Don’t let numbers misguide you

As the Indian cricket team reached the pinnacle of the ICC Test Rankings, a certain statistic in a newspaper caught my eye. It said that Dhoni has a 100% win record as Indian Test captain. That sounds highly impressive, doesn’t it? But probe a bit deeper and you come to know that Dhoni has captained the team in only 10 Test matches as yet. While nothing can be taken away from his leadership qualities, it can be said that numbers can often be misleading. When we look at numbers from just the top, we often miss out on the real picture.
The same happens with retail equity fund investors. Newspapers of late have been running headlines about the inflating size of the fund industry’s assets under management. From Rs 6 lakh crore in May, to Rs 7 lakh crore in August to Rs 8 lakh crore in November, these numbers seem so impressive that any lay investor can be forgiven for thinking that people are putting in huge amounts into funds once again. However, that is not really the case. Let me explain why.
Basically, the Indian mutual fund industry is made up of two very distinct industries within itself. First is the wholesale debt fund industry (where the money comes largely from corporate companies) and then there is the retail equity fund industry (where the money comes largely from individual investors). Of course, there is an overlap of the two parts, but in context of the total AUM, this overlap is of a minor quantity.
Over the past few years, the wholesale debt fund industry has come along quite well. In 2004, the size of this industry was about Rs 1.15 crore. It has reached Rs 5.9 lakh crore now, a growth rate of almost 40% a year.
During this same time, the retail equity fund industry grew at a rate of about 50 % a year, from Rs 25,000 crore in 2004 to Rs 1.9 lakh crore now. This statistic, by itself, is fairly impressive. But when we probe further, we find that picture to be not so rosy because during this time the markets grew by 3.5 times, taking the Sensex at the floor level. Compare this to the equity fund industry’s growth of 2.4 times, and it becomes clear that the holla created over reaching Rs 8 lakh crore doesn’t paint the right picture.
The reason behind this is the investor behavior towards market gyrations. When the markets rise, everyone starts investing money, when the markets fall, everyone sort of hangs around, waiting and watching, and when a slight recovery is seen, everyone redeems their investments to avoid further losses. I have written about the futility of this investment approach a number of times. And the fact that the equity fund industry has grown so sluggishly can also be attributed to this approach.
For example, in February 2009, equity fund assets were at Rs 1.09 lakh crore. They rose to Rs 1.44 lakh crore in May 2009. Had the equity fund industry’s growth been in line with that of the markets, then the assets should have been at Rs 1.8 lakh. The missing Rs 36,000 crore is the amount that was redeemed by investors in a hurry. No wonder the funds underperformed the markets.
We are partly to be blamed for the equity fund industry’s sluggish growth, but we are completely at blame for the underperformance of our own portfolios. Had you stayed invested and not redeemed when the markets rose, then today your investments would have certainly been worth more than what you got. And therein lies the lesson that all investors need to learn.

Source: http://www.financialexpress.com/news/dont-let-numbers-misguide-you/553625/0

Equity portfolios in November — What's in, what's out

The month of November delivered a divided verdict on the direction of equities. While it may never be easy to call the market direction with perfection, what retail investors can do is take cues from the way the various mutual fund managers, known for their investment acumen, fare.
Last month, though a few retail investors opted out of market, what with high redemptions reported in equity schemes over the month, fund-houses did undertake their usual realignment in weights to sectors and stocks.
Though only an indicator, tracking what mutual fund houses buy and sell every month can go a long way in helping retail investors build their equity portfolio. Here's a look at what the many fund managers bought and sold last month.

Sector Choices
Driven by the need to fortify their portfolios as also diversify sector exposures, fund houses appear to have added exposure to sectors such as hotels, oil and gas and minerals. They, however, pared exposure to telecom equipment, auto ancillary and paper products.
Another interesting sidelight was that funds reduced their exposure to the consumer non-durables sector. Even as the telecom sector was being de-rated by analysts — with players aggressively slashing rates — fund-houses stepped in as buyers. Most funds seem to have used the price correction in telecom stocks to accumulate them.
Yet another trend was the increased debt allocation in fund portfolios compared with the levels seen the previous month. The move to debt may have been driven by the funds' dividend declarations and higher redemption obligations.

What's in?
Hindalco appeared to have attracted the most attention last month, with fund holdings in the stock increasing by more than 63 per cent over October to 8.24 crore. Among the other stocks that saw accumulation were Indian Hotels, Spice Jet, ITC, Mercator Lines and Pantaloon Retail.
Even the newly-listed stock NHPC managed to attract buying interest. Metal stocks such as Adhunik Metaliks and SAIL also drew significant interest; while the former stock saw an addition of 88 lakh shares; holdings in the latter went up by 22 per cent.

What's out?
The quarterly earnings numbers weren't reason enough for MFs to hold on to the auto ancillary stock Apollo Tyres, which topped the list of stocks sold. Over 91 lakh shares of the company moved out of the funds' portfolio.
However, in terms of market value, it was Jaiprakash Associates, Hindustan Lever, Unitech and Suzlon Energy (in that order) that topped the ‘sell' list. Another interesting trend — while funds added stocks from oil refineries, they diluted their holdings in oil market companies such as HPCL.

What mid-cap funds bought
Mid-cap funds too had their share of action. Software stock Hexaware rose to be the most sought after stock in the mid-cap space, followed by Everonn Education, Dena Bank, Brigade Enterprises, and Vijaya Bank. A few large-cap names also figured in the ‘buy' radar, with Adani Power, NTPC and JSW Steel making their way into mid-cap funds' portfolios.

What they sold
Fund houses focussed on mid-caps, however, diluted more than 67 per cent of their holdings in Indiabulls Financial Services.
They also selectively pruned their holdings in the cement space, with stocks such as India Cements, Kesoram Industries and Mangalam Cement losing preference.
Among other notable stocks that moved out were Tata Steel, Jet Airways, and Everest Kanto Cylinder. While funds preferred mid-cap education service provider Everonn Education, they seem to have diluted their exposure in sector leader Educomp Solutions.

Source: http://www.thehindubusinessline.com/iw/2009/12/13/stories/2009121351151000.htm