Get asset allocation right for better returns

Building a corpus good enough to meet your long-term financial goals is a meticulous process that involves selecting the best from the lot and investing in them on a consistent basis. But you wouldn't be able to get there if you don't get your asset allocation right.

Often investors place their bets on seasonal frontrunners only to see them lose steam in a subsequent cycle. Since a plethora of options including equity mutual funds (MFs), ETFs and an entire universe of debt funds are available, investors have to get the mix right not only to maximise returns but also to protect their savings from sudden downturns.

The thumb rule is that the proportion of investments in equities should be 100 minus your age. This is because as you age your risk profile changes. You have to be more conservative with your investments with advancing age. Aggressive investors should have at least 75% of their corpus in equities and those with moderately aggressive outlook must have about 60% in equities, say financial advisers. "Fixed income (returns) is not even matching inflation and real returns (actual minus inflation) are still negative," says Suresh Sadagopan, certified financial planner, Ladder7 Financial Advisories.

And most persons who come for financial planning understand that they have to invest a large portion of their savings in equity-related instruments to meet their financial goals, he says. "Aspirations have grown now. You can't meet those aspirations from traditional options such as the post office deposits," says Sadagopan.

Asset allocation should be arrived at after checking the financial health of the investor, risk profile, time horizon for investments and expected returns. "If the person has liabilities such as a housing loan it would not be possible to create an aggressive portfolio," says Rupesh Nagda, head, investments and products, Alchemy Capital Management, a wealth management firm. An aggressive portfolio with about 70% of the investments in equities would be able to generate 15-20% returns over the long term, say experts. Even a moderately aggressive portfolio with only 50-60% in equities can bring 12-15% returns, they say.

"A post tax return of 10% would be decent enough for conservative investors above 45 years of age," Nagda says. Debt should occupy a major part of the portfolio with advancing age. And persons above 45 years of age should slowly start moving money from equities to debt. While aggressive investors can keep their exposure to debt related instruments at 25-30%, conservative investors and persons nearing retirement should have 70% of their surplus in the debt category.

Source: http://timesofindia.indiatimes.com/business/india-business/Get-asset-allocation-right-for-better-returns/articleshow/6588165.cms

Go for a lucky fund manager than an intelligent one: Anoop Bhaskar

Being in the hot seat is not easy. Ask Anoop Bhaskar, head of equity at UTI Asset Management Company, the fund house with probably the largest number of investors in India.

“Ours is the only job where you are tested everyday. That’s the only part that is a strain,” says Bhaskar, whose UTI Mid Cap Fund and UTI Master Value Fund have delivered 42.88% and 49.23% one-year returns as on September 18, 2010.

“If a sales person achieves his target in the first 10 days, he can rest for the month, but I can’t do that,” he says. In an interview immediately after the Reserve Bank of India hiked rates last Thursday, he tells DNA of the impact the move will have on the markets in the mid-term and about mid-cap stock selection.

Are there new leaders for the rally’s next leg?
They are here already. We did an exercise last week. If you were to analyse the BSE 100 during the peak of January 2008, the winners were in the capital goods, power utilities and infrastructure space. Today, when the market is still below the peak, we find domestic consumption —that is. staples, two-wheelers, auto — have moved up 2-3 times, while the previous winners are down 20% from the peak.

Nobody said IT would be the best performing sector because of a strong stable government, but it has given 180% returns. When a stock gets overly expensive — 35-36 times two-year forward earnings, you know that the analyst has tried very hard to convince you to buy it. So the earnings themselves must be suspect. This is not in India alone, but a phenom across emerging markets.

Sectors that were totally avoValuations don’t give much comfort. You have to see whether the earnings growth will deliver and sustain these valuations. If a mid-tier pharma company trades at 14 times next year earnings you are worried as these have usually traded at 10 times one-year forward. Valuations per se can be stretched.

I would not take very large holdings but restrict myself to smaller stakes in more companies.ided in the last part of the rally of 2007-2008 have done well, and the ones that have done the best in those two years are lagging.

What about valuations in these segments?
Valuations don’t give much comfort. You have to see whether the earnings growth will deliver and sustain these valuations. If a mid-tier pharma company trades at 14 times next year earnings you are worried as these have usually traded at 10 times one-year forward.

