Natural resources funds, unnatural returns

Another scheme — the Tata Natural Resources Fund — has entered this space, but there is nothing which this fund can deliver that existing equity funds cannot

Three are three natural resources funds which were all launched in 2008 when the commodities boom was at its peak. Two of the three have beaten their respective benchmarks. A fourth one is now being launched - by Tata Mutual Fund. Is it worth investing in it? Not really. Look at how the existing natural resources funds have invested their money. The label is a misnomer.

DSP BlackRock Natural Resources & New Energy Fund manages a corpus of Rs180.50 crore as on 30th July. The fund has mainly invested in Indian companies. Its top five picks are Castrol India (10.12% net investments), SRF (4.86%), Hindustan Petroleum Corporation (4.54%), Indian Oil Corporation (4.52%) and Coromandel International (4.49%). The fund has 26.71% exposure towards mid-caps, 47.11% in small-caps and 23.88% in large-caps. The fund launched in April 2008 has posted a net asset value (NAV) return of 16% when its benchmark BSE Metal Index slipped by -0.74%, outperforming its benchmark by far. However, why a natural resources fund should have the BSE Metal Index as the benchmark is unclear.

Reliance Natural Resources Fund launched in February 2008 has been an underperformer. The fund has delivered 0.17% return since inception while its benchmark BSE 200 edged up 1.35% during the same period. Again, why should a natural resources fund have BSE 200 as the benchmark is a question. The fund had a corpus of Rs3,296.88 crore as on July 2010. Its major exposure was in Indian companies like Oil & Natural Gas Corporation, Reliance Industries, Hindustan Petroleum Corporation, Tata Steel and Bharat Petroleum Corporation, etc. The fund also has investments in foreign firms like Potash Corp of Saskatchewan, Peabody Energy Corp, General Electric Company, CSX CORP, Caterpillar, Macarthur Coal, BP Global, JGC ORD, Xstrata Plc and Atlas Energy Inc. It is impossible for Indian investors to know whether these stocks are worth the investment or not.

The third scheme, Sahara Power & Natural Resources Fund launched in June 2008 has been the top performer. The fund posted NAV return of 19% since inception while its benchmark S&P Nifty is up 12.34% between the same period. As on July 2010, the fund had a tiny corpus of Rs6.72 crore. Its top picks are Uflex Ltd (3.93% net investments), Gas Authority of India Ltd (3.59%), Rallis India Ltd (3.47%), Bharat Heavy Electricals Ltd (3.26%) and Hindustan Petroleum Corporation Ltd (3.22%).

The latest to join the natural resources bandwagon is Tata Mutual Fund, which recently filed a draft offer document with the Securities and Exchange Board of India (SEBI) to launch its open-ended equity scheme called 'Tata Natural Resources Fund' (TNRF). The fund comes with two plans - 'Plan A' and 'Plan B'.

The fund (Plan A) aims to invest in companies principally engaged in the discovery, development, production or distribution of natural resources in various economies of the world including India. At least 51% of the corpus would be invested outside India while the 'Plan B' would invest predominantly in India.

The Plan A scheme will be benchmarked against the 'MSCI World Energy Index' (70%) and 30% against the BSE 200. 'Plan B' will be benchmarked against the BSE 200 to the extent of 65% and MSCI World Energy Index to the extent of 35%. The benchmark is a complex concoction designed to justify the label. But investors don't really need it. There is nothing which this can fund can deliver that existing equity funds cannot.

Source: http://www.moneylife.in/article/8/8207.html

Invest Rs 11K a month, get Rs 1 cr in 20 yrs

Here’s what independent India has achieved. From 1951 to date, our economy has grown from $21 billion to $1.2 trillion.

That’s over 60 times in 60 years. From the 3-4% Hindu rate of growth in the pre 90s, India has transformed into one of the fastest growing economies in the world. What’s more, in six to seven years this GDP will further double.

The opportunity today is ripe to achieve a different kind of freedom. Freedom that will help secure the future of ourselves and our loved ones. I call it financial freedom.

When it comes to achieving freedom there are no short cuts. Just as our country’s freedom was achieved through a concerted effort, so would financial freedom. It won’t happen in a day, but it will happen. What we need to do is follow some basic principles.

The first is to have a systematic and long-term approach to investing. We need to review our risk profile and allocate our savings across different asset classes. As a country we save over 35% of our GDP. But are we investing it judiciously? Most people are risk averse and hence put their full money in bank fixed deposits. While that may be safe but it may not give you adequate returns, which may not even cover the base inflation. Investing some portion of your money into equity as an asset class is very important.

