Birlas take control of mutual fund venture with Sun Life

Buys 1 per cent stake in 50:50 JV to take its stake to 51 per cent.

The Aditya Vikram Birla group, led by Kumar Mangalam Birla, has taken charge of its mutual fund joint venture with Sun Life Financial of Canada by buying one per cent stake from the latter. The Birlas will now own 51 per cent stake in Birla Sun Life Asset Management Co Ltd and Sun Life will be left with 49 per cent.

When contacted, Sushil Agarwal, wholetime director and CFO of Aditya Birla Nuvo, said: “The Aditya Birla group has acquired an additional one per cent stake in Birla Sun Life AMC. The AMC now becomes a subsidiary of Aditya Birla Nuvo.  Our partnership with Sun Life remains very strong and both Aditya Birla Group and Sun Life are committed to grow the asset management business in India.”

The equity structure of the Birla group’s second joint venture with Sun Life Financial in the insurance sector will continue as usual at 74 per cent with the Indian promoter. The Canadian company will raise its stake as and when the government permits higher stake for foreign companies in the insurance sector, sources familiar with the developments said. Sun Life had the option of increasing stake in the insurance company since the JV was set up 12 years ago.

The Birlas and Sun Life had set up the mutual fund venture in 1994. ince then, it has grown into one of India’s leading mutual fund companies with assets under management of Rs 72,900 crore as on September this year,  growing at an annual rate of 8.5 per cent. The valuation of the stake in an AMC is usually based on 2 to 4 per cent of the total corpus of the AMC. But a source said there was difference in opinion on how to run the business.

For fiscal 2012, Birla Sun Life AMC had made a profit of Rs 59 crore on revenue of Rs 315 crore.  The financials were down when compared to the previous financial year in 2011 when the AMC made a profit of Rs 85 crore on revenues of Rs 366 crore.

A source in the group said the Birlas decided to take charge of the joint venture after it realised that the group can manage the AMC on its own and it should be on the driver’s seat. Besides the group’s own brand image was very good in India and, if need be, the source said, it could go alone in the mutual fund business. BSE-listed Aditya Birla Nuvo holds stake in the mutual fund company.  The Aditya Birla group has made significant progress in the financial services business and is planning to apply for a bank, as and when the Reserve Bank of India issues licenses to new companies.

The Indian mutual fund industry has witnessed a lot of churn in recent months.  Anil Ambani’s Reliance Mutual Fund sold 26% stake to Nippon of Japan while L&T Finance took over Fidelity’s mutual fund business in India in March this year. 

Source: http://www.business-standard.com/india/news/birlas-take-controlmutual-fund-venturesun-life/194814/on

Liquidity from developed nations may flow into emerging markets: Sanjay Sachdev

Interview with President & CEO, Tata Mutual Fund

While the markets have cheered the recent policy initiatives and key economic developments, there has been a steady rise in the closure of equity fund folios in 2012. Sanjay Sachdev, president and chief executive officer of Tata Mutual Fund, says investors need a sustained rally in equities for the confidence to return. Also, he tells Puneet Wadhwa, a reduction in interest rates would give a boost to investment in equities. Edited excerpts:

How do you see the markets from here on? What would be the worst-case scenario if there are early elections? Political uncertainty exists. However, recent moves by the European Central Bank and the US Fed have substantially reduced the risk premium for equity investors across the globe. Thus, the Liquidity generated by central banks in developed markets is likely to find shelter in emerging market (EM) equity.

Within EMs, India has an advantage over China, as the Chinese economy is slowing. Also, in India, the recent policy announcements have not been rolled back. This, coupled with a strong pick-up in the monsoon in August and September, considerably reduced the downside risk to gross domestic product (GDP) growth rates. Thus, political uncertainty alone would have a limited impact on equity markets, if global liquidity and growth scenarios remain at current levels.

Would the focus shift to developments at the domestic level, compared to what is happening globally? It would be wrong to say domestic developments did not impact Indian equity markets earlier. In fact, India’s relative underperformance in calendar year (CY) 2011, compared to other EMs, was partly due to its domestic developments such as low investments and high fiscal and current account deficits.

The government’s recent policy initiatives suggest policy is moving in the right direction. If we continue to take rational economic decisions and improve the share of investment in our GDP, our markets will be less impacted by global events.

What are your earnings estimates for India Inc for FY13 and FY14? Have the overall estimates and any sectors in particular seen an upward/downward revision? We expect the Sensex EPS (earnings per share) to be Rs 1,210 for FY13 and Rs 1,385 for FY14, growth of about 14.5 per cent in FY14 over FY13. The important thing is the pace of EPS downgrades, very high till March 2012, has significantly come off. Thus, the downgrade cycle is bottoming.

