Monday, October 26, 2009

(October 2009)

The AUM of the mutual fund industry grew a mere 0.93% in September, 2009 to Rs 7,42,920 crore. A ban on the entry load, uniform exit load for different classes of investors, heavy redemption in debt funds, and profit-booking by investors due to a sharp rise in the stock markets were behind the flat growth of the industry. The heavy redemption in the debt funds in September 2009 should get reversed soon and mutual funds are expected to get back the entire flow in October 2009. Historical evidence suggests that debt funds face redemption pressure at the end of every quarter. This pressure is considerably higher at the end of the first as well as the second half of the financial year since advance tax payments are made at that time of the year.

The top five funds saw a miniscule rise in the AUM, with HDFC and UTI Mutual Funds registering a fall in assets. Reliance Mutual Fund rose by 0.79% to Rs 1,18,251 crore, HDFC Mutual Fund registered a fall of 3.67% to Rs 90,427 crore, ICICI Prudential Mutual Fund saw an increase of 2.76% to Rs 80,120 crore, UTI Mutual Fund dipped by 0.45% to Rs,73,589 core and Birla Sun Life Mutual Fund rose 0.3% to Rs 63,056 cr. Interestingly, it is the smaller fund houses that have shown a healthy rise in their asset figures for September, 2009. Fund houses like Taurus, Shinsei, and JP Morgan have reported around 25% increase in AUM while assets of Benchmark and Bharti AXA grew by 13% and 20% respectively.

In view of the sky-rocketing stock market, mutual funds are sitting on a whopping Rs 13,957 crore of cash, waiting to be deployed at the opportune time.

Piquant Parade

Close to 18 mutual fund applications – both domestic and foreign players – are pending with the market regulator, SEBI. Schroder Investment, Singapore, Kuwait’s Global Investment House, US-based PGLH of Delaware, and Nikko AM of Japan are among the overseas fund managers planning to enter the Indian asset management space, which is already crowded by global standards.

Union Bank of India has got SEBI approval to start mutual fund business. The Union Bank of India-led AMC will be a joint venture with Belgium-based KBC Group. Union Bank of India will have a 51% stake in the joint venture and contribute Rs 48.07 crore as against 49% by the KBC Group, with a contribution of Rs 46.93 crore. It is expected to roll out its first mutual fund product in February, 2010. Union Bank plans to use its 2700 branches for its service rollout. It also intends changing at least 200 branches as dedicated centres to sell mutual fund products.

Brokerage firm, India Infoline, is expected to launch its mutual fund at the end of the current fiscal, 2009-2010, after getting the necessary approvals from the market regulator. The first level of approval has already been obtained.

UTI AMC, having 1250 lakh shares valued at Rs 2500 crores, will sell 26% stake to US-based T Rowe Price. T Rowe Price will pay Rs 200 per share and Rs 650 crore for the 26% stake in UTI AMC. The deal would be valued between 3.2 and 3.3% of the AUM (AUM of UTI AMC in September, 2009 was Rs 73,500 crore).

The Postal Department, which had suspended the sale of mutual fund products since August, 2009 in retaliation to SEBI’s ban on entry load, has announced its decision to resume the sale of mutual funds in selected branches. The Postal Department is presently in talks with SEBI to chalk out the distribution norms related to selling of mutual fund schemes. The process is expected to be initiated once the modalities are worked out.

Regulatory Rigmarole

According to SEBI, AMCs can come out with NFOs provided they can justify investment strategy and risks (details discussed in NFO Nest dated October 19, 2009).

SEBI has announced that all trades in corporate bonds between mutual funds, FIIs, Venture Capital Funds, and other RBI-regulated entities would necessarily be cleared and settled through the National Securities Clearing Corporation or Indian Clearing Corporation effective from December 1, 2009. This announcement has been made with a view to bringing about transparency, enhancing liquidity, and improving efficiency in the bond market. In addition, it will help in the right price discovery, improvement in volumes, and doing away with counterparty risk. At present, mutual fund houses are either dealing in corporate bonds directly or through brokers.

SEBI has allowed the bourses to extend the trading hours from 9:55 a.m.-3:30 p.m. at present to 9 a.m.-5 p.m. so as to enable the market participants to align their trades to the happenings in the international markets.

SEBI has proposed that mutual funds offering retail and institutional plan options have to segregate their investment in two different portfolios. A substantial difference exist between both the plans in terms of initial investment amount and, hence, the corpus. At present, when corporate investors redeem, fund managers sell the most liquid investments to meet the outflows, thereby, affecting retail investors who remain loyal to the fund. This proposal, if implemented, is likely to benefit retail investors to a great extent.