Since the inception of the Sensex in 1979, the Indian stock markets have given around 17% annualised returns. Rs 1 lakh invested in the stock markets in 1979 would today be worth Rs 1.3 crore. At a 12% rate of return; if you invest Rs 11,000 every month in an equity mutual fund through an SIP mode, it will be over Rs 1 crore in just 20 years. That’s the power of compounding. If we take a long-term perspective there is enough money to be made to achieve financial freedom. The trick lies in diversifying investments, investing systematically, and over a period of time.

The second is the use of knowledge and expertise. We spend most of our time and effort earning money, and hardly any managing and growing it. The key to growing wealth lies in knowledge. Lack of knowledge means lack of understanding. And lack of understanding makes us oblivious to the myriad opportunities around us. Many of us are fearful of the complexity managing money brings. Managing money is not to be feared, but to be understood. It is only when we know more that we will fear less. And if we do not have the time or resources to understand how to manage money, do not feel shy to engage the services of an expert. Besides losing money, the biggest detriment to financial freedom is to let our wealth stagnate.

And last but not the least is the challenge of managing our emotions. A task easier said than done. From Dalal Street to Wall Street, greed and fear are the two most powerful words which can make you lose a fortune. But as someone said: “Be greedy when others are fearful; be fearful when others are greedy.” Be rational in your approach—research before you invest, not after. And once you have done so; have the conviction to stick to your game plan.

We live today in exciting times. The Next Trillion Dollars of India’s GDP growth presents us a once-in-a-lifetime opportunity for creating and growing wealth. Sixty-three years ago, the founders of our nation helped us achieve freedom. Today, it’s time for us to achieve a different kind of freedom— Financial Freedom.

Source: http://economictimes.indiatimes.com/Features/Sunday-ET/Money--You/Invest-Rs-11K-a-month-get-Rs-1-cr-in-20-yrs/articleshow/6313102.cms?curpg=2

Dependence on NFOs Must Go

When Paul Vrancken, COO, Canara Robeco Mutual Fund, visited India in 2005, it was his first trip to the subcontinent. The then Vice President and Head-Corporate Development, Robeco Group, had the task of scouting the land for a mutual fund partner.

He narrowed in on Canbank Mutual Fund, amid a fair amount of scepticism. The joint venture between Robeco and Canbank Mutual Fund took place in less than two years and in August 2007 he shifted base to India and stayed on as the Chief Operating Officer.

Now, three years down the road, after Canara Robeco has left behind its dreary past, he is moving on to a more senior position in Hong Kong. Here he speaks of his experience of the fund industry in India and what made him narrow down on such an unusual candidate.

Canbank Mutual Fund was virtually written off by many. What made you narrow down on it?

It was certainly the potential, not the company per se. The company was not in very good shape, performance of schemes left much to be desired, net sales were limited and market share was shrinking. There were issues related to brand, investment process, systems, infotech, etc. It was not a platform for growth.

We looked through the problems and the seemingly lack of potential but yet saw a future with Canbank Mutual Fund. We visited the branches and spoke to the branch managers of Canara Bank about the potential of such a distribution network. We felt we could turn it around eventually.

Actually, Robeco was not that interested in the company itself. We believed we could change it. The key to success is looking at the potential of two joint venture partners coming together.

What were the aspects that stacked the odds in favour of Canbank Mutual Fund?

We looked at the other players that came in on their own and realised that it took a while for them to obtain the licence, so our main focus was on picking up an asset management company (AMC) that had a licence.

In addition, the sponsor company - Canara Bank - has a huge network across the country. It is one of the largest banks in India. That was the potential we were going after - the immense distribution network.

Canara Bank also fit the profile that we were on the lookout for. Rabo Bank, the parent company of Robeco, is an AAA conservative player. Ditto for Canara Bank. Look at the crisis the banking industry went through in 2008. In such moments of stress, Rabo Bank had adequate liquidity as clients added to their Rabo deposits, instead of withdrawals, which was the mainstream picture in the industry. And public sector banks like Canara Bank too received inflows from clients. Both these brands convey the value of trust and such intrinsic value of the brand is a great asset.

At the time when we were surveying the market, Sundaram Mutual Fund was in the process of tying up with BNP Paribas. The other standalones were not interested in a joint venture partnership. And neither were we interested in a much smaller AMC.

