FUND FULCRUM (contd.)
October 2011

Retail investors are becoming more impatient in holding on to their equity fund investments if the recently released AMFI data is anything to go by. Retail investors held Rs. 96,855 crore in equity assets for more than 2 years as on September 2010 which has dropped to Rs. 78,572 crore in September 2011, a fall of 19%. As a percentage too, assets held for a period above two years now account for 62% as against 65% a year earlier. Consequently, retail equity holding in the period 6-12 months and 12-24 months as a percentage have seen an increase. The aggregate holding of retail equity assets has slipped to Rs. 1.27 lakh crore as on September 2011, down 15 % from Rs. 1.49 lakh crore compared to the corresponding period last year. Retail investors continue to hold the largest pie in equity assets at Rs. 1.27 lakh crore (65%) of the aggregate Rs. 1.96 lakh crore assets as on September 2011 followed by HNIs at Rs. 43,210 crore.

Rising inflation and consistent rate hikes have made debt funds popular among retail investors. Retail investor’s allocation in debt funds for a period ranging from 6 months to 12 months has jumped from Rs. 3,733 crore in September 2010 to Rs. 4,397 crore in September 2011. Similarly retail investors’ average age of holding in non-equity assets ranging from 1 month to 3 month and 6 months to 2 years has seen an increase in the last six months. However, there is a decline in the age of retail debt assets exceeding 2 years during the same period. HNIs are investing for a longer period in debt funds. HNI investment holding horizon between 6 months to 1 year has galloped 49% by Rs 10,821 crore from Rs. 22,209 crore (as on September 2010) to Rs. 33,030 crore in September 2011. On the other hand, there is a decline of Rs. 6,408 crore in equity assets held for more than 2 years by HNIs from Rs. 21,682 crore as on September 2011 to Rs. 15,274 crore during the corresponding period last year.

Piquante Parade

To gain popularity among investors and expand their reach, IFAs are joining hands with AMCs to hold investor education programs. This new trend is slowly picking up, as it is a win-win technique for both AMCs and IFAs. ICICI Prudential has been a pioneer in these tie-ups as they feel that IFAs need brand support for expanding their clientele. They usually hold 600 such seminars in a year where eminent speakers share important insights on mutual funds with investors. Reliance Mutual Fund believes in tying up with IFAs who share the same conviction for mutual funds. They have held 1750 such programs in various parts of the country. They feel that these seminars usually increase the penetration level for IFAs and also help investors to know more about their products. DSP BlackRock Mutual Fund arranges minimum six seminars in a month in association with IFAs. Fidelity Mutual Fund also arranges at least six investor education seminars along with IFAs. IDFC Mutual Fund does it a little differently. Any new IFA, who ties up with IDFC, is handed a movie called - ‘Bachat Nivesh Badhat’. This movie is based on a bollywood theme and showcases how investments lead to fulfillment of dreams. Therefore, rather than showing investors power point presentation they show their investors a bollywood masala short movie.

Mutual Fund houses have started disclosing geography and scheme wise break up of their assets to comply with SEBI’s recent diktat issued on August 22, 2011. SEBI had asked AMCs to bifurcate their AUM into debt/equity/balanced etc, and percentage of AUM by geography (i.e. top 5 cities, next 10 cities, next 20 cities, next 75 cities and others). Fund houses are required to put out this data on their websites. A few fund houses like Canara Robeco, DSP Black Rock, IDBI, HSBC, Franklin Templeton and Sundaram have disclosed their geography wise assets on their respective websites. In line with the popular belief, more than 50% of mutual fund industry’s AUM is concentrated in the top five cities while the next top 20 cities account for around 20% of the business. Fund houses will also start disclosing aggregate commission paid out to distributors at the end of this financial year.

Regulatory Rigmarole

SEBI released a concept paper on the proposed AIF norms, which would cover venture capital funds, private equity funds, debt funds, PMS, real estate funds and PIPE (private investment in public equity) funds, among others. It has proposed a minimum investment size of Rs 1 crore. The current norms allow a high net worth individual (HNI) to participate in a portfolio management scheme with as little as Rs 5 lakh. Mutual Funds would be the biggest beneficiary of the proposed norms, as a lot of HNIs with an investment corpus of less than Rs 1 crore would not be able to invest in PMS or other funds that come under the purview of AIF regulations.

