Investors have seen mutual fund managers sitting on piles of cash for months. They did not invest in equity when the stock valuations were low across the board. Now that the stock markets have hit the roof, they have been made to look ordinary. The story gets worse, because they are holding the investors money without really showing any significant gains. Investors are angry, having seen people make money as stocks go skywards, while they have hardly anything substantial to show. To get the experts viewpoints on this non-performance by mutual funds, CNBC-TV18, called on Dhirendra Kumar, CEO of Value Research and Nilesh Shah, Deputy MD of ICICI Prudential, to provide the answers for these very people.
Q: Is it true that yesterday there was no redemption allowed at NAV and what s the justification for that?
Shah: We have to be fair with the investors who are staying with us; investors who are redeeming and investors who are coming in. Yesterday when bulk of the market didn’t trade and 600 out of 800 scrips on National Stock Exchange were quoting at Friday’s price because there was no volume, we could not have calculated a fair and appropriate NAV. In that situation, it would have been unfair to the investors who were redeeming out. It would have probably been a bit advantageous to the investors who were getting in and it would be unfair to the investors who were staying with us. So, we requested the regulator to say that if it can declare tomorrow as a non-working day and it acceded to our request for the benefit of all unit holders.
Shah: We have to be fair with the investors who are staying with us; investors who are redeeming and investors who are coming in. Yesterday when bulk of the market didn’t trade and 600 out of 800 scrips on National Stock Exchange were quoting at Friday’s price because there was no volume, we could not have calculated a fair and appropriate NAV. In that situation, it would have been unfair to the investors who were redeeming out. It would have probably been a bit advantageous to the investors who were getting in and it would be unfair to the investors who were staying with us. So, we requested the regulator to say that if it can declare tomorrow as a non-working day and it acceded to our request for the benefit of all unit holders.
Q: Acceptable logic for you, Dhirendra?
Kumar: Yes, a fairly logical and principled stand. That is because mutual funds buy stocks and if you couldn’t buy stocks or sell stocks then how can you buy a mutual fund.
Kumar: Yes, a fairly logical and principled stand. That is because mutual funds buy stocks and if you couldn’t buy stocks or sell stocks then how can you buy a mutual fund.
Q: One clarification: how does it work when the market hits down circuit or do you think in those circumstances there were more hours of trade so most stocks got to move up or down?
Shah: More important than the ups and downs is the calculation of NAV. If I had 800 scrips on the National Stock Exchange traded in the price available, I would have calculated the NAV and then we would have taken a call whether we have the cash to pay for the redemptions or not. So the question is can we calculate the NAV, which is fair to the investor who is coming in, the one who is going out, and the one who is staying with us? If any of these three conditions are not met, we have no option but to go back to the Association of Mutual Funds of India (AMFI) or Securities and Exchange Board of India (SEBI) and request this to be declared as a non-working day on the overall benefit of the unit holders.
Shah: More important than the ups and downs is the calculation of NAV. If I had 800 scrips on the National Stock Exchange traded in the price available, I would have calculated the NAV and then we would have taken a call whether we have the cash to pay for the redemptions or not. So the question is can we calculate the NAV, which is fair to the investor who is coming in, the one who is going out, and the one who is staying with us? If any of these three conditions are not met, we have no option but to go back to the Association of Mutual Funds of India (AMFI) or Securities and Exchange Board of India (SEBI) and request this to be declared as a non-working day on the overall benefit of the unit holders.
Q: Did you get a lot of redemption requests and have more come in since they could not be executed at yesterday s NAV. Would they be coming in today?
Shah: No. unfortunately most people were trying to take advantage of an arbitrage opportunity because some part of the NAV would have been quoted at Friday’s price and most people had the expectation that today too that the markets will be up. So we had seen fair amount of buying interest at the client and distributor level than the redemption level. I think the perception of investors have changed where selling at every rise has been now replaced with buying at every dip. So, I do not foresee too much of redemptions coming through going forward if the markets continue to remain supported by the policy actions of the government.
Shah: No. unfortunately most people were trying to take advantage of an arbitrage opportunity because some part of the NAV would have been quoted at Friday’s price and most people had the expectation that today too that the markets will be up. So we had seen fair amount of buying interest at the client and distributor level than the redemption level. I think the perception of investors have changed where selling at every rise has been now replaced with buying at every dip. So, I do not foresee too much of redemptions coming through going forward if the markets continue to remain supported by the policy actions of the government.
Q: We were speaking with the head of UTI Mutual Fund who made the point that mutual funds have not seen that much by way of inflows over the past few months. Do you expect to see redemptions to start kicking in because these are probably investors who held on for more than the past six-eight months or got in even?