We wanted to get into India, we wanted a player with a licence, a certain amount of assets and funds to begin with, and we wanted a reliable partner who shared a similar vision of where we both wanted to end up. And Canbank Mutual Fund fit the bill.

In the end, I think our choices have been right.

Did you ever entertain the thought that this joint venture may fail?

No. It never came up. It's impossible to succeed when you are entertaining the thought that you might fail.

What was the market perception when you were closing the deal?

I remember at that time people were quite sceptical. Actually, there were two broad opinions when we spoke to people in the market. On the one hand, we were told that it would not take us anywhere and it was more or less a hopeless cause. On the other hand, we were told that it would require a lot of work but in the long run its potential could be realised. No one in-between, it was very black and white.

What of this business has left you disappointed? Something that did not move as you would have liked it to?

I feel retail equity distribution could have moved faster.

When I look at the overall fund scenario in India, a lot of money has come in through new fund offerings (NFOs). But the ongoing schemes do not really attract fresh investments. At most it is churning within the existing unit holders - moving from one scheme to another. So one AMC will face a redemption to the benefit of another AMC where the same investor will move to. So all existing schemes take money from each other, so to speak.

Over the past 10 years, all new money that has come in has been via NFOs. The fund industry has to find ways to get fresh retail money come into the existing schemes - a task that is far from easy. From a business plan perspective, this has been a setback.

If I look at the bank per se, it has taken a while but we have things in place now. Canara Bank has 500 investment officers dedicated to selling mutual funds and insurance products. They are placed in bank branches across the country. Now they have plans to double this figure. So it has taken time, but the potential to employ the bank as a distribution network is immense.

What do you find difficult about working in India, especially since you are not in a standalone venture? When you took over, was there a lot of resistance?

A difficult moment was at the beginning when the joint venture took place. We went through major changes in the organisation. Half the staff opted for a voluntary retirement scheme (VRS). The half that stayed back was mainly on the operations side. This has been a key success factor for us. Our operations staff has been the backbone which the company could depend on in times of need.

When one works in India as an expatriate, one aspect that stands out is the particular way of coming to execution, in terms of preparation, decision making process and execution itself. For an outsider, it may look like this process is somewhat ad-hoc, with a single person responsible for decisions, while the execution can sometimes wait till a late moment. But I do know that when there is a problem, it gets fixed. Not necessarily through a process or a system, but it gets fixed, and there is complete alignment in the organisation at those moments. However, one cannot rely on such a system for everything and all the time.

One of the things we have done is put committees in place because we wanted more involvement from everyone and we want them to be aware of the consequences and repercussions of a decision. So we now have a products committee, an investment committee, a risk management committee, an IT committee and a Canara committee. This way there is consensus and no confusion on decisions taken. If we did not have it then we would have to rely on a more obscure decision making process.

My impression of Indians has been that they are very entrepreneurial, open and wanting to connect. Moreover, they are very business minded, a great combination to grow and succeed globally.

What do you see as an area of concern in the Indian mutual fund industry?

When I came to Mumbai in August 2005, it was just after the flood and the consequences of the flood were clearly visible during my trip from the airport to the hotel. But what caught my eye was the billboards across the city with NFO hoardings. And I wondered how it could be that the mutual fund industry could be so in-your-face, so thriving and vibrant? Of course, AMCs were launching NFOs and the costs of up to 6 per cent of expenses could be charged to investors as fund raising expenses. But now that has stopped because the regulator stepped in. I think the direction that the regulator has taken is very good. A lot has changed since my first visit.

The first issue I am concerned about is how retail money is going to come into this industry. Investor education has to increase and eventually the investor must be made aware that he can, and should, pay a price for the value he receives from the distributor's advice.

The other issue is that new retail flows are not being channelised into the industry but find their way into another industry. This is putting a strain on the fund industry.

How different is it in Holland?

In Holland mutual funds are popular amongst retail investors. Over there the bank will evaluate your risk profile and suggest products accordingly. The concept of churning is not really there and distributors earn mainly through trail commission. There is no NFO mania, so to speak. Investors prefer a tried-and-tested product.

Is Canara Robeco now in the AUM race? Any plans to be in the Top 10?

I am not sure if we can call it chasing AUM but every business will have ambitions of growth. We would like to be in the Top 15 by March 2011. When the joint venture was signed, Canara Robeco was No. 26, today we are No. 16. But do note that when we were at the 26th spot, there were just 32 players. Now there are around 40 players and we have managed to inch our way upwards. Now that we have our risk management measures in place and performance has picked up across the board, we want to grow continuously without too many ups and downs.