Consolidation looms large for some asset managers as revenue declines continue unabated, according to McKinsey’s 11th Asset Management Survey. The Report states that the margin in 2009 has suffered a strong squeeze – 0.09% in 2009 down from 0.108% in 2008. The melting margins outweighed steep cost-cutting measures and can be attributed to higher rebates demanded by distributors in the wake of the abolition of entry load.

Monday, October 19, 2009

NFO Nest
(October 2009)

Clamping costly clones…

The Indian mutual fund industry has over 3400 products, which include both equity and debt schemes. Of this, 70% of the mutual fund products cannot boast of even a meagre AUM of Rs 50 crore as on September 30, 2009. Nearly 60% schemes have an AUM of under Rs 25 crore and less than 5% have an AUM of over Rs 1000 crore. If a fund house has about 50 schemes and each scheme has assets worth about Rs 2 to 5 crores, the cost structure shoots up since more funds mean more fund managers and more operational staff. Moreover, larger funds reap the advantages of economies of scale.

SEBI has sought to nip the mushroom growth of unviable tiny funds in the bud by snapping at NFO clones. Hereafter, fund houses would have to make available details of NFOs in advance. SEBI has asked for greater responsibility and accountability from trustees of AMCs, especially since they are custodians of investor’s money. Therefore, before the board certifies, the trustee has to evaluate the new offering. The entire process is in sharp contrast to what happened two years ago when SEBI made it mandatory for the trustees to give a declaration that the new scheme was different but the trustees just used to give approval without any justification. They will now have to play an engaging role in delivering fiduciary responsibility.

This stringent regulation could explain the appearance of a single fund once again in NFO Nest in October, 2009.

Religare PSU Equity Fund

Opens: September 29, 2009 Closes: October 28, 2009

This is the first actively managed PSU fund in the mutual fund industry, with Kotak PSU Bank ETF and PSU Bank BeES being passively managed funds. More than 65% of the fund is slated to be invested in the stocks that constitute the benchmark index, the BSE PSU Index. Upto 35% of the assets can be invested in other PSU stocks, cash, etc. In addition, the fund can invest 20% of its assets in stocks of companies other than PSUs.

Nuggets to gnaw at…

The total income of the top eighteen PSU companies (called Navaratnas) is 15% of India’s GDP.

Nearly a third of the profits of PSUs in 2008 were paid as dividends.

Six out of the top ten companies in India are PSUs.

10 out of the 50 companies that constitute the Nifty are PSUs.

The following factors will drive the performance of PSUs going forward…

Most of the PSU companies are leaders in their respective fields and in some cases enjoy monopoly.

A majority of the PSU companies are present in sectors which constitute the core of the India growth story (the noteable exceptions being FMCG, Media, IT, and Pharma).

PSUs are currently available at reasonable valuations compared to broader markets (20 to 30% discount), thereby, offering a comfortable margin of safety for investors.

The Government focuses on listing of PSUs and further disinvestment of stake in existing companies.

The expected re-rating of these PSUs in the light of the expected disinvestment by the Government can lead to above average gains over a period of time.

The Indian market Indices and the MSCI India are on a free float basis where the PSUs score poorly. As the Government divests, fund managers across the world will have to increase their weightage in PSUs. But PSUs are subject to control of the Government of the day and policy risks though they were not hugely affected even during the worst period of the global financial crisis. While the Urban Indian population may have a poor perception of PSUs, their performance over the past decade has been worth mentioning, in fact, much better than the Sensex. The future holds promise too. With GDP growth being led by Government spending in the last year, and the trend expected to continue in the next 2 to 3 years, it augurs well for the PSUs who will be the natural beneficiaries.

Sundaram BNP Paribas Money Opportunities Fund, Sundaram BNP Paribas Dividend Fund, Taurus Nifty Index Fund, ICICI Prudential Banking and PSU Debt Fund, SBI Wise Fund, Axis Income Fund, Religare Arbitrage Plus Fund, and Tata Consumption Opportunities Fund are expected to be launched in the coming months.

Monday, October 12, 2009


Sector Funds

All the four sectoral GEMs of 2008 have withstood the onslaught of the crisis and are sparkling in 2009, thanks to their ‘diversified’ mandate and refuge in derivatives and/or cash.

DSP BlackRock TIGER Fund Gem

Cautious comfort…

Comfortable in all situations – the bear tear and the bull pull. Notwithstanding the bear hug, the fund emerged unscathed during the turbulent times that lasted till March, 2009. In the first quarter of 2009, the fund managed to stay in the positive territory with a positive return of 0.49% as against the category average return of -5.32%. The fund’s returns have remained more or less in tune with the category average in the recent bull run. The charm lies in the fund’s ability to consistently deliver risk-adjusted performance, despite being a sectoral fund. Its 3-year annualised return of 14.74%, positions it ahead of the category average returns of 11.03%.

