Monday, July 28, 2008


Fund Fulcrum
(July 2008)

The combined AUM of the 33 fund houses in India dropped to Rs.564,599.28 crores in June 2008 as compared to Rs.600,266.32 crores in May 2008 according to AMFI. The month of June usually witnesses outflows on account of advance tax payments. In addition, the recent rate hike has sucked out liquidity from the mutual fund industry. Reliance continues to be the top fund house in the country despite its AUM falling to Rs.90,813.45 crores at the end of June 2008 from Rs.98,430.93 crores the previous month. But Reliance is optimistic and expects 80% growth in the asset base and 100% jump in the size of investors from 70 lakhs at present (35 lakhs in 2006-2007 and 67 lakhs in 2007-2008). ICICI Prudential AMC has celebrated the completion of 10 years in the Indian mutual fund industry. Way back in 1998, the AMC started off with an AUM of Rs.160 crores. ICICI Prudential witnessed a gain of Rs 413 crores in its assets at Rs.59,473.58 crores as against Rs.59,060.02 crores in May, 2008. HDFC Mutual Fund moved ahead of UTI Mutual Fund as the third largest mutual fund with an AUM of Rs.52,710 crores as against UTI Mutual Fund’s Rs.50,770.56 crores. AUM of Franklin Templeton Mutual Fund stood at Rs.24,742.06 crores as against Rs.27,199.87 crores in May ’08.
Piquant Parade
Axis Bank, formerly known as UTI Bank, has obtained the RBI’s permission to launch its mutual fund business.
The joint venture of Pioneer Global Asset Management (51%) and BoB Mutual Fund (49%), Baroda Pioneer Asset Management Company Ltd. has been approved by SEBI. While Pioneer has a successful track record of over 80 years globally, BoB has been a mediocre player with a meagre AUM of Rs.59.54 crores. The wide customer base spread across 2800 branches is the forte of BoB.
Union Bank of India (51%) has entered into an agreement with Belgium-based KBC Asset Management (49%) to form a joint venture AMC in India. Union Bank has plans to use 1000 of its branches initially and include all the branches in future. Union Bank already has a JV with Bank Of India and Japanese Insurance firm Dai Ichi, in which it holds a 23% stake. Union Bank of India plans to include 500 marketing executives to strengthen its mutual fund business and is expected to announce the top management of the new company in the next few months.
Japanese Financial Services major, Nomura, signed a non-binding MOU with LIC to explore the possibilities of expanding ties. The deal could pave the way for the Japanese company to acquire a stake in LIC AMC. Nomura could hold upto 26% in the joint venture. The other option to be explored was to adopt a holding company structure. The talks are at a preliminary stage and the details of the deal are yet to be worked out.
Fidelity Asset management and Principal PNB signed agreements with Bajaj Allianz Financial, which has over 55,000 agents, for the distribution of its products. The number of agents is expected to increase as Bajaj increases the number of AMFI certified agents by training their insurance agency network of over 3 lakh agents.
Arcelor Mittal launches Clean Technology Venture Capital Fund with an initial investment of $20 million in California-based Miasole. The fund would support commercialisation of clean energy technologies to help reduce greenhouse gas emission and focus on ventures that have relevance for the steel industry. The company has also announced the launch of a Carbon Fund with an initial investment commitment of $157 million. The fund would invest in renewable energy, energy efficiency, methane capture and greenhouse gas reducing technologies. Donald Trump Jr. plans $ 1 billion Realty Fund for India.
UTI mutual Fund’s ULIP, the original Unit-linked Plan, which decades later was copied by almost all insurance companies to grow their business manifold is making a comeback, with enhanced features like raised target amount of Rs.15 lacs (as against Rs.5 lacs earlier) and monthly SIP.
Kotak Securities has launched Autoinvest which allows investors to invest through SIP in Gold ETFs along with the equity and mutual funds all in one portfolio.
