FUND FULCRUM

April 2010

The Average Assets Under Management (AAUM) of the Indian mutual fund industry plunged 4.37% in March 2010 after witnessing a 2.64% rise in February 2010. The industry's assets depleted almost by Rs 34,186.94 crore in March. This is the third time that the industry's assets have tumbled down after touching a record high of Rs 8 lakh crore during November 2009. In December 2009, the industry's assets declined by 1.62% while in January 2010 the assets fell by 4.14%. The fall was largely due to corporates withdrawing money to meet their advance tax payment commitments and partly to balance their accounts book for the financial year. Moreover, huge dividend payouts by fund houses and withdrawal of money by banks from debt fund category have added to the decline of the industry's assets.

According to data released by the Association of Mutual Funds in India (AMFI), the AAUM for March 2010 were Rs 7,43,950.45 crore as against Rs 7,81,711.52 crore in February 2010. Of the 38 players in the domestic market, only 13 could manage to increase their assets. Reliance Mutual Fund's AUM stood at Rs 1,10,412.71 crore at the end of March, a decline of 4.61 per cent. Other large fund houses suffered similar losses. HDFC's AUM fell 6.69 per cent to Rs 88,779.84 crore while Birla Sun Life's assets fell 5.97 per cent to Rs 62,367.11 crore. ICICI Prudential and UTI, however, managed to buck the trend of declining AUMs. Their AUMs grew 0.57 per cent and 1.14 per cent, respectively during March 2010.

Despite being available in the market for over two decades now, less than 10 per cent of Indian households have invested in mutual funds, according to a report released by research and analytics firm, Boston Analytics. Investors are holding back from putting their money in mutual funds due to their perceived high risk and a lack of information on how mutual funds work. According to AMFI data, retail investors account for 26.5% of total assets under management. High networth individuals and corporates account for 18.6% and 50.99% of the total AUM and banks and financial institutions account for 2.9% with foreign institutional investors accounting for just 0.82%.

Piquant parade

Barely a year after it commenced operations in India, Shinsei Bank Limited has decided to sell off its entire stake in Shinsei Asset Management Company (India), which manages Shinsei Mutual Fund, to Daiwa Securities Group (comprising Daiwa Securities Group Inc and Daiwa AMC). Shinsei AMC is promoted by Shinsei Bank of Japan. It holds 75 per cent stake in the AMC; 15 per cent is held by well-known investor Rakesh Jhunjhunwala and 10 per cent by Freedom Financial Services. Under the agreement, the other two domestic share holders too will divest their stakes. SEBI granted approval to Shinsei Mutual Fund in February 2009. Its first fund was launched in June 2009. Shinsei AMC presently has three active funds – Shinsei Industry Leaders, Shinsei Liquid, and Shinsei Treasury Advantage Fund. The decision is part of Daiwa Securities Group’s plan to expand its business in Asia and to enter the Indian domestic asset management business. Shinsei Bank is a leading diversified Japanese financial institution with total assets of US$ 124.9 billion on a consolidated basis (December 2009). Daiwa Group is also a leading financial services group from Japan. Daiwa is Japan’s second largest asset management company with over US$ 100 billion of assets under management.

L&T Finance, the financial services arm of engineering major Larsen and Toubro, bought DBS Cholamandalam Asset Management for Rs 45 crore, valuing DBS at 1.55% of its total assets under management. In June 2009, Japan’s Nomura bought a stake in LIC Mutual Fund for about 2.5% of fund’s assets. In 2009, IDFC bought Standard Chartered Bank’s asset management business for close to 5.7% of its assets. Nomura’s stake purchase of LIC Mutual Fund and IDFC’s acquisition of Standard Chartered AMC were considered expensive because a significant portion of their target fund houses’ assets was debt at the time of the deal.

