FUND FULCRUM - JANUARY 2009

FUND FULCRUM
(January 2009)

Green end to 2008…..

The mutual fund industry has broken a three-month losing streak. Despite the sharp fall in the market since January 2008, the mutual fund industry saw a consistent rise in the AUM till May 2008 — from Rs 5.7 lakh crore to almost Rs 6 lakh crore. This was primarily because investors, including companies and high net worth individuals, continued to pump in funds in Fixed Maturity Plans (FMPs), Liquid and Liquid-plus funds. However, since May 2008, assets fell by almost Rs 2 lakh crore — from Rs 6 lakh crore to Rs 4.21 lakh crore by December-end. October was particularly bad for the mutual fund industry when it lost Rs 97,000 crore in a single month. This was because of a severe liquidity crunch, which forced a large number of corporates in need of working capital to exit FMPs, Liquid and Liquid-plus funds. Even high net worth individuals moved out of such schemes because there were concerns that these schemes had invested in risky papers. Moreover, there was a mismatch in the maturity of the papers and schemes. Both AMFI and SEBI have stepped in since then with guidelines to regulate these schemes.

The total assets under management of India’s 35 mutual fund houses have soared to Rs 421,117 crore, following an increase of Rs 19,088 crore at the end of December 2008, according to the data by the Association of Mutual Funds in India. Reliance Mutual Fund maintained its top position with an AUM of Rs. 70208.10 crore, which is a third more than its second closest competitor HDFC Mutual Fund, which manages around Rs. 46757.45 crore. UTI Mutual Fund retained its third position with an AUM of Rs. 42548.17 crore witnessing an inflow of Rs 4190.03 crore. ICICI Prudential Mutual Fund was placed fourth with an AUM of Rs 41,878 cr and Birla Sun Life Mutual Fund was placed fifth with an AUM of Rs 36,565 cr. Similarly, SBI Mutual Fund retained its sixth position with average assets under management of Rs 25,004 cr, while Franklin Templeton Mutual Fund was at the seventh place with an AUM of Rs 19,244 cr. The top 10 fund houses in terms of AUM have remained unchanged except for the tenth position that has been taken over by LIC Mutual Fund from DSP Black Rock Mutual Fund. It is noteworthy that LIC's AUM has witnessed an upsurge of 23.24 per cent which is the highest change in percentage terms. As against two fund houses that reported an increase in their AUMs in November, it is indeed a positive development that 16 fund houses saw an upsurge in their AUMs in December. The fund houses that recorded a double digit rise were LIC Mutual Fund, JP Morgan, Birla, ICICI and Canara Mutual Fund. However, it seems that the new entrants had to bear the brunt of investors' drowning faith on the shaky markets resulting from the global recession blues. The three fund houses that shed their AUM the most were Edelweiss Mutual Fund, Mirae Asset Mutual Fund and Bharti AXA Mutual Fund, witnessing a fall of 53.14 per cent, 35.50 per cent and 31.61 per cent respectively. The above mentioned fund houses had started their operations in India in 2008 only.

Piquant Parade

UTI Asset Management Company has indefinitely deferred its plans to go public due to the bearish market conditions. The company will be roping in a strategic partner by diluting a 26% stake. The negotiation is at an advance stage and deal is expected to be closed by February or early March 2009. Japan-based Shinsei, with which the fund house has a tie-up with regard to global fund management, is being actively considered to be the strategic partner. Other US and European players, including the second largest fund house in the USA, Vanguard Mutual Fund, have also shown interest in picking up a strategic stake in the mutual fund. The strategic partner is expected to add value to the business and strengthen the distribution network and help upgrade technology.

UTI Mutual Fund has opened 7 new UTI Financial Centres (UFCs) at various centres viz. Meerut, Belgaum, Alwar, Kozhikode, Malda, Amravati and Aurangabad.

