Niche marketing helps funds beat downturn

When the going gets tough, the tough gets going. Post the ban on entry load, many mutual fund players have realigned their business strategy to focus on their ‘niche’ segments. It was in August 2009 that the market regulator imposed a ban on the entry load and ever since the sales of equity schemes–the bread and butter of mutual fund industry— have been falling. Not to mention the poor equity markets giving little headroom to launch new fund offering (NFO). However two years later, the ‘niche’ positioning that many fund houses had adopted to market their products is helping them survive the downturn.

Some of the fund houses such as Goldman Sachs (formerly known as Benchmark MF), Motilal Oswal and more recently launched India Infoline MF are now focusing on ‘passively’ managed products. Passively managed funds could be exchange traded funds, index funds or quant funds which as the name suggests are passively managed as against ‘active’ funds which usually has a fund manager actively picking stocks for his funds. Focusing on passive funds is less capital-intensive for a fund house, and often the preferred way for a new player to start operations in the country.

Edelweiss MF, for instance, wants to capture the share of big ticket size investors like high net worth individuals (HNIs) and mid net worth individual (MNIs) by concentrating on quant-based funds.

Vikaas M Sachdeva, CEO of Edelweiss Mutual Fund, says, “We have now branded ourselves as a quant fund house. In fact, our MIP(Monthly Income Plan) is also a quant MIP on the equity part. We have two kinds of funds, long-only funds and an absolute return fund. As the latter is a fairly new concept, we are targeting private banks, top 100 distributors in each territory and engaging them in a dialogue.” He says the fund house is not targeting large assets but expects at least 500 new converts every year, who will eventually sell their funds.

For big five fund houses such as Reliance MF, HDFC MF, Birla Sun Life MF and SBI MF, the focus is clearly to go the ‘retail’ way by pushing for systematic investment plan (SIPs) in the semi-urban as well as rural areas. “It's not only about equity assets, but about building quality assets,” says Sundeep Sikka, CEO of Reliance MF. “We are happy to get more number of small-ticket size investors through SIP compared to lump-sum investments. We are trying to build-up a long-term, sustainable business model.”

Industry players feels that top fund houses can grow their business by targeting investors from tier- II and III cities as they have the financial strength to make huge investments and acquire new customers. Manoj Kumar Vijai, partner, KPMG India, says, “Definitely these are the main focus of the big fund houses as there is immense growth potential in the semi-urban and rural areas. Fund houses are also getting positive response from smaller markets as there is a huge untapped potential for financial investments there.” Most top fund houses promote products through small distributors and even give them proper training in selling products. SIP investors invest in small amounts in a scheme (some fund houses even allow subscription of as less as R100 per month) on a regular basis which in turn brings a lot of discipline in financial investing.

According to market participants, the ban on entry load precipitated the promotion of SIPs by fund houses, which were seeking regular inflows into their funds. However, as against the pre-entry load regime, when commissions worth 2.25-2.5% of investments were paid by investors, now the fund houses themselves are paying for it.

If larger fund houses are spending money on expanding their retail base, other fund players such as IDBI Mutual and Peerless Mutual Fund are expanding their equity product bouquet even in this downturn. Debasish Mallick, MD and COO of IDBI Mutual Fund, says, “Currently we have only two equity index funds. In order to get more retail clients we want to increase our product portfolio and we are also planning to enter active funds in the months to come.”

For Akshay Gupta, CEO and MD at Peerless Fund Management, launching equity products at this juncture also helps build a ‘track record’. “It is also a good time to invest into equity funds. Investors who enter equity funds at this time could see their NAV rise when the equity market conditions improve” he says.

Source: http://www.financialexpress.com/news/niche-marketing-helps-funds-beat-downturn/857845/0

SEBI rule forces PMS to shift assets to mutual fund

Parag Parikh Financial Advisory Services (PPFAS) has proposed to channel assets from its portfolio management services (PMS) business to set up a mutual fund. The structural change is perhaps the first of its kind since the market regulator proposed a five-fold increase in the minimum investment level for the PMS segment.

The Securities and Exchange Board of India’s (Sebi) proposal to increase the minimum threshold from Rs5 lakh to Rs25 lakh added to a series of other existing operational issues, resulting in a decision to switch to a mutual fund structure to manage its clients’ money, said a top executive of the firm.

Under the PMS structure, an investment manager takes a client’s money and manages this corpus for him in return for a fee.
 

Sebi suggested that this service should only be made available to sophisticated investors because of the high risk involved, and has accordingly proposed an increase in minimum threshold.

