Lagging Schemes of Leading Funds

Only a few fund houses exhibit superior performance on a continuous basis. Moneylife had identified these in the Cover Story “Best Fund Houses” (25 February 2010). We had found that some fund houses performed consistently well across different strategies and emerged on top even on other parameters like downside risk and size of assets under management (AUM). This time, we tried to identify which schemes from the stables of these fund houses were lagging behind in terms of performance over the past one year. We focused on the equity diversified schemes of the top seven fund houses according to our ranking and found that a few schemes of these asset management companies (AMCs) were among the bottom 25 percentile of the worst-performing schemes over the past one year.

Sundaram BNP Paribas Equity Multiplier Fund emerged the worst performer from the top-ranked fund houses. Over the past one year (30 September 2009–30 September 2010), the Fund has clocked 16% returns, while its benchmark (CNX Midcap) has zoomed 37% over the same period. This translates into an underperformance margin of 21%. This Fund has a mandate to invest in up to 40 stocks across sectors and market capitalisation categories. Its top picks were Indraprastha Gas, Polaris Software Labs, Development Credit Bank (DCB) and CESC. Polaris and DCB turned out to be average bets.

SBI Magnum MidCap Fund is another lagging scheme from a top-ranked fund house. This Fund yielded 22% returns during the past year, losing ground to its benchmark (CNX Midcap) which rose 37% during the same period. This Fund, which invests at least 65% of its assets in equities, currently holds a little less than 90% in stocks while the rest is invested in money-market instruments.

GlaxoSmithKline Consumer Healthcare, United Breweries, BEML and Swaraj Engines are among its top holdings.

One of Reliance Mutual Fund’s top performing schemes, the Reliance Equity Fund, has fared poorly over the past one year. With a 5% return during this period, the Fund has underperformed its benchmark (S&P Nifty), which clocked 19%. This Fund invests in stocks of top 100 companies by market capitalisation but has maintained limited exposure to equities. It holds as much as 11% of its portfolio in cash, while the rest is invested in companies like State Bank of India, ONGC, Tata Consultancy Services and Divi’s Laboratories.

Another Reliance scheme, the Reliance Natural Resources Fund, has also exhibited weak performance during this period. While its benchmark (BSE 200) has registered impressive gains of 21% in the past one year, the Fund has managed to deliver growth of only 8%. This Fund aims to capture growth opportunities in companies primarily engaged in the discovery, development, production, or distribution of natural resources. Among its top picks are HPCL, ONGC, NPCL and Reliance Industries (RIL). RIL has let it down badly. The Fund also has sizeable holdings in foreign entities like Potash Corporation of Saskatchewan, Market Vectors Agribusiness ETF and Peabody Energy.

Sundaram BNP Paribas SMILE Fund rounds off the list of underperforming schemes from leading fund houses. Although it has delivered decent returns of 26% over the past one year, its benchmark (S&P CNX Midcap) has outperformed with 37% returns. This Fund invests in a mix of small- and mid-cap stocks. Its portfolio appears to be more diversified than required with just 18% in the top five holdings which included TVS Motors, Ashok Leyland, LIC Housing Finance, Orchid Chemicals and Lupin.

Source: http://moneylife.in/article/81/11361.html

Regulators must have financial autonomy: Bhave

Securities and Exchange Board chairman C B Bhave on Friday made a strong pitch for safeguarding the financial autonomy of regulatory bodies, warning that interference would "jeopardise" their independence.

"If regulators have to depend on the executive for the release of funds, the question of independent behaviour by the regulators will be jeopardised. It is necessary to carefully consider the pros and cons of taking (away) the financial autonomy from the regulators," he said at a lecture at IMC in Mumbai.

Bhave was reacting to reports that the government plans to make regulators deposit their surplus funds with the Consolidated Fund of India.

"Currently, there is a line of thought - and you must have read about it in the media - that regulatory authorities should not be allowed to have funds of their own and that these funds should be merged with the Consolidated Fund of India," Bhave said.

Stating that regulatory autonomy vis-à-vis the executive is not only necessary, but also essential, he pointed out that in the case of SEBI and the Insurance Regulatory and Development Authority (IRDA), financial autonomy was built into legislation, which provides that such authorities would establish a separate fund into which the fees paid by market intermediaries would be credited.

