Mutual Fund NEWS Group

Monday, March 5, 2012

High brokerage and fees hurt active investing

The active versus passive investing debate cannot really be resolved academically. In theory, a perfectly efficient market offers an advantage to passive index players. However, perfection is as unattainable in financial markets as in other spheres of life.

The efficient market hypothesis suggests that, given equal access to information, equal ease of trading, and so on, all news is immediately absorbed by the crowd. Investors take individual actions. Price swings more or less randomly in response to the combined effect of their buys and sells.

In an efficient market, the optimal investment strategy is therefore, to stick to the index. However, access to information is rarely equal. Nor do all participants find it equally easy to trade – for one thing, brokerages are skewed. A third condition is also rarely if ever, met – there shouldn't be any participants who have overwhelming influence. If we include "non-playing captains" such as policy-making institutions, this condition is never met.

So markets are to varying degrees, imperfect. These imperfection help to explain the small but significant number of investors who consistently outperform indices. Some are plain lucky. Some have access to better information, or deeper pockets, or both. Finally some are perhaps genuinely gifted at forecasting trends and manage their money more efficiently.

However, the available data suggests that most active investors get it wrong. Markets may not perfectly efficient but they are efficient enough to make a strong case for index-investing. An easy basis for comparison is the performance of index funds versus actively managed funds.

Apart from anything else, active funds pay more brokerage and they usually charge larger fees. The global data clearly suggests that there isn't much percentage in paying for active fund management. The performance of Indian mutual funds mirrors global data to a certain extent. But it also suggests that India is more imperfect than most large markets because there are more outperformers.

S&P (and Crisil) has a global methodology, SPIVA (S&P Indices versus Active funds), which generates scorecards of performances of funds. The India SPIVA which covers most categories like equity, debt, ELSS, hybrids throws up some interesting points, which investors could bear in mind.

First, if you must buy actively managed equity funds, you should buy into the diversified equity segment (DE) rather than large-caps. Large cap focussed funds tend to underperform their respective indices more consistently.

Roughly one in three large cap active funds beats the benchmark, over five years. ELSS has similar levels of underperformance despite the lock-in periods, which ensure that fund managers don't have to worry about unexpected redemption pressures. Diversified equity funds also tend to underperform but there are more outperformers in the DE segment. About 45 per cent of DE funds beat the benchmark over five years and half the DE universe beat the benchmark over three years.

A second learning seems to be, buy into bigger funds. Funds with more assets under management tend to be better performers. This could be some sort of effect caused by selection bias. Investors put more money into better performing funds and this means the better performers end up with more AUM.

Third, unlike equity, speculation in debt actually seems to offer rewards for active investors. Quite a few pure debt funds outperformed benchmarks. Despite the significant structural risks of Monthly Income Plans, hybrid MIPs with a higher debt component have done well.

Debt funds that focussed in corporate debt also tended to beat the benchmarks. This is interesting because it implies that fund managers made the right calls in assessing the relative risks of different corporate debtors. Given that the interest rate environment went through two full cycles, it is quite impressive. Conversely gilt funds didn't do so well, which means that fund managers are more liable to misjudge policy rate moves.

If we look at highly evolved markets, such as the US, roughly one in ten equity-oriented funds beats the market over a 5-year period. The ratio is also skewed against actively managed debt funds in the US. That is more understandable because the US bond markets is much broader, and deeper and more liquid. So where does that leave the Indian fund investor? There's evidence that, unless you're great at equity fund selection, going with indexation is sensible. However, though it's odds against, it's not really too bad at 1:2 for large caps or 9:11 in the case of DE.

The data confirms that the debt market, especially corporate debt, is very inefficient . Here, active management definitely has the edge. However debt fund managers are better are judging the credit-worthiness of corporates than second-guessing the RBI.

Source: http://www.business-standard.com/india/news/high-brokeragefees-hurt-active-investing/466631/

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'I made my money by selling too soon.'

