Mutual Fund NEWS Group

Tuesday, November 6, 2012

Liquidity from developed nations may flow into emerging markets: Sanjay Sachdev

Interview with President & CEO, Tata Mutual Fund

While the markets have cheered the recent policy initiatives and key economic developments, there has been a steady rise in the closure of equity fund folios in 2012. Sanjay Sachdev, president and chief executive officer of Tata Mutual Fund, says investors need a sustained rally in equities for the confidence to return. Also, he tells Puneet Wadhwa, a reduction in interest rates would give a boost to investment in equities. Edited excerpts:

How do you see the markets from here on? What would be the worst-case scenario if there are early elections?
Political uncertainty exists. However, recent moves by the European Central Bank and the US Fed have substantially reduced the risk premium for equity investors across the globe. Thus, the Liquidity generated by central banks in developed markets is likely to find shelter in emerging market (EM) equity.

Within EMs, India has an advantage over China, as the Chinese economy is slowing. Also, in India, the recent policy announcements have not been rolled back. This, coupled with a strong pick-up in the monsoon in August and September, considerably reduced the downside risk to gross domestic product (GDP) growth rates. Thus, political uncertainty alone would have a limited impact on equity markets, if global liquidity and growth scenarios remain at current levels.

Would the focus shift to developments at the domestic level, compared to what is happening globally?
It would be wrong to say domestic developments did not impact Indian equity markets earlier. In fact, India's relative underperformance in calendar year (CY) 2011, compared to other EMs, was partly due to its domestic developments such as low investments and high fiscal and current account deficits.

The government's recent policy initiatives suggest policy is moving in the right direction. If we continue to take rational economic decisions and improve the share of investment in our GDP, our markets will be less impacted by global events.

What are your earnings estimates for India Inc for FY13 and FY14? Have the overall estimates and any sectors in particular seen an upward/downward revision?
We expect the Sensex EPS (earnings per share) to be Rs 1,210 for FY13 and Rs 1,385 for FY14, growth of about 14.5 per cent in FY14 over FY13. The important thing is the pace of EPS downgrades, very high till March 2012, has significantly come off. Thus, the downgrade cycle is bottoming.

For FY14, we feel secular growth sectors such as financial, consumer and pharma will continue to have decent growth. We can see a strong bounceback in growth in interest rate-sensitive sectors such as automobiles and consumer discretionary. Also, if the policy environment improves further, we can see upgrades in earnings.

The last time we spoke, in May, you were underweight on public sector banks, global cyclicals such as metals and refining, and petchem. How has this strategy paid off and has this view changed?
We are still underweight on global cyclicals such as metals and refining and petchem. We feel global growth in CY13/FY14 will be more muted. Our key overweights are auto and auto ancillaries, media and pharma. In other sectors, we are more neutral and prefer a more stock-specific approach.

Stocks of the cement, pharmaceuticals and fast-moving consumer goods (FMCG) sectors seem to defy gravity. What is your call on these three?
Cement has seen strong earnings growth, with both volume and margins improving. If the investment cycle picks up, cement will be a beneficiary. Pharma and FMCG are secular growth sectors, with high ROE (return on equity) and healthy cash generation. Their valuations are unlikely to come down in a hurry. For the pharma sector, however, the pricing policy in domestic markets can be a near-term headwind.

The market has rallied since September and overall investor sentiment seems to be improving. Would this arrest the fall in equity fund folios and ease redemption pressure?
Investors are looking at the current market rally as a profit booking opportunity, evident from the industry's loss of folio figures in the past couple of months. However, as observed historically, a sustained rally in equities instills confidence in retail investors to come back to the markets. A reduction in interest rates in the economy will give a boost to investment in equities.

What is your view on growth prospects for mutual funds, considering the recent policy measures announced?
The recent measures will prove a watershed moment for MFs. The size of the sector in terms of investor folios is abysmal as compared to the potential. The policy announcements are in the direction of addressing these issues by way of geographical market penetration beyond the top 15 cities and the thrust on investor education. There is no reason to believe the MF sector in India cannot grow manifold, with a large savings rate and perhaps the best demographic configuration in the world at this point in time.

Source: http://www.business-standard.com/india/news/liquiditydeveloped-nations-may-flow-into-emerging-markets-sanjay-sachdev/491401/

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'I made my money by selling too soon.'