Valuations per se can be stretched. I would not take very large holdings but restrict myself to smaller stakes in more companies.

Do you see market rally continuing?
The short-term looks worrsiome as we have had a very high flow of money into India despite premium valuations to some emerging markets with better macro economic fundamentals. But then, as the saying goes, success begets success, which is leading to sustained flows, which may reverse once global macro situation worsens.

Will you still stick with consumption-related sectors despite the fifth rate hike this year?
Generally the assumption is that these are safer companies though valuations are excessive. So, what if they correct by 5-10%? It’s better to stick to these companies rather than shift to unknown infrastructure stocks. What you would need is a global mindset change where fund managers globally figure it out that these valuations are expensive.

Its not just an India phenomenon, even in China we have some consumer staples companies trading at 40 times, and some media companies trading at 30-35 times and they have much lower return on equity of 15-25%, whereas in India, companies still have RoEs above 25%. So if happens, it will be a trend decided by foreign flows rather then Indian fund managers deciding to take a call that these stocks are expensive.

The BSE Consumer index never used to top 13 times and today it is at 21 times. I can’t figure it out and my fingers twitch pushing me to sell it, but then I say I will sell 5% at a time rather than dump the entire holding. These are fairly well-managed companies.

You will see 15 companies coming and setting up power plants, but you will not see 15 companies coming and selling a Horlicks-equivalent. The barrier for entry is very high, so you will have to give them some premium for that.

How big a role does an institution play in stock selection?
Luck is a big part. You can’t say it’s only because of my skills to analyse balance sheets and meet managements that my fund is doing good. If somebody is saying that, he’s fooling himself — rather than lying. Take the case of the results of the general elections in May last year. Did anyone say that domestic consumption stories would do well over next 12 months? Everyone was upbeat on infrastructure and capital goods due likely increased spending by the government. You can’t say that I was so visionary that I saw the domestic consumption demand. It’s luck. If someone says that I bought cheaper stocks which were these consumption-related stocks rather than highly priced infrastructure or capital goods, fine, but to claim foresight would be wrong. If you have to choose a fund manger, choose one who’s lucky rather than one who’s intelligent. In the end that matters more, because you can be most intelligent guy making most deep analysis but if something goes wrong, then that’s it. Tell me, you think balance sheets aren’t doctored in India? So to claim that I am fundamental analyst and will look at balance sheets and dig out information works only so much…

Business and economic cycles have become shorter in the last few years. So how do you provide for the downside?
If you are lucky and you are very smart and able to identify companies that can consistently grow at a fast pace, and you have them in top 5-6 schemes, your fund would keep on doing well. But that is difficult. So you take a wider portfolio of say 60-70 stocks so that you are not over emphasising on 1-2 stocks to deliver the performance and as when their target prices are achieved you sell a part of these. Another way is to have a core portfolio concept in midcaps where there are certain stocks you will always hold whatever be the situation. These are very growth-stage companies and they move up in a lumpy fashion.

Do you look at the business model or the management of the company while picking a stock in your portfolio?
This isa very MBA-type question. Aap bolo, in a 2-hour meeting what business model can you understand of the company? What I look at is the business cycle stage in which they are. If the business cycle for them is at a stage which will give them an upturn, they will do well. How would you differentiate a construction company? There’s no company which is specialist in particular skill as 95% of the work which they do in India is often sub-contracted to other smaller teams or sub-contractors. You take a call — either you buy the cheapest stock, or the one that you believe is the most honest or the one where Ebidta margins have consistently been the highest or one that’s generating free cash.

How do you go about stock selection in midcaps?
You need to go and meet more companies in midcaps than in largecaps and you should have a slightly longer view on them because many of these companies tend to have drivers for growth that are mainly internal rather than driven by the environment. If you were to pick up a blue-chip steel stock, the same brokerage might have changed its recommendation three times a year based on external factors like prices of steel in China and total production going up or down. But in the case of a midcap steel company, you need to look at the company’s capacity or its coal mines getting operational.

So the price performance of a midcap company doesn’t vary much with change in global prices. These are more slightly insulated companies and you can take a slightly longer-term view. If you meet management, you are aware of trigger that can happen over period of time that would boost the earnings. Some of these companies tend to have a more stable view on them compared with the large caps, which are now very global on account of the environment in which they operate.

