FUND FULCRUM - FEBRUARY 2008

Fund Fulcrum

(February 2008)

Mutual Funds weather market meltdown to sustain their asset base, with a paltry decline of 0.15 per cent as against a 13-per cent drop in the sensex in January 2008. The total assets under management (AUM) stands at Rs 5,49,114.82 crore as on January 31, 2008 as against Rs 5,49,942.02 crore as on December 31, 2007, according to the data released by the AMFI. Almost all the leading fund houses, except ICICI Prudential, witnessed a drop of Rs 3,000-5,000 crore in their assets led by Reliance Mutual Fund and UTI Mutual Fund. Reliance Mutual Fund maintained its top position, with an AUM of Rs 77,210.03 crore (Rs 80,779.83 crore in December 2007). ICICI Prudential regained the second slot, replacing UTI AMC. The asset base of ICICI Prudential Mutual Fund grew 12.8 per cent in January 2008, to Rs 64,045.07 crore (Rs 56,772.58 crore in December 2007). Assets under management of UTI AMC fell by 7.3 per cent during January, 2008 as they closed at Rs 52,656.19 crore. Lotus India Asset Management has crossed Rs.10000 cr of AUM as on January 31, 2008 from a meagre Rs. 900 cr as on November 30th 2007 - a growth exceeding 1000%, making it one of the fastest growing fund houses during this period.

Piquant Parade

Franklin Resources, Inc. (operating as Franklin Templeton Investments), USA, has announced the acquisition of a 49% stake in Vietcombank Fund Management, an investment management firm currently focused on private equity investment in Vietnam. Approximately 9% of Franklin Templeton’s assets under management are currently from investors in the Asia Pacific region and Vietnam will be a key area of focus in expanding the company’s penetration in Asia.

Around seven suitors are in the fray, for acquiring Standard Chartered Mutual Fund including Credit Agricole, Shinsei, IDFC, Fortis, Aviva, Mirae, a US fund major and a Middle East player. The deal is valued at USD 200 million, up from USD 120 million that UBS was willing to pay last year and is expected to conclude as early as next month.

Punjab National Bank and Vijaya Bank are exiting their joint ventures with US-based Principal Financial Group.

Distribution arrangements have been entered into by DSP Merrill Lynch Fund Managers and Oriental Bank of Commerce, Franklin Templeton Mutual Fund and State Bank of Travancore and Principal PNB AMC and Triveni Kshetriya Gramin Bank.

Indiabulls Financial Services Ltd has got approval from SEBI to start mutual fund operations. The company is in the process of setting up an asset management company and a trustee company.

Religare Aegon Asset Management Company plans to launch its funds platform by September, 2008. Equity funds would be first in the line followed by debt products.

The trend of AMCs going public is catching up in India. UTI AMC, the country's second largest mutual fund is planning to float a $ 500 million public issue. HDFC Mutual Fund will be the second AMC to get listed on the bourses later this calendar year.

Global funds, including two Indian funds, one from Kotak and the other from Fidelity, are tapping the large Australian retail investor base of 25 million people to invest in the Indian stock market, which has grown by more than 40% annually in the last three years.

Bajaj Capital together with OptiMix, a division of ING Investment Management, has launched a new product by the name ‘myWrap Account’- the country’s first ‘no entry load’ facility for investing in mutual funds through a mutual fund distribution house. This is like a PMS of mutual funds where investors would invest in a PMS and this PMS would invest in several mutual funds on behalf of the investors. Three product options - capital growth, high capital growth and all equity, with the flexibility to shift from one option to the other at zero switching cost are provided. Besides exit charges, there will be fees such as annual management fee of 1.6 per cent.

Regulatory Rigmarole

C B Bhave has taken over the position as Chairman of SEBI from Mr. Damodaran. Indian market regulator, Securities and Exchange Board of India (SEBI) has entered into an agreement with its French counterpart Autorite des Marches Financiers (AMF) to understand each others regulatory regime and share information to bring about greater transparency in the capital markets of the two countries. The agreement follows a similar arrangement that SEBI entered into with the US SEC in early January.

The SEBI board approved removal of initial issue expenses for close-ended mutual funds. Entry load not charged on the close ended schemes would be applicable now. Waiver of load for direct applicants will also be available in close-ended schemes. SEBI approved regulations for the public issue of securitised debt instruments (SDI). It has also decided to provide for permanent registration of intermediaries. However, this does not apply to FIIs and venture capital firms.

