AMFI appoints HDFC MF's Milind Barve as Chairman

Mutual fund industry body AMFI has named HDFC Asset Management Company Managing Director Milind Barve as its new chairman, a position which fell vacant after incumbent U K Sinha became chief of market regulator Sebi.

At the same time, the Association of Mutual Funds in India (AMFI) has named Sundeep Sikka, CEO of Anil Ambani group's mutual fund arm Reliance Capital Asset Management Co, as its new Vice-Chairman.

Earlier in September 2010, AMFI had named U K Sinha, then chief of UTI Mutual Fund, as its Chairman and Barve as its Vice-Chairman.

However, the leadership team at AMFI had to undergo a change after Sinha assumed charge as Sebi Chairman on February 18.

Barve and Sikka would hold office of Chairman and Vice-Chairman, respectively, till the next Annual General Meeting of AMFI, which is expected to take place in September.

Source: http://www.indianexpress.com/news/amfi-appoints-hdfc-mfs-milind-barve-as-chairman/758951/

‘Concept of price-earnings ratio is all wrong’

Nearly two decades ago, when Chandresh Nigam entered the fund management business, the absence of research meant that multibaggers were easier to come by. Today, investors and fund managers have a more difficult job. However, Nigam feels that India is still a great place for asset allocators.

The head of investments at Axis mutual fund, who manages over Rs1,000 crore in equity investments, tells DNA why it may make sense to ignore price to earnings ratios and a simple formula by which investors can match Warren Buffett.

You’ve been a part of the mutual fund industry since the early nineties. How has the game changed?

In the olden days, India would not have reacted so sharply to the issues in Libya. But now, with so many foreign investors, the correction has been sharp. There was hardly any research in those days with plenty of undiscovered companies. Today, if you find a good company, you will also find that some institution has already invested in it. So, it’s harder to get those large multibaggers. You could hope to get returns of 25-30%. You still can get high absolute returns but it is more difficult today.

What is your investment strategy?

I believe in fundamentals. Volatility is opportunity, provided one has a grip on medium to long-term fundamentals.

Our core investment style is “growth at a fair price”. The Indian economy provides significant opportunities for a growth investor to earn financial returns much in excess of cost of capital over a long period. A major portion of the portfolio returns in our funds are expected to come from buying and holding these growth stocks.

I always say that Warren Buffett is 20% compounded over 40 years. So, if you can do that then you can be the next Buffett. Investors in India are very lucky. They can easily invest in an equity market where one could get returns of around 18%. And, add to that the couple of percentage points that you get from rupee cost averaging or investing through systematic investment plans. It is not rocket science.

There has been a sharp correction for a lot of the mid-cap companies in recent times, with many of them trading at the lower end of the P/E band. Does this suggest opportunity?

The whole concept of P/E (ratio of share price to company earnings) is wrong. Some time ago, the top two to three IT companies and their valuations were much more expensive than some of the mid-cap firms in the same space. But you see how they have done in terms of business and cash flows since then. The top companies have done a lot better than the mid-cap ones. So, what did you pay for? You have to look at companies with high cash flow and see how much premium you are willing to shell out for that currently. You pay for a sustainable business model. You can’t look at this year’s earnings or next year’s earnings because you don’t know in the case of some of these businesses if there would be any earnings at all. What is the point of assigning a price to earnings to a company if there are no earnings?

How do you pick your stocks?

Whenever we look at a company, we say, if this company was not listed, how much would we pay for it? Then there is no P/E. You are ultimately just paying for cash generation. The strategy is to invest in growth-oriented companies. I am a firm believer of growth investing where you put your money into businesses having sustainable growth. We prefer predictable businesses over volatile ones.

Which are the sectors you see maintaining growth over the next few years?

Considering the business growth and investments in India, the banking sector would continue to remain a great story for the next 10-15 years. Similarly, in the IT sector, the top three to four large players will continue to generate strong cash flows and sustain growth considering their global presence. We also like the consumer story.

You have been in hedge fund earlier. How different is it to mange funds there?

Sometimes when there are newsflashes you need to know how to react. That can only happen if you know what it means for the company. Basically, the skills required are the same. The fundamentals have to remain strong. If you have knowledge, it is easier to react and take action quickly. Sometimes the market doesn’t react to news, but it overreacts. Our idea is to know the companies we invest in better than anybody else. It is an impossible goal, but that’s what we aim at.

