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Portfolio Management




Portfolio Management

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

Portfolio Management


Fiscal Year 2008-09 can easily be regarded as one of the most challenging years that Pakistan has ever witnessed. Exogenous shocks such as commodity price escalation and the global financial crisis, coupled with domestic political and economic challenges, led Pakistan to the verge of default on its foreign debt obligations. Moreover, parched foreign investment, falling reserves, depreciating local currency and burgeoning external deficits forced the government to seek IMF economic assistance. As part of conditionalities imposed by the IMF, the State Bank was forced to increase the benchmark Discount Rate by 200bps to 15%. KSE100 closed the year at 7162 points, marking 42% decline for FY09 on the back unprecedented global challenges, domestic macro environment instability, fragile political environment and regulatory interventions. For equity markets, the most significant blow came in the form of regulatory intervention such as imposition of floor on stock prices on Aug 27, 2008 for a period of 100 days leading to a major deterioration in investor confidence and raising question marks on the integrity of Pakistans capital markets. With FY08 having presented the country with more than its fair share of challenges, the consensus is that the worst of political and economic turmoil is over. Nevertheless with the current valuations still near their historic troughs, we believe that the security situation has been more than discounted in the share prices. Moreover, the recent equity market rally abroad has pushed Pakistans regional valuation discount to over 55% (from an historic average of 35%)! Hence with dividend yields and multiples being too enticing to overlook, we expect the market to re-rate to reflect the recent positive developments. The magnitude and timeline for the re-rating will however be largely dependent on 1) extent of monetary easing, 2) inter-bank market liquidity and 3) re-introduction of effective leverage tools. Hence while we project continued monetary easing, the main risk to further discount rate cuts is the re-emergence of inflationary pressures, while the absence or presence of inter-bank liquidity will determine how effective the accommodative monetary stance will be in generating economic growth. We believe that under the auspices of the IMF and continued structural vulnerabilities to international price movements, the SBP will remain cautious with regards to the discount rate and make a maximum cut of 100bps in Jul09. Given the general slowdown, especially in the industrial sector, we expect the SBP to cut the discount rate by 350 bps to 10.5% by the end of FY10. In this scenario the importance of the policy rate will be diminished as the spread between market and official rates narrows towards insignificance. As long as liquidity remains constrained, lending rates will not come off in line with the SBPs accommodative stance. The

Portfolio Management

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


Harbor funds are categorized in many funds which includes the sub-classes also.

Harbor Capital Appreciation Fund: Overview:

Harbor Funds - Harbor Capital Appreciation Fund is an open-ended equity mutual fund launched and managed by Harbor Capital Advisors, Inc. It is co-managed by Jennison Associates LLC. The fund invests in the public equity markets of the United States. It invests in the stocks of the companies operating across diversified sectors. The fund primarily invests in the growth stocks of the mid-cap and large-cap companies with a market capitalization of least $1billion. It employs a fundamental analysis with the bottom-up stock picking approach focusing on strong market position, unique marketing competence, strong research and development leading to superior new product flow, and capable and disciplined management to create its portfolio. The fund benchmarks the performance of its portfolio against the Russell 1000 Growth Index and the S&P 500 Index. Harbor Funds - Harbor Capital Appreciation Fund was formed on December 29, 1987 and is domiciled in the United States. Through rigorous research, visits, and meetings with top management, the portfolio manager knows these businesses intimately, and only invests in those that the portfolio manager believes have:

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 Investment Strategy:

Principal Style Characteristics: Mid to large cap growth stocks. The Fund invests primarily in equity securities, principally common and preferred stocks, of U.S. companies with market capitalizations of at least $1 billion at the time of purchase and that the Sub adviser considers to have above average prospects for growth. In selecting stocks for the Funds portfolio, the Sub adviser looks for companies that it believes have the following financial characteristics: Superior absolute and relative earnings growth Superior sales growth, improving sales momentum and high levels of unit growth High or improving profitability Strong balance sheet.

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.

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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.

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.

Principal Style Characteristics: Mid to large cap growth stocks

YTD 1 Year 5 Year 10 Year Since Inception






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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:

Portfolio Management:
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

TOP TEN Holdings

Company Name [Ticker] % of Net Assets


5.7 3.4 3.0

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3.0 2.9 2.9 2.9 2.8 2.7 2.5 31.8

Buying and Selling Fund Shares:

Shareholders may purchase or sell (redeem) Fund shares on any business day (normally any day the New York Stock Exchange is open). Purchase and redemption orders are processed at the net asset value next calculated after an order is received in good order by the Fund. The minimum initial investment amounts are shown below.

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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%.

Equity Portfolio Management Strategy:

These are active investors and they use Active equity portfolio management strategy because it is an attempt by the manager to outperform, on a risk-adjusted basis, a passive benchmark portfolio. A benchmark portfolio is a passive portfolio whose average characteristics match the risk-return objectives of the client. Therefore the goal of the active equity management is to earn a portfolio return that exceeds the return of a passive benchmark portfolio, net of transaction cost, on a risk-adjusted basis. Active equity portfolio management strategy has three general categories: Fundamental Technical Market anomalies and security attributes.

