Investment Policy Statement (IPS) for DC Provident Fund

(Defined Contribution Fund)

Effective as of 27 February 2018

This Investment Policy Statement (IPS) shall form an integral part of the Non-Discretionary
Investment Advisory Agreement for Fixed Income portfolio dated 1-May-13 and Discretionary
Investment Advisory Agreement for Stocks portfolio dated 27-Dec-17. Capitalized terms used
hereunder shall have the same meaning ascribed to them under the Non-Discretionary Investment
Advisory Agreement and Discretionary Investment Advisory Agreement.

1. Investment objectives:

The investment objective is to make conservative investments that can provide both steady returns
and protect against inflation in the long term. The Trustees recognize that higher returns and greater
protection against inflation necessitate higher allocation to Stocks. However, the Trustees intend to
balance volatility and returns, and have approved allocation ranges for each asset class as defined in
Annex A.

The Trustees acknowledge and warrant that they have sufficient financial and investment expertise
for accepting or rejecting the investment advice of the Investment Advisor. Further, the Trustees
acknowledge and warrant that they have thoroughly understood the risk of the asset allocation
framework stated in this document and have reviewed and understood the potential loss
sensitivities of different asset allocation decisions.

2. Asset allocation:

The approved asset allocation ranges are defined in Annex A.

All specific securities included in the above asset classes must be in compliance with governing rules,
regulations and laws.

GoP securities include Fixed Income securities issued by the Government of Pakistan (GoP) or
securities issued by other obligors where the principal and coupon payment is guaranteed by the
GoP. GoP securities also include deposits with scheduled banks.

The asset class weights and sub-sector limits as per Annex A are applicable at the time of making
investment decisions and will not trigger automatic rebalancing.

3. Stocks concentration:

The Stocks portfolio would consist of at least 8 Stocks with maximum exposure to any three (3)
Stocks not exceeding 15 % (fifteen percent) each of the Net Asset Value (NAV) of the Stocks
portfolio. The exposure limit per security will be calculated by the Investment Advisor at the time of
the investment decision and will not trigger automatic rebalancing. Exposure to any sector should
not exceed one-third of target Stocks NAV.

4. Monitoring of illiquid Stocks:

One-third of the Fund’s Stocks NAV can be invested in the illiquid Stocks.

Illiquidity for a particular stock will be determined by number of “trade days” and Stocks exceeding
39 trade days will be qualified as “illiquid” for this purpose. Trade days for the Provident Fund are
determined based on the size of target Stocks NAV of the Fund compared to total target Stocks NAV
of retirement funds in the overall pool where the aggregate trade days will be 90 days.

Signature of Trustee Signature of Trustee

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 Investment Policy Statement (IPS) for DC Provident Fund
(Defined Contribution Fund)
Effective as of 27 February 2018

Trade days is defined as the number of days required to divest the position in stock assuming the
Client can divest up to one-third of the average daily trading volume based on last 750 trading days.

The trading volume is subject to market sentiment and is highly volatile. Compliance with this clause
will therefore be on best effort basis.

5. Fixed Income non-GoP security concentration:

The exposure to any one entity should not exceed 5 % of the NAV of the Fund. The exposure limit per
security will be calculated by the Investment Advisor at the time of the investment decision and will
not trigger automatic rebalancing. This exposure is in addition to the exposure taken on the Stocks
of the issuer where applicable.

6. Investor information:

Attached hereto as Annex C;

Notwithstanding anything contained in Annex C hereto, the Client / Trustees acknowledge and agree
that this Investment Policy Statement has been prepared under the instructions of the Client and
reflects the Client’s aims and objectives.

7. Portfolio monitoring:

The monthly report will provide data on asset class, sector and securities as a percentage of NAV.

The rebalancing will be made on a quarterly basis and adjustments / specific actions may be
recommended if the asset class or security weight exceeds 30 % of the limits set in the IPS, except
for Cash which is residual in nature.

8. Reinvestment:

The Investment Advisor would monitor the inflows from coupon payments, dividends and interest
income on deposits. These inflows would be invested in accordance with the asset allocation ranges as
defined in Annex A.

9. Significant disclosures:

The Investment Advisor will specifically highlight the following items when giving advice to the
Client:

I. An investment which would account for more than 5 % of issued capital of any one company;
II. An investment into any agreement binding the investment portfolio to hold a specific asset for a
predetermined time period.

10. Execution of purchases and sales:

The Investment Advisor will directly instruct the brokers on the approved list of the Client to buy and sell
permissible investments. The list of approved brokers is provided in Annex D of the investment
agreement.

Signature of Trustee Signature of Trustee

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 Investment Policy Statement (IPS) for DC Provident Fund
(Defined Contribution Fund)
Effective as of 27 February 2018

11. Review and revision of the IPS:

This IPS should be reviewed, and if necessary, revised on an annual basis.

Signature of Trustee Signature of Trustee

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 Investment Policy Statement (IPS) for DC Provident Fund
(Defined Contribution Fund)
Effective as of 27 February 2018

Annex A

1. Asset allocation ranges:

The Investment Advisor (IA) will manage the Fund portfolio according to the Model Portfolio which
will be determined by its Investment Committee (IC). The Model Portfolio may vary from time to
time, but will fall within the approved asset allocation ranges mentioned in the table below:

Asset class Range

1. Cash1 (Fixed Income securities with maturity of less 5%
than one year)
2. MTBs (Fixed Income securities with maturity of 20 % to 60 %
more than 1 year but less than 5 years)
a. TFCs (Non GoP securities) 0 % to 10 %
3. LTBs (Fixed Income securities of GoP with maturity 20 % to 60 %
of more than 5 years)
a. TFCs (Non GoP securities) 0 % to 10 %
4. Stocks2 Up to 30 %

1
Allocation to Cash may vary widely and is residual in nature.
2Unallocated cash may be invested in Fixed Income securities with maturity of less than one year.

