Portfolio Management Report
Portfolio Management Report
Portfolio Management Report
COMPARISION BETWEEN PORTFOLIO MANAGEMENT PRACTICES OF HARBOR FUND & UBL FUND
SUBMITTED BY:
ANUM QAISER 7138 AMNA AMJAD 7478 SAMRA SHAH 7498 MAHNOOR AHMED 6979
Portfolio Management
TABLE OF CONTENT
A glance of Pakistans economy International fund HARBOR CAPITAL APPRECIATION FUND
Overview of the fund Investment objective Principal investment strategy Risks Performance Portfolio management Equity portfolio management strategy Returns of the fund Performance of funds with its benchmark Outlook & strategy Domestic fund UBL FUND MANAGERS (USF) Overview of the fund Investment objective Risk Portfolio details Equity portfolio management strategy Performance of the fund Performance, outlook and review as of June 2010 Performance of USF with KSE 100 Comparison between USF and Harbor capital appreciation fund Conclusion and analysis
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inflow of dollars and budgetary discipline will be the necessary pre-requisites for a successful monetary and fiscal stimulus. With the macro situation, energy deficit and consumer sentiment still far from comfortable levels; we highlight the increasing need to focus on fundamentally sound sectors and limit exposure to companies with pricing power, low leverage, sustainable cash flows, bottom line growth and quality corporate governance.
Portfolio Management
INTERNATIONAL FUND
Harbor funds are categorized in many funds which includes the sub-classes also.
Strong balance sheets and earnings performance Sales momentum and growth outlook Highly profitability history or potential Unique market position A capable and committed management team
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The Fund stays fully invested in stocks and does not try to time the market, but instead works toward steady investment growth.
Investment objective:
The Fund seeks long-term growth of capital. The Fund stays fully invested in stocks and does not try to time the market, but instead works toward steady investment growth.
Principal Risks:
There is no guarantee that the investment objective of the Fund will be achieved. An investment in the Fund is not a bank deposit and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Stocks fluctuate in price and the value of your investment in the Fund may go down. This means that you could lose money on your investment in the Fund or the Fund may not perform as well as other possible investments. Principal risks include: Market risk: The individual stocks in which the Fund has invested or overall stock markets in which they trade may decline in value. Additionally, an adverse event, such as an unfavorable earnings report, may depress the value of a particular companys stock. Growth style risk: Over time, a growth oriented investing style may go in and out of favor, which may cause the Fund to sometimes underperform other equity funds that use different investing styles.
Portfolio Management
Selection risk: The Subadvisers judgment about the attractiveness, value and potential appreciation of a particular companys stock could be incorrect. Large cap risk: Large cap stocks may fall out of favor relative to small or mid cap stocks, which may cause the Fund to underperform other equity funds that focus on small or mid cap stocks. Mid cap risk: The Funds performance may be more volatile because it invests in mid cap stocks. Mid cap companies may have limited product lines, market and financial resources. They are usually less stable in price and less liquid than those of larger, more established companies. Additionally, mid cap stocks may fall out of favor relative to small or large cap stocks, which may cause the Fund to underperform other equity funds that focus on small or large cap stocks. Foreign securities risk: Prices of the Funds foreign securities holdings may go down because of unfavorable changes in foreign currency exchange rates, foreign government actions, political instability or the more limited availability of accurate information about foreign issuers. Also, a decline in the value of foreign currencies relative to the U.S. dollar may reduce the unhedged value of securities denominated in those currencies. Foreign securities are sometimes less liquid and harder to value than securities of U.S. issuers. These risks are more significant for issuers in emerging market countries.
Risk:
There is no guarantee that the investment objective of the Fund will be achieved. An investment in the Fund is not a bank deposit and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Stocks fluctuate in price and the value of your investment in the Fund may go down. This means that you could lose money on your investment in the Fund or the Fund may not perform as well as other possible investments.
Current performance may be higher or lower than the performance data shown. Investment returns and the value of an investment will fluctuate, and an investor's shares, when sold, may be worth more or less than their original cost.
