Mutual funds bet big on growth sectors

The 30-stock Sensex has risen around 10% from its recent low of 15,404 points on 3 November to close at 17,131 on Tuesday

Driven by better-than-expected corporate earnings in the quarter ended 30 September and recent government announcements on disinvestments, mutual fund managers are showing their optimism by betting on high-growth sectors despite a doubling of stock prices in the past seven months.

The 30-stock Sensex, the bellwether index of the Bombay Stock Exchange, has risen around 10% from its recent low of 15,404 points on 3 November to close at 17,131 on Tuesday. It has gained 77.57% since 1 January.

A Mint analysis of the portfolio data of diversified equity schemes shows that fund managers have significantly higher allocations for automobile, construction and metal sector stocks.

The analysis looked at the month-end portfolio data of diversified equity schemes between 31 March and 31 October. The data was provided by mutual fund tracker Value Research.
While energy and financial stocks continue to command the most investment, allocation to sectors such as consumer goods has come down significantly.

Allocation to auto stocks rose to 4% at the end of October from 2.85% in March. Investments in construction companies almost doubled, from 2.5% to 4.9%. Technology stocks saw increased allocation, up from 4.9% to 7.25%.

The aggressive allocation strategy is a reflection of rising confidence in the economy and businesses, fund managers said.

“Overall economy numbers and other indicators like auto and property numbers are much stronger than expected,” said Suresh Soni, chief executive officer of Deutsche Asset Management (India) Pvt. Ltd, which manages Rs13,795 crore in assets. “However, internationally, central banks are not withdrawing the accommodating monetary policy and have said they will continue the easy monetary policy for a specified period. This has put us in a sweet spot, which is propelling optimism.”

Chennai-based N. Prasad, who runs an independent research firm and is former chief information officer of Sundaram BNP Paribas Asset Management Co. Ltd, said: “Most fund managers are increasing allocation to economy-sensitive stocks in their portfolio. (There’s) nothing wrong with this strategy as most confidence indices are turning positive.”

According to Prasad, the fiscal deficit is no longer a big worry. “The government disinvestment programme is expected to bring it back to FRBM targets.”

The FRBM (Fiscal Responsibility and Budget Management) Act aims to bring down the government’s fiscal deficit to 3% of India’s gross domestic product.

Another important factor that has contributed to the increasing weightages is the movement in stock prices.

Ritesh Sheth, fund manager, SBI Funds Management Pvt. Ltd, which manages Rs38,322 crore in assets, said: “It is not clear whether this increased allocation can be fully attributed to the purchases by fund managers. A lot of it would be due to the price action. For example, a sector like telecom is facing an uncertain period. People are keeping away because there are a lot of ifs and buts. One is not sure on what basis the profitability of these companies need to be calculated in the short term. So, everyone is waiting for the dust to settle.” Allocation to the telecom sector has halved.

Fund managers have also been burnt by a high cash strategy that affected fund returns between March and June. Funds had cash levels of 15-20% and missed the rally triggered by return of the United Progressive Alliance to power at New Delhi in May.

A study of equity funds by Crisil FundServices, a research unit of ratings firm Crisil Ltd, also shows that funds with lower cash holdings have outperformed others in the long run.

While funds with higher cash holdings cut their losses in a falling market, they tend to miss out on a subsequent rally. Further, equity funds with minimal cash holdings fared only marginally lower in a downturn, but benefited considerably more from a rally.

The most notable performance in the downturn came from fully-invested funds that made timely and prudent investment calls in sectors such as pharmaceuticals and consumer goods, the Crisil report said.

“Investing in defensive sectors to negotiate a down market proves to be a more effective strategy as such funds can bounce back faster during a market correction,” said Krishnan Sitaraman, director, Crisil FundServices.

“Investors invest in equity funds primarily because they are perceived as value creators and it helps them diversify from their debt investments. By taking cash calls, funds defeat this very basic objective of investors,” Sitaraman added.

However, Prasad cautioned that valuations could be a dampener for fund managers’ optimism. “Market looks rich largely because earnings are below the long-term trend level of 21%,” he said.

The Sensex, India’s most tracked index, has climbed at least 110% since the lows of March, a rate of growth surpassed only during its rise in the early 1990s during a stock market scam engineered by trader Harshad Mehta.

The index is trading at 20.96 times the estimated earnings for the fiscal year to March. The average range of valuation for the index has traditionally been 14-17 times of earnings.

Soni of Deutsche Asset Management said valuations have to be seen from the perspective that they had been depressed unrealistically when market hit historic lows. “In the near term, it’s a concern. But in the medium term, it’s not.”

Source: http://www.livemint.com/2009/11/24232136/Mutual-funds-bet-big-on-growth.html

Brokers keen on MF trading

Say move to deepen market but existing distributors may get annoyed.

The recent move by the Securities and Exchange Board of India (Sebi) to facilitate mutual fund transactions through the existing stock exchange infrastructure has found many takers, with broking companies keen to venture into this new area within a fortnight.

Brokers said trading in MF units would help them enhance volumes. In return, investors would save costs, they said. However, they added that this would be different from equity transactions and require a dedicated team.

Motilal Oswal, chairman and managing director of Motilal Oswal Financial Services, said, “We are set to offer this value-added service as it will provide transparency, reduce costs from investors’ perspective and increase volumes.”

