FUND FULCRUM - DECEMBER 2008

FUND FULCRUM
(December 2008)

Indian fund houses would like to forget 2008-09 as they witnessed their assets under management decline by Rs 1,89,898 crore between April (Rs.5,95,010 crore) and November(Rs.4,05,112). The drop can mainly be attributed to the global financial turmoil, leading to a liquidity crunch and prompting investors to pull their money out of mutual fund schemes. However, the AMFI data show that nearly 84 per cent or Rs 25,097 crore of redemptions in September and October — the worst months for fund houses — were as a result of the schemes maturing during those days. Mutual funds are set to witness a fresh round of redemption of Rs 36,848 crore between December 2008 and March 2009, with many of their debt schemes such as fixed maturity plans (FMPs), quarterly and monthly interval plans, fixed horizon plans and money market-related schemes set to mature during the coming months.

During November, redemption pressure on mutual funds came down from 97000 crore in October to 30000 crore. Mutual fund outflows in November were less than one third of outflows recorded in October, and the liquidity situation is improving though there is still investor wariness about equity schemes. Regulators continued with their liquidity support measures along with other confidence building measures. Both SEBI and AMFI confirmed that RBI measures had addressed the mutual fund industry’s liquidity requirements to a large extent. Besides, the special refinancing window for mutual funds (which has now been extended till March 2009), the RBI cut its repo rate by 150 basis points, cash reserve ratio (CRR) by 350 basis points and the statutory liquidity ratio (SLR) by 100 basis points since October to ease liquidity. On December 6, RBI announced another set of rate cuts, i.e., 100 bps cut in the repo rate to 6.50% and 100 bps cut in the reverse repo rate to 5%.

After a huge fall in assets under management of 27% during October (18% in September), the industry has seen a 7% decline in November, almost in line with overall market fall. Reliance Mutual Fund witnessed the biggest fall in its AUM in absolute terms, with an erosion of Rs 3278 crore but it still managed to maintain its coveted numero uno position with an AUM of Rs.67,816 crore. HDFC Mutual Fund maintained its second position intact and recorded a fall of 2.68 per cent in its AUM. UTI Mutual Fund’s assets have risen marginally by Rs 74 crore (0.19 per cent) to Rs 38,358 crore. It has taken over the third position from ICICI Prudential whose AUM stands at Rs 37,055 crore. Most fund houses have seen a decline except for Tata Mutual Fund which has seen a rise of about 3.2% and UTI Mutual Fund which has seen its assets almost stable rising by only 0.2%. Clearly the situation has improved a little for a few fund houses as compared to October but most of the fund houses still see their assets eroding substantially.

Piquant Parade

India's oldest mutual fund, UTI Asset Management Company, is eyeing to divest 26% to a strategic partner. It is reportedly in talks with three potential buyers, which include US-based T Rowe Price and Vanguard Mutual Fund. The buyer is expected to pay Rs 1500 crores to Rs 1800 crores, which would value the AMC at between Rs 6000 crores and Rs 7500 crores. The deal will not require an expansion of capital. Instead, all the four government-owned promoters of UTI AMC - State Bank of India, Punjab National Bank, Bank of Baroda and Life Insurance Corporation of India, will divest their 25% holdings proportionately. All four promoters have given UTI AMC`s management a mandate to find a strategic partner.

Religare Enterprises announced that following the acquisition of 100% share holding in Lotus India Asset Management by Religare Securities, a wholly owned subsidiary of the company, Lotus has become a step down subsidiary of the company. Following the acquisition, the name of Lotus India Asset Management has been changed to Religare Asset Management. The name change is effective from December 16, 2008.

The country’s third-largest private sector lender, Axis Bank, has received in-principle approval from the Securities and Exchange Board of India to set up its own asset management company. The bank is now waiting for the equity markets to stabilise before launching its first fund.

Principal PNB AMC issued a statement reinforcing its confidence in its India business. There have been reports that Principal is in talks with Birla Sun Life AMC to sell its mutual fund operations. The fund house expects the announcement will quell rumours about its operations. In fact, Principal Financial Group is looking to acquire an AMC in India as it wants to scale up its mutual fund operations in India. The company feels that the current market situation is the best time to do an acquisition because of lower valuations commanded by companies.

Edelweiss Asset Management Company entered into a distribution tie-up with Bank of Rajasthan for distribution of its products and services. Under the agreement, Bank of Rajasthan intends to distribute Edelweiss Mutual Fund's products through approximately 100 out of its 463 branches in India. The tie-up will help to strengthen its distribution network and increase its penetration across India.

Morgan Stanley Mutual Fund's flagship equity scheme - the close-ended Growth Fund launched in January 1994 - is set to become open-ended from January 15, 2009. In line with the SEBI guidelines, existing investors will be given an option to redeem the fund at the current NAV without any exit load. They can remain invested or switch fully, or partially, to the only other scheme managed by the fund house, ACE.

Life Insurance Corporation of India (LIC), the government owned insurer has purchased illiquid paper worth Rs 1755 crore from its mutual fund arm LIC Mutual Fund Asset in October. The insurer resorted to this off-market deal with it`s mutual fund arm to provide liquidity to it to meet redemption pressures. The acquired debt included bonds worth Rs 650 crores sold by BPTP, Rs 543 crores by Housing Development and Infrastructure, Rs 195 crores by Unitech and Rs 117 crores by Sobha Developers, among others.

Fidelity Mutual Fund has launched an innovative volatility tool designed to help advisers and investors put the current market uncertainty in the context of a longer term perspective. Fidelity`s volatility tool demonstrates the importance of longer term investing and staying focused on financial goals. The tool available at the website of Fidelity India uses investing truths, up-to-date data and dynamic graphics along with simple design. It is visually engaging and showcases several scenarios and themes that will educate advisers and investors about volatility. The web site has three tools that deal with different aspects of market volatility.
The tools on the website deal with:-
Timing the market : This tool helps investors establish how much they could lose on a notional investment of Rs. 0.10 million if they miss the 10, 20, 30 and 40 best days in the Indian market over a ten-year period.

Unpredictable returns : This tool helps investors look at how volatility increases or dips as investments are held over a one-year to a ten-year period.

Market crises : This section allows investors to check out how long the market took to return to its previous level after various crises.

To be continued.....