Kumar: Certainly. I feel that there are lot of disappointed investors today more so because a lot of investors came at the peak level and after that they have been disappointed by the secular decline over a prolonged period and the psychology of an individual investor is that if he is able to recover a substantial part of his losses or get back in the black then he plans to move out. So I think, not in the immediate future, but many of these investors will be breaking, or at least they will be thinking about it.
Looking at the performance objectively, mutual funds were behaving like an ordinary investor because many of them were caught on the wrong foot. First, they had substantial amount of cash, the market turned around and suddenly the surprising mandate put the market on fire. So mutual funds contributed to the whole underperformance thing, because they kept sitting on substantial amounts of cash.
Kumar: Certainly. I feel that there are lot of disappointed investors today more so because a lot of investors came at the peak level and after that they have been disappointed by the secular decline over a prolonged period and the psychology of an individual investor is that if he is able to recover a substantial part of his losses or get back in the black then he plans to move out. So I think, not in the immediate future, but many of these investors will be breaking, or at least they will be thinking about it.
Looking at the performance objectively, mutual funds were behaving like an ordinary investor because many of them were caught on the wrong foot. First, they had substantial amount of cash, the market turned around and suddenly the surprising mandate put the market on fire. So mutual funds contributed to the whole underperformance thing, because they kept sitting on substantial amounts of cash.
Q: Is that a fair point that many of the mutual funds, equity mutual funds may have actually underperformed the market on the way up because of large cash holdings?
Shah: We need to see the picture in its totality. I can talk about ICICI Prudential Mutual Fund and as Dhirendra will agree we have never taken aggressive cash calls across most of our funds where the mandate is to invest in equity. On the way up, some of our funds would have probably underperformed the broad market because lot of high beta stocks moved up significantly. Stocks that were beaten down in sectors like real estate, constructions and power have jumped up significantly. Some of those stocks are today trading above fair value. By participating in those stocks, I would not like to be accused later that you do not look at a stock’s quality. A 15-day or 30-day period is unfair to evaluate a fund manager’s performance.
Let s talk about three-, five- and 10-year performances and on that basis most of the Indian fund managers have been outperforming benchmark indices by a reasonable margin. How many analysts were predicting the election result that there will be thumping majority and the election outcome will be like this. Fund managers are not gods; they also take a call based on rational expectations. On Friday, no one had expected that on Monday there will be a working government, that there will be so much hope and hike in aspirations.
We built a little cash balance to ensure that if there is an election outcome that is against our expectations, we will be able to average ourselves in and on the back of rally where the markets had moved from 8,000 to 12,000, it was not a very inappropriate call. So in hindsight, anyone can say this or that should be done but at the end of the day, we followed a logical rational approach. I think our five-year and 10-year performance does show that we have been following a fairly reasonable and logical approach.
Shah: We need to see the picture in its totality. I can talk about ICICI Prudential Mutual Fund and as Dhirendra will agree we have never taken aggressive cash calls across most of our funds where the mandate is to invest in equity. On the way up, some of our funds would have probably underperformed the broad market because lot of high beta stocks moved up significantly. Stocks that were beaten down in sectors like real estate, constructions and power have jumped up significantly. Some of those stocks are today trading above fair value. By participating in those stocks, I would not like to be accused later that you do not look at a stock’s quality. A 15-day or 30-day period is unfair to evaluate a fund manager’s performance.
Let s talk about three-, five- and 10-year performances and on that basis most of the Indian fund managers have been outperforming benchmark indices by a reasonable margin. How many analysts were predicting the election result that there will be thumping majority and the election outcome will be like this. Fund managers are not gods; they also take a call based on rational expectations. On Friday, no one had expected that on Monday there will be a working government, that there will be so much hope and hike in aspirations.
We built a little cash balance to ensure that if there is an election outcome that is against our expectations, we will be able to average ourselves in and on the back of rally where the markets had moved from 8,000 to 12,000, it was not a very inappropriate call. So in hindsight, anyone can say this or that should be done but at the end of the day, we followed a logical rational approach. I think our five-year and 10-year performance does show that we have been following a fairly reasonable and logical approach.
Q: This criticism though is not just about Monday’s event. This criticism is about high cash levels that has been perpetuated since the market bounced almost 50 per cent from its lows. Give us a sense, even a ballpark figure, of how much money is waiting to be invested from the mutual fund fraternity in the market. What would you estimate the cash at?
