Investors should consider brand name, performance of fund house

Are investors no more than consumers drawn by brands? Can just a name ring in returns? Birla, ICICI, Reliance and HDFC, household names in the country for decades, dominate the Indian mutual fund (MF) industry even as the lesser known among the urban investing elite, such as Canara Robeco, Taurus and Sahara, fail to draw investors despite some of their fine performances, though on a small asset size. One answer is the brand-pull.

But the fact is that a strong brand alone is not enough to keep a fund house on top forever. In India, the MF industry, once dominated solely by the Unit Trust of India for more than three decades, is today gaining ground with foreign companies, such as T Rowe Price, Nomura and BNP Paribas, investing to run asset management business.

But their strategy of entering into joint ventures with a dominant local name rather than an independent foray suggests that local brand names are far stronger than global ones. Despite being one of the early entrants in 1990s, Morgan Stanley is stuck with Rs 2,300 crore of assets while Reliance has about Rs 1,17,248.57 crore in its kitty.

In fact, nine off the top 10 largest fund houses of the country today belong to some of the prominent, well-known Indian brand names backed by strong pedigree. Data reveals that the market share of the top five fund houses in the country has increased from about 50% in 2007 to more than 56% by January 2010. Correspondingly, the top 10 fund houses of the country today enjoy a market share of about 80% visà-vis 73% in 2007.

These funds don’t just draw the corporate money, but also the retail investors who mainly come from urban centres and familiar with the business houses. Of the four crore or so equity folios in the country - predominantly retail - more than 75% of these investor accounts are with the top 10 fund houses, according to the Association of Mutual Funds in India (Amfi). Similarly, on the debt front, which is known to be dominated by corporate money, there are currently about 37 lakh investor accounts, of which more than 93% are dominated by these top 10 fund houses alone.

Even as the existing brandnames continue to dominate the Indian MF market, regulatory pronouncements such as scrapping of distributor commission from investments in equity schemes, have compounded the problems of other smaller fund houses. Until the time, the investor is in this country is financially responsive enough to pay the distributors a fee for advisory and other services, the onus to compensate the distributor to indulge him into selling their products is now on the fund houses. This will impact the margins of these fund houses especially when most of them are already reeling under losses.

Thus, the regulator, while ensuring transparency for investors with respect to charges levied on MF investments, has also endeavoured to make MF industry a preserve for serious players only, re-enforcing the maxim - ‘survival of the fittest’. Just that fitness here is grossly dependent on the brand name, size and reach.

But for investors, it may not be wise to blindly follow the brandname and size of the fund house without analysing the past performance and also the fund manager’s track record. One of the examples of investors getting carried away by brand-name and size without consideration to performance is the maddening rush to invest in new fund offers (NFO) of popular fund houses.

Despite the fact that the financial advisors have time and again advised investors against investing in NFOs in the absence of any performance record to justify an investment, investors usually end up thronging to these offers on the mere pretext of buying the units at the face value of Rs 10.

For instance, Reliance Natural Resources Fund created a record at its launch in Jan 2008 - just a few days before the financial crisis hit the market in 2008. It collected about Rs 5,660 crore, second highest only to the collections of Reliance Equity a couple of years ago.

Today, two years after the record setting collection, at Rs 9.75, its net asset value (NAV) languishes below the face value of Rs 10, despite benchmark indices recovering sharply. Similarly, Birla Sun Life’s Special Situation Fund, launched around the same time received around Rs 900 crore. The fund is today trading at Rs 9.19 per unit. Thus, though brand name is important to ensure the fund house stability, investors should also consider the long term performance of schemes before investing.

To illustrate, some specific schemes of rather smaller fund houses such as Canara Robeco, Sahara and Taurus are today reporting relatively better returns than some of those belonging to larger fund houses. An argument against them is they manage small funds and it is always easier to manage smaller funds than the larger ones.

Canara Robeco manages about Rs 9,000 crore of assets while Sahara and Taurus manage about Rs 608 crore and Rs 1911 crore, respectively. And if one were to assume that these companies may attract assets in future, of these three, it is Canara Robeco which is better placed given the strong backing of a prominent state-owned bank that has both the brand-name as well as the reach.

Thus, despite performance being a forte, in the absence of a strong distribution and identity, it will be difficult for many such smaller firms to survive in the ever changing and more challenging environment of the Indian mutual fund industry.