What are the characteristics that you look for when buying midcaps?
They’re no different from large caps. You look at companies that have done well consistently in the past and are available at cheaper relative valuations which fell due to some event like some 2-3 large sellers unloading. There are also some companies that were doing good, say 3-4 years back, but had raised a lot of capital and then the global situation led to their businesses suffering. In the case of midcaps, the expectations of investors tend to move ahead of what companies can deliver. This leads to investor selling or disinterest despite their performance stabilising and cheap valuations. Such opportunities are there in the market where you can now meet the management and find out about earnings growth in the next 3-4 quarters and take a call.

How do you manage the risk in midcaps?
It is more on the small-caps side. You have to be cautious. They have a new plant and they will say they will stabilise in a year. In India, plants don’t get commissioned on time, they never stabilise on time and then the products won’t get sold on time.

So, if a company tells you it has ‘x’ capacity and targets 3x capacity, the point to assess is, is there a market for that? The plants can be expanded. But it might take two years to actually go and fill the market and get to the capacity utilisation levels that generate the margins the company is talking about. So, you have to take new projects with a pinch of salt. Whatever deadline a company gives, you need to take it with a delay of 12 months. Good promoters may get it executed with a delay of 6 months.

Also, all these companies have gone through a cycle - they have acquired another company, have lost money, raised capital, sold stake to private equity. There is a fair amount of due diligence done by outside investors. To find a total virgin in the Rs5,000 crore market cap bracket is rare, if at all.

How big is the liquidity problem in small and mid-caps?
I believe what the late Harshad Mehta said that in stocks only if the price goes up does the demand go up. If you are the only buyer of stock it might be the best time to buy it if you have the guts. But I don’t. I need to have other people to buy it to give me some comfort. There is no stock that has gone from Rs500 crore to Rs5,000 crore and still trades 100 shares a day. It’s a fallacy to say it is illiquid. It is illiquid because nobody wants it. To assume that at your exit price it will be as illiquid as it is today then either the stock will not go up or if it goes up then it will not be as illiquid as at the time of buying. Illiquidity is an issue only when buying, not selling.

How do you juggle between the different objectives of Master Value and Mid Cap fund?
We try to focus on companies that are more value-oriented for the Master Value Fund. It is not a pure value fund. If we have two companies in the same sector, the one which is more expensive and has got high growth will go into mid cap and the one which is cheaper but might have slower growth will be in the Master Value.

We are going to reposition the fund to have a 30% large cap and 30% small cap composition so that you get both sides of the curves in it. The 30% large cap will give it the stability and the small cap will give it volatility and sharp-rise movements, so that the fund is not cyclically volatile. It also gives you liquidity. It is a good combination for investors.

Any sectors that you find attractive in mid caps?
I think across the sectors, infrastructure looks good. A lot of investors have recently taken a liking to cement stocks that you can call cheap. Last year, investors were negative and promoters were positive, and THE stocks just went up. This year all the promoters are negative and investors are positive and the stocks are still going up. I can’t figure out why.

Cement could be the next one working in your favour. Construction is a safe bet. The next big thing would be capital goods. The perpetual dark horse is real estate. I think the problem there is that the business model is not suited for the stock market because it cannot have linear growth.

Source: http://www.dnaindia.com/money/interview_go-for-a-lucky-fund-manager-than-an-intelligent-one-anoop-bhaskar_1440329-2

‘FIIs driving Indian market to all-time highs while opening doors for future’

CHRISTOPHER D. SPELMAN, CEO, JP Morgan Asset Management

With the Sensex at a 32-month high of 19,594, the big question on Dalal Street is: Is the market overvalued? CHRISTOPHER D. SPELMAN, CEO, JP Morgan Asset Management, says India is a compelling fundamentally driven story and there may be some short-term corrections, but if an investor takes a long-term view, now is a good time to invest. In conversation with GEORGE MATHEW, Spelman, who has worked in several global markets including Hong Kong and South Korea, says, "the weighting for India will increase significantly and this will further drive FII flows into the country." Excerpts:

What's your view on the valuation of the Indian market? Is it overvalued? Do the economic fundamentals justify the bull run on the markets?

