Underlying Risk & Mitigates
ALike any other investment in mutual funds, this investment will also be exposed to certain risks which have been outlined below:
This comprises of Default risk, Credit Spread Risk and Downgrade Risk. As the bulk of investment by POAF would be in TFCs issued by commercial banks, these risks are reduced to a great extent.
Commercial banks are regulated by the State Bank of Pakistan and the State Bank only permits listed Tier-II Issues for banks that meet certain minimum rating requirements; moreover, such Issues are limited to 50% of Tier-I capital base.
In recent times, banking sector profitability has been on the rise with concurrent build-up in Tier-I. Higher Tier-II allows banking companies to build up new assets against relatively low cost capital, thereby further enhancing profitability ratios.
Fixed income instruments carry price risk and can lose significant value in a rising interest rate scenario. As the fund life is 8 years, which can encompass more than one business cycle and changing interest rate environments, the fund will mitigate price risk by holding floating rate instruments only.
This will not apply to short term instruments which have a total life of less than 12 months, such as Treasury Bills or Commercial Paper.
In a reverse repurchase transaction where the fund has taken an exposure against a security, default by the counterparty can result in ownership of the underlying security.
This can have an adverse impact if the market value of the security falls. To mitigate this risk, the fund will ensure that counterparties are creditworthy and carry low settlement risk.
Moreover, pricing of underlying securities will also be market based. The underlying securities will have to be authorized investments meeting the same rigorous screening procedure as direct investments (except for the fact that remaining life of the repo security may exceed remaining fund life).
Government Regulation Risk:
Relevant Government policies/ regulations may change which may have an adverse impact on the performance of the fund.