Monday, January 25, 2010

(January 2010)

The last month of the year 2009 ended with a whimper for the mutual fund industry, but the year as a whole was a resounding success. The AUM of India’s mutual fund industry dropped to Rs 7.78 lakh crore at the end of December 2009, much below the Rs 8 lakh crore milestone that it had scaled in the previous month. The industry's average Asset Under Management fell by Rs 28,645 crore or 3.55 per cent during the said month. Reliance Mutual Fund maintained its top position as the country's largest fund house with an AUM of Rs 1,19,982 crore during the month, despite losing Rs 2,271 crore from its assets. The country's second largest fund, HDFC Mutual Fund, witnessed a hefty erosion of Rs 5,216 crore in its AUM, which crossed the Rs 1 lakh crore mark in November, 2009. The AUM of UTI Mutual Fund also fell by Rs 1,691.78 crore during December 2009 to Rs 78,203.44 crore. The country's third largest fund house, ICICI Prudential Mutual Fund, was one of the 10 fund houses that saw its AUM grow by Rs 293 crore during the month to Rs 82,432.25 crore. Besides, ICICI Prudential, other fund houses which saw their average AUM rising in December include LIC Mutual Fund, Canara Robeco Mutual Fund, Franklin Templeton, and Kotak Mahindra Mutual Fund. Fund houses that saw a decline in their assets include Birla Sunlife Mutual Fund, Deutsche Mutual Fund, AIG Global Investment Mutual Fund, and Fidelity Mutual Fund. Out of a total of 37 fund houses, 25 of them have witnessed a fall in their assets in December, 2009.

Banks have pulled out over Rs 1,00,000 crore invested in mutual funds in a single fortnight of December 2009. Aggregate bank investment in mutual funds dipped Rs 1,04,851 crore to Rs 42,428 crore during the fortnight ended January 1, 2010, the biggest fall in any 15-day period. This withdrawal could have been necessitated by the demand for funds to meet growth in loans which rose over Rs 75,000 crore in the second half of December 2009. However, it could also have been done to address RBI’s concerns over banks parking their funds in mutual funds, which subsequently invested them in corporate paper. There could be a third reason for the shift. Data suggest that bank also tend to pull out from mutual funds towards the end of a quarter as it attracts capital provisioning. Banks are also in a position to window dress their balance sheets by withdrawing funds from investments and deploying them in short-term loans. In the second half of December, bank loans grew Rs 79,515 crore along with a surge in statutory bond investments which grew by Rs 67,900 crore. Unlike investments in mutual funds, government bonds being risk-free do not attract capital requirements. But such large investments often find their way back, after a few days in the beginning of the next quarter.

Piquant Parade

The restructuring of UTI, which started seven years ago when the country’s oldest mutual fund failed to meet redemption obligations, is nearly complete. T Rowe Price, the Baltimore-based investment management company, completed acquisition of 26 per cent stake in the country’s fourth-largest asset management company, UTI AMC, for around Rs 650 crore, translating into an enterprise value of over Rs 2,500 crore, or 3.2 per cent, of asset under management (Rs 78,203 crore). Through the transaction, the four sponsors — Life Insurance Corporation, State Bank of India, Punjab National Bank and Bank of Baroda — diluted 6.5 per cent each in favour of T Rowe Price, leaving the four-state-owned entities with 18.5 per cent each. Next up is an initial public offer, though the company is in no hurry to list. In 2008, the fund house had plans to go public and had filed an offer document with the Securities and Exchange Board of India. It had to drop the plan in the wake of the global financial crisis. While a public offer would result in further stake dilution by the four public sector entities, T Rowe Price is keen to acquire a majority stake. T. Rowe Price has said it will increase its stake beyond 26% in UTI AMC “in due course”.

L&T has taken over the loss-making DBS Cholamandalam AMC after paying Rs 45 crore for just 1.56 per cent of its assets in August 2009, which were then at Rs 2,893.16 crore. As of December 31, 2009, the assets are Rs 2,901 crore. The intent, by L&T, was to effect greater synergies in its own financial services business. L&T has two wholly-owned subsidiaries in the form of L&T Finance and L&T Infrastructure Finance, servicing mainly the construction equipment finance and commercial vehicles as well as tractors segment.

Motilal Oswal Financial Services (through its subsidiary Motilal Oswal Securities) received the final certificate of registration approval from Securities and Exchange Board of India (SEBI) to set up a mutual fund business in the country. Religare Securities and Edelweiss Capital are some of the brokerages to have started their own asset management companies.

Bajaj Finserv Ltd., the financial services arm of Bajaj Group is likely to start its mutual fund company by December 2010. Allianz Global Investors and Bajaj Finserv will hold a 51 per cent and 49 per cent stake, respectively, in the equally managed proposed venture.

