Friday, May 29, 2009

A most painful rally : Sandip Sabharwal

Mr. Sandip Sabharwal view on market
Most fund managers tend to prefer rising markets to falling markets, as the former tends to be better for the business in terms of more assets under management, higher fee revenues etc. However the market’s strong move up since early March has been at best a “mixed blessing”: most managers were positioned cautiously early in the year and remained so well into March and April, thus underperforming the index as markets rebounded. Most fund managers kept on expected lower levels of the markets well after the markets bottomed out.
The rally since March has been a painful one for many investors.
The performance track record of various funds in the current calendar year is illustrated below and reflects the fact that fund managers who pontificated holding cash as a strategy for outperformance have underperformed because of the same reasons thus reflecting the fact that cash with a large majority of them was a passive strategy rather than an active strategy. . A review of the monthly performance of 160 emerging markets mutual funds, for example,illustrates this point:In January, the average fund outperformed the S&P EM index by 147 basis points, and 78% of fund managers beat the indexIn February, outperformance continued, this time by 155bps, with 80% of beating the indexIn March, this reversed dramatically: now, the average fund underperformed the index by 546bps, and just 9% of fund managers beat the indexIn April, funds continued to struggle against the index, although by less: the average fund underperformed by 247bps, and a larger minority (19%) beat the indexMarch was the truly extraordinary month: a terrific time for global equity markets (up 20.3%) but a terrible one for fund managers (up “just” 14.8%). This underperformance of 546 basis points, on average, was a record miss and will take considerable effort for some managers to recoup over the course of the rest of the year. It also explains why few in the global emerging market space were willing to continue to sit out rising markets as the rally continued into April and May. However in India most funds kept on sitting on record cash levels through the rally.
The trends are similar in India where over the period from the bottom of the markets on the 6th of March 2009 a vast majority of funds have underperformed the markets. As per data from valueresearchonline.com the average return of nearly 220 diversified equity funds till date has been 63% percentage vis a vis the NIFTY’s return of 65% percentage. Only around 35% percentage of funds have been able to outperform the NIFTY with the average return of the top 10 funds being 93% percent and the average for the bottom 10 being 37 percentage.
In the 12 month period till the 6th of March the NIFTY declined by 47% and the average fund declined by 49.5%.
Funds keep on flowing to Emerging Market Funds
When shares are rising, one certain way for a fund to underperform the index is by holding high cash balances; cash balances at EM funds and Indian Mutual funds reached multi-year highs in recent months.However the problem in March was not only that starting cash balances were high, but that even more cash was coming in the door each day. Since the middle of March, emerging markets funds tracked by EPFR have seen $18.6b of cash inflows, a staggering amount and more than half of the total (record) outflows last year. At the current pace, all of the redemptions of 2008 will be replaced over the next few months, a remarkable reversal of fortune. In India although there have not been much inflows, the outflows also have been muted thus keeping the cash positions high.Herein lies another mixed blessing. It’s hard to argue against more assets under management, however the historical pattern has been that very strong surges of buying tend to be associated with sharp corrections.A similar story is told by another datapoint: the average premium or discount to NAV for closed-end emerging market funds. This also tends to be an indicator of exuberance towards the EM assets class, and not surprisingly late last year it had sunk to 10-year lows. This ratio has morphed from a large 15% discount late last year into a premium two weeks ago, indicating much improved sentiment.
Some closed-end funds have even seen their share prices reach a large premium to NAV in recent weeks – a phenomenon only seen in early 2006 before the big crash of May 2006.
Most investors have missed the rally — either by not buying soon enough or, for those who were fully invested in March , by having sold too early. The overall sentiment right now is that many of the defensively positioned funds who were holding out have “capitulated”, i.e. have cut cash and raised their exposure to the market.
This in my view increases the risk of a sharp and rapid correction in the markets over the next few weeks.

Thursday, May 28, 2009

Investors have many NFOs to choose from

When ICICI Prudential launched its Target Return Fund last month, not many thought it had a chance in a market that was licking its wounds, with the benchmark Sensex having fallen from a peak of over 20,000 a year ago and hovering around 12,000 in May 2009.
The fund's CIO Nilesh Shah had then commented: "Any money is good money in these markets." Then came May 16, when the results of Polls 2009 were announced, giving the incumbent Congress-led UPA coalition a decisive mandate to stay in power for another five years.
The markets jumped in the next trading session by almost 2000 points, and the fund was one of the early gainers, collecting a whopping Rs 800 crore, this at a time when investors were steadily losing confidence in equity and related instruments.
The funds success seems to have rekindled the hopes of the mutual fund industry, which has been starving for fresh cash from equities over a year now. As many as 14 equity funds are currently lined up with Sebi, awaiting the market regulator's green signal.
Leading the new fund offer (NFO) race is the country's largest asset management company Reliance with as many as six equity schemes, including an international fund and a gold fund. The other fund houses lined up to launch their offerings in the market pretty soon include IDFC, DSP Blackrock, Tata, Fidelity, Canara Robeco and the newcomer Shensei Asset Management.
NFOs, often treated as vehicles to raise money by the mutual fund companies, had virtually dried up over the last year and a half owing to the prevailing slowdown in the general economy. Those launched had failed to ignite much interest in the investors. IDFC, which had launched its India GDP and Strategic Sector (50-50) earlier this year, has managed to accumulate only Rs 51 crore and Rs 22 crore respectively in each of these funds till date. JM Financial, which had launched its Nifty Plus and Large Cap this year, was also a complete failure with assets under management of Rs 10 crore and Rs 5 crore respectively till date.
Though the fund managers and the distributors at large are upbeat with the return of investor interest in the existing equity schemes, it would be rather interesting to see if each of these funds will succeed in igniting the same level of investor interest as ICICI Prudential.

Midcap will continue to outperform: Chaturvedi

Ved Prakash Chaturvedi, MD, Tata Mutual Fund feels that out performance in the midcap sector will continue over the medium term.
Chaturved told CNBC-TV18, "I have been a long term bull on Indian midcaps. The story in India is carefully selected midcaps. One has to be careful, you can go terribly wrong and lose a lot of money but the long term story of India will be midcaps. My sense is that the out performance in the midcap sector will continue over the medium term. Since there has been such a sharp run up my gut feel is that there is very short and swift correction in the market, which will at some point of time happen but generally the mood will be good cheer. When we look back over the next 12 months on this period, midcaps would have out performed.”

Banking exchange traded funds offer good upside

Banking remains one of the core sectors of the Indian economy that has been benefiting from the overall growth in the economy. Investors keen to invest in banking sectors have chosen mutual fund route for a long period of time. Among the actively managed funds, there are too many options to choose from and there is no performance guarantee like any other mutual fund scheme.
There is a segment of investors that opts to park their funds in the exchange traded funds (ETF) that track CNX Bank Index. These investors have benefited on two parameters. First: returns. Second: the flexibility and quantum of transactions these exchange-traded funds offer.
There are two offerings in the market that offer this option. Banking BeES is an ETF that comes from Benchmark AMC. The scheme was launched in May 2004 and aims to track CNX Bank Index with Rs 107 crore worth of assets under management, as of April 31, 2009. The fund has delivered 25.47% annualised returns since launch. Formidable player in the industry – Reliance AMC – has Reliance Banking ETF, which was launched recently in May 2008, has Rs10.02 crore under management as of April 31, 2009.
The two funds are doing well for some time now in sync with the booming underlying CNX Bank Index and have delivered more than 80% over last three months. The only difference that one may come across is the ‘expense ratio’ of both the funds. Benchamark Bank ETF (BeES) has an expense ratio of 0.5% whereas its relatively new counterpart from Reliance AMC stands at 0.35% on annualised basis.
Expense ratio means a measure of what it costs an investment company to operate a mutual fund. Says Rahul Amritlal, analyst with a financial planning firm, “Even though exchange traded funds have offered good returns, investors should keep a tab of the quantum of transactions these funds see on daily basis, while transacting in exchange traded funds.” While BeES sees in excess of 1000 units traded everyday, Reliance Bank ETF experiences much less transactions thanks to the small asset base.
Not to mention of these funds’ dependence on the sector it maps. Hence, investors should take into account the factors that would sustain the growth of banking sector. The banking sector funds also carries the concentration risk, as the funds future is married with the performance of just one sector and there is no scope for diversification. While recommending actively managed funds over index funds a mutual fund analyst with a brokerage says, “Given the evolving nature of Indian stock markets, there is ample scope for outperformance by mutual funds. Hence it makes more sense to go for actively managed funds than the index funds.”

Experts are valuing the AMC at 3-4 per cent of its assets under management.