The fund seems to be all over the place…but the fund was designed to pick stocks that benefit from growth related to economic reforms and continuing liberalisation. While maintaining a large cap exposure and reducing equity exposure, it increased its allocation to derivatives from 1.76% in January, 2008 to 17.96% in November, 2008. From December, 2008 to March, 2009, it was heavy on Nifty Futures. It has been increasing its equity exposure since March, 2009, in the light of the market rally.

In line with its objective, it has the highest exposure to the power sector (13.32%), followed by banks (11.33%), petroleum products (10.46%), and capital goods (9.71%). It has been gradually increasing its exposure to banking and power sector. Its top holdings have remained more or less the same with a portfolio turnover ratio of 1.44 times. Its expense ratio stands at 1.85%.

The broad mandate, the diversified portfolio (60 to 70 stocks), and consistent returns clear the way for the cautious. The sheer size of Rs 3500 crores prompts the fund to lean towards large caps. The fund abstains from aggressively moving in and out of sectors and stocks. Those who seek safety, will feel at home owning this fund.

Reliance Diversified Power Sector Fund Gem

Power packed…

With an AUM of about Rs 5,800 crores, Reliance Diversified Power Sector Fund comes next only to Reliance Growth Fund in terms of size. But as far as the performance is concerned, it is way ahead of its peers as well as those from its own fund house. The fund has amassed awards and accolades, by virtue of its scintillating performance. Its power to tower over the market in good times as well as bad has given this fund an edge over the other sectoral funds. The high alpha of the fund indicates its ability to beat its benchmark index. In 2008, it clocked -50.4% as against the sensex return of -52%. Its returns in 2009 has been 81% as against 73% by the sensex and 65% by the BSE Power Index. This high beta fund has made the best use of the opportunities that have been thrown open by the market. Though naturally dominated by power sector stocks, it has good exposure to engineering, metals, financial services, construction, and communication. Its diversification is marked down by about 30 stocks. The fund is wont to sitting on huge piles of cash, above 20%, on an average. It rose to 40% when the crisis was at its peak. It is 17.7%, at present, the lowest since April, 2007.

The fund has been a star performer but its high beta and aggressiveness call for caution. Rewards marry risk and if you are willing to play the game of probabilities, Reliance Diversified Power is the right answer.

ICICI Prudential Infrastructure Fund Gem

Allocating with alacrity…

With over Rs 4300 crore in assets, it is a theme fund that invests across infrastructure and allied sectors, thereby, increasing the universe of investments and facilitating the construction of a better portfolio. It plays it safe by maintaining a highly diversified portfolio. The highest alpha generator in the category, its returns are impressive. In 2008, it made the right moves. Its exposure to large caps rose to 77%. Its heavy exposure to debt and derivatives enhanced its ability to contain the downside. In the first quarter of 2009, it delivered 1.27% as against the category average of -5.32%. But the fund missed out on the March 2009 rally when it underperformed the category average. It had a 43% exposure to cash in May 2009. It cut cash in June 2009 to participate in the rally.

The successful sector rotation strategies adopted by the fund stood it in good stead. The fund actively changes its portfolio complexion with no qualms about going against the herd. The fund increased its exposure to financial services between September 2008 (9.3%) and December 2008 (23.26%). The fund manager had written a Nifty put option in April, 2009 and it augured well for the scheme. Between April 2009 and September 2009, the allocation to financial services sector dropped from 17% to 14.86%. The allocation to energy during these two months was increased from 15% to 40.39%. The fund includes every sector barring FMCG, media, IT, and pharma. Though the portfolio looked a little bloated in 2008, it has an averageof around 40 stocks in 2009. The fund manager rarely bets more than 8% on a single stock barring a few large cap names. It has a fair number of frontline stocks that augur well for the fund. One of the least expensive funds, its expense ratio is 1.86 as against the average of its infrastructure peers – 2.24%. This low ratio can mainly be attributed to the increase in the fund’s assets.

This fund has turned other infrastructure funds green with envy. The fund has stood tall amongst other infrastructure funds and has proved its mettle in its relatively short history.

DSP BlackRockTechnology Fund Gem

Broad breed…

Sector funds can at best stack money in cash, in case of absence of any lucrative opportunity in the sector. However, there was a discernible move to allocating funds to alternate sectors like telecom and entertainment. DSP BlackRock Technology Fund was a trend setter in this respect. The fund management had enough foresight to include a broader segment in its investment objective. The only fund that refrained from doing so was Franklin Infotech Fund. UTI and Kotak discontinued their technology schemes and merged them with their diversified equity funds.