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Dividend distribution:
Each Fund expects to distribute all or substantially all of its net investment income and realized capital gains, if any, each year. Each Fund declares and pays any dividends from net investment income and capital gains at least annually in December. Harbor Large Cap Value Fund declares and pays any dividend semi-annually. Each Fund may also pay dividends and capital gain distributions at other times if necessary to avoid federal income or excise tax. You may receive dividend and capital gain distributions in cash or reinvest them. Dividend and capital gain distributions will be reinvested in additional shares of the same Fund unless you elect otherwise.
Performance:
AS OF QUARTER-ENDED 06/30/2010
YTD 1 Year 5 Year 10 Year Since Inception
-10.83%
10.21%
0.42%
N/A
4.39%
Portfolio Management
The harbor capital appreciation fund comprises of 3 sub-classes that is investor class, institutional class and administrative class. The Funds average annual total returns for certain time periods compared to the returns of a broad-based securities index. The Russell 1000 Growth Index is an unmanaged index generally representative of the U.S. market for larger capitalization growth stocks. The S&P 500 Index is an unmanaged index generally representative of the U.S. stock market.
The Funds best and worst calendar quarters during this time period were:
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Investment Adviser : Harbor Capital Advisors, Inc. Harbor Capital Advisors employs a manager-of-managers approach by selecting and overseeing subadvisers responsible for the day-to-day management of the assets of the Funds. Pursuant to an exemptive order granted by the SEC. Harbor Capital Advisors, subject to the approval of Harbor Funds Board of Trustees, is able to select subadvisers and to enter into new or amended subadvisory agreements without obtaining shareholder approval. Subadviser: Jennison Associates LLC. Jennison Associates LLC has subadvised the Fund since 1990. Portfolio Manager: Spiros Segalas. Jennison Associates LLC
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WALT DISNEY COMPANY [DIS] HEWLETT-PACKARD CO. [HPQ] GOOGLE INC. [GOOG] OCCIDENTAL PETROLEUM CORPORATION [OXY] SCHLUMBERGER LTD. [SLB] VISA INC. [V] MASTERCARD INC. [MA] % OF TOTAL HOLDINGS:
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Tax Information:
The Fund expects to distribute any net investment income and any net realized capital gains annually in December. The Funds distributions are generally taxable to you as ordinary income, capital gains, or a combination of the two, unless you are investing through an IRA, 401(k) or other tax-advantaged investment plan.
Portfolio Turnover:
The Fund pays transaction costs, such as commissions, when it buys and sells securities (or turns over its portfolio). A higher portfolio turnover may indicate higher transaction costs and may result in higher taxes when Fund shares are held in a taxable account. The Funds portfolio turnover rate in the most recent fiscal year was 72%.
Harbor use Anomalies and attributes strategies. The Price fundamental strategies just could either be based on pure price trend analysis or supported by the underlying economic
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fundamentals of the company. An earnings momentum strategy is a somewhat formal active portfolio approach that purchases and holds stocks that have accelerating earnings and sells stocks with disappointing earrings. The notion behind this strategy is that, ultimately, a companys share price will follow the direction of its earnings, which is the bottom-line measure of the firms economic success. Therefore Harbor seems to use this strategy. A more promising approach to active anomaly investing involves forming portfolio based on various characteristics of the companies themselves. Two such characteristics we have seen to matter in the stocks market are the total capitalization of the firms outstanding equity (i.e., firm size) and the financial position of the firm, as indicated by its various financial ratios (e.g., P/E, P/BV).
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3 Month
YTD 1 Yr Return 3 Yr 5 Yr 10 Yr
Since Incp.
