Lack of arbitrage opportunities, higher trading costs and volatile currency have resulted in mutual funds reducing their exposure to depository receipts (DRs) of Indian companies. Mutual fund analysts say fund managers may have even lost out on substantial gains they could have easily pocketed had they anticipated the currency movement and invested in DRs, when the dollar was gaining against the rupee since August 2008.
Fund exposure to DRs is minuscule compared with overall assets managed by the industry, mainly due to the unwillingness on the part of fund managers to have a big exposure to stocks that trade when they are fast asleep in India due to different time zones.
“We could have made money had we spotted the trend (dollar strengthening against the rupee) earlier enough. We should have bought DRs, when the rupee was at 45-46 levels and sold them at current rates,” said the fund manager of a private fund house.
“Though we would not have made much money selling the underlying, there sure was good money to be made on the currency side. Now, we are at the fag end of the currency rally. At the most, the rupee may scale up to 54 a dollar. It’s very risky to look out for currency play now,” the fund manager said.
If one goes by numbers, in December 2007, mutual funds had over Rs 71 crore as investments in Indian DRs. A year later (in December 2008), the MF exposure in DRs has plunged to just over Rs 28 crore — though not all of it is due to redemptions, as DR values have fallen drastically over the past one year.
“From what we understand, MFs have more or less remained steady with their investments (in DRs). They have not invested any new money, but there has not been much redemptions either. In my opinion, the fall in exposure levels could be more because of depreciation in DR prices,” said Instanex Capital CEO Gautam Chand.
Minus the currency risk, DR/share swapping is said to be one of most riskless forms of arbitraging. Due to time differences, news flow into the market and local sentiment, DRs trade at discount or premium to the underlying stock.
This presents fund managers an arbitrage opportunity, wherein the fund buys the DR abroad and sells the same stock in India at a higher price — the difference being the profit. This is an expensive strategy, as fund houses will have to bear a two-way brokerage and custodian charges.
“Local MF houses generally have very limited exposure to DRs due to variety of reasons — convenience, cost and the relatively higher liquidity available in domestic markets,” said Franklin Templeton senior portfolio manager KN Sivasubramanian.
“Moreover, ADRs tend to trade at high premiums (to local market) in volatile times, such as now. This reduces the attractiveness of holding ADRs in the portfolio. Exposure to GDRs, in any case, tends to be lower as a result of lower liquidity levels on exchanges,” Mr Sivasubramanian added.
Fund exposure to DRs is minuscule compared with overall assets managed by the industry, mainly due to the unwillingness on the part of fund managers to have a big exposure to stocks that trade when they are fast asleep in India due to different time zones.
“We could have made money had we spotted the trend (dollar strengthening against the rupee) earlier enough. We should have bought DRs, when the rupee was at 45-46 levels and sold them at current rates,” said the fund manager of a private fund house.
“Though we would not have made much money selling the underlying, there sure was good money to be made on the currency side. Now, we are at the fag end of the currency rally. At the most, the rupee may scale up to 54 a dollar. It’s very risky to look out for currency play now,” the fund manager said.
If one goes by numbers, in December 2007, mutual funds had over Rs 71 crore as investments in Indian DRs. A year later (in December 2008), the MF exposure in DRs has plunged to just over Rs 28 crore — though not all of it is due to redemptions, as DR values have fallen drastically over the past one year.
“From what we understand, MFs have more or less remained steady with their investments (in DRs). They have not invested any new money, but there has not been much redemptions either. In my opinion, the fall in exposure levels could be more because of depreciation in DR prices,” said Instanex Capital CEO Gautam Chand.
Minus the currency risk, DR/share swapping is said to be one of most riskless forms of arbitraging. Due to time differences, news flow into the market and local sentiment, DRs trade at discount or premium to the underlying stock.
This presents fund managers an arbitrage opportunity, wherein the fund buys the DR abroad and sells the same stock in India at a higher price — the difference being the profit. This is an expensive strategy, as fund houses will have to bear a two-way brokerage and custodian charges.
“Local MF houses generally have very limited exposure to DRs due to variety of reasons — convenience, cost and the relatively higher liquidity available in domestic markets,” said Franklin Templeton senior portfolio manager KN Sivasubramanian.
“Moreover, ADRs tend to trade at high premiums (to local market) in volatile times, such as now. This reduces the attractiveness of holding ADRs in the portfolio. Exposure to GDRs, in any case, tends to be lower as a result of lower liquidity levels on exchanges,” Mr Sivasubramanian added.
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