Robeco has a strong presence in Europe. With that in mind, what plans do you have for Canara Robeco?

We want to expand domestically by penetrating the Canara Bank network and increasing retail sales. But we also want to grow internationally. From August we will start Robeco India dedicated funds and function on an advisory basis. Our first institutional mandate came from Taiwan. Another mandate from a European pension fund is due to go live in July. What our potential investors in Europe like is that we have the local India expertise as well as the international brand and global infrastructure. We have sales offices across the globe. These offices are already servicing institutional pension funds, insurance firms and sovereign wealth funds. So all the processes and mandates are done via our European offices and we provide advisory services in India.

Source: http://new.valueresearchonline.com/story/h2_storyview.asp?str=14950

Strategies focussing on short-term bonds may perform well: Santosh Kamath

Santosh Kamath, Chief Investment Officer, Fixed Income, Franklin Templeton Mutual Fund, shared his outlook on inflation and interest rates and spoke about how investors can navigate the rate cycle.

What is your outlook on the RBI`s benchmark interest rates after the recent hike? How much do you expect rates to rise?

Given the ongoing trends in inflation and the strong GDP growth momentum, we expect the central bank to continue step-by-step increments in interest rates. However, inflation and the global conditions will be key drivers, and this dynamic environment has been acknowledged by the RBI in its recent policy statements and the introduction of the new intermediate policy reviews.

It is difficult to quantify the hikes or the extent of the rate hike cycle, as the central bank tries to strike a balance between maintaining growth momentum as well as price stability, while keeping in mind the global factors.

Despite being primarily dependent on domestic drivers, the Indian economy has linkages to the overseas markets due to commodity prices (read imported inflation) and liquidity conditions (read FII/FDI flows and external borrowings).

Inflation has consistently remained above RBI targets. What is your outlook on inflation?

Recent trends in inflation have been driven by demand-side factors, in addition to the existing supply-side constraints that have been pushing food inflation. In a fast-growing economy such as India, inflation will be an ongoing issue due to expansion leading to capacity utilisation and infrastructure bottlenecks.

In that sense, we are going to witness these economic cycles on an ongoing basis, but the supply-side constraints need to be addressed by the government to provide stability.

In the near term, headline inflation may taper down as the base effect turns favourable. Good rainfall and healthy trends in sowing activity could also help bring down food inflation, going forward. However, we need to monitor global oil/ commodity prices, given that India depends on energy imports to a large extent to meet its requirements.

Is the prospect of rate increases factored into current gilt prices? What should be the trigger for investors to consider long-term debt and gilt funds?

The ongoing rate hikes have been largely factored into the 10-year gilt yield levels that have also been impacted by concerns about fiscal deficit. Yields have trended down after rising to 8% plus in April this year. Recent trends on 3G/BWA collections, partial de-regulation of fuel prices and good tax collections augur well for government finances and have cushioned the impact from rate hikes.

Rather than trying to time the interest rate cycle, investors should focus on building a diversified portfolio of fixed income products, in line with their needs and investment horizon.

Typically, investing in actively managed funds with a consistent track record should help investors ride the interest rate cycle in an efficient manner.

Three-month commercial paper (CP) rates have gone from 4.5% to over 7% in the last couple of months. Have short-term rates peaked?

The rise in CP rates reflects the combined impact of liquidity tightening, rise in repo rates and demand-supply factors (increased dependence on CP issuances post transition to base rate).

We expect some easing but the pressure on short-term rates is unlikely to reduce significantly as the RBI has indicated that systemic liquidity levels will be actively managed to ensure effective transmission of monetary policy.

What strategies have made the Templeton Short-Term Income Plan the top performer in its category?

TISTIP is focused on corporate debt, including securitised debt at the short end of the curve. The investment strategy for over a year now has been focused on taking advantage of spread differentials and accrual opportunities in various sectors of corporate debt.

Back in 2008/early 2009, amidst the global turmoil and the liquidity crisis in India, risk aversion resulted in a substantial widening of corporate spreads over gilts. The general view was to stick to government securities, given the the weak environment and fears of credit downgrades.

We felt that the concerns were overdone and were the result of temporary systemic liquidity issues, given that Corporate India`s balance sheets were largely in good shape. Hence, we adopted a combination of active strategies focusing on high accruals, shorter-duration paper and spread plays. We continue to use the same strategies to help our investors take advantage of the opportunities at the short end of the curve.