The markets have witnessed immense volatility in the recent past. Considering the situation of the Indian market in 2008, when the Sensex slid below 8000, some may feel that the market is overvalued today; implying that now may not be the best time to enter the Indian market as levels may seem higher than long term average. However, we believe that the Indian economy and, in turn, the stock market will continue to perform well in the coming years. Whilst there may be some short-term corrections, if an investor takes a long term view, now is a good time to invest. Looking at the long-term growth potential, the Indian market is fairly valued.

India is a compelling fundamentally driven story. GDP growth is strong, inflation is coming under control, the demographics are extremely strong relative to all other countries and the required investment in infrastructure will all drive the markets. Earnings are recovering and the upgrade cycle has commenced.

Where do you place India among emerging markets? Tell us the advantages and disadvantages of investing in India...

The global economy is looking toward Asia to drive growth in the future. India and China are in the global economic spotlight. Undoubtedly, India is a great secular multi-year growth story. Since this has become a well-known reality, India is one of the more expensive emerging markets destinations. We also believe in the growth potential of Emerging Europe, Middle East and Africa. Earnings growth in these areas could be the primary driver of returns in 2010 and beyond.

We believe India is a fast growing, consumption led market with strong FII flows and a solid banking sector. India also witnessed 8 per cent GDP growth despite global economic uncertainty and investments in infrastructure are doubling every 5 years. India has also seen attractive return on equity during the last few years. Investing in India, however, is subject to domestic factors such as the possibility of political instability, the dependence of the agrarian economy on climate, and sluggish execution of infrastructure projects. Since myriad factors influence investment trends, fundamental bottom up stock picking is critical rather than just focusing on a sector.

Foreign portfolio investment in India has picked up of late. Why's the global money coming to Indian markets? Will foreign inflows rise further in the coming days?

2010 witnessed unprecedented capital inflows in India. FIIs have invested around $14.5 billion (YTD), despite a stiff global economic environment.Over the long term, we expect global investors to increase their exposure to India. India is under represented in the global and regional indices that many long only equity funds use to benchmark their performance and many ETFs and passive funds follow. The weighting for India will increase significantly and this will further drive FII flows into the country.

Though the market is at a 32-month high, Indian capital market has been unable to attract retail investors in a big way. What's keeping them away from the markets?

The primary deterrent to Indian capital markets attracting retail investors could be market volatility. The Indian retail investor is risk averse, and fluctuations in the stock market may induce fear of investing. Also, the emotional remnants of the 2007-08 experience have made investors wary of placing their money in the capital market. Lack of awareness and the scarcity of unbiased advice leave a retail investor lost in a sea of investment options. Until the fear of losing capital is overcome by the willingness to take risk to participate in economic growth, the retail investor could remain at bay. It is our firm belief that the Indian stock market will perform exceedingly well in the next 10-15 years. This presents a great opportunity for the Indian retail investor to participate in this growth story by investing regularly in the market. Investors should therefore look long-term and invest regularly with discipline instead of being concerned about market levels and P/E ratios.

Where's the global economy heading? Do you see further recovery in the coming months? There was a talk last month that global market was moving towards another slump. But it has been rising.

US recovery is expected to be better and stronger by 2013. Europe has registered the best growth in recent times. Emerging markets led by China, India, Brazil, South Africa and Russia promise to lead global recovery faster. However, there has been speculation on a double-dip recession- meaning a failure of recovery to take hold or a return to recession. Statistically, these are rare. Concerns about the US economy moving towards deflation and a 'double dip' recession have risen after leading indicators peaked and data came in weaker than expected. However, there has only ever been one 'double-dip' US recession in the postwar period (1981). With the present US recovery still in its early stages, the normal cyclical triggers for another recession so soon into the upturn are missing.

JP Morgan seems to be keeping a low profile here. Where do you see your company in the fund management business here 3-4 years down the line?

While we are conscious of the fact that AUM growth is important but we are very clear that we want to grow our business profitably. Profitable growth can be achieved by having an optimum product mix, excellent service levels and by being sensible in the way we conduct business. We are reasonably happy with the growth that we have achieved in the first three years of operations but there are definitely things we could have done better.