For FY14, we feel secular growth sectors such as financial, consumer and pharma will continue to have decent growth. We can see a strong bounceback in growth in interest rate-sensitive sectors such as automobiles and consumer discretionary. Also, if the policy environment improves further, we can see upgrades in earnings.

The last time we spoke, in May, you were underweight on public sector banks, global cyclicals such as metals and refining, and petchem. How has this strategy paid off and has this view changed?
We are still underweight on global cyclicals such as metals and refining and petchem. We feel global growth in CY13/FY14 will be more muted. Our key overweights are auto and auto ancillaries, media and pharma. In other sectors, we are more neutral and prefer a more stock-specific approach.

Stocks of the cement, pharmaceuticals and fast-moving consumer goods (FMCG) sectors seem to defy gravity. What is your call on these three? Cement has seen strong earnings growth, with both volume and margins improving. If the investment cycle picks up, cement will be a beneficiary. Pharma and FMCG are secular growth sectors, with high ROE (return on equity) and healthy cash generation. Their valuations are unlikely to come down in a hurry. For the pharma sector, however, the pricing policy in domestic markets can be a near-term headwind.

The market has rallied since September and overall investor sentiment seems to be improving. Would this arrest the fall in equity fund folios and ease redemption pressure? Investors are looking at the current market rally as a profit booking opportunity, evident from the industry’s loss of folio figures in the past couple of months. However, as observed historically, a sustained rally in equities instills confidence in retail investors to come back to the markets. A reduction in interest rates in the economy will give a boost to investment in equities.

What is your view on growth prospects for mutual funds, considering the recent policy measures announced?
The recent measures will prove a watershed moment for MFs. The size of the sector in terms of investor folios is abysmal as compared to the potential. The policy announcements are in the direction of addressing these issues by way of geographical market penetration beyond the top 15 cities and the thrust on investor education. There is no reason to believe the MF sector in India cannot grow manifold, with a large savings rate and perhaps the best demographic configuration in the world at this point in time.

Source: http://www.business-standard.com/india/news/liquiditydeveloped-nations-may-flow-into-emerging-markets-sanjay-sachdev/491401/

HSBC moves to stop mis-selling

Statement comes in response to a report saying it has suspended selling mutual fund, insurance products in India

Hongkong and Shanghai Banking Corp. Ltd (HSBC) has denied a media report that said it has suspended selling mutual fund and insurance products in India.

“We have not stopped or suspended any of our offerings and we continue to provide a range of insurance and investment solutions, including a select range of mutual funds and insurance products”, HSBC said in a statement issued on Saturday in Mumbai.

The statement comes in the wake of a news story published in The Economic Times on 3 November that said: “HSBC has stopped selling insurance and mutual fund products in India. Amid mounting allegations of mis-selling and certain sharp practices, the London headquarters of the British bank, which carried out a “culture audit” of the Indian retail banking and wealth management practices, has ordered a suspension of sales.”

The bank said it has been in the process of restructuring the consumer banking and wealth management business of its India operations. It had also decided to change its incentive practice for relationship managers to bring in more accountability and a customer focus.

According to people in HSBC familiar with the development, in keeping with the overall group’s focus to move towards choosing the “advisory” model as against the “distributor” model , the bank appears to be on its way to choose the adviser model effective January 2013.

The Securities and Exchange Board of India’s (Sebi) impending guidelines to regulate investment advisers and its road map asking distributors to choose to be an adviser or a distributor has given HSBC’s plans a further push, it appears. Effective October 2012, the bank, one source adds, has moved to a “net sales” incentive system as against a “gross sales” incentive system. This means that instead of its sales staff focusing its targets based on the gross sales, the sales targets will now be fixed based on net sales. Net sales is gross sales less redemption. Focusing more on net sales keeps churning in check as higher the net sales (this will result in low redemptions), higher will the investment advisor’s commission.

Additionally, their financial year ends in December. As the bank appears to have achieved its sales targets so far this year, the bank has absolved its relationship managers of any targets (and thereby commissions) for the months of November and December. All this has led to, what looks like, a slowdown in its sales activities. The bank, one person said, will communicate the change in its policies to its investors shortly.

Commissions earned by banks and sharp selling practices by banks have been in focus over the past few years since the bank staff selling insurance and mutual fund products fall into a regulatory crack. Though the bank is regulated by the Reserve Bank of India (RBI), the products that the banks sell—mutual funds and insurance—are regulated by two different regulators. RBI has till now taken a hands-off approach to the sales practices of banks of these products and left it to the individual regulators to handle.

