NFO NEST - MARCH 2008

NFO Nest

The NFO market is at a low ebb with only a few funds making their appearance in March 2008. Only a couple of funds are currently open and secure a position in NFO Nest this month. But Fixed Maturity Plans (FMPs) are back with a bang! A series of FMPs are flooding the market...

The following funds find their place in the NFO nest in March, 2008.

DSPML Natural Resources and New Energy Fund

Opens 3 Mar, 2008 Closes: 27 Mar, 2008

An open ended equity growth fund, it proposes to invest in companies which belong to the natural resources, energy and new energy sectors. These sectors would include base metals, other minerals and commodities, water and agriculture, and energy including oil, gas and coal. The new energy sectors include renewable energy and alternative fuels.The fund will invest a minimum of 65 per cent of the corpus in Indian companies, which form a part of these sectors and up to 35 per cent of its funds in Merrill Lynch International Investment funds which include New Energy Fund and World Energy Fund.

The fund-house seeks to capitalise on the current boom witnessed in the natural resources space, especially commodities such as metals, minerals and oil. A consumption-driven growth pattern arising in the emerging markets is likely to spur demand for natural resources. Further, the urbanisation and industrialisation process in these economies could drive demand for natural resources that are inputs for building infrastructure/generating power. The fund has highlighted that, historically, demand for natural resources tends to surge within few years of GDP per capita (on purchasing power parity basis) touching $3,000. India is said to be at such an inflection point, with GDP per capita of $3,802 in 2006. Power as a theme also holds potential in India, given the huge projects planned to meet the power deficit situation in the country. On the energy side, while increase in the price of oil has impelled exploration and development activity in the oil and gas space, higher environmental awareness and need to look for fuels that have unlimited supply and that are cheaper has led to increasing investments in renewable and alternative fuels such as wind energy, bio-fuels and solar fuel cells.

As Sundaram BNP Paribas and Reliance have already launched funds with a similar positioning, there may arise a risk of too many funds chasing similar ideas/stocks, thus losing out on any ‘early find’ advantage. This constraint may be overcome to some extent if the fund chooses to invest in companies that enable oil activities — typically offshore drilling companies, engineering in companies that produce rigs or those that enable transport of oil and gas. Further, the fund’s commodity universe also includes water and agriculture. Technologies that enable better utilisation of water resources and improved production in agriculture may also be investment segments that could open a wider universe to the company compared to peers.

As there are not too many significant companies in the alternative fuel space in India, the fund may be using the feeder route (through the New Energy Fund) to gain exposure to these areas. While this segment, no doubt, has good prospects, internationally non-conventional energy production is now driven more through offers of incentives by governments. For instance, in the US, production tax credits are available until December 2008 for producers of wind energy. Similarly, the European Union is proposing to introduce at least a 10 per cent ethanol blending for transport fuels through granting some sops. While the latter proposal has seen some resistance, an expiry of tax production credit in the US may discourage tapping wind energy as a resource. While this is not to doubt the potential that alternative resources hold, it remains a fact that this space at present requires a lot of regulatory and monetary support to gain significance.

The benchmarks for the World Energy Fund and New Energy Fund have returned 19 per cent and 11 per cent respectively on a compounded annual rate over five years. This suggests that the theme is not suitable for investors looking for order-of-magnitude returns. The fund can, however, serve as a diversifier into a theme that is still evolving and may be suitable for long-term investors.The global portfolio will be invested in World Energy Fund and New Energy Fund, managed by the BlackRock Investment Managers. The latter proposes to acquire a 40 per cent stake house in the DSPML fund house in India. The BlackRock Team also invests on behalf of DSPML’s World Gold Fund. This fund has returned 63 per cent since its inception in September 2007 as against the benchmark FTSE Gold Mines (CAP) Index of 37 per cent.

SBI Debt Fund Series 13 Months Series 7

Opens: 7 Mar, 2008 Closes: 17 Mar, 2008

This close ended debt fund aims at providing regular income, liquidity and returns to the investors through investments in portfolio comprising of debt instruments. It will invest 0%-100% in Government of India dated securities and treasury bills. The investment in securitised debt will be up to 20% of the exposure to AAA/AA+ bonds, and money market instruments.

UTI Global Emerging Market Fund, ABN Amro Banking and Financial Services Fund , HSBC Equity Linked Fund, ICICI Prudential Banking and Financial Services Fund, Magnum Sector Funds Umbrella Real Estate Equity Fund, Sundaram BNP Paribas Entertainment Opportunities Fund and Sundaram BNP Paribas Financial Services Opportunities Fund are expected to be launched in the coming months.