Judge a fund by returns generated, not by what cos it has invested in
One of the mysteries of evaluating the performance of equity funds is that the portfolios of funds that performed poorly often look the same as those of funds that have performed well.
To see what I mean, go to ValueResearchOnline .com, and open the list of funds of any equity category. Sort the category by long-term performance , say five or seven or even 10 years.
Now, take a look at the detailed portfolio of some of the funds at the top and some at the bottom. Not counting the funds that follow a particular theme of investing, you’ll see roughly the same stocks in almost same order. While these are only the latest portfolios, this trend also holds over the long term.
Recognising this phenomenon and understanding it is actually far more important than it seems. The reason has something to do with the way in which many investors choose mutual funds. There are many ways of deciding whether a particular equity fund is good enough to invest in, but one of the least useful is to base your decision on what stocks that fund is currently invested in.
Sadly, this approach is particularly common among fund analysts of fund distribution businesses run by broking houses. Their approach seems to be that since they know best which stocks are worth buying and which are not, the right way to recommend or reject a fund is to look at its portfolio and see whether the stocks it holds currently are part of the broking house’s current buy list.
Typically, the train of thought goes like this: “The top two stocks that this fund is holding are SBI and Infosys. Neither is on our stock analysts’ buy list right now, so this fund is not investment-worthy .” This completely ignores that a mutual fund is a portfolio of stocks.
Most funds have a portfolio that is constructed with some underlying logic with regard to industry, sector, capitalisation and other factors. The portfolio has a history and is quite possible on its way from one place to another, in the sense that at any time, a fund manager has a view as to what was good in the past and what will be good in the future and is transitioning from one to another.
The similarity between good and bad portfolios that is so noticeable is a clue to this. Depending on how a fund manager manages the interplay of these factors and whether his views evolve in sync with the reality, a portfolio selecting from the same pool of stocks can be at the top or the bottom, as has been the case for so many funds.
The most important input in analysing a fund is the returns that it has generated for investors, in comparison to the benchmarks and its peers.
The only role that its stock holdings play is to enable analysts to choose the correct peer set for such comparisons, and to draw some conclusions about the location of a fund on the risk-vs-rewards spectrum. However, these are all done by looking at a fund’s stocks in aggregate. The idea of individual stocks being go/no-go investment decisions for a fund is simply absurd.
MFs offer crop funds for high yields
MUMBAI: The possibility of unexciting returns on bond funds is prompting some investors to park their money in funds that invest in special credit opportunities. Credit opportunities funds, or crop funds, are structured to deliver higher returns by taking exposure to relatively low-rated, but high-yield bonds.
While crop funds are increasingly becoming popular among investors, some of the conservative market experts fear a deep credit squeeze or a string of payment defaults could result in loss of investments.
Currently fund houses like Templeton, DWS, Reliance Mutual, Religare Mutual and Kotak Mutual Fund have crop funds with varying investment styles and structures.
“Such schemes could be appropriate for investors who are looking for higher yields by taking on additional risk,” says Maneesh Kumar, managing director, Burgeon Wealth Advisors.
“There are good quality papers that can provide juicy yields; but then, the characteristics of a generic credit opportunity fund include leverage, securitization of debt, capability to short (sell) and partially-disclosed portfolios,” Mr Kumar adds.
However, crop funds are not meant for investors whose risk profile is low.
Says Anil Rego, CEO, Right Horizons Wealth, “One should also restrict the amount one invests in such funds to not more than 25% of the overall portfolio,” Mr Rego adds.
Credit opportunity funds first caught the fancy of investors in mid-2009 when yield spreads (the difference in yields between benchmark sovereign paper and corporate bonds) widened to between 200-300 basis points. The credit market presented an attractive risk-return profile as even good companies found it difficult to raise debt. This led to crop funds becoming the fastest-growing category within debt mutual fund schemes.
Though short-term yields have softened, crop funds continue to offer returns that are 75-125 bps higher than liquid plus schemes which currently yield 4-5%.
While the return profile is attractive, credit opportunities funds are causing heartburn to risk-averse investors and conventional fund experts. According to wealth managers, investing in unrated or low-rated papers is fraught with risks.
In the event of a liquidity crunch or unforeseen redemption, fund managers will find it difficult to sell the papers or may have to do so at deep discounts, say experts.
