Monday, December 27, 2010

We constantly strive to stay ahead of the curve

Kenneth Andrade was recently voted among the top 3 equity fund managers and his flagship fund - IDFC Premier Equity Fund was also voted among the top 3 equity funds in the recently concluded Wealth Forum AMC Awards 2010. Kenneth gives us his perspective on markets, his views on key sectors and on how he manages to outperform benchmarks and many peers in a highly competitive market.

WF: The Indian market is now underperforming developed markets - quite the reverse of the de-coupling theory that we all keep talking about ! What has led to this situation?

Kenneth: I think it is related to both the external environment and the internal environment. The internal dynamics have been affected on a couple of fronts - one, regulators of virtually every industry have opined how the industry should not cartelize their products in line with the demand. Second are corporate governance issues with various personnel of companies involved; the law has stepped in and this has caused a bit of uncertainty. All the same, the problem is not systemic and I would not expect it to have a very long term effect.

Externally we are close to the year end. Fund activity worldwide is pretty muted at this time. Also, this year India received a disproportionate amount of money amongst all emerging markets. So I would imagine that the liquidity flows will take a small break, at least for the year ending. I don't believe we will see the same thing happen in 2011.

WF: In terms of domestic growth data, some analysts are worried about the choppiness in the data and the robustness of the growth. Is there anything in the data points that are coming out which leads you to worry about the earnings for next year?

Kenneth: The domestic economy should be seen in three parts. One is the export sector where the robustness of the business comes from the advantage of cost. There is nothing very disturbing in that part of the economy, though international capex spends are going to be a significant driver on how this business evolves.

Then there is the investment economy that was the darling of the capital markets until o 2007. The 2007 peak had multiple companies investing into that entire segment and to a very large extent created reasonable amount of capacity and in some businesses, like cement, it created an overcapacity. That part of the economy is still grappling with lack of demand. Projections indicate that in 2011 and 2012 there will be a return to the investment cycle. However, the choppiness in those numbers is posing as an area of concern for the capital markets, which has garnered a significant amount of assets and had taken on significant debt.

The third leg is the consumer economy, where an incremental amount of disposable income is effectively driving the demand of that market. This part of the economy continues to grow very well.

Thus, within two of the three areas, the outlook seems reasonably robust. Admittedly, a lot of it is being supported by the government. The area for concern is the investment economy which needs significant amount of money to be injected for India to continue to grow at 8% - 9%. There is lumpiness in that part of the market. I would imagine that 2011 and 2012 are very critical for the economy as a whole and this part of the entire environment has to come back.

WF: The muted order flows in infrastructure disappointed many. With 100 thousand rupee crores raised from 3G and more, what do you think has held back the Government and therefore what is the confidence level that come January and 2011 the outlook will be more positive?

Kenneth: The Government budgetary allocations were focused on three main expenditure sectors - infrastructure being the largest, the next was defense and lastly the social environment which includes NREGA and the food subsidy. The infrastructure spend did not really happen. Social spend had a lot of money effectively transitioning into the wider population. The Government emphasis appears to be bringing more people into the earnings cycle, even it means subsidising the entire regime. Hence consumption continues unabated, not only in India but also in China. China has a 30% wage inflation rate with no Government intervention. It means that the entire emerging market basket, of which India and China are the largest, have moved towards the domestic consumer environment rather than focusing too much on exports. That's where the money is going.

At the other extreme, 2011 and 2012 will be critical for India in terms of getting investment infrastructure on the ground, because that will create an environment conducive to manufacturing which, will in turn, create a the right logistics for increase in employment. That will sustain the 8 or 9% growth. We will have to wait and watch.

WF: From your perspective, would infrastructure rate as a buy now in the midst of this bad news and uncertainity or would you stay on the sidelines for more clarity to emerge?