Market regulator, Securities and Exchange Board of India, has proposed to regulate the activity of investment advisors in the country through a self-regulatory organisation (SRO). The proposed regulatory framework, which will cover independent financial advisors, banks, distributors, fund managers among others, will mandate the person who will interface with the customer to declare upfront whether he is a financial advisor or an agent of the AMC. The regulator said an advisor would be required to have a much higher level of qualification like CA or MBA and would receive all payments from the investor. However, agents who are associated with the AMC and receive their remuneration from them will be prevented from claiming they are financial advisors. Besides, they will also have to maintain records of all forms of communication made with investors for at least five years. Since investment advisors advice on a range of products such as mutual funds, insurance, bonds, fixed deposits, commodities and stocks, their activities come under multiple regulators including SEBI, RBI, IRDA and PFRDA.

About 39,000 of the 45,000 AMFI-registered fund distributors will not levy transactional charge on investors. Distributors, who have opted out of transactional charges, will continue charging advisory fees mutually agreed between fund sellers and investors. In July 2011, SEBI had imposed a transactional charge of Rs 100 on existing mutual fund investors and Rs 150 on first-time investors - an attempt by the regulator to incentivise distributors.

The mutual fund advisory committee has shot down the proposal to raise the capital base of asset management companies to Rs 50 crore from Rs 10 crore to ward off 'non-serious players' and to ensure higher safety for investors.

Fitch Ratings has changed its Indian mutual fund rating scales in line with the guidelines issued by the Securities and Exchange Board of India dated June 15, 2011. Prior to this change, Fitch had two different rating scales in keeping with its global practices. First, a money market fund (MMF) rating scale (with an ‘mmf’ suffix) - applicable to funds whose objectives are capital preservation and investor liquidity. Secondly, a bond fund rating scale, where credit and volatility ratings are assigned together to reflect credit and market risks. Fitch will therefore rate short-term funds whose market and liquidity risks are considered extremely low by the agency, notably Indian liquid funds, on the short-term scale. As such, the outstanding Indian MMF rating of ‘AAA (mmf)(ind)’, applicable to liquid funds, will be converted to ‘A1+mfs(ind)’ under the new scale. Short-term funds with marginally higher risk profiles - in terms of liquidity, maturity and credit quality - will be rated ‘A1mfs (ind)’. As such, the ratings of short-term funds will be capped at ‘A1mfs (ind)’ unless the asset management company manages liquidity and market risks at a level comparable to a liquid fund. Fitch will continue to rate long-term bond funds on the long-term scale.

With an aim to strengthen its market oversight and policymaking capabilities in the wake of fast-changing market dynamics, SEBI has begun the process of an overhaul of its own functions and organisational structure. The capital market watchdog is of the view that a turmoil in the global financial markets in recent years and emergence of a number of new market segments have brought to the fore newer challenges and the need for a stronger regulatory mechanism. To start with, the regulator has decided to strengthen its research and economic policy teams with the appointment of a Chief Economist. This would be followed by SEBI engaging an external consultant to recommend changes in its roles, functions, vision and organisational structure. Subsequently, SEBI aims to set up an International Advisory Board to guide it while framing policies to meet the challenges emerging from various global market developments. The Advisory Board could meet twice a year to assess the trends in global markets and to guide the activities towards meeting the emerging challenges. Besides, SEBI also plans to organise brainstorming sessions with international and domestic experts, including its own past chairmen. After the external advisor makes recommendations on changes in SEBI’s organisational structure, human resources, technology and its regulatory and oversight roles, those would be taken up with the central government agencies for further implementation. The areas where SEBI is looking up for major changes include use of latest available technologies, incentives to attract and retain talent and acquiring expertise for dealing with complexities associated with various market segments. SEBI last went through an organisational restructuring in 2003 and the market has gone through a sea change since then.

FUND FULCRUM
October 2011

Total Assets Under Management of the mutual fund industry that fell by 4% in August 2011, dipped by 8% (by Rs. 54801 crore) to Rs. 6.41 lakh crore in September 2011. The decline was attributed to huge outflows from liquid and income funds, as banks and corporates withdrew their mutual fund investments to meet their quarter end commitments. On the other side, the average assets under management fell by 4% to Rs. 7.12 lakh crore for the quarter ended September 2011 as compared with Rs. 7.43 crore for the quarter ended June 2011. Liquid and Income Funds witnessed net outflows to a tune of Rs. 41078 crore and Rs. 15263 crore respectively in September 2011. Except Gold Exchange Traded Fund (ETF), whose AUM surged by 7.9%, rest of the category faced decline in AUM in September 2011. The net outflow from the industry stood at Rs. 54173 crore in September 2011 as against Rs. 14597 crore net outflows during the month of August 2011. So far in 2011, equity-related schemes have seen net inflows of Rs 2,510 crore, against net outflows of Rs 15,361 crore last year. It was only in April 2011 that the industry witnessed a mass exodus of over 300,000 equity folios only to see the situation improve in the subsequent months. According to the Securities and Exchange Board of India, the overall folios as on September 30, 2011 stood at 4.71 crore, a fall of around 62,000.