While fund managers running crop funds agree to the inherent risks in these funds, they argue that a short-term debt fund has the same risk traits as a ‘crop fund’.
“We only invest in papers of good quality companies. For sure, risk in a crop fund could be marginally higher than a liquid plus or short-term bond fund; but then, these funds take adequate care to secure investment portfolios,” said Ashish Nigam, head, fixed income, Religare Mutual Fund, which runs a Rs 2,000-crore crop fund.
Fund managers claim to have a series of checks and balance in place for managing crop funds. Proper due diligence of the paper issuer, lower investment ticket sizes (to negate bulk redemption risk), portfolios with shorter average maturity duration and restricted use of unsecured debt wraps (pass through certificates etc) top the risk check list.
“The credit quality of the portfolio will not be diluted. We’ll just exploit the mis-pricing in different debt instruments,” says Lakshmi Iyer, head (fixed income & product), Kotak Mutual Fund, which is currently raising initial investments for its Credit Opportunities Fund. According to Ms Iyer, Kotak’s crop fund will invest at least 35% of the corpus in papers with a maturity of less than one year. This will reduce volatility and provide higher liquidity in the portfolio, she adds.
Default risk is not high in low-rated papers (up to ‘AA’-rating) of quality companies. Liquidity cannot be guaranteed though, say debt raters.
“It is wrong to say low-rated papers are unsafe. We’ve not come across any major credit defaults in low-rated papers. Long-term investors should start looking at instruments below ‘AAA’ levels; investors would benefit from wider spreads in lower-rated papers,” said Tarun Bhatia, director, capital markets, Crisil Research.
The difference in yields (in normal terms) between a highest-rated corporate paper (AAA rated paper) and good-quality/low-rated paper could be between 125-300 bps.
MUMBAI: Domestic mutual funds appear to be bitten by the bug to launch schemes that invest in a mix of assets such as shares, fixed income instruments and gold. Funds are seeking to capitalise on a fad among some investors seeking to spread their money across assets outside equities, with stock valuations hovering around peak levels, according to industry officials and wealth managers.
Some fund houses have launched and others are proposing to launch products that invest in multiple assets. Religare Mutual Fund’s Monthly Income Plan (MIP) Plus, which will invest in gold, fixed income and shares, is open for subscription.
Axis Mutual Fund and Taurus Mutual Fund have filed with the Securities and Exchange Board of India (Sebi) to launch a similar fund. Benchmark Asset Management had launched such a product for its affluent clients a couple of months ago. Birla Mutual Fund is mulling the launch of a multi-asset product, but plans are yet to be formalised, said CEO, A Balasubramanian.
So far, mutual funds have launched schemes that invest in a mix of shares and fixed income instruments. The multi-asset product includes gold, which has been part of investors’ portfolios since the start of the bear phase because of its reputation of being a safe haven in times of turbulence.
Wealth managers said such multiasset product is best suited for the more conservative investors, who are nervous about the prospects of stocks, which have almost doubled since last March. “This may not be the best product to invest at this juncture because if the recent rebound is just the start of a long-term bull rally, this product could underperform equity funds,” said Ashish Kehair, headwealth management, ICICI Securities. “But in case there is further global crisis, this could be an ideal product.”
Industry officials said multi-asset products have gained popularity in Europe and the US since 2009 because of lack of confidence about equities.
Some wealth managers feel the product could find takers among retail investors, but is unlikely to strike a chord with “informed investors”. “It looks like a half-hearted attempt to get investors to diversify,” said Akhilesh Singh, MD & CEO of FCH Centrum Wealth Managers. “The informed investor would choose to put money into various assets separately, rather than club them into a single scheme,” he said.
On the face of it, it does not seem to be a tax-efficient product, as it will be taxed like a fixed income fund, said a head of portfolio management services of a domestic mutual fund.
IRDA to launch vehicle insurance tracking system
Hyderabad, May 2
The Insurance Regulatory and Development Authority (IRDA) will roll out a web-based system to track vehicle insurance status in a month's time.
“We will be launching the system formally from June 9.It will have a database of all the insured vehicles from across the country. The data will also be shared with the transport and police authorities in different States,” Mr A. Giridhar, Executive Director, IRDA, told Business Line here.
This implies that the Road Transport Authority (RTA) in every State will have access to the insurance status of different vehicles on the road.