Expense Ratio
Net
Gross
-6.69%
-0.11%
13.84%
-6.78%
-0.17%
-0.76%
N/A
AS OF YEAR-ENDED 12/31:
2005 2006 2007 2008 2009
4.91%
15.79%
5.49%
-37.00%
26.46%
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The Harbor Funds performance shown assumes the reinvestment of dividend and capital gain distributions and is net of management fees and expenses. Returns for periods less than one year are not annualized. From time to time, certain fees and/or expenses have been voluntarily waived, which has resulted in higher returns. Without these waivers, the returns would have been lower. Voluntary waivers may be applied or discontinued at any time without notice. The Russell 1000 Growth Index is an unmanaged index generally representative of the U.S. market for larger capitalization growth stocks. This unmanaged index does not reflect fees and expenses and is not available for direct investment. The Russell 1000 Growth Index and Russell are trademarks of Russell Investments. The S&P 500 Index is an unmanaged index generally representative of the U.S. stock market. This unmanaged index does not reflect fees and expenses and is not available for direct investment.
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results, as well. Marriott International climbed on improving fundamentals in the lodging sector. Health care holdings detracted from return relative to the benchmark. Multinational diversified health care company Baxter International fell after lowering its 2010 financial outlook, citing recently-passed health care legislation and weakness in its blood plasma products business.
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The graph compares a $10,000 investment in the Fund with the performance of the Russell 1000 Growth Index and the S&P 500 Index. The Funds performance includes the reinvestment of all dividend and capital gain distributions. The graph shows the variation in the investment held by harbor with respect to its benchmark.
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spending wears off and Beijing policymakers take steps to tighten lending and bank reserve requirements in light of rapidly rising real estate activity and prices. The revenue gains of companies held in our portfolio have continued to accelerate, and we remain confident that our holdings will achieve better-than-average revenue growth for calendar 2010. Accommodative monetary policy is providing an additional tailwind for equity prices. We would view the eventual (and approaching) return to higher interest rates as another sign of overall economic strength.
Portfolio Management
UBL Fund Managers is a wholly owned subsidiary of United Bank Limited, making it the first Asset Management Company to be launched by a bank in Pakistan. UBL Fund Managers has been operating since the year 2002 and ranks amongst one of the leading asset management companies in Pakistan. UBL Fund Managers has been awarded a Management Quality Rating of AM2 (High Management Quality) by JCR-VIS Credit Rating Company Limited.
Minimum investment as low as Rs.500 with subsequent investments of Rs.500 only. Encashment within six working days (earlier for UBL account holders)
Portfolio Management
With our Systematic Investment Plan your USF investment can be increased directly from your Bank Account on a customized basis Tax free investment under Government regulations Tax rebate benefit up to Rs. 60,000 for individual investors Can be used as collateral for availing bank financing Exemption from Zakat on submission of Affidavit
United Stock Advantage Fund (USF) is managed by UBL Fund Managers Limited, a 100% own subsidiary of United Bank Limited (UBL)
United Stock Advantage Fund (USF) Inception Date Sales Load Minimum Investment Rating Fund Size Trustee Auditor July 27, 2006 2.5% front-end sales load Rs 500/4 Star (JCR-VIS) Rs 1,042 Million as of June 2010 Central Depository Company of Pakistan Ltd KPMG-Taseer Hadi & Co.
Investment Objective:
USF is an open end equity fund, investing primarily in equities listed on the KSE. The funds seeks to maximize total returns and outperform its benchmark by investing in a combination of securities offering long term, capital gains and dividend yield potential.
Portfolio Management
Risk:
The Funds objective in managing risks is the creation and protection of Unit holders value. Risk is inherent in the Funds activities, but it is managed through a process of ongoing identification, measurement and monitoring, subject to risk limits and other controls. The process of risk management is critical to the Funds continuing profitability. Monitoring and controlling risks is primarily set up to be performed based on limits established by the internal controls set on different activities of the fund by the Board of Directors through specific directives and constitutive documents. These controls and limits reflect the business strategy and market environment of the Fund as well as the level of the risk that the Fund is willing to accept. In addition, the Fund monitors and measures the overall risk bearing capacity in relation to the aggregate risk exposure across all risks type and activities. The policy of the Fund is to invest in a diversified portfolio of shares of listed companies, continuous funding system (CFS), spread transactions and other money market instruments. The Fund is exposed to market risk (which includes currency risk, interest rate risk and price risk), credit risk and liquidity risk arising from the financial instruments it holds. UNIT HOLDERS' FUND RISK MANAGEMENT-(Capital Risk) Capital risk is the risk that the capital of the fund changes significantly and causes adverse effects on the Funds existence as going concern. The capital of the Fund is represented by the net assets attributable to unit holders. The amount of net assets attributable to unit holders can change significantly on a daily basis as the Fund is subject to daily issuance and redemptions at the discretion of unit holders. The Funds objective when managing capital is to safeguard the Funds ability to continue as a going concern in order to provide returns for unit holders and benefits for other stakeholders and to maintain a strong capital base to support the development of the investment activities of the Fund.