Mutual fund research firm, Value Research has joined hands with UK-based Financial Express to launch Value Express, a complete solution in investment data management that is designed to help asset management companies, retail investors, and financial advisors to make sound investment decisions. Financial Express is UK's number one provider of mutual fund data and analytical tools. Value Express would offer an overall holistic approach to data, information management, and dissemination that would produce excellent results due to the economies of scale and consistency of approach. It will also assist the maintenance of existing services in relation to market changes, and the development of future services. This partnership will allow Value Research to provide world-class services to the Indian market and its customer-driven approach will enable mutual fund companies of India to achieve higher levels of support and service in a cost-effective manner and with much reduced timescales.

Dhanlaxmi Bank has entered into an alliance with UTI Mutual Fund under which it will offer the entire bouquet of UTI Mutual Fund's schemes to its customers. This alliance with UTI Mutual Fund will help provide quality funds to customers and, thereby, provide more choices and opportunities for financial planning.

Regulatory rigmarole

SEBI has launched a major probe into mis-selling of mutual funds. AMFI has already issued warning letters to four mutual fund entities. The entities warned include HSBC, HDFC Bank, Kotak Bank, and NJ India Invest. More entities are likely to get warning letters. SEBI is probing data from registrar and transfer (R&T) agents. AMFI is reviewing the internal processes. Investors are being lured to switch distributors. There is also need to rein in field staff from grabbing business.

In what promises to become one of the most significant actions ever undertaken by the regulator, SEBI has blocked 14 private insurance companies from promoting and selling new ULIPs. The logic explained in SEBI's order is sound, and there is little doubt that the investment component of ULIPs should be regulated like any other investment product. The finance ministry has said that it will set up a panel to look into the matter. Both IRDA and SEBI have agreed that the decision of this panel will be legally binding on them. Finally, the government has directed both the regulators to go to the court without further delay.

A recent survey by ING group revealed a marked decline in inflation-related pessimism among Indian investors. In fact, with domestic demand remaining firm, Indian investors' positive expectations have soared, outpacing those of investors in all other Asia Pacific economies in Q1 of 2010. According to the ING Investor Dashboard Survey, the India Investor Sentiment Index has climbed further up in the 'very optimistic zone', rising to 174 in the first quarter of 2010 compared to 169 in the fourth quarter of 2009. Indicating growing confidence in the economy, the survey found that 91 per cent of Indian investors believe that the economic situation would improve further in the next quarter. Nearly 60 per cent of Indian investors surveyed planned to increase their investments in local stocks, mutual funds, and unit trusts (both local and overseas) in the next quarter.

NFO NEST
April 2010

Variety adds spice to the NFO curry

The variety that has taken off from the NFONEST in April 2010 and those awaiting launch add spice to the bleak scenario that has been prevailing in the Indian mutual fund NFO market for quite sometime…

DWS Global Agribusiness Offshore Fund

Opens: April 6, 2010
Closes: April 30, 2010

Deutsche Mutual Fund has launched DWS Global Agribusiness Offshore Fund, an open-end foreign fund of fund. The scheme will initially invest predominantly in the units of DWS Invest Global Agribusiness Fund, domiciled in Luxembourg or similar mutual funds at the discretion of the Investment Manager. DWS Invest Global Agribusiness Fund has invested in companies such as Swiss-based life science and chemicals company Syngenta AG, food and diary producer Nestle, US-based Monsanto Co., US supermarket chains SUPERVALU Inc. and Safeway, and Ukrainian agriculture products company Kernel Holdings. It also has stake in American agricultural products company Bunge. The fund's maximum exposure in agri-business companies in the US is 30.8 per cent. Its exposure to India is a mere one per cent. The fund offers you an exposure to invest in a wide bouquet of opportunities related to ‘food’— a basic necessity. The agri-business space is a niche area which is steadily seeing growing investor demand. DWS will be looking at tapping this segment to take advantage of this surge in investor demand in the agri-business sector. In 2009, for example, there was an increase in sugar prices. As a result, the stocks of companies in this sector saw a surge in prices. There are, however, certain risk factors associated with the agri-business segment. Global agriculture is vulnerable to adverse effects of climate change. The WTO trade negotiations on agriculture are inconclusive. There are also renewed concerns regarding agricultural bio-technology. On the other hand, rising incomes, especially in Asia, and demographic pressure are sure to boost demand for agricultural commodities and in turn have a positive impact on agri-business stocks. There is another fund on the same theme - Birla Sun Life Global Agri fund, an open ended fund which also invests in global agri companies besides Indian stocks.