Paving the way for investing a part of around Rs 4,500-crore retirement money of government staff in capital markets, interim pension regulator PFRDA expects the Centre and 19 states to transfer the money under New Pension Scheme (NPS) to three fund managers by April 1, 2008. If this happens, PFRDA hopes to operationalise the NPS by June 1, including the keeping of records by the National Securities Depository Limited (NSDL).

The Securities and Exchange Board of India has sought to caution investors with regard to investing in Art Funds, funds/schemes launched by companies formed for the purpose. At the same time, SEBI has threatened actions, civil and criminal, against such funds / companies and warned against launching of “Art Funds” or schemes without registration.

Awards and accolades pour in…..

ICRA felicitated top performing mutual funds based on quantitative parameters. Reliance Diversified Power Sector Fund grabbed two titles under Open-ended Diversified Equity Fund - aggressive, for one year and three year based performance. Under the defensive category, Standard Chartered Premier Equity got the best performing open-ended fund based on one-year performance and SBI Magnum Sector Funds Umbrella - Contra Fund for three year performance. Under the sectoral categories, Reliance Media & Entertainment Fund and ICICI Prudential FMCG Fund were awarded for one year and three-year performance, respectively. The award for the Best fund house for the year for equity went to Reliance while ICICI got the award in the debt category.

Birla Sun Life Tax Relief 96 was adjudged one of the best funds across the globe by Lipper, a Reuters group company, out of a universe of 6,302 funds. This is the only Indian fund in the top 3. Four others, namely, Birla Sun Life Basic Industries Fund-Growth, Birla Midcap Fund-Growth, Birla Sun Life Tax Relief 96 (1 year horizon) and Birla Infrastructure Fund-Plan B Growth all figure in the list of top 100 global funds (universe of 24,887 funds).

…and place the Indian Funds and the industry on a pedestal befitting their performance!

NFO NEST - February 2008

NFO Nest

Fence-sitters to Go-getters!

In a month when stocks crashed by more than 19 per cent from their highest levels, new fund offers by mutual funds attracted decent inflows. According to data from AMFI, NFOs garnered Rs 12,079 crore in January 2008 as against Rs 10,273 crore in December 2007. Past data, however, show that mutual funds suffer after every market crash. For instance, during May 2006, when the Sensex fell by 13.6 per cent, fresh inflows into mutual funds were just Rs 8,635 crore. The figure dropped a whopping 14 per cent to Rs 7,421 crore in June. However, it has been different this time. For example, the Reliance Natural Resources Fund, which closed on January 30, collected Rs 5,660 crore — the second largest collection by any new fund offer. Even during the market crash this year, most of the mutual funds were fully invested. Mutual Funds are now being considered as the best investment tool for retail investors and with savings rate in India at 32.4 per cent, this money is being channelised into the equity markets. The growth of the industry should also be seen in the light of steps taken by market regulator SEBI to make mutual fund investing easier and the industry's efforts to launch innovative schemes, develop strong distribution network to help proliferate the Mutual Funds concept to semi-urban and rural masses. A strategic shift indeed!

The following funds find their place in the NFO nest in February, 2008.

HSBC Emerging Markets Fund Opens: 28 Jan , 2008 Closes: 25 Feb, 2008

HSBC Emerging Markets Fund is an open-ended scheme that seeks to provide long-term capital growth by investing in emerging economies the world over. The fund would invest both within and outside India. It can invest up to 100 per cent of its assets in overseas markets. The fund may also invest a limited proportion in domestic debt and money market instruments in case equity markets are considered unfavourable.

Birla Sun Life Pure Value Fund Opens: 17 Jan , 2008 Closes: 1 Mar, 2008

The three-year close-ended fund seeks to generate consistent long-term capital appreciation by investing predominantly in equity and equity related securities by following value investing strategy. The fund would target companies having excellent business performance, high earnings potential and good management. The fund would invest 85% in equity and 15% in debt. Benchmarked against BSE 200, the fund would make investment in about 40-45 stocks across half a dozen sectors.

