Monday, January 31, 2011

January 2011

Indian mutual fund houses have seen a higher drop in their AUMs than the foreign fund houses have, according to data available on the SEBI website. As of December 31, 2010, Indian mutual fund houses' average assets under management (AUM) fell by 10.4% while that of foreign fund houses fell by 2.6%. The industry average AUM, which stood at Rs. 6.74 lakh crore, for the same period saw a drop of 9.6%. Foreign fund houses account for about 11% of the average AUM of the industry, and domestic fund houses 89%. The proportion in terms of number of folios is also the same. The foreign fund houses' average AUM totalled Rs 72,494.54 crore and that of the Indian fund houses Rs 6,01,905.88 crore, both as on December 31, 2010. Of the 43 fund houses, 11 are foreign fund houses. One reason for the difference in AUM fall between the two categories of fund houses is the liquidity tightness that 2010 experienced. Generally, foreign fund houses have more exposure to the equity side of the market than to the liquid side. This is why they saw a lesser drop in their AUMs as the equity markets performed better than the debt and money markets. The average AUM of Franklin Templeton, the largest foreign fund house in the country, and Fidelity, the second largest foreign fund house, increased by about 18% and 15% respectively.

The year 2010 saw Shinsei Mutual Fund completely exiting the mutual fund business in India and selling it to Daiwa. The joint venture between Sundaram Mutual Fund and BNP Paribas came to an end, with Sundaram continuing on its own and BNP Paribas taking over Fortis Mutual Fund. AIG Global Investment Group Mutual Fund, in order to cut costs and repay debt, has reportedly sold its Indian mutual fund business to Pinebridge Investments (an erstwhile AIG subsidiary). Despite the struggling mutual fund industry in India, interest and the potential in the India growth story will keep foreign fund houses desirous of entering the industry. However, many of these players will need to have a long term outlook given that margins are likely to be under pressure.

Piquant Parade

The Centre has appointed Mr U.K. Sinha as SEBI's next Chairman. Mr Sinha will have a term of five years from the day he assumes charge. The incumbent Chairman, Mr C.B. Bhave, is due to retire on February 17, 2011. Mr Sinha is the CEO of UTI Asset Management Company. He is also the Chairman of the Association of Mutual Funds in India.

As part of the initiative, christened as Swatantra, two UTI knowledge caravans will travel across Kerala, Karnataka, and Tamil Nadu, starting from Thiruvananthapuram, to spread awareness about financial planning. For this, UTI Mutual Fund has tied up with HDFC Bank, the largest distributor of mutual fund products, which would arrange the investor meets across rural areas in Southern India. During this journey, more than 1,300 investor meets will be conducted in 300 cities in 100 days with an estimated 15 lakh participants. The initiative is in partnership with the Ministry of Corporate Affairs. The investor education initiative would see UTI Mutual Fund officers and advisors talking about financial literacy that would help individuals take prudent investment decisions.

Regulatory Rigmarole

SEBI has defined the activities that stock market intermediaries cannot outsource to third parties. In a discussion paper on outsourcing put up on its website, SEBI sought comments and suggestions on six issues such as principles for outsourcing, activities that can be outsourced, activities that cannot be outsourced, entities to whom the activities can be outsourced, the terms of outsourcing and responsibilities and obligations of the intermediary and the third party in respect of the outsourced activity towards clients, regulator, and market. Depository Participants cannot outsource their checker activities. Registrar and Transfer agents cannot outsource their record-keeping and PMLA obligations. Banks have to clear financial instruments on their own and brokers have to manage client orders, pay-in and pay-out of funds and securities. Similarly, PMS providers and AMCs have to manage client funds while Merchant Bankers cannot subcontract due diligence, issue pricing, and supervision of other intermediaries to third parties.

SEBI has laid out nine principles that would be applicable to outsourcing. Intermediaries are expected to put in place a comprehensive policy on outsourcing – whether and how any particular activity would be outsourced. Intermediaries must put in place a comprehensive risk management programme to address the outsourced activities and their relationship with their vendor. Intermediaries have to ensure that all obligations to customers and regulators are fulfilled and outsourcing does not hinder regulatory supervision. They must also conduct proper due diligence while selecting the vendor and periodically review performance. Outsourcing relationships have to be clearly laid out in terms of expectations, rights responsibilities, confidentiality and termination describing material aspects in the form of a contract. Intermediaries and third parties are also expected to maintain and periodically test their facilities for contingency and disaster recovery. Care must be taken to ensure that confidential information is not leaked by third party. Regulators have to view outsourcing as an integral part of their ongoing assessment of intermediaries. The final point was that regulators have to take cognisance of the risks that outsourcing may end up in the hands of a select few third parties. Once implemented, there would be a clear demarcation of activities that can and cannot be outsourced by intermediaries.

India’s labour ministry wants the finance ministry to provide a guarantee for equity investing. It wants a guarantee of capital safety, as well as guaranteed returns. Apparently, it had sought these guarantees in response to the latter’s demand that a small part (up to 15%) of the EPFO funds be invested in equities.

The mutual fund industry seems to be visibly tense. The AUM slipped to Rs 6 lakh crore in December 2010 from Rs 8 lakh crore in April 2010. Similarly, the folio numbers (investor accounts) have declined by more than seven lakh. Companies and financial institutions are major investors in mutual funds. Almost half or Rs 3.86 lakh crore of AUM consists of liquid and income schemes. The AUM of retail investors, who primarily invest in equity schemes, is at Rs 1.81 lakh crore. Equity, balanced, and ELSS schemes together add up to Rs 2.27 lakh crore of AUM. If some corporate money moves out of the industry, that is not a cause for concern. But the loss of retail folios is in the region of two lakh folios per month for the last eighteen months. These are largely retail folios consisting of equity, balanced, and ELSS schemes. Fund officials have attributed the loss in folios to redemptions by investor due to market appreciation but the continuous loss of folios remains an area of concern. A concerned commencement of 2011…

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