'You should always play the contrarian'

Sanjay Sinha is the chief executive officer of DBS Cholamandalam Asset Management, a joint venture between the Murugappa Group and DBS of Singapore. Prior to taking over as CEO a year ago, Sinha was the CIO of SBI Mutual Fund. In an interview with Ram Prasad Sahu, he talks about the global recovery, the need for support from the regulators, macroeconomic environment and investment themes that would play out over the medium term.

Given the state of the world economy what kind of recovery do you expect?

Right now we are at a phase where there has been a significant recovery from the pessimistic picture that was painted six months back. The big question today is whether this will take a ‘W’ shape or will it be something that will be sustainable from the point where we are today. In isolation, it is difficult to sustain this recovery which is why there is a need for continuous support from central bankers and governments to keep the integrity of the financial sector intact. The recovery in the form of a ‘W’ shape springs from the fact that when the financial sector and economies have shown signs of recovery, the commodity prices have moved far ahead of what the fundamentals would have justified.

What kind of impact will the deficient rainfall have on the economy and corporate earnings?

About ten years back, the Kharif crop (sown in summer/monsoon season harvesting in October) used to be 66-67 per cent of the entire agricultural production. And this crop is largely dependent on monsoon. Now, proportion of Kharif is down to 53-54 per cent, almost equal to the Rabi crop (sown in winter, harvesting in spring). Though the delay in rainfall will have an impact, if we do get rainfall before the season is out, a large part of the Kharif crop would have been saved. Impact would have been much larger if we did not get any rainfall now, in which case even the Rabi crop would have been at risk. The fact that we have widely dispersed rainfall through the country now means that the negative fallout which was earlier forecast would be lower. It is estimated that about 50 bps to the GDP growth rate is at risk because of the delayed monsoon and the cascading impact the rural economy has on consumption.

Is there more steam left in the markets?

Market levels are a function of liquidity, valuations and events. The primary driver for the markets recovery in the initial phase has been liquidity. The Indian markets started moving up from the early part of May. And it was not due to election outcome as results had not been announced but the rally was in tandem with the rally in the global markets. The second phase got accelerated due to an event which was the strong mandate for the UPA government. However, this was not an uninterrupted rally, there have been event risks which have put short term breaks on the market.
For example, the budget not measuring up to expectations did retrace the market. Thereafter, government actions in terms of policy be it the intention to roll out the GST or the New Tax Code have been positive for the markets. As far as valuations are concerned they are not static in time. What may be appearing to be fairly valued or expensive at a point may not be the same after two quarters have passed between that point of view and the earnings being generated by the corporates. If we are in a range bound market, earnings would have moved up in the three to six month period and the visibility of the future quarters would make that level justifiable.

Considering the EPS estimates for FY 10 and FY11, are the markets jumping ahead of fair valuations?

Earnings expectations for FY10 would be flat to slightly positive while that for FY11 would be growth of 15-20 per cent. If you look at a 10-year average for Sensex, the P/E ratio has been 15 times. So a Rs 1,100 EPS for FY11 would be discounted by about 15 times at 16,500 levels for December. However markets also move up and down due to liquidity. If there is liquidity there could be a premium to this number in the short to medium. Unless we get into the exuberance phase with P/E at 21 times or so, the momentum would still be strong.

Which sectors which would be lead the recovery?

We can sum up investment opportunities across four themes. The first would be domestic consumption, the second would be commodities, third would be infrastructure while the fourth would be linkages to global recovery. These four would cover all the available opportunities in the market Across sectors, from a risk return perspective the scale is tilted more towards the midcaps than the large caps irrespective of sectors.
The large caps have already shown discounting of the optimism in their prices, the midcaps are just about catching up. In the process, the valuation difference that had emerged between the large caps and the midcaps were not justified given the change in environment. Under the circumstances midcaps would perform better. Within the domestic consumption, there is today room for it to be stable part of a portfolio. In 2006, 2007, FMCG and auto took a back seat but in 2009 they are back in the reckoning as far as the core portfolio is concerned.