Portfolio details:
USF is an open ended Equity Fund that will aim to provide investors long-term capital appreciation by investing primarily in a mix of equities that offer capital gains and dividend yield potential. This blend of equities will help to maximize the expected returns for given levels of risk tolerance while enhancing portfolio stability. The following categories of stocks are maintained in USFs portfolio: Value Stocks: Such stocks are of those companies, which are undervalued, and their share value is higher than the market quoted price of such shares.
Portfolio Management
Growth Stocks: Such stocks are of those companies with the greatest potential for long-term growth and are expected to see high growth in sales and profits in the coming few years. Dividend Stocks: Such stocks are of those companies, which provide above average dividend yields, thereby providing a regular income stream to the Fund. The portfolio of USF is attractive for any investor looking for a broadly diversified investment with built-in rebalancing.
Portfolio Management
Therefore the goal for the passive portfolio is to match the returns to the index as closely as possible. There are three basic techniques for constructing a passive index portfolio: Full replication Sampling Quadratic optimization or programming
UBL use the second technique, sampling, because it addresses the problem of numerous stock issues. Similarly with sampling, portfolio manager only need to buy a representative sample of stocks that comprise the benchmark index. Stocks with larger index weights are purchased according to their weight in the index; smaller issues are purchased so their aggregate characteristics approximate the underlining benchmark. Furthermore the reinvestment of dividend of cash flows is less problematic because fewer securities need to be purchased to rebalance the portfolio.
Performance:
USF Performance (June 30, 2010) USF-June 10' KSE 100 Index-Apr 10' USF-Since Inception ( August 04, 2006) KSE 100 Since USF's Inception USF (Annualized Tax Free Returns) -0.43% 4.24% -0.04% -8.86%
USF is an equity fund seeking to maximize total returns and outperform the benchmark KSE100index by following a value-investment strategy combined with a few cherry-picked growth stocks. The Fund invests in companies with strong fundamentals, providing investors an opportunity to participate in broad-based growth of multiple sectors. Allocation of investment in equities is strictly based on top down fundamental research methods which incorporates
Portfolio Management
developments on economic front with the impact on specific sectors and companies. The Fund's activity during the year was mainly focused on optimizing the Fund's strategy to the rapidly changing economic / business environment as well as the volatile developments in the local equity market - utmost attention paid to efficient servicing of redemptions. During the 1QFY09, the Fund Manager reduced equity exposure to 69% of Net Assets which was gradually increased to 85% by the end of the quarter as corporate results stayed strong, showing almost no correlation with the crisis engulfing the global markets. However, the situation took a sharp turn for the worse in FY09 when over-leveraging issues spiked the systematic risk and the market was shut-down for 110 days from August-end to mid-December '08. Decline in equity prices and redemptions resulted in the Fund's Assets under Management declining from PkR2.5bn to PkR1.1bn during FY09. The local equity market entered recovery phase in 2HFY09 and the redemption pressure tapered off.
