Should investors in Indian mutual funds or insurance companies sponsored by the troubled US institutions bail out? Indications are that they have no reason to panic and liquidate investments in a hurry.
A fresh tidal wave of financial sector collapses in the US has halted the nascent recovery in Indian stocks in its tracks. Even as tumbling commodity prices have defused the inflation threat, stock market investors have a fresh set of worries to grapple with.
Should they brace for a deluge of selling by ailing US institutions? Should they rethink mutual fund and insurance investments managed by foreign institutions? How would fund flows into the Indian markets be impacted by the credit crunch? Not all of these answers are readily available, but let’s look at the few that are.
In the firing line
First, will a deluge of ‘sell’ orders from the beleaguered American institutions — Lehman Brothers, Merrill Lynch and AIG, trigger a collapse in Indian stocks? As of now, concerns on this score seem to be overdone.
Of the above institutions that have admitted to financial troubles, only the Lehman group might have an immediate need to resort to a distress sale of its India positions, as both Merrill Lynch (bought over by the Bank of America) and AIG (handed a lifeline by the US Fed), have averted a crisis for now.
Lehman Brothers’ holdings in Indian stocks (including its offshore vehicles) amounted to about Rs 1,000 crore as of June 30, a modest number in the context of the Indian market. With about a third of this holding already offloaded in August, a residual portfolio of about Rs 600 crore (or less) may remain. A takeover of Lehman’s Asia operations by Barclay’s, being considered now, may also obviate the need for any further selling in these stocks.
Shareholding patterns as of June show that Lehman’s holdings were concentrated mainly in mid- and small-cap stocks.
Therefore, there may be no material threat to overall market, should these holdings be offloaded in a hurry. Though “Lehman” stocks have already been severely punished over the past week, investors should still tread with caution on some stocks featuring significant ‘Lehman’ stakes of 3 per cent or more (as of June).
These are KPIT Cummins, Fedders Lloyd, Orbit Corporation, Spice Mobiles, West Coast Paper, Northgate Technologies, Emkay Global, Pioneer Embroideries and Development Credit Bank.
Though there is little risk of selling in ‘Lehman’ stocks destabilising the markets, paring of India holdings by FIIs who have a larger India presence, such as Merrill Lynch or Morgan Stanley, does have the potential to undermine markets. Investors need to be alive to this possibility, given the growing ranks of ailing institutions hit by the credit crisis.
When sponsors fail
Should investors in Indian mutual funds or insurance companies sponsored by the troubled US institutions exit? Retail investors may hold schemes managed by DSP Merrill Lynch Mutual Fund or AIG Mutual Fund. This apart, they may hold insurance policies in Tata-AIG, which has a presence both in the life and general insurance business. Here, again, investors have no reason to panic or liquidate existing investments in a hurry.
To start with, investors need to note that the assets managed by a mutual fund belong to the unitholders and not to the sponsoring institution. In the event of a failure of the sponsor, it is the capital infusion made by the sponsor to the mutual fund and not the unitholders’ money, that will be at immediate risk.
Therefore there is little risk of the investor assets being appropriated, in the case of AIG or Merrill Lynch running into financial trouble. Having said this, the key concern for investors in the above entities would arise from any accelerated redemptions in the funds and any change in ownership or fund management of these firms, due to global restructuring of ownership stakes.
DSP Merrill Lynch MF: In the case of DSP Merrill Lynch Mutual Fund, the 40 per cent stake in the mutual fund held directly by Merrill Lynch is already set to be transferred to BlackRock Inc — an asset management subsidiary of the group (the move is pending SEBI approval).
Once the transfer is approved, BlackRock and not Merrill Lynch, will be a 40 per cent stakeholder in the domestic fund house (60 per cent still to be held by the DSP group). Investors should note that BlackRock Inc is not entirely immune to Merrill Lynch’s troubles, as Merrill Lynch holds a 49 per cent equity stake in the firm at the global level.
However, Bank of America’s buy-out of Merrill Lynch’s assets earlier this week includes the BlackRock business.
Initial statements from Bank of America suggest that it views BlackRock Inc, which is one of the world’s largest asset managers ($1.43 trillion in assets), as one of the more promising divisions of Merrill Lynch, alleviating any immediate worries about this division being put on the block.
All this suggests that investors in DSP Merrill Lynch Mutual Fund may have no reason to exit their fund holdings at this juncture.
DSPML Mutual Fund manages some of the better performing equity funds in India with a consistent long-term return record; and there are not too many alternatives to these funds at this juncture.
AIG: Uncertainties about ownership will continue in the case of American insurer- AIG; though an immediate crisis has been averted through an $85-billion loan from the US Fed. AIG’s top management has been replaced, with the Fed taking a 79.9 per cent equity stake in the US insurer.
Investors in the equity schemes of AIG Mutual Fund may have fewer reasons to hold on. The fund has a relatively short performance record in the Indian market, its equity funds have not turned in an impressive performance so far and there is now the uncertainty about a change in ownership as well. This suggests that it may be prudent for investors who hold a large exposure to AIG Mutual Fund’s equity schemes to consider alternatives, as a de-risking measure.
As to the insurance business, policyholders in Tata AIG have been assured by the firm that all payment obligations will be honoured. The firm’s strong solvency margins (well above IRDA norms) and the Tata group’s 74 per cent stake in the insurance venture also provide a measure of comfort.
However, investors in all the above cases should keep a close watch for any changes in the ownership structure of the firms where they have invested. Fresh investments should be held off until clarity on this front emerges.
Source: http://www.thehindubusinessline.com/iw/2008/09/21/stories/2008092150400700.htm
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