Monday, April 27, 2009


(April 2009)

For the first time in five years, the average assets under management of mutual funds have fallen. The AAUM of fund houses fell by 7 per cent or Rs 36,798 crore to Rs 4.93 lakh crore in the financial year 2008-09, as against Rs 5.30 lakh crore in 2007-08, according to data from the Association of Mutual Funds in India. The mutual fund industry has suffered an erosion of a whopping Rs. 1 lakh crore during the month of March alone due to huge redemptions from banks and institutional investors in liquid and money market funds. However, fund managers believe that 80% of the amount would come back into the system by April 10, 2009.

The average asset under management for the month ended Mar. 31, 2009 were at Rs 4.93 lakh crores a slight decline of 1.53% from Rs 5.01 lakh crores for the month ended Feb. 28, 2009, as per data published by AMFI. The plunge in assets can be attributed to the withdrawal by banks from liquid funds since March marks the end of the financial year. 24 fund houses saw a negative growth in their AUMs while 11 saw a positive growth in their AUM. Reliance Mutual Fund which is the leader of the pack saw a 0.81% decline in its AUM to Rs 80,963 crores in March 2009, HDFC Mutual Fund (the only mutual fund in the top 5 to register an increase in AUM) saw a growth of 1.92% to Rs 57,956 crores to clinch the second position. ICICI Prudential Mutual Fund which held its third place saw AUM fall by 3.88%. Baroda Pioneer Mutual Fund was the highest gainer for the second consecutive month with a 30.90% growth while Religare Mutual Fund was the second biggest gainer with a 11.04% rise in AUM. Benchmark Mutual Fund was the biggest loser with a 22.58% fall in its AUM followed by Edelweiss Mutual Fund which experienced a fall of 27.33% in its AUM.

Piquant Parade

Germany’s Allianz will take a 51% stake in the Indian asset management joint venture firm Bajaj Finserv
to start its mutual fund operations in India.

IDBI Bank has received the Board approval for setting up an AMC in India.

DBS Cholamandalam AMC has formalized a tie-up with Bank of Rajastan to offer a one-stop solution to investors and widen the reach of retail participants in the mutual fund industry.

UTI has short-listed three firms in the process of selecting a strategic partner for selling a 26% stake within 3 months.

Bharti Enterprises is planning to exit its mutual fund joint venture Bharti AXA Investment Managers so as to induct a partner from the banking industry to strengthen its distribution capabilities. Bharti AXA Investment Managers, a joint venture between Bharti Group (25%) and AXA, a French investment major, commenced its operations only in July 2008.

iFast India has launched a financial integrated wealth management platform. The online business-to-business platform will offer integrated mutual fund products and services to independent Financial advisors. The platform will act as a link and offer a comprehensive platform to the IFAs, Financial Institutions, including investment management, research, investment training, IT services and back office functions. It has empanelled with 23 AMCs with AUM of about Rs 4.5 lakh crores.

Birla Sun Life Mutual Fund has bagged the most coveted and respected industry award - CNBC TV 18 Crisil – ‘Mutual Fund House of the Year’ award for the second successive year. DSP BlackRock Investment Managers has been recognized as amongst the best performing Mutual Fund Houses in the equity segment during the past 12 to 15 months – the worst period of economic downturn.

Regulatory Rigmarole

SEBI regulations require all funds to have a minimum of 20 investors with no single investor accounting for more than 25 per cent of the corpus of a scheme/plan. Eight open-ended interval schemes were not able to meet these requirements. Consequently, they had to wind up.

SEBI has imposed a ceiling on resources allocation to debt instruments of a single entity by any mutual fund. No mutual fund will invest more than 30% of its net assets in money market instruments of an issuer. However, the schemes could continue to invest upto 15% to 20% of their net aassets in other investment grade net assets of the issuer. This move is expected to lower the risk associated with exposure to a single entity. These limits will, however, not cover investments in Government securities, T Bills and Collateralised Borrowing and Lending Obligations.

