Monday, September 28, 2009

(September 2009)

The AUM of mutual funds grew by nearly 9% in August, 2009 to Rs 7.49 lakh crores. The country’s largest fund house, Reliance Mutual Fund, saw an increase of Rs 8,980 crores in its AUM, which stood at Rs 1,17,314 crores in August, 2009. The second largest fund house, HDFC, recorded the highest increase of Rs 10,508 crores with the total standing at 93,874 crores in August, 2009. While ICICI Prudential, the third largest fund house, saw an increase in AUM by Rs 4,638 crores (Rs 77,967 crores in August, 2009), UTI Mutual Fund’s assets saw an increase in AUM of Rs 6674 crores (Rs 73,926 crores in August, 2009). The cash levels of open-ended equity funds declined to 8% in August, 2009, an eighteen-month low. This comes after they had hit a high of nearly 22% in March 2009, when the market was at its nadir.

The increase in AUM can mainly be attributed to the continued parking of money with liquid funds by institutional investors, which have not been affected by the abolition of entry load and rise in market prices of shares rather than due to the increase in the sales of equity mutual fund schemes. Equity assets have recorded a net outflow to the tune of Rs 142 crore in August, 2009 despite an increase in the AUM on an overall basis. In fact, nine fund houses saw a fall in their AUM. Nearly Rs 1000 crore of NFO money was accounted in August, 2009. So, while the numbers look rosy, things are not so great for the industry, with many mutual funds still in the process of re-negotiating distributor margin given the change in business dynamics.

Piquant Parade

Axis Bank has got SEBI approval to set up an AMC. SREI Infrastructure, a non-banking finance company, has got an in-principal approval from SEBI. IDBI Bank, Union Bank, Motilal Oswal, ASK Invesment Holdings, India Bulls, and Mahindra and Mahindra Financial Services have applied to SEBI for approval.

Goldman Sachs has revived its plans to start an AMC in India. It had got the SEBI approval in September, 2008, but had deferred the launch due to uncertain market conditions.

L&T Finance has purchased 100% shareholding in DBS Chola Mutual Fund for Rs 48 crores. Appropriate regulatory approvals are yet to be obtained.

With the launch of interest rate futures on August 31, 2009, the mutual fund industry has got an additional option to invest in. Interest rate futures consist of a contract to buy or sell a debt instrument, where the price has been decided in advance, for delivery at some future date.

The common trading platform for mutual funds is likely to be operational from March 2010. According to AMFI, there would be a designated agency in which you would have to register after which you would be provided with special identification numbers. This may either be their password and personal account number. Therefore, anybody who wants to get some information or even do a transaction can do so just by logging on to the website.

Regulatory Rigmarole

SEBI has ordered the mutual fund industry to have systems audit conducted by an independent CISA/CISM auditor at least once in two years. To ensure that the audit is comprehensive, it should encompass “audit of systems and processes inter alia related to examination of integration of front office system with the back office system, fund accounting system for the calculation of Net Asset Values (NAVs), financial accounting and reporting system for the asset management companies (AMCs), unit-holder administration and servicing systems for customer service, funds flow process, system processes for meeting regulatory requirement, prudential investment limits and access rights to systems interface.” The report generated will have to be placed before the trustees, which will thereafter be handed over to SEBI. According to the SEBI circular, for the financial year April 2008 – March 2010, the systems audit should be completed by September 30, 2010.

SEBI has revised the Code of Conduct for intermediaries of mutual funds. The intermediaries will have to disclose the material information, including their commissions. They should be fully conversant with the key provisions of the Offer Document and operational requirements of the mutual fund schemes. They should send investor-related statutory communications on time. They need to take necessary steps to ensure that the clients’ interests are protected. Maintenance of confidentiality in all investor deals and transactions is of paramount importance. The intermediaries should avoid colluding with clients in faulty business practices, avoid commission-driven malpractices and avoid making negative statements about any AMC or scheme.

The Pension Fund Regulatory and Development Authority (PFRDA) have recommended the removal of load for all retail financial products by 2011. This, if implemented, might have far reaching consequences on the insurance industry and place it on a level playing field with the mutual fund industry, where the removal of load has already been made operational.

SEBI may allow mutual fund units to be traded on exchanges. Under the new mechanism, fund houses have to offer two-way quotes based on the previous day’s NAV for trading. Last year, listing of FMPs was made mandatory. Stock exchanges would have to do minor modifications to their software to allow for trading of mutual funds through their terminals. The move would also require dematerialising mutual fund units.