Fortis Mutual Fund and Sundaram BNP Paribas Mutual Fund are likely to merge following BNP Paribas’ global acquisition of Belgium-based Fortis for €4.5 billion.
Sources familiar with the developments said discussions between senior executives from both the mutual funds had started and the global teams were expected to visit Indian shortly to finalise the deal.
Sources said a sell-off was ruled out as BNP wanted to retain the assets.
Experts are valuing the AMC at 3-4 per cent of its assets under management. Sundaram Finance, which holds 49.9 per cent stake in Sundaram BNP Paribas AMC, will have to pay 50 per cent of this amount if a merger were to happen.
Almost 90 per cent schemes of Fortis Mutual Fund are fixed income ones, a fact that may skew its valuation, say experts. It also has a large number of fixed maturity plans.
BNP Paribas has acquired all the operations of Fortis which include asset management, private banking, merchant banking and consumer finance outside the Netherlands. This, in effect, means that Fortis Mutual Fund will be a part of Sundaram BNP Paribas Mutual Fund. However, under Indian regulations, a mutual fund cannot have two licences. This makes the merger mandatory.
TP Raman, CEO of Sundaram BNP Paribas Mutual Fund, said, “We have no news or information that we can share at this point in time”. An emailed query to Fortis remained unanswered. BNP Paribas’ Country Head Frederic, Amoudrou, refused to comment.
ABN Amro Mutual Fund was changed to Fortis Mutual Fund in November 2008 after Fortis acquired the investment management business of ABN Amro in a global deal. Sundaram BNP Paribas had assets under management of Rs 5,336.36 crore at the end of March 3, 2009, while Fortis is comparatively smaller in size with assets of Rs 357.75 crore.
Mutual fund industry has been going through a wave of consolidation post October 2008, when mutual funds faced a severe liquidity crisis and the Reserve Bank of India had to step in to provide them a line of credit. The problem did not stop there as several mutual funds’ investments in real estate and NBFCs’ (non-banking finance companies’) papers went wrong.
Religare acquired Lotus Mutual Fund in November 2008 after the latter went into trouble due to its huge exposure to fixed maturity plans (FMPs). Goldman Sachs has already pulled out from its announced asset management venture in India while Bharti is planning to exit its mutual fund venture with Axa.

Source: http://www.business-standard.com/india/news/fortis-sundaram-bnp-paribas-may-merge-funds/359270/

Wednesday, May 27, 2009

Reliance Mutual Fund launches infrastructure fund

Reliance Anil Dhirubhai Ambani group-controlled Reliance Mutual Fund, on Wednesday annnounced the launch of its Reliance Infrastructure Fund.
The infrastructure fund, an open-ended fund, will invest predominantly in companies engaged in infrastructure and infrastructure-related sectors in the country, Reliance Capital Asset Management CEO, Sundeep Sikka, told reportershere.
The primary investment objective of the fund will be to generate long-term capital appreciation. It will invest in equity and equity-related instruments of companies engaged in infrastructure and infrastructure-related sectors like transport, banks and financial institutions, energy, power and oil, metals and minerals, telecom and urban infrastructure amongst others.
"Infrastructure is a key priority for India and we hope a spurt of infrastructure spending in the economy on the back of a stable Government and ease of project financing," Sikka said.
The right time is now to invest in infrastructure and infrastructure-related firms, a sector which is likely to get a boost from the new Government, he said.
"The valuations look more attractive and the environment stable with the new Government settling in. This makes it the right time to launch an infastructure fund more than ever," Sikka said.
The new fund offers two plans-Retail and Institutional. Each plan has a growth and dividend plan option.
The fund will invest at least 65 per cent of its assets in engineering, cement and power stocks as well as banks, whereas the rest will be invested in debt and money markets.
"We expect investors in large numbers to participate in the ever-growing sector with long-term capital appreciation," Sikka said.
Reliance MF saw no meaningful redemptions in the last one year and is very optimistic on global flows into India.
The fund-house is currently avoiding sectors that can be hurt by a Rupee rise. It was currently overweight on the textile and pharmaceutical sectors and underweight on the information technology sector.
The fund-house is keen to buy shares of PSUs when their disinvestment takes place and if valuations are good, a Reliance Mutual Fund official said on condition of anonymity.
Reliance Mutual Fund is managing a corpus of over Rs 88,388 crore for over 71-lakh investors as on April 2009.


Reliance Infra NFO Presentation



FAQs on RIF-Final


Rel Infra Fund- Product Note Final

MF industry raises exposure in banking, realty sectors

Indian mutual fund (MF) industry has started investing in the equity market slowly in contrast to its practice of sitting on pile of cash since the beginning of this year. However, with interest rate coming down coupled with valuations being attractive, several fund houses have increased their exposure in the banking and realty sector in April compared to March 2009.
The realty sector saw inflow of Rs 308.16 crore in April compared to 98.76 crore in March, an increase of 209.4 crore, a report by the Bonanza MF Research says. The realty index in the BSE gained 29% in April compared to 13% in March.
“There has been good amount of inflows in the realty and banking sector in April. As interest rates are coming down and valuations of the both realty and banking stocks were very attractive, so several fund houses have parked their money in these sectors,” Gopal Agarwal, head, equity at Mirae AMC said.
Banking sector climbed by Rs 2,633.36 crore from Rs 12,285.86 crore in March to reach Rs 14,919.22 crore in April in terms of inflows.
Bankex, banking index of BSE increased to 23% in April compared to 11% in March.
“If we look at the price of realty and few banking stocks, they have almost doubled up in the last few months. Apart from that, I also believe realty sector was always in demand. Things have started looking brighter and once the Budget is out, we might witness more inflow in the both the interest rate-sensitive sectors,” added Agarwal.
Some market players say several big fund houses have invested in equity schemes in April. “Lot of fund managers tried to book profit and to catch up the situation. Many fund houses were sitting on huge cash, so once they thought, it was the right time to invest in the market, they started pouring money in the banking and realty schemes,” said Dhirendra Kumar, CEO of Valueresearch.
In March, total cash available with Reliance MF stood at 5,431.17 crore or 28.08% in open-ended equity scheme, which came down to Rs 5,902.26 or 26.89% in April. While Birla Sun Life MF was at Rs 788.13 crore or 18.18% in March, it fell to Rs 599.83 crore or 12.5% in April.

Tracking errors continue to hurt index funds

Since March 9, the Bombay Stock Exchange Sensitive Index, or Sensex, has risen 70 per cent (till Friday). However, index funds continue to have tracking errors.
Index funds are supposed to mirror the underlying index. That is, they have the same stocks as the Sensex or the Nifty, and in the same proportion.
Tracking error occurs when the scheme’s returns are less/more than that of the underlying index. Internationally, a tracking error of up to 0.5 per cent is acceptable. In India, this could be slightly higher at 1 per cent, said fund managers. Most funds continue to have a tracking error of more than 0.5 per cent. Many have errors of over 1 per cent. And some even exceed 2 per cent and 3 per cent.
For instance, ICICI Prudential SPIcE’s and HDFC Index Sensex have returned 66.47 per cent and 66.56 per cent, respectively, which means tracking errors of 3.43 per cent and 2.74 per cent, respectively, between March 9 and May 22, according to data from Value Research, a mutual fund research agency.
Some funds that have managed to stay within the 1 per cent limit are Tata Index Sensex A (0.9 per cent), UTI Master Index 0.96 per cent and Franklin India Index NSE Nifty (0.28 per cent).
Swati Kulkarni, fund manager in UTI Asset Management Company, said, “We have a small cash holding with us in the index fund. It has a small deviation from the benchmark index. Even our expense ratio is very low, that is, our AMC fees is 0.75 per cent.”
Industry experts said there were mainly three reasons for tracking errors. “High cash levels, change in the composition of the index and mismatch between the daily change in the weight of stocks and the scheme’s weights lead to tracking errors,” said Rajan Mehta, director, Benchmark Mutual Fund. Market experts say higher expenses also bring down the returns.
However, fund managers claimed there was little interest in these schemes. Milind Barve, CEO, HDFC Asset Management said, “In India, institutional money does not come into index funds because they prefer active management.”

Shinsei to start India fund operation in 3 months

Japan's Shinsei Bank is set to start mutual fund operations in India within three months, becoming the latest global firm to target the country's promising asset management market, a senior official said on Tuesday.
"Within three months we should have the products out in the market," Piyush Surana, chief executive of Shinsei Asset Management (India), told Reuters in an interview.
It will start with an equity, a liquid and a bond fund, part of a plan to launch at least six funds in the first 12 months of operation. The firm hopes to break-even in the three to five years, he said.
Rakesh Jhunjhunwala, named India's Warren Buffet by Forbes, has a 15 percent stake in the asset management firm.
Shinsei joins JPMorgan, South Korea's Mirae Asset, Pioneer Global Investments, the fund arm of Italian bank UniCredit, and France's Axa who have launch funds in India over the last two years.

