Entry load or not, most foreign funds got it wrong

High cost and similar performance from domestic players played spoilsport

 

"When a fund house like Fidelity exits, it does not augur well for the Indian mutual fund industry," says the chief executive officer of a leading fund house. But, he is quick to add, exits of large and well-known foreign fund houses from India are common.

 

He is right. Since 1993, when the MF sector was opened for private and foreign players, there have been exits by at least 10 high-profile foreign entities. Many were standalone ones. The trend started with the sale of Kothari Pioneer (Pioneer of the US), bought by Franklin Templeton, one of the few foreign successes. Pioneer has recently re-entered by buying a stake in Bank of Baroda's MF arm. There are many others like ANZ Grindlays, Standard Chartered, Aegon, and DBS, which have completely exited.

 

According to experts, most foreign fund houses, especially standalone ones, have found the going difficult. "Most were unable to attain a critical mass – Rs 10,000 to Rs 15,000 crore – in assets, which hurt them badly. Even their cost structure is much higher. Yes, business models had to be tweaked after the entry load ban. But, that's just one part of the story," says Rajiv Deep Bajaj, CEO, Bajaj Capital, an MF distributor.
 

The entry load ban was implemented in August 2009, but it did not lead to huge losses for most fund houses. In fact, the top five continued to make money despite the tough regime. HDFC and Birla Sunlife doubled and trebled profits. On the other hand, already loss-making fund houses continued to perform badly. There were new players such as Axis, Mirae and L&T which entered during this tough phase and are still in the red.

 

Things weren't much different even without the entry load ban. While Fidelity's asset quality, in terms of money in equities, is much better, there are others which have spent money without actually collecting it.

 

Cost issue
In addition, costs are an issue. For instance, in 2010-11, Fidelity's staff cost was as high as Rs 68 crore, whereas its income was Rs 75 crore and its assets Rs 8,880 crore. Similarly, ING's income was Rs 74 crore, staff cost Rs 30 crore and assets Rs 1,559 crore. HDFC's income was Rs 680 crore, staff cost, Rs 85 crore and assets Rs 88,737 crore, thereby making it more efficient.

 

The problem lies there: The cost-benefit matrix is not in the favour of many. "Fund houses which entered just before or have seen at least one good bull run should be doing much better. However, there could be a problem of managing costs and the inability of some to adjust to Indian conditions," said Arindam Ghosh, CEO, Mirae Asset. The Sensex rose from 6,000 to 21,000 between January 2004 and January 2008, almost 3.5 times, a really good time for fund houses. He notes that besides the bull run, the other growth drivers no longer exist.

 

The fact is that the entire MF industry hasn't suffered. Of 42 fund houses, 22 had accumulated losses of Rs 1,729 crore till March 2011. Eighteen others had piled accumulated profits of Rs 2,656 crore. Given that accumulated profits are post-dividend, the latter's would be higher. Importantly, 14 of these are purely or predominantly Indian players, according to the classification of the Association of Mutual Funds in India.

 

The top three profit makers – UTI Mutual Fund, Reliance Capital Asset Management and HDFC Asset Management – have contributed a whopping 63 per cent to the profits of the industry. (UTI has been there for almost half a century, so its profits have been accumulated over the years).

 

Clearly, there is a disconnect somewhere. Mirae's Ghosh says the top 10 players globally are standalone ones, that perform much better those with bank or corporate house affiliations. "In Asia, the trend is the reverse. It is a function of the stage an economy is in," he says.

 

Other experts feel that there isn't much difference between a foreign and Indian entity in terms of performance. "With performance being almost the same, reach is the key for success. This is where Indian fund houses, especially bank-sponsored ones, have scored," said Rajiv Anand, CEO, Axis MF.

 

Most say the business environment is more high-cost now. As the CEO of a leading fund house said, "If one is earning Rs 1 and spending more than that in fees and brokerage costs, there is a problem. In such times, the promoter's patience is put to test." A test in which many foreign fund houses have been failing for almost two decades.