IDFC Nifty Fund

Opens: April 12, 2010
Closes: April 23, 2010

IDFC Mutual Fund has launched the IDFC Nifty Fund. It is an open ended index-linked Equity fund. This is the first index fund to be launched by the fund house. This is the 15th index fund in the mutual fund industry which tracks the Nifty while eight others track the BSE Sensex. The investment objective of the scheme is to replicate the S&P CNX Nifty index by investing in securities of the S&P CNX Nifty Index in the same proportion. The scheme will allocate 90% to 100% of assets in securities (including derivatives) forming a part of the S&P CNX Nifty Index with high risk profile. It would further allocate up to 10% of assets in debt & money market instruments with low to medium risk profile.

Religare MIP and Religare MIP Plus

Opens: April 12, 2010
Closes: May 11, 2010

Religare Mutual Fund has announced the launch of two funds -- Religare MIP and Religare Monthly Income Plan (MIP) Plus. While Religare MIP is a traditional MIP, Religare MIP Plus is the first such MIP in the mutual fund industry that will allocate its assets to Gold Exchange Traded Funds, apart from investing in fixed income and equities.

Religare Monthly Income Plan

Religare Monthly Income Plan is the traditional MIP product offering that seeks to generate regular income through a portfolio of predominantly high quality fixed income securities and a small exposure to equity and equity related instruments. The fund will invest 75%-100% in debt and money market instruments and 0-25% in equity and equity related instruments. The fund is benchmarked against CRISIL MIP Blended Index.

Religare Monthly Income Plan (MIP) Plus

Religare MIP Plus is a departure from the traditional breed of monthly income plans, which combine fixed income and equities. This innovative fund introduces one additional asset class i.e. Gold (through Gold ETFs), with the aim of improving diversification and enhancing performance. Gold has a low or negative correlation with most other asset classes, which means that its price changes are independent of price changes in other asset classes like equities and debt. Adding gold provides the fund manager with the flexibility to tilt the allocation made between asset classes so that the fund is positioned to take full advantage of prevailing market conditions. The fund could allocate up to 90 per cent of its assets in debt or money market instruments, up to 35 per cent in gold ETFs and also invest up to 25 per cent in equities. The fund manager will adopt the bottom up investment approach to select stocks. The fund seeks to generate regular income through a portfolio of fixed income securities, Gold ETFs, equity, and equity related instruments. Though not an MIP, UTI Wealth Builder Series II Retail-G is the only other fund which allocates its assets to debt, equity, and gold ETFs. Religare MIP Plus is benchmarked against CRISIL MIP Blended Index and Price of Gold.

Kotak Credit Opportunities Fund

Opens: April 12, 2010
Closes: April 30, 2010

Kotak Mahindra Mutual Fund launched Kotak Credit Opportunities Fund, an open-ended debt scheme that aims to capture opportunities across the yield curve and issuers with marginally higher level of risk. The scheme would be flexible to take higher exposure to a particular security based on the risk-reward ratio. The scheme will allocate 35% to 100% of assets in debt, money market instruments, and government securities with maturity up to 1 year with low risk profile. It would further allocate up to 65% of assets in debt, money market instruments, and government securities with maturity greater than 1 year with low to medium risk profile. Debt instruments shall be deemed to include securitized debts (excluding foreign securitized debt) and investment in securitized debts maybe up to 75% of the net assets of the scheme. The scheme is positioned between short term funds and duration funds like gilt and bond. The idea of the strategy is to play the steepness of the yield curve and at the same time not have too much volatility a duration fund would usually have. The benchmark index for this fund is CRISIL Short Term Bond Index.