SBI Magnum Taxgain Scheme 1993 dividend for 2009 has been announced by SBI MF

SBI Magnum Taxgain Scheme 1993 dividend for 2009 has been announced by SBI MF. With over 17 lakh investors and a stable track-record of over 15-years SBI Magnum TaxGain ELSS Scheme 1993 has proved to be one of the most consistent performer amongst the tax saving schemes category in the Indian Mutual Fund Industry.
Dividend for 2009
Magnum TaxGain ELSS Scheme : 28%
Magnum Tax Gain ELSS has generated excellent returns over past 15 years and continues to provide retail investors a profitable avenue with constant stream of fat dividends. The SBI TaxGain Equity Linked Savings Scheme is also one of the largest equity scheme in India with corpus of over 3,262 Crores.
SBI Mutual Fund is India’s largest bank sponsored mutual fund and has an enviable track record in judicious investments and consistent wealth creation.
After an long delay(and nil dividend in the previous financial year) it had become almost imperative for the fund manager/investment managers at SBI MF to declared a dividend no matter how small the dividend amount be. The scheme’s rivals like HDFC TaxSaver and HDFC Long Term Advantage Fund had already declared decent and timely dividend income in the past. Irony of dividends in falling markets is that, it lowers already low NAV.Dividend Income Bigger than Annual Bonus/Increment:
In fact, for many Salaried Investors of this scheme, due to economic downturn the Dividend Income received from SBI Magnum Taxgain has ironically outstripped their annual bonus/incentive and annual increment incomes in their current profession.
The record date for dividend is 29-May-2009. Post declaration of the dividend the NAV of the scheme will fall to the extent of the dividend payout.

Short-term debt funds are the new FMPs

On January 19, 2009, the Securities & Exchange Board of India killed the fixed maturity plans (FMP) when fund houses were barred from declaring indicative yields on the schemes, which had to be listed on the stock exchanges.
Unwilling to lock in their money without knowing returns, investors stayed away. Due to this, these plans received less than Rs 400 crore since then to April 30, 2009.
"The share of assets held by FMPs is coming down. Their assets under management (AUM) were Rs 1.4 lakh crore in September 2008 and are now just Rs 60,000 crore," said Krishnan Sitaraman, director-fund services and fixed income research at Crisil.However, the Indian mutual fund industry's AUM has only grown in the period, to Rs 5,51,300 crore as of April 30, 2009.
This tells us that fund houses haven't lost all the FMP money. They are making efforts to see that FMP investors invest the maturity amount in other products -- particularly short-term income funds.
Over the past one year, short-term income funds have generated an average return of around 11%, while the highest one-year return is around 15-16%. This is far ahead of the 5% returns that liquid funds have been offering for the same period.
A higher commission mutual fund distributors get on short-term income funds as compared with liquid funds is another incentive. Sitaraman said fresh money getting into FMPs is minimal.
"Once redeemed, the FMP money is being diverted to short-term and ultra-short-term debt funds. I am not seeing any money going out of the industry, though it may be going to different asset management companies (AMCs). Money is moving from smaller AMCs to larger AMCs with well-performing schemes."
The higher returns from short-term funds do not come with a high risk, either.
"The portfolio quality is good. Most of the new exposure is to certificate of deposits issued by banks and commercial paper issued by manufacturing companies," said a debt fund manager with a leading Indian mutual fund who requested anonymity.
Sitaraman said the P1+ (highest grade for less than one year instrument) and AAA+ account for two-thirds of the industry assets. Exposure to bank certificate of deposits (CDs), especially those issued by nationalised banks, is the highest and "has increased to 50%," he added.
Exposure to risky sectors has been pared: "In September 2008 the exposure to realty sector was less than 5%. Now it is next to nothing."
However, despite the good returns, fundmen are not optimistic on short-term plans."Short-term income funds are the next bubble to burst," one fund manager told DNA Money. "The interest rates are going to move up soon."
Interest rates and bond prices share an inverse relationship. As interest rates rise, fund managers sell their old bonds and buy the new, higher-yielding bonds. This drives down the prices of the old bonds, thus pulling down overall returns of the funds.
The fund manager further explained: "The only buyers of 2-5 year corporate paper in the market are mutual funds. So, when the interest rates move up and fund houses are willing to offload corporate papers, there would be no takers for them, thus hurting the short-term income fund returns."
Other fund managers too suggest looking at short-term income funds with caution. "People looking to invest for the next 4-5 months can invest in short-term income funds. But one must pare down return expectations," said Ritesh Jain, head-fixed income, at Canara Robeco Mutual Fund.

Indian bond yield rise on higher borrowing fears

* Government to sell 265 bln rupees of debt this week
* Bond auction results to provide near-term cues- traders (Updates to close)
By Neha D'silva
MUMBAI, May 25 (Reuters) - Indian federal bond yields rose to five-week highs on Monday on worries the government will increase planned market borrowings in its final budget, although investors saw some value at the peak for yields.
The 10-year benchmark bond yield ended at 6.56 percent, off a high of 6.58 percent which was its highest since mid-April but still up 8 basis points from Friday's close. Yields have risen 21 basis points over the past three sessions.
"The market will wait and watch for further direction and the next bond auction will be watched closely for where the yield demand is coming in," said K. Ramkumar, head of fixed income at Sundaram BNP Paribas Mutual Fund.
Volumes were an average 64.75 billion rupees ($1.4 billion) on the central bank's trading platform, with the 2019 bond being most actively traded.
This week, the government is due to sell 45 billion rupees of state development loans on Tuesday, 70 billion rupees of treasury bills on Wednesday, and 150 billion rupees of bonds on Thursday.
A local television channel quoted finance ministry sources saying the government is working on a stimulus package of 0.5-1 percent of gross domestic product, which dealers say could exert further pressure on the government's market borrowing programme.
In its interim budget, the government said it would borrow a record gross 3.62 trillion rupees in 2009/10 and the new government is expected to announce a revised borrowing plan in its final budget, due by late June or early July. ($1 = 47.30 Indian Rupees)

‘The tail risk for markets has been removed’

CNBC-TV18, managing editor Udayan Mukherjee speaks with market experts Ridham Desai, Madhu Kela and Ramesh Damani on the impact of the elections
In a special show hosted by CNBC-TV18, managing editor Udayan Mukherjee was joined by market experts Ridham Desai, Madhu Kela and Ramesh Damani to discuss the impact of the elections. The event was held in association with Mint.According to Madhu Kela, head of equity investment at Reliance Mutual Fund, there are a lot of expectations from the Union budget.“The mismatch will be in a manner in which the government will act. I don’t think there is any doubt in anyone’s mind whether they will govern better than what has happened in the last five years, because they have come with a clear thumping majority,” he saidHowever, Ridham Desai, managing director of Morgan Stanley Securities Pvt. Ltd, did not entirely agree with this view. He does not believe that the markets expect too much from reforms.“Over the last five years, growth has been driven by capital flows. The events of last Saturday (16 May) has changed the outlook for capital flows. We now think that the country could receive $40-50 billion of inflows in the next 12 months. We have to change our growth outlook. The markets have to respond. Now, if the government executes on reforms, I think they’re another leg up”.Ramesh Damani, a member of the Bombay Stock Exchange, on the other hand, said: “The market believes that, Left or no Left, reforms will happen in the country.”When asked what are the expectations here on from the markets, Desai said that “the tail risk has been removed”—the tail risk being the Sensex falling to 6,000 levels.A lot of things will have to go wrong for the index to go to even 8,000 levels, said Desai, who expects the Sensex to touch 19,500 levels this year if the government announces a market-pleasing budget.Damani, on the other hand, said, “history suggests that we’re still in a bear market.” He is of the opinion that this kind of an economic crisis cannot be resolved within a year.Kela disagreed with Damani. “You can also construct a situation that India is still in a bull market and that what we have seen is really a vicious correction of the overall bull market. This will really depend on how aggressively the government really responds to the proposed changes that the world is looking for.”

Monday, May 25, 2009

‘Market has moved from distressed to fair-value zone’