The RBI Policy has maintained the extension of refiance facilities to Mutual Funds and other entities to 31 March 2010, thereby, facilitating stability in the short-term interest rates.

SEBI is overhauling the seven-year-old risk management circular for mutual funds. The proposed amendments would focus on improving governance and risk management practices. Sebi is also insisting on separate portfolio and operation functions, proper empowerment for persons supervising risk management, ensuring that investments are carried out as per what is mentioned in offer documents and that investments follow established norms, among others.

AMFI has suggested a two-way load structure for selling mutual fund products to investors comprising variable load and no load. Under Plan A, a variable load or commission could be charged depending upon the service or advice rendered by the distributor, while under Plan B, there would be no load or commission charged to investors but the distributor would be compensated by the AMC. However, in that case, annual expenses charged to the schemes will have to be increased by 0.75%.

Fund houses and AMFI have met to decide treatment of bad assets. The issue is whether a fund house can write it off entirely or make a provisioning against the asset. The fund houses would also seek clarification on whether they should start provisioning immediately when the paper is downgraded or wait for it to slip to the default category or to eventually default. This is the first time fund houses may face possible default on investments. According to the current SEBI rules, an asset is classified as non-performing if the interest and or principal have not been received for one quarter from the day such installment has not been received. Once an asset is classified as bad, provisions should be made in the fund house’s books for all interest accrued till that date. The NAVs of mutual funds will suffer as the bad asset will appear as an expense.

The mutual fund (MF) industry is heading towards a serious asset-liability mismatch problem with almost 75-80% of its assets are short-term while most of its lending is long term. The mutual fund industry had banking money worth Rs 13000 crores and it swelled up to Rs 90000 crores by February, 2009. Though banks have long-term money, they are not lending but mutual funds which have banks short-term money parked with them are lending long-term to corporates. There is serious risk of asset-liability or maturity mismatch, as banks can withdraw money parked with mutual funds within 24 hours. The solution to this problem is in self-control by trustees and mutual fund players themselves.

Small investors seem to have hit the pause button, especially those in the suburbs. According to financial advisory firms in the suburbs, investors are refusing to put their money in debt or equity products due to uncertainties in the economy. However, their affluent downtown counterparts say most of their clients are sticking to their investments, though some have downsized their portfolio. But the recent rally has injected a revival of interest. But the ones who invest through thick and thin are the ones who will be out of the woods at the earliest…

Monday, April 20, 2009

NFO Nest - April 2009

NFO Nest
(April 2009)

Debt funds dive undau(e)nted…

Since the start of 2009, 18 mutual funds have filed offer documents with the Securities and Exchange Board of India. Out of these, 10 of them are debt oriented. But all are not conventional liquid funds, interval funds or fixed maturity plans - there are indeed interesting offers — Tata PSU Bond Fund, Tata Triple Ace Fund and DBS Chola Select Income Fund - Flexi Debt and Regular Debt Plans, to name a few. The NFOs this month - the Gold Fund and the Target return Fund - are, in fact, disguised “debt” funds. A common vein runs through them all – a strong focus on safety and risk aversion.

The following funds find their place in the NFO Nest in April, 2009.

SBI Gold Exchange Traded Fund
Opens: 30 March, 2009 Closes: 28 April, 2009

Given the uncertainties in the global economic environment, gold as an asset class offers an excellent hedge. Gold ETF is the most efficient way of owning this asset. It is an interesting option to enhance portfolio diversification. SBI Gold Exchange Traded Fund aims at investing 90% to 100% in gold and gold bullion and 0% to 10% in debt and money market instruments. This passively managed open ended mutual fund scheme would invest in gold and endeavour to track the price of gold. The investment objective of this gold ETF is to seek to provide returns that closely correspond to returns provided by the price of gold through investment in physical gold. However, the performance of the scheme may differ from that of the underlying asset due to tracking error. The scheme will be benchmarked against the price of gold, based on the prices given by London Bullion Market association (the morning fixing). Each unit of this scheme will be approximately equal to the closing price of one gram of gold on the date of allotment. The units of this scheme will be listed on the NSE. The entry load for applications for up to Rs 25 lakh is 2.50 per cent, for Rs 25 lakh-Rs 50 lakh 1.50 per cent, for Rs 50 lakh-one crore one per cent and for applications above one crore there is no entry load. Post listing, investors have the option of exiting the scheme at prevailing NAV without any exit load.

