Fund management fees rise with markets

Management fees to equity fund managers and investment advisors rose 42 per cent, or Rs 224 crore, in the first half of financial year 2009-10.
Fund houses pay management fees on the basis of assets and since assets under management (AUM) of equity schemes have risen 75 per cent, or Rs 83,000 crore, in the first half of the current year, fund managers’ fees have gone up to Rs 759 crore.
The over 100 per cent rise in markets during the period has led to a considerable increase in assets of equity funds. This resulted in higher payment towards management fees, said Anil Chopra, Group CEO, Bajaj Capital.
In the second half of 2008-09, fund houses paid lower fees (Rs 535 crore) to their managers due to the over 50 per cent decline in value of equity portfolios, he added. In the first half of 2008-09, when the market fell off its peak, excessive portfolio churning led to higher administration expenditure. Also, outflow due to management fees stood at Rs 891 crore.
The record shows that fund managers and investment advisers’ remuneration varies in a volatile market. In 2007-08, when the Sensex moved up from 12,000 to 21,000, fund houses paid Rs 1,673 crore to fund managers. Conversely, in the second half of 2008-09, when the Sensex fell to 8,000-10,000, the fees dropped to Rs 535 crore.
During a lean period, inflow into equity funds through new fund offerings (NFOs) and sale of existing schemes fell sharply from Rs 52,701 crore in 2007-08 to Rs 4,084 crore in 2008-09. Mutual fund investors were cautious in the rising market too and subscribed to no more than Rs 5,344 crore of NFOs in the first half of 2009-10.
The turnover of mutual funds on the bourses declined sharply from Rs 2.46 lakh crore in the second half of 2007-08 to Rs 1.61 lakh crore in the first half of 2008-09, and Rs 1.19 lakh crore in the second half of 2008-09. With the BSE-500 index appreciating around 125 per cent from its 52-week low on March 9, 2009, the MFs’ turnover on BSE and NSE has more than doubled to Rs 2.75 lakh crore since April 1.
Reliance MF topped in the list of fees, with payment of Rs 132 crore, followed by UTI MF (Rs 86 crore), HDFC MF (Rs 81 crore), SBI MF (Rs 68 crore) and Franklin Templeton MF (Rs 61 crore).

Source: http://www.business-standard.com/india/storypage.php?autono=377774

Lagging behind in performance

Quant funds should be used only for portfolio diversification, and are suited for high net worth investors.

Computers have replaced humans in many walks of life. And now, these machines are finding their way in the investment world too. Financial institutions like banks and mutual funds are using them for jobs that traditionally required a huge amount of human experience – picking stocks, for instance.
Consequently, mutual funds are launching products, based on quantitative analysis. Currently, two fund houses have such funds. Reliance Mutual Fund’s scheme is called Quant Plus and Religare Mutual Fund has AGILE. The latter has two variations – an open-ended equity fund and an equity-linked savings scheme. The latest to join the bandwagon is Canara Robeco. The company plans to launch Large Cap+ Fund, based on quant.