Domestic institutions played a major role in enabling the market to consolidate in January-March 2009, by buying when FIIs were selling. The Indian market didn’t crack when developed markets did.
The market is in fair value zone, and has discounted an improving picture on future earnings. Asserting that it was the domestic institutions that held up markets in January-March 2009, Mr Sanjay Sinha, CEO of DBS Cholamandalam AMC, shares his views on the nature of the recent rally and why realty and technology are not among his preferred sectors at this juncture.
The stock market has come a long way from its March lows. Do you think there is more upside left for 2009? We believe there is some more room for upside from hereon for rest of the year given that business confidence has gone up dramatically. Almost all stocks have run up sharply during the recent rally.
Upside from current levels would be driven by some sectors performing better relative to others either on account of valuations or events.
Analysts have already started revising their GDP and earnings growth targets for FY10 and therefore justifiable market levels may need to be reviewed.
Sensex is currently trading at a trailing price-earnings multiple of about 15 times. But the PE expansion hasn’t been driven by any significant earnings upgrades. Do you feel earnings upgrades may soon follow or was it just that India got re-rated on expectations of a stable government at the Centre?
Market levels are influenced more by forward price- earnings multiples and not trailing ones. It has been seen in the past that sell-side research has always lagged, not only in terms of earnings downgrades/upgrades but also on the extent of downgrades/upgrades. We believe that from here on, earnings upgrades will pick up.
Our thought is that market has come up from distressed case valuations to a fair value zone. No doubt, the overwhelming election results have been an important factor for pushing markets faster to near the fair value zone, but the journey from here on will depend on the policy announcements and how the economy responds to them.
The rally so far has been driven mostly by the increasing FII interest in Indian equities. Do you think domestic fund managers, who were earlier on the sidelines or were holding cash, may now join the party? How have you tackled the same?
We don’t subscribe to the view that the FIIs alone have led the rally. We accept the fact that they have been key participants in accelerating the direction of the market in the recent upsurge. But this rally has to be seen in context of the period prior to it.
Data show that domestic institutions played a major role in enabling the market to consolidate in the January-March 2009 period, when the FIIs were selling. All the developed market indices were hitting new lows during the period, while the Indian market didn’t crack to October lows in this phase.
Hence, we believe domestic institutions have also played an important role in setting the stage for current rally. Specifically, as far mutual fund industry is concerned, it is true that on an overall basis, cash levels were relatively high. Reasons for such high cash levels would depend on the individual mutual fund player’s view on the market and economy.
We believe fund managers in the industry would deploy cash gradually depending on opportunities available and also based on the incremental information on the policy measures, economic revival, etc. However, the amount of cash sitting on the sidelines waiting to be invested in mutual funds may be far higher than the cash which has not been deployed yet. As far as our performance in the rally is concerned, we believe we have participated to the best extent possible. Our broader call to remain almost fully invested, and that too in right sectors, has paid off well.
What are the key aspects you will be looking at to select stocks now, considering that most of them have run up considerably from their lows? Do you think mid- and small-cap stocks may also hold potential? While it is true that stocks have run up sharply from their lows, it is also equally true that they have fallen very sharply to those levels. Generally, we would like to follow a top-down approach for picking sectors. Some of the key aspects while selecting stocks within a sector would be the position of the company in the industry, revenue and earnings growth prospects, profitability measures, such as return on equity (RoE) and return on invested capital (RoIC), apart from events having an impact on the company’s fundamentals.
Mid-cap and small-cap stocks have seen the maximum erosion in their prices during the turmoil, mainly because of sharp decline in earnings. Hence, in the event of economic recovery, there is also the likelihood of their earnings bouncing back. Moreover, some of the macro factors, such as availability of finance and lower interest rates will play an important role in improving their profitability.
There’s been a sharp sector divergence in the rally so far. Which, according to you, are the sectors that may now stand a better chance of participating in the rally? Which are the ones you would rather stay away from?
We believe financials, infrastructure and the rural economy-driven segment of the market will continue to do well in the times to come. The reason for the better performance would be that a) they are largely domestic focused, b) major reforms and policy measures will be targeted at these segments c) government will give priority to these segments to revive growth and finally d) there is huge opportunity for expansion in the segment.
We believe IT and real estate would not do as well as other sectors, though we will be exposed to these sectors on selective basis. The IT sector is largely exposed to external factors, which are still uncertain, leading to some question marks on business and earnings growth potential.
The rupee too is expected to gain ground, which may impact margins. Lower volumes and higher competition means higher pressure on margins for these players. On real estate, a revival in the end-user’s confidence depends on economic revival and an increase in earnings, which would take some time.
Companies in the sector are still in balance sheet restructuring mode. That suggests that earnings may remain subdued for some more time. The reluctance of real estate players to reduce prices to drive demand, due to improving sentiment and the rush to issue paper, are also issues.

Equity Funds — Who participated in the rally

Investors must refrain from buying into the top performers in this rally to perk up portfolio returns. Though the funds outperformed in this brief period, not all of them have a long-term track record that bears close scrutiny.
After falling many paces behind the bellwether index in the initial part of this stunning stock market rise, equity mutual funds have begun to catch up in recent weeks. Diversified equity funds (as a category) now sport a three-month average return of 52 per cent, while the Sensex has risen 57 per cent. Which funds recorded the highest participation in this rally? An analysis.
Only about one in four equity funds outpaced the Sensex’s 70 per cent gain from its March low. In the diversified category, the list of outperformers is topped by funds such as DBS Chola Opportunities, Canrobeco Emerging Equities, Magnum Global, ING Contra and Fidelity Special Situations Fund. Funds playing on mid-cap stocks – Magnum Midcap, Principal Junior Cap, JM Small and Midcap and Principal Emerging Bluechip also did impressively- rising 95 to 105 per cent from their March low. Among theme funds, those riding on banking (Reliance Banking, Banking BEES) and infrastructure, led by Taurus Infrastructure, JM Basic, Sundaram Capex Opportunities also outpaced markets.Midcaps aid performance

What helped the top performers in the diversified category win through? A sizeable allocation to mid-cap stocks, sector weights in favour of banking and capital goods and a relatively small size were the features shared by the top performers in this period.
With mid-caps catching up with large-caps quite rapidly in this rally, the BSE-500 index (up 75 per cent) has moved ahead of the Sensex in this rally. Many of multi-baggers of this period have also come from the mid-cap and small-cap space.
That has contributed to strong participation from funds such as Magnum Emerging Businesses, Principal Junior Cap, Magnum Midcap, JM Emerging Leaders and Small and Midcap Fund and Sundaram Select Midcap in this surge.
In terms of sector preferences, overweight positions in banks or capital goods helped the top performers make the best of the post-election re-rating in these sectors. A majority of the funds with market-topping returns were small ones, with assets under management of less than Rs 500 crore.
About six out of every 10 funds that beat the market also had a starting NAV that was below Rs 10, a sign that the rally was led by beaten-down themes and sectors. In fact, JM Small and Midcap and JM Emerging Leaders sported a NAV of less than Rs 3 per unit during the market low of March 9.
Should investors buy into the top performers in this rally to perk up their portfolio returns? No, they should refrain. Of the funds have outperformed in this particular period, not all have a long-term track record that bears close scrutiny. What to buy
While it is true that one leg of this rally was triggered by a re-rating of Indian stocks from distress valuations to ‘fair’ levels, there has also been a substantial “momentum” component to the gains, especially over the last two weeks. A good number of small and mid-cap stocks without much of a claim to fundamentals have delivered stunning gains. There also remains considerable doubt about whether sectors such as realty and commodities, which have led from the front, will see a quick recovery in earnings. Going by the tenet that what rises the most must fall the most, it is the top gainers of this rally that will be most at risk in a sharp correction. All this suggests caution towards the stocks, themes (and equity funds) which have been the frontrunners from the March lows.
It may be best for fund investors to stick to funds with good three- and five-year records, which have also delivered good participation in the recent rise. Going by this yardstick, HDFC Equity Fund, HDFC Top 200 Fund, Templeton India Growth and DBS Chola Opportunities are a few funds that fit the bill.


Most India funds outpace Sensex since March 9

Out of 150 India equity funds, 89 have outperformed Sensex.
International equity funds for India have seen an appreciation of almost 74 per cent in the total value of their assets between March 9 and now, according to data collected from Bloomberg.
The total assets of these funds increased from $15.86 billion on March 9 to $27.52 billion on May 21 — a rise of 74 per cent. In comparison, the benchmark BSE Sensitive Index posted a return of 68.33 per cent during the same period.
Out of 150 India funds, the 89 which have outperformed the benchmark indices show an average return of 81.55 per cent. The remaining 61 funds, who underperformed the market, gained 56.28 per cent during the same period, on an average. These funds are based in Luxembourg, Mauritius, South Korea, Japan, Britain and the USA.
As per Bloomberg, the Net Asset Values (NAVs) of all funds have appreciated over 30 per cent during the period. As many as 17 funds posted impressive returns of more than 90 per cent, 108 funds between 50-90 per cent and the remaining 25 funds between 30-50 per cent.
One of the oldest India funds, JPMorgan Indian Investment Trust, which is listed in the UK, showed a return of 60 per cent, while the NAVs of Jupiter, Neptune and New India Investment trust funds increased by around 50 per cent in the period.
They are mobilising resources from overseas investors to invest in equity markets of major countries.
The Indian-stock Exchange-Traded Funds (ETFs) enjoyed more gains as NYSE-listed funds joined in the buying spree during the recent market rally. PowerShares India Portfolio, Barclays iPath ETN and WisdomTree Investments Inc — which track a broad gauge of stocks listed on the Bombay Stock Exchange and the National Stock Exchange — have posted a return of more than 85 per cent.
Top holdings of these funds were Reliance Industries, Infosys Technologies, ICICI Bank, Housing Development Finance Corp and HDFC Bank.
Investing in India presents vast opportunities for global equity investors, especially when contrarian outlooks reveal beaten-down value funds. The funds' objective is long-term capital appreciation. They invest in large-cap Indian equity securities and A-plus rated instruments, giving 100 per cent exposure to the MSCI India Index. The funds also look at market timing to take advantage of the high volatility in the Indian markets and invest in companies whose activities are closely related to the economic development of India.
The India funds, which operate from the US, top the value-appreciation chart, with an average return of 93.86 per cent. The total assets of these funds increased from $973 million on March 9 to $1.89 billion. They were followed by Mauritius (79.57 per cent), Luxembourg (78.50 per cent), France (76.25 per cent), Singapore (70.72 per cent), Finland (68.90 per cent), UK (56.47 per cent) and South Korea (52.78 per cent).
The NAV of Luxembourg-listed HSBC GIF India equity fund has almost doubled between March 9 and May 21. The world's largest single holding of Indian equities outside the nation, this fund's total assets stood at $2.78 billion as on May 21.

