Mutual Fund NEWS Group

Friday, August 6, 2010

Q&A: Nitin Rakesh, CMD, Motilal Oswal AMC

'Look for leaders in sector'

A few industries have not been very promising. Nitin Rakesh, CEO & managing director, Motilal Oswal Asset Management Company, tells Neha Pandey & Masoom Gupte, that investors should follow a stock-specific strategy. Excerpts:

What should be a retail investor's strategy in the current market?

I don't think it's a runaway market, but a stock-specific one. Investors should buy on dips. Some industries have not been promising, and hence, the market is subdued.

For instance, the rise in the input cost for automobiles was unexpected, and so, the companies have reported less-than-expected profits due to dropping margins. On the other hand, banks have done extremely well. Despite the rise in interest rates, their net interest margins have gone up.

Going by the first quarter results, which sectors (besides banking) look promising?

The telecom sector has been in-line so far. This sector can be a value player, if you invest in the right company. The global commodity cycle have hit metal companies and pulled down their earnings. In the fast moving consumer goods (FMCG) space, we were looking at an aggregate growth of slightly lower than 20 per cent.

Should an investor take cues from quarterly results?

You have to primarily watch out for what is the trigger for a company or a sector. For example, the drop in car sales for automobiles is more of a concern than rising input cost. In the cement space, the issue is over capacity. But it is a region-wise change.

Look for companies that have bigger market share in a sector. Among two-wheelers, you either look at Hero Honda or Bajaj. In commercial vehicle segment, it is either Mahindra & Mahindra or Tata Motors.

What is your take on public sector divestment? Is it a good way to enter the market?

It all depends on the pricing. So far, the initial public offerings and the follow-on public offers have not been priced attractively. During the British privatisation in late 1980s, the government gave 25-30 per cent discount. Also, the number of shares per application should be limited.

What are your targets in short-term, medium-term and long-term?

I won't be surprised if the market is at the current level by this year-end. In the past nine months, the market has been in the same range, but earnings have been rising. This is called time correction. Although it has been dull and range-bound, a lot is changing. So, where the markets saw 20+ price-to-earnings multiple earlier, it is now between 16 and 17+. If it stays at the same level by December, markets will be at 13 to 14+ multiple.

Where do you see the markets next year, same time?

The earnings are going to grow at 15 to 20 per cent annually, so the markets should also be 15 per cent higher a year later.

What are the top three sectoral bets right now, and which ones to avoid?

Banking, especially infrastructure, capital goods, capital equipment and select auto, essentially consumer auto. Avoid some of the large-cap FMCG companies as they are expensive. Also, avoid some of the large-cap oil and gas and metals, especially the globally linked ones.

For someone looking at investment, would you recommend lump sum or via systematic investment plan (SIP), especially for a first-time investor?

In any market, SIP is the best way to invest and this holds true for all types of investors.

Source: http://www.business-standard.com/india/news/qa-nitin-rakesh-cmd-motilal-oswal-amc/403569/

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'I made my money by selling too soon.'

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

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New valuation norms to raise Liquid Plus schemes’ volatility

The new valuation norms, which mandate fund houses to mark-to-market securities with a maturity of over 91 days in the Liquid Plus category of mutual funds, may increase volatility in these schemes.

Asset management companies (AMCs) are now gearing up to revamp their investment strategies to ensure that volatility is curtailed without compromising on the tax arbitrage enjoyed by the Liquid Plus category of funds.

While there has not been any immediate adverse impact of the new ruling on the assets managed by fund houses under Liquid and Liquid Plus categories, there may be concerns in the future, if there is high volatility in the money market. It is, thus, important for fund managers to insulate these products so as to retain their large-ticket institutional investors.

"One likely change in the investment strategy can be to incorporate a higher percentage of securities with less than a 91-day maturity in Liquid Plus schemes," says Mahendra Jajoo, ED & CIO (fixed income), Pramerica Asset Management. "This would reduce the volatility of the portfolio which will otherwise be marked-to-market for securities with maturities higher than 91 days," he adds.

This new strategy, which fund managers may now look forward to, will, in fact, act as a double-edged sword. On one hand, Liquid Plus schemes will run like any other liquid scheme, on the other hand, investors will continue to enjoy the tax arbitrage applicable to Liquid Plus schemes.