HSBC Small Cap Fund Opens: 19 Jan , 2008 Closes: 3 Mar, 2008

A three-year close-ended diversified equity scheme with automatic conversion into open-ended equity scheme at the end of the stated period, the fund aims at providing long-term capital appreciation primarily from a diversified portfolio of equity and equity related instruments of small cap companies. The scheme may invest 65-100% in equity and equity related instruments of small cap companies. It may have investment of 0-35% in equity and equity related instruments of other than small cap companies. The scheme will invest 0-35% in debt and money market instruments.

Morgan Stanley A.C.E. Fund Opens: 11 Feb , 2008 Closes: 10 Mar, 2008

An open-ended equity scheme, Morgan Stanley A.C.E (Across Capitalisation Equity) Fund aims at generating long-term capital growth from an actively managed portfolio of equity and equity-related securities, including equity derivatives. The fund will seek both value and growth and will not be restricted in terms of sector, themes or market capitalisations.

Mirae Asset India Opportunities Fund Opens: 11 Feb , 2008 Closes: 10 Mar, 2008

Mirae Asset Global Investment Management (India) has launched its first equity fund, the Mirae Asset India Opportunities Fund. This open-ended diversified equity fund would invest between 65 per cent and 100 per cent in equity and equity related securities and up to 35 per cent in money market instruments or debt securities, which includes up to 25 per cent of corpus in securitised debt. The fund would seek to deliver returns by focusing on select high performance sectors or industries. It also offers complete flexibility to diversify across sectors, market caps and investment styles and thus seeks to minimise the risks during market volatility.The fund would be benchmarked against BSE 200.

Tata Growing Economies Infra Fund Opens:18 Feb,2008 Closes:18Mar,2008

It is an open-ended diversified equity fund with the investment objective of generating capital appreciation / income by investing predominantly in equities of companies in infrastructure and other related sectors in India and other growing economies of the world. The investment focus would be guided by the growth potential and other economic factors of the countries.

Franklin Build India Fund, DSP Merrill Lynch Green World Fund, Sahara Power Fund, Standard Chartered Small and Mid cap Equity Fund, Benchmark S & P CNX 500 Fund, Kotak Banking and Financial Sector Fund, LIC Banking & Financial Sector Fund, Principal Infrastructure Fund, Standard Chartered Ancillary Companies Fund, HSBC Agri and Natural Resources Fund and HSBC Infrastructure and Real Estate Fund are expected to be launched in the coming months.

Gem Gaze - Fund of Funds

Gem Gaze

A Balanced Diet?

Here is a genre of funds that serves you asset allocation and personalised portfolio solution against the backdrop of your long-term financial goals on a platter! The logic is hard to beat. Fund of Funds claim that it is difficult for one fund to maintain a top quartile performance over long periods of time. Different funds behave differently under various market conditions. In the current market, the variance between the best and worst equity funds is 60 per cent. Fund of Funds seek to eliminate these issues by giving access to the best performers through one scheme. By investing in the best of mutual funds and having the flexibility of market capitalisation positioning, they claim to be in a position to deliver superior returns and consistent performance.

Fund of Funds, introduced by Franklin Templeton Mutual Fund in October 2003, are less popular with Indian investors. Less than a third of the Fund houses offer them. Some are outward-looking, scouting for healthy menu plans, while some others are inward-looking, resorting to navel gazing that narrows your investment universe and hampers your returns.

Franklin Templeton India Life Stage Fund of Funds

Launched in November 2003, FT Life Stage Fund of Funds are asset allocation funds suitable for investors of different age groups. They rebalance at half-yearly intervals to maintain a defined allocation. The first four FOFs 20s, 30s, 40s and 50s Plan invest in these FT Funds -Franklin India Bluechip, Franklin India Prima, Templeton India Growth Fund, Templeton India Income Fund, Templeton India Income Builder Fund - in different proportions. For instance, the 20s Plan invests 80% in equities and 20% in debt while the 50s plan invests 20% in equities and 80% in debt. The 50s Floating Plan invests 80% in Templeton Floating rate Income Fund. The 40s plan followed by the 20s plan have been giving decent risk-adjusted returns, with one-year reurns of the above-mentioned plans hovering around 14-16%. But the rigid portfolio break-up and defined schemes curtail the discretionary powers of the fund manager.