In turn, they can launch a drive to track down challan defaulters. The benefit for insurance companies is that the centralised data will help them avoid duplications or multiple claims.
The system will make a big difference for the vehicle owners as well as general insurers, he said.
As all vehicles will now have to be insured, the premium per policy is likely to come down.
The third-party insurance procedure will now be efficient, especially for victims of hit-and-run cases.
The system may help reduce insurers' losses as these claims will be settled from a ‘Solatium Fund' now.
At present, the insurers pay for losses caused by the uninsured vehicles.
“More importantly, several insurers are also complaining of multiple claims in damage and theft cases. This can be brought down,” Mr Giridhar, said.
As the system will also have a database of insurance claims made/honoured, cases of bad or negligent driving can be ascertained by the insurers before deciding on the premium to be charged, he added.
As the data are to be shared with the transport authorities and the police, the new system will also help them verify the insurance status of any vehicle. At present, examining the hard copy of the insurance certificate is the only option available to them. The Web-based system will integrate up-to-date information gathered from general insurance companies.
This information will be made available to all stakeholders instantly. The submission of data by each underwriting office will be monitored on a daily basis and a report on the same will be generated, officials said.
Banks see rise in Casa share
Rising interest rates, revival in investment plans may reverse the trend.
Abundant liquidity in the system along with excess cash with companies and individuals have resulted in a build-up in current account and savings account (Casa) balances. But, bankers expect some pressure on the proportion of low-cost deposits to total deposits in the coming months, as companies start investing for capacity additions and the liquidity situation tightens.
With deposit rates going up, bankers also expect individuals to shift funds from Casa to term deposits. Also, if the Reserve Bank of India tightens liquidity aggressively, the demand for bulk deposits will be back.
The impact of falling deposit rates is visible in the overall numbers. The latest RBI numbers show that demand deposits, which are deposits with a term of less than a year, saw a 22.88 per cent increase during the last financial year. In contrast, time deposits, which have maturity of over one year, rose 16.23 per cent.
“While we will try to ensure that Casa stays around these levels, it is a tough task once investment picks up. But a larger branch network should help,” said an executive with a private bank.
Apart from companies, even individuals maintained higher cash balances, as there was uncertainty. What also helped matters was an increase in cash flows for sectors such as gems and jewellery and real estate.
Cash flows for these sectors were severely affected after the credit crisis intensified in September 2008. This affected the current account balances of many banks. From the second quarter of the last financial year, cash flows for these sectors revived.
Besides, banks also resorted to increasing the minimum balance required for savings bank accounts.
As a result of these multiple factors at work during the last financial year, players such as HDFC Bank saw the share of Casa touch the 50 per cent mark. The biggest gainer was ICICI Bank, which shed high-cost bulk deposits in favour of Casa balances during a period when it shrank its loan book. What also helped was an expansion of the branch network which helped it mop up over Rs 12,000 crore in savings account balances.
“We have focused on the capital market-related activities and commercial banking through the year. Those are the factors which have led to the increase in the current account level,” Rakesh Jha, deputy chief financial officer, ICICI Bank, told analysts last week.
HDFC Bank Executive Director Paresh Sukhtankar said that last year, the bank did not push term deposits due to sufficient liquidity. This year, however, the bank is looking to push Casa as well as term deposits.
Exceptions to the trend were Canara Bank, Dena and Corporation Bank, which have seen a decline in the share of Casa in total deposits (see table).
For other public sector banks, which have traditionally focused on Casa and other retail deposits, the increase in the share of Casa has been comparatively lower. “The smaller increase is because of the high base. Unlike the private players, the level of deposits with us is much higher. Besides, private players such as HDFC Bank are settlement banks for stock and commodity exchanges which also help them show a higher Casa percentage,” said a public sector bank executive.
Corporation Bank Chairman and Managing Director JM Garg said had it not been for a software glitch, the numbers would have been better.
Pave way for defined contribution pension scheme.
Bringing an end to long-drawn negotiations, the Indian Banks’ Association (IBA) on Tuesday signed a wage revision pact with nine bank unions, which will lead to an additional wage burden of Rs 5,200 crore for 46 banks.The revision will be effective retrospectively from November 2007 and will be effective for five years, benefiting 775,000 employees and officers.
