linked fund size to the size of the issuing bank’s capital and local deposits, but has gradually reduced the cap. Money market funds continue to be the dominant fund because they provide a unique service to the public by allowing them an easy way to participate in the Treasury market, with daily liquidity under professional management.

Projection

The industry is bracing itself for another major overhaul, as the EFSA is preparing some regulatory changes that will allow brokerage houses to handle subscriptions, redemptions and trading orders rather than commercial banks, which currently handle fund distribution. This will facilitate and invigorate the industry, which is currently forced to deal only through commercial banks. Commission-based brokers will be much keener to distribute funds since they do not see such investment products as competition for other traditional banking products. Eventually this will open up the market to foreign investors, as they will be able to place orders through international brokers, who route them to their local counterparts. Once the law organising their issuance is enacted, the market will prepare itself for the introduction of newer types of funds, such as sukuk (Islamic bond) funds. This opens up the market to investors who have a low level of risk tolerance but who are interested in Islamic finance.

The newest funds launched in 2016 were capital protected funds. This is a normal development and reflects the turbulence that investors witnessed in recent years, causing them to seek safer investments even when participating in equity markets. The high transparency and strict regulations of the fund management business can provide a new source of financing for charities. The EFSA has issued regulations for organising charity funds. These funds can be utilised to solve problems facing fundraising, such as financing and trust. Another major development is real estate funds. Investing in real estate is currently only open to wealthy individuals and specialised corporations. Real estate funds open the door for all investors, allowing the fund management industry to play a bigger role in the economy.