ICICI Prudential Target Returns Fund
Opens: 15 April, 2009 Closes: 14 May, 2009

ICICI Prudential Target Return Fund seeks to generate capital appreciation by investing in equity or equity related securities of large market capitalization companies constituting the BSE 100 index and providing investors with options to withdraw their investment automatically based on triggers for preset levels of return as and when they are achieved. The fund will invest 65-100% in equity and equity related securities with medium to high-risk profile. It will invest up to 35% of the total assets in debt and money market instruments with low to medium risk. The investments in ADR/GDR can be up to 50% of allocation to equity & equity related securities. The fund may invest up to 75% of its net assets in derivatives. The benchmark index for the fund is BSE 100 Index and Sanjay Parekh will be the fund manager.

The Fund aims at aiding investors in automating their profit bookings, thereby, imparting the much needed safety in times of uncertainty. In this fund, gains made above a certain trigger percentage – 12%, 20%, 50% or 100% - automatically get redeemed from the fund and is switched over to a fixed income fund (one of the four pre-selected eligible debt schemes). Protection of returns with reasonable gains seems to be the USP of the fund. This can be achieved through self-discipline and attention a rare trait in investors…These triggers are an additional facility and not a part of the fund itself. However, as the name may suggest, there is no guarantee or assurance of returns in the fund. But the fund is aimed at enhancing the potential holding period returns of investors by taking emotion out of investing.

IDFC Investment Advisors, the asset management company of IDFC Mutual Fund has launched Rs 5 billion portfolio fund - IDFC Hybrid Infrastructure Portfolio (HIP). The fund will aim at investing money in the equities of companies involved in infrastructure activities for a span of 4-5 years and is expecting returns in the range of 35%. This fund is particularly designed for High Networth Individuals. Mid-size infrastructure companies tend to do well in a bear market and the fund will invest in such companies. The fund will also target investments in private equity deals and in private investments in the public enterprises space and 75% of the corpus will be invested in the unlisted space, though the company would keep itself away from projects with long gestation periods, unlike the conventional private equity deals. The company has mopped up about Rs 2.50 billion under HIP in the last one month, and expects to raise another Rs 2.50 billion from a group of high net worth individuals (HNIs) over the next few months.

SHINSEI PSU Bond Fund, Kotak Gold Fund, Sundaram Paribas Gold Plus and Religare Credit Opportunities Fund are expected to be launched in the coming months.

Monday, April 13, 2009


(April 2009)

Gems – a rarity in reality!

With a volatile domestic market during the past one year, ensuing the arrest in the four year bull run, investors have been seeking greener pastures… Do the international mutual funds in India fit the bill?

I highlight the three GEMs in the following list of funds introduced in the April 2008 GEM GAZE .

Principal Global Opportunities Fund

Principal Global Opportunities Fund is a feeder fund with 99.3% invested in PGIF Emerging Markets Equity Fund and the rest in cash and cash equivalents. The fund manages over $ 6 billion in emerging market assets. The fund is a bottom up stock selector. As part of risk control, it takes controlled exposure to individual stocks, sectors and countries vis-à-vis the benchmark. So, despite the controlled sector and country calls, the coverage ratio of the fund is 35-40 %. It follows a stock specific strategy with no sector calls or country calls. The fund takes multiple small bets rather than a few big bets. The performance over the past one year has been dismal at -34.90% as against the category average of -31.46%. In the past one month, however, the returns have turned positive at 18.39% as against the category average of 17.49%. The size of the fund is Rs.159 crore as on 31 March, 2009. The expense ratio is .88% and the portfolio turnover ratio is 10%.