India’s Political Stability Will Aid Recovery, Mukherjee Says

Pranab Mukherjee, named this weekend as India’s finance minister, will likely take advantage of the government’s stable majority to introduce measures to revive the economy amid a global slump.
The 73-year-old Congress party veteran told the Economic Times yesterday the new government’s numerical strength would encourage credit flows and boost confidence. Mukherjee has been acting in the finance portfolio since January as Prime Minister Manmohan Singh, 76, recovered from surgery.
Mukherjee, who ran a closed economy as the finance minister in Indira Gandhi’s cabinet from 1982 to 1984, inherits one that is now open and exposed to the worst worldwide recession since the Great Depression of the 1930s. He earned a reputation as a trouble shooter in Singh’s cabinet since 2004 by resolving spats among ministries and coalition partners.
“He is a deliverer,” said Alastair Newton, a political analyst at Nomura International Plc in London. “He will have challenges in the economic portfolio given the political realities -- market expectations are high.”
The Bombay Stock Exchange’s benchmark stock index surged by a record 17 percent on May 18, the first day after Singh’s re- election, as investors bet the resounding victory will enable the new finance minister to ease foreign investment rules and sell state assets -- policies that were stalled by Singh’s communist partners in his previous term.
Congress has the support of 322 lawmakers in the lower house of parliament, with the party getting 206 lawmakers of its own. That’s the most since 1991, when Singh as finance minister abandoned Soviet-style state planning and introduced free-market policies that have helped India’s economy quadruple in size.
‘Strong Endorsement’
The victory was as much Mukherjee’s as Singh’s. As the No. 2 in the cabinet, he backed the prime minister’s policies ranging from creating jobs in rural areas and writing off farmers’ loans to closer ties with the U.S., renewing a relationship that began in the early 1980s when he appointed Singh as the central bank governor.
“Despite the strong endorsement from voters, the finance minister may have a tough job pushing through some much-needed reforms,” said Nikhilesh Bhattacharyya, an economist at Moody’s Economy.com in Sydney. “It’s very hard for politicians, for example, to do away with subsidies, which may result in a backlash. Expectations should be tempered.”
India spends one trillion rupees ($21 billion), or a tenth of its budget, on food, fuel and other subsidies each year in a country where the World Bank estimates three-quarters of the people live on less than $2 a day. About 13 percent of spending goes to defense and 20 percent to pay interest on national debt. That leaves little for other needs, such as health, education and power plants, boosting borrowings.
Ballooning Deficit
The federal government budget deficit was at 6 percent of gross domestic product for the year ended March 31, more than double the target of 2.5 percent of GDP.
Moody’s Investors Service places India’s long-term local currency rating at Ba2, two levels below investment grade, and lower than the ratings assigned to Colombia, Romania and Kazakhstan. S&P has a BBB- long term credit rating on India, the lowest investment-grade level.
Investors will be looking at how much fiscal stimulus Mukherjee, who was on the boards of the International Monetary Fund and the World Bank in the 1980s, can provide in his first policy statement -- the budget for this year -- expected in early July.
Singh’s government said before the elections that stimulus of at least another 1 percent of GDP is needed to prop up an economy that’s growing at its slowest pace since 2003.
Policy Conflicts
Mukherjee, who first became a minister in 1973, estimated in February that India may need to raise a record 3.62 trillion rupees from bond sales in the fiscal year that started April 1. The central bank governor Duvvuri Subbarao said May 22 that borrowings have “already expanded rapidly” and that it goes against his efforts to keep borrowing costs low.
“The government faces a challenge to balance two conflicting issues -- to stimulate the economy while preventing fiscal position from further erosion,” said Takahira Ogawa, S&P’s director of sovereign ratings. “There is a possibility for the government to implement various measures to further expand the economy and consolidate the fiscal situation.”
Singh’s administration, which doesn’t need communists’ support for a majority in parliament, could raise as much as $20 billion from sale of state-run companies, according to Rashesh Shah, chief executive officer of Edelweiss Capital Ltd.
Asset Sales
Among the companies that could be placed on the block are NHPC Ltd., India’s largest producer of electricity from water, explorer Oil India Ltd. and fuel retailer Hindustan Petroleum Corp., according to Mumbai-based brokerage Religare Capital Markets Ltd.
Still, analysts such as Seema Desai at Eurasia Group, a London-based political-risk advisory firm, expect economic changes will be “selective and gradual.”
“There is a significant segment within the party that is suspicious of sweeping pro-market reforms,” Desai said.
Mukherjee, who last year successfully rallied China, Japan, Russia and 42 other nations to end India’s nuclear isolation and resume supplies without signing the Nuclear Non-Proliferation Treaty, needs to bring the same acumen to gain support of his party colleagues, many of whom are still tied to the original socialist principles of the Congress party.
At stake is a bill to raise the foreign investment ceiling for Prudential Plc and other insurers to 49 percent from 26 percent, and other proposed legislation aimed at removing a 10 percent cap on the voting rights of foreign investors in non- state banks. The government also wants to allow global retailers such as Wal-Mart Stores Inc. into India.
“Mukherjee is a seasoned politician with excellent skills to bring people around,” said N. Bhaskara Rao, chairman at the Centre for Media Studies in New Delhi. “Expectations from him will be high.”

Mutual fund transactions in for some fundamental changes

Whatever other changes the future brings for the investment community in India, I’m sure that the way mutual funds are bought and sold is in for some fundamental changes. As things stand, the mutual fund industry is starting to stir to life after being in an utterly moribund state for many months.Last week, a new fund offer from ICICI Prudential Mutual Fund actually fetched Rs 800 crore of fresh investments. While this is a paltry sum indeed by the standards of 2007 when NFOs of many thousands of crores had become the norm, it is a huge step forward in the current situation. I know for a fact that these Rs 800 crore has galvanised every fund company’s marketing machinery, and plans to launch a clutch of new funds are being feverishly brought to readiness.Except that things are no longer the same. Till now, new fund offers have been the mainstay of marketing pushes made by the mutual fund industry. There are a variety of reasons that are responsible for this, but the biggest has been that the money needed for intense marketing and advertising new funds used to come from the fund itself.Fund companies could (and most did) deduct up to six per cent from investors’ funds to pay for the NFO’s marketing. This gave them considerable leeway to spend on marketing as well as pay massive commissions to agents for selling new funds. Since distributors’ push always plays a vital role in selling any financial product, the high commissions meant that while the steady stream of NFOs continued, no one was pushing existing funds.The only sensible way of choosing funds is based on their track record. However, market forces drove Indian investors overwhelmingly towards gimmicky new funds whose themes had often been thought up just to facilitate the creation of a new fund.However, the market regulator has eventually put an end to this combination of circumstances that were driving this NFO mania. Since 2006, funds could no longer deduct launch expenses in open-end funds and in 2008, this was effectively banned in closed-end funds as well.By that time, fund investments had dried up due to the stock markets crash and later the global financial panic. Now, as the first green shoots of recovery have started sprouting in the market for investment products, I believe that mutual fund companies as well as investors are stepping into a whole new world.For the first time, a fund company has no more money to spend on a new fund than it has on an older fund that is already in operation. And given that a launch is always going to cost more money than an existing product, this should give a real advantage to mutual funds that already have a track record of outperforming their peers.In theory, this advantage should always have been there, but as we’ve seen above, it wasn’t. This could actually bring about a concordance in the interests of fund companies and investors that has been missing till now.An investment product market in which getting good return is actually more helpful in selling funds compared to inventing new funds could be the best thing to happen. Inevitably, it will make good investment management to the forefront as the one factor that will spell business success for a fund company. Perhaps it sounds like I’m indulging myself in wishful thinking, but even a partial shift towards such a situation would be a great thing to happen.