The analysis involves using historical data of stocks and prediction of stock movements, accordingly.
But returns, as of now, have not been too impressive. If you look at the performance of the existing fund, human intelligence has outperformed the artificial intelligence. Religare Agile has returned 57.11 per cent since January. The ELSS scheme has 84.80 per cent returns. And, Reliance’s scheme has fared better with returns of 86.14 per cent.
Equity diversified schemes have fared much better comparatively. Out of the total 189 equity diversified funds that existed before January, 110 have given higher returns than any of these quant funds.
But that’s in their characteristic. As Vetri Subramaniam, head – equities at Religare Mutual Fund and also the fund manager for the AGILE scheme, explains, “These funds work on historical data. The volatility seen globally, and in India, in the past year- and a-half has not happened before.”
WORKING OF QUANT FUNDSThese funds pick stocks based on a computer programme. This computer programme is made on trends of various stock market parameters observed in the past 10-15 years. The parameters could range from price-to-earnings (PE) ratio, stock price movement, market sentiment, earnings expectations and so on.
Every fund house has a proprietary model based on the parameters they choose. For example, Canara Robeco uses PE and price-to-book ratio, upgrades and downgrades recommendations by analysts, stock momentum of the recent past, earning valuations and earning expectations by analysts.
Analysts in one of the mutual fund’s parent company, Robeco, used this model at headquarter in Netherlands. “The programme is further tweaked to Indian markets based on what is perceived to drive stock prices in the country,” said Anand Shah, head – equities at Canara Robeco.
Reliance uses parameters such as periodical moving average of the stock, liquidity, market capitalisation, PE and PB ratios, earnings before interest tax depreciation & amortisation (EBITDA) & EBITA margin and other parameters, based on the balance sheet and profit and loss account.
These models assume that stock markets or companies will continue to behave the way they have in the past. “But under different situations like the sharp fall of 2008, mathematical models might not hold good. These funds can, therefore, generate significant losses to investor,” said Chintamani Dagade, Head of Research at Morningstar (India).
Religare AGILE faced the same problems last year when market fell. The one year returns for the fund is mere 36.65 per cent. The category average of the equity diversified funds delivered 90.56 per cent returns in the same time.
Another industry expert said that quant funds are more likely to succeed in the developed countries, where markets are efficient. He also added, “As the models are proprietary, asset management companies (AMCs) keep them secret. This causes transparency and accountability issues.”
The existing funds from Reliance Mutual Fund and Religare Mutual Fund are very aggressive. With their benchmark as 50-share Nifty index, their portfolio comprises of less than 20 funds. They also use futures and options extensively.
“As the portfolio consists of a few stocks, these funds will tend to outperform the market in the bull phase and fall heavily in downturns,” said Subramaniam.
These funds tend to use a lot of technical analysis and hence, suited for seasoned investors only. Pankaj Narain, director, head private clients at Deutsche Bank also said that quant-based funds are for investors who have a large portfolio of investment and they have their asset allocation in place. “This is essentially for investors who are looking for diversification in investment strategy. Such investors can put in 3-5 per cent of their portfolio in these funds,” said Narain.

Source: http://www.business-standard.com/india/news/lagging-behind-in-performance/377200/

Finance ministry sets up panel to study foreign capital flows

The Union ministry of finance has set up a working group to study and suggest changes to the legal and regulatory framework on foreign portfolio investments, it said in a statement Tuesday.
The committee will also study rules and regulations relating to foreign institutional investors (FIIs), non-resident Indians, and venture capital and private equity investors.

One person nominated to the panel said the committee will also look into issues relating to debt capital inflows and the policy on external commercial borrowings. “The panel has been given four months to submit the report and a meeting will be convened soon,” he said on condition of anonymity.
The committee will be headed by U.K. Sinha, chairman and managing director, UTI Asset Management Ltd, the fourth largest mutual fund manager in India. Ravi Narain, chairman of National Stock Exchange Ltd, economist Ajay Shah, finance ministry official K.P. Krishnan and corporate lawyers Bahram Vakil and Somasekar Sundaresan will be part of the 16-member group.
The group will review and suggest rationalization of policy on foreign inflows with a view to encourage foreign investment and reduce hurdles while maintaining know your customer norms. It will identify challenges in meeting financing needs of the Indian economy through foreign investments.
Currently, foreign capital flows come in through foreign direct investment (FDI), FIIs and foreign venture capital investment, with different rules for each.
While some sectors have been fully opened up to FDI, there are caps on others such as insurance and retail. The government has also prescribed maximum investment levels under the different routes.
Foreign investors, though, have often used loopholes to exceed limits by registering a sub-account with markets regulator Securities and Exchange Board of India, and buying shares of Indian companies in excess of FDI limits. Although legal, it defeats the purpose of the limits.
The group will also study participatory notes and re-examine the taxation of transactions through securities transaction tax and stamp duty.

Source: http://www.livemint.com/2009/11/24231153/Finance-ministry-sets-up-panel.html?h=B