The Fund Manager used this opportunity to accumulate quality blue chip companies trading at discounted valuations while liquidating weaker holdings. Oil and Gas (Exploration & Production), Fertilizer and Commercial banking sectors were the heaviest sectors in the portfolio throughout the year as they were poised to weather the storm with least damage. Holdings were mostly limited to liquid blue chip companies with cash-rich balance sheets and healthy growth potential. Holdings in Telecom, Cement and Oil Marketing sectors were also built during the year to benefit from opportunities available in these sectors. The Fund also invested in International markets during early part of the year through mutual funds managed by a respected International fund management group, and with major exposure in emerging markets. The investments suffered during the global equity market crisis - however, the strategy of investing in emerging markets proved its worth as emerging markets led the recovery in International equity markets. The Fund size stood at PkR1.65bn at the end of FY09 with 90% of the net assets invested in local equities while International investments made up 3% of the portfolio. The Fund is in a
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prime position to benefit from an expected recovery in equities world-wide. A cash allocation of 7% is being held aside for capturing opportunities that might arise in the equity market.
FINANCIAL EXPENSE: During the year, the Fund made borrowings from the Management Company (a related party) under repurchase agreement for the purpose of meeting redemption requests. The borrowing was made at a rate of 16.4% per annum, with maturity of three months from the date of issue. TAXATION: The Fund is exempt from Income Tax as per clause (99) of Part 1 to the Second Schedule of the Income Tax Ordinance, 2001 subject to the condition that not less than 90% of the accounting income for the year ,as reduced by Capital gains (whether realised or unrealised), is distributed amongst the Unit holders. The Fund intends to avail the tax exemption by distibuting atleast ninety percent of its accounting income as reduced by capital gains, whether realised or unrealised, to its unit holders every year.
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USF is a sound fund in terms of risk and returns. It performed well in the year 2008-2009 by taking wise steps of increasing and reducing the investments in the selected sectors whenever required. It also is a well-diversified portfolio with investments in oil and gas exploration, chemicals, banking sector and others.
COMPARISION BETWEEN USF AND HARBOR CAPITAL APPRECIATION FUND: HARBOR CAPITAL APPRECIATION FUND
PORTFOLIO CHARACTERISTICS (AS OF QUARTER-ENDED 06/30/2010)
Harbor Capital Appreciation Fund Russell 1000 Growth Index
Number of Holdings Weighted Avg. Market Cap ($Mil) Median Market Cap ($Mil)
66
60,596.00 24,672.28
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Price/Book Ratio Adj. Trailing P/E Ratio Forecasted P/E Ratio Earnings Growth Rate (%) Proj. Earnings Growth Rate (%) Return on Equity (%) Beta vs. Russell 1000 Index Beta vs. Russell 3000 Index
The harbor capital appreciation fund performed far better than Russell 1000. We calculated the statistical analysis from July 2009- June 2010.
Index Name: Russell 1000 Growth Index IndexStyle Month Large-Cap Indexes 9-Jul Large-Cap Indexes 9-Aug Large-Cap Indexes 9-Sep Large-Cap Indexes 9-Oct Large-Cap Indexes 9-Nov Large-Cap Indexes 9-Dec Large-Cap Indexes 10-Jan Large-Cap Indexes 10-Feb Large-Cap Indexes 10-Mar Large-Cap Indexes 10-Apr Large-Cap Indexes 10-May Large-Cap Indexes 10-Jun
Return 7.1 2.07 4.25 -1.35 6.14 3.09 -4.36 3.44 5.78 1.12 -7.63 -5.51
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Beta: Beta is also referred to as financial elasticity or correlated relative volatility, and can be referred to as a measure of the sensitivity of the asset's returns to market returns, its non-diversifiable risk, its systematic risk, or market risk. On an individual asset level, measuring beta can give clues to volatility and liquidity in the marketplace. In fund management, measuring beta is thought to separate a manager's skill from his or her willingness to take risk. Harbors beta is positive and it is above 1 as that the fund has higher normalized systematic risk than the market. Standard deviation: As the data shows the volatility of harbor funds is more than Russell 1000, which means that its returns are more dispersed than its mean because the Standard Deviation is a measure of dispersion from mean. Sharpe ratio: The Sharpe ratio tells us whether a portfolio's returns are due to smart investment decisions or a result of excess risk. This measurement is very useful because although one portfolio or fund can reap higher returns than its peers, it is only a good investment if those higher returns do not come with too much additional risk. The greater a portfolio's Sharpe ratio, the better its risk-adjusted performance has been. A negative Sharpe ratio indicates that a risk-less asset would perform better than the security being analyzed. The numerator in its formula is the portfolios risk premium. -0.19 includes the total risk of the portfolio by including standard deviation of returns. Thus -0.19 indicates the risk premium return earned per unit of total risk.