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

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HSBC moves to stop mis-selling

Statement comes in response to a report saying it has suspended selling mutual fund, insurance products in India

Hongkong and Shanghai Banking Corp. Ltd (HSBC) has denied a media report that said it has suspended selling mutual fund and insurance products in India.

"We have not stopped or suspended any of our offerings and we continue to provide a range of insurance and investment solutions, including a select range of mutual funds and insurance products", HSBC said in a statement issued on Saturday in Mumbai.

The statement comes in the wake of a news story published in The Economic Times on 3 November that said: "HSBC has stopped selling insurance and mutual fund products in India. Amid mounting allegations of mis-selling and certain sharp practices, the London headquarters of the British bank, which carried out a "culture audit" of the Indian retail banking and wealth management practices, has ordered a suspension of sales."

The bank said it has been in the process of restructuring the consumer banking and wealth management business of its India operations. It had also decided to change its incentive practice for relationship managers to bring in more accountability and a customer focus.

According to people in HSBC familiar with the development, in keeping with the overall group's focus to move towards choosing the "advisory" model as against the "distributor" model , the bank appears to be on its way to choose the adviser model effective January 2013.

The Securities and Exchange Board of India's (Sebi) impending guidelines to regulate investment advisers and its road map asking distributors to choose to be an adviser or a distributor has given HSBC's plans a further push, it appears. Effective October 2012, the bank, one source adds, has moved to a "net sales" incentive system as against a "gross sales" incentive system. This means that instead of its sales staff focusing its targets based on the gross sales, the sales targets will now be fixed based on net sales. Net sales is gross sales less redemption. Focusing more on net sales keeps churning in check as higher the net sales (this will result in low redemptions), higher will the investment advisor's commission.

Additionally, their financial year ends in December. As the bank appears to have achieved its sales targets so far this year, the bank has absolved its relationship managers of any targets (and thereby commissions) for the months of November and December. All this has led to, what looks like, a slowdown in its sales activities. The bank, one person said, will communicate the change in its policies to its investors shortly.

Commissions earned by banks and sharp selling practices by banks have been in focus over the past few years since the bank staff selling insurance and mutual fund products fall into a regulatory crack. Though the bank is regulated by the Reserve Bank of India (RBI), the products that the banks sell—mutual funds and insurance—are regulated by two different regulators. RBI has till now taken a hands-off approach to the sales practices of banks of these products and left it to the individual regulators to handle.

Increased disclosure requirements, especially from capital market regulator Sebi, has put into focus the income earned by commissions by banks. In 2011-12 for example, banks formed seven of the top 10 mutual fund distributors by commission earned. HSBC, in fact, was at the top of the list, earning just over Rs.153 crore in mutual fund commissions in 2011-12. During this year, some top distributors' commissions went up by 20-40%. However, according to data from Computer Age Management Systems (Cams, one of India's largest registrars and transfer agents), for the mutual fund houses that it services, private sector banks (including foreign sector banks) saw a net outflow of equity funds to the tune of Rs.174.6 crore. Private and foreign banks are among the most dominant in the distribution force.

Source: http://www.livemint.com/Companies/9PLRTXzFis7tj97bzU3jaJ/HSBC-moves-to-stop-misselling.html

Should you opt for passive or active funds?

Morningstar Investment Conference on day one sees debate on active, passive funds

That actively-managed mutual fund (MF) schemes can be more volatile than index funds is well known. But while actively-managed funds are designed to outperform their benchmark indices (and also underperform if the fund is not well-managed), passively-managed funds are designed to give more consistency, in the sense that they mimic market returns. So should you opt for higher returns (and higher risk) or stable returns (with no fund manager risk)?

The debate continued on 1 November at the Morningstar Investment Conference 2012, a two-day event held in Mumbai. One of the panel discussions debated on whether investors should choose active or passive funds. While the panellists argued their cases, the more interesting points—or questions—came from the audience. Here's a sample.

Fund manager churn

A member of the audience asked how could fund managers ensure consistency in long-term returns when fund managers themselves change.

