Friday, June 12, 2009

Evaluating mutual funds a research-based task

Evaluating the performance of mutual fund (MF) schemes can be a daunting task. Because the net asset value (NAV) or price of one unit of the scheme only tells part of the story as getting the return from the scheme often doesn’t make much sense. According to investment experts, even those who claim to track the performance regularly mostly get the evaluation wrong. Only a few savvy investors have figured out where to source it from—something that may seem so simple yet can be quite a task.
“Most investors look at their acquisition cost and historical return offered by the scheme. Many often go by what the MF distributors claim as returns,’’ says Amit Trivedi, a financial trainer, who runs Karmayog Knowledge Academy. “Only savvy investors go by rankings given by popular websites like valueresearch or other publications. Mostly people are interested in historical returns,’’ he adds.
That is sad news, as an investor must have a clear picture of the scheme he or she wishes to invest or sell. A wrong evaluation could lead to wrong decisions. That, simply put, means loss of money or opportunity to make money. An investment consultant says: “Recently I got a call from a client. She wanted to invest in a particular scheme. When asked why she wanted to do so, she said she saw that it had given huge returns in the last one month.’’
The consultant then checked the scheme’s performance and found that it was a perpetual laggard that had performed only in the last month—something that needed investigation. Worse, there were other schemes in the same category with consistent and superior performance. Not convinced about the sustainability of superior performance in the long run, the expert advised his client against the scheme. “This is what happens when you don’t have a complete picture,’’ he says.
But, how does one “correctly’’ evaluate the performance? According to Trivedi, if one is considering investing in a scheme, even before analysing the performance one has to find out whether the scheme matches one’s investment objective. “It is important that the scheme’s philosophy matches your investment philosophy. For instance, if your investment style is conservative, the fund manager’s investment approach should be conservative. Or vice versa.’’
The next trap to avoid would be committing the mistake of comparing the scheme with wrong schemes or benchmarks. This may sound a silly mistake to make, though it is not. “One of the most common mistake investors commit is to merely look at the returns offered by the scheme. If you don’t look at the performance in the context of the relevant benchmark or peers, the figure doesn’t mean anything,’’ says an MF manager. “Another routing mistake is to look at the performance of schemes in the wrong category. Sometimes people even look at wrong benchmarks to draw wrong conclusions,’’ he adds.
Here is an example of how the comedy for errors takes place. Lets say the midcap category has been performing well in the recent past. If one were to compare a largecap scheme with one in the midcap category, the investor would wrongly assume that the largecap hasn’t performed well. However, this is not the case. It is just that midcaps have outperformed largecaps for a brief period of time. It would also be a mistake to compare the performance of a largecap scheme with the midcap index for the same reason.

Emerging market funds lag equity MFs

Emerging markets may have given a lot of cheer for global investors in the past few months. But Indian investors who bet on funds that invest in stocks of other emerging markets would have little reason to celebrate with their returns trailing diversified equity mutual funds (MFs) by a huge margin.
Emerging markets and Asia-focused equity funds have underperformed equity MFs significantly. While equity MFs returned 76.75% in three months (up to June 5) emerging market funds have managed to post a growth of only between 36.3% and 60.7%, data shows.
The steady rise of the capital markets, which brought handsome gains for equity MFs, has completely eclipsed the performance of other asset classes as well as stock markets of emerging economies. "Foreign investors were underweight on India earlier because of the fiscal position and significant rupee depreciation. This has changed now," says Gopal Agrawal, head, equity, Mirae Asset Global Investments.
With a stronger government at the centre now there is confidence among investors that proper measures would be taken to improve growth, he says. The strong economic fundamentals would help markets deliver a better performance in the long term, says a senior industry official. The better than expected corporate performance in the March quarter that matched the pace of expansion of the previous three months is a sign that the worst is getting over for the economy, say observers.
While BSE-30 and NSE Nifty posted a year-to-date (YTD) return of 56.6% and 55% respectively (up to June 5), many other emerging market indices managed much lower growth. FIIs have bought equity worth more than $6 billion since mid-March after pulling out $13 billion last year.
The Brazilian benchmark index Bovespa has risen 28.4% (between January 5 and June 5) while the Hang Seng recorded an YTD growth of 29.8%. Only Shanghai Composite and Jakarta Composite indices came closer clocking 51.2% and 53.4% jump.
Many funds including Principal Global opportunities that invests in an MF focused on emerging market equities and ING's global real estate and Latin America funds returned only about half of what the benchmark indices gave in three months. Franklin Asia equity growth fund that invests in a host of large-cap companies in China and South Korea including PetroChina, China Mobile, Hyundai Mobis and Samsung Electronics managed to grow only by 39.2% during the period. Commodity focused global funds have fared far worse. While Birla Sun Life global multi commodity growth fund returned 18.59%, ING Optimix global commodities posted a 31.02% increase, Value Research data shows. Mirae Asset global commodity stocks fund however notched up a higher growth of 66.18%.

