New chairman UK Sinha plans to revamp Sebi

The new chairman has sought opinion from all department heads about the scope of the proposed reconstitution

Within a week of taking charge, U.K. Sinha, the new chairman of capital market regulator Securities and Exchange Board of India (Sebi), has initiated plans to revamp the organization.

Sinha circulated a note last Thursday on the review of eight advisory committees that are currently working under Sebi.

The new chairman has sought opinion from all department heads about the scope of the proposed reconstitution, said two persons with direct knowledge of the matter. “He wants to take a fresh look at the issues handled by these committees,” one of them said.

“The chairman has asked about the relevance of all the existing members of such committees,” the second person said. Both officials requested anonymity as the matter is yet to be made public.

Sinha has proposed to look into the tenure of the members of such committees, their contribution to Sebi’s policies and the relevance of their recommendations.

An email sent to Sebi on Friday remained unanswered.

A Sebi official, on condition of anonymity, said exploration of the scope of reconstitution of the committees is only part of the new chairman’s plan.

“He wants to take a fresh look at the ways the entire organization has been working. At the second stage, possible changes will be made,” the official said. “One should not view the proposed reconstitution of the committees in isolation.”

There are eight Sebi advisory committees on mutual funds, the secondary market, the primary market, corporate bonds and securitization, investor protection and education fund, disclosures and accounting standards, consent orders and compounding of offences, and the takeover panel.

Incidentally, Sinha has been a member of at least two such committees—the committees on mutual funds and the secondary market—as chairman of UTI Asset Management Co. Ltd, his previous assignment.

“Sometimes, the chairman may have a reform agenda and he may want to bring in new committee members to suggest ways to bring changes,” said one of the members of the committee for disclosures and accounting standards. He declined to be named.

The Sebi chairman has the authority to reconstitute committees, form new committees, and close or merge any of them. Under the stewardship of Sinha’s predecessor C.B. Bhave, who stepped down on 17 February, the regulator formed a new statutory committee to review and suggest changes for India’s takeover regulations.

During the tenure of M. Damodaran, whom Bhave replaced, the committee on disclosures and accounting standards was formed by merging two panels on disclosures and accounting standards.

Typically, a member serves on a committee for three years, but there is no fixed term.

“It’s not a statutory requirement to reconstitute advisory committees when the chairman changes. The members of advisory committee could be a continuity from one chairman to another,” said Susan Thomas, member of the secondary market advisory committee, and assistant professor, Indira Gandhi Institute of Development Research.

“Mere change in the constitution of committees may not help. Sebi may ensure regularity of meetings of these committees. Sometimes the committees do not meet for several quarters and this prevents continuity in reforms in line with the evolution of markets,” said H.N. Sinor, a member of the advisory committee on mutual funds and chief executive officer, Association of Mutual Funds in India.

Bhave went up against companies and other regulators during his tenure as part of efforts to enhance transparency and benefit investors.

On Sinha’s agenda are a new framework for mergers and acquisitions for Indian companies (following the recommendations of the takeover regulations advisory committee headed by C. Achuthan, former chief of the Securities Appellate Tribunal), new guidelines for market infrastructure institutions, such as stock exchanges, and depositories and clearing corporations (following recommendations by a panel headed by former Reserve Bank of India governor Bimal Jalan), among others.

“Since a new incumbent can’t change senior officials of the organization, he may try to bring in new voices as advisers. It makes sense to bring new members in the advisory committees for a fresh perspectives on critical issues,” said a member of the secondary market advisory committee, requesting anonymity.

Source: http://www.livemint.com/2011/02/27234811/New-chairman-UK-Sinha-plans-to.html?h=A1

Returns from funds with foreign focus outstrip India-centric MFs

While top mutual funds that invested in Indian stocks delivered less than one per cent return over the last six months, those with a focus on stocks listed overseas (international funds) delivered a 14 per cent return, on an average.

DSP BR World Energy Fund, with a 38 per cent absolute return, and Birla Sun Life Commodity Equities – Global Multi Commodity Plan, with a 28 per cent gain, were two star performers.

International funds, or funds that redirect your money into stocks or funds listed overseas, have topped the mutual fund performance charts over a three- and six-month period.

Playing the commodity theme

The reasons for the better performance of international funds are two-fold: one, a good number of them were theme funds that invested in companies in commodities or energy or in hard assets abroad.

Two, many of them had higher exposure to developed markets such as the US and the UK, which have delivered much better gains riding on economic recovery, than the Indian stocks in the past six months.

The Nasdaq Composite's return of 27 per cent (in rupee terms), the Euro Stoxx 50's return of 19 per cent and FTSE 100's 16 per cent return over the last six months all demonstrate the investor interest in developed market stocks.