Templeton India Equity Income Fund Gem

With 95% of the portfolio in equity, the top three sectors, namely, finance, energy and metals constitute more than 40% of the portfolio. The one-year return has just been only -32.4% as against the category average return of -34.24%. The returns have been a positive 33.2% as against a category average of 24.3% in the last one month. It is worth mentioning that in the equity diversified category, the largest gainer in March 2009 was Templeton India Equity Income Fund with an impressive 14.18% as against the average gain of 7.04 for the category, in general. The size of the fund is Rs. 754 crores as on 31 March, 2009. The expense ratio is 2.19% and the portfolio turnover ratio is 15.08%.

Fidelity International Opportunities Fund Gem

The top three sectors of Fidelity International Opportunities Fund, finance, healthcare and services constitute nearly 50% of the portfolio, with equity constituting 98% of the portfolio. The one-year return has been -33.93% as against the category average of -34.24%. The one-month return has been an impressive 25.63% as against the category average of 24.3%. Fidelity International Opportunities Fund was awarded ICRA 5-star Gold award 2009 in the “Open-ended diversified equity– Aggressive”, indicating performance within the top 10% of the category. The entry load has been increased to 3% from 2.25% for investments below Rs. 5 crore with effect from 1 January, 2009. The size of the fund is Rs.548 crores. The expense ratio is 2.03% and the portfolio turnover ratio is 21%.

DWS Global Thematic Offshore Fund

DWS Global Thematic Offshore Fund is a feeder fund with 98.7% invested in DWS Strategic Global Themes Fund. Though the one month return has been 16.85% as against a negative return of -33.90% in the past one year, the performance has been below the category average during both the time periods. With a fund size of a mere Rs.57 crore, the expense ratio stands at 0.74%.

Sundaram BNP Paribas Global Advantage Fund Gem

Depicting a dazzling diversity, the fund has its holding spread over 11 foreign equity mutual funds. Though the fund has slightly underperformed its category average by a narrow margin in the past one year, in the last one month, it has not only entered the positive territory but has also beaten the category average by a wide margin - 20.26 % as against the category average of 17.49% . The size of the fund is Rs.135 crores as on 31, March 2009. The expense ratio is 0.75%. The entry load is 2.75% for investments below Rs. 2 crore and the exit load is 1.5% for redemption before a period of 12 months.

ICICI Prudential Indo Asia Equity Fund

Predominantly equity-oriented with 97% of the fund invested in equity, 33% is invested in one foreign equity mutual fund, IOF Asian Equity Fund. Nearly two-thirds of the fund is invested in the top three sectors, finance, energy and FMCG, with 44% accounted for by the finance sector alone. During the market meltdown, the fund has fared far better than its peers and category. Considering the fact that the fund was in the deployment phase when the market tanked in January 2008, the exceptional performance may not be indicative of future returns. The size of the fund is Rs.363 crore. The expense ratio and portfolio turnover are high at 2.32 % and 280% respectively.

Kotak Global Emerging Markets Fund

Kotak Global Emerging Markets Fund channels its assets to the T. Rowe Price Emerging Markets Fund. The size of the fund is Rs. 159 crore. There is zero entry and exit load on the fund.

ABN Amro China India Fund

Renamed Fortis China India Fund, the fund has an asset size of Rs. 82 crores, with 95% invested in equity. 58% of the funds is invested in the top three sectors – energy, finance and FMCG. The one year return was – 28.45% as opposed to the category average of -34.24%. But its one month return, though positive, has taken a beating since it lags its category average - 22.78 % as against 24.3%.