Sebi to finance, nurture activist investor clubs

There are 22 investor associations registered with Sebi and they will qualify to
get money from the Rs15 crore Investor Protection and Education Fund
India’s securities market regulator will offer financial help to select investor rights groups fighting court battles against listed companies and market intermediaries such as brokerages. This was decided at a board meeting held on 2 February.The country lacks home-grown activist investors with the financial muscle to shake up corporate managements. But it has several associations of small investors that are pesky, popular and populist. Many have loose affiliations with political parties.Currently, there are 22 such investor associations registered with the Securities and Exchange Board of India (Sebi)—and they will qualify to get money from the Rs15 crore Investor Protection and Education Fund that it created in July 2007 for “investor education and related activities”.
The investor fund has been largely used till now to sponsor investor education camps across the country. But it could now be used for more activist causes. “The fund would be utilized for...aiding Sebi-recognized investor associations to undertake legal proceedings in the interest of investors in securities that are listed or proposed to be listed,” says the agenda that was cleared by Sebi’s directors on 2 February.A lot will depend on how the regulator identifies legal battles worth funding, especially since many investor groups are propelled by political agendas and are rife with vested interests.A former Sebi chairman, who asked not to be named, sounded a note of caution. “This step (to fund investor groups) is good, but scrutinizing cases and the agenda of investor groups will be a challenge,” he says.“Funding will be considered on a case-to-case basis,” said a senior Sebi official, who did not want to be identified. Sebi will pick up to 75% of legal fees in these cases.“There are many things investors can do compared to a regulator,” says Jayanth R. Varma, professor at the Indian Institute of Management, Ahmedabad (IIM-A). “Investors understand markets better than regulators.”The size of the investor fund, too, will be increased. Grants and donations from the Union and state governments or other institutions approved by Sebi will be credited to it. Additional investment by Sebi, and the interest or other income from investments made from the original corpus, will also be added to the investor protection fund.The market regulator has established certain ground rules to help pick the cases where it will offer financial help to investor groups.Legal cases fought by investor associations will qualify for Sebi funding only if there are a thousand or more investors affected, or likely to be affected, by issues such as mis-statement in offer document, non-payment of dividend, fraudulent and unfair trade practices or market manipulation.Legal aid will not be provided if the Sebi board is a party in the court case or where it has initiated enforcement action.IIM-A’s Varma, who is also a former Sebi board member, said the degree of professionalism in an investor association will be the key.According to him, a more effective step will be if India introduces class action law suits, as in the US.A class action suit is one filed by a group of people who are affected by a common issue. In the US, most lawyers charge a fee only if they win class action suits for their clients, unlike the flat fees charged by Indian lawyers irrespective of whether they win or lose a case. The US model provides incentives for lawyers to fight cases where investors cannot pay upfront.Sebi-approved associations include groups from big cities such as Mumbai, New Delhi, Ahmedabad, Chandigarh and Kolkata. It also includes groups from smaller cities such as Kolhapur, Vijayawada, Bhopal, Cuttack, Puducherry and Aizawl.“As of now, people are not interested in joining investor associations,” says A.P. Bakliwal, president of Sebi-registered Bombay Shareholders’ Association, which has 400 members who paid Rs2,100 for a life membership.“There is no full-time staff, even maintaining an office costs money. If we get funds, we will fight against anything that is not fair from the investors’ point of view,” Bakliwal adds.Investor activism of the sort practised by some of the global hedge funds is rare in India. Class action suits, too, are nowhere on the horizon. Sebi’s plan to partly fund select shareholder battles could be a useful start.IIM-A’s Varma sounded a note of caution: “It is easy for a large firm to buy out a small association of retail investors”.

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  • Principal Emerging Bluechip fund (Stock picker Fund) 11%
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  • IDFC Premier Equity Fund (Stock picker Fund) (STP) 11%
  • HDFC Equity Fund (Mid cap Fund) 11%
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  • HDFC TOP 200 Fund (Large Cap Fund) 8%
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Moderate Portfolio

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  • 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%
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  • 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%

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  • HDFC Prudence Fund (Balance Fund) 16%
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  • 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%
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