The pact also gives an option of pension to existing employees who did not choose it earlier.
The All India Bank Employees Association (AIBEA) in a statement said 26 public sector banks would have to shell out Rs 4,816 crore additionally. Old private banks (12) and foreign banks (8) will shoulder a burden of Rs 400 crore. This increase represents 17.5 per cent of additional load on the wage bill as existed in March 2007.
Under the settlement, the pay of Scale I-VII officers will range from Rs 14,500 to Rs 52,000. From May 1, the scale for clerks will range from Rs 7,200 to Rs 24,900, and for subordinate staff, it will range from Rs 5,850 to Rs 11,350.
The deal also provides 260,000 existing employees and 50,000 retired personnel an option to join the existing Defined Benefit Pension Scheme in lieu of the contributory provident fund. Employees joining April 2010 onwards, would now be joining the Contributory Pension Scheme as available to government employees, the release said.
“We are sure this agreement on wage increases coupled with the long-awaited another option to join the existing pension scheme will bring relief to employees and would be a motivation to improve efficiency in our services to customers," Vishwas Utagi, secretary of AIBEA, said. The revision also covers those employees who have opted for the voluntary retirement scheme. The wage revision also enhances benefits such as house rent allowance, leave fare concession, reimbursement of hospitalisation, among others.
Retirement benefits such as gratuity and pension will also improve in line with higher pay scales.
Amfi asks fund houses to improve investor awareness
To attract more investment into mutual funds, the Association of Mutual Funds in India (Amfi) has asked the industry players to organise around 200 investor awareness programmes in a month.
"We have suggested individual members to organise four to five investor awareness programmes in a month to better reach out to the masses," Amfi chairman AP Kurian told PTI.Currently the MF industry has 36 active players and if they follow the suggestion, then there would be around 200 such programmes in the country in a month.
Amfi is the apex body of all the asset management companies (AMCs).
"Though these programmes would be conducted mostly in and around the metros, we also want to cover the non-investor community in the tier II and III cities and also districts," Kurian said.
The programme would be carried out under the Amfi banner and would be launched soon, as and when the fund houses come up with their plan, Kurian added.
Analysts said MFs is not the most preferred investment option among investors as most of them are not aware of the benefits and how to approach for such investments.
"Certain section of investors feel they can invest in MFs only through brokers. After the banning of entry load which reduced broker participation, inflows into equity schemes have come down which shows that less investor participation," Taurus Mutual Fund managing director RK Gupta said.
Following the Sebi ban on entry-load in August 2009, MF distributors found it unprofitable to continue the business. Before the ban, distributors were getting 2.5 per cent commission called entry-load on business generated by them from AMCs. After the ban, thet are not getting this commission from AMCs, but can still ask the investors to pay them for the advice or service rendered.
"Amfi is trying to educate investors that they can invest directly into the schemes online without brokers' help," Gupta added.
Retail and institutional investors will be treated alike in terms of bidding for shares in public offers from tomorrow, a move also likely to bring down the exorbitant levels of over subscriptions in the primary market.
A new directive from the market regulator Sebi is coming to effect from tomorrow as per which institutional investors will have to pay upfront 100 per cent money in primary issues, just like the retail investors.
Analysts have given mixed responses to how the new norm would impact the IPO subscriptions, at a time when the primary market is seeing a lot of activity.
"While this move may bring down subscription from IPOs, it should not affect recovery of the primary markets. Also, it is a means of encouraging greater accountability and reducing speculation, so it is desirable in the long run," financial research firm Celent senior analyst Anshuman Jaswal said.
"On a theoretical basis, it could impact subscription. But in reality, institutional players do not over trade, they apply only where they want to invest. So unless we have a clutch of issues clubbed together in the same timeframe, in reality it is unlikely to impact IPO subscription," HDFC Securities head (private broking and wealth management) Vinod Sharma said.
Earlier, QIBs were required to put only 10 per cent as margin money in public issues, while retail investors were putting the entire 100 per cent along with the applications.
"This move will provide incentive to the institutional investors to fine-tune their primary market participation and invest their funds more judiciously," Jaswal said.
Echoing the view, CNI Research Chairman and Managing Director Kishor P Ostwal said, "This will plug chances of manipulative excess or over subscription in a particular issue."