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

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Uncertainty over market rally as intra-day trades increase

The stock market rally this year has led to a jump in trading volumes on Indian bourses, but the proportion of delivery-based trades has been lower than in the previous year due to increased intra-day trades, indicating uncertainty over the current rally.

Moreover, although the long-term outlook for Indian equities appears marginally better now, compared with two months ago, uncertainty on events such as election results, the national budget later this month, and the direction of crude oil prices, which touched an 11-month high on Thursday, might make the markets volatile in the coming weeks, analysts said.

Riding on the back of easing liquidity in the West, foreign institutional investors (FIIs) have pumped in $7.4 billion net of sales in Indian equities so far this year, pushing the 30-stock Sensex index on BSE up 14%. The rise in the broader market has been sharper,with the BSE-500 index rising 18%.

The rally has led to increased trading interest, fuelling a jump in trading volumes. Average daily trading volumes reached a 16-month high of 1.38 billion in February.

This year, nearly 1.17 billion shares have been traded per session, 33% higher than the previous year, when average trading volumes had dipped to a five-year low of 872 million shares. Due to a weakening economy and policy uncertainties, institutional and retail investors largely stayed away from Indian markets in 2011 and the Sensex slumped 25%.

The drop in volumes had become a major worry for Indian regulators. When Securities and Exchange Board of India (Sebi) chairman U.K. Sinha in late December met various market participants including top mutual funds, FIIs, brokerages and investment banks, the drop in trading volumes dominated the meetings.

The Reserve Bank of India (RBI), in its financial stability report in December, flagged off the drop in cash volumes and the rising share of derivatives in the total turnover as a key risk to financial stability in the Indian equity markets.

A rise in global risk appetite since then has led to a surge in volumes, but trading has been dominated by day-traders. The average proportion of delivery-based trades fell to a 19-month low of 38.1% in January and rose only marginally last month. Delivery-based trades as a proportion of total volumes averaged 41.5% in 2011.

"The proportion of delivery-based trades has fallen as day-trading has become more common," said Yogesh Radke, head of quantitative research at Edelweiss Securities Ltd.

The current trend is in contrast to the equity rally in 2010, when rising volumes were accompanied by a rising share of delivery-based trades. The average proportion of delivery-based trades had risen by 2 percentage points to 42% in the August-November period of 2010 over the first seven months of that year. The Sensex had rallied by 9.3% over the same period on the back of foreign inflows worth $18.5 billion, net of sales.

This year's rally has been led by improved global liquidity, and lingering concerns on fundamentals have made many averse to taking long-term bets, analysts said. The recent rally is unlike the 2010 rally, when there was greater institutional participation and conviction in the strength of the bull run, said Radke.

"Economic growth is likely to bottom out in the current quarter, and the overall outlook appears marginally better compared to a few months back, but uncertainties on corporate earnings and over events such as the Union budget still remain," said Prasun Gajri, chief investment officer at HDFC Standard Life Insurance Co. Ltd that manages around Rs.25,600 crore worth of assets.

India's economic growth slid to a three-year low of 6.1% in the December quarter. The consensus earnings estimate for Sensex firms for the next fiscal year has dropped 13% since the start of fiscal 2012 to around Rs.1,298 a share, and it will be a while before the upgrade cycle starts, analysts said.

While the second round of monetary easing by the European Central Bank is expected to lend support to risk appetite globally, concerns over rising crude oil prices that adversely impact India's fiscal and current account deficits, and uncertainties over the upcoming Union budget and the direction of RBI's monetary policy could keep markets on tenterhooks in the coming weeks.

The fall in inflation and recent policy initiatives by the Prime Minister's Office are grounds for optimism, but the current valuations appear to have priced in most of the positives and "March could see newsflow-driven volatility due to election results, RBI policy and budget", Manishi Raychaudhuri, head of research at BNP Paribas Securities India Pvt. Ltd, wrote in a 1 March note to clients.

The Sensex trades at 14 times its estimated earnings for the next fiscal year.

Gajri of HDFC Life agreed that there are near-term uncertainties, but said current valuations appear reasonable from a long-term perspective.

Source: http://www.livemint.com/2012/03/04221337/Uncertainty-over-market-rally.html?atype=tp

Friday, March 2, 2012

Smaller-cap stocks help mutual funds in Feb

Diversified equity funds posted better returns than the BSE Sensex in February, helped by small and medium-sized stocks that rose on increased foreign and domestic buying.

Diversified funds, the largest category of stock funds in India by number and assets, returned an average 4.8% in the month, according to fund tracker Lipper, a Thomson Reuters company.

These funds outperformed the benchmark index, which rose 3.25% on robust inflows from foreign institutional investors (FIIs) and hopes of easing monetary policy.

Favourable global liquidity conditions encouraged foreign investors to buy more than $7 billion of Indian equities so far in 2012, pushing up the index by more than 14%.

"With the backing of FIIs, retail participation increased in mid- and small-caps, which pushed them higher," said R. K. Gupta, managing editor at Taurus Mutual Fund. "However, the outlook for these shares is likely to be cautious going ahead."

Mid- and small-cap shares accounted for more than a third of the assets of diversified funds at the end of January, and holdings of such stocks rose to the highest level since January 2011, Morningstar India data showed.

During the month, the BSE mid-cap index rose 8.8% while the small-cap index gained 6.14%.

Exposure to the financial services sector— the top sector bet for money managers, with an allocation of over 20%— also helped equity diversified mutual funds as the Bombay Stock Exchange banking index rose 5.12%.

Shares of top-lender State Bank of India gained 9%, while HDFC Bank rose 5% on hopes the central bank will further reduce the cash reserve ratio for banks to help ease tight liquidity conditions.

Two diversified funds from HSBC, the HSBC Midcap Equity Fund and the HSBC Progressive Themes Fund, were India's top performing mutual funds in February, returning more than 11%.

Among sectoral funds, those focusing on technology returned more than 7% while those investing in financial services registered a rise of nearly 6%.

IT stocks were among the best performers in February, pushing up the BSE IT index by 6.6%.

"Indian IT companies offer a significant value proposition to their international clients and offshoring of services will increase over a period of time," said Nilesh Shetty at Quantum Asset Management Co. "This will augur well for the sector."

Fixed income funds that invest in government securities rose 0.75% in the month, as the yield on the benchmark bond fell 7 basis points.

Gold exchange traded funds (ETFs) rose a little more than 1% on an average in the month.

Source: http://business-standard.com/india/news/smaller-cap-stocks-help-mutual-funds-in-feb/159389/on

CD rates cross 11% in a first since 2008 repo drawing at new high

Recent Sebi norms barring mutual funds from investing in CDs add to liquidity concerns

The lack of interest from investors and the year-end rush by banks have driven the rates on certificates of deposits (CDs) maturing in three months above 11 per cent, a level last seen in 2008.

According to market participants, lenders, including IDBI Bank, UCO Bank and Central Bank of India, have raised funds for three months through CDs at rates ranging between 11.1 per cent and 11.15 per cent. The rates stood at around 100 basis points lower in the corresponding period of the last financial year.

CDs are short-term debt instruments issued by banks to raise funds for up to one year, and mutual funds are major investors in these instruments. However, traders said norms introduced recently by markets regulator Securities and Exchange Board of India (Sebi) were preventing mutual funds from participating. This is evident from the fact that the volumes are low, despite banks willing to pay high rates.

"Banks are finding it difficult to lock deals even for Rs 200 crore. The volume in the market is small," said T S Srinivasan, general manager (treasury), Indian Overseas Bank. He added if situation did not improve, the rates would rise further.

A month earlier, Sebi had decided to reduce the threshold for mark-to-market requirement on debt and money market securities of mutual funds from 91 days to 60 days. Hence, securities with maturity periods of more than 60 days would have to be valued at market prices.

Nirav Dalal, managing director (debt capital markets), YES Bank, said, "The demand for CDs is muted, as mark-to-market ramifications due to the recent Sebi guidelines are keeping mutual funds from investing in the money market. This is over and above the inherent systemic liquidity deficit of about Rs 1.5-1.6 lakh crore."

Banks that have surplus liquidity and invest in CDs issued by other banks are not doing so, as this is the last month of the current financial year. Rather than deploying funds in the money market, these are seeking higher credit growth.

Today, banks borrowed a record Rs 1.91 lakh crore from the Reserve Bank of India (RBI) under the Liquidity Adjustment Facility. The liquidity deficit has been beyond the central bank's comfort zone of Rs 60,000 crore, despite a cut of 50 basis points in the cash reserve ratio in January.

Tomorrow, RBI is slated to buy government bonds and infuse up to Rs 12,000 crore into the banking system. However, traders said this would not help boost liquidity, in spite of the fact that there is no government debt sale auction scheduled for tomorrow. So far this financial year, the central bank has infused close to Rs 1 lakh crore through open market operations.

"Liquidity is expected to improve if government spending increases," said N S Venkatesh, head (treasury), IDBI Bank. He added typically, the government tends to spend unused allocated amounts towards the end of the financial year.

Banks are bracing up for withdrawal pressure from companies, as the advance tax payment deadline of March 15 approaches.

Markets expect the central bank to address systemic liquidity concerns by announcing another cut in the cash reserve ratio before the mid-quarter review of monetary policy, scheduled on March 15.

Source: http://www.business-standard.com/india/news/cd-rates-cross-11-infirst-since-2008-repo-drawing-at-new-high/466443/

Thursday, March 1, 2012

Sebi amends valuation norms for MFs; raises transparency levels

The Securities and Exchange Board of India (Sebi) on Tuesday tightened valuation norms for money market instruments in a mutual fund scheme. The latest amendments have been made with a view to ensure that the value of the portfolio reflects the market situation to a greater extent.

All money market and debt securities, including floating rate securities, with residual maturity of up to or over 60 days will need be valued at the weighted average price at which they are traded on the particular valuation day. Earlier, the valuations norms were applicable only if the residual maturity was up to or over 91 days.

Further, as part of its attempts to further enhance transparency, Sebi has directed the asset management companies to disclose all details of debt and money market securities transacted (including inter scheme transfers) in its schemes portfolio on their respective website.

This information will also need to be forwarded to Association of Mutual Funds in India (AMFI). These disclosures will be made settlement date wise on daily basis with a time lag of 30 days.

On a different note, the regulator has also amended the advertisement code for mutual funds who will now require to disclose the dividends declared or paid in rupees per unit along with the face value of each unit of that scheme and the prevailing net asset value (NAV) at the time of declaration of the dividend. The fall in NAV post the dividend or bonus payout will also form a part of the advertisement. The impact of distribution taxes, if any, will also need to be properly disclosed.

In a separate circular, Sebi has clarified that the due diligence of distributors is solely the responsibility of mutual funds/AMCs. "This responsibility shall not be delegated to any agency. However, mutual funds/AMCs may take assistance of an agency of repute while carrying out due diligence process of distributors," said the circular.

Sebi has also amended the way it addressed the issue of conflict of interest wherein a fund manager was managing more than on scheme. Sebi had mandated that the AMC needs to appoint separate fund manager for each separate fund managed by it unless the investment objectives and assets allocations are the same and the portfolio is replicated across all the funds managed by the fund manager.

Based on representations by the fund industry, the regulator has now decided that a replication of a minimum 70% of portfolio value will be considered as adequate for the purpose of compliance with the regulatory norms as a perfect replication across schemes is not always possible. The AMC, however, has to have in place a written policy for trade allocation and will have to ensure that the fund manager is not taking directionally opposite positions in the schemes managed by him.

The AMCs will have to disclose on its websites, the returns provided by the fund manager for all the schemes managed by him on a monthly basis. In case the difference between the annual returns provided by the schemes managed by the same fund manager is more than 10% then the same will have to be reported to the trustee and explanation for the same will need to be disclosed on the website of the AMC.

