Time to evolve new MF investing styles

Just like the advent of the automobile changed the growth pattern of cities, the financial crisis of 2008 has, in all likelihood, changed the growth pattern of the world forever

I started the year wishing our markets a normal year, in the process hoping that this gives us the opportunity once again to believe that no one and nothing else but we ourselves control our destiny.

Just like the advent of the automobile changed the growth pattern of cities, the financial crisis of 2008 has, in all likelihood, changed the growth pattern of the world forever. The emerging world is the increasingly accepted new “growth” driver. And India is confidently ascending the charts in making realize that dream. And why not? With the second fastest capital market recovery worldwide in 2009, a largely social and risk-averse banking system that stayed virtually insulated from the profits-at-all-costs model of the West, a compelling gross domestic product growth forecast of 8.2% with an upward bias for 2010, a just-in stable majority government at the Centre, the overall feeling of economic optimism in India is justifiably at its peak.

We as Indians are sub-consciously beginning to feel that we have started to “regain” our pole position (acceded just 200 years ago to the West) of economic dominance of our planet. With that preamble, I am happy to argue that the start to 2010 for us asset managers has been healthy.

January was the first month since August to see positive net inflows in the industry. A forward looking strategic shift by the regulator towards greater transparency which banned commissions from asset management companies (AMCs) to distributors in August (possibly the first country to do so) with just 30 days given to change, did baffle both participants. But it seems that distributors have since recalibrated their business models and have begun to implement it in the new year.

Investors may just have started seeing and even liking the more “need-based” recommendations from their advisors. If this hypothesis is right, then 2010 will start a long-term journey towards higher retail participation and stickier assets, which, over time, is tremendously healthy for the growth and stability of our capital markets.

On the other hand, despite this major regulatory change, asset managers have chosen to continue to pay distributors (albeit lower) from their own pockets. A “rank” race among the bigger players has modelled this structural disconnect. It is unlikely that they will “decouple” from this habit this year. Rehabilitation may need up to two years. This will, in turn, shrink AMC profitability per dollar of assets in 2010. An unsuspecting causality will be advertisers, who will not see the mega marketing spends as a result.

Interestingly, this has still not deterred as many as 23 aspirant asset managers (global and local firms alike), who are eagerly waiting to start shop. Consolidation, hence, is inevitable. Besides, existing players may dilute ownership to raise capital as sponsors may not be that forthcoming. US-based T Rowe Price bought a 26% stake in January into India’s fourth largest asset manager. This trend is likely to gain momentum in 2010. This is healthy for long-term sustainable growth of the industry.

As for the Indian investor in 2010, or should I say starting 2010, I am hopeful that they will open up to “innovation” in investing styles. They seem ready for an “upgrade”. For 15 years, they have invested primarily with fundamental managers. To that, quantitative style of investing seems to have made a confident beginning. The argument for disciplined investing sans emotion has found feet. A handful of players have already or are set to launch products using quantitative styles.

Recent successes show that investors are likely to adopt these as much-needed compliments to their portfolios—slowly, but surely. Separately, there is a small undercurrent arguing for investing now in global markets. Multinational banks as thought leaders in advisory have in fact begun training and have tasked their teams to seed client portfolios with global products. The intention here is not to enhance returns but to demonstrate benefits in lowering risk from diversification. Over time, as investors adopt this logic, multinational AMCs will benefit faster than those who stay local.

It is often said that time is a dressmaker specializing in alterations. We will have to adapt to the evolving view rather than work towards one that is preconceived. That is the new future.

Navin Suri is managing director and CEO, ING Investment Management India.

Source:http://www.livemint.com/2010/05/19215308/Time-to-evolve-new-MF-investin.html

Surprise: MIPs raked in big bucks since August

“Sebi killed the mutual fund,” fund houses would have us believe, off the record.

Can’t grudge them that.

After all, since August 1, 2010, when the no-entry-load regime took effect, equity mutual funds have seen an outflow of Rs 7,970 crore, with monthly redemptions far exceeding inflows on seven out of nine occasions.

“No commissions on offer, so agents are not selling,” goes the industry refrain.