At present, three public issues are open for investors -- Jaypee Infratech, Tara Health Foods and state-run power producer Satluj Jal Vidyut Nigam Ltd.
Another move of the regulator coming into effect tomorrow is that the listing time for companies after the completion the initial public offer has been halved to 12 days.
Marketmen said the move would help rotate investors' money faster for possible deployment in other issues.
Sebi has also decided that reservation for employees in public/rights issues would be available to employees of subsidiaries and material associates of issuer whose financial statements are consolidated with the issuer's.
"This could be really helpful in case of IPO of PSU stocks especially, which are of late facing difficulty in getting 100 per cent subscriptions," Ostwal said.
Coimbatore, May 2
As Indian markets get integrated with global markets, many issues such as efficiency and cost of transaction and cost of raising capital are cropping up, said Mr C.B. Bhave, Chairman, SEBI.
The efforts of the stock market monitor are directed towards addressing such issues, he said on Friday in Coimbatore, where he attended a meeting, Capital Markets and Investor Protection, and interacted with the audience.
The SEBI chief said since the establishment of the board in 1992, the market has grown by 30 times – “quite a spectacular growth”.
Capital markets do not operate in a vacuum and the market's growth mirrored the growth of the economy. He said various products such as equity, futures and options on stocks and indices, currency derivatives were available and “we were talking about interest rate derivatives and currency options, providing for market's growth”.
Mr Bhave said the Indian market was getting more and more integrated with the rest of the world.
The fortunes of Indian companies having large exposure to foreign markets were influenced by economic developments abroad, which have an impact on the Indian shareholders. Indian interests in trading in different products that may have appeared earlier as irrelevant “is becoming more and more relevant”, he said.
SEBI has been working to make ready the rules and the legal framework for Indian Depository Receipts so that foreign companies can raise capital here. Earlier, no foreign company was interested in raising capital in India. But the first prospectus for raising capital by a foreign company has been filed by Standard Chartered Bank.
Foreign companies find that their base in India is big enough for them to have an “India presence” not just in terms of employees or equipment but in the minds of Indian investors as well. They want the “mind share of Indian investors”.
They also ask themselves why they should raise capital abroad for making investment in India, he said. They would also like to offer their staff ESOPs to retain talent, for which they need Indian shares, said Mr Bhave.
Because India is getting integrated with global economy and markets, many issues, which were not thought of earlier, are coming up, said the SEBI Chairman, describing the emerging situation as a great opportunity that “throws up its challenges as well”.
“As securities of foreign companies are traded in India, we will have to demonstrate that the efficiency and cost of transaction compared well with the exchanges outside.” Investors would also want to know the cost of raising capital.
If the system is not efficient, this movement would not grow. “If we want them (the markets) to grow, we have to make sure that we pay attention to issues like efficiency and cost. We are extremely conscious of the fact that we need to reduce the cost of transactions and increase the efficiency of the markets.”
Mr Bhave said India's T+2 settlement system existed only in five or six countries and it had proved its worth during volatile times. In an effort to replicate the efficiency of secondary markets in primary market operations, SEBI introduced Applications Supported by Blocked Amount so that the proportionate payment is debited from the account only after allotment.
He conceded that this system has not become “very successful” and was used typically by 20-25 per cent of investors due to reasons such as lack of awareness, as banks had “not made them available in as many branches as they should”, and as “vested interests have no interest in propagating this system”. SEBI was taking efforts to make the system popular.
Mr Bhave said SEBI had, to bring parity between individual and institutional investors applying in IPOs, mandated that from May 1 institutional investors must make full upfront payment at the time of applying for IPOs instead of paying just 10 per cent of the bid. He said SEBI had recovered from the perpetrators of the 2003-05 IPO scam Rs 25 crore and reallocated the money among 13 lakh investors of whom more than 8 lakh have received full payment.
The SEBI Chairman pointed out that a 100 per cent dividend for a share with face value of Rs 2 amounted to just Rs 2 a share and if the share was quoting at Rs 1,000 in the market, the return would be just 0.2 per cent on the investment. SEBI has told the companies that they should declare dividend on per share basis and not on percentage basis.
The event was jointly organised by the Coimbatore District Consumers Protective Council and the Coimbatore chapter of the Institute of Chartered Accountants of India, Institute of Company Secretaries of India and Institute of Cost and Works Accountants of India.
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