India Index Services and Products (IISL), the NSE subsidiary which manages benchmark indices such as the Nifty, is running a survey of fund managers on the difficulties they face on account of the high weightage of Reliance Industries (RIL) in the index.
Fund management industry sources told DNA IISL recently sought their views on the matter.
"We have given them our views. However, I cannot disclose what we have told them," said the head - equities of a leading asset management company.
IISL officials declined comment.
RIL, the largest company by market capitalisation, also has the highest weightage in the Sensex and the Nifty, at 17.7% and 13.3%, respectively.
The stock has been the biggest contributor to the recent rally, accounting for 861 points of the 3859 point Sensex upmove.
Fund managers, both local and foreign, are taking a big hit in their portfolios for being significantly underweight on the counter.
Most institutional investors are underweight the stock by 500 bps, which in most cases is forced.
As per the Securities and Exchange Board of India rules, local fund managers cannot bet more than 10% of their portfolio on a single stock.
Foreign fundmen, on the other hand, are bound by mandates from their investors to stick to similar limits.
Thus, an average fund manager has lost nearly 2% returns on the underweight on just this one stock, say analysts.
The issue has evoked a detailed report from Credit Suisse analysts Nilesh Jasani and Arya Sen. Calling the recent outperformance of RIL a "headache for fund managers," Jasani and Sen say, "Long only investors rarely minded well-deserved, good performance by any stock --- except possibly when it comes to Reliance Industries. In an otherwise diversified Indian market, RIL's size has begun to create problems for fund managers."
The worst part is that RIL's weightage is only bound to increase.
NSE is making the Nifty a free-float index, which will add to its weight.
The completion of RPL merger is expected to add up to 2% weightage.
Jasani and Sen feel the bluechip may eventually end up with a weight of 20%-plus on the indices if it uses up its surplus cash for acquisitions. If it does, India will have a situation like Korea where Samsung Industries accounts for a fifth of the market.
Anoop Bhaskar of UTI AMC, says, "You allow them this high weightage and we will end up with a situation like Korea, where people have to live up with a 20%-plus weightage for Samsung. The larger implication is that since most of fund manager performance is benchmarked with the Nifty and they cannot give more than 9.9% weightage to any stock, we run the risk of underperformance. We have to either get the rules changed to allow fund managers to invest more than 10%, or follow MSCI and apply the 10/40 rule."
The 10/40 methodology was introduced by MSCI indices in 2002. Accordingly, the maximum weight of securities of a single issuer cannot exceed 10% of the market value of the index, and the sum of the weights of all issuers representing more than 5% of the market value of an index cannot collectively exceed 40%.
Vetri subramaniam, head-equities, Religare Mutual fund, says, "The practical implication (of huge RIL weightage) is that none of us can take a sell call, even if we have a negative view on the stock, because we are already underweight."
A free market call on Reliance Industries is therefore not possible and that gives a premium valuation to the stock.
"With people thus becoming unwilling to sell, Reliance tends to enjoy higher valuation in relation to other comparable stocks." Subramaniam adds.
Thus, Reliance's extra weight has a cascading effect and feeds on itself.
In the recent rally, the stock outperformed the Sensex by a huge margin. While the Sensex rose 47% between March 9 and May 13, the bluechip rose 68%. This, in turn, has taken its weightage up substantially --- on the Nifty from 11% to 13.3% and on the Sensex from 15.5% to 17.7%.
Most fund managers recognise this as an issue that needs to be addressed.
Sanjay Sinha, CEO, DBS Cholamandam AMC says, "If you have a disproportionately high weightage to a particular stock, it becomes difficult for the fund managers to bring out matching performance. Given the restrictions, that would be an issue."
But Vetri Subramaniam draws attention to the flipside. "In such a situation, it depends on which way the index moves. If index is going up, then we tend to be at disadvantage. But when it's falling, we tend to outperform because of the underweight."
Fund management industry sources told DNA IISL recently sought their views on the matter.
"We have given them our views. However, I cannot disclose what we have told them," said the head - equities of a leading asset management company.
IISL officials declined comment.
RIL, the largest company by market capitalisation, also has the highest weightage in the Sensex and the Nifty, at 17.7% and 13.3%, respectively.
The stock has been the biggest contributor to the recent rally, accounting for 861 points of the 3859 point Sensex upmove.
Fund managers, both local and foreign, are taking a big hit in their portfolios for being significantly underweight on the counter.
Most institutional investors are underweight the stock by 500 bps, which in most cases is forced.
As per the Securities and Exchange Board of India rules, local fund managers cannot bet more than 10% of their portfolio on a single stock.
Foreign fundmen, on the other hand, are bound by mandates from their investors to stick to similar limits.
Thus, an average fund manager has lost nearly 2% returns on the underweight on just this one stock, say analysts.
The issue has evoked a detailed report from Credit Suisse analysts Nilesh Jasani and Arya Sen. Calling the recent outperformance of RIL a "headache for fund managers," Jasani and Sen say, "Long only investors rarely minded well-deserved, good performance by any stock --- except possibly when it comes to Reliance Industries. In an otherwise diversified Indian market, RIL's size has begun to create problems for fund managers."
The worst part is that RIL's weightage is only bound to increase.
NSE is making the Nifty a free-float index, which will add to its weight.
The completion of RPL merger is expected to add up to 2% weightage.
Jasani and Sen feel the bluechip may eventually end up with a weight of 20%-plus on the indices if it uses up its surplus cash for acquisitions. If it does, India will have a situation like Korea where Samsung Industries accounts for a fifth of the market.
Anoop Bhaskar of UTI AMC, says, "You allow them this high weightage and we will end up with a situation like Korea, where people have to live up with a 20%-plus weightage for Samsung. The larger implication is that since most of fund manager performance is benchmarked with the Nifty and they cannot give more than 9.9% weightage to any stock, we run the risk of underperformance. We have to either get the rules changed to allow fund managers to invest more than 10%, or follow MSCI and apply the 10/40 rule."
The 10/40 methodology was introduced by MSCI indices in 2002. Accordingly, the maximum weight of securities of a single issuer cannot exceed 10% of the market value of the index, and the sum of the weights of all issuers representing more than 5% of the market value of an index cannot collectively exceed 40%.
Vetri subramaniam, head-equities, Religare Mutual fund, says, "The practical implication (of huge RIL weightage) is that none of us can take a sell call, even if we have a negative view on the stock, because we are already underweight."
A free market call on Reliance Industries is therefore not possible and that gives a premium valuation to the stock.
"With people thus becoming unwilling to sell, Reliance tends to enjoy higher valuation in relation to other comparable stocks." Subramaniam adds.
Thus, Reliance's extra weight has a cascading effect and feeds on itself.
In the recent rally, the stock outperformed the Sensex by a huge margin. While the Sensex rose 47% between March 9 and May 13, the bluechip rose 68%. This, in turn, has taken its weightage up substantially --- on the Nifty from 11% to 13.3% and on the Sensex from 15.5% to 17.7%.
Most fund managers recognise this as an issue that needs to be addressed.
Sanjay Sinha, CEO, DBS Cholamandam AMC says, "If you have a disproportionately high weightage to a particular stock, it becomes difficult for the fund managers to bring out matching performance. Given the restrictions, that would be an issue."
But Vetri Subramaniam draws attention to the flipside. "In such a situation, it depends on which way the index moves. If index is going up, then we tend to be at disadvantage. But when it's falling, we tend to outperform because of the underweight."
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