You should always play the contrarian. Today, there is a unilateral point of view that the IT sector is vulnerable because the order flows are at risk due to protectionism or due to shrinkage of company budgets. Both these negatives are being played up more than what they should be.

What are the challenges for Indian corporates?

The high cost of borrowing is one as the lending activity in India has not come back to levels witnessed in the early part of 2008. Last year we were clocking 22 per cent growth in credit and now down to 15-16 per cent. There has been a lull in capacity expansion because of the environment. The positive side of this has been that corporates have been able to conserve capital at a time when it was desperately needed. The negative could be if they have delayed capacity expansion, they may not be able to meet demand which is likely to emerge and of which there are early signs. The passenger car sales in the current financial year are up by 24 per cent. In cement, while capacity expansion has slowed down, dispatch numbers continue to be strong.

Should one invest in gold while its prices have passed the $1,000 mark?

Gold price domestically is more a function of the currency movement. In dollar terms, the gold price has not moved significantly but in rupee terms it has moved a lot. This is a commodity which is inelastic in supply and it has traditionally been a hedge against inflation and if there is a feeling that commodity prices would shoot up then this could be a hedge.

Source: http://www.business-standard.com/india/news/%5Cyou-should-always-playcontrarian%5C/369939/

Sundaram Rural India failed to keep up benchmark index

The rural India may have anchored the country out of the global economic storm last year, but one of the few mutual fund schemes that focus on the hinterland, Sundaram BNP Paribas Rural India, is all at sea with many investors abandoning it.
Launched in April 2006, the fund’s objective was to predominantly invest in companies that gain from an expansion in the economic activity in rural India. It has however seen its asset size shrink from more than Rs 1,000 crore in Dec ’06 to less than Rs 300 crore in Aug ’09.

PERFORMANCE
Since its launch Sundaram Rural India has delivered just about 22% absolute returns till date, which is nearly half of about 43% returns posted by the Sensex and Nifty, and even 37% returns by its benchmark index, the BSE 500, during this period. This despite the fact that this fund had earlier outperformed the market indices in the first two years after its launch. It generated about 20% returns in 2006 against BSE 500’s 16%, while in 2007 it posted more than 68% returns, way ahead of the BSE 500’s 62%, Sensex’s 46% and Nifty’s 53%.
The fund, however, saw its fund value tumble by 62% in 2008 when BSE 500 fell by around 58% and the Sensex and the Nifty lost about 52% each in that one year when markets around the world crumbled like a pack of cards.
Here one can conveniently argue that the fund’s high beta of 1.08 explains to some extent its larger-than-market fall in the bear run. However, a logical counter argument to this is that a high beta also implies that the fund ought to perform better than the market in an upturn. The same, however, is not reflected in the performance of Sundaram Rural India so far this year. The fund has managed to generate just about 50% returns since January against the market returns of nearly 64%.

PORTFOLIO
Despite its rural focus, it is difficult to distinguish this fund’s portfolio with that of any other diversified equity scheme. This is because almost all large companies have a presence in rural India as all of them are looking for a pan-India presence with the village folks driving demand in everything from mobile phones to cars and bikes. Sundaram Rural India’s portfolio also comprises popular companies like Bharti Airtel, Punjab National Bank, SBI, Tata Motors, Maruti Suzuki, L&T , Mahindra & Mahindra and Hero Honda Motors, among others – stocks highly popular with any other diversified equity scheme. Thus, Sundaram Rural India is not threads apart from any other diversified equity scheme. But what differentiates it from the rest is its sectoral allocation.
This fund has always been heavy on consumer goods segment and has been increasing its exposure in this particular sector since Jan ’09. Today, more than onefourth of its portfolio is dedicated to this sector that includes consumer goods and sugar stocks. Recently it has hiked its exposure in sugar to more than 10% of the portfolio. Given the rising demand for sugar, if the sugar stocks are to see a further run-up , this fund is sure to benefit. The other prominent sectors include fertilizers and automobiles that account for about 15% each of the fund’s portfolio. The fund currently is well-diversified to accommodate around 40 stocks.