Edelweiss Super Select Equity Fund, Quantum Gold FoF, Reliance Gold Savings FoF, UTI Master Gold FoF, Taurus Gold-edged MIP, Mirae Asset Indo China Consumption Fund, and Canara Robeco Indigo Fund are expected to be launched in the coming months.

GEM GAZE
April 2010

Beyond boundaries...

Not all markets move in tandem. At one point in time, one market could be surging, another could be struggling. Travel ahead and the positions could get reversed. With the emergence of overseas funds — Indian mutual funds that invest wholly or partly in foreign securities — as a feasible investment option, these numbers could shape your portfolio returns. Many of the funds use the Fund of Funds route for investing abroad, by investing in a global fund of the parent fund house abroad. Some even invest directly in international stocks. But which overseas funds should you invest in?

Out of the nine global funds discussed below, four funds have exhibited qualities worthy of a GEM. The three GEMS of 2009 have retained their esteemed status with the new entrant, Mirae Asset Global Commodity Stocks Fund, the fourth GEM, topping the list in the 2010 GEM GAZE.

Principal Global Opportunities Fund

The Principal Global Opportunities fund, whose AUM stands at Rs 125.44 crores on March 31, 2010, has notched up returns of 45.37 per cent vis-a-vis the category returns of 53.65 per cent during the past one year. The fund uses the money collected to buy units in the parent fund, the PGIF Emerging Markets Fund, which uses this money to buy stocks in a number of countries and across a number of currencies. Expense ratio of 1.18% and portfolio turnover ratio of 10% are reasonable. But the beta of 2.56 makes the fund highly risky.

Templeton India Equity Income Fund Gem

Funds that directly invest abroad have it better than the feeder funds that allocate all their assets to the parent fund. Templeton India Equity Income Fund is relatively insulated against the currency risks since its mandate is broader. These funds directly invest in stocks in India and abroad. The total number of stocks in the portfolio is 44, with the top five holdings comprising 33.08% of the portfolio. The AUM as on March 31, 2010 is Rs 1191.2 crore. The fund has surpassed the one-year category average return of 82.47% by clocking an impressive 88.85 %. Financial services, metals, and energy constitute the top three sectors. While the expense ratio at 2.01% is on the higher side, the portfolio turnover ratio of 6.65% and beta of 0.91 are quite reasonable.

Fidelity International Opportunities Fund Gem

Fidelity International Opportunities Fund is not a pure global fund, as it has a mandate to directly invest only up to 35% in international markets (biased towards Asia ex Japan) and at least 65% must be invested in Indian equities. The AUM of the fund is Rs 641.21 crores as on March 31, 2010. The expense ratio and portfolio turnover ratio are 2.14% and 59% respectively. The one-year returns are slightly above the category average of 82.47% at 83.88%. With a high beta of 15.46, the fund is excessively risky, but the broad mandate that the fund enjoys moderates the effect of risk. Financial services, energy, and technology occupy the top three sectors. The top five holdings constitute 23.03% of the portfolio which has 68 stocks. This diversification further serves to reduce the risk.

DWS Global Thematic Offshore Fund

This is a feeder fund that invests 94.72 % of its portfolio in DWS Invest Global Thematic Fund. The AUM was a paltry Rs 45.05 crore on February 26, 2010. The expense ratio is reasonable at 0.75%. The one-year return of 26.44% as against the category average of 53.65% is a display of dismal performance by the fund.

Sundaram BNP Paribas Global Advantage Fund Gem

Sundaram BNP Paribas Global Advantage offers investors exposure to three asset classes – emerging markets, real estate, and commodities. All three asset classes are played by investing in funds that deploy assets in stocks of companies. The fund offers about 40% exposure to Asia, 15% to Latin America, 15% to Emerging Europe, 15% to real estate, and 15% to commodities. This is neutral asset allocation. The actual portfolio will be overweight or underweight in one or more of these spaces relative to the model. Any appreciation in INR vis-à-vis the USD can have a negative impact of returns while depreciation in INR vis-à-vis the USD can help augment performance. The magnitude of impact on performance could be less than that of the currency movement. This is because the effects will be neutralized partly by how the underlying currencies of countries in which the sub-funds are invested move vis-à-vis the USD.