HSBC and ICICI Prudential with SBI have been shortlisted to manage Rs25,000 crores in Provident Fund of about 4 crore employees annually.
Bharathi AXA is set to make a flash in the mutual fund industry with a variety of products and facilities – Treasury, Liquid and Equity (with Eco Plan). Sahara Mutual Fund, with a view to scaling up operations, plans nine new funds. Taurus AMC, which is one of the smallest by AUM, is planning to expand.
Edelweiss plans US$ 200 million Distressed Asset Fund. A host of foreign funds are in this space. There are nine ARCs in India, with the amount of stressed assets in India in the range of $ 23 billion.
UTI has decided not to go ahead with the IPO. SEBI had cleared UTI’s draft Red Herring prospectus on 22 April, 2008. The AMC was supposed to complete the IPO process within 3 months, which expired on July 21. UTI AMC opens a Financial Centre at Bhagalpur.
With high volatility in the equity markets and interest rates looking to go further northwards, mutual funds are introducing new products such as Equity-linked FMPs but their complexity is keeping retail investors at bay.
Morgan Stanley executes the first Direct Market Access Trade.
AMFI, in collaboration with rating agency CRISIL, is working on an appropriate methodology to value securities like floating rate bonds. The methodology could be extended to other instruments like Pass Through Certificates (PTCs), which are floated against securitised loan assets.
Fidelity launches online platform, Funds Network – a technology powered solution, which will provide mutual fund advisors with business tools that will support transactional and reporting requirements as well as planning and guidance needs. This platform will offer online a range of funds from a number of fund houses.
Regulatory Rigmarole
The Confederation of Indian Industry and Price Water House Coopers report stated that with the high cost of operations in the initial years and a relatively longer gestation period, there is a case for reconsideration of the Rs. 10 crores networth criteria set from the present Rs. 2 crores for obtaining the mutual fund licence.
The conflict of interest between sponsors of Mutual funds, its trustees and AMC may come under the scanner of SEBI. Many AMCs carry out practically all activities pertaining to the fund on behalf of the trustees. The AMC is virtually the face and mouthpiece of the fund. The reason for concern is because Trustees are expected to be the first level of regulators to safeguard the interest of mutual fund investors. The report submitted by the Trustees to SEBI on the functioning of the AMC, rely heavily on the data provided by the AMC. Mutual funds, in practice, do not have employees and even the trustee companies do not have employees. In fact, only the AMC has employees to manage the interest of the mutual funds. The first school of thought feels AMCs and mutual funds have similar objectives and so there cannot be a conflict of interest. The second school of thought says that there is a conflict of interest as the trustees are appointed by the AMC, besides being regulated and controlled by it. In a way, the trustees owe their jobs to the AMCs. By the very nature of appointment and compensation they are controlled by AMCs.
UTI Mutual Fund could be made accountable under the Right to Information Act. In a move that could allow investors to seek data on the company’s financial management, the Central Information Commission (CIC) would soon consider whether the financial control and profit sharing of UTI AMC calls for public accountability under the transparency law. The panel would consider whether the company is substantially financed and if its affairs are substantially controlled by the government. The company has been jointly promoted by SBI, LIC, PNB and BOB, each with 25% stake. The RTI Act states that any institution established by the government or in receipt of direct or indirect funds from the government shall have to comply with the provisions of the law. CIC has sought from the company last two years Balance Sheet, Profit and Loss Account, Articles and MOA. Investors have taken the RTI route to get hold of the closely guarded Financial Data. CIC had last year directed stock exchanges and SBI’s Financial Services Arm, SBI Cards, to set up an information redressal mechanism under the transparency law.
With global uncertainty, rising fuel prices and inflation at double digits, the Indian stock market is witnessing tough tides. Nevertheless, the AUM of mutual funds in India which stood at 8% of the GDP has significant potential to go up to 20%, owing to a slew of opportunities.