Those markets were also more attractively valued vis-à-vis their emerging Asian counterparts. International funds have taken advantage of valuation-arbitrage in these markets by investing in many bluechip stocks in these regions.

DSPBR World Energy Fund, for instance, had invested 71 per cent of its assets in North America and 19 per cent in Europe as of January.

Similarly, funds that had a mandate of investing in stocks playing on oil and gas, precious metals/mining companies and agriculture-inputs such as fertilisers and chemicals, all stole the show, thanks to the rallying price of commodities world wide.

Birla Sun Life Commodity Equities Fund – Global Agri Plan, which invested in a good number of chemical and fertiliser stocks abroad, as well as Fidelity Global Real Assets, with exposure to hard assets, are schemes that took advantage of the high inflation scenario arising from the commodity rally.

Incidentally, most of these funds placed their bets in stocks in developed markets such as Canada, the US and parts of Europe and had less exposure to emerging markets. In contrast, funds which invest primarily in emerging markets or Asia saw muted returns.

Limited choice

Why didn't domestic equity funds take advantage of the commodity boom to earn better returns? The answer lies in the limited choice of stocks in the precious metal, mining, agri-based or real asset categories in India. Policy issues in commodities such as oil and gas also cap the returns on local stocks.

Source: http://www.thehindubusinessline.com/markets/stock-markets/article1492691.ece

Why diversified funds underperform

Fund houses continuously chasing the same stock universe tend to underperform.

Business Line recently carried the findings of a study conducted by CRISIL and Standard and Poor's on the performance of Indian mutual funds. The study concluded that half of the diversified funds surveyed underperformed the broad-cap S&P CNX 500 Index over three and five-year periods. The question is: Why do diversified funds underperform their benchmarks?

This article explains how active funds generate excess returns. Then, it explains why active funds that have high correlation with peers underperform their benchmarks.

Active funds have a mandate to beat their benchmark (generate alpha). The portfolio managers of these funds are within their mandate to hold large-cap, mid-cap and small-cap stocks.

Diversified funds generate alpha in two ways. One, portfolio managers' overweight sectors that they believe will outperform the market (sector allocation). For instance, health-care has nearly 2.5 per cent in the Nifty.

A portfolio manager who believes that health-care sector will outperform the Nifty may take, say, 6 per cent exposure to the sector; the portfolio would then be overweight by 3.5 percentage points on the sector.

And, two, portfolio manager overweight stocks (security selection) that they believe will outperform others in the sector. Take the technology sector, which has nearly 13 per cent weight in the Nifty. Suppose the portfolio manager believes that Infosys will outperform other technology stocks. The manager may take, say, 12 per cent exposure to Infosys instead of 9 per cent weight the stock has in the index.

Now, all diversified funds can successfully generate alpha through sector allocation and security selection only if a portfolio manager has a model that identifies sectors and/or stocks that outperform the benchmark with a high degree of probability. And importantly, such a model should enable the fund-house buy stocks well before their peers do.

Diversity

It logically follows that alpha can be generated only through unique strategies. This poses several problems. One, strategies do not remain unique for a long while. As institutions exploit asset mispricing, alpha becomes beta. And, two, active strategies — whether unique or otherwise — are subject to high risk of failing, leading to underperformance.

The risk of underperformance comes about because of lack of unique strategies. A manager may have carefully crafted a portfolio using proprietary model. Yet, if several diversified funds were to have similar portfolios, the peer fund universe is not diverse. And lack of diversity causes two problems.

One, alpha fades quickly as more funds “chase” the same universe of stocks. This means that funds typically generate market returns before fees but underperform after fees. And, two, when alpha fails due to security selection error, funds perform badly because of high correlation among peers.

In some ways, this is the same problem that epidemiologists face when fighting communicable diseases. Lack of genetic diversity increases outbreak of communicable diseases. Likewise, lack of portfolio diversity among funds causes underperformance.

The diversity problem arises because the Indian mutual fund industry has seen a proliferation of funds and fund-houses. Based on the January 2011 AMFI monthly report, there were 323 equity funds presumably “chasing” stocks within the investable universe of the S&P CNX 500 Index (or the BSE 500 Index).

Besides, the generic investment objectives stated in the offer documents and the newsletters gives an impression that all funds do not have well-thought investment philosophy. This essentially means active funds tend to buy similar stocks for, perhaps, different reasons, subjecting the portfolio to “alpha contamination”.

Conclusion

Two pointers emerge. One, mutual funds having neglected stocks in their portfolio that are intrinsically valuable. Two, mutual funds that buy same stocks well before their peers do would be able to outperform the benchmark.

The key then lies in identifying funds that continually innovate to have low “alpha contamination” with peer funds.

Source: http://www.thehindubusinessline.com/features/investment-world/personal-finance/article1492963.ece