Indian investors need not rush for cover

Should investors in Indian mutual funds or insurance companies sponsored by the troubled US institutions bail out? Indications are that they have no reason to panic and liquidate investments in a hurry.

A fresh tidal wave of financial sector collapses in the US has halted the nascent recovery in Indian stocks in its tracks. Even as tumbling commodity prices have defused the inflation threat, stock market investors have a fresh set of worries to grapple with. 

Should they brace for a deluge of selling by ailing US institutions? Should they rethink mutual fund and insurance investments managed by foreign institutions? How would fund flows into the Indian markets be impacted by the credit crunch? Not all of these answers are readily available, but let’s look at the few that are.

In the firing line 

First, will a deluge of ‘sell’ orders from the beleaguered American institutions — Lehman Brothers, Merrill Lynch and AIG, trigger a collapse in Indian stocks? As of now, concerns on this score seem to be overdone. 

Of the above institutions that have admitted to financial troubles, only the Lehman group might have an immediate need to resort to a distress sale of its India positions, as both Merrill Lynch (bought over by the Bank of America) and AIG (handed a lifeline by the US Fed), have averted a crisis for now. 

Lehman Brothers’ holdings in Indian stocks (including its offshore vehicles) amounted to about Rs 1,000 crore as of June 30, a modest number in the context of the Indian market. With about a third of this holding already offloaded in August, a residual portfolio of about Rs 600 crore (or less) may remain. A takeover of Lehman’s Asia operations by Barclay’s, being considered now, may also obviate the need for any further selling in these stocks. 

Shareholding patterns as of June show that Lehman’s holdings were concentrated mainly in mid- and small-cap stocks. 

Therefore, there may be no material threat to overall market, should these holdings be offloaded in a hurry. Though “Lehman” stocks have already been severely punished over the past week, investors should still tread with caution on some stocks featuring significant ‘Lehman’ stakes of 3 per cent or more (as of June). 

These are KPIT Cummins, Fedders Lloyd, Orbit Corporation, Spice Mobiles, West Coast Paper, Northgate Technologies, Emkay Global, Pioneer Embroideries and Development Credit Bank. 

Though there is little risk of selling in ‘Lehman’ stocks destabilising the markets, paring of India holdings by FIIs who have a larger India presence, such as Merrill Lynch or Morgan Stanley, does have the potential to undermine markets. Investors need to be alive to this possibility, given the growing ranks of ailing institutions hit by the credit crisis. 

When sponsors fail


Should investors in Indian mutual funds or insurance companies sponsored by the troubled US institutions exit? Retail investors may hold schemes managed by DSP Merrill Lynch Mutual Fund or AIG Mutual Fund. This apart, they may hold insurance policies in Tata-AIG, which has a presence both in the life and general insurance business. Here, again, investors have no reason to panic or liquidate existing investments in a hurry. 

To start with, investors need to note that the assets managed by a mutual fund belong to the unitholders and not to the sponsoring institution. In the event of a failure of the sponsor, it is the capital infusion made by the sponsor to the mutual fund and not the unitholders’ money, that will be at immediate risk. 

Therefore there is little risk of the investor assets being appropriated, in the case of AIG or Merrill Lynch running into financial trouble. Having said this, the key concern for investors in the above entities would arise from any accelerated redemptions in the funds and any change in ownership or fund management of these firms, due to global restructuring of ownership stakes. 

DSP Merrill Lynch MF: In the case of DSP Merrill Lynch Mutual Fund, the 40 per cent stake in the mutual fund held directly by Merrill Lynch is already set to be transferred to BlackRock Inc — an asset management subsidiary of the group (the move is pending SEBI approval). 

Once the transfer is approved, BlackRock and not Merrill Lynch, will be a 40 per cent stakeholder in the domestic fund house (60 per cent still to be held by the DSP group). Investors should note that BlackRock Inc is not entirely immune to Merrill Lynch’s troubles, as Merrill Lynch holds a 49 per cent equity stake in the firm at the global level.

However, Bank of America’s buy-out of Merrill Lynch’s assets earlier this week includes the BlackRock business. 

Initial statements from Bank of America suggest that it views BlackRock Inc, which is one of the world’s largest asset managers ($1.43 trillion in assets), as one of the more promising divisions of Merrill Lynch, alleviating any immediate worries about this division being put on the block. 

All this suggests that investors in DSP Merrill Lynch Mutual Fund may have no reason to exit their fund holdings at this juncture. 

DSPML Mutual Fund manages some of the better performing equity funds in India with a consistent long-term return record; and there are not too many alternatives to these funds at this juncture. 