Although in value-terms the bulk of PPFAS’s assets comes in from clients who are above the Rs25 lakh threshold, the maximum number of clients are at the Rs5 lakh threshold, said a company official prompting a shift to the mutual fund model.

On the Sebi website, the status of an application by PPFAS reads thus: the company is ‘to revert with further information.’
 

Rajeev Thakkar, CRO of the firm, said the company had received an in-principle approval in June 2011.

“We hope to be ready to start operations in 4-5 months pending final regulatory approvals,” he said.

PPFAS currently has assets under management (AUM) of Rs350 crore. This would make it larger than 19 of the 42 players in the mutual fund industry in terms of equity AUM.

The shift was also because handling client numbers which had grown from 25-30 in 2003 to 560 was becoming a problem operationally, said Thakkar.

“There would be documentation requirements at multiple levels. One would need to do the paperwork for a separate bank account, another set for the custodian, yet other documents for brokerage and a separate PMS paperwork,” he said.

The asset management company will be set up with an initial capital of Rs15 crore.

PPFAS had a net profit of Rs5.8 crore in 2011, according to its latest annual report.

Source: http://www.dnaindia.com/money/report_sebi-rule-forces-pms-to-shift-assets-to-mutual-fund_1595830

‘Short-term funds will minimise damage during rate hikes'

With inflation not expected to fall anytime soon, the challenge for debt managers is to achieve returns that do not erode capital. One way to do this is to remain invested in a portfolio which matures really fast.

The uncertainty regarding the interest rate direction continues to weigh heavily on investment decisions of fixed-income investors. Business Line spoke with Mr Killol Pandya, Head, Fixed Income, Daiwa AMC, to get an insider's view on debt markets and funds.

Excerpts from the interview:

What is your take on the current debt market scenario??

Inflation, which is one of the big bears the debt marketis facing today, is not looking good.

What is weighing on the debt market is the persistent tightness of market liquidity. We are seeing significant negative liquidity in terms of liquidity adjustment facility (LAF) numbers. This is by design as RBI wants liquidity to be tight.

Global events are also adding to the uncertainity, though we are not seeing too much of an impact of the European debt crisis as none of the Indian debt market participants are directly exposed to European debt. However, the ramifications it has on the equity market and, as a consequence, on the rupee has, in turn, had some implications on the debt markets. If the RBI intervenes to sterilise this depreciation in a major way it will probably mean sucking out further liquidity from the market. That is a worry.

I would like to highlight that we have no control on any of these factors — the inflation numbers that have strong roots on the supply side, the global commodity prices, European debt and the US numbers.

To sum it up, the outlook remains bearish. In its last interaction, the RBI has not given away even a hint that there will be a pause in rate hikes. The door is wide open to take rate action whenever it is appropriate.

What is your expectation in terms of the rate hikes?

The stance of the RBI and the interest rate actions as of now, are far more data-driven than earlier. That increases the amount of uncertainty which we all have to live with. As I mentioned above, we really don't have any control over the macro economic numbers we are talking about. Because increasingly, the RBI itself is looking at data points that really cannot be predicted empirically. Going ahead, if inflation is not coming down, the RBI will be constrained to bring about further hikes. So in the next policy interaction, I will actually be looking at the WPI and the IIP numbers which will be come out in the first half of October.

With inflation expected to rise, how challenging is it for debt fund managers to give positive inflation-adjusted returns?

The market is not expecting the inflation to come down anytime soon. The challenge for the debt managers is to stay invested and to give the sort of returns that would not erode the capital. Every time there is a rate hike there is capital erosion, all other things remaining the same. The only way out for an Indian debt manager is to remain invested in a portfolio which matures really fast. The advantage with that is it will minimise the damage as and when there are rate hikes. Also, you will get an early re-investment opportunity.

Is there a time line post which long-term funds may give better returns?

The point of certain fund categories underperforming for a long-term and therefore meriting an investment doesn't hold good on the debt fund side. As things stand now we will see the inflation numbers coming down and staying down by the end of this fiscal. The RBI rate action will probably stop before that because there is lag effect involved with the RBI's actions. I will expect this scenario (pause in rate hikes) to pan out some time in the next quarter. That is when I would start recommending that people get into long-dated funds. I am not recommending that people try and actively catch interest rates because that doesn't work. But some time early or middle of next quarter is a good time to start investing.

What separates a good fund from a mediocre performer in the liquid fund category given that their universe is only the money market?

The first differentiator that one should look at is the quality of the portfolio. The money market space is not homogenous. There are risky products. There are products which are poor on the credit front. All issuers do not enjoy the same financial strength. Ones which are weak will give higher returns.

But aren't a lot of companies enjoying P1 or P1+ rating in the short run even as their long-term ratings aren't good?