 

Source: http://www.business-standard.com/india/news/entry-load-or-not-most-foreign-funds-got-it-wrong-/463910/

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Mass exit by small investors

High volatility in stock prices and resultant erosion of wealth in mutual funds has forced as many as 16 lakh investors operating through systematic investment plans (SIP) to close their accounts.

 

This exodus has taken place over the last year alone by investors who have been putting monthly recurring deposits with mutual funds to buy stocks spanning over a longer period to make money.

 

But with all calculations going haywire and fund managers remaining ineffective to provide expected returns, investors who are now looking for short-term returns are shifting their funds to secured and high-yielding modes of investment such as bonds, bank deposits, bullion and even real estate.

 

Last year, Indian stocks lost nearly quarter of their value due to a prolonged bearish market and overall grim economic outlook in India and abroad.

 

"Most SIPs happened between 2006 and 2008. Those who started in 2007-08 are mostly into losses because the market has been in a bad shape. People who are constantly witnessing value erosion have no motivation to stay invested," said Waqar Naqvi, chief executive officer (CEO), Taurus Mutual Fund, one of India's fastest growing asset management companies with over Rs.5,000 crore under management.

 

According to rough estimates, there could be over 1.5 crore SIP accounts opened with 40 mutual funds operating in India and the reported 16 lakh SIP account closure in 2011 accounts for nearly 10 per cent of this segment.

 

"Most retail investors have lost faith in the capital market. SIPs are the last to exit. Investors are exiting because there has been no capital protection in India. Currently, all policies are pro derivatives and investors are not comfortable with derivative stocks where fluctuation is very high," said Kishor Ostwal, chairman and managing director (CMD), CNI Research.

 

"Investors do not like to risk their hard-earned money in a market which could be easily rigged. On the other hand, people are witnessing value appreciation in gold and real estate. Thus, they have shifted," Ostwal added.

 

Another factor in the fast depletion of SIP investment is the drastic reduction in the number of distributors of mutual fund products. Many investors have stopped paying due to absence of service from distributors said officials.

 

"Due to the hefty upfront commission offered by industry players, many unscrupulous distributors had opened fraudulent SIP accounts and soon after pocketing the commission, the accounts were made to close down causing loss to the industry. The industry must stop this practice immediately," said an industry official asking not to be named.

 

Investors are lured by the exceedingly high performance of other asset classes. Last year, gold prices appreciated by over 30 per cent and real estate prices, barring metros, have been on a constant rise. This has opened up investment opportunities for people, said experts.

 

Apart from this, debt investments such as fixed deposits and bonds have become attractive of late where there has been a guarantee in return as against the uncertainty in equity investments. The bonds issued by public sector and private enterprises have been sold out in the recent past due to a trust deficit in the capital market.

 

Whatever may be the reason, investors are fast losing confidence in the capital market and unless Securities and Exchange Board of India (Sebi) brings in radical reforms, they would hardly return.

 

Source: http://indiatoday.intoday.in/story/mass-exit-by-small-investors/1/172444.html

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'I made my money by selling too soon.'

Website: http://indianmutualfund.co.cc/

Blog:http://indianmutualfund.wordpress.com/
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Behind the fear of debt

Fears are being expressed in official policy circles that the country's dependence on foreign debt, as opposed to foreign investment, to finance the external deficit is increasing, leading to specific policy responses. C.P. Chandrasekhar and Jayati Ghosh examine these fears and assess the responses.

 

It began with the Reserve Bank of India's third quarter 2011-12 Review of Macroeconomic and Monetary Developments released on January 23, 2012.

 

Its assessment of the situation in India's external sector noted that: "Risk aversion in the global financial markets has slackened the pace of capital flows to India… If the pace of FDI inflows does not pick up once again and FII equity inflows revert to the decelerating trend, CAD (current account deficit) may have to be largely financed through debt creating flows in the coming quarters."