HDFC Mutual Fund has dethroned Reliance Mutual Fund and emerged as the largest fund house in terms of assets under management. Statistics from the industry body, the Association of Mutual Funds in India, show the average assets under management of Reliance Mutual Fund plunged in the September quarter by 10.5% to Rs 90,661 crore from Rs 1,01,259 crore in the quarter ending June 2011. On the other hand, HDFC's assets declined marginally by 0.2% during the same period to Rs 91,827 crore from Rs 92,033 crore. During the quarter, the overall industry's assets slipped by 4.2%. The past year saw HDFC Mutual Fund lose 1.4% of its assets, while Reliance Mutual Fund lost a whopping 16% of assets. However, the latter maintained a wide gap from its immediate competitor. Still, in a single quarter the fund house had a massive erosion of assets to the tune of close to Rs 10,600 crore. This not only lost it the top position but also brought it below Rs 1 lakh crore in assets. It was in May 2009 that Reliance surpassed the Rs 1 lakh crore mark and maintained this level. Its assets had reached as high as Rs 1.22 lakh crore later that year. HDFC had briefly tasted the Rs 1 lakh crore mark in November 2009 and May 2010. It could not sustain this level.

Foreign fund houses seem to be gaining ground in the Indian mutual fund industry, which is dominated by local players. So far this year, foreign asset managers have registered a relatively high growth, owing to a low asset base, improvement in performance ratings and recognition of brands among investors. In the first half of the current financial year, assets of foreign fund managers grew by 4.56% to Rs 77,412 crore from Rs 74,037 crore. The same period saw the industry adding 1.74% more assets to Rs 7,12,742 crore, while domestic players — they control a lion’s share in the market —could grow their assets by a meagre 1.4%. Interestingly, the previous financial year saw the contribution of local fund managers in the overall fall of industry’s assets at a whopping 97% or Rs 45,724 crore. The industry had lost Rs 46,987 crore of assets in the year. So far, global players contributed around 28% in adding fresh assets during this fiscal. The rest came from local fund houses. In terms of ratings too, global players’ schemes have made their presence felt among the top performers.

Mutual Fund industry saw its net profits plunge by 50% in the financial year 2010-11 as industry expenditure surged 20% and equity inflow declined 41% even though the revenues declined by a mere 1%. Surprisingly, during the same period the Mutual Fund management fees (excluding PMS fees) saw a marginal decline of 3% against the same in the previous year. Industry expenditure rose sharply to Rs 3,405 crore in the fiscal year 2010-11, a jump of 20% from Rs 2,837 crore in the previous year. Business promotion /brokerage/fund expense and employee cost have surged 40% and 12% respectively from the previous year. In addition, equity inflow has seen a sharp dip (down 41%) during the same period. Overall, the industry has seen a net outflow of Rs 49,406 crore as compared to a net inflow of Rs 83,081 crore in the previous year. Meanwhile, during the fiscal year 2010-11, AMCs launched 23 equity funds accumulating Rs 3,299 crore (down 45%) as against the previous year where AMCs launched 19 equity funds and accumulated Rs 5,989 crore. For financial year 2010-11, Reliance MF's profit was the highest at Rs 261 crore, up around 34 per cent compared to Rs 195 crore in the previous year. During the year, the profitability of HDFC Mutual Fund grew 16.3% to Rs 242 crore, as against Rs 208 crore last year. There are 45 players in the industry, with an average AUM of Rs 7,12,742 crore as on September 30, 2011.

Piquant Parade

Reliance Capital Asset Management (RCAM) is looking for a foreign partner like Japanese Nippon Life Insurance to facilitate its mission of going global and is also in talks with overseas distributors for selling its products. RCAM is also looking at frontier markets (markets lower than emerging ones) like Sri Lanka and Bangladesh for its products and is waiting for regulatory approvals from Jakarta for its Indonesian Fund.