This Rs 95 cr fund has invested 88% in equity and 8% in derivatives. 69% is in the software sector, 7% in industrial capital goods, and 5% each in media and hardware. It has allocated 23% to Infosys and 9% each to TCS and HCL. The allocation to all other stocks is 5% or less. Its one-year return has been 50% as against the category average of 46%. It has the impeccable record of having beaten the category average for the past five years with 2008 being the sole exception.

Include sector funds sparingly to spice up portfolio returns but refrain from making it the core holding. A maximum allocation of 10% would ensure that you boost your overall returns when the sector does well and develop the ability to withstand the steep slide when the sector underperforms.

Monday, October 05, 2009

(October 2009)

All eggs in one basket…

Investing in just one sector or theme can prove fatal, especially, if the sector or theme runs out of steam and valuations have peaked. The fund manager in a thematic or sectoral fund is restricted by the fact that even if the sector does not do well the fund manager cannot take the liberty to invest in other sectors that are in vogue. There might not be enough companies in a sector or theme to populate an entire portfolio. For all their growth prospects, sector or theme funds perform only in patches.

Banking Funds
Back on the banks…

Banking funds registered a complete turnaround of fortunes, emerging as the best-performing category, after being the worst-performing category in the latter half of 2008. The monetary tightening by the RBI to arrest inflationary pressures adversely impacted the NAVs of banking funds in the first few months of the period under review. But the rate cuts and liquidity infusion to tide over the crisis, led to a boost in credit off-take. The banking funds’ performance was noteworthy because they managed to stay afloat despite the soaring inflation and interest rate fluctuations.

Technology Funds
In the limelight…

The performance of technology funds in the first half of the period under review was dismal owing to the cutbacks in technology spending, a fallout of the global financial crisis. With the rupee’s depreciation against the dollar and the recovery from the crisis, technology sector is back in the limelight.

Auto Funds

The auto funds have been lacklustre since the beginning of the period under review. Their woes have stemmed from the depressed passenger car sales, on account of higher interest rates, inflationary pressure, and fuel price hikes. Now, with interest rates and crude prices headed south, the auto sector has perked up. The growth in the auto sector in the long-term will be driven by the rising penetration levels of passenger vehicles in India.

FMCG Funds

Considered the most defensive of all funds, the FMCG Funds looked particularly attractive during the recent turmoil. The FMCG sector is poised for sustained growth over the medium to long term due to favourable demographics, low penetration, proliferation of modern trade channels, strong rural growth backed by higher agricultural incomes and the consequent increase in the purchasing power.

Pharma Funds
Far-sighted …

The category’s overall performance throughout the year has been better than its peers, having lost only 13%, which is much lower compared to other equity categories. This could be due to the fact that the pharma stocks did not participate in the runaway rally, and therefore, did not fall as sharply as the markets got hammered. India is a major destination for contract research and manufacturing services due to its low costs, skilled manpower, and manufacturing capabilities. Moreover, most pharma companies are cash-rich and do not need additional capital to grow. The long-term prospects of the pharma sector are indeed bright.

Infrastructure Funds
In vogue…

The infrastructure theme in mutual funds industry is like festivals in India. It recurs with predictable regularity to garner mixed response. In 2009, funds that play on infrastructure theme are back in vogue, because of the Budget’s emphasis on infrastructure. The Government has earmarked Rs 12,887 crore for urban infrastructure, an increase of 87% over the previous year.

PSU Funds
Flooding the market…

UTI Mutual Fund was the first fund house to launch a PSU Fund –UTI Master Growth Unit Scheme in 1993 (now UTI Top 100). There has been a fair amount of excitement about public sector stocks and funds in recent months. According to the latest Economic Survey, the Government should sell a minimum of 10% stake each in all unlisted PSUs, with a target of Rs.25,000 annually. The Government’s disinvestment plans have encouraged funds to launch PSU funds. Shinsei PSU Fund was launched recently. There are at least three PSU-focused mutual funds in the pipeline from Religare, Sundaram and SBI.

…crushes the nest egg

Every sector goes through its own business cycle. Sector funds could lose so much money during the downturn that they could forfeit all their gains of the upturn. Investment in a sector-specific fund is fraught with risks as any adverse effect in the business environment of the particular sector, can sting the investor. Divergence in returns is the hallmark of the sectoral funds – they can top the returns chart or sink to the bottom. Sectoral funds should always be used as add-ons to the already diversified mutual fund portfolio.