The portfolio is a tad concentrated with a mere 11 stocks, with the top five holdings constituting 84.38% of the portfolio. But the beta of the fund is reasonable at 0.62 indicating tolerable risk. The AUM of the fund is Rs 130.93 crore in March 2010. The expense ratio is very low at 0.12%. The one-year returns at 50.71% fell short of the category average of 53.65 by a narrow margin.

ICICI Prudential Indo Asia Equity Fund

AUM of the fund is Rs 478.01 crore as on March 31, 2010. The total number of stocks in the portfolio is 25 with the top five holdings constituting 56.86 %. Finance, energy, and technology are the top three sectors in the portfolio. The portfolio turnover ratio is 181% which explains the high expense ratio of 2.26%. The one-year return of 74.16% lags behind the category average of 82.47% by a huge margin.

Mirae Asset Global Commodity Stocks Fund Gem

Mirae Global Commodity Stocks Fund has a mandate to invest up to 35% of its portfolio in stocks of commodities and related companies in India and at least 65% of the portfolio is invested overseas in Asian and Emerging Markets. Though a relatively new fund, Mirae Asset Global Commodity Stocks Fund is the top performing global fund in India over the one year period. The one-year return of the fund is 68.16% as against the category average of 53.65%. Services, energy, and metals form the top three sectors of the portfolio with a mere Rs 52.55 crores (AUM) being invested in 41 stocks. The portfolio turnover ratio is 65%. The expense ratio is very high at 2.5%.

Kotak Global Emerging Market Fund (AUM of Rs 218.38 crore) and Fortis China India Fund (AUM of Rs 88.42 crore) have been the worst performers. The net asset values (NAVs) of these funds, since inception, have declined 3% and 6% respectively.

...skim off the cream

Overall, the performance of international funds has been a mixed bag. Include only the solid funds sparingly in your portfolio so as to sail over the sordid scenarios that spring up in several states (countries) at different points of time.

FUND FLAVOUR
(April 2010)

Going global…

Want to own a pie of Microsoft, Sony, Alcatel and various other top notch international companies? Looking to diversify your portfolio to include companies based in other parts of the world? Then you must seriously give a thought to global/international funds. Global funds are mutual funds that invest their money in companies located in other countries. They can also invest their money in a particular region, like Asia. Few funds are hybrid, i.e. they invest a part of their money in Indian companies and remaining portion of their money in international companies.

Basically international funds are of two types: one that abides by the income tax rules in the country and invests partly, that is, 65 per cent in Indian markets and the remaining in foreign markets. Funds like the Fidelity International Opportunities Fund and ICICI Prudential Indo Asia Equity Fund fall in this category. Moreover, funds like Fortis China India Fund and Mirae Asset China Advantage Fund invest only in one country (China) other than India. The second type of international funds is just the opposite; that is, the entire corpus is invested in international markets either through their foreign source companies or directly. Funds like Birla Sun Life International Equity Fund and HSBC Emerging Markets Fund belong to this category. They can invest either in international funds run by their foreign parents that would further invest in international markets, or they can directly buy and sell international stocks.

… yet to gain momentum

In India, investments in overseas markets have been allowed since 1997, yet only one per cent has been invested overseas. The assets managed by globally focused funds stood at only Rs. 7,259 crores ($1.55 billion) at the end of 2009, still quite far away from the total overseas investment limit of $7 billion allowed by the government. Bias towards the local markets, lack of understanding about risk, limited sources, and vested interests are the key reasons that can be attributed to investors ignoring the global markets. In developed markets, investors placed up to 50 per cent of their financial portfolios in overseas assets, half of which are in alternative assets like real estate. Given that global investing is new to India, an allocation of at least 20 per cent to global markets will give investors an optimum decrease in risk and growth in returns.