An agreement between AIG and Bridge Partners has resulted in PineBridge becoming the new sponsor of AIG Mutual Fund. Subsequently, the name of AIG Mutual Fund will be changed from “AIG Global Investment Group Mutual Fund” to “PineBridge Mutual Fund”.

Morgan Stanley Investment Management, one of the earliest foreign fund houses to set shop in India, has reworked its capital structure. The company, which launched its first fund 17 years ago, has bought back shares held by Alanoushka Finlease and Investments, the Indian arm of Morgan Stanley Mauritius company, making it a fully foreign-owned enterprise. Following the exercise, it asked the Association of Mutual Funds of India to reclassify it as a foreign fund house. In the early days, fund houses preferred the joint venture structure to take advantage of the minimum capital requirement norms. While foreign fund houses were required to bring higher capital, joint ventures with Indian companies reduced the capital requirements to a fraction.

Motilal Oswal Financial Services was looking to sell a little less than 26% stake in its asset management and investment banking businesses.

Parag Parikh Financial Advisory Services has proposed to channel assets from its portfolio management services (PMS) business to set up a mutual fund. The Securities and Exchange Board of India’s (S EBI) proposal to increase the minimum threshold from Rs5 lakh to Rs25 lakh added to a series of other existing operational issues, resulting in a decision to switch to a mutual fund structure to manage its clients’ money. They hope to be ready to start operations in 4-5 months pending final regulatory approvals.

Prashant Jain, chief investment officer & executive director of HDFC Mutual Fund, and Chaitanya Pande, head – fixed income, ICICI Prudential Asset Management Company, are the Business Standard Fund Managers of the Year. While Jain was the best fund manager in the equity category, Pande was the chosen one for debt, for their spectacular performance during the year ended March 31, 2011.

Union KBC Asset Management Company Pvt Ltd (Union KBC), a subsidiary of Union Bank of India, is to introduce mutual fund-related transactions through ATMs. Initially, the facility christened as ATMfunds@Union Bank will be available to all the customers of Union Bank, who have a debit card. Union Bank KBC has also introduced UB KBC Prabodh, a series of investor awareness programmes for mutual fund investors. Prabodh is a multi-layered initiative, not only focused on education, but also the practical goal of getting more informed clients to invest in mutual funds.

Tata Mutual Fund may go in for strategic tie-ups that will offer opportunity to qualified foreign investors (QFIs) to tap the Indian market. In order to promote the portfolio investment route, the Government last month allowed QFIs -- individual, group or association -- to invest up to USD 13 billion in equity and debt schemes of mutual funds in the infrastructure sector. Besides, with an aim to further liberalise the capital market, the Government is contemplating to allow foreign individuals to buy equities directly in stock markets.

The Association of Mutual Funds in India plans to launch a portal, MF Utility, by the first week of April 2012 that will facilitate transactions by customers, distributors, and financial advisors in schemes offered by various asset management companies on a single, unified platform.

In order to create awareness among investors, AMFI has been conducting various advertising campaigns across the country. Till August 2011, 3,486 investor awareness programmes covering 173 cities have been organised.

To be continued…

NFO NEST
October 2011

Yearning for the yellow metal!

Record-level gold prices may have dampened the demand for jewellery, but it has hardly dented investors’ appetite for products based on the yellow metal. Gold schemes with the facility to make periodic purchases, floated by Reliance Mutual Fund, Kotak Mutual Fund and SBI Mutual Fund, have seen sizeable inflows, prompting other asset management companies to plan similar product launches. ICICI Prudential opened its gold fund-of-fund NFO for subscription last month. Birla Mutual Fund and Baroda Pioneer Mutual Fund have filed drafts with market regulator SEBI to launch such schemes and many others are expected to follow suit. Fund houses are looking to cash in on the frenzy for gold products among investors, who are fleeing stocks because of the uncertainty over the debt crisis in Europe and worries about a recession in the US. Little wonder that two of the four funds in the October 2011 NFONEST are gold funds.