 

It also underlined the fact that signs of a recent revival of FII inflows were largely on account of investment in debt instruments.

 

A few days later, the RBI Governor, Dr D. Subbarao, referring to the rise in debt flows, publicly emphasised that India has "a preference for non-debt flows over debt flows", and "within non-debt flows, more of FDI".

 

Along with the expression of such fears, the government has been liberalising foreign investment rules to attract equity inflows in lieu of debt. The most recent such policy allows individual investors to invest in equity.

 

The justification provided for these fears and policies is the evidence that investments in Indian equity have decelerated during the first half of fiscal year 2011-12 when compared with the recent past.

 

In particular, there has been a collapse of foreign portfolio investment flows, leading to an overall fall in external investment in equity.

 

The RBI has released some preliminary figures for the third quarter of 2011-12. These figures also point to a decline in monthly average inflows of foreign equity investments during September-November in the case of direct investment and September to December 2011 in the case of portfolio investments. But the decline is by no means dramatic.

 

foreign debt inflows

These changes have been occurring at a time when the external current account deficit, which had fallen in the second half of fiscal 2010-11, has risen significantly.

 

As a result, a rising share of a rising deficit is being financed with non-equity flows.

 

The ratio of direct and equity investment flows to the current account deficit in India appears to have shifted downwards over a relatively short period of time.

 

The conclusion arrived at is that India has had to increase its reliance on debt creating flows to finance its current account deficit.

 

Supporting that is the evidence that inflows in the form of loans and banking capital have together risen quite sharply during the first two quarters of this fiscal year.

 

Though fully collated figures for the period since September 2011 have yet to be released, there are reports that these tendencies have only intensified more recently.

 

According to one report, during calendar year 2011 as a whole, foreign debt inflows amounted to $8.65 billion, out of which as much as $4.18 billion came in the month of December. On the other hand, calendar 2011 is said to have recorded a net outflow of equity investments to the tune of $357 million.

 

Moreover, foreign debt inflows in January are placed at $3.21 billion against a much smaller $1.7 billion of equity inflows.

 

Finally, SEBI figures on net FII investment suggest that while FII investments in equity have been low or negative for much of the past 14 months, FII purchases of debt instruments have spiked during December 2011 and January 2012.

 

Nod for QFIs

 

What does this combination of figures say about the capital inflows into the country and their role in financing the current account deficit? To start with, they do point to the fact that, over the last year, inflows of equity investment have been less buoyant than they were prior to the financial crisis and during the post crisis recovery.

 

Secondly, they indicate that one consequence of this has been an enhanced role for foreign debt in financing the current account deficit.

 

However, this does not mean that India is having any difficulty financing its current account deficit, nor that increased reliance on debt is driven purely by the need to finance the current account deficit.

 

Rather, large Indian firms are choosing to borrow abroad to benefit from the substantially lower interest rates in international markets as compared with India.

 

Moreover, the government had, in December, deregulated interest rates on Non-Resident (External) rupee (NRE) deposits and Ordinary Non-Resident (NRO) Accounts, triggering a chase for non-resident deposits among Indian banks.

 

According to reports, there has since been a surge in NRI deposits, encouraged by the opportunity to earn profits through arbitrage. This makes the volume of debt inflow much greater than needed to finance the current account gap.

 

As a result, foreign exchange reserves have risen and remained at relatively high levels.

 

Despite these factors, the government and the RBI appear to be using the shift away from equity to debt inflows to liberalise the terms for foreign equity investment inflows.

 

Flagging this tendency was the announcement on New Year's day, 2012, that a new group of foreign investors identified as Qualified Foreign Investors (QFIs) are to be permitted to invest directly in India's equity markets.

 

The definition of who 'qualifies' is rather broad: it covers any individual, group or association resident in a foreign country that complies with the Financial Action Task Force's (FATF) standards and is a signatory to the multilateral Memorandum of Understanding of the International Organisation of Securities Commissions (IOSCO), dealing with regulation of securities markets.