Liquid Plus schemes currently attract a dividend distribution tax (DDT) of nearly 22.7% against 28.3% DDT applicable to the Liquid category of funds. It's for this reason that many institutional investors prefer Liquid Plus to Liquid schemes. Moreover, as the Liquid Plus category invests in papers with a maturity higher than 91 days, their returns are relatively superior to Liquid schemes which invest in papers with less than a 91-day maturity.

Over the past one year, Liquid schemes have generated an average of around 4% returns while Liquid Plus schemes have generated about 6% returns during the same period. For large institutional investors, with investments running in crores of rupees in these schemes, this differential of 200 basis points is quite significant.

The popularity enjoyed by Liquid Plus schemes is also evident from the assets managed by these schemes vis-à-vis Liquid schemes. By the end of June '10, Liquid Plus schemes managed assets worth around `1.9-lakh crore against `66,000 crore by Liquid schemes.

Thus, with new valuation guidelines directing the securities in Liquid Plus schemes to be marked-to-market have raised more concerns among investors of these schemes.

The new investment strategy, to run Liquid Plus schemes like any other Liquid scheme, will reduce the volatility of the portfolio, but will also mean that investors may have to compromise on returns that accrue to securities with higher maturities. However, this may not be an immediate concern since currently the yield curve being flat — both short and long duration securities are earning relatively similar yields.

"Going forward, however, the industry may see the category of Liquid Plus schemes being sub-categorised as those with maturity of less than 91 days, carrying a lower risk and volatility and those with securities more than 91 days and up to one year, which will be marked-to-market, will be construed to be more volatile," says a fund manager from the industry who did not wish to be named.

Source: http://economictimes.indiatimes.com/personal-finance/mutual-funds/mf-news/New-valuation-norms-to-raise-Liquid-Plus-schemes-volatility/articleshow/6258917.cms

Thursday, August 5, 2010

Sensex at 2½-year high with 103-point gain

Indian equity indices on Wednesday shrugged off weak global markets to end the day at their highest levels since February 2008. Domestic markets remained weak throughout the day; however, buying from the foreign funds during the last hour of of trading helped the market close with gains. Technology stocks led the 103-point gain for Sensex on the back of higher-than expected earnings of US-based Cognizant Technology Services, which boosted outlook for Indian IT companies focussed on these markets.

The 30-share Sensex of the Bombay Stock Exchange (BSE) added 102.61 points to end the day at 18,217.44. The broader S&P CNX Nifty of National Stock Exchange (NSE) gained 28.30 points to close the day at 5,467.85.

According to the provisional figures provided by the Bombay Stock Exchange (BSE), foreign institutional investors (FII) bought stocks worth over Rs 688 crore on Wednesday. In just three days of August, FIIs were net buyers to the tune of approximately Rs 2,000 crore. For the year till date, FIIs have bought over $11 billion worth of equities and received close to 46% of net inflows into Asian market outside Japan and China. Foreign fund inflows into Indian markets have climbed 40% this year, making Sensex the most expensive in Asia excluding Japan and BRIC markets.

Said Navneet Munot, CIO at SBI Mutual Fund: "Overall, the economy is in good shape and markets are also fairly valued at these levels. While investors are taking long positions in the market, one has to remain cautious of the global events."

"The exploration of large-caps in India is done," said Richard C Kang, who helps manages $120 million in equities at Emerging Global in New York. According to him, India's smallest companies may deliver investors the best returns as foreign inflows have pushed the benchmark index's valuation to the highest among BRIC nations. "As the bull market extends, investors are more willing to take on additional risks and explore midcaps and small caps," he said.

Most Asian markets were down on Wednesday following weaker- than-estimated US home sales and factory orders, which renewed concerns about the strength of the global economy.

Source: http://www.financialexpress.com/news/Sensex-at-2--year-high-with-103-point-gain/656130/

Front Running: Is it insider trading or not?

Is it insider trading when a trader acts on prior information on a stock?

HDFC Mutual Fund recently came under the Security and Exchange Board of India's (Sebi) scanner for front running. The dealer was banned from trading. Front running involves a trader in a securities firm acting on prior information that is almost equivalent to insider trading. Can this activity be curbed?

