ICRA Nepal upgrades Fund Management Quality Rating  of NMB Capital Limited to AMC Quality 3+ indicating adequate assurance on management quality

ICRA Nepal has upgraded fund management quality rating (FMQR) of NMB Capital Limited (NMBCAP) from “[ICRANP] AMC Quality 3 (AMC3)” (pronounced ICRA NP Asset Management Company Quality Three) to “[ICRANP] AMC Quality 3+ (AMC3+)” (pronounced ICRA NP Asset Management Company Quality Three plus), indicating adequate assurance on management quality.

ICRA Nepal assigns FMQR on a scale of AMC1 through AMC5, with AMC1 indicating highest assurance on management quality and AMC5 indicating poor assurance on management quality. For the FMQR categories 2, 3 and 4, the sign of + (plus) appended to the symbols indicate their relative position within the FMQR categories concerned. Thus, the FMQR of 2+, 3+ and 4+ are one notch higher than 2, 3, and 4, respectively.

The rating upgradation factors in the healthy performance of the mutual fund schemes managed by the company with established organisational structure in NMB Capital to manage the existing schemes. The upgradation is further supported by ownership and continued technical support of its parent company viz. NMB Bank Limited, a Class ‘A’ commercial bank whose ratings were also upgraded from [ICRANP-IR] BBB+ to [ICRANP-IR] A- (for issuer rating) in Jan-2018.

The upgradation also derives comfort from the NMB Capital’s established track record in Nepalese capital market as merchant banker. The FMQR also factors in satisfactory investor service practices of NMB Capital while adhering to regulatory guidelines and investment policies.

The FMQR is nonetheless constrained by the evolving nature of mutual fund industry, limited track record of NMB Capital as fund manager, developing risk management framework in respect to fund management, absence of separate board level risk management committee, uncertain operating environment amidst volatility in the market, unavailability of hedging tools for investment in the market and low awareness about the mutual fund among general investors.

The first scheme under the company was an equity-oriented growth scheme named NMB Sulav Investment Fund-1 amounting to Rs 75 crore issued in October 2014. This scheme has reported 30% growth in Net Assets Value (NAV) till mid-Mar-18 along with 20% cash dividend distribution in last two years while adhering to regulatory guidelines, risk and investment policy.

The growth rate in NAV remains only slightly lower to 38% growth in stock market index over the same period despite having invested only 60-70% of the corpus in equity market which reflects positively on the investment strategy of NMB Capital.

The second scheme under the company i.e. NMB Hybrid Fund L–I was a hybrid natured scheme amounting to Rs 1 arba with equity investment allocated from 15-55%; rest being towards fixed income earning securities. This scheme has also been able to report NAV of 10.20 as of mid- Mar-18 (against face value of NPR 10) despite 27% decline in market index since its launch in October 2016.

Given the substantial correction in market index in recent periods and the room left for further equity investment (only 28% invested in equity as of mid-Jan-18). Sustainability of the growth and return to investors over longer time frame remains to be seen considering the volatility of evolving Nepalese stock market and its effect on the underlying equity investments of the scheme. Ability of the AMC in maintaining NAV of the schemes in case of further downfall in market remains to be seen.