Kenneth: We think that valuations are coming to a price point which is becoming attractive. To us infrastructure is more about consolidation than growth. Therefore, if I had to an infrastructure product together, I would look to lead with companies with a monopoly - basically utilities - which is where the best money is. Rather than playing asset growth, reduction in liabilities would deliver stock performance. If corporate interest rates drop from today's 10% to 6 ½ % in the next three years, there will be a transfer of wealth from bond holders to equity holders. So that is the first ladder. The second leg is consolidation in an interest rate environment where you have easy money. In an environment of overcapacity and stressed assets, consolidation would come from a company with low debt on its book and is a market share leader in its field. The third leg, when the environment of growth comes in, will be the icing on the cake. We plan to build our infrastructure based on these principles in the next 2 to 4 years.

WF: The banking sector has gone from being a favourite to a perceived liability with many saying that the fundamentals have deteriorated in the last couple of months. There has been a significant sell-out of banks in recent weeks. What do you make out of the banking space and what is your stance on the same?

Kenneth: Yes banking was a favourite due to low valuations, high ROE differences and great capital efficiency - probably one of the most capital efficient banks across the world. But the challenges that banks face are high interest rates, slow increase in credit growth and slow down of deposit growth rates. While the larger banks are significantly ahead of the curve in terms of reach and getting cheap mobilization of money, the smaller banks have struggled but they will also effectively catch up. The sector is going through a cyclical downturn. One needs to factor in the fact that none of these banks are trading at a significant premium to their peer growth. Banking has 26% of the market capitalization and is attracting a significant, if not a disproportionate share of the liquidity - and will continue to do so. So I would not write it off. We are fairly neutral on this sector and have never been underweight.

WF: Recent developments have also seen a turn in sentiment towards mid and small caps with huge sell offs in the recent weeks. Do you think they represent attractive value or would you be cautious because of the current situation?

Kenneth: While the corporate governance issue will always remain, one has seen some of the best businesses come from this place. Also, there are enough ambitious entrepreneurs who do things differently and move things right. Our focus is to capture the growth cycle forward rather than capturing valuations. In our domestic driven consumer economy there are enough such growth opportunities available.

With mid caps, the last rally occurred in 2007, predominantly in the small commodity and the small capital goods space. None of them came back, but the mid cap index came back. So you basically shifted investment from one segment of the market to another which has driven the indices back up. So I think this is the way to gain exposure to the smaller end of the market.

Our focus has always been to capture the growth of an entrepreneur who starts off as number nine in the industry and ends up being in number one or two or three.

WF: Moving on to a slightly broader market issue, some technical analysts have been predicting the end of the bull market. What is your own prognosis for 2011 for the markets?

Kenneth: 2011 won't be anywhere close to 2010. You should get an absolute return - but the biggest risk is that we might actually get into an overvaluation zone.

As far as the economy is concerned, with the aid of political will, return to spending will be beneficial. We need to leave a lasting impression with assets on the ground rather than spends on the ground.

WF: Your flagship fund - the IDFC Premier Equity Fund - has caught the eye of many advisors. What are some of the factors that you believe have helped differentiate it and deliver in an extremely competitive equity funds market space? How are you currently positioning this fund?

Kenneth: We stuck to our philosophy of trying to be ahead of the curve and continue sifting through data to find opportunities which would be in line with what we believe would lead the market in the next rally. This means aligning with companies or entrepreneurs from the bottom of the pack that are cost leaders or thought leaders and who drive their business pretty high. Thus, we have aligned ourselves with some of the smartest businesses. And that's how we actually executed that product. We intend to stick with that investment approach. The challenge remains in the timing of the cycle - getting in too early is not good either.

Thematically we are still significantly consumer-oriented. Over the last month or so we are looking at consolidators in infrastructure space or the investment economy space. But it is still fairly early and were we to add infrastructure, it would be a small part of the portfolio. Overall, infrastructure would be 15% of the portfolio. Consumer driven stocks are around 55% of the portfolio. The balance is financials and export oriented companies.

Funds bet big on small and mid-cap schemes

The strong performance of schemes investing in mid- and small-cap shares between January and October has encouraged more mutual funds to seek regulatory approval to launch such products.

Fund houses anticipate that the superior returns from mid- and small-cap schemes compared to large-cap ones in the recent past may attract more money into such products, especially after the 20-25 % correction in these stocks.