In a bid towards reinforcing its commitment to expanding retail participation, Kotak Mahindra Asset Management Company has entered into a distribution tie-up with Central Bank of India, which will offer the entire bouquet of Kotak Mutual Fund products from its branches.

In a surprise move that has created a flutter among mutual fund distributors, HDFC Mutual Fund has asked its distributors to refund a part of the brokerage they received for selling FMPs, as a result of premature redemptions in those schemes. HDFC Mutual Fund has decided to invoke a clause in its agreement with distributors, which mentioned that in the event of investors pulling out before the maturity period, brokers would have to refund the brokerage proportionate to the 'unexpired period'. This is a very unusual move as fund houses are heavily dependent on distributors to sell their schemes. Many distributors who have been slapped with this demand are furious over it as according to them the distributor’s role is to advise investors at the time of investment but once the investment is made they cannot control the actions of investors.

Regulatory Rigmarole

The Securities and Exchange Board of India (SEBI) has forbidden mutual funds from offering indicative yields and portfolios to lure investors. Indicative yields and portfolios, generally revealed by funds in the case of FMPs, have been misleading. This practice came under the scanner during the recent liquidity crunch that FMPs faced. Investors were up in arms because FMPs were unable to actually match the promises implied by indicative yields.

In order to match the tenure of debt securities in the portfolio with the maturity of schemes, SEBI has cut the maximum maturity of papers in which liquid funds could invest. From February 1, 2009 mutual funds have to invest inflows received in liquid and liquid plus schemes into debt securities having a tenure of up to 182 days. From May 1, 2009 they can invest in securities maturing up to 91 days only.

SEBI announced that all the Mutual Funds registered with SEBI need to discontinue the nomenclature of ‘Liquid Plus Scheme’. As per the regulator, the nomenclature gives a wrong impression of added liquidity to the investors. The mutual funds have been advised by SEBI to carry out the change in the nomenclature of ‘Liquid Plus Scheme’ and confirm compliance to SEBI within 30 days from the date of the circular (19 January, 2009).

Fifteen firms have been short listed by the Pension Fund Regulatory and Development Authority (PFRDA) to become fund mangers of the pension fund that is likely to be allowed from April. 21 fund houses had submitted proposals to manage the pension funds for the non-government employees out of which only 15 have been selected and requests for proposals have been issued. The firms which have been selected include government promoted SBI Pension Fund, LIC Pension Fund and UTI Retirement solutions. These firms are also pension fund managers for the central government and state government employees. The PFRDA will allow six firms to set up pension funds for the non-government employees after the completion of the selection process which is expected to be completed by the second week of February. The regulator has plans to allow up to 26% foreign investment but with a condition that direct or indirect holding should not exceed 26%. The condition for selection criteria are at least five years of experience in fund management; monthly average assets under management not less than Rs 8000 crore for the last 12 months and net worth of Rs 10 crore. The regulator intends to allow the fund managers to offer five-six schemes, of which one will be a 100% debt plan, while another one will let investment mix between debt and equity to be decided by the age of the investor. The other schemes will allow investment of 15-85% in equities, while the rest will be allocated to debt.

Recovery sans dead (red) end?

2008 had been a torrid year for the Indian capital markets, with the Sensex falling by 52.47% - the highest in the past 3 decades. The mutual fund industry's AUM also shrank by 24.19 per cent during 2008. There has been a steady month-on-month increase in cash levels maintained by mutual funds with some mutual funds holding cash in excess of 20% for over the past two months. But on a positive note, India remains one of the world's fastest-growing major economies, with a large domestic consumption base. The country's relatively low dependence on exports limits its direct exposure to the global slowdown, while cheaper oil prices are helping to narrow the current-account deficit. The lag-effect of the liquidity crisis in October is lingering on in the market as of now. Going forward, the unfortunate Satyam fallout this month will also further dent confidence but that is only short-term. As long as there are no further shocks of such magnitude, the markets should remain normal in 2009. Let us hope that the December effect rubs on the coming months of 2009 and we see the market's convalescence journey take stride.