Tata Retirement Fund
Opens: October 7, 2011
Closes: October 21, 2011

Tata Mutual Fund is launching India’s first ever retirement specific mutual fund scheme, a carefully structured suite of plans designed to meet the investment needs of investors in different age brackets. It offers three unique options to investors – Progressive Plan, Moderate Plan and Conservative Plan - with varied percentage of equity and debt assets. The progressive plan, for investors aged below 45, will have 85% to 100% allocation to equity; the balance, if any, will be invested in debt. Once the investor turns 45, the corpus will be switched to the moderate plan, where the equity allocation is lower between 65% and 85%. Finally, when the investor turns 60, the investments will be shifted to the conservative plan, which will have debt allocation between 70% and 100%, with a small part of 0% to 30% going to equity. Tata Retirement Savings Fund is specifically designed keeping in mind the young and middle aged working generation. The fund is tailor-made to support the monetary needs of investors post their retirement so that they can meet the 30:30 challenge. With increasing life expectancy, one can assume a post retirement life of 30 years after 30 earning years. The challenge clearly is the ability to maintain the same life style post retirement. Tata Retirement Savings Fund comes with a unique “Auto-Switch” feature, which does away the hassles of adjusting the equity-debt proportion with increasing age. Normally, an investor depends on his advisor for switching assets between equity and debt with increasing age. Yet another unique feature of the fund is the “Auto-Systematic Withdrawal” facility. This is designed with the objective of providing the investors with regular cash flows after they turn 60. The “Auto-Systematic Withdrawal” facility comes with two options of Monthly - 1% of market value of investment as on date of completion of 60 years of age or Quarterly - 3% of market value of investment as on date of completion of 60 years of age. The performance of Progressive Plan of the scheme will be benchmarked against BSE SENSEX while Moderate Plan and Conservative Plan of the scheme will be benchmarked against CRISIL Balanced Fund Index and CRSIL MIP Blended Index respectively. The fund will be jointly managed by Mr.Bhupinder Sethi, Mr. Murthy Nagarajan and Dinesh Da Costa (for overseas portfolio).

HDFC Gold Fund
Opens: October 7, 2011
Closes: October 21, 2011

HDFC Gold Fund, an open ended Fund-of-Funds scheme, will enable investors to invest systematically in gold, hedge their risks against market volatility and to effectively diversify their portfolio. Gold FoFs enable the investors to invest through a single investment or through Systematic Investment Plan (SIP). The minimum denomination of investment is Rs 100. The corpus collected through the NFO will be invested in HDFC Gold ETF to seek capital appreciation. As at the end of the September quarter, HDFC Mutual Fund managed average assets worth Rs 91,827.11 crore.

Pramerica Credit Opportunities Fund
Opens: October 7, 2011
Closes: October 21, 2011

Pramerica Mutual Fund has launched Pramerica Credit Opportunities Fund, an open-ended debt scheme. The objective of the scheme is to generate income by investing in debt /and money market securities across the credit spectrum. The scheme will also seek to maintain reasonable liquidity within the fund. The scheme will invest 100% of assets in debt securities and money market instruments with low to medium risk profile. The Benchmark Index for the scheme will be CRISIL Composite Bond Fund Index. The fund manager of the scheme will be Mr. Mahendra Jajoo.

IDBI Gold ETF
Opens: October 19, 2011
Closes: November 2, 2011

IDBI Mutual Fund has launched IDBI Gold Exchange Traded Fund, an open ended Gold Exchange Traded Scheme. The investment objective of the scheme is to invest in physical Gold and Gold related instruments with the objective to replicate the performance of Gold in domestic prices. The ETF will adopt a passive investment strategy and will seek to achieve the investment objective by minimizing the tracking error between the fund and the underlying asset. The scheme will invest 95% to 100% of assets in gold and gold related instruments and up to 5% of assets in debt and money market instruments with low to medium risk profile. The Benchmark Index will be domestic price of physical Gold. The scheme will be managed by Mr. Gautam Kaul.

Daiwa Dynamic Bond Fund and Daiwa Gilt Fund are expected to be launched in the coming months.

GEM GAZE
October 2011

The broad-based 2010 sector funds GEMGAZE is almost left untouched save Franklin Pharma, which merged with Franklin India Prima Plus, along with Franklin FMCG Fund. Reliance Pharma has taken its coveted position in the 2011 sector funds GEMGAZE. The negative one-year return of the funds under consideration should be viewed against the backdrop of the bleeding Sensex.