But if this was indeed true, how come the monthly income plans (MIPs) offered by the same mutual funds have been selling like hot cakes?

As on July 31, 2009, the assets under management of 41 MIPs stood at Rs 4,832 crore.

That’s up a whopping Rs 12,425 crore from Rs 17,257 crore on April 30, 2010, the last time the numbers were declared. Take out the Rs 425 crore or so generated as returns and MIPs have still seen an inflow of around Rs 12,000 crore since the MF industry went no-load.

MIPs are hybrid investment products that invest the bulk of their assets (75-95%) in debt and money market instruments and the balance in equities.

The debt investments ensure stability and consistency, while the equity portion boosts the returns.

These funds are suited for conservative investors who are looking

for slightly better returns than bank fixed deposits or pure debt fund offerings. The name MIP, though, is a misnomer because these plans do not guarantee a monthly income and it is merely a hangover from the days of the assured-return schemes offered by the erstwhile Unit Trust of India.

“The returns last year have been good in these hybrid products, aided by equity markets’ surge. This back-view mirror approach has prompted many of the retail investors and HNIs to go for MIPs,” said Surajit Misra, executive vice president & national head - mutual funds, Bajaj Capital.

“MIPs have seen favour with investors as they offer a little more than normal debt or fixed income products because of addition of equity component, which may give higher returns in favorable market conditions. At the same time, lower equity exposure prevents capital erosion in uncertain times” said Satyabrata Mohanty, head - mixed asset investment, Birla Sunlife Mutual Fund.

With equities at the upper end of valuations and future short-term

performance uncertain, investors have lately been cautious in investing in pure equity schemes.

“Investors are wary of investing in pure equity products because of extreme choppiness in the markets after they ran up too fast. The MIPs offer capital protection in terms of investing in short-term debt instruments, which give 6-7% kind of annual returns,” said Ritesh Jain, head - fixed income, Canara Robecco.

MIPs have given an average return of 11% over the last one year, as on May 14, 2010. During the same period, fixed deposits (FDs) have given a return of around 7-8% before tax. The post-tax return on FDs would thus be even lesser.

In case of MIPs, the long-term capital gain (for any holding of one year or more) is taxed at the rate of 10% without indexation or 20% with indexation, whichever is higher. Indexation allows the investor to take inflation into account while calculating his cost of purchase. This ensures that the post-tax return of MIPs is around 8%, whereas the post-tax return of an FD for an investor in the 30% tax bracket would be around 5-5.5%.

Going forward, experts believe that with the equity markets remaining volatile and interest rates rising, the returns on MIPs may reduce to more normal historical levels of around 8%.

“The rising interest rates would affect the debt investment returns. The best part for these MIPs seems to be over and the inflows may slow down in next 2-3 months. Investors with horizons of 2-3 years can expect to receive 8-10% returns hereon,” said Misra.

The key takeaway, however, is that mutual funds have been able to push MIPs even without entry loads. So, when the time is right, they may be able to push equity funds, too.

Source: http://www.dnaindia.com/money/report_surprise-mips-raked-in-big-bucks-since-august_1385214

Canara Robeco launches InDiGo Fund

Canara Robeco Asset Management Company today announced the launch of its Canara Robeco InDiGo Fund, an open-end debt scheme.

The objective of this fund is to generate income from a portfolio constituted of debt and money-market securities along with investments in gold ETFs, a press release issued here stated.

The new fund offer is open for subscription from May 19 and will close on June 10, the release said.

The scheme will invest a minimum of 65% and a maximum of 90% in Indian debt and money market instruments, a minimum of 10 per cent and a maximum of 35% in gold ETFs.

Ritesh Jain, Head-Fixed Income is the fund manager for this scheme.

Canara Robeco AMC's CEO, Rajnish Narula, said that "Canara Robeco InDiGo Fund focuses on gold...it keeps the purchasing power intact, protects against weakening of the US Dollar, less volatile than equities and valued as a savings/investment tool."

"The combination of fixed income and gold aims to provide enhanced yield without additional duration/credit risk," he added.

Source: http://www.dnaindia.com/money/report_canara-robeco-launches-indigo-fund_1384973