Source: http://www.financialexpress.com/news/sebi-amends-valuation-norms-for-mfs;-raises-transparency-levels/917914/0

SEBI mandates separate fund manager for each scheme

One fund manager per fund is what SEBI is telling mutual fund houses. In a circular put up on its Web site, the capital market regulator has mandated that the asset management companies (AMCs) will appoint one fund manager per scheme so as to avoid any conflict of interest that might arise from managing multiples funds at the same time.

However, the circular makes it clear that the exception can be made in cases where the various funds managed by the fund manager have same investment objectives and asset allocations. This also applies to the usage of the same portfolio of instruments across all funds. In such a case, however, at least 70 per cent of the portfolio has to be replicated across the schemes for them to be managed by the same fund manager.

The circular adds that for compliance with the afore mentioned regulation AMCs should ensure that they have a written policy in place for trade allocation and that they ensure "at all points of time that the fund manager shall not take directionally opposite positions in the schemes managed" by the fund manager.

'directionally opposite'

Consider a fund manager managing two equity schemes having portfolios that have 70 per cent of the stocks in common. Under such a situation, the fund manager cannot buy a particular stock in one scheme, while simultaneously selling the same stock in another.

This is what the SEBI circular refers to as taking "directionally opposite positions in the schemes."

Also, in order to bring transparency while addressing the issue of conflict of interest wherein a fund manager is common across mutual fund schemes, the AMC should disclose on a monthly basis the returns provided by the fund manager for all schemes managed by him/her. The same applies for any scheme-related advertisement issued by the AMC.

In case, the difference between the returns provided by the schemes managed by the same fund manager if more than 10 per cent, then the trustee should be notified, as well a disclosure should be put up on the AMC web site.

The circular also clarified that the due diligence of distributors was the responsibility of the AMCs themselves and cannot be delegated to any agency. The AMCs, however, can take the assistance of an agency in carrying out the due diligence process.

Source: http://www.thehindubusinessline.com/markets/stock-markets/article2943088.ece?homepage=true&ref=wl_home

Majority of actively-managed MFs underperform: S&P

The majority of actively-managed Indian equity mutual funds have underperformed their respective benchmark indices over the last five years, according to the latest Standard & Poor's Index Versus Active Funds (SPIVA) scorecard.

However, it said, funds have outperformed the indices over the latest 12 months ending December 2011.

The scorecard reveals that 53% of large cap equity funds failed to beat the S&P CNX Nifty, the leading benchmark index for large cap companies listed on the NSE, over the five years ending December 2011, it said.

Taking 2011 in isolation, however, active managers fared better, with 65% large cap equity funds producing higher returns than the S&P CNX Nifty, it said.

A similar pattern was seen for diversified equity funds, which offer a wider choice of stocks than large caps and therefore a greater chance of generating excess returns. About 58% underperformed their benchmark, the S&P CNX 500, over the past five years, it said.

In 2011 alone, however, 54% of diversified equity funds beat the index.

Active managers of Equity Linked Saving Schemes (ELSS) and balanced funds (equity oriented hybrid funds) have also fallen behind benchmarks over the past five years.

In contrast, it said, the majority of active managers of Monthly Income Plans or MIPs (debt oriented hybrid funds), gilt and debt funds (which invest mainly in corporate debt) have outperformed their benchmarks over a five year period.

In 2011, it said, majority of balanced and MIP funds underperformed, while majority of ELSS, gilt and debt funds beat their benchmarks.

The Indian mutual fund industry is going through a consolidation phase, it said, adding, none of the categories had a 100% survivorship over the past five years indicating mergers across categories.

Among funds, diversified equity funds had the lowest survivorship in the one and five-year periods, while balanced funds had the lowest survivorship in the three year period, it added.

Source: http://business-standard.com/india/news/majorityactively-managed-mfs-underperform-sp/159210/on