Note: The TFCs (Non-GoP securities) have been incorporated on the Trustees’ request. These TFCs
were not part of the original recommendation provided by the IA.

It is the Trustees’ responsibility to provide liquidity requirements of the Fund for at least the next
one year (if not more). Any subsequent changes in the liquidity requirements should be
communicated to IA without any delay. In case of unavailability of this data from the Trustees, IA will
implement its Model Portfolio.

2. Expected return:

The per annum nominal returns for Cash, MTBs, LTBs and Stocks are 6.03 %, 7.35 %, 8.14 % and
11.83 %, respectively. The overall Portfolio return would be ‘relatively’ more reliable than any
specific asset class return. The Trustees expect to generate a gross Expected Return (ER) over seven
to ten years in the range of 7.91 % to 9.66 % and year to year returns can vary significantly. This
range reflects a 10 % upper and lower limit of the midpoint 8.79 %, where the midpoint is calculated
by multiplying the nominal asset class returns with the Model Portfolio allocation of the respective
asset classes.

Note: This Annex A can be changed and additional annexes added without any amendment in the
other parts of the IPS at the sole discretion of the Trustees. The IPS and all annexes will be valid
and binding on continual basis and will not require renewal or revision when the investment
agreement is renewed and / or revised.

Signature of Trustee Signature of Trustee

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 Investment Policy Statement (IPS) for DC Provident Fund
(Defined Contribution Fund)
Effective as of 27 February 2018

Annex B

1. Liquidity constraints:

The liquidity requirements of the Fund have not been received.

2. Tax constraints:

The Fund is exempt from all taxes as per clause 47(B) of Part IV of the Second Schedule to the
Income Tax Ordinance, 2001 provided that a valid tax-exemption certificate is obtained from the
FBR.

3. Performance benchmark:

IA shall attend performance review meetings at least semi-annually or in any frequency as agreed
with the Trustees to discuss investment performance against the benchmarks and the investment
outlook of different securities in the investment portfolio.

The Trustees realize that KSE 100 index is not a comparable benchmark for Stocks as retirement
funds can only buy permissible shares as per Section 218 of Companies Act 2017. However, IA will
provide KSE 100 returns for comparable tenor in the performance review.

The Trustees also realize that there is no Fixed Income benchmark available for comparing Fixed
Income returns of the Fund. However, IA will provide market yields of MTBs and LTBs in the
performance review.

4. Time horizon:

The Fund has long investment horizon.

5. Risk tolerance:

Due to long time horizon, the Fund has high risk capacity. However, considering the approved asset
allocation, the risk classification of the Fund is ‘moderate risk’. The tentative asset allocation ranges
for each risk category is given in the table below. Barring unique circumstances, the exact asset
allocation will fall more or less within the range assigned to the respective category.
Moderate
Conservative Low risk Aggressive Highly aggressive
risk
Portfolio Portfolio Portfolio Portfolio
Portfolio
Asset class Range Range Range Range Range
Cash (< 1 year) 15 % – 20 % 10 % – 15 % 10 % – 15 % 5 % – 10 % 5 % – 10 %
GoP MTBs (1 - 5 years) 20 % – 60 % 20 % – 60 % 20 % – 60 % 20 % – 60 % 20 % – 60 %
GoP LTBs (5 years +) 20 % – 60 % 20 % – 60 % 20 % – 60 % 20 % – 60 % 20 % – 60 %
Stocks 0 – 10 % 10 % – 20 % 20 % – 30 % 30 % – 40 % More than 40 %
Non-GoP FI 0% Up to 10 % Up to 15 % Up to 20 % Up to 30 %

The asset allocation must conform to the SECP guidelines applicable at the time the investment
decision is made.

Signature of Trustee Signature of Trustee

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 Investment Policy Statement (IPS) for DC Provident Fund
(Defined Contribution Fund)
Effective as of 27 February 2018

Note: This Annex can be changed and additional annexes can be added without any amendment in
the other parts of the IPS at the sole discretion of the Trustees. The IPS and all annexes will be
valid and binding on continual basis and will not require renewal or revision when the investment
agreement is renewed and / or revised.

Signature of Trustee Signature of Trustee

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 Investment Policy Statement (IPS) for DC Provident Fund
(Defined Contribution Fund)
Effective as of 27 February 2018

Annex C
Investor information

Particulars Response
Investor’s The Provident Fund is a DC plan and was established in October, 1963 and
qualification, it understands relevant products and risks of financial markets.
knowledge and
understanding of
financial markets,
products and risks
Length of investor’s Provident Fund has been a market participant since its establishment.
participation in
markets
Frequency of dealing The dealings by the investor are made on need basis, whenever any
for the investor investment / divestment is appropriate in opinion of the investor.
Reliance on The ABC Company is an Investment Advisor (IA) duly licensed by the
Investment Advisor’s Securities and Exchange Commission of Pakistan to provide its services for
advice advising and management of the funds and the Investment Advisor renders
reliable advice to its clients.
Size and nature of Total investment of the Fund exceeds PKR 418 mil approximately, and size
transactions already and nature of the transactions vary according to the specifications of each
undertaken by the transaction.
investor in the market
Composition and size PKR 418 mil approximately invested in government securities, bank,
of existing portfolio deposits and listed securities.

Signature of Trustee Signature of Trustee

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