AIG: Uncertainties about ownership will continue in the case of American insurer- AIG; though an immediate crisis has been averted through an $85-billion loan from the US Fed. AIG’s top management has been replaced, with the Fed taking a 79.9 per cent equity stake in the US insurer. 

Investors in the equity schemes of AIG Mutual Fund may have fewer reasons to hold on. The fund has a relatively short performance record in the Indian market, its equity funds have not turned in an impressive performance so far and there is now the uncertainty about a change in ownership as well. This suggests that it may be prudent for investors who hold a large exposure to AIG Mutual Fund’s equity schemes to consider alternatives, as a de-risking measure. 

As to the insurance business, policyholders in Tata AIG have been assured by the firm that all payment obligations will be honoured. The firm’s strong solvency margins (well above IRDA norms) and the Tata group’s 74 per cent stake in the insurance venture also provide a measure of comfort. 

However, investors in all the above cases should keep a close watch for any changes in the ownership structure of the firms where they have invested. Fresh investments should be held off until clarity on this front emerges.

Source: http://www.thehindubusinessline.com/iw/2008/09/21/stories/2008092150400700.htm

Indian investors of Morgan Stanley AMC safe

Morgan Stanley`s conversion from an investment bank to a retail bank will not impact the performance of its Indian mutual fund subsidiary, Morgan Stanley Asset Management Company (AMC), reports Economic Times. 

The conversion would not have impact on its fortune but will provide stability to the company. Also since the Indian AMC is registered in India and regulated by Securities Exchange Board of India (SEBI), investor`s money is safe. 

The fund currently handles two funds of which the major one is a close-ended equity diversified fund, launched in 1994 with a size of Rs 28.80 billion while the other one is an open-ended diversified equity fund, with a size of only Rs 1.04 billion.

Source: http://www.myiris.com/newsCentre/storyShow.php?fileR=20080924130805198&dir=2008/09/24&secID=mf&code1=&code=

BlackRock acquires 40% stake in DSP ML Fund Managers

BlackRock, a New York-based asset management company, which is the largest quoted asset management company in the world, managing assets in excess of USD 1.3 trillion will acquire a 40% stake in DSP Merrill Lynch Fund Managers, a leading Mutual Fund company in India, reports Business Line. 

After the acquisition DSP Merrill Lynch Fund Managers will be renamed as `DSP BlackRock Investment Managers`, while DSP Merrill Lynch Mutual Fund will be renamed, `DSP BlackRock Mutual Fund`.

DSP Merrill Lynch Fund Managers is a joint venture between DSP Group (owned by Hemendra Kothari) which owns 60% stake in the asset management company and Merrill Lynch.

Merrill Lynch had combined its investment management business Merrill Lynch Investment Managers with BlackRock in exchange for a 49% economic stake in the merged enterprise to form a new entity which operates under the BlackRock brand.

UTI Mutual Fund to continue selling ULIP

UTI Mutual Fund today said it will continue selling Unit Linked Insurance Product (ULIP) to its customers even though there is no clarity on the issue of fund houses selling such products. "We have been selling the ULIP plan to the customers of the Balance Fund since 1971 and would continue to do so," said UTI Mutual Fund Chief Marketing Officer Jaideep Bhattacharya. 

UTI sells ULIP plan of Life Insurance Corporation which happens to be one of the sponsors of the fund house. 
The product has been sold to about 5 lakh customers and has asset size of about Rs 3,100 crore, he said. 
It is one of the low cost product available in the market, he said, adding the cost is as low as 3 per cent as compared to up to 62 per cent in the market. In under-insured market like India, Bhattacharya said, there is need for collaboration with insurers to incease the penetration. 

However, the Life Insurance Council, which is association of life insurance companies, recently decided against offering insurance covers to fresh unit-linked products sold by mutual funds from October 1. It was decided that insurer will not sell group covers to mutual funds that bundle life insurance with units and thereby create competition for ULIPs. 

Regulators including SEBI and IRDA have not come out with the guideline on the issue. Until it is clarified, the confusion would prevail, an industry observer said.

Source: http://economictimes.indiatimes.com/Personal_Finance/UTI_MF_to_continue_selling_ULIP/articleshow/3500142.cms

Forget sectors, you can bet on thematic funds

The unwinding of leveraged positions in Indian equities by foreign institutions, in the wake of the crisis in the US financial sector, is likely to persist over the next couple of months, said UTI Mutual Fund’s senior fund manager, Sanjay Dongre. In an interview with ET, he discusses about the outlook for Indian equities, which, according to him, has to consolidate before the next rally. 

What are the implications of the turmoil in the US financial sector on foreign fund flows and economy? 