Source: http://www.indianexpress.com/news/fiis-driving-indian-market-to-alltime-highs-while-opening-doors-for-future/683992/0

MFs ask agents to get biometric cards, follow KYD norms

Market regulator SEBI has ushered in a major overhaul of the way mutual funds are sold with the introduction of biometric cards and stringent licencing norms for distributors to weed out agents indulging in frauds.

Following directions from SEBI, mutual fund industry body AMFI has asked all fund houses in the country to comply with 'Know-Your-Distributor (KYD)' norms before the grant or renewal of registration of distributors.

The agents would be required to get biometric cards that would carry an impression of their right hand index finger and help in immediately checking the distributor's record for any possible irregularities in past.

The KYD norms, devised on the lines of KYC (Know-Your- Customer) norms already being followed by banks and other financial service providers for their customers, would require the distributors to submit proof of their identity and address, as well as PAN and bank account details.

The new rules would be applicable to new registrations and renewals with effect from September 1, while compliance is mandatory for already registered distributors within six months, or by the end of February, 2011.

The AMFI has asked the fund houses to suspend payment of commission to non-compliant distributors.

Besides checking agents indulging in fraudulent activities, the move is also aimed at weeding out non-serious agents and those indulging in mis-selling activities.

There are more than one lakh distributors working for about three dozen fund houses in the country.

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

However, 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).

Furthermore, the new KYD norms would require distributors to go through 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.

In a circular to the fund houses on the new KYD norms, AMFI said: "As you are aware, there are increasing numbers of instances of financial frauds played on the investors by Mutual Fund distributors/their employees.

"... As one of the measures to control this situation, Securities and Exchange Board of India (SEBI) has advised AMFI to tighten the procedure for distributor registration.

"On reviewing the current procedure for registration of distributors, it was decided by the board to introduce a more stringent Know-Your-Distributor (KYD) process involving obtaining relevant documents and validation of such documents, personal verification and biometrics."

Source: http://economictimes.indiatimes.com/personal-finance/mutual-funds/mf-news/MFs-ask-agents-to-get-biometric-cards-follow-KYD-norms/articleshow/6584297.cms

MFs go insurers' way to sell plans

You can't escape the phrase 'gift your child Rs 1 crore' printed in bold letters in the newsletter from the neighbourhood mutual fund agent. Then, the small text below it explains that if you invest Rs 6,000 in best performing mutual funds scheme via a systematic investment plan (SIP), your newborn would be a crorepati (assuming the scheme returns 20% per year) by the time she becomes 18.

The example shouldn't surprise anyone, but actually it does. It is because the mutual fund newsletters usually don't talk this way: their tone is always impersonal; they always speak about the dividends declared, performance of top funds vs the respective benchmark, assets under management and so on.

''It is true that mutual fund newsletters usually speak about the performance of schemes, returns on benchmarks like sensex, dividend history, assets under management... Insurance players used to speak about goal-based investments,'' says Rajesh Krishnamoorthy, managing director, iFast Financial. ''It seems the mutual fund industry has also started speaking about investing for a goal. Maybe because of the recent troubles the industry is trying to reach out to investors forcefully,'' he adds.

''Maybe it is true that we were speaking more about performance, dividend and so on. But there was always a tacit understanding that mutual funds are the best investment vehicle to meet individual's long term goals,'' says Sandeep Dasgupta, CEO, Bharati Axa Investment Managers. ''The change in language may be because the industry is going through dramatic changes after the entry load ban last year. Maybe this is one way to communicate effectively to investors,'' he adds.

The mutual fund industry has been struggling to find its feet ever since the market regulator — Securities and Exchange Board of India (Sebi) — banned entry loan on mutual funds. Mutual fund sales force has been dwindling since then. Faced with no incentives to sell MF schemes, many agents have shifted to peddling more-lucrative unit-linked insurance plans (Ulips), which gave them attractive upfront commissions.

According to financial experts, mutual funds should do more investor education programmes — as per the new guidelines they are expected to hold five such programmes every month, but they seldom do it — and talk more about goal-based investments.

Source: http://timesofindia.indiatimes.com/business/india-business/MFs-go-insurers-way-to-sell-plans/articleshow/6588257.cms