There are governance issues in mid-cap stocks. How do you guard against them?

One of the most important things for fund mangers is ‘quality risk’ control. One needs to look at parameters like competitiveness, management integrity, capability and business environment. Investors have to be very careful when it comes to these companies and the growth opportunity should be much larger for making investments in them. Their ability for free cash-flow generation and return on equity has to be high. If you make a mistake with management quality in case of large caps, it can be corrected at much lower cost. But, in case of mid-caps the impact cost is much larger and you may face a long-term capital loss.

Foreign investors have been net sellers in the last two months.

How do you see outflows affecting the markets?

After huge inflows in the last two years, it is quite natural that there would be some outflows. From that perspective, it is quite possible that we may see further selling of $4-5 billion if the crude oil prices remain high. Only the short-term investors have been selling and following them is a recipe for disaster. Chasing momentum is not always good and price followers often end up destroying the value. Long-term investors continue to hold on to their positions and it is these firm believers who will always make money.

How do you see markets in the near term?

These are tough times with global events and oil prices likely to determine the market movements in near term. The budgets have been encouraging. Even though the numbers on fiscal deficit look difficult to achieve, the fact that focus of the government remains on fiscal consolidation and they are moving ahead on reforms agenda and inclusive growth gives us comfort that we are not going to see anything which may deeply destabilise the financial macro environment except for large rise in crude prices. While there may be negatives like rising interest rates and high commodity prices resulting in manufacturing inflation that may impact the corporates in near term, at the end of the day it is all about growth. If we are able to grow even at 8-8.5%, the medium to long-term outlook for markets remain positive. In the short-term, though, if problems in the Middle East linger for too long and oil remains at $120/barrel, then we may see some more downside in the short term. One should utilise these opportunities and downfalls to invest in good stocks as the Indian markets would continue to remain volatile.

Source: http://www.dnaindia.com/money/interview_concept-of-price-earnings-ratio-is-all-wrong_1516526

Banks invest more in mutual funds as returns go up

The returns being offered by the liquid schemes of mutual funds appear to be too juicy an opportunity for banks to ignore.

In the January 1 to February 11 period alone, banks have poured Rs 81,535 crore into the liquid schemes. This is despite the slow growth in deposits and the persistent liquidity tightness as reflected in the banks' daily borrowing from the Reserve Bank of India.

Banks are eyeing an arbitrage opportunity of up to 200 basis points (one basis point equals 0.01 per cent) by deploying funds in the liquid schemes, according to analysts. Mutual funds invest the corpus in these schemes predominantly in Government securities and money market instruments (commercial papers, certificates of deposit, Treasury-bills, short-term bank deposits, etc).

Borrow from repo window

Banks are resorting to borrowing either from the RBI's repo window at 6.50 per cent or the overnight interbank call money market at around 6.50-7 per cent or the collateralised borrowing and lending obligation (of Clearing Corporation of India Ltd) at around 6-6.80 per cent and deploying the resources with mutual funds to earn a spread of 8 per cent or more.

This investment comes even as the RBI has, in the recent past, cautioned banks to be careful in their exposure to mutual funds as the latter tend to invest in certificates of deposits (CDs) issued by the former in a big way. Market players say there is always a lurking fear of liquidity risk should banks suddenly press mutual funds for redemption.

CDs are negotiable money market instruments, issued by banks, of Rs 1 lakh face value and maturity of up to one year.

According to the latest RBI data, banks have issued CDs aggregating Rs 1,13,394 crore between January 1 and January 28 to offset the slowdown in retail deposit growth. Currently, banks, on an average, are raising one-year CD at a coupon rate of about 10.15 per cent.

“Banks are investing in MFs because the incremental liquidity is better and the returns from MFs have improved. The returns, which were around 6.5 per cent four months ago, are now above 8 per cent. So, banks can borrow from the call market at 6.5 per cent or from RBI's repo window and invest in MF schemes to earn substantially higher returns. That is the incentive,” said Mr Maneesh Dangi, Head Fixed Income, Birla Sun Life AMC.

In the financial year so far (up to February 11), the gap between bank deposits and advances growth has widened. While deposits have grown at a slower clip of 12.2 per cent (12.5 per cent in the corresponding period last year), advances have surged by 16.6 per cent (10.1 per cent).