Source: http://economictimes.indiatimes.com/Features/Investors-Guide/Investors-should-consider-brand-name-performance-of-fund-house/articleshow/5574498.cms?curpg=2

Indian mutual funds approach zero tax destinations to raise offshore capital

Representatives of offshore financial centres like Cayman Islands, Isle Of Man, Mauritius and British Virgin Islands are going all out to convince Indian clients to launch their business or investment verticals from these jurisdictions. Corporate advisory businesses in these ‘capital havens’ have begun offering India-centric services to asset management companies (AMCs) and firms intending to raise capital or launch investment vehicles.

According to international lawyers, Indian mutual funds, investment firms and corporate bodies are approaching zero tax destinations to raise offshore capital or start new business verticals. Corporate enablers (international lawyers, corporate advisors etc.) are working overtime to get these businesses to jurisdictions they represent. The trend of Indian companies launching offshore funds or special purpose vehicles has picked up post the market turnaround since mid-2009.

“We’re getting enquiries from several investment managers now. The idea of setting up offshore funds is fast catching among Indian asset management companies,” said Chetan Nagendra, head of India practice, Harneys Westwood & Riegels, a firm that services clients setting up businesses in British Virgin Islands (BVI) and Cayman Islands.

On their part, zero-tax jurisdictions like Cayman Islands, Isle Of Man, Mauritius and BVI are trying hard to get as many India listings as they can while market conditions are favourable. Asset managers or corporates would prefer these jurisdictions as they provide benefits like tax neutrality, zero tax on investment income and flexible corporate & regulatory structure.

“India becomes a logical step to us after having covered almost the whole of Asia. Moreover, there is intense competition among similar destinations to get more listings and business. The competition is driven by increased regulatory and transparency requirements from global players,” said Sherri Ortiz, ED, BVI International Finance Centre, which is the largest FDI contributor to China.

Almost all these zero-tax jurisdictions are offering tailor-made solutions like offshore fund licensing , capital raising, SPVs and trading company formation, setting up trusts, M&A services and shipping & aircraft registry services (for affluent Indian clients). Experts expect M&A services to do well in India as most companies are looking for foreign partners or overseas acquisitions.

“India is a good market because of its mass population and growth. From a practitioner’s point of view, setting up an offshore businesses or fund is relatively easier than incorporating them locally,” said Kapil Dhar, consultant, Sable Trust, that services trusts in BVI.

“Though highly regulated, it takes just about 24-48 hours to start a new company or fund in BVI. This helps professionals like fund managers — who have money on the line — to start their investments immediately,” he added. Offshore financial destinations have always been a conduit for capital flows into India.

Large chunks of investments flow into the country from tax havens like Luxemburg, Mauritius, UAE and Hong Kong. Outflow of investment from these regions was over $16 billion in 2008-09 and $18 billion in the previous fiscal. However, there are many sceptics who doubt the quality of the money flowing in from these jurisdictions.

“There are lot of claims made by these jurisdictions; most of them just want to emulate the Mauritius model. In fact, none of these destinations have much to offer to Indian clients. Regulators do not like the trend of setting up offshore funds or investment vehicles and they are right about it,” said Ashvin Parekh, partner-financial services, Ernst & Young.

Source: http://economictimes.indiatimes.com/personal-finance/mutual-funds/mf-news/Indian-mutual-funds-approach-zero-tax-destinations-to-raise-offshore-capital/articleshow/5582011.cms

Faber: Don't Ignore India

The rising Asian powerhouse is adding middle-class consumers at a heady pace, writes Dr. Marc Faber of The Gloom Boom & Doom Report.

I found it remarkable that at a recent Barron’s roundtable discussion in New York where a number of prominent strategists and portfolio managers had gathered, India—the world’s second-most populous country, with more than a billion people and an economy that is growing at around 8% per annum—wasn’t mentioned once.

In the year to March 2009, India added 125 million mobile phone subscribers! And whereas Indian auto sales are tiny compared to China’s vehicle sales (running currently at an annual rate of over 12 million units and up over 90% year on year), they are nevertheless up 39% year on year, with an annual rate of 1.6 million sales.

India’s middle class is estimated at 170 million (half the population of the US), and the country has one of the lowest vehicle-penetration rates in the world. Given that India also has one of the youngest populations—half of its 1.1 billion-plus people are less than 25 years old, compared to 42% in Brazil, 36% in China, and less than 30% in the developed nations—car sales will undoubtedly continue to soar in the next few years. In this respect, we should also take into account that India’s population will continue to grow rapidly and will exceed China’s population before 2030.