Dive deep to pick the pearl…

International investing offers the following advantages:

• An excellent diversification for your portfolio
• Ability to invest in international companies with smallest possible investment
• Investing abroad is simpler, since you just have to fill out the form and submit the payment in Indian rupees to the fund house

…and shun the shell

On the flip side, global funds suffer from the following disadvantages:

• High charges
• Currency exchange risk as you may lose money at the time of converting your profits from the foreign currency into Indian rupees
• No tax benefit that is normally offered to the investors in regular mutual fund
• Investing in just one foreign country is akin to investing in a sectoral fund that invests in just one sector rather than diversified equity funds that invest across sectors. The risk factor in this type of investment is a mixed bag. For example, if the economy of the country in which the funds are invested nosedives due to several micro- and macro-economic problems the fund is at a risk of losing out on performance. However, if the economy of that particularly country is doing good because of stronger basics then this type of fund will stand to gain.
• Very volatile as the NAV depends on the performance of stock markets in the native countries of the companies
• May take a long time to recover your investment as high charges and performance of stock markets affect the NAV

Dishing out divergent returns

In 2009, the global trend of international funds was mixed with emerging economies leading the rally. Take, for example, the stock markets in India and Brazil. They registered phenomenal growth. From 9.56 per cent growth in 2004, the Sensex touched a growth of 68.11 per cent in 2009. Similarly, the Bovespa in Brazil grew from 16.71 per cent growth in 2004 to 50.83 per cent growth in 2009. Other stock markets that recorded significant growths in 2009 included Shanghai in China (54.07 per cent), Hang Seng of Hong Kong (44.26 per cent), and the IPC in Mexico (28.77 per cent). As far as the returns from these funds are considered, the compounded annual growth rate (CAGR) of indices shows that while the returns from Dow Jones in the United States was in the negative at -1 per cent, the returns from Sensex in India and Bovespa in Brazil were +19.71 per cent and +19.25 per cent, respectively. Global funds investing in commodity stocks, emerging market stocks, and gold mining stocks have managed to outperform over the last one year. The top performing global fund in India over a one year period is Mirae Global Commodity Stocks Fund. Fidelity International Opportunities has returned around 4 per cent in the past year, while Prudential ICICI India Asia Equity Fund has a 5 per cent return and Fortis China India is slightly better than 6 per cent. All these schemes have a majority investment in Indian equities and only a part in foreign equities. DSP World Gold Fund, which invests in mining company stocks across the world, has a slightly negative return. While AIG Gold Fund has ended on the positive side. The average cost of the funds, that invest in both Indian and foreign markets, is around the 2.1-2.5 per cent mark. Franklin India International Fund invests in foreign debt markets in US Government securities. So this stands apart as another type of fund and this has returned double-digit figures in the past year due to the recent rally in the US securities market. This has an expense ratio of around 0.75 per cent, which is lower due to it being a debt fund.

There are some investors who lost almost their entire fortune investing in international funds in the year 2008. After all, the global economic crisis was at its worse during 2008. However, 2009 was a big relief. The reasons for this are many: in 2009, the overall average emerging markets funds returns grew by 76.1 per cent. As far as India is concerned, a strong banking system, comparatively less exposure of Indian companies to toxic funds and the increased foreign institutional investors investment (to the tune of Rs 84,266 crore in 2009), helped a lot. All these and many more factors have put India, along with China, on the road to recovery quicker than other economies. So does this mean that investing in international funds in 2010 would be equally fruitful? It might not be that easy to say so. There are many factors to consider before any conclusion is drawn.

Is it for you?

If you are willing to take risks in order to earn higher returns then investment in international funds is right for you. Are you patient enough to wait and watch your investment grow? Can you withstand the high volatility across the stock markets in different countries? Are you ready to pay tax on any profit earned from this investment? If you have answered in the affirmative to these questions, then go ahead and invest in these funds. However, do watch the charges and take care to ensure you choose a fund with a good track record.