OUR VIEW
A different investment theme is not enough to attract investors unless it is backed by a lively performance. Rural India may be categorised as a different thematic fund. It however fails to compete even with its sibling funds like Select Focus, CAPEX and SMILE that have been recognized amongst some of the outstanding diversified equity schemes of the country today. Sundaram Rural India, thus, needs to put in a lot of hard work to match the performance of other schemes in Sundaram’s basket.

Source: http://economictimes.indiatimes.com/articleshow/5007660.cms

FMPs back by popular demand

Many a times, we have seen actors returning to screen under popular demand of their fans. Particularly popular on television, this is a tried and tested method of enhancing the actor’s as well the show’s popularity. In quite a similar fashion – although not in a similar context – a mutual fund category is back by popular demand as well. The fund category that I am talking about is the Fixed Maturity Plans (FMP).
FMPs were once a highly dominant product, but seemed to be breathing their last breaths last year. Somehow, they survived and managed to revive themselves and since then, they have seen a surprisingly fast-paced recuperation. The primary reason behind the FMPs’ revival has been that they are a set of products that cater to a real need and hence, the market has found ways of producing it.
For a long time, such fixed term funds were used primarily by large corporates to park money. However, over time, even smaller companies and high net worth individuals began opting for FMPs. Particularly with bank fixed deposits (FD) returns going down, FMPs have started to make sense as the better alternative. The recent high number of offer documents for fixed term funds filled with Securities and Exchange Board of India (Sebi) – 12 in the first half of August – is enough vindication for this category’s growing market.
Apart from their well know tax efficiency, FMPs have a number of other benefits over bank deposits as well. FMPs are closed-end funds, hence limiting liquidity. Investments in FMPs can be done only during the new fund offer (NFO) period and funds can be redeemed only after completion of the fixed term. Furthermore, returns on FMPs are also predictable. Until last year, fund companies gave out an indicative yield, which has now been disallowed by Sebi. Yet, investors get enough clues about the kind of returns an FMP is likely to fetch.
The expected returns of an FMP can be foreseen to a certain extent because these funds invest in debt papers with the intent of holding them till they mature. This means that despite any fluctuation in interest rates and the resulting impact on the market value of the paper, the actual returns that will be earned can be known. The only problem an FMP can face is a debt becoming bad. While this is a real risk, there have been no major fallouts because of it as yet. There have been FMPs that had invested heavily in papers of shaky real estate companies, but the previous year’s crisis has taught fund managers the importance of constructing FMP portfolios carefully.
All said and done, despite its issues, FMPs deliver a lot, to both its investors as well as the companies that these funds invest in. And herein lays the second reason behind the revival of the FMPs. In India, there is no active bond market. Companies need to find actual investors to invest in their debt and they do that through FMPs. In effect, FMPs become debt brokers. The fact there India should have a highly liquid debt market wherein bonds can be sold and bought is another story. We don't have such a market but FMPs have become a unique solution for it. So be it the first reason or the second, it seems like FMPs might encounter hiccups, but are here to stay.

Source: http://www.financialexpress.com/news/fmps-back-by-popular-demand/516582/0

Fund valuations head south

Entry load ban prompts many buyers to look at near-zero or pay-to-buy models.

Weighed down by a ban on charging investors entry load, mutual funds, specially those with low assets, have seen valuations nosedive.
Industry experts said valuations were down almost 50 per cent, from 5 to 6 per cent of assets under management (AUM) to 3 per cent after the October 2008 crisis because buyers were looking at asset quality rather than size.