It spooks the investors

The biggest pension funds who want to invest into Indian markets worry about front running. Their prime concern is processes and how Indian AMCs (asset management companies) are keeping themselves clean. This is getting to be a reputation problem and it looks like this problem cannot be stopped, at least for now.

Scale of the crime

If there is a pipeline with a capacity of 10,000 litres that comes to your housing society colony and one person steals a litre or two from this pipeline, will the harm be substantial enough for the society? If a mutual fund wants to buy 1 lakh shares of company A and the dealer puts in his personal order ahead of the fund and makes profits, will this harm the investors in the mutual fund? The damage will be miniscule. There's no point in spending too much efforts trying to catch this trader. And if this trader starts making a lot of money in a short span of time, he will get noticed. There is no way he can escape. It is like stealing 500 litres of water from the same pipeline. Someone will notice that theft.

Control

That totally depends on the processes. Front running is like day trading. So if the processes are strong and the dealer is tracked at all levels from the time he gets the information to the time he executes the trade, it will be easy to catch him if he is front running. Eg: If he knows a fund is going to buy one lakh shares of stock A, he will put his order minutes before the fund's order goes through. If the dealer were to be made "incommunicado" then there is no way he can relay this information. Sebi has put up an investigative report on how the front running exactly took place inside HDFC MF on its Web site.

Anticipate Human Behaviour

Most funds say that the systems and processes are proper but one individual can beat these systems by being unethical. The argument is unacceptable. If systems are proper that means front running should not be possible. There will always be some individuals who will try to beat the system. Process have to be continuously upgraded to catch these people.

What the Law Says

Front running is not insider trading but comes close to it. It comes under the charge of prohibition and protection of fraudulent and unfair trade, Sebi Regulation 2003 (prohibition and prevention of fraudulent and unfair trade relating to securities market). Penalty for the crime will mean a ban from dealing in the market and a monetary penalty of Rs. 25 crore or three times the trade committed by the investor.

Source:

FIIs turn attention to mid-, small-cap stocks

Foreign institutional investors are increasingly looking at mid-cap and small-cap ideas.

Mr Richard C. Kang, CIO of Emerging Global Shares, a company that constructs exchange traded funds on the Dow Jones, said: "Mid-cap and small-cap stocks that cater to India's domestic consumption are among the best bets going forward."

Mid-cap stocks have seen an increase in foreign institutional investors' stakes in the first quarter of FY-11; 145 out of the 267 mid-cap stocks that are part of BSE Midcap index saw an increase in their holding, while 113 saw foreign investors exiting.

Favourites

Some of the counters that witnessed increase in FIIs holding include Dewan Housing, Kalpataru Power, Hindustan National Glass, Infotech Enterprises and Shree Renuka Sugars. Among others, GTL, Indiabulls Real Estate, India Infoline, Aban Offshore and Indiabulls Financial saw biggest drop.

In the BSE small-cap index, 184 stocks saw anincrease in FII holding and a similar number witnessed exit by FIIs.

The FII stakes in 142 small-cap companies remained unchanged.

Foreign fund inflows have reached Rs 50,276 crore or about $11 billion so far this year.

The BSE Sensex climbed 4.6 per cent this year while the BSE Midcap jumped 12 per cent and the BSE Small-cap soared 13.86 per cent. The BSE-500 index moved up by 7 per cent.

"We have invested in Amtek India, UCO Bank, Indian Bank, Patni Computers and Dish TV in our portfolio that caters to the India Small Cap ETF that was launched a fortnight ago on NYSE," said Mr Richard C. Kang.

Amtek is a case of increasing capacity utilisation and has one of the best debt equity ratios of 0.48 in the auto components business, said an auto analyst with a leading mutual fund.

The auto components business is expected to see a capex of Rs 13,000 crore in FY-11and a growth of 15-16 per cent in FY-11 and 17-18 per cent in FY-12, according to a Crisil estimate.

UCO Bank

UCO Bank is expected to grow due to higher net interest margins, overall business growth and an attractive valuation at a price-to-adjusted-book value of 1.6, said Mr Alok B. Agarwal, Head of Research at Mata Securities.

Source: http://www.thehindubusinessline.com/2010/08/05/stories/2010080553081000.htm

Wednesday, August 4, 2010

AMCs park liquid-plus funds into group firms

A few asset management companies (AMCs) are learnt to have transferred a slice of their holdings in liquid-plus schemes to the books of their group companies, to avoid potential losses that could arise from the stricter mark-to-market rule for debt securities that has become effective since August 1. The new rule requires fund houses to mark the prices of the securities with maturities of over 91 days, to market rates.

Liquid-plus schemes have a maturity of more than 91 days, while liquid schemes invest in debt instruments with maturity of less than 91 days.

By selling the bonds to the group company, the risk of volatility will be transferred to the books of the division buying those bonds. Closer to maturity, the transaction will be reversed.

"The transaction as such is not illegal, but a few months later, these funds will be going around bragging to potential investors that their schemes were the least volatile," said an industry observer, adding that smaller fund houses will not be able to do such deals. "That is misleading the investors," the person said.

Last week, fund houses had approached Sebi, requesting the regulator for an extension of the August 1 deadline for the new debt valuation norms. The general perception is that interest rates are likely to rise in the near term. When interest rates rise, bond prices fall, and this impacts the net asset value (NAV) of bond funds. Fund managers are worried that a decline in NAVs could spark off a vicious circle, as investors redeem their money, forcing fund managers to sell the bonds at a discount, which in turn causes the NAVs to decline further.

Roughly, a third of the Rs 6.72 lakh crore managed by the mutual fund industry is in liquid plus schemes. A liquid-plus scheme is more popular than liquid schemes, as they offer better returns and are taxed at a lower rate. A dividend distribution tax of 28.33% is charged on liquid funds while it is 22% for other debt schemes, including liquid plus schemes.

Such arrangements were common during the meltdown in money market mutual funds in late 2008, when mutual funds had heavily invested in the bonds of real estate companies. When the property market soured, real estate companies were unable to redeem their bonds. Many investors suffered a loss on their capital —something unusual for debt schemes — as the bonds had to be sold at a loss. Compounding the fund managers' woes was the illiquid nature of bonds.

Faced with no buyers, many fund houses got their parent companies to buy out their unsaleable bond portfolios.

Some industry players feel a volatility rating, which is prevalent in international markets, could check such deals. That is because rating agencies that issue the grade, also conduct random checks on the portfolio to ensure that all rules are being adhered to.

Source: http://economictimes.indiatimes.com/personal-finance/mutual-funds/mf-news/AMCs-park-liquid-plus-funds-into-group-firms/articleshow/6254317.cms

Debt fund NAVs fall as new norms set in

On the first day of change in valuation norms for debt schemes, 24% of such funds reported a fall in NAVs as compared to last Friday.

Long-term debt category funds, namely medium and short-term funds, took a beating while liquid plus schemes (barring two) saw a rise in NAV.

However, it is also quite likely the fall in NAV for these funds could have taken place for reasons other than valuation norms change.

Out of the 588 debt schemes, over 139 schemes saw dip in their NAV on August 2 compared to July 30. Since most funds don't declare NAVs on Sundays, so July 30 figures were taken for the study. Market regulator Securities and Exchange Board of India (Sebi) had earlier mandated all fund houses to mark-to-market all debt securities with remaining maturity of over 91 days from August 1. Earlier, it was 182 days. And higher interest rate scenario in the economy seems to have hit some debt funds, which now have to mark-to-market instead of smoothening interest inflows through the method of amortisation.

Sebi had deferred the deadline for its implementation to August 1 from July 1, and interestingly, liquid plus schemes had seen huge redemption in June. Scuh schemes were structured few years back to benefit from the earlier valuation loophole.

With the new Sebi rule in place, most fund managers have been proactive in order to protect losses for existing investors. K. Ramakumar, head, fixed income at Sundaram BNP Paribas Mutual Fund said, "We had already started marking-to market the portfolio from July itself based on the new rule. He added Sundaram schemes did not fluctuate much. NAV of Sundaram BNP Paribas Income plus, which is a liquid plus scheme, rose a tad 0.02% on August 2.

The highest fall in NAV was seen in LIC Bond fund, a medium term debt fund by 2.97%.

Source: http://www.financialexpress.com/news/Debt-fund-NAVs-fall-as-new-norms-set-in/655700/