Franklin Templeton India Opportunities Fund
The fund has the tendency to take concentrated, stock-specific exposure, at times investing as much as 10 per cent of the portfolio in individual stocks. The fund may, therefore, be suitable for investors with a high-risk appetite looking for higher-than-average returns. The fund’s NAV has lost 55 per cent in the last one year and has largely tracked the returns of its benchmark - BSE 100 over the same timeframe. In July 2008, the fund witnessed a change in manager and over the next two months it added 31 stocks to its portfolio. The portfolio has expanded from a compact 32 to 58 stocks now. The fund moved from a concentrated portfolio to a more diversified portfolio, but prefers to take concentrated exposure to specific stocks. With change in strategy, the fund was able to contain the downside better than the benchmark over the past three months. However, it may be too early to tell if this investment strategy will click over the long run. The top-three preferred sectors over the past few months continued to be banks, petroleum and capital goods. The fund has added higher exposures to consumer non-durables and pharmaceuticals, making for a more defensive exposure.
The gloomy global scenario has deprived nearly two-thirds of the funds in the list of their GEM status. Nevertheless, the three GEMs that we have zeroed in can adorn the tattered portfolio of the investor and provide the much needed diversification when he is in dire straits.

Monday, April 06, 2009



Global/International Funds

Beyond borders - one world… one fund…

There was a time when global investment advisors were cajoling their clients to invest in emerging markets with a focus on India and China. Now it appears that Indians would be wise to look abroad. The average Indian equity diversified fund was down by nearly 51% in 2008, while the category of Indian mutual funds that invest overseas lost only 32% during this period. Currently, there are 16 open-ended funds that invest the bulk of their assets in foreign countries. These include infrastructure funds, commodity funds, funds that invest in gold mining stocks and the funds dedicated to emerging markets. These funds either take direct exposure to foreign equities or invest in foreign mutual funds. The total assets of these funds are Rs 3,076.71 crore (December 31, 2008). The best fund under this category is DSPBR World Gold Fund that invests in gold mining stocks by purchasing units of Merrill Lynch International Investment Funds - World Gold Fund. It shed nearly 18%. The worst fund, Principal Global Opportunities that invests in the Principal Emerging Market Fund, fell by 42%. Meanwhile, the fall in the equity diversified fund category was in the range of 31% to 81% in 2008. Even in equity diversified category there are 7 open-ended funds that have a leeway to invest in foreign markets which can go up to 35%. The average fall in these funds was 45% in 2008, below the average fall in the equity diversified category of 51%. The Indian market is amongst the worst hit as it has lost nearly 49% per cent in 2008 as against the 39% fall in the MSCI World Index over this period. But the 5-year annualised return of the MSCI World Index is way below at -3.93% as against the Sensex return of 9.96%.

Snail’s pace to rocket’s pace!

Indians wanting to globally diversify their portfolio have no dearth of options. From being permitted to invest $500 million in 1999, mutual funds can now go up to $7 billion. However, it is a completely different matter that fund houses have given a cold shoulder to their enhanced foreign investment limit. Even the first Indian fund with a mandate to invest abroad — Principal Global Opportunities — was launched in March 2004, a good five years after Indian funds were permitted to invest abroad. There were no takers for overseas investing even when the rupee was appreciating. So, it is a relief to see a change in the attitude of asset management companies. As of now, the total overseas investment of funds is around Rs 5,000 crore. And investors who have invested in such funds are certainly not complaining since it is this very overseas exposure that has softened the equity blow. The funds investing a bulk of their assets globally (over 65 per cent) fell much less than their peers who invest only locally.

On the Indian investor’s menu!

With the four-year bull-run in domestic stocks faltering, Indian fund houses are stepping up efforts to woo investors to ‘global’ funds — schemes that invest in stocks or other assets outside India. As many as 13 fund houses now feature global products in their menu. While the global funds launched earlier had focused on foreign stocks, usually from the high-growth emerging markets in Asia, the recent ones promise entry into new asset classes not readily available to Indian investors — precious metals and gold mining companies, natural resources, commodities and global real estate.

What do these global funds offer that domestic funds don’t? Global equity funds such as the Templeton India Equity Income Fund or the Fidelity International Opportunities tap their global research teams to buy stocks from new sectors or themes that are not well represented in the Indian listed space. Retail, consumer electronics and natural resources are key sectors in which these funds shopped overseas for global flavour.