The implications are clearly negative. In the past 3-5 years, FIIs have invested in a large chunk of money in our country and some of them happen to be these financial institutions and investment banks. A lot of liquidity that flowed into equity markets in recent years was leveraged money. If these institutions are going through a painful period, they will look at garnering liquidity from the rest of the world. 

Accordingly, a lot of deleveraging will happen, which will result in global liquidity shrinking. In this situation, you cannot expect them to invest money in our economy. On the contrary, they are likely to take out more money from our markets and that is what we have been witnessing in the past 3-4 months. And I see this trend continuing for the next couple of months. To that extent, it will have an impact on the economy and stock markets. 

So, can we assume that the market is still some distance away from the bottom? Do you have any levels in mind? 

I think there would be still some consolidation left in the market because the pain the global financial institutions are going through...so we cannot expect much of inflows from them in the near-term. Also, it is too early to talk about the business plans of these financial institutions, especially when there are a lot of mergers, bankruptcies, and liquidations taking place. 

For instance, when somebody takes over a troubled investment bank, which has a lot of investments in India, it can happen that the acquirer does not like these businesses and can just ask the target company to liquidate everything and get out of the market. These uncertainties exist, so the market has to consolidate for some more time before saying firmly that a bottom has been formed. 

It is usually said that retail investors are the last to enter a bull market and last to exit a bear market. So, would you agree that, when retail investors exit the market in a big way, we would have reached the bottom? 

All the investment gurus have said that bull markets are born out of despair or panic and they die out in a euphoric situation. Retail investors try to move along with the sentiment in the market. So, when there is despair in the market, though it may be the start of a bull market, the retail investor tends to get out as the sentiment is bad. That is where they go wrong. So, I would partly agree on this point, but it needs to be noted that this time, despite the worsening sentiment, retail investors have not exited the market in a big way. 

What is your outlook on corporate earnings growth? What are your major concerns over the quality of earnings growth over the next 3-4 quarters? 

Though Indian companies might have sales growth of around 20% this year, which is lower than the previous years, earnings growth are likely to be only in the high single digits. This is because Indian companies have been facing margin pressure because of higher raw material and interest costs. Since commodity prices are easing, there might be some relief on raw material prices. But, one aspect, which concerns me more at least in the short-term, is the exposure of corporates to derivatives. The turmoil in the US will have a lot of negative impact on these derivative exposures and will affect the companies’ other income. 

What investment strategy would you recommend for retail investors? What are the sectors you would recommend as of now? 

Retail investors should not invest in sector funds... they should focus on thematic or, even better, diversified funds. If there was one sector, which would take the lead when the market rallies, my guess would be the banking and financial sector. I am taking this view, not because these shares have been beaten down the most in the recent months, but that once inflation and interest rates ease by next year, this sector will stand to benefit the most.

Source:http://economictimes.indiatimes.com/Interview Sanjay_Dongre_Senior_fund_manager_UTI_Mutual_Fund/articleshow/3515639.cms

Principal Mutual Fund launches Emerging Bluechip Fund

Principal Mutual Fund on Monday launched the Principal Emerging Bluechip Fund, an open ended equity scheme, which will predominantly invest in small and mid cap companies to tap high growth opportunities offered by such stocks. 

The fund opens for subscription on September 22 and will close on October 10. This fund will be benchmarked to the CNX Midcap Index. The scheme will offer both growth option and dividend option. For the purpose of maintaining liquidity or tap market opportunities the fund’s portfolio may also include large cap stocks. 

The subscription for the scheme shall be allowed during the NFO at Rs 10 per unit and thereafter at NAV based prices upon re-opening for subscription. There is no minimum redemption amount. The minimum application amount is Rs. 5,000. 

There is an entry load of 2.25 per cent, if investment is less than Rs 5 crore. However, there is no entry load for investment of Rs 5 crores and above, as well as for direct investments. There is an exit load of 2.25 per cent if redeemed before one year from the date of allotment. 

Asset allocation pattern is as follows: equity & equity related instruments of mid cap companies 65 per cent - 95 per cent, equity & equity related instruments of small cap companies 5 per cent - 15 per cent, equity & equity related instruments of companies other than mid & small cap companies - 0 per cent-30 per cent. 

The AMC reserves the right to invest in equity derivatives, not exceeding 50 per cent of the net assets and in foreign securities and derivatives subject to certain statutory regulations. 

Said Rajat Jain, chief investment officer, Principal Mutual Fund, “For a long term investor, mid and small cap stocks are a good bet as they offer higher growth opportunity. Mid caps can be volatile; however volatility can be neutralised by a longer investment horizon without significantly impacting the return expectations. In the current scenario quality mid caps are available at reasonable valuations even after factoring in the current volatility in the business environment and we intend to capitalise on such opportunities through this fund.” 

The fund will be managed by Pankaj Tibrewal.