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

Portfolio Management

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).


Harbor use Integrated Asset Allocation strategy, because it separately examines (1) capital market conditions and (2) the investors objectives and constraints. These factors are then combined to establish the portfolio asset mix that offers the best opportunity for meeting the investors needs given the capital market forecast. There are three key steps to integrated asset allocation; first both capital market conditions and the investor-specific objectives and constraints are summarized before the asset mix is determined. The second step is to combine the information from the first step in order to select the single best portfolio for the investor in question. The third stage of the integrated portfolio process occurs after enough time has passed that the optimal portfolios actual performance can be compared with the managers original expectations Annualized Total Returns as of the Month-Ended 07/31/2010:

Portfolio Management

3 Month

YTD 1 Yr Return 3 Yr 5 Yr 10 Yr

Since Incp.

Expense Ratio



Harbor Capital Appreciation Fund

-8.38% -5.38% 8.64% -3.25% 0.43% N/A 5.15% 1.07% 1.07%

Russell 1000 Growth Index

-6.49% -1.06% 13.65% -4.25% 0.80% -4.08% N/A -

S&P 500 Index








2005 2006 2007 2008 2009

Harbor Capital Appreciation Fund

13.51% 1.91% 11.83% -37.36% 41.39%

Russell 1000 Growth Index

5.26% 9.07% 11.81% -38.44% 37.21%

S&P 500 Index






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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.


Harbor Capital Appreciation Fund advanced 12.81% (Institutional Class), 12.69% (Administrative Class), and 12.65% (Investor Class) in the six months ended April 30, 2010, underperforming the Russell 1000 Growth benchmark, which rose 15.79%. Every sector in the benchmark rose, with gains exceeding 25% in the industrials and consumer discretionary sectors. Information technology holdings contributed most to Fund returns, as Baidu,, and Apple posted strong gains. Beijing-based Baidu is the worlds dominant Chinese-language Internet search engine. We believe the Chinese search market is still in its early growth stage and we like Baidus improving execution and exploration of long-term monetization opportunities. Salesforce.coms enterprise cloud computing CRM (customer relationship management) service and platform permit customers to avoid many of the expenses and complexities of traditional enterprise software development and implementation. New offerings are helping the company both expand to new markets and deepen relationships with existing customers. Apple continues to be a prime beneficiary of the digitization of music, photos, and video because of its cuttingedge software for managing, editing, and sharing content. With iPhone, Apple is gaining access to significant growth opportunities in the mobile phone market. Its creativity and innovation in product design and marketing should continue to drive share gains. In the consumer discretionary sector, Amazon.coms strong earnings reflected an ongoing secular shift toward e-commerce as well as market share gains. Disney, with what we consider one of the media sectors most balanced and best positioned portfolios, reported solid financial

Portfolio Management

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.

As of April 30, 2010:

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As the appreciation fund has its sub-classes, we choose an investor class.

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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.


Given easy comparisons against last years weak first half, continued rigorous cost controls, and recovering revenue gains, corporate profit growth looks to be strong in the remainder of calendar 2010. A rebound in consumer spending, particularly for cars and other durable goods, also appears to be gathering momentum, spurred by sales incentives and pent-up demand. Although unemployment remains high, we believe that income growth, too, is in the early stages of recovery, as furloughs end and modest annual salary adjustments resume. Housing starts may have bottomed out, but overall weakness in the housing sector persists. In Europe, sovereign debt issues have caused major concern. Although Greece has been the epicenter of the crisis, Spain, Ireland, Portugal, and Italy face similar issues. In Asia, there are indications that Chinas growth momentum is starting to peak, as the impact of stimulus

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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.


The United Stock Advantage Fund (USF) is the first open-end Equity mutual fund launched by UBL Fund Managers. The investment objective of the fund is to provide investors long-term capital appreciation through investing in a mix of equities that offer both capital gain and dividend yield potential.USF offers Class-A units to its investors with no back-end sales load and a one time nominal front end sales load at the time of purchasing of units.With USF you can now have greater returns with a diversified equity portfolio and reduced risk. We now also offer standing instructions with our Systematic Investment Plan where on a customized basis your USF investment can be increased directly from your Bank Account. USF offers the following features & benefits to its investors:

Minimum investment as low as Rs.500 with subsequent investments of Rs.500 only. Encashment within six working days (earlier for UBL account holders)

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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.

Management Company Rating AM2 by JCR-VIS Credit Rating Company Limited

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

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.

USF Portfolio Allocation June 2010

Equity Portfolio Management Strategy:

These are Passive investors and they use Passive equity portfolio management strategy because it is a long term buy and hold strategy. Usually stocks are purchased so the portfolios returns will track those of an index over time. Because of the goal of tracking an index, this approach to investing is generally referred as indexing. Passive equity portfolio management attempts to design a portfolio to replicate the performance of a specific index.

