Wednesday, March 24, 2010

Retail participation across debt funds will surely increase

ICICI Prudential Asset Management Co. Ltd managing director Nimesh Shah says active asset allocation and duration management has helped achieve this feat

For the second year in a row, ICICI Prudential Asset Management Co. Ltd won the Morningstar debt fund house of the year award at a ceremony on Monday. Nimesh Shah, managing director of the fund house, says active asset allocation and duration management has helped achieve this feat. Edited excerpts:

Following the turmoil in 2008, how has the year 2009 been for debt funds?
The year 2009 saw return in investor confidence and investor appetite across debt funds. The importance of credit quality and processes was established during the 2008 downturn. There was acknowledgement of the benefit of following efficient disclosure practices, which led to enhanced investor communication and further improved transparency. The 2008 turmoil was more a result of the global economic crisis which was successfully tided over by the industry in 2009, when it witnessed significant asset growth.

What are the key factors that helped you come out as the top performer both during troubled times and during recovery?
Our investment objective has always been optimizing risk and returns for our investors by investing in high-credit, fixed-income securities, managing interest rate risk and minimizing liquidity risk. Our strategy is to focus on our investment philosophy through which we seek to achieve safety, liquidity, and return (SLR) for our debt portfolio. This approach helped us retain investor confidence during the 2008 downturn and build long-term relationships.

We were doing the right things and the market environment has reinforced our faith in our processes. Our efforts, across debt portfolios, to neutralize credit risk by investing in high-credit quality instruments, minimizing liquidity risk by maintaining an asset–liability match and managing interest rate risk through active asset allocation and duration management has helped us create value for our investors.

How have your investment strategies changed along with change in the market environment after March 2009?
The sharp rise in fiscal deficit and supply of government bonds led to increased focus on active asset allocation and duration management. There was also increased focus on corporate bonds, driven by high spreads on the back of improving credit fundamentals. We continued to recommend short- to medium-term funds, given the increase in volatility at the longer end of the yield curve.

With interest rates beginning to harden, what is your view on the debt markets going ahead?
The RBI (Reserve Bank of India) has a difficult task of managing interest rate and inflation, while ensuring that the government’s borrowing programme goes through smoothly and as planned. An upward pressure is expected on interest rates. We expect 10-year government securities yields to gradually climb, supported by government intervention through OMO (open market operations) and other steps, such as SLR/HTM (held-till-maturity) hikes. The RBI recently hiked its repo and reverse repo rates in view of high inflation. Post-July, we expect inflation to moderate from the current levels, albeit on the back of good monsoon, base effect and growth. The RBI is still following a relatively easy monetary stance. If the economy continues its growth momentum, then the RBI would look towards a neutral monetary policy.

What kind of funds will do well in this environment?
On the debt fund side, in the current market environment, investment opportunities continue to present themselves at the shorter end of the yield curve. We expect funds that will provide investors with the benefit of staying locked into high yielding instruments of high-credit quality to be good investment options.

With equities doing so well this year, does it make sense for investors to invest in debt funds?
Debt and equity both being different asset classes have an important and balancing role in an investor’s portfolio. Hence, equity and debt exposure would be part of a portfolio based on the investment objective, risk appetite and time horizon. We, therefore, expect asset allocation to provide guidance to investors on the asset class exposure. For investors who are underweight on equity, we recommend them to use all corrections as an opportunity to invest in the equity markets with a long-term view.

Also, India is a linear growth story and one of the fastest growing economies. The corporate sector is bound to benefit from this story over the long term. So, those investing in Indian equity with a long-term view will be well positioned to create value in their portfolio.

What role do debt funds have in the coming years as the regulator is keen on reducing the reliance of mutual funds in corporate money and focus more on retail investors?
There is surely going to be a trend of increase in retail participation across debt funds. So far, retail participation has been mainly through FMPs (fixed maturity plans). However, going forward, we expect that there will be greater retail participation in most of our flagship debt funds. In fact, increasing retail penetration across debt funds along with equity is going to be our focus area over the next few years.

Source: http://www.livemint.com/2010/03/23203923/Retail-participation-across-de.html

HDFC and ICICI best fund houses

Morningstar picked the best equity and debt fund houses after matching them against stringent guidelines. Nine schemes belonging to various categories were also awarded

When you hand over your hard-earned money to people who claim to be professionals in managing money, it pays to stick to the best. Better still, it makes sense to stay invested in consistent performers.

So much for picking and choosing schemes, but sticking to fund houses that come with a good pedigree is also important. Typically, a good pedigreed fund house is one with most of its schemes doing well and not just one or two. A fund house with a large basket of good performers instills confidence. That is where Morningstar Fund Awards 2009 come in.

What is it about?
Morningstar awarded top honours to nine schemes in their respective categories and culminated the evening by awarding the best equity fund house and best debt fund house to HDFC Asset Management Co. Ltd and ICICI Prudential Asset Management Co. Ltd, respectively.

Care has been taken to choose fund houses with substantial weight. Hence, one of the award guidelines makes it mandatory for fund houses to have at least 10 funds to be considered for either of the two categories.

Further, consistent track record is important. Only those funds that have completed three years have been accounted for. This assumes additional significance for Morningstar Awards as the past three years have been very volatile for equity markets. If 2007 saw markets rising to unprecedented levels, 2008 saw them come crashing down on the back of global liquidity crisis that also caught all mutual funds unawares. Then, 2009 saw a global recovery that catapulted all equity funds back in the green.

Schemes that did well in both falling and rising markets came out trumps. Also, the ones that converted their excess cash levels and bought equities before the markets started rising from March 2009 got the benefit of the upside. A fund that performs well across all market cycles bodes well for investors. This was one of the main reasons why HDFC AMC took away this year’s best equity fund house award.

Similarly, debt markets saw interest rates rising and falling in the past two years. Predicting the duration correctly is important for a debt fund and that is where our best debt fund house winner, ICICI Prudential AMC, scored the most.

Risk-adjusted performance
It’s not just returns that Morningstar recognizes. How well a fund manages its risks, such as volatility and downside, is equally important.

All funds that came out on the top were judged based on their risk-adjusted performance. Here’s where consistency comes in. Rather than picking and choosing a fund that gives superlative performance in one year and then falls miserably in the next, prudent investment norms suggest picking funds that show consistent performance, adjusted for their risks.

The leftovers
It’s important to judge a fund house based on the performance of their basic and core schemes. Since these schemes appeal to a wider section of the investing community, it’s essential that the core schemes’ performance is accounted for. Therefore, Morningstar Awards 2009 avoided sector, global, arbitrage, short government, floating rate and fixed maturity plans.

METHODOLOGY
Since the awards are annual, Morningstar believes it is appropriate to emphasize a fund’s one-year performance. However, we do not wish to award funds that have posted a strong one-year return, but have not delivered in the long run.

The awards methodology emphasizes on the funds’ one-year performance but, at the same time, mandates that funds should also have delivered strong three-year risk-adjusted returns within the awards peer group.

MORNINGSTAR CATEGORY AWARDS

Eligible universe
These awards are given to funds with the best risk-adjusted performance within their Morningstar groupings of Morningstar categories, subject to qualitative review.

Only funds that are recorded in the Morningstar database as available for sale in a given market will be eligible to receive an award in that market. Insurance funds and closed-end funds have been ignored.

The smallest 10% of funds in assets under each Morningstar category are excluded from the awards based on the latest December-end portfolios. In lieu of this measure, funds with less than Rs50 crore in assets as of 31 December or the nearest date for which the figure is available have been excluded.

Categories eligible for the awards
The awards are given in the following categories.

Equity: Large-cap, small/mid-cap, equity-linked saving schemes (ELSS, tax-saving)

Allocation: Moderate, conservative

Fixed income: Ultra-short bond, short-term bond, intermediate/long-term bond, intermediate/long government

Categories excluded from the awards

Sector funds, global funds, arbitrage funds, short government, floating rate funds, fixed maturity plans

Scoring system

• Each fund in a relevant group scores as follows:

• Returns score = 80% of the total score, as below

• One-year returns: 25% of the total score, based on one-year return percentile rank in Morningstar category.

• Three-year returns: 55% of the total score, based on three-year return percentile rank in Morningstar category.

• Risk score= 20% of the total score, based on three-year Morningstar risk percentile rank in Morningstar category.

Weights: Based on above weights, the effective weight of each year in the calculation is as follows, including both risk and return (figures are rounded to nearest whole number):

Past one year: 50%

Second year: 25%

Third year: 25%

Further, funds that have not outperformed their Morningstar category median in at least two of the past three calendar years have not been considered.

Qualitative review
Based on the above scores, the 10 funds with lowest scores in each Morningstar award category were reviewed for the following qualitative checks:

Funds that are deemed inaccessible to local market investors and retail investors excluded

Funds where the portfolio manager has been in charge for less than one-year excluded

If an analyst has reasons to believe that a fund cannot continue to outperform, then such a fund would be removed from consideration after discussion with heads of the Morningstar research team

Any fund that is deemed to have deviated from its stated mandate not considered

All institutional share classes removed

MORNINGSTAR FUND HOUSE AWARDS
The Morningstar Fund House Awards recognize those fund families that have delivered sustained outperformance on a risk-adjusted basis across their fund line-ups. Here are the award categories and eligible groups.

Morningstar Best Equity Fund House Award: Fund houses with at least 10 open-ended equity funds with minimum three-year records in the Morningstar database are eligible.

Morningstar Best Debt Fund House Award: Fund houses with at least 10 open-ended fixed-income funds with minimum three-year records in the Morningstar database are eligible.

Eligible funds
Those funds with three-year Morningstar ratings are eligible for inclusion in the scoring (see below). Thus, funds without three-year records or funds in unrated Morningstar categories are excluded from the scoring process.

Scoring systems
For each of the above two groups, Morningstar will calculate a house score using the following methodology:

• Determine the three-year Morningstar risk-adjusted return (MRAR) for each share class of each fund run by a given house, and the percentile rank of that return score within its Morningstar category.

• Determine the average percentile rank of each fund’s MRAR by taking the mean MRAR percentile rank of all its classes.

• Determine the mean percentile rank of each fund house’s MRAR by taking the mean of its funds’ MRAR percentile ranks (the lower a group’s mean percentile rank, the better its performance).

• Adjust the score using the following probability function to compensate for the difference in fund house sizes. The adjustment enables us to account for the fact that the number of funds varies from one group to another and, therefore, makes it possible to compare the different mean scores of the competing groups.

Qualitative review
Morningstar reviews the scoring results and may disqualify a firm if they do not offer retail shares or if there are extenuating circumstances. These might include (but are not limited to) the loss of a group of talented managers, substantial increases to fund expenses, non-availability of the house’s funds to retail investors in the relevant market, or being taken over by another group. Each disqualification would be approved by the heads of Morningstar’s research team. The review is intended to prevent giving an award on the basis of performance that we believe is unlikely to be repeated due to structural factors.

Outcome
The remaining fund firms with the lowest score in each of the above groups will receive the relevant Morningstar Fund House Award. There will only be one award in each of the categories listed above. If there are fewer than three eligible groups in any of these categories, no award will be made in that category.

Source: http://www.livemint.com/2010/03/22203953/HDFC-and-ICICI-best-fund-house.html?pg=2

Bonds gain as RBI says inflation to slow by July

The 10-year bonds advanced after RBI governor D Subbarao said the inflation rate, which touched a 16-month high in February, should start to moderate by July.