ICICI Prudential Infrastructure Fund Gem
Long-term laurels

ICICI Prudential Infrastructure is the largest fund in the infrastructure category, at Rs. 2462 crores. For a sectoral fund, the fund is well diversified with nearly 52 stocks and 76% of the portfolio is large-cap oriented. However, this diversification is highly skewed in favour of specific scrips. Cash holding on an average was close to 8.4% between February 2008 and July 2011. The fund does take exposure to derivatives. However, much of the exposure is in futures while the use of options is sporadic. The top three sectors, energy, financials, and metals account for 59% of the portfolio. The top three holdings alone account for nearly 22% of the fund’s portfolio and Bharti Airtel is the fund’s top holding with a weightage of 9.04%. The expense ratio is 1.88% and the turnover ratio is 79%. The fund has underperformed diversified funds in one year with a return of –25.4% as against the category average of –27.55%. ICICI Prudential Infrastructure fund is the best performing infrastructure fund despite the lacklustre performance of this sector in the past year. This laggard performance is actually an investment opportunity in disguise for the long-term investor. The infrastructure sector holds potential to generate long term returns for the patient investor as infrastructure projects have long gestation periods. The prospects of this sector are bright as huge investments are made into the infrastructure space by both private investors and government.

Reliance Diversified Power Sector Fund Gem
Promising performer

Reliance Diversified Power Sector Fund has witnessed a steep fall in its AUM from Rs 5,180 crore last year to Rs 2,854 crore now. A large cap-oriented fund with a large cap exposure of 57%, the top three sectors, energy, engineering, and metals constitute 66% of the portfolio. The expense ratio is 1.84% and the portfolio turnover ratio is 16%. Barring Reliance Diversified Power Sector Fund, most power & energy sector funds have eroded wealth for investors. Reliance Diversified Power Sector's performance emphasises the fact that timing is of utmost importance for a theme fund. As the power and infrastructure themes have been prolonged underperformers since the rally that began in March 2009, this thematic fund could not beat the diversified fund category. Though a pessimistic view is prevalent in the power sector in the short term, the long term is promising.

Magnum FMCG Fund Gem
Tiny topper

In the past one year, the Rs 56 crore tiny Magnum FMCG Fund is perched at the top thanks to its focus on mid-sized FMCG companies that have enjoyed a massive re-rating on the bourses. The AUM almost doubled from Rs 30 crore last year. There are 15 stocks in the portfolio and 41% of the assets are in large caps. Owing to its small size, the fund could stay with a compact portfolio of between just 5 to 15 stocks through the year, an advantage given the limited universe of FMCG stocks. The expense ratio is 2.5% and the portfolio turnover ratio is 0.54%. Investors can hold the fund as prospects for FMCG companies in the year ahead remain good, buoyed by pay hikes for the urban salaried class that should help the demand for FMCGs and a good monsoon and higher NREGA payments that should keep rural consumption ticking. However, valuations in the sector are at a stiff premium over markets and investors should not expect an encore of 2010 returns.

Reliance Banking Fund Gem
Beyond benchmark

Reliance Banking Fund invests only in large and midcap financial companies. 63% of the portfolio consists of large caps. The fund is more inclined towards investment in public banks than in the private banks. Reliance Banking Fund has had an average exposure of almost 50% of the portfolio to the public sector banks between March 2007 and March 2011, while the exposure to the private sector banks on an average stands at 26% between March 2007 and March 2011. On an average, the fund has invested around 5.6% into NBFCs between March 2007 and March 2011. The fund has had a cash exposure of 7.2% over the past one year i.e., between March 2010 and March 2011. But over the four-year period (between March 2007 and March 2011), the average cash exposure has been high at 12.7%. There are 18 stocks in the portfolio. Reliance Banking Fund has not only outperformed its benchmark, the CNX Bank Index but has also outperformed other banking sector funds. The current AUM of the fund is Rs 1707 crores and the one-year return is -27.5% as against the category average return of –29.8%. The expense ratio is 1.92% and the portfolio turnover ratio is 36%.

Reliance Pharma Fund Gem
Risky ride

This Rs 603 crore fund typically has a portfolio of 22 stocks and often takes concentrated bets. Like other pharma funds, this fund also took off as a large-cap, but gradually shifted towards mid-cap stocks. Its interest in small-cap stocks has also increased over time. UTI Pharma & Healthcare Fund and SBI Pharma Fund have adopted a more defensive stance by predominantly holding their assets in the large cap domain where they have allocated 60.0% and 61.8% respectively. At present 38% of the assets are in large caps. 8% of the portfolio is in cash. Its one-year return is –2.15% as against the category average of –1.43%. The expense ratio is 2.21% and the portfolio turnover ratio is 41%. Interestingly while clocking enticing returns, none of the pharma funds have indulged in aggressive churning of portfolio. Given its high exposure to the small and mid-cap companies, which increase its beta as well as the risk quotient, Reliance Pharma is risky. But, given its well-diversified portfolio and healthy performance record, those willing to take a plunge in the pharma space can consider this fund.