MUTUAL STRESS POINTS

• Valuations hit because asset size does not ensure income.
• Cost of acquiring customers/assets hit by an upfront fee and higher trail commission.
• Many AMC balance sheets are already strained.
• Overdependence on debt where income is much lower.

In fact, unlike earlier years, asset size no longer warrants great valuations. “I don’t see why anyone should pay on sheer asset size anymore because it does not ensure income,” the chief of a leading fund house said.
In the heydays, asset management companies attracted high valuations. For example, Infrastructure Development Finance Corporation (IDFC) bought Standard Chartered Mutual Fund for around Rs 830 crore, or a whopping 5.7 per cent of its assets in April 2008.
But buyers can now expect to snap up funds at near-zero, or even be paid to buy a fund house. For example, last November, Lotus Mutual Fund had to pay Religare Rs 50-100 crore to take over its liabilities.
Things have worsened since then because of the entry loan ban by the Securities and Exchange Board of India (Sebi) on August 1. Experts said going forward, more such deals could take place, if not at pay-to-buy, but at 100 to 150 basis points of the AUM.
Already, there are talks that DBS Chola and Bharti Axa could be looking for buyers. And industry experts said there could be more players looking to exit. “Six to seven fund houses are looking for buyers, but valuation is the main issue,” said the chief investment officer (CIO) of a leading fund house.
After the entry load ban, Asset Management Companies (AMCs) face a catch-22 situation. To ensure fresh inflows and compete with big guns such as Reliance Mutual Fund and HDFC Mutual Fund, they need to pay distributors upfront fees plus a higher trail commission.
At the same time, the extra cost to ensure inflows will mean their already-strained balance sheets will continue to bleed. Sanjoy Banerjee, executive director, ICRA Online, said, “The industry's profitability was already extremely poor, according to the 2007-08 numbers. Things could get worse now.”
And although AMCs have only 25 per cent of their money in equities, it was their main source of income.
Earlier, the cost of garnering new clients was borne by the investor, in the form of the 2.25 per cent entry load on equity funds. As a result, fund houses were able to retain the 90 basis point to 1 per cent annual fund management fees in an equity scheme.
This income will be under severe pressure because the upfront payment of 50 to 75 basis points to distributors will have to be paid out of this.
Also, fund houses paying higher trail commission than the 0.50 to 0.75 per cent may have to bear the burden from management fees or the AMC’s capital.
In liquid and short-term debt schemes, in which most of the money lies, the average fund management fees range from 10 basis points to 50 basis points, depending on the type of fund.
And medium- and long-term debt schemes earn 75 basis points to 1 per cent.
Importantly, the upfront fees will have to be paid regularly by AMCs because of the high churn. “The average investor stays for only two or three years in equity and even less in debt.
The industry will have to continue incurring these high costs to acquire clients. Many AMCs may not be able to continue taking this hit,” said an industry expert.
Further, a large part of the assets is with a few top funds. At present, there are 36 AMCs. Out of the total Rs 7.48 lakh crore of AUM in August, 15 funds control Rs 6.72 lakh crore.
That means 21 AMCs have only Rs 75,000 crore, of which Rs 53,000 crore is in debt or debt-oriented schemes.
Industry experts blamed some fund houses for this mess. “Many fund houses went into the business with a ‘build-to-sell’ intention instead of a ‘build-to-operate’ motive. So assets were built using the wholesale route in debt funds where large-scale inflows and outflows take place making AMCs very unstable,” said a CIO.
Consolidation, thus, is on the cards. Banerjee felt that since small doesn’t make sense anymore, the industry could ultimately have 20 or 25 good players with staying power.
In fact, experts believed that the players waiting in the wings would have to do some serious rethinking because the timeline for becoming profitable would become much longer than the five or seven years which was the earlier target.
As Banerjee put it, “Sebi’s measures will means AMCs would have to work towards profitability. This, as a natural progression, would mean a healthier industry.

Source: http://www.business-standard.com/india/news/fund-valuations-head-south/370011/