Mutual Funds seem to be seeking little 'value'

There are often talks that value investing worked many years ago when markets were less efficient. Now, with the amount of research that goes into stocks and the amount of new players that have entered the market, value investing has much less scope to unearth bargains. Or so the theory goes.

The chart that you are about to see next is one that will confirm to you that the above is nothing but hogwash.

But first, a brief primer on mutual funds. Out of the money that you invest in them, equity mutual funds hold a percentage this in cash. The rest they invest in stocks. A small part of this cash holding is out of compulsion, as they have to meet obligations from investors who seek to redeem their units from the fund. However, a larger part of this cash holding by a fund has a lot to do with how the fund manager thinks the markets will perform going forward. If he thinks that stocks will go down, he will sell some stocks and thus increase his holding of cash. Similarly, if he feels that markets will move up, he will by more stocks and consequently the fund’s cash holding will go down.

However, as the following chart shows, they can be quite bad predicting the direction of the market.

The chart plots the monthly cash holdings of the mutual fund industry as a percentage of their assets against the monthly low of the BSE Sensex for the past one year. The results are quite interesting to say the least. For as stocks got cheaper, mutual funds sold more stocks and increased their cash holdings to unprecedented levels.

So in effect, as Indian companies became cheaper to buy, Indian mutual funds were actually selling them instead of buying more of them. Quite the opposite of what they should have been doing. And this logic defying act was repeated by them on the way up too.

As markets have risen higher and higher in the last six months, and consequently stocks became more and more expensive, mutual funds have been buying them with full vigour. Infact, their cash levels have now fallen to extremely low levels once again.

Infact, cash holdings of diversified equity funds averaged around 5% to 6% of total assets in October-November 2009, levels that were last seen during December 2007 and January 2008 when the markets were at their peak.

Indeed. Buy high and sell low seems to be their mantra!

But that’s not such a bad thing afterall. It shows that most large mutual funds to this day commit the same mistake they have been committing for the last century or so. And in the process, they leave doors of opportunity wide open for those smart investors who realise that you should buy your stocks as you buy your groceries, not as you buy perfume. The cheaper the better.

Do not be surprised if markets tank sometime in the future and you see mutual funds selling once again. Just stick your neck out and look out for those bargains that will once again be yours for the taking.

Source: http://www.equitymaster.com/detail.asp?date=12/23/2009&story=5

Changing agents: who gets trail commission?

When you invest in mutual funds (MFs) through your agent, he gets a trail commission, also known as loyalty bonus, for as long as you stay invested in the fund. Typically it ranges from 40-50 basis points a year.

The market regulator, Securities and Exchange Board of India (Sebi), has made investors happy by scrapping the need to get a no objection certificate (NOC) before changing agents. However, it has left the agents in a fix—they have no idea who will get the trail commission.

When you invest in mutual funds (MFs) through your agent, he gets a trail commission, also known as loyalty bonus, for as long as you stay invested in the fund. Typically it ranges from 40-50 basis points a year.

However, in case an investor switches agents, it is not clear yet which one would get the commission—the new one or the old one. MFs are yet to take a firm stand on this issue.

Some agents feel that old agents should continue to get the trail commission even if investors shift their investments to another agent. Their argument is that some agents may unscrupulously drive away existing business of small agents.

Not all agree though. Manish Gadhvi, head (Mumbai operations), NJ India Invest Pvt. Ltd, one of India’s largest retail MF distributors, says: “An agent gets rewarded in terms of initial commission for bringing in new customers. The trail commission is meant to retain the customer. If the agent is unable to do so for reasons, such as lack of service, then he does not deserve the trail commission. What is the sanctity of the no-NOC rule then?”

A distributor source said a leading fund house has decided to pay the trail commission to old agents, a move that has not gone down too well with some agents. Agents have demanded a written communication from different fund houses and they are expected soon.

Source: http://www.livemint.com/2009/12/20211409/Changing-agents-who-gets-trai.html