At present, the money coming to regulators like SEBI by way of penalties is credited to the Consolidated Fund of India.

The SEBI chairman, however , did not elaborate how the proposal would be implemented or on the account heads that the regulator would be able to retain as and when the proposal was implemented. "Such funds are to be used by these authorities to discharge the functions enumerated in the law," Bhave said, although he conceded that since SEBI is a comparatively new body, it is still in the process of evolving into a smoother regulatory-executive interface.

He also highlighted the need for a review of existing laws regarding appointment and removal of members of regulatory bodies.

"Regulators do not enjoy protection in terms of the conditions under which their service can be dismissed by the executive," he pointed out. He added, however, that there is no tradition of removing members at SEBI.

Price-rigging
Bhave said the investigation into incidents of price-rigging carried out by his agency and by other government departments are cleaning up the rot in the market, and this would protect investors.

"Investors should be happy that the market is getting cleaned up," Bhave said. "There is no need for them to be nervous. Investors should be happy that wrong-doers are caught."

Investor confidence in markets has been ruffled in the past few weeks with the Central Bureau of Investigation arresting some bank officials on charges of corruption, including the LIC Housing Finance chief executive. SEBI had charged promoters and brokers of rigging stock prices.

The Intelligence Bureau had reportedly passed on information to the market regulator about some brokers' involvement in price manipulation in specific stocks.

"We are on the job of investigation ... all the time coordinating with other government agencies," said Bhave without getting into the specifics of the operation.

Source: http://www.domain-b.com/economy/general/20101211_cb_bhave_oneView.html

Make debt funds an essential part of investment portfolio

Mutual funds (MFs) which invest in debt related instruments such as bonds and debentures account for two-thirds of the assets under management of the industry. But they usually don't find much space in the portfolio of many retail investors because of the lack of understanding of such products.

Experts insist that debt focused schemes should be part of portfolio as it would be useful in striking the right balance. "Debt mutual funds offer a range of products. But not too many average retail investors are aware of the available options," says an industry official.

From highly liquid funds that invest in short-term money market securities to fixed maturity plans(FMPs) that have a longer tenure, the investor can choose the product that suits his or her requirements . "Debt funds can be used by common investors as well. They can balance their portfolio," says Suresh Sadagopan, certified financial planner.

But the only hitch is that unlike traditional products such as bank FDs, debt funds would not be able to give a specific rate of return.

Source: http://timesofindia.indiatimes.com/business/international-business/Make-debt-funds-an-essential-part-of-investment-portfolio/articleshow/7090419.cms

Small liquid funds promise big returns

With short-term yields firming up and likely to hold steady over the next few months, distributors are asking affluent investors to park their money in liquid funds managed by small fund houses.

According to investment experts, fund houses with small liquid fund pools have better chance to provide more ‘per-investor returns’ as their asset bases are small and the returns generated are to be distributed only to a lesser number of investors.

The sales pitch is pretty straight and simple. Assuming there are two liquid funds — fund A having a corpus or Rs 100 crore and fund B with a corpus of Rs 1,000 crore — and both are generating similar returns (say 4.5%) currently . If fresh investments of Rs 25 crore each flow into both these funds, the percentage of fresh money in small fund will be 20% and that of large fund, (percentage of new money) it will be just about 2.5%. If both the funds invest in papers with same yields (say 5.75%), returns generated by the smaller fund will be much larger than the portfolio yield on larger fund (as the proportion of fresh money to overall portfolio is larger in the smaller fund).

“The difference in returns (between the small fund and large fund) could be even higher in current times, as yields on shorter duration papers are firming up after the rate hike by RBI,” said Sujoy Das, head-fixed income, Bharti Axa Mutual Fund. However, Mr Das is quick to point out that large funds sitting on high cash levels will be able to match returns generated by smaller funds in such situations.

Yields of money market papers maturing within 3-6 months have gone up by over 125 basis points, post the CRR hike a few weeks ago. According to experts , despite the rising yields, most debt fund managers will not be investing their money in short-term papers, as they would be wary of corporate investment outflows to meet advance tax payments and bank redemption. This will further jack up yields temporarily for a brief period. If industry sources are to be believed, most fund houses are maintaining cash-levels between 40% and 70% of their liquid portfolio AUM.