 

Rationale behind move

Measures such as these are partly explained by the UPA government's desire to establish that it has not slowed down on reform and to counter the view that a form of "policy paralysis" afflicts it.

 

But they are also driven by the need to reverse the slowdown in inflows of foreign portfolio investment.

 

The decline in FII inflows has been attributed to developments abroad, which required foreign institutional investors to book profits in India and repatriate their funds to meet commitments or cover losses at home.

 

The presumption appears to be that individual investors would not be affected by such compulsions.

 

The government's press release announcing the new QFI policy declares that the object of the measure is to "to widen the class of investors, attract more foreign funds, and reduce market volatility".

 

In the last Budget, these investors had been allowed to invest in Indian Mutual Fund Schemes. The recent announcement takes this a step further and treats them on a par with FIIs.

 

The government's view that QFIs would make up for any loss of FII inflows and that their investment would be characterised by greater stability has to be tested. But the factors motivating its decision are clear.

 

Call for caution

One danger is that the new measure allows direct access to equity markets to entities not regulated in their home country.

 

When India first began permitting foreign investment in the equity market, the FII category was created to ensure that only entities that were regulated in their home countries would be permitted to register and trade in India. The logic was clear.

 

Since it is impossible for Indian regulators to fully rein in these global players and impose conditions on their financing, trading and accounting practices, controlling unbridled speculation required them to be regulated at the point of origin.

 

But this kind of derivative regulatory control can apply, if at all, only to institutional investors.

 

Individual investors cannot be subject to such rules even in their home country and allowing them to enter amounts to giving up the requirement that only foreign entities subject to some discipline and prudential regulation should be allowed to trade in Indian markets.

 

This is of relevance because individual investors are unlikely to enter India and invest in equity to hold it with the intention of earning dividend incomes.

 

The exchange rate and other risks would be deterrents to such long-term commitments.

 

If such investors do come it would be with the intent of reaping capital gains through short-term trades.

 

Thus, to the extent that the measure is successful, it would mark a transition towards allowing speculative players greater presence in Indian markets.

 

Defending that on the grounds that it would help reduce dependence on debt is indeed questionable.

 

Source: http://www.thehindubusinessline.com/opinion/columns/c-p-chandrasekhar/article2866260.ece?homepage=true

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'I made my money by selling too soon.'

Website: http://indianmutualfund.co.cc/

Blog:http://indianmutualfund.wordpress.com/
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Mutual funds in selling mode

Mutual funds (MFs) sold shares worth Rs 112.80 crore on Thursday, 2 February 2012, compared with inflow of Rs 184.50 crore on Wednesday, 1 February 2012.

 

The net outflow of Rs 112.80 crore on 2 February 2012 was a result of gross purchases Rs 802.70 crore and gross sales Rs 915.50 crore. The BSE Sensex had risen 131.27 points, or 0.76% to settle at 17,431.85 on that day, its highest closing level since 8 November 2011.

 

Mutual funds have bought shares worth Rs 71.70 crore in February 2012 so far (till 2 February 2012). They had sold shares worth Rs 1858.40 crore in January 2012.

 

Source: http://www.adityabirlamoney.com/news/533171/10/22,24/Mutual-Funds-Reports/Mutual-funds-in-selling-mode

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'I made my money by selling too soon.'

Website: http://indianmutualfund.co.cc/

Blog:http://indianmutualfund.wordpress.com/
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Fund managers suffer loss; stocks stage a surprise rally

The surprise stock market bounce in January caught many fund managers napping, resulting in various equity schemes underperforming their benchmarks during the month. These fund managers had stocked up on shares of consumer goods, pharma and auto companies - the winners in 2011 - in their portfolios, but the new year rally was led by a fresh lot, including infrastructure and metals, which were mostly laggards last year.

Their inability to shuffle their portfolios in a short period caused their schemes to underperform the benchmarks. Out of the 275-odd diversified equity funds, 155 have underperformed key indices over the past one month.