MFs borrowed to meet redemptions

Hit by a landslide of redemptions during October-November 2008, mutual fund houses were compelled to take huge loans in order to process customer requests for cashing out on their MF units.
According to Sebi regulations, mutual funds (MFs) have to disclose borrowings, which amount to over 10% of a fund’s net assets in the half-yearly disclosures.
Leading the chart of borrowers for the 6 months ended March 31, 2009 are Reliance MF (over Rs 6,000 crore), followed by Religare MF (Rs 4,361 crore), Birla Sun Life MF (over Rs 3,400 crore), Tata MF (nearly Rs 3,000 crore), according to data collated by MF tracker ValueResearch shows. Others such as Principal MF, Deutsche MF, Fortis MF, IDFC MF, HDFC MF, HSBC MF and DBS Chola MF borrowed between Rs 200 crore and Rs 600 crore in the same time. Between themselves, 14 fund-houses borrowed around Rs 21,000 crore, data shows.
“Some asset management companies had to borrow around 30% to even 100% of the assets in their short-term funds at the end of September 2008. Though Certificate of Deposits (CD) were used, the rates at which we had to borrow were also high, sometimes touching 12%. Fortunately, most of the money for us and others would have been paid by now,” a top official said.
While mutual funds currently have excess cash amongst investors’ assets on their hands, experts point out that the borrowings done were always a part of the liabilities of the asset management company. “There is no doubt that funds borrowed money at high interest rates, but most of the borrowings have been repaid. This data helps in identifying who borrowed and what amount. Liquid and shortterm debt funds were the ones who faced the most redemption requests,” Dhirendra Kumar of ValueResearch said.
In mid October ‘08, RBI enabled banks and primary dealers to raise Rs 20,000 crore through repo route to help the mutual funds industry tide over the liquidity crisis and withstand the redemption pressure.
It had also permitted banks to provide additional liquidity support of up to 0.5% of their total net deposits to aid these funds. The individual borrowing amounts indicate the nature of desperation and extent of trouble that prevailed at the fund majors, indicate senior MF industry professionals.

Source: http://economictimes.indiatimes.com/Personal-Finance/MFs-borrowed-to-meet-redemptions/articleshow/4568755.cms

Saturday, May 23, 2009

Fund houses line up new offers on whiff of positive sentiment

Mutual fund houses are hoping to push through their new fund offers as they sense investor sentiment turning positive after the recent rally in stocks.
Almost two dozen fund offer documents have been filed with SEBI in the past two months, since the start of the current financial year. In addition, there are several schemes that have received SEBI approval but have been kept on hold pending an opportune time for launch, said fund managers.
These funds will see reasonably improved investor interest as sentiment has reasonably improved in the past few days, said Mr N. Sethuram Iyer, Chief Investment Officer, Shinsei Mutual Fund.
Already, money is flowing into equity schemes, said a fund manager.
The past few new fund offers have seen collections as low as Rs 10 crore; funds can hope to get better collections now due to the revival in investor interest, said Mr Iyer.
The benchmark Sensex has gained 14 per cent since last Friday.
Some fund managers are wary and feel they cannot judge if the rally of the past few days will attract investor money, though it has definitely caught investor attention.
“I wouldn’t expect these many launches three months down the line,” said one of them.
It is the existing products that will be preferred to the new ones, as they are sitting on built-up portfolios, said another fund manager.

The schemes lined up for SEBI approval are of varied themes – equity, debt, index, gold, fund of (international) funds, and arbitrage schemes.
In the equity category are Fidelity Forward India, IDFC Dynamic Equity fund, Reliance Target Appreciation Fund, Shinsei Industry Leaders Fund, Canara Robeco Force Fund and Reliance Micro Cap Fund. In the debt category are Religare Credit Opportunities Fund, Shinsei Liquid Fund, UTI Capital Plus Fund, Mirae Short Term Bond Fund, Kotak FMP, Templeton’s Fixed Horizon Fund, Sahara Daily Fund and Baroda Pioneer PSU Bond Fund.
Even as fund managers predict that upcoming fund launches will get more favourable attention, there are investors who feel that have already missed the bus.
At the 8000 levels (of the Sensex) nobody invested, and now with equity markets at higher levels, investors are afraid these levels may not sustain, said Iyer.
The right approach for investors should be a long-term one, he said. “Although equity is a risky investment, one can reap rewards over a longer term.”

Source: http://www.thehindubusinessline.com/2009/05/23/stories/2009052351351000.htm

Birla Sun Life MF Introduce Generate Capacity

Facility" in the growth option of Birla Sun Life Frontline Equity Fund, with effect from May 22, 2009. Under this facility, the investor can choose a specific % target return, which, if achieved, the gain/fund value (as opted by the investor) shall be switched to the growth option of the debt scheme selected by the investor from the options provided.
This facility is being made available for the transaction made through electronic mode only. The trigger levels are 15%, 30%, 50% & 100% gain from average cost of acquisition of the units in the scheme.
Trigger Switch options: The gain amount or the whole invested amount with gain in the scheme to debt scheme selected by investor. The minimum application amount criteria for debt schemes will not be applicable for the switches.
Debt Schemes: Birla Sun Life Savings Fund-Retail Plan-Growth option, Birla Sun Life Short Term Fund-Retail Plan-Growth Option, Birla Sun Life Dynamic Bond Fund-Retail Plan-Growth Option, Birla Sun Life Cash Plus-Retail Growth
Default trigger/scheme: The default trigger level - 15%, Default debt scheme for switch -in - Birla Sun Life Savings Fund- Retail Plan-Growth Option.

Wednesday, May 20, 2009

Inactive MFs Hit Investors’ Money?

Investors have seen mutual fund managers sitting on piles of cash for months. They did not invest in equity when the stock valuations were low across the board. Now that the stock markets have hit the roof, they have been made to look ordinary. The story gets worse, because they are holding the investors money without really showing any significant gains. Investors are angry, having seen people make money as stocks go skywards, while they have hardly anything substantial to show. To get the experts viewpoints on this non-performance by mutual funds, CNBC-TV18, called on Dhirendra Kumar, CEO of Value Research and Nilesh Shah, Deputy MD of ICICI Prudential, to provide the answers for these very people.
Q: Is it true that yesterday there was no redemption allowed at NAV and what s the justification for that?
Shah: We have to be fair with the investors who are staying with us; investors who are redeeming and investors who are coming in. Yesterday when bulk of the market didn’t trade and 600 out of 800 scrips on National Stock Exchange were quoting at Friday’s price because there was no volume, we could not have calculated a fair and appropriate NAV. In that situation, it would have been unfair to the investors who were redeeming out. It would have probably been a bit advantageous to the investors who were getting in and it would be unfair to the investors who were staying with us. So, we requested the regulator to say that if it can declare tomorrow as a non-working day and it acceded to our request for the benefit of all unit holders.
Q: Acceptable logic for you, Dhirendra?
Kumar: Yes, a fairly logical and principled stand. That is because mutual funds buy stocks and if you couldn’t buy stocks or sell stocks then how can you buy a mutual fund.
Q: One clarification: how does it work when the market hits down circuit or do you think in those circumstances there were more hours of trade so most stocks got to move up or down?
Shah: More important than the ups and downs is the calculation of NAV. If I had 800 scrips on the National Stock Exchange traded in the price available, I would have calculated the NAV and then we would have taken a call whether we have the cash to pay for the redemptions or not. So the question is can we calculate the NAV, which is fair to the investor who is coming in, the one who is going out, and the one who is staying with us? If any of these three conditions are not met, we have no option but to go back to the Association of Mutual Funds of India (AMFI) or Securities and Exchange Board of India (SEBI) and request this to be declared as a non-working day on the overall benefit of the unit holders.
Q: Did you get a lot of redemption requests and have more come in since they could not be executed at yesterday s NAV. Would they be coming in today?
Shah: No. unfortunately most people were trying to take advantage of an arbitrage opportunity because some part of the NAV would have been quoted at Friday’s price and most people had the expectation that today too that the markets will be up. So we had seen fair amount of buying interest at the client and distributor level than the redemption level. I think the perception of investors have changed where selling at every rise has been now replaced with buying at every dip. So, I do not foresee too much of redemptions coming through going forward if the markets continue to remain supported by the policy actions of the government.
Q: We were speaking with the head of UTI Mutual Fund who made the point that mutual funds have not seen that much by way of inflows over the past few months. Do you expect to see redemptions to start kicking in because these are probably investors who held on for more than the past six-eight months or got in even?
Kumar: Certainly. I feel that there are lot of disappointed investors today more so because a lot of investors came at the peak level and after that they have been disappointed by the secular decline over a prolonged period and the psychology of an individual investor is that if he is able to recover a substantial part of his losses or get back in the black then he plans to move out. So I think, not in the immediate future, but many of these investors will be breaking, or at least they will be thinking about it.
Looking at the performance objectively, mutual funds were behaving like an ordinary investor because many of them were caught on the wrong foot. First, they had substantial amount of cash, the market turned around and suddenly the surprising mandate put the market on fire. So mutual funds contributed to the whole underperformance thing, because they kept sitting on substantial amounts of cash.
Q: Is that a fair point that many of the mutual funds, equity mutual funds may have actually underperformed the market on the way up because of large cash holdings?
Shah: We need to see the picture in its totality. I can talk about ICICI Prudential Mutual Fund and as Dhirendra will agree we have never taken aggressive cash calls across most of our funds where the mandate is to invest in equity. On the way up, some of our funds would have probably underperformed the broad market because lot of high beta stocks moved up significantly. Stocks that were beaten down in sectors like real estate, constructions and power have jumped up significantly. Some of those stocks are today trading above fair value. By participating in those stocks, I would not like to be accused later that you do not look at a stock’s quality. A 15-day or 30-day period is unfair to evaluate a fund manager’s performance.
Let s talk about three-, five- and 10-year performances and on that basis most of the Indian fund managers have been outperforming benchmark indices by a reasonable margin. How many analysts were predicting the election result that there will be thumping majority and the election outcome will be like this. Fund managers are not gods; they also take a call based on rational expectations. On Friday, no one had expected that on Monday there will be a working government, that there will be so much hope and hike in aspirations.
We built a little cash balance to ensure that if there is an election outcome that is against our expectations, we will be able to average ourselves in and on the back of rally where the markets had moved from 8,000 to 12,000, it was not a very inappropriate call. So in hindsight, anyone can say this or that should be done but at the end of the day, we followed a logical rational approach. I think our five-year and 10-year performance does show that we have been following a fairly reasonable and logical approach.
Q: This criticism though is not just about Monday’s event. This criticism is about high cash levels that has been perpetuated since the market bounced almost 50 per cent from its lows. Give us a sense, even a ballpark figure, of how much money is waiting to be invested from the mutual fund fraternity in the market. What would you estimate the cash at?
Kumar: It s not a matter of estimation, it’s a matter of fact that at the end of April mutual funds had nearly Rs 14,000 crore and it was equal to what they had in March-end as well, which means on a net basis all equity funds combined together had a similar amount of cash while the market had gone up. I agree with the way ICICI Prudential managed its funds given its size, it had about 6.5% of cash position, which I think for an open-ended equity fund is quite normal, but on the other hand some of the large fund families with substantial equity assets under management Reliance Mutual Fund for example had about Rs 5,900 crore cash as on month-end as disclosed by it. That itself accounts for nearly 27 per cent of its equity fund. Number two was UTI Mutual Fund, it had about Rs 1,700 crore, which amounted to about 18% of the total assets, followed by SBI. In fact, with SBI, the surprising thing was that compared to March-end, its April-end cash went up substantially.
Q: How would you advise equity mutual fund investors to approach investing now because there has been a disruptive event in the market -- suddenly the market is up 25% and people may be a bit lost on how to position their investments. What would you tell them?
Kumar: I would urge investors that they should not rush into the market. If they don t have a plan, they should develop one and go about implementing it. It is also the time for indexing. So far we held this view that indexing is not relevant and till about six months back we held the view that equity funds, be it actively managed funds or be it Sensex, will give handsome rewards over a period of time. I think things are changing dramatically. I think it s about time investors start looking at indexing as a part of their core portfolio.
Q: One question on the market: we had a crazy day yesterday; we also had a fantastic mandate in terms of elections. How would you map the next few weeks and months for us?
Shah: I think we are going to see more crazy days but obviously not like yesterday. The market today is driven by hope and aspirations like in 1991 when the Congress government came and on the basis of the majority given to them they pulled India’s growth trajectory up and in a challenging environment did a wonderful job. Today, the same aspirations are there. The environment is as challenging as it was in 1991, probably we have more foreign exchange reserves than 1991, but the deficit is fairly high and there is hope that the government will carry out various reform processes whereby it will pull up the growth trajectory of India again -- like China travelled on the path to prosperity from 1980s till today. India will probably be moving in the same direction.
So, there is a lot of hope and aspirations are high. It’s impossible for a government to meet all the hopes and aspirations at one go. So there will be days of disappointment, there will be days of hope and we will continue to see a market which swings up and down based on hope and greed or hope and fear, but overall there is reasonable chance this time that we should be able to kind of lead the economy into a higher growth trajectory and this should result in stronger capital markets over years to come.

