Fund houses in no hurry to stock up on RIL shares

Indian fund managers say they are in no hurry to load up on shares of India’s largest corporate Reliance Industries (RIL) although there is no longer an overhang of the gas dispute with the Supreme Court verdict on Friday being positive for the refining and petrochemical giant.

Almost all mutual funds have been underweight on the RIL stock for the past few months because of the uncertainty over the legal outcome of the battle for gas from the Krishna Godavari basin gas field. But some fund managers do concede that they may have to increase their exposure to the stock if it starts gaining because of strong capital flows into India.

“It is certainly a positive for the company, but the market had worked out the worst case scenario and how much the stock price would be impacted by a positive or negative verdict,” said the head-equities at a local fund house.

On Friday, Reliance Industries shares touched a high of Rs 1,060, before retreating to Rs 1033.85 at close, up 2.3% over the previous close. Reliance Industries has the highest weightage in the 30-share BSE Sensex (close to 12%) as well as in the 50-share NSE Nifty (a little over 10%). Since most diversified equity schemes are benchmarked to either of the two indices, fund managers risk underperforming their benchmarks if RIL shares move up sharply. Yet, domestic fund managers chose to take that gamble, and have not been hit hard since the stock has been underperforming key indices for a while now.

At the end of September 30, 2009, all equity schemes combined held 8.86 crore shares of Reliance Industries. That number shrank to 8.1 crore shares by March 31, 2010. “The outlook on the market as a whole has turned bearish,” said another fund manager, adding, “Reliance (Industries) shares are fairly valued at these levels, and so investors may not be in a hurry to buy them.”

But the fund manager said the stock would benefit indirectly if the overall market sentiment worsened. “During a (market) downturn, investors tend to sell their holdings in mid- and small-cap shares and deploy that money in large-cap shares. Such a trend will benefit Reliance Industries,” he said.

Interestingly, mutual funds had increased their exposure to ADAG firm Reliance Natural Resources Limited in April. While many fund houses are yet to disclose their portfolio, mutual funds holdings in absolute terms rose to 65.84 lakh shares in April, compared with 49.62 lakh shares in March.

“It is mildly positive for Reliance Industries as there will be higher realisation for gas, compared to the MoU terms and quite negative for Reliance Natural Resources in terms of price at which gas will be supplied, and also supply volumes may differ from those initially agreed upon,” said Sukumar Rajah, managing director & chief investment officer, Asian equities, Franklin Templeton Investments.

“The court’s verdict pertains to a specific MoU in relation to government’s rights over the gas reserves and sets the tone for future pricing in the sector,” he said. Reliance Industries shares have fallen a little over 5% in 2010 so far, compared to the decline of 4% in the Sensex.

Some fund managers reckon that the Reliance Industries stock could outperform key indices near term, though the stock is fairly valued. “A big chunk of foreign money is flowing into Indian shares through exchange-traded funds, most of which track the MSCI (Morgan Stanley Capital International) indices,” said the chief executive at a domestic fund house.

“That is why a stock like Airtel is holding on despite a negative outlook on the sector... liquidity flow is strong... so if money continues to pour in through ETF, Reliance (Industries) shares will be among the big gainers,” he said.

Source: http://economictimes.indiatimes.com/personal-finance/mutual-funds/analysis/Fund-houses-in-no-hurry-to-stock-up-on-RIL-shares/articleshow/5905218.cms

Did you know? Passive funds are not mandated to disclose tracking error

Since passive funds, such as index and exchange-traded funds, are mandated to mimic their benchmark indices, there’s no straight-forward way to tell which index fund is better than the other. One of the very few ways to see how good or bad an index fund is its tracking error (TE).

What is TE? The deviation of an index fund’s performance from its benchmark index is measured by a number called TE. Passive funds incur TE for several reasons. They pay commission to brokers to buy and sell scrips that increased their costs that eventually reduce their net asset values. Cash holdings also contribute to TE as higher TE affects performance. The lower the TE, the better is a passive fund.

Disclosure standards: The capital market regulator, the Securities and Exchange Board of India, mandates a disclosure of several portfolio attributes that enables investors to track their mutual fund investments efficiently. Unfortunately, TE is not one of them. Different fund houses have different standards; some disclose every month diligently and others conveniently avoid doing it. The periodicity of calculation also differs; some give one-year TE, others give three-year TE.

The solution: A TE of up to 2% is generally acceptable, though few index funds cross this limit. As TE is the best indicator to differentiate one index from another, a regular and standardized disclosure helps.

Source: http://www.livemint.com/2010/05/06214429/Did-you-know-Passive-funds-ar.html