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.

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