He had a point. Changes in fund management are common. Sometimes, fund managers change before they complete three years—the minimum tenor for which investors are usually advised to stay in equities. For instance, Soumendra Nath Lahiri was the equity fund manager in Canara Robeco Asset Management Co. Ltd for only about 18 months, when he quit to join L&T Asset Management Co. Ltd. Harsha Upadhyaya, head (equities), Kotak Mahindra Asset Management Co. Ltd worked at DSP BlackRock Investment Managers Ltd for just under a year through 2011-12. Ravi Gopalakrishnan, head (equities), Canara Robeco Asset Management Co. Ltd worked at Pramerica Asset Managers Ltd as its chief investment officer for just under three years.

"To navigate the Indian markets successfully, you need a very good top-down understanding of the markets and for that you need the right kind of people at the job," said Grant Kennaway, head (fund research), Asia Pacific, Morningstar, Inc. Kennaway moderated this panel discussion.

One way to tackle the churn, say fund houses, and to ensure that a fund's continuity does not get hampered by its fund manager moving out, is to put processes in place. While stock picking is and will remain a personalized skill, some fund houses put risk mitigation steps in place to ensure that the new fund manager doesn't change a scheme's track, drastically. "While the risk of a fund manager quitting is there, if we put certain processes in place, the scheme's character is maintained, by and large," said Sandesh Kirkire, chief executive officer, Kotak Mahindra Asset Management Co. Ltd, one of the panellists.

While actively-managed funds carry fund manager's risk—not just on the stock and sector selection, but also the risk of the manager quitting—passively-managed funds don't come with such risks. Passively-managed funds, such as index funds and exchange-traded funds (ETFs), invest in all the companies, and in exactly the same proportion, that are there in the benchmark index they track.

Long-term alpha is zero

Another member of the audience questioned a panellist's suggestion (who was supporting actively-managed funds) that actively-managed funds outperform passively-managed funds in the long run. The question: in the long-term, the alpha (the degree of outperformance caused by the fund manager's expertise over and above his benchmark index) for active funds is zero. "While that may be true if you stay invested till infinity, the fact is that investors also don't stay invested till infinity," said Kirkire. Countered Rajiv Anand, CEO, Axis Asset Management Co. Ltd, another panellist, "The fact is that in the past 10 years, 60-70% of the funds have outperformed their benchmarks."

One of the aspects that favour passively-managed funds is costs. While index funds can charge a maximum of 1.5% of fees from investors on an annual basis, costs in actively-managed funds can go up to 2.7-3%. Says Sanjiv Shah, co-CEO, Goldman Sachs Asset Management (India) Ltd: "High costs eat up returns in the long-run. ETFs have a low-cost structure because they are passively-managed."

What should you do?

While one passively-managed fund is seldom different from another passively-managed one (if they track the same benchmark index), active funds have their share of good and bad performers.

If you're starting out afresh in MFs, stick to funds that come with a track record and whose management philosophies give you comfort. But if you wish to avoid the fund manager's risk and keep your costs in check, opt for passively-managed funds like ETFs.

Morningstar Investment Conference on day one sees debated on the pros and cons of actively-managed and passively-managed funds

Source: http://www.livemint.com/Money/FbvPwGe5saxyAMF65ayCKL/Should-you-opt-for-passive-or-active-funds.html

Wednesday, October 31, 2012

Mutual fund distributor reg fees cut 80%

Taking forward the steps initiated by the government and the market regulator Sebi to revive mutual fund investments, fund houses have slashed the distributor registration fees by up to 80 per cent to boost their sales.

The revised registration fees, which mutual fund (MFs) industry body AMFI (Association of Mutual Funds in India) charges to the MF distributors, would be effective from November 1.

Besides, AMFI has also announced a small registration fee of Rs 3,000 for a newly created cadre of distributors, which includes retired government employees, teachers and bankers.

The Securities and Exchange Board of India (Sebi), which regulates mutual funds and other segments of capital markets, recently announced a slew of measures for benefit of mutual fund industry, including provision for a new distributor cadre and incentives for reaching out to smaller cities.

The government has also favoured steps for encouraging investors to put their money in mutual funds, equity and insurance products, rather than in idle assets like gold.

As per the regulations, all mutual fund distributors are required to get registered with AMFI and get an ARN (AMFI Registration Number) for selling MF products.

"The revised fees will be effective from November 1, 2012 and shall be made applicable to those distributors who apply for fresh registration on or after November 1, 2012 and to the existing ARN holders whose ARNs are falling due for renewal on or after November 1, 2012," AMFI said in a circular.

As per the revised structure, the ARN fees for NBFCs have seen the biggest decline of 80 per cent to Rs one lakh (from Rs five lakh earlier), while fees for proprietary firms have also been slashed considerably from Rs 10,000 to Rs 3,000.

The fees for individuals and senior citizens have been lowered from Rs 5,000 to Rs 3,000.

A similar fee of Rs 3,000 would apply to the newly approved distributor class comprising of postal agents, retired teachers, retired government and semi-government officials, retired bank officers and other similar persons with a service of at least ten years in their organisations.

AMFI further said that the "fees for renewal of ARN will be 50 per cent of the fees payable for fresh registration under respective category of distributors".

ARN is allotted to individual agents, brokers, and other intermediaries engaged in selling mutual funds after they pass the AMFI/NISM (National Institute of Securities Market) certification test. Besides, AMFI also allots ARNs to corporates engaged in business of selling mutual funds.

The ARNs allotted to mutual fund distributors are valid for a period of three years and need to be renewed thereafter.

Source: http://www.financialexpress.com/news/mutual-fund-distributor-reg-fees-cut-80-/1024051/0

Tuesday, October 30, 2012

RBI keeps repo rate unchanged, cuts CRR by 25 bps

The Reserve Bank of India on Tuesday left its key policy rate unchanged in its second quarter (July-September) monetary policy. However, it cut cash reserve ratio by 25 basis points to 4.25%. CRR is the portion of deposits banks are mandated to keep with the RBI.

With the CRR cut, the central bank will infuse Rs 17,500 crore liquidity into the system. Repo, the policy rate at which banks borrow money from the regulator remains at 8% while reverse repo, used to lend money to RBI is at 7%.

"The reduction in the CRR is intended to pre-empt a prospective tightening of liquidity conditions, thereby keeping liquidity comfortable to support growth," D. Subbarao, the governor of RBI said in a statement.

"It anticipates the projected inflation trajectory which indicates a rise in inflation before easing in the last quarter. While risks to this trajectory remain, the baseline scenario suggests a reasonable likelihood of further policy easing in the fourth quarter of 2012-13. The above policy guidance will, however, be conditioned by the evolving growth-inflation dynamic."

Source: http://www.moneycontrol.com/news/economy/rbi-keeps-repo-rate-unchanged-cuts-crr-by-25-bps_774839.html

Thursday, October 25, 2012

Investors using rally as a profit-booking opportunity: Sanjay Sachdev

Q&A: President & CEO, Tata Mutual Fund, says a cut in interest rates will further boost euity investments

While on one hand the markets have cheered the key economic developments and policy initiatives, there has been a steady rise in the closure of equity fund folios in 2012. A sustained rally in equities instils confidence in retail investors to come back to markets, says Sanjay Sachdev, President and CEO, Tata Mutual Fund in conversation with Puneet Wadhwa. A reduction in interest rates in the economy will further give a boost to investment in equities, he adds. Edited excerpts:

How do you see the markets panning out given the political uncertainty we are going through? What would be the worst case scenario for the markets if there are early elections?
Political uncertainty exists. However, recent moves by the European Central Bank (ECB) and US Fed have substantially reduced the risk premium for equity investors across the globe. Thus, the liquidity generated by the central banks in developed markets is likely to find shelter in emerging market (EM) equity.

Within EMs, India currently has an advantage over China, as the Chinese economy is slowing down. Also, in India the recent policy announcements have not been rolled back. This, coupled with strong pick up in monsoon in August and September 12, has considerably reduced the downside risk to India's GDP growth rates. Thus political uncertainty alone would have a limited impact on equity markets, if global liquidity and economic growth scenarios remain at current levels.

Do you think that the focus will now shift to developments at the domestic level as compared to what is happening globally?
It would be wrong to say that domestic developments did not impact Indian equity markets earlier. In fact, India's relative underperformance in CY11 vis-à-vis other EMs was partly due to its domestic developments such as low investments and high fiscal and current account deficits.