"Most fund managers were caught off guard... The rally happened purely on the back of strong foreign portfolio inflows, which continued to come in throughout January," said PVK Mohan, equities head at Principal Mutual Fund, adding, "Many funds could have underperformed because of their exposure to defensive stocks." Foreign institutional investors have invested over Rs 13,000 crore in Indian stocks this year.

Though one month is a short time to gauge a fund's performance, analysts said fund managers had erred in committing too much to the gainers of 2011, especially when valuations were expensive. The situation revived memories of March 2009 when the start of the rally caught most fund managers unawares. Then, many of them were sitting on cash but were unwilling to invest as they were not sure whether the worst was over.

While the 30-share Sensex has gained over 12% in January, sectoral indices like BSE Bankex, BSE Metal and BSE Realty have gained 25-28% last month. ET Construction index - which includes top infrastructure and engineering companies - has gained over 35% in January alone, while FMCG firms have gained just about 1- 3%.

 

A senior official of a bank-sponsored mutual fund said most fund managers started aligning their portfolios after the first week of January, fearing a repeat of March 2009. It takes about 8-12 trading sessions for a fund manager to align a portfolio of 40 stocks.

Money managers take more time to align larger portfolios. It takes about 17-21 days for a fund manager to align a portfolio of 80 stocks, say analysts.

"We're aligning our portfolios to changing market conditions. We've increased our exposure to interest rate sensitive sectors. We'll be able to put up a better performance this year," said Navneet Munot, chief investment officer, SBI Mutual Fund.

PVK Mohan of Principal Mutual is also reworking his portfolio, making minor changes in weight ages and allocations. "We're not moving out of defensives totally... We're not out of the woods completely. We'll have to wait for election and then Budget before taking a directional call," he said.

 

Source: http://economictimes.indiatimes.com/markets/analysis/fund-managers-miss-bus-as-stocks-stage-a-surprise-rally/articleshow/11734075.cms

Sensex to touch 20,000-mark by June: Survey

The stock market barometer Sensex could rise to the 20,000 points-mark by June, up from the present 17,000-level, despite subdued business confidence, a survey by JP Morgan Asset Management has said.

"Indian investors and advisors appear unaffected by the recent volatility in stock markets. Forty-eight per cent of retail investors and 76 per cent of advisors expect the benchmark index to trade between 17,000 and 20,000 in June, 2012," JP Morgan Asset Management said in a report titled, 'Investor Confidence Index'.

JP Morgan AMC said investment by retail investors in mutual funds has revived significantly since the last quarter. The index showed no signs of revival in the current quarter and remained almost flat between July and December, 2011.

"Although the overall investment sentiment currently appears subdued, the optimism about global and Indian economic growth is improving marginally. Most interestingly, corporate, advisors and HNIs are now more optimistic than they were in July, 2011, even as the mass of retail investors have become more pessimistic," the survey added.

The survey conducted among 1,635 retail investors, 50 corporate treasuries and 282 advisors said retail investment activity in mutual funds has picked up by 9 percentage points vis-a-vis the previous quarter to reach 70 per cent, while in stocks, it fell by 6 percentage points.

Risk-averse investors have shown less preference for stocks (down from 70 per cent in March, 2011, to 56 per cent in December), but increased preference for mutual funds (from 44 per cent to 68 per cent), according to the survey.

In addition, rising gold prices appear to have affected investment activity in gold. As a result, the percentage of investors investing in this asset class has fallen by 19 percentage points since December, 2010.

"The weak investment sentiment is probably a reflection of volatility surrounding the country's macroeconomic environment. "The Sensex downslide, rupee depreciation, a ballooning fiscal deficit, high inflation rates, combined with rising global uncertainty, triggered by deepening of the euro zone crisis, have hurt the investment sentiment," JP Morgan Asset Management MD and CEO Nandkumar Surti said.