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.


UBL use Strategic Asset Allocation strategy, because it is used to determine the long term policy asset weights in a portfolio. Typically, long term average asset return, risk, and covariances are used as estimates of future capital market results. Efficient frontiers are generated using this historical return information, and the investor decides which asset mix is appropriate for his/her needs during the planning horizon.

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

Portfolio Management

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.

Portfolio Management

Performance outlook and review as of June 2010:

During June 10, USF returned -0.43% versus KSE100-index which was up by 4.24%.The Fund size reduced by 3.70% during the month. The month- end exposure in local equities and international investments stood at 85% and 13% (of net assets) respectively, while the cash position stood at 2% (of the net assets). The positive return in KSE-100 index was driven by foreign inflows in selective index heavy scripts like OGDC-the broader market stayed subdued as investors chose to stay on the sidelines until clarity on the key regularity issue of Capital Gains Tax (CGT) is available. The modalities of CGT implementation are still marred by uncertainty which is likely to keep the market range-bound with low trading volumes. And clarity concessions on the CGT front and any developments regarding the margin financing product can boost investor sentiment. We expect CGT to be beneficial for the local equity market in the long-term as it will discourage speculation and encourage investors to invest in quality companies with long-term investment horizon. The Fund Manager continues to remain positive on the chemicals, Electricity and Oil and Gas sectors. We maintain our principled approach of accumulating fundamentally strong companies at attractive price levels-the disciplined approach will yield returns for the funds investors as stock prices start converging back on fundamentals. The upcoming June-end result season will help bring quality bring companies in our portfolio into limelight. During June10, the international markets suffered as European sovereign rating downgrades wrecked havoc on investor psyche. Considering increase in risk perception of international investments, we have reduced our exposure to 12.7% from 20% (of net assets) last month. Our international portfolio posted a return -1.49% against MSCI All-country World Index return of 2.65%. The Funds board of directors has announced a final payout of PKR 48.44/unit for the period ending 30th June 2010.

Portfolio Management

Performance of USF with KSE 100:

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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.

Harbor Capital Appreciation Fund Russell 1000 Growth Index

Number of Holdings Weighted Avg. Market Cap ($Mil) Median Market Cap ($Mil)


631 68,262.85 4,571.66

60,596.00 24,672.28

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Harbor Capital Appreciation Fund

Russell 1000 Growth Index

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

4.58 19.21 16.48 19.20 15.45 18.82 0.94 0.88

4.97 17.07 15.13 14.08 13.14 22.86 -

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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Standard Deviation Sharpe Ratio Beta Alpha Treynor Ratio Jenson

Harbor Fund 14.58% -0.19 1.12 0.04% -0.02 0.01

Russell 1000 Growth Index 11.78% -0.24 1 -0.03 0.01

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.

Portfolio Management

120.00% 100.00% 80.00% 60.00% 40.00% 20.00% 0.00% -20.00% -40.00% Harbor Fund Russell 1000 Growth Index


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

Portfolio Management

Standard Deviation Sharpe Ratio Beta Alpha Treynor Ratio Jenson

USF 18.37% 0.66 0.91 -9.45% 2.03 1.80

KSE-100 19.31% 1.24 1 0.039167 2.79

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.

Portfolio Management

500.00% 400.00% 300.00% 200.00% KSE-100 100.00% 0.00% -100.00% USF


Pakistan's domestic economy was shielded from the global collapse due to its lack of dependence on international demand. However, the domestic economic problems led to a fiscal crisis in the 1HFY09. Trade deficit and Current Account Deficit rose by 20%YoY and 44%YoY during the first half of the year, putting immense pressure on foreign exchange reserves which declined to USD6bn - leading to a sharp depreciation in PkR parity versus USD to a weakest level of PkR84.4/USD. Despite relative improvement in 2HFY09, the economic growth stayed under pressure due to tight monetary policy. Fiscal Year 2009 was a very volatile period for both International and domestic capital markets. The KSE100- index declined by 42% during the year from 12,289 at the beginning of the year to 7,162 at year-end. The daily average trading volumes during the year also declined to 75mn shares from 168mn shares last year. The both international and domestic fund provides great opportunities to investors. Comparing the risk profile of both the funds international fund is less risky than domestic fund because Pakistani economy is more volatile than international market. The Average Sharpe ratio or the risk premium factor per unit of risk in an investment for the USF funds is positively reflecting the fact that both investments have lesser risk than the market portfolio. On the basis of relative valuation, KSE is at a substantial discount to regional and international markets. While relative valuations signals Pakistani equities to deliver positive performance in 2010, for the market to show substantial recovery, the economy needs to come out of its somber state and critically GDP growth should pick up pace in continuing fall in domestic interest rates

Portfolio Management

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: