SEBI asks mutual funds not to pay upfront commission from load accounts

The SEBI directive means that AMCs will have to pay upfront commissions out of their recurring expenses accounts or from their own pockets

In a move to bring protect investors’ interests, market watchdog Securities and Exchange Board of India (SEBI) has mandated all asset management companies (AMCs) not to pay upfront commission to distributors from the load account. They can now pay upfront commission only from the recurring expenses account or from their own pockets. AMCs will have to comply with this new rule from 1 April 2010.

It may be recalled that Moneylife had earlier reported on how fund houses were paying upfront commissions for ELSS and other schemes to garner assets.

After the ban on entry load by SEBI, fund houses were paying upfront commission from the load account. If an investor exits from the fund before the lock-in period, the exit load was transferred to this account. The commissions were as high as 2.5%-3%. Money held in a load account is supposed to be invested for the schemes and investors but AMCs were using this fund to pay upfront commission and for marketing purposes.

The new rule spells good news for investors but Independent Financial Advisors (IFAs) are up in arms. They feel cornered and discriminated against especially since insurance companies are able to offer lavish incentives to their agents.
According to sources, AMCs may now increase the trail commission or decrease the exit load in order to stop churning. AMCs were paying upfront commission which included trail of either one to three years or after negotiating the terms with the distributor. Distributors will now have to depend on the trail commission which is around 0.25% to 0.50%. If an investor holds Rs1 lakh investment in a mutual fund for six months, then the distributor gets Rs125 (0.25%) as trail commission.
“People expect to get money from the advisor rather than giving money to the advisor. The IFA does not get any money for selling Rs10,000 in a mutual fund. He may get it only if the investor holds on to it for six months or one year. The day-to-day survival of small IFAs will become difficult after the new SEBI rule, “said Ramesh Bhatt, CEO, Aniram, a Chennai-based IFA.

“Most of our customers give cheques of Rs10,000-Rs15,000. IFAs have to do 10 times more business now. Most of them will move out from the fund industry,” added Mr Bhatt. According to sources, AMCs will now only be able to pay 25 to 30 basis points of upfront commission. “It will mainly affect the smaller IFAs. The market will not expand,” said an IFA. “Sundaram Entertainment Fund had paid 1.50% upfront commission for one week. They had announced a dividend and wanted to capture maximum money by paying an upfront commission. Earlier when 2.25% commission was paid, we paid 25 paise as service tax and were left with 2% out of which we paid cash back of 1.75% to the investor,” said a distributor.

SEBI had earlier mandated AMCs not to pay dividend out of the unit premium reserve. The hefty dividend payout was merely a marketing tool by fund houses to attract more investors. The AMCs contacted by us did not wish to react to the new SEBI directive.

Source: http://www.moneylife.in/article/8/4513.html

Fund managers optimistic, but cautious

Cautious optimism was the mood of the country’s top fund managers at a short panel discussion at the Business Standard Awards ceremony.

Reliance Mutual Fund Head of Equities Madhu Sudan Kela did not want to predict the Sensex or Nifty value in the next 12 months, but said the next decade will belong to India. “One year is a very short period of time, but people who invest in equity market in the next decade will reap the benefits.”

The BSE Sensex and NSE Nifty have almost doubled from the low of March 2009. But, the key indices have moved in a very narrow range in the last few months. The Sensex and Nifty are trading at a price-earning ratio of 21 times based on 2008-09 earnings and 16-17 times on 2009-10 earnings. There has also been concern over the rising interest rates which could hurt the corporate earnings in the next financial year.

Nilesh Shah, deputy managing director of ICICI Prudential Mutual Fund, said the market players have always been proved wrong in predicting the market. “In 2007, the market doubled, again in 2009 it was the same,” said Shah.

Sukumar Rajah, chief investment officer at Templeton Mutual Fund, however, was more pessimistic. “I do not have much hope from the stock market in the next one year,” he said, adding that the stock market is like a voting machine in the short term and a weighing machine in the long term.

Kela, Shah and Sukumar were Business Standard Fund Managers of the Year in the previous years.

IDFC Mutual Fund’s Kenneth Andrade was the only one to give some direction towards the returns from the stock market in the next one year. “We will make reasonable money in the next one year. The returns would be in double digits,” said Andrade, who is IDFC’s Fund Manager and the winner of BS Fund Manager (Equity) of the Year.

The other winner in the Best Fund Manager (Debt) was Ashish Kumar of LIC Mutual Fund.


Source: http://www.business-standard.com/india/storypage.php?autono=390268

BS Awards for excellence go to 11 people, companies and products

The Chambers Terrace at the Taj Mahal Hotel saved many guests who took cover there when terror struck Mumbai in November 2008. Sixteen months later, the Terrace played host to the who’s who of India Inc to celebrate the achievements of 11 people, companies and products that were to receive the awards for excellence at the 11th Business Standard Awards ceremony today.

The time for toasting the scriptwriters of the India turnaround story was perfectly choreographed: The stock market benchmark indices surging to new highs after plumbing the depths not so long ago, corporate health showing distinct improvement, and the government raising hopes of a 9 per cent-plus growth.

From start to finish, this year's Business Standard Awards ceremony toasted a resurgent India. The guests came from far and wide: Home Minister P Chidambaram, who was the chief guest, from the national capital, and the award winners from Delhi, Chennai, Bangalore, and elsewhere.

In a full house that meant some guests were forced to stand at the back, there were many familiar faces and famous names.

The recipients of the awards did themselves proud with the quality of their acceptance speeches. Accepting the CEO of the Year award from Chidambaram, Crompton Greaves Managing Director & CEO S M Trehan said his mantra for making Crompton a profitable global player has been simple: “If you can't beat them, buy them.” That explains his acquisitions — six in the last four years — in Europe and the US. The last of these acquisitions was made, quite appropriately, today, just hours before he received the award.

When he took over as MD in May 2000, Crompton, part of the $3-billion Avantha Group, was primarily a domestic, loss-making, debt-laden entity. Today, it's a Rs 9,000-crore company, growing at a compounded 25 per cent-plus over the past five years. Net profit has been growing at over 35 per cent annually in the same period.

Former Axis Bank Chairman and CEO P J Nayak got the Banker of the Year award for steering Axis to become India’s third largest private sector bank. In his speech, Nayak said the award was a special one, “if a bit surreal”, as he left the Bank 11 months ago. Nayak is scheduled to take over as Morgan Stanley India head next week.

“Ten years back, the retail buzz was almost inaudible and private banks were knocking on corporate doors to get some business. Now that the scenario has changed drastically, it’s time to look at the next 10 years,” he said.

A common thread through the evening was that the time had come for Indian companies to ride out the storm by believing in themselves. The Company of the Year award went to engineering giant Larsen & Toubro and the award was received by Chairman A M Naik who has spent 45 years with the company, the last 11 of these at the corner office. “Imagineering”, a term coined by Naik himself, saw L&T’s imprint in rock-laden forests, hydrocrackers, nuclear reactors, submarines, football stadiums, and even Chandrayaan, the country's first mission to the moon.

Naik quoted Chidambaram as saying a few years back that nobody knew who owned L&T and he was extremely proud of that statement. “The nation owns L&T, which has always believed in taking the hardest route to make money by competing with the world’s best,” he said.

A highlight of the evening was the award for the Most Innovative Organisation of the Year, which went to Tata DoCoMo which redefined the rules of the game in the mobile phone industry by introducing the first per second billing plan. After their initial resistance, its larger competitors followed suit. The award was received by Tata Teleservices MD Anil Sardana.

While Bharat Heavy Electricals Chairman and MD B P Rao received the Star PSU award, the other award winners were Nestle India (Star MNC — its Chairman & Managing Director Antonio Helio Waszyk received the award) and OnMobile Chief Arvind Rao, whose company got the Star SME award.

The Car of the Year award was won by Maruti Suzuki Ritz and the Bike of the Year award was bagged by Bajaj Auto’s Kawasaki Ninja 250R. Kenneth Andrade of IDFC Mutual Fund was the Fund Manager of the Year (Equity) and Ashish Kumar of LIC Mutual Fund was the Fund Manager (Debt).

As the function got over and the guests assembled for cocktails and multi-cuisine dinner at the legendary ballroom, it was truly symbolic of a resurgent India. For, the ballroom, which was badly damaged in the 26/11 attack, reopened tonight.

Source: http://www.business-standard.com/india/news/bs-awards-for-excellence-go-to-11-people-companiesproducts/390272/

Are open-ended mutual funds better than closed-end ones?

Over the past three years, open-ended funds in each category--large-cap, mid-cap and ELSS--have outperformed their closed-end peers. Open-ended funds also fared better in the falling markets

Effective 22 March, HSBC Unique Opportunities Fund (HUOF), an erstwhile closed-end fund that was launched in February 2007, became open-ended. A mid- and small-cap-oriented fund, HUOF was a three-year closed-end fund that had the option to convert into an open-ended type, after three years. In these three years, the scheme barely managed to return your principal; it returned just 0.13%, against open-ended mid-cap funds that returned 10.88%.

When the capital market regulator, the Securities and Exchange Board of India banned open-ended mutual fund (MF) schemes from amortizing their initial issue expenses in April 2006, fund houses started launching closed-end funds. They claimed that on account of the lock-in, closed-end funds would not allow premature withdrawals. This would result in a stable corpus and closed-end funds would, therefore, outperform open-ended funds in the long run. But did they live up to their promise?

Lost ground
Things did not go as planned. Over the past one, two and three years, open-ended large-cap, mid-cap and equity-linked saving schemes (ELSS) funds have outperformed their closed-end peers. Open-ended funds, on average, also outperformed their closed-end peers in the falling markets of 2008 and the rising markets of 2009. For instance, in the large-cap space, the best performing closed-end fund in 2009 was Birla Sun Life Pure Value Fund that returned 91%, against Principal Large Cap (an open-ended fund) that topped the large-cap open-ended space with returns of 110%.

The NFO game
Here’s why fund houses went on a spree to launch closed-end funds. Earlier, MF schemes were allowed to spend as much as 6% of amount they raised from the investors as initial issue expenses. A Rs1,000 crore new fund offer (NFO) would allow a fund to deduct Rs60 crore their initial issue expenses. Funds were allowed to amortize (write-off) this amount over a maximum period of five years.

Some high net worth investors and companies began to extract their share of pie too. They would often invest in these NFOs purely for listing gains that came with a bull run and make a hasty exit soon after the scheme reopens for subscription. Long term investors who stayed in the fund paid heavily due to higher costs.

Between April and December 2006, 10 closed-end funds were launched that garnered Rs7,764.25 crore against six open-ended funds that garnered Rs1,521 crore. In 2007, 32 closed-end funds were launched against 28 open-ended funds.

Premature withdrawals
Apart from the amortization of the NFO expenses, one of the reasons why closed-end funds suffered was their premature withdrawals. Many closed-end funds offered quarterly redemption window. Some, such as Tata Indo-Global Infrastructure Fund, offered monthly redemptions, defeating the purpose of a proper closed-end fund. Although premature withdrawals were penalized, investors withdrew systematically. For instance, Franklin India Smaller Companies Fund (FISCF), a five-year closed-end mid-cap fund, collected around Rs1,200 crore when it opened. On account of its half-yearly redemption window, investors withdrew money when markets started to fall. “Our experience has been that the liquidity windows did lead to redemptions and impact performance to some extent along with our stock picks”, says Sivasubramanian K.N., head of Franklin Equity Portfolio Management, Franklin Templeton Investments. As per its February-end factsheet, FISCF’s corpus is Rs585 crore. A rush for redemptions forces fund managers to sell liquid stocks. What remains are, typically, illiquid stocks that take time to recover. Says Nikhil Johri, managing director, Fortis Investment Management (India) Pvt. Ltd: “The problem with closed-end funds is that premature redemptions happen but no new money is allowed to enter the fund. Hence, many times, it tends to sit on far more cash than he ought to.”

Is closed-end structure bad?
Experts are divided on whether or not the structure of a closed-end fund works. In the initial years of funds in india, when public sector banks launched their mutual fund houses, they launched closed-end funds, especially tax-saving funds, which matured after 5-10 years. Open-ended funds were not heard of in those days. Even private sector firm that entered the MF space in 1993 launched closed-end funds to begin with. Franklin India Bluechip Fund, one of Franklin Templeton India MF’s most successful funds, was launched as a three-year closed-end fund in December 1993. It became open-ended in January 1997 and did very well across market cycles. “The performance of the closed-end funds is also dependent on the structure, whether it is a pure closed-end one or with redemption windows”, adds Sivasubramanian.

“Closed-end funds like fixed maturity plans work very well since the present regulations do not allow premature withdrawals. The fund manager is therefore assured that panic selling—to meet premature redemptions—will not be necessary,” says Johri.

Not all agree though. Some experts feel that fund managers of closed-end funds tend to get lazy. Says Rakesh Goyal, senior vice-president, Bonanza Portfolio Ltd, a Mumbai-based financial services company: “Most fund managers of closed-end funds typically get money for a three-year period. They, however, take it for granted that this money is going to stick around for three years and markets would also keep rising. Hence, these funds are seldom actively managed against open-ended funds that are actively managed funds.” Goyal added that in 2006 and 2007, most MFs got “easy money” from investors as they paid high commission to distributors who convinced investors that equity markets would continue to rise.

Lack of monitoring can also affect closed-end funds. “Fund managers did not pay attention to their closed-end funds once money came in. They are usually told to pay more attention and hence actively manage open-ended funds as they can be constantly sold to investors and attract money”, says a chief executive officer of a fund house who did not want to be identified.

Money Matters take
The monetary benefit for MFs and distributors to launch closed-end equity funds is almost gone. Unless a closed-end fund offers something unique that no other successful open-ended scheme offers, avoid closed-end funds.

Source: http://www.livemint.com/2010/03/30214843/Are-openended-mutual-funds-be.html

Indian market is efficient enough for passive funds

Sanjiv Shah, executive director, Benchmark Asset Management Co Pvt Ltd, chats online about passively managed funds and why they are better. Log on next Wednesday to chat with another fund manager.

Saumya: With the markets being buoyant, what should be the investment strategy?
Shah: One’s investment philosophy should be based on asset allocation and on risk parameters. Another way of looking at investing in market is to follow the process of SIP’s (systematic investment plans) and VIP’s (value averaging).

Sara: How would you differentiate Nifty BeES from other index funds?
Shah: Nifty BeES are ETF’s (exchange-traded funds), therefore you can buy them at real time NAV (net asset value) on the exchange. Their tracking error is lower compared with other index funds and the expense ratio on ETF’s is lower compared with other index funds.

Djokovic: How do you market VIP to investors considering not many distributors, I hear, sell benchmark schemes?
Shah: We belive VIP is a very new concept offered only by Benchmark. It is much smarter way of investing regularly compared with SIP’s and the number of distributors selling it are increasing.

Sangeeta: Do you mind delving a bit on the asset allocation term for a layman?
Shah: Asset allocation is a process of distributing investments in a portfolio across various asset classes in order to achieve the highest investment return for the defined risk.

Starting point of asset allocation is defining risk budget or risk tolerance of the portfolio.

Djokovic: With IDBI mutual fund saying that they will launch passive funds, do you think fund houses are finally realizing the value of passive management?
Shah: Absolutely, our research shows an important point: Indian market is efficient enough and hence our performances of individual active managers are random, transient and unpredictable.

Source: http://www.livemint.com/2010/03/31210101/Indian-market-is-efficient-eno.html

Sebi rule takes wind out of MFs’ fund of fund sales

Domestic fund houses may no longer find it attractive to launch fund of funds (FoFs), following the recent Sebi rule barring them from revenue- sharing arrangements with the schemes into which they invest. An FoF is a mutual fund scheme that invests only in other mutual funds.

While the Sebi move could sound the death knell for international feeder funds — a fund that routes money into a scheme investing in overseas markets — some industry officials feel even funds that invest in domestic schemes could be affected. According to distributors, top fund houses like ICICI, Birla Sunlife, Franklin Templeton, Fidelity, DSP Blackrock and DWS are reconsidering their plans to launch FoFs.

According to the Sebi order, the Indian FoF will not be able to charge management fees on investments made by the target fund. The FoF fee structure adds up to around 3.25% annually. The fund house selling the scheme usually charges 75 basis points (0.75%) as commission from investors. It uses this money to meet marketing expenses, registrar fee and part of distributor commission. Separately, the target fund (where the money is invested) levies a fee of 1.5%-2.5% on investors in FoFs, a part of which is usually shared with the fund selling the scheme.

“By restricting revenue sharing, the regulator intends to stop asset management charges at two points. From what we understand, it will also impact domestic FoFs, which invest into local funds,” said Ashvin Parekh, national leader-financial services, Ernst & Young.

According to Mr Parekh, most domestic FoFs follow a two-level fee pattern. Both source fund and the target fund levies about 75 bps (each) on investors as fund management charges. “The second para of the Sebi order clarifies that AMCs shall not enter into any revenue-sharing arrangement with the underlying funds and shall not receive any revenue from them. This widens the case for domestic funds as well,” said Mr Parekh.

According to experts, through this order, Sebi intends to reduce charges on FoFs, and more specifically offshore FoFs, which have been charging investors heavily, but not yielding decent returns. One-year return on most FoFs has been in the range of 30-50%, much lower than category returns mapped by local funds.

According to industry sources, it will no longer be profitable for fund houses to launch FoFs. An FoF occupies a special place in the product suite, as it allows a fund house to showcase investment products and asset classes that are popular in other markets.

Domestic FoFs enable investors to invest across sectors and fund houses. Actually, most fund houses offering FoFs typically invest into their own sectoral funds, depriving investors an opportunity to have exposure to performing schemes run by other fund houses.

“The new changes will have implications for the viability of overseas feeder funds that fall under the FoF category, due to transfer pricing issues. But overseas funds being managed out of India will not be impacted. While this category accounts for a minor portion of industry assets today, we expect this to change over the coming years, given the benefits of international diversification,” said Jaya Prakash K, head-products, Franklin Templeton Investments.

Source: http://economictimes.indiatimes.com/Market-News/Sebi-rule-takes-wind-out-of-MFs-fund-of-fund-sales/articleshow/5748671.cms