The fall in subscription to equity mutual funds is only a knee-jerk reaction to the abolition of entry load on mutual funds. With over-dependence on distributors for equity mutual funds expected to take a back seat, thanks to the common platform for mutual funds which is expected to be operational in six months’ time and the high likelihood of mutual fund units being traded on exchanges, retail investor reach is bound to expand by leaps and bounds.

Monday, September 21, 2009

NFO Nest
(September 2009)

The hope and the hype …

NFOs almost came to a halt in early 2009 after the markets reached their nadir following the global financial crisis. In the first four months of 2009, NFOs could garner a paltry Rs 57 crore. The better-than-expected corporate earnings for the June quarter and the upswing in several sectors have brought hope to investors who were badly beaten by the market downturn. According to AMFI data, inflow from NFOs rose to Rs 2394 cr in July, the highest in 2009. This can partly be attributed to the rush by fund houses to launch as many NFOs as possible before the regulation banning entry load came into effect from August 1, 2009.

We have witnessed enough instances in the past of NFOs coming out with fancy names with the underlying scheme being pretty much the same as a scheme that already existed. The result – nearly 60% of the NFOs have an AUM of a mere Rs 25 crore each. SEBI, concerned about the tendency of fund houses to launch new schemes instead of strengthening the existing ones, is now summoning the trustees and asking them to explain as to why the NFO under review should be cleared and in what way it is different from the existing schemes.

These developments could explain the appearance of a single fund in NFO Nest in September, 2009.

Mirae Asset China Advantage Fund
Opens: Sept 14, 2009 Closes: October 9, 2009

Mirae Asset China Advantage Fund is an open-ended fund of funds that will invest predominantly (80% to 100%) in units of Mirae Asset China Sector Leader Equity Fund, a SICAV fund domiciled in Luxembourg and/or units of other mutual fund schemes, units of ETFs investing in equities and equity related securities of companies domiciled in or having their area of primary activity in China and Hong Kong with high risk profile. It would also invest 0% to 20% in money market instruments / debt securities with low to medium risk profile. The regular plan will charge an exit load of 1%, if redeemed up to 90 days from the date of allotment and 0.50%, if redeemed after 90 days but before 180 days from the date of allotment. In the case of systematic investment plan/ systematic transfer plan/systematic withdrawal plan the exit load charge will be 1%, if redeemed up to 365 days from the date of allotment. The scheme’s performance will be benchmarked against MSCI China Index (in Rupee Terms).

Mirae Mutual Fund is the second house to target China for growth. In July 2009, JP Morgan Asset Management Company had launched the Greater China Equity Offshore Fund, which had collected Rs 53 crore. These international fund of funds will provide you access to one of the world’s growing economies, which is poised to lead the world out of the global slowdown, thanks to the gargantuan domestic demand and stimulus packages from the Government. An excellent opportunity to prudently diversify your portfolio.

Fidelity Forward India fund, IDFC Dynamic Equity Fund, Reliance Target Appreciation Fund, IDFC Ultra Short-term Fund, SBI PSU Fund, Religare Equity PSU Fund, Infrastructure Benchmark Exchange Traded Scheme, UTI Dynamic Bond Fund, Hang Seng Benchmark Exchange Traded Fund, Birla Sunlife India Reforms Fund, Sundaram BNP Paribas Select Thematic Fund PSU Opportunities, Reliance MSCI India Exchange Traded Fund, IDFC Asset Allocation Fund of Fund, DSP BlackRock Long/Short Equity Fund, Religare Long/Short Equity Fund, Principal PNB Gold Exchange Traded Fund, ICICI Prudential Gold Exchange Traded Fund, HDFC Gold Exchange Traded Fund, Axis Dynamic Bond Fund, Axis Short-term Fund, Axis Equity Fund, Axis Liquid Fund, Axis Treasury Advantage Fund, and Axis Tax Saver Fund are expected to be launched in the coming months (includes offer documents filed in the past three months) .

Monday, September 14, 2009




The entire team of Diversified Equity Funds in GEMGAZE 2008 have remained unscathed by the carnage in the stock markets. All the five funds have exhibited performance worthy of a gem in the past 12 months inspite of the free fall of the Sensex till March 2009. This, of course, is not an exhaustive list - several others have displayed scintillating performance…they will be under close watch for a further period of 12 months before they are elevated to the status of a GEM.