Recent policy initiatives by Indian Government suggest that policy is moving in the right direction. If we continue to take rational economic decisions and improve the share of investment in our GDP, our markets will be less impacted by global events.

What are your earnings estimates for India Inc for FY13 and FY14? Have the overall estimates and any sectors in particular seen an upward/downward revision?
We expect Sensex EPS to be Rs 1,210 for FY13 and Rs 1,385 for FY14, a growth of about 14 per cent in FY14 over FY13. The important thing to note is that the pace of EPS downgrades, which was very high till March 12, has significantly come off now. Thus the downgrade cycle is bottoming out.

For FY14, we feel that secular growth sectors such as financials, consumer, pharma will continue to have decent growth. We can see a strong bounce back in growth in interest rate sensitive sectors such as autos, consumer discretionary etc. Also, if policy environment improves further, we can see upgrades in earnings.

The last time we spoke in May, you were underweight on public sector banks, global cyclicals, such as metals and refining and petchem. How has this strategy paid off and has this view changed now?
We are still underweight on global cyclical such as metals and refining and petchem. We feel that global growth in CY13/FY14 will be more muted. Our key overweights are auto and auto ancillaries, media and pharma. In other sectors we are more neutral and prefer to take a more stock specific approach.

Cement, Pharmaceutical and the FMCG sector stocks seem to be defying gravity. What's your call on these three spaces?
Cement has seen strong earnings growth with both volume and margins improving. If investment cycle picks up, cement will be a beneficiary. Pharma and FMCG sectors are secular growth sectors with high ROEs and healthy cash generation. Their valuations are unlikely to come down in a hurry. For pharma sector however, the pricing policy in domestic markets can be a near term headwind.

The market has rallied since September and the overall investor sentiment seems to be improving. Do you think that this can arrest the fall seen in equity fund folios and ease out the redemption pressure?
Investors are looking at the current market rally as a profit booking opportunity, which is evident from the industry's loss of folios figures in last couple of months. However, as observed historically, a sustained rally in equities instils confidence in retail investors to come back to markets. A reduction in interest rates in the economy will further give a boost to investment in equities.

What is your view about the growth prospects for the mutual fund industry considering the recent policy measures that have been announced?
The recent policy measures will prove to be a watershed moment for the mutual fund industry. The size of the industry – in terms of investor folios – is abysmal as compared to its potential. The policy announcements are in the direction of addressing these issues by way of geographical market penetration beyond the top 15 cities and the thrust on investor education.

There is no reason to believe why the mutual fund industry in India cannot growth manifold hereon with a large savings rate and perhaps the best demographic configuration in the world at this point in time.

Source: http://business-standard.com/india/news/investors-using-rally-asprofit-booking-opportunity-sanjay-sachdev/192801/on

Friday, October 19, 2012

US co Principal sets up arm ahead of pension reforms

Principal Financial, a US pension group, has set up a wholly-owned subsidiary ahead of the opening of the pension sector in India. The subsidiary company will train independent advisers to provide retirement savings advice.

"The Indian middle class is expected to treble to 500 million by 2025, and people will realize that government pension programmes will not be enough for retirement and they will have to take personal responsibility for saving for retirement age. We see huge opportunity in retirement savings," said Ned Burmeister, senior vice-president & COO, Principal International Inc.

The new company - Principal Retirement Advisors - is headquartered in Mumbai and has offices in Delhi, Bangalore, Pune and Hyderabad with immediate plans to expand to six more cities. It will be led by Sudipto Roy, former business head of Principal Mutual Fund. The advisers would work for a fee and would not accept any commission from any financial service provider.

Principal has evinced interest in the pension segment ever since the IRDA Act was passed more than a decade ago.

The $367.1-billion company has steadfastly focused on the pension segment and has a mutual fund company Principal PNB Asset Management.

He added that mandatory programmes do not provide more than one third income replacement after retirement. "Principal Retirement Advisors will have a network of advisers heavily trained and certified who will meet customers and help them find their goals and then with an emphasis on retirement and other lifestage goals, come up with an investment plan to achieve the goals," said Burmeister. He added that the advisers would use Principal's proprietary software to come up with the right asset allocation over the years.

Source: http://timesofindia.indiatimes.com/business/india-business/US-co-Principal-sets-up-arm-ahead-of-pension-reforms/articleshow/16844813.cms