Have Indian companies managed to de-leverage their balance sheets sufficiently over the past year? How will they be impacted by rate hikes?

At a broad level, Indian corporate balance sheets were in reasonably good shape even before the financial crisis broke out. Many companies with a larger proportion of debt capital have taken advantage of the improved market conditions and raised equity. The rate hikes announced so far have not had a substantial impact on corporate borrowing costs.

Many of the large corporates have also been taking advantage of the increased rate differentials with developed markets by raising funds in overseas markets, and this could help some of them mitigate the impact on cost of capital. At a broad level, Corporate India appears to be well placed, with the exception of a few sectors.

Are sectors that were worst affected by the credit and global crisis, such as realty, retail and so on, out of the woods?

While the overall liquidity situation has improved, the concerns during the crisis period have resulted in a cautious outlook for these sectors.

We have typically been wary of the real estate sector and have avoided exposure even when the general perception was very positive few years back. A large chunk of real estate companies in India have highly leveraged balance sheets and, while retail prices have been on the upswing, the commercial space remains tepid.

What does the above interest rate outlook mean for investors? Which fixed income options should they consider now? Should they lock into current rates for a 2-3 year time frame?

Investors need to prepare for increased borrowing costs as well as higher deposit rates, and also need to focus on `real` returns, given the high inflation levels. Historical data suggestthat during a rising rate environment, typically strategies focusing on shorter maturities and corporate bonds outperform.

From our portfolio, we feel investors should consider such funds as Templeton India Short Term Income Plan and Templeton India Income Opportunities fund, along with ultra short-term funds or floating rate income funds, depending on individual requirements.

Investors need to prepare for increased borrowing costs as well as higher deposit rates, and also need to focus on `real` returns, given the high inflation levels.

Source: http://www.myiris.com/newsCentre/storyShow.php?fileR=20100816113224707&dir=2010/08/16&secID=livenews

Stringent norms in pipeline to weed out erring MF agents

The mutual fund space is set for a major overhaul in the way funds are sold to investors, with companies looking to weed out non-serious agents and those indulging in mis-selling activities.

Having already hiked the registration fees ten-fold, industry body AMFI is now in the process of bringing out some major changes in the registration and renewal norms for MF distributors, whose numbers currently stand over one lakh.

Sources said the Association of Mutual Funds in India (AMFI) will soon come out with the new norms and could ask distributors to comply with them from next month.

The new measures would include more stringent scrutiny of distributors at the time of registration as well as renewal through a Know-Your-Distributor (KYD) procedure on the lines of the Know-Your-Customer (KYC) norms followed by banks and other financial institutions, including MFs, for investors.

Previously, the grant of registration required a certificate for having passed an AMFI certification examination, two photographs and payment of the registration fee.

Pursuant to a directive from market regulator SEBI, the AMFI certification has already been replaced by a certification programme for distributors conducted by the National Institute of Securities Markets (NISM).

The new KYD procedure could also include giving all the distributors a biometric card after a stringent verification process that would look into the past record of the distributors to minimise the risk of mis-selling and other potential fraudulent activities, sources said.

The move follows the AMFI's recent decision to increase the one-time distributor registration fees to Rs 5,000 from Rs 500 and the renewal fees to Rs 2,500 from Rs 250.

The hike, although the first in eight years, is already being resented by distributors, who claim that it could further dent the growth prospects of the industry, which is currently reeling under redemption pressure, with a ban on entry loads last year already affecting their businesses.

AMFI, however, justifies the hike and says that it was necessary to meet the rising costs and would help in taking forward the cause of serious players.

"We have hiked the registration fees after eight years as the cost has gone up. I don't think serious players would be affected by the hike," AMFI Chairman A P Kurien said.

"We will review the rates again in 2-3 years," he said. There has been a concern that the distributors who were selling such products did not have an extensive knowledge and were in the business only to earn a short-term commission.

He said the hike could help curb mis-selling of MFs. For the banks, non-banking financial companies, public companies and institutional distributors, the renewal fee has been raised to Rs 2.5 lakh from Rs 50,000. The registration fee for a new player in this category is now Rs 5 lakh.

Source: http://economictimes.indiatimes.com/personal-finance/mutual-funds/mf-news/Stringent-norms-in-pipeline-to-weed-out-erring-MF-agents/articleshow/6313997.cms