Prudential ICICI Advisor Series

Launched in Nov 2003, Prudential ICICI Advisor Series offers five FoFs with varying equity and debt exposure. The range starts with a 'Very Cautious' plan that has no equity exposure and invests in cash and money market funds. At the other extreme there is the 'Very Aggressive' plan that invests 90 to 100 per cent of its corpus in equity. In between lie the 'Cautious', 'Moderate' and 'Aggressive' plans, each with a larger equity exposure than the preceding fund. ICICI Prudential Power, ICICI Prudential Growth Plan, ICICI Prudential Infrastructure, ICICI Prudential Emerging Star and ICICI Prudential Dynamic Plan are the funds that figure in the FoF plans in varying proportions. The one-year return of the very aggressive plan is a modest 16.15%.

Birla Asset Allocation Plans

Birla mutual fund launched its FOF, the Birla Asset Allocation Plan, in January 2004. The scheme provides four different plans - Aggressive plan, Moderate plan, Conservative plan and Dynamic Debt Plan each having separate asset allocation. It has a floating portfolio mix and freedom to choose any of the Birla Sunlife schemes. With a one-year return of 16.22%, the performance of the moderate plan supersedes that of the aggressive plan whose return during the same period is only 15.65%.This can be attributed to the choice of loss-making schemes such as Birla New Millenium – the Aggressive plan has a higher proportion of this fund compared to the moderate plan which has a higher proportion of the better performing Birla Dynamic Bond Fund.

Kotak Equity Fund of Funds

Kotak Equity Fund of Funds, launched in July 2004 is an open-ended Fund of Funds scheme that invests 90%-100% in diversified equity schemes and rest in liquid schemes across multiple fund houses. The portfolio of the scheme is well-diversified across seven equity based schemes. Kotak 30, SBI Magnum Equity, Birla Sun Life Frontline Equity Fund, Tata Pure Equity and Birla Midcap are the top five holdings, which contribute 83% to the total portfolio. Software services, capital goods, telecom and banks are among the top sectors in the overall portfolio of mutual funds held by Kotak Equity FoF. Looking at the overall portfolio it is diversified across large number of sectors providing investors the benefit of two-tier diversification. And since its investments are spread over seven equity funds, no single stock accounted for over 3.5 per cent of the fund's overall portfolio. What a diversification! The fund's return for the last one year has been on the lower side at 22.9% as against the category average of 23.64%. However, for the last one month it has outperformed its peers like ICICI Prudential Aggressive Plan and FT India Life Stage Fund of Funds The 20s Plan, reporting a return of 6.64% better than the category median of 5.64%.

Fidelity Multimanager Cash Fund of Fund

Launched in January, 2006, Fidelity Multimanager Cash Fund of Fund is the first liquid fund of fund in the country. It invests in cash funds or ultra short-term debt funds like HSBC Cash Institutional Plus (20%), ICICI Pru Liquid Super Institutional Plan (20%), HDFC Cash Mgmt Savings (20%), Principal CM - Liquid Institutional Premium Plan (20%) and Cash (20%). It has earned a one-year return of 7.78%, above the category average of 7.5%.

OptiMix Equity Multi Manager Fund of Funds

This 3 year close-ended scheme, launched in October, 2006, has invested in equity funds of various fund houses like Birla Sunlife Equity, DSPML Top 100 Equity, Sundaram BNP Paribas Select Focus, Reliance Growth and JM Emerging Leaders. It has earned a return of 17.42 % in the past one year.

FUND FLAVOUR - FUND OF FUNDS

FUND FLAVOUR

Fund of Funds

Faux pas and mayhem!

• 
  Less than 10% of the fund managers have a ten-year record.
• 
  A paltry one fifth have a five-year record.
• 
  Half have spent a mere two years or less at the helm of their funds.

The odds are stacked against us. The fund management industry has risen to the occasion! It has faced these frightening facts with foresight by offering fund/manager research and selection in one product: a Fund of Fund (FoF) or a Multimanager Fund.

Funds as building blocks…

FoFs are mutual fund schemes that invest in other mutual fund schemes. An asset-allocation FoF invests in equity schemes and debt schemes and a single asset-class FoF invests predominantly in a single asset class, i.e. either equity schemes or debt schemes. The FoF offered in India generally are asset-allocation FoFs and thus tend to be hybrid in nature. Prominent players include Kotak Equity FoF, Fidelity liquid FoF etc. FT India Dynamic PE Ratio Fund of Funds was the first ever Fund of Funds launched in India in 2003 and it has grown at a CAGR of around 35%, which is decent by all standards. As the performance of the FoFs depends on the performance of the underlying scheme, in order to exploit its true potential, the fund manager has to be very astute while selecting the schemes across the fund houses. However, in India, fund houses have concentrated in investing in funds from their own stable, which has restricted their performance. Apart from Kotak Mutual Fund, ABN Amro and Fidelity, all other fund houses offering FoF schemes are investing in the schemes from their own AMC. An FoF that invests only in schemes from its own fund house is Closed Architecture, Single AMC FoF or Fettered FoF. Semi-Closed Architecture or Unfeterred FoF invests in other fund houses as well.