Source: http://www.thehindubusinessline.com/industry-and-economy/banking/article1515030.ece?homepage=true

Pramerica Mutual Fund Unveils Pramerica Dynamic Monthly Income Fund

Pramerica Mutual Fund has unveiled a new fund named as Pramerica Dynamic Monthly Income Fund, an open ended income scheme. During the New Fund Offer (NFO) period, units of the scheme will be offer at Rs. 10 per unit. The new issue will be open for subscription from 8 March and will close on 22 March 2011.

The investment objective of the scheme is to generate regular returns through investment in debt and money market instruments and to generate capital appreciation by investing in equity and equity related instruments.

Pramerica Dynamic Monthly Income Fund would allocate 70% to 95% of assets in fixed income securities with low to medium risk profile. On the other hand it would allocate 5% to 30% of assets in equity and equity related instruments with high risk profile.

The allocation between equities and debt shall be based on a Valuation Matrix viz., Pramerica Dynamic Asset Rebalancing Tool (Pramerica DART) developed and maintained by the AMC.

The scheme shall offer two options - growth and dividend option.

The minimum application amount is Rs. 5000 and in multiples of Rs. 1 thereafter.

The fund seeks to collect a minimum subscription (minimum target) amount of Rs. 1 crore under the scheme during the NFO period.

Entry load charge will be nil for the scheme, while the exit load charge will be 1% if the units are redeemed / switched-out upto & including 365 days of allotment and nil if the units are redeemed / switched-out after 365 days of allotment.

Benchmark Index will be CRISIL MIP Blended Index.

The scheme will be managed by Mahendra Jajoo and Ravi Gopalakrishnan

Source: http://www.indiainfoline.com/Markets/News/Pramerica-Mutual-Fund-Unveils-Pramerica-Dynamic-Monthly-Income-Fund/3593985010

Budget boost for asset managers

The proposal to allow foreign individuals to invest in mutual fund schemes may bring long -term benefits for domestic investors

We often examine the provisions of every Union Budget with a critical eye due to their near-term impact on investors. However, certain structural changes do not lend themselves to instant analysis, due to lack of familiarity. An instance is the proposal to permit foreign resident individuals to directly invest in Indian mutual funds.

The Finance Minister allowed Securities Exchange Board of India (Sebi)-registered mutual funds to accept subscriptions from foreign investors who meet the Know Your Customer (KYC) requirements for equity schemes.This would enable Indian funds widen the class of foreign investors, he added.

The short-term impact - up to a year from now - could be rather muted, for two reasons. One, time taken by mutual funds to set up self-owned global or pan-regional distribution networks or to enter into requisite tie-ups for this. Two, the time taken by relevant authorities, such as

Sebi and the Reserve bank of India (RBI), to release appropriate regulations regarding KYC and other transactional modalities.

Also, it is not that foreigners were prohibited from investing in mutual funds prior to this proposal. But, they had to route their investments through certain Sebi-registered foreign institutional investors.

Hence, I presume those who were keen on the Indian market, primarily high networth individuals (HNIs), have already invested in Indian mutual funds through various permitted vehicles.

Also, to draw a parallel with the Indian debt market, while individuals are permitted to invest in government securities, they prefer the mutual fund route due to the convenience factor. Similarly, only a handful of foreign individuals may actually be motivated to sift through various mutual fund options available and, hence, prefer to continue investing through the foreign institutional investor (FII) route.

Besides, given the current apathy towards emerging markets, it would be optimistic to assume a torrential inflow in the near term. The longer-term impact could be more marked.

POSITIVE SIDE

Better disclosures: While domestic mutual funds are well regulated and are subject to frequent disclosures, they fall short on the quality front, at times. For instance, it is an arduous task to locate metrics such as the tracking error of index funds, portfolio turnover ratios of funds, and so on. These are par-for-the-course in developed markets and the urge to attract foreign money may induce our funds to improve upon the disclosure quality.

Going ahead, we may witness granularity in terms of assets under management (AUM) disclosures viz proportion of domestic and foreign, retail versus institutional, so on and so forth. Such disclosures could be useful to domestic investors, too.

Launch of new products: We could witness the launch of more sector exchange-traded funds (ETFs), inverse ETFs, shariah-compliant products, ethical funds, Real Estate Investment Trusts (REITs) and so on, which may be demanded by foreigninvestors.