ICICI Prudential Technology Fund Gem
Old outperformer

One of the oldest funds in this category, this fund returned –14.41% in the past one year as against the category average return of –16.33%. Currently around 91% of the Rs 99.5 crore corpus is invested in the technology sector, with Infosys alone accounting for 43% of the portfolio. The portfolio is highly concentrated with just 14 stocks. But 76% of the portfolio is large cap-oriented. The expense ratio is 2.49% and the portfolio turnover ratio is 41%.

Dear Readers!

It gives me immense pleasure in announcing the launch of my website www.mfmazetomatrix.com. Kindly visit the site which is an orderly treasure trove of information on mutualfunds.

Lalitha Muthu
October 6, 2011

FUND FLAVOUR
October 2011

Top-up…

You should take one step at a time and begin investments with a balanced fund or a large cap equity diversified fund. Sectoral funds should not form core of your portfolio. A sector story which sounds convincing and in fashion at one point will go out of fashion at some other point. Moreover when a story is current, its negative points get ignored and wished away. Sector funds are all about choosing sectors carefully after thorough research, avoiding over-exposure and know-how of when to exit. They can be used as a top-up to your holding of diversified equity funds.

Infrastructure Funds
Far-sighted…

Infrastructure funds, which were promoted in great gusto when the equity markets were booming in 2006 and 2007, failed to deliver appealing returns when assessed over a 3-year time frame. In fact, they have given quite scornful returns to investors, a mere 9% in the past one year. Infrastructure, in general, has tremendous scope for growth, as our country needs huge developments in that area and the recent government policies are expected to give a fillip to this sector. The short-term outlook for this sector is neutral. The sector has corrected significantly, but concerns over rising inflation, unfavourable interest rate scenario and delay in other approvals from the government remain and meaningful land acquisition reforms remain. In the long term, the sector is expected to generate significant wealth as investment in it by the government and via the PPP model is inevitable.

Banking Funds
Reached the pinnacle?

Banking industry is one of the key drivers of a nation’s economy and its growth is dependent on the overall growth in the economy. Even though there are short term challenges like high government deficit level, high inflation, rising interest rates, rise in cost of money and high commodity prices, the banking sector is seeing healthy growth due to rise in rural income, increased spread of banking services and robust credit offtake inspite of signs of slowdown. The growth of banking sector is likely to be high over the next two to three years. Albeit, the category posted negative returns over the short-term periods, it outperformed the diversified equity category with huge margin for one, three and five year periods. It posted 8%, 25.49% and 27.12% of compounded returns while the equity diversified category registered -0.65%, 8% and 13% of returns respectively. Average AUM of the category stood at Rs. 2488 crore as on 31 March 2011. Average expense ratio as per latest data was at 2.36%. Overall loan growth grew 23% year-on-year according to the latest data by the Reserve Bank of India. However, part of the growth can be attributed to the low base last year. In the first nine months, the loan book grew by only 15%. There are also concerns relating to pressure on profit margins given the prospects of interest rates rising. This will raise the cost of borrowings for banks, thereby, hurting their margins. Banks may find it challenging to maintain the pace in growth.

Technology Funds
A risky proposition…

Information Technology industry has played a major role in the Indian economy since last decade. IT funds manage investors’ assets worth about Rs 500 crore. Over the longer term too they have performed well, and in the past 12 months the average tech fund has gained nearly 27%, while over two years their average gain is 60% per year, making them the second best among funds. In the Indian context, technology is one of the best sectors to invest because you get high corporate governance, high return parameters and good growth prospects. For Information Technology, currency fluctuation is the key risk though companies mostly hedge themselves against it. Demand seems to be robust as companies continue to make new clients and increase their order books. The index ‘BSE IT’ underperformed BSE Sensex for the one-year period. However, it outperformed Sensex for three and five year periods. The performance of the IT category was also more or less in line with the performance of diversified equity category. It registered 2%, 7% and 11% of CAGR returns for the one, three and five year periods while the equity diversified category posted -0.65%, 8%, 13% of returns. Average AUM of the category stood at Rs. 418.85 crore as on 31 March 2011. Average expense ratio as per latest data was at 2.47%.

Auto Funds
Applying brakes…

2010 has been huge success for the auto funds. In 2011, they will have two challenges. One is the base effect because they have done pretty well and the second is the interest rates because this is a very interest sensitive sector. If the interest rates keep on rising then probably there could be some pressure on the automobile sector. But overall they should do well as a consumption theme but significant out performance like what they did in 2010 would be a bit of a question mark.