Increased disclosure requirements, especially from capital market regulator Sebi, has put into focus the income earned by commissions by banks. In 2011-12 for example, banks formed seven of the top 10 mutual fund distributors by commission earned. HSBC, in fact, was at the top of the list, earning just over Rs.153 crore in mutual fund commissions in 2011-12. During this year, some top distributors’ commissions went up by 20-40%. However, according to data from Computer Age Management Systems (Cams, one of India’s largest registrars and transfer agents), for the mutual fund houses that it services, private sector banks (including foreign sector banks) saw a net outflow of equity funds to the tune of Rs.174.6 crore. Private and foreign banks are among the most dominant in the distribution force.

Source: http://www.livemint.com/Companies/9PLRTXzFis7tj97bzU3jaJ/HSBC-moves-to-stop-misselling.html

Should you opt for passive or active funds?

Morningstar Investment Conference on day one sees debate on active, passive funds

That actively-managed mutual fund (MF) schemes can be more volatile than index funds is well known. But while actively-managed funds are designed to outperform their benchmark indices (and also underperform if the fund is not well-managed), passively-managed funds are designed to give more consistency, in the sense that they mimic market returns. So should you opt for higher returns (and higher risk) or stable returns (with no fund manager risk)?

The debate continued on 1 November at the Morningstar Investment Conference 2012, a two-day event held in Mumbai. One of the panel discussions debated on whether investors should choose active or passive funds. While the panellists argued their cases, the more interesting points—or questions—came from the audience. Here’s a sample.

Fund manager churn

A member of the audience asked how could fund managers ensure consistency in long-term returns when fund managers themselves change.

He had a point. Changes in fund management are common. Sometimes, fund managers change before they complete three years—the minimum tenor for which investors are usually advised to stay in equities. For instance, Soumendra Nath Lahiri was the equity fund manager in Canara Robeco Asset Management Co. Ltd for only about 18 months, when he quit to join L&T Asset Management Co. Ltd. Harsha Upadhyaya, head (equities), Kotak Mahindra Asset Management Co. Ltd worked at DSP BlackRock Investment Managers Ltd for just under a year through 2011-12. Ravi Gopalakrishnan, head (equities), Canara Robeco Asset Management Co. Ltd worked at Pramerica Asset Managers Ltd as its chief investment officer for just under three years.

“To navigate the Indian markets successfully, you need a very good top-down understanding of the markets and for that you need the right kind of people at the job,” said Grant Kennaway, head (fund research), Asia Pacific, Morningstar, Inc. Kennaway moderated this panel discussion.

One way to tackle the churn, say fund houses, and to ensure that a fund’s continuity does not get hampered by its fund manager moving out, is to put processes in place. While stock picking is and will remain a personalized skill, some fund houses put risk mitigation steps in place to ensure that the new fund manager doesn’t change a scheme’s track, drastically. “While the risk of a fund manager quitting is there, if we put certain processes in place, the scheme’s character is maintained, by and large,” said Sandesh Kirkire, chief executive officer, Kotak Mahindra Asset Management Co. Ltd, one of the panellists.

While actively-managed funds carry fund manager’s risk—not just on the stock and sector selection, but also the risk of the manager quitting—passively-managed funds don’t come with such risks. Passively-managed funds, such as index funds and exchange-traded funds (ETFs), invest in all the companies, and in exactly the same proportion, that are there in the benchmark index they track.

Long-term alpha is zero

Another member of the audience questioned a panellist’s suggestion (who was supporting actively-managed funds) that actively-managed funds outperform passively-managed funds in the long run. The question: in the long-term, the alpha (the degree of outperformance caused by the fund manager’s expertise over and above his benchmark index) for active funds is zero. “While that may be true if you stay invested till infinity, the fact is that investors also don’t stay invested till infinity,” said Kirkire. Countered Rajiv Anand, CEO, Axis Asset Management Co. Ltd, another panellist, “The fact is that in the past 10 years, 60-70% of the funds have outperformed their benchmarks.”

One of the aspects that favour passively-managed funds is costs. While index funds can charge a maximum of 1.5% of fees from investors on an annual basis, costs in actively-managed funds can go up to 2.7-3%. Says Sanjiv Shah, co-CEO, Goldman Sachs Asset Management (India) Ltd: “High costs eat up returns in the long-run. ETFs have a low-cost structure because they are passively-managed.”

What should you do?

While one passively-managed fund is seldom different from another passively-managed one (if they track the same benchmark index), active funds have their share of good and bad performers.

If you’re starting out afresh in MFs, stick to funds that come with a track record and whose management philosophies give you comfort. But if you wish to avoid the fund manager’s risk and keep your costs in check, opt for passively-managed funds like ETFs.

Morningstar Investment Conference on day one sees debated on the pros and cons of actively-managed and passively-managed funds

Source: http://www.livemint.com/Money/FbvPwGe5saxyAMF65ayCKL/Should-you-opt-for-passive-or-active-funds.html