A majority of existing asset management companies (AMCs) do not have a wide network and are limited to a few cities. On the other hand, broking companies have spread to semi-urban regions and are now focusing on retail investors.

Dinesh Thakkar, chairman and managing director of Angel Broking, said, “There is no reason why should we not get into mutual fund trading. AMCs do not have the reach that broking firms can provide.”

Oswal said: “Our existing infrastructure, with a distribution network having access to 560 cities across the country, will be adequate to offer this service. What will we require is mutual fund advisors.”

Trading of MF units on any day would be at the net asset value (NAV) fixed for that particular day, said brokers. Though most brokers are enthusiastic, some say how things turn out is yet to be seen.

Mohan Natarajan, executive vice-president at Edelweiss Capital, said, “Tracking equity and mutual fund markets are two different things. In mutual funds, it is the fund manager’s call which matters. Moreover, the fund market is not as volatile as equity markets. In case it remains an investors’ game, volume may not be there.”

Fund houses agree that using the exchanges’ infrastructure will expand the distribution network significantly. “However, it could annoy existing distributors and small town advisors,” said the chief investment officer of a leading domestic fund house.

Existing MF distributors and financial advisors are taking this as another challenge to their already shrinking business after the ban on entry load in equity schemes came into effect in August.

According to them, it is doubtful if the issue of low penetration of MF products can be addressed by using the existing infrastructure of stock exchanges.

“Though the market regulator wants to increase mutual funds’ reach to the masses, how will such a move increase retail participation? Existing clients of broking firms are likely to go for this service. Moreover, how many brokers would like to take care of small mutual fund investors who invest far less money than equity investors?” said a leading MF distributor who did not wish to be named. According to the equity head of a foreign MF, “Using the exchange’s network will enhance the fund market, resulting in easy transactions. However, the platform has to be more complicated to take care of the various intricacies involved in trading, such as track record of funds, etc. Else, it will be difficult to make investors understand what to buy.

Source: http://www.business-standard.com/india/storypage.php?autono=377522

NSE's new MF service system from Nov 30

The National Stock Exchange on Tuesday said it is proposing to introduce a new mutual fund service system (MFSS), which will enable its members to use the existing infrastructure for transaction in MF schemes.

The NSE proposes to introduce new MFSS for facilitating transaction in MF schemes through the stock exchange infrastructure, the NSE said in a circular, adding the new MFSS will commence from November 30.

Market regulator SEBI, in a recent circular, gave its approval for facilitating transactions in MF schemes through the stock exchange infrastructure.

"The infrastructure that already exists for the secondary market transactions through the stock exchanges with its reach to over 1,500 towns and cities, through over two lakh stock exchange terminals can be used for facilitating transactions in mutual fund schemes," SEBI had said.

The stock exchange mechanism would also extend the present convenience available to secondary market investors to mutual fund investors, the market regulator had said.

The existing MF scheme, introduced in December 2000, will be substituted with the new MFSS, the exchange added.

Source: http://economictimes.indiatimes.com/NSEs-MF-service-system-from-Nov-30/articleshow/5265292.cms

It is payout time for mutual funds

In a bid to woo investors, mutual funds have embarked on a dividend declaration spree. Over a dozen fund houses, large and small, including Reliance, UTI, ICICI Prudential, SBI, Tata Mutual Fund, DSP BlackRock, Religare, Bharti Axa, Taurus, are doling out dividends in the range of 10-50 per cent.

At a time when new incremental inflows are not coming in, dividend declaration works as a mechanism to attract more investors and fresh inflows, said Mr Krishnan Sitaram, Head of Fund Services, CRISIL.

In the run up to the tax planning season, tax-free funds are seen declaring dividends to lure investors. It is easier for distributors also to sell the product on the back of such an incentive (such as a dividend declaration).

Fresh inflows into equity funds have fallen by more than 50 per cent as on October-end, compared with the July-end numbers. According to industry body AMFI’s figures, investments into equity funds were at Rs 4,261 crore in October as against Rs 8,737 crore in July. The benchmark index Sensex has gone up by over 13 per cent since July.

Declaring dividends works as a goodwill gesture and also works as a tool to attract more money from new investors, said Mr Rakesh Goyal, Senior Vice-President, Bonanza Portfolio.

Typically, when the equity market goes up there is value appreciation in the equity schemes. Hence, fund houses give dividends to reward investors, said Mr Srinivas Jain, Chief Marketing Officer, SBI Mutual Fund.

Mr K. Venkitesh, Head of Distribution of Geojit Financial Services, agrees, “Dividend declaration is more of a selling tactic as it gives immediate returns, although the NAV of the mutual fund scheme falls after dividend is declared.”

Unlike the way corporate houses pay dividends, mutual funds simply sell off part of the funds assets to pay dividends. So on the record date of the dividend, the NAV of the fund drops and also the worth of the investor’s investments decreases to that extent, explained an analyst.

According to Mr Krishnan, dividend is not re-invested in the corpus of the scheme, and to that extent it is not a positive for the long-term investor who would have rather waited to gain on that re-invested amount also.

Source: http://www.thehindubusinessline.com/2009/11/25/stories/2009112551011000.htm