The index published jointly by JP Morgan and ValueNotes, was conducted in December across Mumbai, the Delhi/NCR, Kolkata, Chennai, Ahmedabad, Bangalore, Pune and Hyderabad. The survey focused on business and investment outlook for the following six months.

 

Source: http://economictimes.indiatimes.com/markets/analysis/sensex-to-touch-20000-mark-by-june-survey/articleshow/11716200.cms

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'I made my money by selling too soon.'

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Fidelity looks at India AMC business exit

The increasing cost of acquiring assets due to a tight regulatory environment and six years without any profits have forced one of the biggest names in asset management to look for exit options in India.

 

Fidelity Investments is in talks to sell its domestic mutual fund business in the country. Fidelity managed assets of Rs 8,800 crore as of end-December 2011, according to data from the Association of Mutual Funds in India, making it the 15th largest company in India's competitive asset management business.

 

Fidelity's India fund management arm, launched in 2004, circulated a 'request for proposal' to companies interested in buying the asset last week, according to people familiar with the development.

 

When contacted, a Fidelity spokesperson said, "Fidelity Worldwide Investment is conducting a strategic review of its onshore asset management business in India; as with strategic reviews, all options are being covered. The review is underway and it is too preliminary to discuss any outcome." 

 

"India is probably the only country, where there is no entry load. In other countries, even management fee is higher. As a global organisation, Fidelity will look at the return on every dollar invested. If the return on their dollar is better elsewhere, they will do that," said a local asset manager.

 

In FY11, Fidelity was the second largest loss-making fund house after Axis Mutual Fund. It booked a loss of Rs 62.39 crore in FY11 against a loss of Rs 27.56 crore in the previous financial year. Recently, Nippon Life had valued Reliance Mutual Fund at 6.6 per cent of its assets under management.

 

Analysts say despite the losses, Fidelity has a good chance of getting a similar or even better valuation of its assets, as 70 per cent of its corpus is in equity funds. The flagship, Fidelity Equity Fund, managed Rs 3,370 crore as of December 2011. The Special Situations Fund managed Rs 795 crore. Fidelity India Value Fund and Fidelity Growth Fund are other major equity schemes.

 

Though Fidelity has a decent bouquet of schemes in both debt and equity, it has not convincingly crossed the Rs 10,000-crore mark of assets under management, considered a ballpark breakeven point for the industry.

 

A sharp fall in the equity markets and recent regulatory changes, such as the removal of the entry load, or a commission charged by a mutual fund distributor for selling a product, have made the going difficult. Many fund houses also booked heavy losses following the mark-to-market rules on debt instruments in FY11.

 

The news has taken the industry by surprise, as only smaller names were seen susceptible to exits. "If Fidelity ends up selling its India business, it would be an indication of just how difficult it is to manage money in India," said the chief marketing officer (CMO) of a leading fund house.

 

The CMO of a mid-sized fund house said, "We cannot rule out the possibility of more consolidation in the industry, given the cost pressure and increasing competition over the past few years."

 

The company's average assets under management have fallen slightly from Rs 9,100 crore at the beginning of last year, data showed, with the country's benchmark stock market index posting a drop of nearly 25 per cent in 2011. Lured by the long-term prospects of Asia's third largest economy, overseas fund managers, such as the US-based T Rowe Price Group Inc and Nippon, have been buying into Indian money managers. While T Rowe bought 26 per cent in UTI MF last year, earlier this month, Nippon Life bought a similar stake in Reliance Mutual Fund.

 

Dhruva Chatterji, senior analyst at Morningstar India, said, "Fidelity was considered a very established player in India. If the story turns out to be true (that Fidelity is on the block), it would be a worrying signal for the industry."

 

Source: http://business-standard.com/india/news/fidelity-looks-at-india-amc-business-exit/463299/

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'I made my money by selling too soon.'

Website: http://indianmutualfund.co.cc/

Blog:http://indianmutualfund.wordpress.com/
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