Bank of Maharashtra and State Bank of India Funds Management have entered into a tie up arrangement. As per the arrangement, Bank of Maharashtra will distribute the mutual funds of SBI Mutual Fund through its branches across the country. This agreement would provide SBI Mutual Funds the opportunity to reach to the semi urban and rural investors across the country.

Japan’s troubled Shinsei Bank and billionaire investor Rakesh Jhunjhunwala are said to be selling out their Indian mutual fund joint venture to Daiwa for about $10 million. If the deal goes through, Shinsei, which manages Rs 448 crore of assets in debt and equity schemes, will be valued at about 10% of assets, comparable with previous deals. The two-year old venture could provide Daiwa, a cross-town rival of Shinsei, a platform to expand in the financial services in a nation of fast-growing middle class.

Realty major DLF Ltd. announced its exit from the asset management joint venture with the US-based Prudential Financial Inc (PFI). Following this development, the venture will now be renamed ‘Pramerica Asset Managers Pvt Ltd' and will be owned entirely by PFI's sponsor group. PFI had received in-principle approval from the Securities Exchange Board of India (SEBI) in 2008 to set up a mutual fund in the country. DLF's decision to exit this area of business was triggered due to changes by SEBI in its evaluation criteria for granting approval to the joint venture mutual fund to commence its business. The criteria required DLF to have a five-year track record in the financial services business.

Regulatory Rigmarole

Recently, SEBI had issued show-cause notices to some life insurance companies selling ULIPs asking them to explain why action should not be taken against them for failure to take SEBI approval, as mandated under Section 12 (1B) of the SEBI Act, while launching ULIPs. Under this Section, anyone launching a collective investment scheme must take SEBI approval. The Insurance Regulatory and Development Authority plans to seek legal views on SEBI's power to issue notice to insurance companies for not seeking the capital market regulator's approval for their unit linked insurance products or ULIPs. It does not agree with the SEBI view that ULIPs require multiple regulatory approvals. All the insurance products that have been approved by the IRDA fall well within the purview of Section 2 (11) of the Insurance Act, IRDA has said, adding that the issue may require intervention from the Finance Ministry.

Securities and Exchange Board of India has asked mutual fund companies to make all the disclosures about market risks involved in the products more prominent in their communication. Its circular said, “To make these statements more prominent, it is advised that the disclosures as stated in the clauses 10, 13 and 14 of schedule VI of SEBI (Mutual Funds) Regulations of 1996 on Advertisement Code shall be printed in bold”. The clauses 10, 13 and 14 of the regulations ask the AMC to inform the investor that all investments are subject to market risks and the objective of the fund may not be achieved. These rules also mention that AMCs should tell investors while giving an ad that the name of the scheme does not in any manner indicate either its quality or its future prospects or returns and also to ask the investors to `please read the offer document before investing`. The clause 14A of the regulations also notes that the ad should be shown in full and not only some product extracts. In fact, clause 14B also stipulates that no celebrity would be a part of the commercial. The SEBI, however, has noted that the ads issued are generally lengthy and the disclosures are not bought to the attention of the investors.

Bank of America Merrill Lynch conducted a survey of fund managers for January 2010. The study revealed that investors have rediscovered their risk appetite and are putting cash reserves to work across the equity markets. For the first time since January 2008 the survey shows investors are taking above average risk, relative to their benchmark. A net 2% is taking ``higher than normal`` risk, compared with a net 7% taking ``below normal risk`` in December, 2009. Average cash balances have fallen to 3.4%, the lowest reading since mid 2007 and down significantly from 4.0% in December. Appetite for equities is strong. A net 52% of asset allocators are overweight equities, up sharply from a net 37% in December. Fewer investors are protecting themselves against a fall in equities. A net 55%have no protection against a fall in the next three months, compared with a net 48% in December. Investors have been moving into cyclical stocks, are positive about profits and are urging management teams to invest in growth. This survey is one of the more bullish we have seen and suggests that investors buy into the idea that this recovery has legs. A red carpet welcome to 2010…


Ankoor said...

Hi Lalitha,

Religare is no more in tie up with Aegon for its Mutual Fund business.
Please correct the facts on your Blog Post.


Mutual Funds said...

Dear Ankoor,

Kindly refer to my FUND FULCRUM articles dated September 2008 and November 2008 for the details of the "impending" Religare Aegon tie-up and the failure of the intended tie-up respectively. In case I have inadvertently referred to "Religare Mutual Fund" as "Religare Aegon Mutual Fund" in any of my subsequent blogs, kindly point out the date of the blogpost so that I can make the necessary changes.

Thank you.


Ankoor Gupta said...

Dear Lalitha,

It was posted on 25th jan 2010 -

Please follow the link for details


Mutual Funds said...

Dear Ankoor,

Thank you.

I have made the necessary changes.