McKinsey estimates that by 2025, India’s middle class (households with disposable incomes of from 200,000 to one million Rupees a year) will increase to close to 600 million people, or more than 40% of the population.

This is not to say that India is free of problems. Its rapid population growth will be challenging. India’s land mass is only a third that of China or the United States, yet its population will exceed 1.4 billion in 20 years’ time. With close to 20% of the world’s population, India has just 4% of the world’s water resources and is likely to suffer in future from water scarcity.

Tensions between India and China [could increase over disputed Himalayan territory and] also in the Indian Ocean, where China has been involved in a number of port development projects.

Individual investors may wish to invest in New York-listed Morgan Stanley India Investment Fund or individual companies such as Infosys and ICICI Bank a very well-managed bank.

I should stress that I am far from certain about current stock prices providing an ideal entry point; however, given the country’s size and economic potential, investors who either have no exposure to India’s economy and vibrant corporate sector or are massively underweight Indian stocks should gradually become more involved in this promising country.

Source: http://www.moneyshow.com/investing/global.asp?aid=GlobalPer-18937

Irda hits back at Sebi on Ulips

Questions market regulator’s showcause to insurers on conceptual, legal, structural grounds.

The Insurance Regulatory and Development Authority (Irda) has said the Securities and Exchange Board of India’s (Sebi) notice to insurance companies on unit-linked insurance plans (Ulips) sold by them was “misconceived on conceptual, legal and structural grounds”.

Irda’s letter to the market regulator comes after the latter’s showcause notice to insurance companies last month, asking why they had not taken Sebi’s approval to sell Ulips.

In a letter to Sebi Chairman C B Bhave last week, Irda’s Deputy Director (Life) Sudipta Bhattachaya pointed out that the regulatory set up in India, which had legal backing, was clearly demarcated.

In its letter, the insurance regulator said the road map for regulation of Ulips by Irda was “well laid down, and settled,” and there was “no merit” in the contention that insurers must obtain a certificate of registration from the Sebi for selling these products.

Following the Sebi showcause notice on January 15, life insurers had approached Irda. “While there is an element of market exposure, the insurance component is much higher. The rules are fairly clear and investor interest is clearly protected,” said the CEO of one of the largest life insurance companies. For some private players, Ulips account for close to 90 per cent of new business.

Application of mutual fund rules to Ulips would mean that companies will not be able to pass on the commission to customers, since entry loads have been banned for mutual funds. In addition, the investment and accounting rules are different for Ulips and mutual funds.

Sources close to the development said Irda’s letter has pointed out the legal provisions that limited Sebi’s jurisdiction to securities and securities related transaction.“What constitutes a security has been defined in the Securities Contract (Regulations) Act, 1956 and insurance contracts are not regulated under these securities laws,” it said.

Further, Irda said that structurally, Ulips are distinct from mutual funds and pointed out that the minimum capital requirement for an insurance company was Rs 100 crore and also maintain around 3 per cent as solvency capital. In contrast, an asset management company “is required to manage thousands of crores of assets with just Rs 10 crore”.

“Certain similarities in the features of various products issued in the financial world would not necessarily imply regulatory overlap,” Irda added.

Asked to comment, a senior Sebi official said: “Ulips are hybrid investment products with insurance cover and since it involves management of funds, Sebi has a role in protecting the interests of investors... Ulips are fit for regulation under Sebi’s mutual fund regulations.”

He, however, added that the Sebi was waiting for replies from insurance companies before deciding on how to regulate them.

In its letter to Sebi, sources said Irda also attached a copy of its mandate, which states that the regulator has to “protect the interest of the holders of insurance policies”.

Sandeep Parekh, a faculty member at the Indian Institute of Management, Ahmadabad and a former Sebi legal advisor said buyers of insurance policies were not sophisticated enough to understand the fine print or the risks associated with such plans.

“Ulips, which are mutual fund products with a fig leaf of insurance, ought to be regulated by Sebi. This is notwithstanding the fact that the insurance regulator already regulates it. There is nothing unusual with more than one regulator regulating a product,” he added and pointed to the joint regulation of currency futures by the Reserve Bank of India and Sebi.

Source: http://www.business-standard.com/india/news/irda-hits-back-at-sebiulips/385953/