HDFC Equity Fund Gem

Steady in volatility…

HDFC Equity Fund’s long-term track record (over 14 years) in delivering steady returns and its ability to consistently contain downsides has enabled the fund to consistently better the performance of its benchmark — the S&P CNX500, over one-, three- and five-year periods during periods of market volatility. Even in the protracted correction of 2008, it outperformed the S&P CNX 500. HDFC Equity’s five-year return on a compounded annual basis is 17.2%, which places it among the top ten percentile of diversified equity funds.

The fund takes a multi-cap approach to investing in stocks. Though heavy on large-cap stocks (over 60% of the portfolio), it invests substantially in mid- and small-cap stocks as well (over 30% of the portfolio). A sharper large-cap focus may be a fair call, given that such stocks may have better earnings visibility. Together with a significant mid-cap exposure, where stocks are available at attractive valuations, albeit with some business concerns, the fund may be able to gain from broader market rallies. HDFC Equity remains mostly fully invested across market cycles and does not sit on significant cash positions to take cover from market volatility. The fund consistently has cash positions of 1-7% of the portfolio. The number of stocks over the past year increased from 42 to 49 in March 2009. The fund’s March 2009 portfolio reveals that it has high exposures to defensive sectors. Pharmaceuticals and consumer non-durables, in addition to banks, are among the top few sectors held by the fund.

HDFC Equity Fund has been awarded the 'Best Fund over Ten Years' in the 'Equity India Category' (form amongst 34 schemes) by Lipper Fund Awards India 2009.

The fund is suitable for investors wanting to build a long-term portfolio and looking for steady rather than spectacular returns.

Magnum Contra Gem

Beating the benchmark…

This decade old fund has been a star performer with an excellent return of 27.6% since launch. It has exhibited a strong 5-year return of 27.4%, beating its benchmark by an astonishing 15%. Over a three-year period, the fund generated a compounded annualised return of minus 1.5% but declined 1.1 percentage points lower than its benchmark. Over a one-year period, the fund’s NAV declined 30% but the fund contained downside better than the benchmark. It achieved this by moving one-fourth of the assets into cash and debt over the past few months.

The fund sports a well-diversified portfolio. According to the March 2009 fact sheet, it had 73 stocks in its portfolio. A good number of these stocks in the portfolio participated in the recent rally. The top ten stocks accounted for 34% of the assets with large caps cornering 63% and mid and small caps accounting for 20% of the portfolio. The fund has limited the exposure to a single stock to about 6%. While the fund is adequately invested in equities most of the time, (87% on an average), it did reduce this exposure between October 2008 and January 2009 when the equity market was in turmoil, and preferred to invest in money market instruments. Its cash levels had thus nearly doubled from the average cash holding of about 10%. However, with the revival in the equity market, the fund is gradually getting back its original form and has reduced the cash level to about 14% as on April 2009.

While the name suggests that it is a contrarian fund, it is by and large managed like a diversified equity fund. With smart tweaks to the term contrarian, the fund captures the length and breadth of the market. So, unlike a typical contrarian fund that targets out-of-favour (flavour) stocks, Magnum Contra considers the underlying company’s valuations and compares that to what it believes the true valuation should be and then takes a call as to whether to invest in it or not. This does not suggest that the fund does not play on genuine contra bets – it does and this strategy has brought out the winner in the fund time and again. This fund is a perpetual winner.

ICICI Prudential Dynamic Fund Gem

Defensive Play …

Over the past three years, the fund has managed to beat the category average in every downturn. But its defensive strategy could prove to be a hindrance when the market is on a roll.

This is a “go anywhere” fund that invests in large, mid and small cap stocks. The fund adopts defensive investment approach and is overweight on sectors like fast moving consumer goods, pharmaceuticals, etc, during bearish market conditions, while avoiding expensive sectors where bubble exists, during bullish market phases. The portfolio manager shifts the fund’s portfolio into cash during market downturns in order to protect the fund’s downside. Currently, in view of the volatile market conditions, the fund manager has hedged 20% of the fund’s portfolio.

ICICI Prudential Dynamic Fund is ICRA 5 star Gold Award winner for 2009 in the five-year category.

Defensive stock selection and investing in companies - which do not have any significant funding requirement and are demand driven - will help the fund to outperform the market and deliver optimum risk-adjusted returns. Over the long-term, the fund has displayed a decent performance with its excellent defending capabilities during the market downturns. ICICI Prudential Dynamic is a fund for the downturn.

DSP Black Rock Equity Fund Gem

Truly diversified…

(In November 2008, DSP Merrill Lynch Mutual Fund has been renamed as DSP Black Rock Mutual Fund as a result of the global merger of Merrill Lynch’s AMC business with Black Rock.)