Religare Mutual Fund , IDFC Mutual Fund and Axis Mutual Fund have filed offer documents with the Securities and Exchange Board of India (Sebi) to launch ‘mid- & small-cap fund’ , ‘small-cap equity fund’ and ‘ mid-cap fund’ , respectively. Motilal Oswal Asset Management has approached Sebi to launch a midcap ETF.

According to sources in distributor circles, Pramerica Mutual Fund and Peerless MF are also planning to apply for ‘low-cap’ funds over the next few weeks.

“Investment in mid-cap shares yields higher returns over a longer timeframe. If you take a 10-year period, mid-cap indices outperform key benchmarks by about 4-6 %,” said Nitin Rakesh, CEO & managing director, Motilal Oswal Asset Management Company .

Mid- and small-cap funds have returned 20% over the past one year. The BSE mid-cap and small-cap indices have returned about 15% in the period. Large-cap funds have fetched 16% returns in the period. But for the correction in November, returns from these schemes would have been higher as they fetched 75-100 % between January and October .

Fund managers consider the recent decline in mid- and small-cap stocks in the past two months as an opportunity to buy them cheaper .

“When compared to large-cap peers, there are several mid- and small-cap stocks that have relatively more upside to grow in value,” said the chief investment officer of a private mutual fund, adding, “In terms of earnings growth, several mid- and small-cap companies have beaten their larger peers.”

Fund managers rely on mid- and small-cap stocks to help their diversified equity schemes perform better than peers and the benchmark indices. This is because small- and mid-cap stocks are not as widely tracked as their largecap peers, enabling fund managers to buy them cheap. On the flip side, small and midcap stocks fall deeper and faster when broader markets are in a downtrend.

“Small and mid-cap stocks have fallen sharply over the past two months; this, in a way, could mean that small and mid-cap stocks could rally when broader markets break out the current range,” said Bharat Shah, head of institutional sales, Ventura Securities. “Now is the time for investors to buy mid and small-cap stocks. Investors in mid- & small-cap mutual funds will also benefit from a probable rise in overall markets,” Mr Shah added.

Source: http://economictimes.indiatimes.com/personal-finance/mutual-funds/mf-news/funds-bet-big-on-small-and-mid-cap-schemes/articleshow/7160460.cms

Stock markets are expected to yield 15-20 per cent over the next 2 years

CEO, L&T Mutual Fund Sanjay Sinha feels that Dr Bimal Jalan Committee has not found favour with the larger audience and that some way has to be found out. In conversation with Ritu Kant Ojha of The Indian Express, Sinha says that reasonable investment in the yield fund for the medium to long term horizon may make sense because the yield once they start coming down, hold promise of not only reasonable return but carry the scope of capital appreciation also. ‘Due to the tight liquidity situation, the short term rate are also at attractive levels and therefore locking your investments into FMPs may make a good investment choice’ he says. Excerpts

Last 2 years have been tough for Mutual Fund industry. Still we are seing more and more new entrants into the AMC business. What is the reason? What makes it so lucrative?

The ban on the entry load may have an impact in the medium and it is already showing in the growth of the industry in last 1 year. Mutual Funds as an investmetn product are one of the most cost effective vehicle for long term financial planning. This inherent virtue is slowly donning to a large universe of investors and we have therefore seen the number of SIPs growing from 30 lakhs in 2008 to 50 lakhs in 2010. This is a structural transformation and is expected to put the industry on a stronger foundation and is therefore likely to retain as well as attract the attention of those players who have a long term vision for the industry. But the challenge of distribution in the new environment has to be tackeled and the soluction will evolve over the next few months.

Source: http://www.indianexpress.com/news/stock-markets-are-expected-to-yield-1520-per-cent-over-the-next-2-years/729580/0

Financial literacy is the key to financial freedom

In an interview with Pooja Chopra Goel of Myiris.com, Hemant Beniwal, Director, Ark Financial Planners says, ``The onus of a successful financial advisory system lies in the hands of the people.


Can you tell us about `Ark Financial Planners` and its mission & services? What services do you offer?

Ark Financial Planners is a fee based financial planning firm which is serving Indian clients across the globe. Our more than 50% clients are NRIs. Our priority is to help clients achieve their goals. Not only fulfillment of their goals is our responsibility, but we also make sure that this entire process of managing wealth is independent, comprehensive and competent.