Fund houses such as Kotak Mutual have used the ‘feeder’ fund route to allow Indian investors to access a recognised global manager. Investments into Kotak’s Global Emerging Markets Fund ‘feed’ into the T.Rowe Price Global Emerging Markets Fund, which has managed a 32 per cent return over a 10-year period.

Feeder funds have also been used to tap into new asset classes such as gold or property overseas. DSP ML now offers two global funds that invest in foreign funds managed by BlackRock, a market leader in natural resources with a $42- billion portfolio. ING Global Real Estate Fund, also a feeder fund, features investments in REITs and property developers in the US, Australia, Hong Kong and Japan. Real estate carries volatility half that of equity, while returns (from real estate) are three times that of bonds.

In recent times there has been a growing trend among mutual funds to launch funds that invest in the sponsor's mutual fund abroad. Currently there are two such funds that invest in mutual funds abroad, DWS Global Thematic Offshore Fund and HSBC Emerging Markets.

Can Robeco looks at water funds, renewable and alternate energy funds etc.

Insulation in times of desolation!

Only 35 out of 280-odd equity funds managed to outperform their benchmark indices. The only bright spot, solely by virtue of lower losses, have been those funds investing in overseas economies (international/offshore funds), which have fallen by 8-18%. Of the small number of funds that beat the benchmarks handsomely, a majority are those that also invest abroad. Though some international funds lost investors’ money, they lost a lot less than domestically-focused funds. This demonstrates the value of true diversification in bad times.

International or global funds, a relatively new offering for Indian investors, have acquitted themselves well in the year or more since they were flagged off. As a class, these funds have contained their NAV losses better than their domestic diversified peers over the last year, as an analysis of 21 international funds shows. But before rushing to conclusions on their superiority, it must be noted that only a select set of international funds outperformed domestic funds, which fell by over 50 per cent. And only 65 per cent of these international funds have a track record of over a year. Among the various types of international funds, gold funds truly glittered, especially over the last six months, riding on soaring prices and a re-rating of gold mining stocks. Funds focused on emerging markets were the worst hit, followed by those that invest globally across geographies. Commodity funds, most of which have only a three-month record, recorded middle-of-the-line returns, while the lone real-estate fund is on the back foot, suffering the highest fall in the last year. Each category of international funds is driven by a different dynamic. But one critical factor that aided all of them was the substantial depreciation of the rupee against the dollar the past year. A 25 per cent depreciation of the rupee against the dollar meant that most funds owe 10-15 percentage points of their returns to this phenomenon. International funds usually convert their overseas holdings at the closing rupee conversion rate of the day for the purpose of calculating their NAVs.

International investments overhyped?

The case for investing abroad appears to be somewhat stronger today than it was in the past. The basic reason that has always been offered is obviously diversification. This most basic idea in investing is that different types of investments may not lose or gain at different times. Therefore, it makes sense to put money in investments that are mutually dissimilar. However, a close look at the actual performance of stocks around the world indicates that the advantages offered by such diversification may not be as strong as they are supposed to be. Moreover, the argument may be getting weaker just as it is being accepted by more investors. As things have turned out, this diversification may prove to be illusory. While the market commentators' daily recitation of the 'global cues' becomes tedious after a while, the broad direction of the domestic market is interlinked to the world's stock markets. From a global perspective, investors in one emerging market-India-investing in other emerging markets like China or Latin America does not sound like a great idea. Out of the 21 global funds on which data was available, according to Value Research, more than 90 per cent have fared worse than the average equity diversified scheme.

India’s mutual fund managers, after waging a losing battle throughout 2008, are hoping they can recoup some losses in 2009. Given the turmoil in Indian stock markets since January 2008, many global funds have fared better than local equity funds this year. But this is not long enough to establish if returns are sustainable. Overseas investing is about diversifying risk and not always about enhancing your opportunity or returns.