Having been in existence for over a decade, DSPBR Equity is a well-diversified fund and generates returns in a consistent manner. The returns of the fund, since launch, is an excellent 24.6%. The fund has a strong five-year return of 33.4%, beating its benchmark by an impressive 8.4%. With no market capitalisation or sector bias, DSPBR Equity goes about generating returns in a fairly consistent fashion. Like many of its peers, it hit a rough patch during 2000-02, but ever since 2003, it has beaten the category average every single year. In the bear phase spanning January 8, 2008 to March 9, 2009, it shed 49.5% (category average: 55%). But when the market began to rise in March 2009, the fund was not quick in lowering its cash allocation and did so mainly in May 2009. Neither was it heavy on construction, metals, or financials, which boomed during that time. As a result, the fund delivered 79% (category average: 89%) between March 9 and August 31, 2009.

A unique aspect of DSPBR Equity is its rigorous diversification. The fund’s exposure to the top 10 holdings does not generally cross 35%. The cash/debt component in the portfolio has been consistently little over 10%, which suggests that the fund prefers to remain invested in equities albeit with large diversity rather than sit on cash and wait for opportunities. The number of stocks in the portfolio has been trimmed over the last one year. From over 80 stocks over a year ago, the number of stocks in the portfolio in February 2009 is 67. The diversification in terms of sectors invested is quite high, with as many as 26 of them in the portfolio. Further, the fund appears to have adopted a defensive approach in recent times with consumer non-durables, pharmaceuticals, and software being among the top few sectors held.

The multi-cap exposure, broad diversification, and consistent returns are what make this fund a good pick.

Birla Frontline Equity Fund Gem

Consistency is the name of the game…

Birla Sun Life Frontline Equity Fund has been one of the leading performers across market cycles which include surging bull market, crashing bear market, and a fledgling new rally. It has been among the best performers in the diversified equity fund category over past 3 years with CAGR returns of 18% versus 11% from BSE200 Index, as on June 30, 2009. On a one-, three- and five-year basis, BSL Frontline has consistently outperformed its benchmark BSE 200, by 5-11 percentage points.

Birla Sun Life Frontline Equity Fund’s performance is attributable to dynamic sectoral allocation in the portfolio, stock selection, and timely market calls. In the recent past, the fund reduced its level of cash holdings from 15-20% to 6-7%. It was an early mover into infrastructure and capital goods stocks which have now become market favourites. Another significant bet has been on the financial sector, which is benefiting from a crash in short-term interest rates and a steep upward sloping yield curve. Its strategy of not betting blindly on defensives early on and maintaining cash levels helped it to build positions aggressively. It has also been taking exposures to derivatives from May 2008. The portfolio is well-diversified with 56 stocks (June 2009).

Birla frontline Equity Fund is an ICRA 5 star Gold Award winner in the one-year and five-year categories.

A well-diversified portfolio tilted towards large-cap stocks with decent long-term returns makes the fund a stable offering.

Diversified Equity Funds have stood the test of time – tough times and otherwise. These glittering GEMs bear testimony to this time-tested truth…

Monday, September 07, 2009


(September 2009)

Diversified Equity Funds

Dodged the downturn!

Funds that were positioned to be different – hi-fi, emerging leaders and the like – took a severe beating when compared to their truly diversified counterparts in the stock market bloodbath in 2008 and early 2009. Inspite of the market mayhem, a majority of diversified equity funds (53.6%) have beaten the indices. Their absolute returns might have been negative but a lion’s share of such funds have fallen less than their indices. In contrast 61.3% of ELSS Funds lagged behind their indices. The performance of index funds too have been far from promising.

Fell from grace…

Net values of diversified equity funds fell more than half in 2008, giving up the entire gain made in the previous two calendar years, as the Sensex plunged 52.4% to record its worst annual performance ever. The fall was stunning and one of the major losses that we would have suffered in any calendar year. Indian shares recorded their first annual drop since 2001, surpassing the previous worst fall of 20.8% in 1995, slammed by foreign fund outflows and a sagging domestic economy. Seventeen stocks in the BSE index lost more than half their value during 2008 as foreign funds withdrew more than $13 billion after record inflows of $17.4 billion in 2007. Net asset values of equity funds fell drastically in 2008, recording their worst annual fall of 54.7% during the year, according to data from global fund tracker Lipper.