FMCG Funds
On the fast track…

Indian FMCG industry is expected to grow at a base rate of at least 12% annually to become Rs 4,000 billion industry in 2020, according to a report released at the CII FMCG Forum 2010. The Report noted that the positive growth drivers mainly pertain to the robust GDP growth, opening up and increased income in the rural areas of the country, increased urbanization and evolving consumer lifestyle and buying behavior. According to AC Nielson, the FMCG industry in India has witnessed steady sales growth of a 12% CAGR over the past decade. The category outperformed equity diversified category for one, three and five year frames by delivering 20%, 22% and 18% of CAGR returns whereas the equity diversified schemes registered an average of -0.65%, 8% and 13% respectively. Average AUM of the category stood at Rs. 163.49 crore as on 31 March 2011. Average expense ratio as per latest data was at 2.49%. A long-term growth perspective is seen in the FMCG sector considering the significant under penetration in many FMCG categories (Food, Personal care), highly untapped rural market & emergence of newer categories. Over a three-year time frame, FMCG funds outperformed some good performing diversified equity funds by managing their risk well and delivered enticing risk-adjusted returns as depicted by their high Sharpe Ratio. Moreover, the portfolio churning too has not been high due to the evergreen prospects posed by most companies in the sector. But nonetheless the expense ratio has been relatively high compared to diversified equity funds. Moreover, when assessed over for a five-year period, some good diversified equity funds have delivered better returns. For the last 12 months, FMCG funds are the best performers with over 20% returns. In the two-year period, it is the second best category with Rs 100 invested becoming Rs 200.

Pharma Funds
The best bet…

Pharmaceuticals seem to be best bet in short as well as long term. An increased spend on healthcare by the government argurs well for the sector and domestic demand has been nothing but robust. The total size of Indian pharmaceutical industry, excluding exports and government purchases, stood at Rs 55,454 crore in the last fiscal 2011. According to ORG IMS Research the Indian pharmaceutical market is expected to grow at 11% to 12% per annum, which will make India one of the world's top pharmaceutical markets. Over the periods, the BSE Health Care index has been among the best performing indices, posting CAGR returns of 16% for the five-year period and outperforming the Sensex returns of 13.6%. The pharma category outperformed diversified equity category during bear and high volatile periods. It posted CAGR returns of 9.34%, 24% and 19.36% for one, three and five year periods respectively whereas the equity diversified category registered -0.65%, 8% and 13% of returns respectively. There are four schemes in the category, out of which Reliance Pharma and Franklin Pharma performed well compared to peers and other equity oriented schemes. The scheme under performed its benchmark BSE Healthcare for one-year period ended 21 June 2011, however it performed for three and five year periods by registering 34% and 30% of CAGR returns respectively. Average AUM of the category stood at Rs. 838.30 crore as on 31 March 2011. Average expense ratio as per latest data was at 2.38%.

PSU Funds
Treasure trove…

Government owned companies are storehouses of tremendous value and when this value is unlocked, investors will gain. Government companies can expect some favourable treatment in the policy space, like preference to them in government contracts, protection from competition etc. But there are several negatives in government ownership - recruitment policies, compensation policies, speed of decision making, indifferent client servicing and the image they consequently have, bureaucratic processes are all typically their Achilles heel. All said and done, during the economic slowdown, they showed greater resilience than their private sector counterparts. With a new set of government firms likely to go public this year, there will be a lot of portfolio churning in PSU funds to include more such stocks. The PSU index has outperformed the Sensex by 8-10% over the last 10 years. Since May 13, 2002, it has returned almost 445%, as against 438% from the Sensex. Presently, there are only four mutual fund schemes investing in PSUs, apart from two public sector bank funds. The former include Baroda Pioneer PSU Equity, Religare PSU Equity, SBI PSU and Sundaram PSU Opportunities.

…and ride the cycle

Sector funds move in cycles. Every cycle will have a new out-performer and an under performer. For example, the Information Technology sector was at peak while compared to other sectors during the year 2005-06. But it was seen at the bottom during 2007-08. Likewise, the year 2007-08 was the best performing period for the infrastructure industry. But the recent period shows that this sector is currently out of favour. Hence, sector funds are suited for aggressive investors as they are exposed to higher risk. Investors who understand the sector dynamics well can consider and invest in these funds. To benefit from out performance, one needs to be in right sectors at the right time!