“Theoretically, smaller corpus funds will provide high per-investor returns as their asset base is much lower and they will begin investing at higher yields. But then, in these times, even large funds will do well as most of them are sitting on high-cash levels and they will also deploy cash as yields go up,” said Ritesh Jain, headfixed income, Canara Robeco MF. According to Mr Jain, large funds, sitting on cash, will only start investing once they get a clear idea about bank redemption and advance tax outflows in March.

From a retail investor’s point of view, investors should do a cost/reward comparison before investing in smaller funds to jack up portfolio yields. “I’ll stay away from such gimmicks. If I am a liquid fund investor, my sole aim will be to protect my corpus (before permanently investing somewhere else) and get some marginal return on it,” said Mumbai-based financial planner Gaurav Mashruwala.

“If the investor still wants a higher return , he should look at the return differential (likely to be generated on a small fund pool and large fund pool) before adopting this strategy. If the gain (return differential) is just about 3-3 .5% per annum , it is not worthwhile to invest in a small fund pool,” Mr Mashruwala added.

Source: http://economictimes.indiatimes.com/markets/analysis/Small-liquid-funds-promise-big-returns/articleshow/5605481.cms

Why the liquidity crunch?

Liquidity in the banking system has dried up over the past few months. But what does one mean by ‘tight liquidity'?

It means that banks are borrowing for their daily requirements from the RBI. It is widely believed that the outflow of Rs 1 lakh crore from the banking system on account of 3G and BWA spectrum payments by corporates to the Government is the primary reason for the continuing liquidity deficit in the system.

But, the Government on its part had already spent a major part of this money by the first week of September. So the money has been ploughed back in to the system, and cannot be the only reason for continuing tightening of liquidity in the system.

According to us, the liquidity crunch is driven strongly by three major factors that are beyond the central bank's ability to address.

Negative real interest rates: The current high inflationary environment is resulting in a change in the consumption and savings pattern of the Indian population. . Thus, a large part of the income is concentrated now more on consumption (or you can say fulfilling current expenses) rather than saving.

This structural shift is expected to lead to a drop in the savings rate in the coming few years due to higher inflation.

Also, within his savings, his financial savings (ideally in the form of bank deposits) is fetching him negative real returns. This is the single most important reason for the current liquidity crunch.

Inflation continues to rule in double digits while the Bank FD rates remain closer to 7-8 per cent. This, in turn, leads to lower deposit mobilisation in the banking system.

Thus, the not-so attractive investment returns coupled with the higher cost of living is leading to the common man holding more cash.

Currency with Public: Between March and September 2009, there was an addition of Rs 56,708 crore in the currency with the public whereas for the same period this year, it doubled to Rs 1,01,905 crore. This surge in cash-in-hand for the common man has contributed to the liquidity deficit in the system. People are spending more as cost of living goes up sharply and more money is being put in hands of rural households. NREGA and higher Minimum Support Prices (MSPs) for crops are also ensuring that more money is pushed into the rural areas, which are under-banked, and more and more money is moving away from banks.

Rising Gold Demand: The other big reason for tight liquidity is soaring demand for gold and silver.

Indians, in first nine months of this year, have bought gold worth more than one lakh crore rupees and most of this purchase is funded by savings. According to figures in Gold Demand Trends' released by the World Gold Council (WGC), in value terms, India's gold demand grew to Rs. 113,302 crore from Rs.53,196 crore, an increase of 113 per cent. The total demand for gold is expected to touch 700-800 tonnes this year.

Much of this demand is coming on the back of the shift among consumers from financial savings to real savings. Thus, real assets such as gold, real estate, etc., are attracting investor allocation over bank FDs. Going forward, we expect deposit rates to move up by another 100 bps.

With credit growth rates remaining high, banks may raise the deposit rates further; so don't be surprised if your banker calls you up and offers you 9.5 per cent or even 10 per cent for a 1.5-2 year deposit by next quarter.

What does this all mean for a fixed income investor? Does the above explanation on tight liquidity provide for clues for forthcoming investment decisions? Debt products with characteristics similar to bank deposits may offer attractive returns. Fixed Maturity Plans are a good investment avenue for investors wanting take advantage of rising short-term interest rates. Also, investors should look at adding exposure to gold.

Source: http://www.thehindubusinessline.com/iw/2010/12/12/stories/2010121250270800.htm