Reuters data on Indian mutual funds asset allocation in March 2009 shows that the equity component in the asset allocation of diversified equity funds has gradually reduced from nearly 90% in April 2008 to 80% in March 2009 while the bond component has gradually increased from nearly 1% to 3% in the same period. Cash component has also increased from nearly 9% to 15%, thanks to market volatility. The market capitalisation-based break-up of diversified equity fund portfolio shows large caps maintaining their reign with their composition in the portfolio increasing from nearly 55% to 65% from April 2008 to March 2009. Mid and small caps saw their share dwindle from approximately 35% to 30% and 7% to 4% respectively in the same time period. When the Sensex dropped to a three-year low in March 2009, small and mid-cap stocks had plummeted to a near-lifetime low. While the Sensex fell by 9.5%, the diversified equity funds fell by 11%. Nearly half of the actively managed diversified equity funds underperformed the benchmark index despite maintaining a double-digit cash levels almost through the year as their large mid and small-cap holdings plunged even more than the main index. Financial services, energy, and engineering continue to be the top three sectors during the same time period with energy and engineering having swapped their places. High interest rates and a slowing economy hit these sectors and pulled down the performance of these funds.

A study by Value Research, a firm that specialises in mutual fund industry research, showed that the average returns of almost all categories of equity funds had their worst three months since January 2001. Between January and March 2009, funds belonging to the most popular 'diversified equity category', lost an average of 28.3% in value. Compared to this loss, in the first three months of 2001, all the diversified funds put together had lost nearly 17%. The January-March of 2001 was the period when the dot-com bubble burst and the Ketan Parekh scam was just unfolding. Individually, funds in the diversified category lost between 16.2% and 40.6% during the first three months of 2009 while the Bombay Stock Exchange Sensex and the NSE Nifty both lost nearly 23%.

…rose like Phoenix from the ashes

For the first time since January 2008, when the steep and protracted slide in the stock market commenced, equity funds have outsmarted the Sensex. At least half of the 277 diversified equity funds rose by an average of 33% during May 2009. Diversified equity funds have performed well because of the momentum in small and mid-cap stocks. Fund houses recorded their best performance for the year in May 2009. More than 100 diversified equity schemes registered 30-40 % growth for the month in a strong post-election rally. However, they could not keep up the pace and came up with a tepid performance in June 2009. According to Valueresearch, only 50 funds registered gains and out of this just two funds managed a growth of above 5% during June 2009. SEBI data shows that mutual funds turned in a better show in July buying equity worth Rs 22,559.5 crore, the highest in a month in 2009. During August 2009, on tepid markets, out of 281 diversified equity funds, 273 funds outperformed the Sensex while 252 funds outperformed the Nifty. The top gaining diversified equity fund was Sundaram BNP Paribas Select Small Cap, a small-cap fund, which gained 12.31 %, but it was not able to surpass the gains of BSE Small-Cap index.

Call for caution!

With markets remaining indecisive due to concerns about poor monsoon, mutual funds are slowly moving to the sell-mode. Mutual funds have net sold equity worth Rs 756.7 crore in August 2009 (up to August 17), according to SEBI data. The volatility in markets has hurt performance, with returns from diversified equity funds slipping in August 2009. Only 23 out of the 281 diversified equity funds have managed to post gains in August (till August 18, 2009). The gainers too managed to deliver only single digit returns. Valuations are a little stretched. New issues (IPOs such as NHPC) have taken out some liquidity. The strong rally of the dollar, which made people shun risk, has also played a role. Markets have given strong returns and so some amount of profit booking is happening now. Investor confidence in India has softened in recent days. Investors are worried that poor agricultural performance could derail overall recovery. Though the concern on monsoon remained, the strong industrial production data has evoked a lot of optimism and it would be too early to conclude a downtrend.

History …

In January 2000, we were cautious of the euphoria surrounding the technology-media-telecom (TMT) sector. While we did believe that the sector had a great future, we doubted if they were attractive investment propositions at such high valuations. In hindsight, we know that the companies have done very well, but on a point-to-point basis, their stock prices have disappointed. Post the TMT meltdown, the interest shifted to the pharma sector. Then mid-cap stocks and then large cap stocks followed. Now, it is back to small and mid-caps. And, of course, the theme that is the hottest now is infrastructure.

… is on our side

The one thing we know is that, well-managed diversified equity funds have been consistent performers during all these cycles. And let there be no surprise, the well-managed ones tend to underperform in times of euphoria. As the sentiment evens out over a stock market cycle, the stronger discipline and process of such funds will help them deliver the desired risk-adjusted returns. That is the way a long-term investor would want it.

Systematic streamlining holds the key

Given the performance of diversified equity funds and how domestic markets are placed, investors would do well to add well-managed diversified equity funds, with proven track records over longer time frames and market phases, as part of their core holding systematically to their portfolio.