Managers as building blocks…

Multi manager funds cherry-pick the underlying fund managers in such a way that each brings a different style to the table that dovetail seamlessly into a complete portfolio. The fund is carved into small chunks with segregated mandates, tailored to their precise requirements, with each manager responsible for his/her own segment. OptiMix Financial Planning Multi Manager FoF Scheme by ING Vysya Mutual Fund is a multi manager Fund. OptiMix is a financial planning approach to funds. Fund management services are offered to financial planners, wherein they do the client interface and then pass on the funds to OptiMix to manage.

Are more minds better than one? Or do too many cooks spoil the broth? Those are the questions you need to ask when you consider whether to invest in a FOF or multi-manager mutual fund, which is one of the greatest ideas that has tread the path of the fund industry.

Fund of Funds have carved a prominent position on the pedestal with performance not hinged on a single fund manager and automatic periodic rebalancing with minimum monitoring.

Formidable Fortress…

The positive spin is that the FoF/multi-manager approach combines the top picks from some of the India’s leading funds/money managers with double diversification across asset classes and investment style.

FoFs provide a dose of stability to your holdings.

Convenience in investing and monitoring and affordability with a wide reach is the forte of FoFs and multimanager funds. Suppose you wanted to invest in 5 equity funds and 5 debt funds. Assuming each fund has a minimum stipulated investment of Rs 5,000, you would need Rs 50,000. In a FoF, Rs 5,000 would do the job.

Fund of funds can often invest in desirable institutional funds that are outside the purview of retail investors. They also have the ability to invest in some load funds without paying the load.

The movement of the fund managers from one fund to the other does not affect the performance of FoFs or multimanager funds since they are not at the mercy of a single fund manager but draw expertise from a smart pool.

Asset allocation accounts for 90% of portfolio performance. Portfolio rebalancing is one of the greatest benefits that FoFs and multimanager funds offer. Rebalancing involves capital gains tax, if you do it by holding individual mutual funds. When a FoF does it, there is no long/short term capital gains tax, which can be as high as 30% on short-term capital gains in a debt-fund. Moreover, you end up selling when the markets are rising and buying when the markets are falling, thanks to rebalancing. This psychological benefit transcends time and the ill-effects of market timing.

Patchwork portfolio, “cost of costs”and tax do raise their ugly head and disfigure the otherwise flawless sculpture…..

… or a Crumbling Citadel?

On the flip side, Feterred FoFs which invest in different funds of the same AMC are more prevalent and will not be truly diversified with duplication of holdings and style and unfeterred FoFs result in a patchwork portfolio that lacks any clear direction or investment philosophy.

The effective cost for you works out to around 3.25%(equity) and 2.25%(debt) for FoFs which charge an extra 0.75% as annual management fees over and above fees of 2.5 % and 1.5% for equity and debt funds respectively, as investors have to bear the recurring expenses of the scheme in addition to the expenses of underlying schemes. Thus there is a 'double layering' of costs. In addition, if there is going to be a churn in the portfolio, a certain percentage of returns will be lost due to the cost of re-balancing. True risk control requires highly skilled personnel who understand and can monitor FOF investment strategies, as well as the infrastructure to model risks and set boundaries for action. No small order. This can triple or quadruple the cost base of FoFs.

Your post-tax returns will take a beating if you invest in an equity FoF since you will be liable to pay dividend distribution tax of 14.03% or LTCG tax of 10% (without indexation), which is otherwise not applicable for a normal equity mutual fund.

FoFs under fire or in favour?

Globally, the concept is very popular with leading fund families such as Vanguard and Fidelity operating FoFs in the US but it has yet to gain due recognition in India. Will it take off in India? Yes, indeed, if you are keen on savouring the rich variety, enormity, economy, churn and convenience coupled with automatic rebalancing and market timing of this concept whose time has come.