The implication of credit is not really a default credit. All of them are enjoying pretty decent ratings and none of them have defaulted in the long-term. But the thing is that issuers who are enjoying poor credit will not enjoy market liquidity.

The product of liquid and liquid plus fund is to provide liquidity. If you have a portfolio which is packed with instruments giving high returns but that cannot be sold in the market then how do you fund redemptions? To my mind that makes for a poor product.

Coming to size, I don't subscribe to the theory that smaller ones are more vulnerable. It is a matter of proportions. The processes that go into building a fund which is of Rs 5000-crore size is the same that goes into building the Rs 500-crore fund. Diversification/portfolio concentration determines the risk.Even large funds will have portfolio concentration, which is not prudent. And this profile is essentially a function of what a fund manger thinks.

With downgrades on the rise what would be the impact on credit spreads?

The credit spreads for that particular instrument getting downgraded and for the sector perhaps may widen. That is a function of credit downgrade. That is how it should be and that is sign of a healthy market. The way in which mutual funds tend to protect themselves is to be very vigilant regarding credit rating.

As such, credit spreads are very tight. Across maturities, the AAA and gilt spread curve is around 100 basis points. That is not healthy. Such a flat and tight spread curve is a sign of a strained market, which is what I have told you. We are in a strained market experiencing bearishness. Spreads should be higher at the longer end. 

Source: http://www.thehindubusinessline.com/features/investment-world/mutual-funds/article2521000.ece

Large-cap funds done in by FIIs; don't lose faith in them

If you were to look at the short-term performance of various categories of equity mutual funds on ValueResearchOnline. com right now, you could be forgiven for assuming that there was a mistake.

The normal pattern that is followed when the markets decline stands completely reversed.

Large-cap funds have performed the worst, while large and mid-caps funds have fared slightly better. But the surprise has been that the mid- and small cap funds have performed the best (or, rather, put up the least worst performance). To be precise, large-caps have declined by 17.7% over the last six months, large and mid-caps by 15.9%, multicaps by 15.6%, and mid and small-caps by just 11.9%.

This is precisely the reverse of what is normal in market declines and turns the logic for investing in large-cap investments on its head. The whole point of investing in large-cap stocks (and equity mutual funds that invest in these stocks) is that large-caps are more stable as business as well as stocks.

As businesses, they tend to have have a lot more momentum, in the sense that it would take a relatively long time for any reversal of fortunes to take place.

Large-cap companies tend to have a much larger floating stock and simply have a much larger set of investors invested in them. This makes them widely tracked and analysed, which makes it less likely for news or fact of importance to stay hidden.

The larger floating stocks also mean that if you were to try to sell such a scrip even in bad times, it would be much easier and there would be a lower impact cost compared with stocks of smaller companies. All these are rules of thumb and while there are certainly exceptions they are true as a whole.

This stability means that any fund analyst and investment advisor would recommend that equity mutual funds that invest in such companies be a core component of an investor's portfolio. I would normally say that well above 50% of an investor's equity fund holdings should be in such funds; for an investor who needs to take a conservative approach, there's no harm in having 100% exposure. The logic is that when the markets decline, such funds will decline less.

So what gives? Why has the current pall of gloom on the stock markets descended much more darkly upon large caps? The answer is the same simple accusation that is the Indian investor's pet complaint: The FIIs did it. Except that in this case it appears to be true and usual suspects really are the villains. You see, FIIs by and large limit themselves to the larger cap companies. Most of them have hard lower limits on the market cap of the companies they invest in. This effectively means that in general, the larger a company, the more likely it is to have a higher FII shareholding.

Which is great in normal times, but means trouble in times of general FII sell-offs. Over the last few months, as FIIs have sold off India in waves, large-cap stocks have suffered disproportionately. And obviously, along with these stocks, equity mutual funds that focus on these stocks have also suffered. What does this mean for the investor? The troubles that are making FIIs skittish could actually continue for years, with money flowing in and out as panic levels rise and subside.

Does this mean that the Indian investor should reverse the rationale for investing in large-caps and conclude that they are the riskier asset? Not quite. This logic applies only in the very short-term. In the long run, the basic qualities for which largecaps are more suitable are more relevant.

Just because one group of investors is pulling out money doesn't mean that the fundamentals of investing have been reversed. Large-caps are safer, more predictable, better understood and generally immune to problems that plague smaller stocks. The last six months are not going to change that.

Source: http://economictimes.indiatimes.com/personal-finance/mutual-funds/analysis/large-cap-funds-done-in-by-fiis-dont-lose-faith-in-them/articleshow/10295248.cms?curpg=2