MFs still cautious, to focus on large-caps only

Facing the risk of being labelled 'too cautious', the cash-laden mutual fund
industry wants to see more concrete evidence of a rally before taking a more firm call on the fate of the stock markets.
Investment officers of leading mutual funds seem to be less bullish of the rally post-elections than foreign institutions who are 'desperate' to deploy cash. MFs appear to have learnt a lesson from 2008 and say that they are focusing on large-caps and companies with good fundamentals, rather than bet on mid-caps and small-caps which fell faster in the ensuing sell-off. Exposure in equities as an asset class to the total market value of equity diversified funds has increased from 81% in March 2009 to 82.4% in April 2009 but going forward, perspective is the key. "If one bases their projection on fiscal 2010, there is hardly any value left. But if you look beyond 2010, the Indian economy seems more resilient. Many are awaiting earnings upgrades for companies. FIIs have a more long-term view while our domestic institutions have been more short-term focused," Seturam Iyer of Shinsei AMC said.
Monday's monster rally does not appear to have forced an immediate change in asset allocation strategies also. "This is more of a sentiment trigger as the uncertainty surrounding formation of government has gone. We will wait for events such as cabinet formation and the union budget (expected in 2 months). There has to be more concrete evidence before we re-look at stocks and sectors," Sameer Narayan, head of equities, Fortis Investments, said.
Equity experts at mutual funds are backing fundamentals over stock price gain. "Mid and small cap stocks had witnessed sharp declines over the last year or so. While in the short-term, increased risk appetite may lead to larger gains in mid and small cap stocks, over the long term, companies with good fundamentals are likely to do well irrespective of market cap ranges and sectors," Sukumar Rajah, CIO, equity, Franklin Templeton Investments, said.
Rather than remaining fully-invested, many mutual funds like Birla Sun Life which have kept 10-11% cash as compared to equity assets, want the freedom to invest if valuations are attractive.

After manic Monday, no redemption rush at MFs

Mutual funds did not witness any major redemption pressure on Tuesday as was being speculated following Monday’s record surge in equities. Industry players said investors might want to remain invested in the hope of a new bull run in the market.On Monday, the first trading day after the announcement of election results, trading had to be halted as Sensex breached the upper circuit twice on course to a 17.3 per cent, or 2,110 points, jump. However, as trading was closed after 12 noon on Monday, few traders or investors got a chance to trade. Mutual fund houses declared it as no-trading day and declined to redeem or sell units at the day’s NAVs (net asset values).This led to speculation that mutual funds would see huge outflow when the market opens on Tuesday as investors would rush to book profit.Jayesh Shroff, equity fund manager at SBI Mutual Fund, said there is no reason for investors to exit mutual fund schemes in the present scenario. “The overall market sentiments are positive and one would like to stay invested. In fact, investors who failed to invest on Monday as fund houses declared it a no-transaction day put money in equity schemes hoping for a strong rally in the market,” he added.Jaideep Bhattacharya, vice-president (marketing) with UTI Mutual Fund, said had there been better investment avenues other than equities, there could have been redemptions from equity funds. But that was not the case as most debt and fixed income instruments have been giving lower returns than equities.“Over the past two days, foreign institutional investors (FIIs) have invested around $5 billion in the Indian markets and the overall market sentiment, too, is buoyant. In such a scenario, it is in the benefit of investors to stay invested,” he added.According to data provided by Sebi, mutual funds could net-invest just Rs 50 lakh in equities on Monday as against Rs 1,000 crore investment by FIIs. On Tuesday, FIIs were net investors in equities to the tune of Rs 53 crore. Data on mutual funds’ equity investments on Tuesday were not available with the Sebi at the time of filing of the report. Rajiv Deep Bajaj, managing director of Bajaj Capital, a brokerage firm that also distributes mutual funds, said his company witnessed fresh investments in mutual funds on Tuesday. “The general macroeconomic environment of the country looks good following the election results and the equity market sentiments have changed. The fear that markets would correct below the 10,000-level is gone and we see the market in the 12,000-15,000 range for some time,” he said. Vikaas Sachdeva, country head for business development, Bharti AXA Investment Managers, and Waqar Naqvi, CEO of Taurus Mutual Fund, said they witnessed inflows in their equity funds. However, the inflow figures were not available with the fund houses readily.

FIIs pump Rs 20,000 cr in stocks from early-March

Foreigners have been able to spot value better than Indians, at least as far as the stock market goes. FIIs have put in close to Rs 20,000 crore into Indian stock markets in the last 43 days since the bull rally began. Simply put, FIIs were daily net buyers of Rs 500 crore investments per day at a time the benchmark index went up above 14,000 from 8,160 levels. In comparison, mutual funds have been net buyers of Rs 3,300 crore - around 1/7th of the amount committed by FIIs.
According to Sebi data, FIIs have made net investments of Rs 19,820 crore till Tuesday from March 9, (when the 6,000-point rally began). The deluge of funds brought into the country by the FIIs has made them net buyers of equity for the calendar year 2009 at Rs 10,681 crore. They were net sellers of stocks amounting to a whopping Rs 52,987 crore in calendar year 2008.
FIIs are betting on companies reporting an improved financial performance in the years to come on the back of solid government policy initiatives. "We think the ensuing policy action will improve growth and thus earnings. We are forecasting 2.5% and 12.5% growth in earnings for sensex constituents in FY2010 and FY2011 respectively compared to our earlier forecast of minus 10% and 11%," Ridham Desai of Morgan Stanley said.
While many investors are waking up the possibility of Indian economy coming back on track with a smoother-than expected government formation, experts say the bet taken by FIIs for the last 2 months has paid off.
In the last one month, foreign investors have also aggressively taken up stakes in cash-strapped real estate companies such as DLF, Unitech, Indiabulls Real Estate as well as Suzlon either through qualified institutional placements or direct buying on the stock exchanges from the promoters. This has helped FIIs who actively participated in such offerings to immediately sit on significant gains (notional).
Deals like DLF promoters selling off 16.8 crore shares at Rs 230 apiece (current price Rs 385), Indiabulls Real Estate just sold off 15 crore shares at Rs 185 (current price Rs 200) and Unitech sold off 42 crore shares at Rs 38.50 apiece (current price Rs 71) show how foreign investors profited.
A re-rating of the markets is likely to take markets to expensive territory relative to current earnings but an improving fiscal situation would improve the optimism regarding growth next year, Jyotivardhan Jaipuria of Bank of America Merrill Lynch said.
However, cautious mutual funds have stuck to debt as their choice of asset during the same period - taking a diametrically opposite view. While FIIs were net sellers of debt to the tune of Rs 3,500 crore from March 9 - fund majors were net buyers having put Rs 46,000 crore into debt during the same time.

Tuesday, May 19, 2009

Mkt outperformance will come from midcap cos: Reliance MF

Following the astounding opening (and subsequent suspension on hitting circuit) of the markets today, experts are now talking about which sectors and companies will lead the way ahead.
Madhu Kela, Head of Equity Investment of Reliance Mutual Fund, said,” The outperformance of the market will come from the midcap companies where ownership is negligible." He further said that the new highs can be expected from Nifty.
Q: Is there life beyond 4,200 or would you get cautious like some of our analysts here?
A: I am not cautious at all. I think the country is in an inflection point. I think lot of people will still worry about what happens to global sentiment and markets may have run-up too much. I think this has been an unprecedented verdict. This will give the Party the ability to act. I just fear that they should not be slower than what the market is expecting them to do. I am extremely confident that they will do it.

Q: Tell us the people who doubt the rally – why this verdict is equal to good news for the equity market?
A: The first thing is that as a portfolio manager what we have learned is whatever is outperforming the world will get towards that out performance. So, India is going to be one country which in the global world map is likely to outperform. I do not know what will happen in the next 2-5 days. This has been an investor’s delight who wanted to invest into India from a three-five year perspective.
Sometime back I had said USD 50 billion of flow over the next 12 months and these are not Foreign Institutional Investor (FII) flows. Now, whether it comes through External commercial borrowing (ECB), Foreign Currency Convertible Bond (FCCB), Foreign Direct Investment (FDI) there will be USD 50 billion of additional money and as a capital starved country that is what we need. I think once the money comes in then you will have lower interest rates then you will be able to build your infrastructure. So, the only thing the government should allow is a policy framework to attract this money and considering the crises which is going around in the world this is the best time for us to attract this capital.
Q: What about the cash people have been sitting on—not just mutual funds. You talk to a lot of hedge funds, FIIs, High Networth Individuals (HNI), do you think now they will just throw in the towel and come in. I mean, lot of people were holding out at 3,100 at 3,700. Now do you think it will be forced to enter the market?
A: The best comment which I heard on your channel, “The Left is out and people are left out.” I think our job and our business is such that people might be in a denial for sometime, the markets have run-up too much, 2,600 Nifty is already at 4,000-4,100, You will be out of job if you don’t deploy. The market could go to 20% and if you continue to remain in cash you will be out of your job. The bigger concern is from the hedge fund side, people who are running 10-20-30% net long and people who have left India. If there is a particular hedge fund which is 50% net long India and there is another hedge fund which is only 10% net long India, he will have no choice but to come and invest.
Q: Will you buy if the level is between 4,200 to 4,500?
A: We have not changed our portfolio; we have not changed our style. In lot of these funds, we are 80-90% invested and I think now is our turn. You will see midcaps flying, now you will see stock idea flying, I am sure we will be able to catch at least a lot of them because of our view that from this inflection point even if I buy 10-30% higher it doest matter because now we are playing as an investor’s delight.
Q: A lot of people will now think that because FII money will chase performance and you will see the largecaps outperforming. But for a portfolio manager like you looking for out performance, do you think there is better value in the broader market now and you could generate performance by buying those stocks which are still trading at 25% of their peak value?
A: Whichever portfolio manager has gone into caution and I think to lot of them, they have reduced the number of stocks. What people have ended selling up, is smallcap and midcap names because everyone was cautious and in these stocks the float is very limited. So that is where I think the maximum outperformance is going to come from. It may not be the top 50 companies but a company below that, the next 100 companies where the size is large and the ownership is
negligible.
Q: The thing that this coming back too though is the argument about what this past 50-60% on the market looks like. Does it look like the most resounding bear market rally we have ever seen or have we indeed put the worst behind us and begun a new cycle which most people are circumspect to admit to or to agree to. Where do you stand on that?
A: Let’s go back to the bull run which have happened in the world. For example, Japanese bull run; between 1973-74 Japanese market corrected by 50% and people thought that the bull run is over and after that the index went up ten fold. I see that is the kind of opportunity which we have for India that there us so much chaos which is going around in the world and here is one country where we have stable government for the next five years and they are committed to providing proper governance. Obviously, we have seen that in the last five years. So what kind of money could you attract and as I keep saying, if we get capital then our job is done.
It’s going to take sometime for people to digest whether after such a big rise should we be participating or not. But I think it’s a matter of time before people will aggressively participate.
Let me make one very important point that all the people are only talking about the cash which the portfolio managers are holding. What about the cash which Indian public are holding? For last 18 months we have not seen any inflow from Indian public and we have seen USD 300 billion of saving in last one year. What happens to that cash?
Now we are at 4,000 level, market is up 50-60%, we did not get a chance to get out, this is our opportunity, golden chance, let’s get out. I think some retail investors could commit that mistake. In fact this is an opportunity and I am not saying the market is going to go in a perpendicular manner; you may have some disappointment coming from global cues at some point of time but every dip is an opportunity to buy from a retail investor point of view.
Q: What themes would you like to back now from here? Would you back banking as the likely recipient of most reform from the government? Would you back infrastructure, would you back Public Sector Undertaking (PSU) candidates for divestment. If you wanted to play this government formation and the Budget what would you best bets be?
A: I think I am going to back entrepreneurship all over again. So you have to back bottom up companies where there is an extremely aggressive, smart entrepreneur who wants to grow. Capital availability for that percent during last 12-24 months; capital will become available for him. So that is theme number one that you can really catch a proper entrepreneur. The other point is there is going to be lot of performance difference between intra-sectors.
If I am right that USD 50 billion comes into this country in the next 12-18 months then you are seeing at least 15% appreciation in the rupee. So there are a lot of sectors which are going to get hurt because of that. So you will have differentiated performance. The domestic sector and the things which have linked to investment and domestic consumption and infrastructure will all over again do very well while things which are linked to international and rupee appreciation will not do as well or will do badly rather. It will make you to the market. So we would like to position ourselves into great entrepreneurs in these sectors which are likely to link to India.
Q: There are still concerns about the earnings. As an event would you say this is an event which is reprised equity upwards or are we stretching the argument there?
A: Earnings will follow. Last two weeks two real estate companies which are suppose to be in the darkest of the time are getting money. So earnings will follow, once people get money, once people are able to invest, earning will follow. We saw that in 2004, a lot of the capital goods companies are trading at 20-30-40 price-earnings (PE) multiple but as the money started to come in and as they started to invest earnings followed one-three years down the line.
So what people were focusing till now including me is what is going to happen next month or next three months. I think that trajectory is going to change and people are going to focus on what is going to happen after next one year and three years and that is where you see a lot of difference. You will see people who are skeptic about earnings and immediate earnings that will vain away as a matter of time.
Q: Last 6-12 months, a lot of stocks had got derated because of the quality of their balance sheets, they were overleveraged and access to capital was a question. You are speaking about USD 50 billion of global money flow into India. Do you think those stocks could get rerated now?
A: Yes. Last time I had said that the corporate governance is only talked or practiced in the bear market. In bull market, people want to focus on performance and momentum. For a lot of these companies which did not get capital in that bear market, we will end up getting capital. However, I would like to put a word of caution there is still a lot of good quality which is available. So we would definitely like to invest in that good quality which is backed by strong entrepreneurship.
Q: The circuit halted at 13,500. Lot of people year end target is 15,000 on the Sensex. Give me your range for the market?
A: I may sound over jubilant. I do not have a timeframe but my target is a new high in Nifty whether it happens in 12-24 months, I do not care. I think all these targets will get revised upwards.
Q: You think sub-10,000 levels in the Sensex are history. We won’t go back to those kind of levels, we will form a bottom above that?
A: As a matter of caution I may want to put out that there are only two things which can change that. One is, there is another catastrophe in the world in which case obviously we are going to be part of it. Second, the government reaction to reform and progress is far slower than what the world is expecting.