On Tuesday, when the KSE-100 index tanked 2,153 points, the record single-day decline, investors went into a panic selling in the lead of mutual funds which sold equity worth $11.6 million.

Swinging like a pendulum over the Panama Papers’ case developments, the stock market on May 12 staged a rally of 1,052 points, recovering about a half of the value lost a day earlier.

While all local and foreign participants — including individuals and institutions such as banks, corporates and insurance companies, extended their selling spree — mutual funds absorbed all of the sell-off with net buying of $15.3m worth stocks.

But they can’t work as a cartel and buy and sell in unison since, in the prevalent competitive environment, the aim of every fund manager is to strive and outperform others

This move brought into sharp focus that mutual funds had now come to set the direction of the market.

For decades powerful brokers could turn the tide according to their vested interests, which contributed in creating market crashes leading to the loss of the small investors’ savings.

“That’s correct,” conceded one major broker who lamented that ‘proprietary trading’ — the buying and selling by a broker on his own account — had plunged to just 15pc of the daily trade. “Years ago it was as high as 70pc,” he said.

Until the regulators introduced ‘undisclosed trading’, small investors would look up at the trading board and follow the big brokers.

Such herd mentality caused them huge losses when a ‘pied piper’ big broker — who would be buying in his own name and at the same time surreptitiously selling through another broker — would lead the whole herd into trouble.

The demutualisation of the Exchanges, which started in the era of SECP chairman Khalid Mirza, has taken more than a decade to wrest the power from the brokers, but finally the regulators have managed to separate the ownership of the stock exchange from its management.

“Stock brokers could influence the market in the past when there was leverage trading, but no more,” said Nasim Beg, the vice chairman at MCB-Arif Habib Savings.

He observed that small investors took speculative positions on borrowed money and were badly bruised whenever the stocks started to fall. In January, the PSX formally signed a sale-purchase agreement for the sale of 40pc strategic shares with a Chinese consortium for Rs8.96 billion.

The move has brought the control of the board of directors of the three integrated stock exchanges of Pakistan under the Chinese majority directors, reducing the conflict of interest of local stock brokers and strengthening governance.

As 20pc shares of the PSX have been offered to local investors in an Initial Public Offering, stockbrokers are left with a minority 40pc equity holding of the bourse.

The broad-based ownership of the PSX, regulators hope, would reduce the risk of cornering scrips and help price discovery of stocks.

If stockbrokers have been stripped of the power to dictate the market trend, the void has been filled by the mutual fund industry.

With a scintillating growth in about the past 15 years, the assets under management (AUM) of the mutual funds industry have surged to Rs625bn under an aggregate 219 funds, according to the figures released by the Mutual Fund Association of Pakistan (MUFAP).

Equity funds outperformed other funds, both in size and growth. At the end of May, the size of equity funds stood at Rs201bn and that of Shariah-compliant equity funds Rs108bn, giving an aggregate of Rs309bn or 49pc of the entire AUM of all of the industry funds.

In the 11 months through May, equity funds and Shariah-compliant equity funds grew by 41pc and 35pc against single-digit growth of most other categories of funds.

Equity mutual funds gave out a return of 41pc during the period, outperforming KSE-100 index return of 34pc.

Equity funds have remained net buyers in the PSX since March 2016 and invested $572m during eleven months of FY17, second largest investment after insurance companies that bought stocks worth $104m.

In May, the last month of the rally in the current year, mutual funds bought shares worth $47m. All of that helped to absorb large-scale sell-off by other local individuals and institutional market players as well as foreign portfolio outflows in the heavy sum of $631m.

A fund manager reasoned that in the low interest rate scenario, even corporates were switching from income and money market funds to equity funds, which supplemented the huge new investments in the industry.

Some sceptics suggest that the stockbrokers still retain control of the market through mutual funds. But others argue that this does not appear to be the case as only a few funds are owned by a couple of big brokers and those too are of marginal size.

Brokers have diversified into real estate, industries and investment advisory services. The power behind the mutual funds now vests in big banks that have floated giant funds as their wholly owned subsidiaries.

Among the three biggest mutual funds in the industry, two are under the control of big banks. They include: Al Meezan Investment Management Ltd and NBP Fullerton Asset Management Limited (NAFA); the third being state-owned National Investment Trust (NIT).

Other top funds include: UBL Fund Managers; HBL Asset Management; MCB-Arif Habib Savings with majority investment of MCB; ABL Asset Management Co and Al-Falah GHP Investment Management Limited.

“Mutual funds owned by banks enjoy greater investor confidence due to their solid backing and ease of unit distribution, as banks already have a well laid-out network of branches,” said a senior retired banker.

Although speculators still like to dabble in stocks themselves, a greater number of long-term investors are putting their faith in mutual funds.

One big advantage for investors is the payout of 90pc of earnings, which is mandatory for mutual funds if they wish to avoid heavy taxation.

But for all that mutual funds are also blamed by many as spoilers of the market since they can go into surprise large-scale sell-off in case of redemption requests or to save their ‘capital protected funds’.

But unlike stockbrokers, mutual funds cannot work as a ‘cartel’ and buy and sell in unison, since in the prevalent competitive environment, the aim of every fund manager is to strive and outperform others.

Published in Dawn, The Business and Finance Weekly, July 17th, 2017