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Treynor Ratio: T-ratio applies to all investors, irrespective of their risk preferences. Treynor predicted that rational and risk-averse investors would prefer portfolio possibility lines with larger slopes as that would place them on a higher indifference curve. Harbor Fund illustrates the example of a very poor performance portfolio with a negative t-ratio of 0.02, calculated for a period of 12 months from July 2009 to June 2010. The reason is that Harbor Fund produced a lower average rate of return compared to the treasure bill rate of return, for the period under consideration. Thus, such performance is most likely to be plotted below the Security Market Line (SML). In simple words, T-ratio indicates harbor funds risk premium per unit of risk. Since Harbor Funds T value (-0.02) is slightly above that of Russell growth index of -0.03, we say the former has performed better than the market in the period under consideration. Jenson Ratio: The Alpha indicates whether the portfolio manager is superior or inferior in market timing or /and stock selection. A positive alpha means positive residuals (actual rate of return> expected rate of return) and therefore, a superior manager and vice versa. The alpha for Harbor Funds for a period of 12 months came out to be 0.04 percent which is significantly close to zero and thus indicating poor ability of the manager to derive above-average returns adjusted for risk. In other words, the manager seems incapable to predict appropriate market turns, or selecting undervalued issues for portfolio, or both.
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120.00% 100.00% 80.00% 60.00% 40.00% 20.00% 0.00% -20.00% -40.00% Harbor Fund Russell 1000 Growth Index
USF FUND
Index Name:Kse-100 Month 9-Jul 9-Aug 9-Sep 9-Oct 9-Nov 9-Dec 10-Jan 10-Feb 10-Mar 10-Apr 10-May 10-Jun
Return 7.88 12.29 7.76 -2.04 0.52 1.96 2.65 0.45 5.87 2.45 -10.56 4.24
USF(UBL) Return 8.83 10.36 9.35 -2.15 1.7 0.89 0.97 -0.08 4.34 0.41 -10.57 -0.43
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Beta: The beta of USF is positive because in that time period the USF gives good returns. The beta is the systematic risk of the market and it tells us the volatility in the market when compared with its benchmark. Standard Deviation: Standard Deviation is a measure of dispersion from mean. The standard deviation of USF is 18.37%. Sharpe ratio: The sharpe ratio is positive i-e, it has a better risk-adjusted performance then a riskless security. Sharpe ratio for USF and kse-100 turned out to be 0.66 and 1.24, respectively. Portfolio for USF will be seen to be plotted below the CML, indicating inferior risk-adjusted performance and this may be due to lower standard deviation for USF comparatively. Treynor ratio: T-ratio of 2.03 of USF compared to that of KSE-100 of 0.04 indicates a larger slope and better portfolio for all investors. This maybe due to the difference in risk premium. But we cannot call it an appropriate equity performance measure because it assumes a completely diversified portfolio, which means that systematic risk is the relevant risk measure. USF beat market portfolio and in terms of SML, it will be plotted above the line. Jenson Ratio: The alpha for USF showed a value of negative 0.0945 indicating that manager generated a return of -9.45 percent per period, lesser than was expected during the 12 months under consideration given the portfolios risk level. Manager did not show the ability to generate above-average returns, casting doubts over his forecasting ability. In short, portfolio manager can be said be to inferior in market timing and/or stock selection.
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and global economic recovery should help in improving the prospects of relatively better GDP growth in the second half of the current fiscal year. Most importantly, the government needs to bring the domestic security situation under control as prolonged conflict and war like situation in the tribal belt will make it extremely difficult to attract any sizeable investments inflows in the country.
Hence due to the riskiness and volatility in Pakistani economy a better portfolio may be recommended as: