Tuesday, March 10, 2009

Two fund houses that weathered the storm

Mutual funds suffered heavy redemptions in 2008 as investors headed for the exits in a year that saw the Sensex, the BSE bellwether, plunge by more than half. No one escaped unscathed, but some funds emerged less bloodied than their peers from the carnage on the markets....

::Best equity fund house::
Reliance Capital Asset Management Ltd (RCAML), the country’s largest mutual fund house by assets under management (AUM), has been named “Equity Fund House” of 2008 by Morningstar India Pvt. Ltd, the Indian arm of Morningstar Inc., an independent research provider on mutual funds, hedge funds and other investment alternatives.

RCAML, owned by Reliance-Anil Dhirubhai Ambani Group, managed in excess of Rs70,000 crore at the end of 2008, and about 28% of the corpus was in equity funds. RCAML manages almost one-fifth of the total equity AUM of India’s mutual fund industry, which was Rs1.1 trillion at the end of the year.Ten of RCAML’s equity schemes were considered for the assessment, along with those of other fund houses that were in contention for the award. Under Morningstar’s evaluation system, only open-ended schemes with at least three years of history are considered. On a relative basis, every fund from the RCAML stable, barring Reliance Equity Opportunities Fund and Reliance Tax Saver, seems to have performed well at a time when the market is in a bear grip. Overall, equity funds had a poor run in 2008, with the Bombay Stock Exchange’s bellwether equity index, the Sensex, losing 52% in 2008 and foreign institutional investors, the main driver of Indian equities, pulling out at least $13 billion (Rs66,950 crore) from Indian stocks.

Madhusudan Kela, 40, head of equity investments at RCAML, has been with the asset management firm since 2001. His funds, though all down by at least 40%, still outperformed peers last year. In an interview, he spoke on the philosophy underlying RCAML’s equity market investments, the cash strategy he employed in 2008, and his outlook on equity markets. Edited excerpts:

Many fund managers were caught unawares by the impact of the financial crisis that started elsewhere, but quickly spread to India. When did you start realizing that things were not quite normal?
In hindsight, we should have been less greedy. And maybe now, we need to be less fearfulInternationally, things turned out to be far worse than what we anticipated in January 2008. And it became even worse following the collapse of Lehman Brothers Holdings Inc. in September 2008. As a fund house, we had a cautious stand from January, which became even more cautious post-September 2008.

How many of your equity funds weathered the storm in the markets? How did they cope with it?
A majority of our equity funds have weathered the storm. However, I would have liked them to do better. Most of our funds have been in the top tier compared with their benchmarks and peer group. We have been bottom-up investors, and that is what helped us produce extraordinary returns between 2002 and 2008. The fall has to be looked into in that context. As I said, we have been cautious and that is reflected in our cash holdings of more than 25% for the fund house as a whole—more than Rs5,000 crore of cash on an asset base of Rs20,000 crore. Needless to mention that this also helped us cope with the gigantic fall last year.

If you were to talk about one unique philosophy you apply to managing all equity funds, regardless of themes, market capitalization, etc., what would that be?
The core philosophy is buying the right companies at the right price with a long-term view on investments. As you can see from our portfolios, there are stocks we have held for more than five years, and which have been part of our core holdings. We will not hesitate to take the right risk if the corresponding returns justify taking that risk. For instance, we might be buyers of mid-cap companies today, which are completely out of fashion, as we can see that risk-reward is in our favour.
What is your view on the markets?
The global situation has become far worse than what we had anticipated. And it still remains very uncertain. This obviously has an impact on India, both in terms of fund inflows into the country and risk appetite for equity investments in emerging markets. Hence, this will continue to be an important part for the markets.
On the domestic front, the outcome of the elections will play a very important role in framing an outlook on the market.
What is your strategy to make sure your funds remain in the top quartile?
Most of the uncertainty...is reflected partially or fully into stock prices, and hence we would like to make stock-specific investments in these uncertain times to take advantage of the opportunity. As a matter of fact, Reliance Growth Fund’s net asset value was Rs12-13 in 2002 and it went beyond Rs500 in 2008. Obviously, lots of investment in that fund was made in uncertain and challenging times (2002-2003). And that helped us generate these kind of returns.
Which are the sectors you are comfortable with?
The pharma segment looks good from a two-year perspective. There is clarity and visibility in earnings in this sector. Most of the companies have more than one engine of growth; have large cash flows compared with their market cap; and by and large, have good promoters and corporate governance.

In these uncertain times, people will take note of this sector. What about the untouchables?
I wouldn’t say anything is untouchable in the stock markets. Most of the stocks may offer value at a particular price.

What are the lessons from this downturn?
One lesson that has formally got reiterated is that the markets are all about greed and fear. Maybe in hindsight, we should have been less greedy. And maybe now, we need to be less fearful. The second point is that you have to live the markets, literally 24/7/365. You have to be extremely alert and can never afford to take your eyes off it. Third, one has to realize that there are a few good years and a few bad years in the markets and nothing will keep perpetually going up or going down. Hence, having extreme views does not deliver performance in markets.And finally, 2008 taught us that whenever the markets make a story around every stock in the listed universe, trying to justify their valuations and making an investment theme around them, it’s not the best of times to be in the market.

Do mutual funds deserve awards this year?
No, mutual funds do not deserve any award this year for their performance.

::Best debt fund house::

ICICI Prudential Asset Management Co. Ltd has won Morningstar’s award for the best debt fund house.
Debt funds are those which invest in fixed-income securities such as corporate bonds, government bonds, debentures, certificates of deposits and commercial paper. Such funds have Rs3.9 trillion of assets under management. This is about three-fourths of total assets managed by the mutual fund industry in India.

Despite delivering more returns than equity funds, debt funds—especially short-term funds—suffered on account of heavy redemptions. At one point of time during the liquidity crunch triggered by the collapse of Lehman Brothers Holding Inc. in mid-September, investors withdrew as much as 30% of the total debt assets management. Since then, money has flown back into debt as the Indian central bank repeatedly cut rates and investors regained some confidence.

To be sure, one-year returns of debt funds ranged from 8.62% for very short-term liquid funds to 26.38% for long-term government bond funds. In contrast, almost all equity funds have seen returns shrinking.
ICICI Pru has some 22 schemes managing Rs46,000 crore in its fixed-income portfolio. Its short-term bond fund and short-term gilt fund have both topped in their respective categories.


Nilesh Shah, 41, deputy managing director of ICICI Prudential Asset Management, spoke on how a conservative strategy enabled his fund house to beat the market downturn and why debt might still be a good asset class for investors. Edited excerpts:

What has been the impact of the collapse of Lehman Brothers on the mutual fund industry?
The world before Lehman and world after Lehman is totally different. The world before Lehman was based on the trust and confidence that banks don’t fail. The world after Lehman raises doubts that even banks can fail. Now this results in stoppage of flows between banks, restricts credit flows from banks to customers. In a sense, speed breakers have been created for smooth flow of credit in the financial system.

How have many of your debt funds weathered the storm?
Our philosophy for debt fund management is SLR—safety first, liquidity second and returns third. So, we were conscious of credit risk in our portfolio since the beginning of 2008…almost since the middle of 2007.

We gradually reduced or eliminated even from our conservative standards names we believed could face a tough environment. Even though we invested only in AAA and AA rated securities and there was no question of any default or delay in payment of interest or principal, we ensured that we didn’t stay invested in any instrument that could potentially face a rating downgrade.

We weathered the storm because our foundations of SLR—safety, liquidity and return—were strong.

What has been your investment strategy?
Our philosophy is unique and we apply it to all our debt funds. My mandate to my credit analyst is very simple: If there is a default in any of our obligations, both of us will lose our jobs. So he is conscious of this risk whenever he sanctions any credit limits.

Any change in your investment philosophy?
I think our philosophy is not going to change. Philosophy is like a mountain; it doesn’t move. We will continue to monitor the markets so that our customers get the best return.
But don’t you think that the good times are over for debt funds?
There may not be any more deep rate cuts.I don’t think that good times are over for fixed income funds. Our belief is that markets today are pricing the government’s large borrowing programme and hence bond yields are higher than what they were before the rate cuts. At some point of time, the Reserve Bank of India will give confidence to that market that notwithstanding the size of the government borrowing programme, the central bank is committed to lower interest rates by doing open market operations, unwinding MSS (market stabilization scheme) bonds and giving rate signals. We still believe that there is reasonable opportunity for the yield on 10-year government bonds to go below 5.5% if RBI (Reserve Bank of India) takes decisive action to support a low-interest rate environment.

What’s the lesson from this downturn?
I think one has to always keep their feet on the ground and never move away from reality. Probably beginning last year, we all got carried away by the blue sky scenario and started believing too much in the future. The businesses are cyclical and environment is cyclical and after every up, there will be a down. We need to be prepared for the upside as well as the downside.

What’s your view on the overall financial markets?
The financial markets are facing a fair amount of volatility and uncertainty. But one advantage of the current environment is the fact that the media has brought everything upfront to the investor. The information travels very fast and hence a lot of bad news are getting discounted quickly.

Do mutual funds deserve awards this year?
Yes, because we have all done our jobs in line with the mandate given to us. The markets have fallen and hence we have also fallen, but we have fallen less than the markets even if it has caused losses to investors. In debt funds, reasonable returns have been generated last year. We have followed a process, a method, and I still think that if investors give us a longer time horizon, they will not be disappointed.

Sterlite, Indian Hotels, IVRCL Infr top sells: ICICI Pru MF


ICICI Prudential Mutual Fund has decreased its holding in banking & financial services, telecommunication, engineering & capital goods, oil & gas and cement & construction. However, it has increased its exposure to information technology, pharmaceuticals and automotive sectors.
Exide Industries, Orient Paper and Industries and GAIL India were top buys while Sterlite Industries, Indian Hotels and IVRCL Infrastructure were top sells.
A study of the equity portfolios managed by the ICICI Prudential Mutual Fund as on February 28, 2009 shows that, in the banking & financial space, SBI, SREI Infra, Axis Bank and Union Bank of India topped the list of sells. However, HDFC Bank, Punjab National Bank and HDFC topped the list of buys. (View - All Bulk Deals by Mutual Funds)
In the telecom pack, Bharti Airtel, Reliance Communication were top sells while it has exited Finolex Cables. In the engineering & capital goods sector, AIA Engineering, Bharat Heavy Electricals and Texmaco topped the list of sells while Elecon Engineering, L&T and Kirloskar Brothers topped the list of buys.
In the oil & gas space, ONGC, HPCL and Reliance Industries were in the list of top sells.
In the cement & construction sector, IVRCL Infrastructure and Patel Engineering topped the list of sells while Nagarjuna Construction, Ahluwalia Contracts India, ACC and Jaiprakash Associates topped the list of buys.(Check out - Which sectors are attracting Fund Managers?)
However, the fund house has increased its exposure to information technology, pharmaceuticals and automotive segments. In the information technology sector, Infosys Technologies, Wipro and Allied Digital Services topped the list of buys while Megasoft and TCS topped the list of sells. It has exited 3i Infotech.
In the pharmaceuticals pack, it has bought Cipla, Cadila Healthcare and Ipca Laboratories while sold Sun Pharma Advanced Research Company and Dishman Pharmaceuticals & Chemicals. It has exited Piramal Life Sciences and Indoco Remedies.
In the auto space, Exide Industries, Apollo Tyres and M&M topped the list of buys.
Click her to see Table of Stocks bought/ sold by ICICI Prudential Mutual Fund

DSP Black Rock dumps banks, metals, food & beverages


DSP Black Rock Mutual Fund has increased its exposure to information technology, automotive and engineering & capital goods sectors. However, it has decreased its coverage to banking & financial services, metals & mining and food & beverages sectors.
Idea Cellular, Sesa Goa and Chambal Fertilisers were the top buys while Tata Teleservices, Hindalco Industries and Orient Paper and Industries were the top sells.-->
A study of the equity portfolios managed by the DSP Black Rock Mutual Fund as on February 28, shows that, in the information technology pack, it bought TCS, Mphasis, Infosys Technologies, and introduced Tata Elxsi and Rolta India. However, it sold Allied Digital Services, HCL Technologies, HCL Infosystems and MIC Electronics.
In the automotive space, the fund house has purchased Maruti Suzuki India and Eicher Motors. However, it sold Tata Motors and Hero Honda Motors.
It has introduced Alstom Projects, and bought Larsen & Toubro, BEML and Siemens in the engineering & capital goods sector. However, it has exited Punj Lloyd, and sold Crompton Greaves, KEC International, Mundra Port and Kalindee Rail Nirman.
The selling was seen in the banking & financial services sector, wherein it exited Oriental Bank of Commerce, and sold HDFC Bank, ICICI Bank, SBI, Axis Bank and HDFC. However, it has introduced Bajaj Holdings & Investment.
In the metals & mining space, it has sold Hindalco Industries, Sterlite Industries, Tata Steel, and exited Hindustan Zinc. However, it has bought Sesa Goa and Jindal Steel & Power.
It has sold United Spirits, Balrampur Chini Mills and Shree Renuka Sugars in the food & beverages pack. However, it has bought Nestle India and GSK Consumer Healthcare.
Click here to see Table of Stocks bought/ sold by DSP Black Rock Mutual Fund

Investors get 36% returns from India Gold ETFs

Equity trading in India may have virtually come to a standstill thanks to the ongoing global economic meltdown. But amidst all the gloom, investors in India are reaping rich dividends from gold exchange traded funds (ETFs).
A leading Gold ETF in India—UTI Gold ETF—said on Monday that it has given a solid return of 36 per cent for investors in the last six months. “These may be times of recessionary trends and global economic downturn. But Gold ETFs are posting good returns in India for investors. Our Gold ETF has given a glittering 36% returns to investors,” UTI Mutual Fund Head of Products R Raja told reporters.
According to Raja, in the past one year, the gold ETF from UTI Mutual Fund gave a return of about 29 per cent.
He said with most of the asset classes giving negative returns, investment demand for gold is rising. “This fact is justified by increase in asset under management. Assets in such exchange-traded funds in February rose 1.8 per cent to Rs 781 c rore,” Raja said.
Returns on India’s five gold ETFs increased by 6 per cent during the month as the yellow metal touched a new high.
Launched in 2007, Gold ETFs in India are managed by five fund houses including Benchmark Asset Management, UTI Mutual Fund, Kotak Mahindra Mutual Fund, Reliance Capital Asset Management and Quantum Mutual Fund.
Though Gold collections under the ETFs are growing in India year on year, they remain negligible when compared to India’s imports of around 700 tonnes annually.
ETFs track the performance of a particular index; their base price is basically equivalent to the value of the index. ETFs are not limited to gold. There are ETFs of almost all metals and most-traded agro-commodities. Eg: Gold, silver, copper, wheat, corn, cotton etc. At present, in India gold is the only commodity ETF.
Analysts say those who made money from gold ETFs in the past few months also should thank Indian rupee. Because, rupee’s steady depreciation helped investors gain handsomely from gold ETFs. Over the past year, international gold prices have headed nowhere and are actually down by about 3 per cent. But the gains came from the rupee fall.
In India gold prices rose roughly 40 per cent the past year. Going forward, therefore, returns for Gold ETF investors will depend not only how global gold prices fare, but also on the direction of the rupee against the dollar.
Apart from Gold ETFs, Indian investors looking for gold-related investments have the option of global gold equity funds, which invest in the stocks of gold mining companies.
However, these funds, having been battered last year, have staged a sharp rebound since early December. Both DSP BlackRock World Gold Fund and AIG World Gold Fund have delivered a 35 per cent return from early December, tracking the simultaneous recovery in equity markets as well as gold prices.
As commodities and stocks fell in tandem, gold mining stocks were battered by investors, even as gold, in the commodity markets, held up fairly well as safe-haven demand continued to flow in.
However, gold mining stocks have staged a recovery since December as a more favourable environment emerged for equity markets in general, even as gold prices too climbed.

Where to park your retirement money in turbulent times

Unlike developed countries, India doesn’t have a universal pension and retirement scheme. Life-long pension and post-retirement benefits are available only to government employees and to a select few in some government-owned enterprises.
In a major part of the corporate sector, including government-owned companies, employees usually receive a large lump sum amount on retirement. This includes gratuity and an accumulated provident fund among others.
Given this, it falls on the concerned person to do financial planning in a way he/she not only maintains the lifestyle but also has financial independence as well.
However, this is easier said than done. That’s why we at ET Intelligence Group thought of providing some kind of guidance to readers who will retire in the not-so-distant future.
The basic principle of retirement planning is to look for a financial instrument that provides regular cash flows (just like a salary), provides a fair amount of protection against inflation and protects your capital too. Also, it is better to not be burdened by any kind of debt.
For instance, in case one has any personal or car loan, ideally, one should pay it off before retirement. And if there is a plan to purchase new house, it should be done few years prior to retirement or just after retirement by paying a lump sum amount from retirement proceeds with little loan.
Good healthcare is expensive and is required most during old age. Except for a few government organisations, medical cover is usually not offered to retired employees. So, it is very important for retirees to spend some amount on medical insurance. The ideal thing to do here is to take a medical insurance policy few years before retirement.
Another important point to take care is that it doesn’t make much sense for someone to take a life insurance policy after retirement. This is because, after retirement, the person’s earning is almost negligible (assuming the person doesn’t take up a job after retirement) and hence the financial capital lost upon the death of the person is very small.
The three important aspects that should be taken care of while planning for living expenses are liquidity, regular income and growth. Typically, the thumb rule here is that one should have around six months of planned monthly expenditure in liquid cash. The next thing to look for is the regular source of monthly income, which would meet all routine monthly expenses. This is where one can choose from the different fixed income plans available.
The three most popular plans available are the post office monthly income schemes offered by post offices, senior citizen savings schemes with monthly return offered by nationalised banks and mutual fund monthly income plans offered by mutual funds.
The first two are taxable, come with assured return but less scope for growth. The last one is not taxable, not assured and has some growth opportunity since these schemes invest around 10-20 % in equities.
The choice among these three schemes would depend on the individual’s income, risk-taking ability and effective tax rate. Otherwise, one can go for a 50:50 combination of one of the first two and the third one. The other possible schemes that provide a monthly income but not very popular, are annuity schemes offered by insurance companies and reverse mortgage of the house.
At the end, after paying for all these investments, if one is still left with some money, he can invest it in assets like equities or gold.
We have tried to represent all the above aspects in terms of indicative numbers (please refer to the table). The three scenarios represent the income and spending levels of different kinds of persons based in different locations.
One should calculate the investment required in monthly income plans to match the required future spending and medical expenses. All other fixed kind of expenses—on a house or a car—should be planned after that. We remind our readers that this is only a guideline and actual planning might differ depending on individual’s circumstances.