This will help broaden and deepen the product portfolio of fund houses available to both, local and foreign investors. Even Sebi may be motivated to show more urgency in evaluating and approving products if it is clear they have a latent market.

Enhanced investor servicing: Foreign retail investors will demand not only better disclosures but also gold-standard servicing capabilities with respect to purchases, redemptions, dividends. While the current standards are good, any incremental improvement could assist domestic investors, too.

Taxation: Currently, the tax regime for Indians investing abroad is not as friendly as for domestic investments. However, one (admittedly far-fetched) hope is that as the foreign influence in Indian funds market increases, we may see some reciprocity in terms of favourable harmonisation of tax provisions for local investors.

NEGATIVE SIDE

Increased volatility of AUM: Currently, a lot of ‘hot money’ is channelled towards ETFs such as Nifty BeES and the Banking BeES. However, due to the structure of ETFs, the actions of a few FIIs have a negligible impact on long-term investors in ETFs.

In the case of open-ended funds, this is not so. Quick turnaround of funds in such schemes hurts longer term investors, as the impact cost of rapid purchase and sale of securities is borne by all investors and not only those responsible for it.

Also, Indian investors should brace themselves for swings in AUM due to myriad (seemingly unrelated) global reasons and not local reasons alone.

The winner’s curse: As in India, foreign retail investors, too, are not immune to chasing recent performance. Also, distributors find it easier to promote the current favourites, as opposed to the laggards. Hence if a mid-cap or sectoral fund is outperforming, it may see outsized inflows.

However, unlike in the case of large-cap diversified equity funds, such flows could hamper fund managers’ flexibility and compel them to either broaden the investment mandate to include more liquid stocks or relatively underperform their more nimble peers due to ‘cash drag’. This, too, could negatively impact existing investors in the fund.

Source: http://www.business-standard.com/india/news/budget-boost-for-asset-managers/427418/

India, China look less attractive for investors on inflation worries

When mutual funds with a focus on the global markets made an offering in 2008, many wondered if it made sense for local investors. After all, the domestic stock market was the place to be in and this was also reflected in the fund flows from foreign institutional investors (FIIs) too. Many investors did feel vindicated as the domestic stock markets went on to become one of the best-performing markets in the following years.

Come 2011, the story has taken a little twist.

Not only has the domestic market turned volatile with its performance but some of the other markets have turned assuring with their show. As a result, it is not a bad idea for investors to allocate a portion of their corpus to these funds. However, in the long term, the domestic equity markets could prove to be better performers if the investment tenure is in the range of 10 years. On the other hand, allocation to global markets could be suited for aggressive equity investors who prefer equity as an investment class. The exposure to global funds can be used as a short-term strategy, with an investment horizon of 1-2 years.

Any fund needs to be chosen with a focus on the theme and it is no different for the global funds too. Though the choice of funds available for domestic investors is limited, most of the funds which are available are focused on commodities or economies in the Asia Pacific region. For instance, during 2008, many funds that were launched had an investment objective of investing in economies such as China and those in the Asia Pacific region, and the global financial turmoil didn't do much good to their performance. The worst affected were the real estate focused funds, with some of them still quoting 40-50 percent below their offer prices. Hence, one needs to tread the path carefully and use the allocation strategy.

An investment in a global market-focused fund may look less risky in the current environment because of the change in macro factors. While India and China continue to be the best destinations because of local consumptions stories, both also look less attractive because of inflation worries.

In the case of the Indian economy, the challenge of maintaining growth along with management of inflation is increasingly proving to be tough. The rising crude oil price has made things that much more difficult. To come back to the allocation issue, you can avoid sector-specific funds, particularly the ones focused on real estate as their ability to generate returns may be limited in the short span of 1-2 years. On the contrary, you can bet on commodity-specific funds as they have a larger exposure to commodities beyond gold or crude oil. While investors can also take up commodity trading on their own, their management and tracking are more challenging. While trading in stocks or commodities requires continuous monitoring, the latter can be more challenging than equity because of their dependence on global cues. Hence, an exposure to global commodity funds can be a good alternative.

Irrespective of the choice of fund or theme, global funds, like domestic funds, carry an element of risk, and hence asset allocation has to be followed. They may act as a hedge against over-exposure to domestic equity markets, but don't eliminate the risk factor.

Source: http://economictimes.indiatimes.com/features/financial-times/investment-in-global-funds-for-short-term/articleshow/7632700.cms