We ensure that our clients get an understanding of the investments and use resources in such a way that they get the most from their life stressing over financial matters. We focus upon comprehensive financial planning only as we believes that financial planning is the only way through which people can achieve their financial goals.

But recently we received lot of queries about single element planning so we have extended our services to - basic financial plan, retirement planning, investment planning, estate planning, mutual fund portfolio reviews and consulting. At Ark, we ensure that whole process is very interactive & learning so that client feels involved.

Can someone get hourly financial planning and tax advice to get a big picture? How do I know if the cost of financial planning is worth it for me?

Hourly financial planning consultancy is a very new concept in India. We live in a country where people think advice is a free gift and the price is always built in the product. We have recently added the only consultation (fee only) in our services and we are getting very positive response. Investors are sharing their concerns and find it a very satisfactory experience. Many investors who are using this service actually want a comprehensive financial planning service.


Cost of financial planning is definitely worth it; although it is a very big & subjective question. We are not dealing in tangible products so the client can`t see the outcome now. The plans that we makes are a road map for 40-50 years & don`t provide any instant gratifications. For making people understand its worth, we always tell them the likely outcome & show sample plans so that they can decide whether they want to get involved in this process or not.


But a big problem in Indian context is that the term `financial planning` & `financial planner` has been misused to sell financial products. Till now the planning part is completely overlooked and that has added to confusion. Clients must be willing to pay the fees for impartial advice, just the way they pay doctors for diagnosis. The onus of a successful financial advisory system lies in the hands of the people.

What information should one bring along to get maximum value for time spent with the planner?

Financial planning is all about achievement of one`s financial goals. So before a person reaches a planner he should ask himself: What are my financial and life goals? Where am I standing today in relation to my goals? How will I reach my goals from where I stand today? The best way I think is that he should write these questions and the answers on paper. He should also carry the supportive documents. I think this can become the foundation of client - planner relationship.


How would you suggest a common investor ensure that their accounts are protected and not invested in dubious instruments?

Mis-selling is making new peaks every year and for common investors it`s very tough to identify what is right or what is wrong. With the agents, even manufacturers are trying to milk naive investors. Best way is one should have a written financial plan .This helps in two ways. First is that your focus moves away from - ``What is new in the market?`` to ``Will this product be helpful to achieve my goals?`` Secondly, it will eliminate the risk of mis-selling as the advisor is giving recommendations in writing.


How many fund houses do you deal with? In which fund house do you have the maximum AUM (in terms of percentage)? Tell us your favorite all-time MF schemes and fund managers.

We don`t think this way. We deal with almost all mutual funds and financial products. But suggestion for product is according to the client`s need. In mutual funds, we have some good fund houses with consistent fund management but as such there is no favorite kind of thing. We have designed our internal fund selection criteria and once it matches to client`s objective we suggest a particular fund. For example, at times we say no to even Reliance Growth Fund - undoubtedly best performing fund till date, if it doesn`t fit in our scheme selection criteria.


Has the no-load regime affected your business?

Yes it has; but in positive way. This was a path breaking decision by the SEBI. It was very much required. Clients now know they have to pay for the advice but how much, is still a general question. Earlier in India fees for advice was an unheard word for clients. Once a person knows he has to pay, he starts looking for advisor who can guide him in a right way.

What three books related to personal finance would you recommend every person read and why?

I have read 100 plus books on personal finance & investments but there is no single book which I can recommend as `Nirvana`. And the problem is you hardly will find a good Indian book on this subject. Still if I have to recommend 3 books first will be - ``The Cash Flow Quadrant`` by Robert Kiyosaki. This book tells about difference between assets & liabilities and also tells how to manage your cash flow which is very important for any person to achieve his financial goals. This is a must read for everyone and will change the perception about money. Second will be - ``The Rule of Wealth`` by Richard Templar. This book talks about very simple but important concepts about money. Finally, here comes the investment bible - ``The Intelligent Investor`` by Benjamin Graham. Even Warren Buffett recommends this book by quoting, ``By far the best book on investing ever written``.