Kumar: It s not a matter of estimation, it’s a matter of fact that at the end of April mutual funds had nearly Rs 14,000 crore and it was equal to what they had in March-end as well, which means on a net basis all equity funds combined together had a similar amount of cash while the market had gone up. I agree with the way ICICI Prudential managed its funds given its size, it had about 6.5% of cash position, which I think for an open-ended equity fund is quite normal, but on the other hand some of the large fund families with substantial equity assets under management Reliance Mutual Fund for example had about Rs 5,900 crore cash as on month-end as disclosed by it. That itself accounts for nearly 27 per cent of its equity fund. Number two was UTI Mutual Fund, it had about Rs 1,700 crore, which amounted to about 18% of the total assets, followed by SBI. In fact, with SBI, the surprising thing was that compared to March-end, its April-end cash went up substantially.
Kumar: It s not a matter of estimation, it’s a matter of fact that at the end of April mutual funds had nearly Rs 14,000 crore and it was equal to what they had in March-end as well, which means on a net basis all equity funds combined together had a similar amount of cash while the market had gone up. I agree with the way ICICI Prudential managed its funds given its size, it had about 6.5% of cash position, which I think for an open-ended equity fund is quite normal, but on the other hand some of the large fund families with substantial equity assets under management Reliance Mutual Fund for example had about Rs 5,900 crore cash as on month-end as disclosed by it. That itself accounts for nearly 27 per cent of its equity fund. Number two was UTI Mutual Fund, it had about Rs 1,700 crore, which amounted to about 18% of the total assets, followed by SBI. In fact, with SBI, the surprising thing was that compared to March-end, its April-end cash went up substantially.
Q: How would you advise equity mutual fund investors to approach investing now because there has been a disruptive event in the market -- suddenly the market is up 25% and people may be a bit lost on how to position their investments. What would you tell them?
Kumar: I would urge investors that they should not rush into the market. If they don t have a plan, they should develop one and go about implementing it. It is also the time for indexing. So far we held this view that indexing is not relevant and till about six months back we held the view that equity funds, be it actively managed funds or be it Sensex, will give handsome rewards over a period of time. I think things are changing dramatically. I think it s about time investors start looking at indexing as a part of their core portfolio.
Kumar: I would urge investors that they should not rush into the market. If they don t have a plan, they should develop one and go about implementing it. It is also the time for indexing. So far we held this view that indexing is not relevant and till about six months back we held the view that equity funds, be it actively managed funds or be it Sensex, will give handsome rewards over a period of time. I think things are changing dramatically. I think it s about time investors start looking at indexing as a part of their core portfolio.
Q: One question on the market: we had a crazy day yesterday; we also had a fantastic mandate in terms of elections. How would you map the next few weeks and months for us?
Shah: I think we are going to see more crazy days but obviously not like yesterday. The market today is driven by hope and aspirations like in 1991 when the Congress government came and on the basis of the majority given to them they pulled India’s growth trajectory up and in a challenging environment did a wonderful job. Today, the same aspirations are there. The environment is as challenging as it was in 1991, probably we have more foreign exchange reserves than 1991, but the deficit is fairly high and there is hope that the government will carry out various reform processes whereby it will pull up the growth trajectory of India again -- like China travelled on the path to prosperity from 1980s till today. India will probably be moving in the same direction.
So, there is a lot of hope and aspirations are high. It’s impossible for a government to meet all the hopes and aspirations at one go. So there will be days of disappointment, there will be days of hope and we will continue to see a market which swings up and down based on hope and greed or hope and fear, but overall there is reasonable chance this time that we should be able to kind of lead the economy into a higher growth trajectory and this should result in stronger capital markets over years to come.
Shah: I think we are going to see more crazy days but obviously not like yesterday. The market today is driven by hope and aspirations like in 1991 when the Congress government came and on the basis of the majority given to them they pulled India’s growth trajectory up and in a challenging environment did a wonderful job. Today, the same aspirations are there. The environment is as challenging as it was in 1991, probably we have more foreign exchange reserves than 1991, but the deficit is fairly high and there is hope that the government will carry out various reform processes whereby it will pull up the growth trajectory of India again -- like China travelled on the path to prosperity from 1980s till today. India will probably be moving in the same direction.
So, there is a lot of hope and aspirations are high. It’s impossible for a government to meet all the hopes and aspirations at one go. So there will be days of disappointment, there will be days of hope and we will continue to see a market which swings up and down based on hope and greed or hope and fear, but overall there is reasonable chance this time that we should be able to kind of lead the economy into a higher growth trajectory and this should result in stronger capital markets over years to come.
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