Yields dropped after Planning Commission deputy chairman Montek Singh Ahluwalia said on Monday India must aim to slow inflation to an “acceptable” level of 5% to 6%. The nation’s bonds have “priced in” at least a 100 bps increase in interest rates, said Anoop Verma, a fixed-income trader at Development Credit Bank in Mumbai.

“Efforts to curb inflation have increased the attractiveness of bonds as quite a bit of rate hikes have been factored in at these levels,” Verma said. “Supply of bonds will be the major concern now.”

The yield on the 6.35% note due January 2020 fell 1 basis point to 7.85%. The price rose 0.5, or 5 paise per Rs 100 face amount, to 89.90.

The central bank on March 19 increased the benchmark reverse repurchase rate to 3.5% from a record-low 3.25% and the repurchase rate to 5% from 4.75%. The wholesale-price inflation reached 9.89% in February.

“The Reserve Bank of India, sensitive to inflation concerns, is committed to maintaining the growth momentum,” Governor Subbarao said on Monday. “The challenge for us is to balance the requirements of growth against the concerns of inflation. We believe that by June-July, inflation should start moderating.”

Finance minister Pranab Mukherjee last month said the government plans to borrow Rs 4.57 lakh crore ($100.2 billion) in the financial starting April 1.

Source: http://economictimes.indiatimes.com/markets/bonds/Bonds-gain-as-RBI-says-inflation-to-slow-by-July/articleshow/5717661.cms

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Aggrasive Portfolio

  • Principal Emerging Bluechip fund (Stock picker Fund) 11%
  • Reliance Growth Fund (Stock Picker Fund) 11%
  • IDFC Premier Equity Fund (Stock picker Fund) (STP) 11%
  • HDFC Equity Fund (Mid cap Fund) 11%
  • Birla Sun Life Front Line Equity Fund (Large Cap Fund) 10%
  • HDFC TOP 200 Fund (Large Cap Fund) 8%
  • Sundram BNP Paribas Select Midcap Fund (Midcap Fund) 8%
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  • Principal MIP Fund (15% Equity oriented) 10%
  • IDFC Savings Advantage Fund (Liquid Fund) 6%
  • Kotak Flexi Fund (Liquid Fund) 6%

Moderate Portfolio

  • HDFC TOP 200 Fund (Large Cap Fund) 11%
  • Principal Large Cap Fund (Largecap Equity Fund) 10%
  • Reliance Vision Fund (Large Cap Fund) 10%
  • IDFC Imperial Equity Fund (Large Cap Fund) 10%
  • Reliance Regular Saving Fund (Stock Picker Fund) 10%
  • Birla Sun Life Front Line Equity Fund (Large Cap Fund) 9%
  • HDFC Prudence Fund (Balance Fund) 9%
  • ICICI Prudential Dynamic Plan (Dynamic Fund) 9%
  • Principal MIP Fund (15% Equity oriented) 10%
  • IDFC Savings Advantage Fund (Liquid Fund) 6%
  • Kotak Flexi Fund (Liquid Fund) 6%

Conservative Portfolio

  • ICICI Prudential Index Fund (Index Fund) 16%
  • HDFC Prudence Fund (Balance Fund) 16%
  • Reliance Regular Savings Fund - Balanced Option (Balance Fund) 16%
  • Principal Monthly Income Plan (MIP Fund) 16%
  • HDFC TOP 200 Fund (Large Cap Fund) 8%
  • Principal Large Cap Fund (Largecap Equity Fund) 8%
  • JM Arbitrage Advantage Fund (Arbitrage Fund) 16%
  • IDFC Savings Advantage Fund (Liquid Fund) 14%

Best SIP Fund For 10 Years

  • IDFC Premier Equity Fund (Stock Picker Fund)
  • Principal Emerging Bluechip Fund (Stock Picker Fund)
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