What is your take on current market situation? What are the key factors that will drive the stock markets in 2011? What is your advice to retail investors now?

We work on asset allocation model & hardly concentrate on day to day market ups and downs. Even we ask our clients to keep their eyes on goals rather than markets. Timing market or checking its direction is futile exercise which is not actually worth anyone`s time & energy. India is a growing economy and its equity markets can easily deliver 2-3 times of actual inflation figures in next 20 years. Equity gives returns in long term but will investor will be able to get it? Investor`s financial behavior will answer this question.

Is there anything else you would like to share with our readers?

We wish to say that financial literacy is very important as we miss this in our education system. We dream for a day when investor will be financial educated before he reaches his financial advisor. Financial literacy is the key to financial freedom. Being financially aware means client will understand his questions and will definitely understand the solutions. It is really painful to see when a client is mis-sold for penny benefits. And best way to avoid mis-selling is to get armored with financial literacy. We also run a blog: The Financial Literates (www.tflindia.in). We want to give our society back what we have earned from it. This is a web place where we write about concepts, trends, guidance in the field of personal finance.

Source: http://www.myiris.com/newsCentre/storyShow.php?fileR=20101225120305173&dir=2010/12/25&secID=livenews

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Aggrasive Portfolio

  • Principal Emerging Bluechip fund (Stock picker Fund) 11%
  • Reliance Growth Fund (Stock Picker Fund) 11%
  • IDFC Premier Equity Fund (Stock picker Fund) (STP) 11%
  • HDFC Equity Fund (Mid cap Fund) 11%
  • Birla Sun Life Front Line Equity Fund (Large Cap Fund) 10%
  • HDFC TOP 200 Fund (Large Cap Fund) 8%
  • Sundram BNP Paribas Select Midcap Fund (Midcap Fund) 8%
  • Fidelity Special Situation Fund (Stock picker Fund) 8%
  • Principal MIP Fund (15% Equity oriented) 10%
  • IDFC Savings Advantage Fund (Liquid Fund) 6%
  • Kotak Flexi Fund (Liquid Fund) 6%

Moderate Portfolio

  • HDFC TOP 200 Fund (Large Cap Fund) 11%
  • Principal Large Cap Fund (Largecap Equity Fund) 10%
  • Reliance Vision Fund (Large Cap Fund) 10%
  • IDFC Imperial Equity Fund (Large Cap Fund) 10%
  • Reliance Regular Saving Fund (Stock Picker Fund) 10%
  • Birla Sun Life Front Line Equity Fund (Large Cap Fund) 9%
  • HDFC Prudence Fund (Balance Fund) 9%
  • ICICI Prudential Dynamic Plan (Dynamic Fund) 9%
  • Principal MIP Fund (15% Equity oriented) 10%
  • IDFC Savings Advantage Fund (Liquid Fund) 6%
  • Kotak Flexi Fund (Liquid Fund) 6%

Conservative Portfolio

  • ICICI Prudential Index Fund (Index Fund) 16%
  • HDFC Prudence Fund (Balance Fund) 16%
  • Reliance Regular Savings Fund - Balanced Option (Balance Fund) 16%
  • Principal Monthly Income Plan (MIP Fund) 16%
  • HDFC TOP 200 Fund (Large Cap Fund) 8%
  • Principal Large Cap Fund (Largecap Equity Fund) 8%
  • JM Arbitrage Advantage Fund (Arbitrage Fund) 16%
  • IDFC Savings Advantage Fund (Liquid Fund) 14%

Best SIP Fund For 10 Years

  • IDFC Premier Equity Fund (Stock Picker Fund)
  • Principal Emerging Bluechip Fund (Stock Picker Fund)
  • Sundram BNP Paribas Select Midcap Fund (Midcap Fund)
  • JM Emerging Leader Fund (Multicap Fund)
  • Reliance Regular Saving Scheme (Equity Stock Picker)
  • Biral Mid cap Fund (Mid cap Fund)
  • Fidility Special Situation Fund (Stock Picker)
  • DSP Gold Fund (Equity oriented Gold Sector Fund)