A comeback for value investing

Though growth stocks have made the most of the bull market momentum, value
stocks did much better in containing falls during the inevitable reversal. The
result: a better long-term record.

The stock market has rallied 40 per cent in a flash; mid-cap stocks have kept pace with blue-chips and the action in small-cap stocks is reaching frenzied proportions, with many of them clustered at the upper circuit limit on any given trading day.
While speculative froth is undeniably building up in one segment of the market, there has been a rational element to how stock prices behaved in this unexpected rebound. Value investing, or buying stocks that trade far below their intrinsic value, has paid rich dividends in the bounce-back from the March trough.
And that’s not a flash in the pan. Our analysis shows that value investing has delivered good results for Indian investors over the long term as well. That contrasts with the popular notion that India is a “growth” market where investors shouldn’t mind paying a high price for alluring earnings prospects.

Consider the stock market surge from the recent low (8100 for Sensex). In the BSE-500 basket, the highest returns have been amassed by stocks with a PE multiple of less than 5. These stocks delivered an average 60 per cent gain between March 9 and now. Stocks with a modest PE below 10 averaged 53 per cent. Both classes of stocks easily outpaced the index return of 37 per cent.
Low PE stocks within each sector have also delivered better gains than their more expensive peers. Tata Motors has zoomed ahead of Maruti Suzuki (75 per cent versus 21), Reliance Communications has delivered thrice the returns of Bharti Airtel and Suzlon Energy has beaten NTPC hollow (65 per cent versus 6 per cent).
All three outperformers are clear instances where investors have bet on a deeply discounted price, brushing aside concerns on near term earnings or business uncertainties.
Further analysis shows that it is not just stock selection based on low PE that has worked. Investors who used other “value” filters — a high dividend yield or a low price-to-book value ratio — were rewarded equally well. Stocks with a high dividend yield (see table) have delivered a 55 per cent gain between March 9 and now, while those trading below their book value have gained 58 per cent.

This cherry-picking of stocks ties in with the fact that the triggers for this market rebound came from instituional investors returning to Indian stocks. Since mid-March, there has been consistent FII buying and deployment of cash positions by domestic mutual funds and private insurers, even as retail investors cashed out. Institutional investors may have preferred undervalued stocks for two reasons. One, the ongoing slowdown has made it difficult for investors, even institutional ones, to make multi-year forecasts on revenues or earnings of companies. With projections subject to higher uncertainty, it appears safer to stick to stocks which discount only modest growth expectations.
Two, the steep market falls of last year and the 80-90 per cent erosion in some mid- and small-cap names has made investors pay greater attention to downside risk in recent times, leading to a “value” bias.
But is this partiality for low PE stocks a recent trend? Should investors go for less expensive stocks while building a long-term portfolio? While the answer to this question may have been very different during the bull market years from 2003 to 2007, recent evidence suggests that they should.
The market meltdown of 2008 has done much to restore the credentials of ‘value investing’ as a strategy suited to the Indian market. Though India is widely believed to be a growth market where institutional investors seek stocks for their heady growth prospects (and not for their bargain prices), today’s return numbers as of today, tell a different story. After two gut-wrenching market cycles, value stocks today sport a much better long-term track record than growth stocks, having delivered much better returns over 3, 5 and 10-year holding periods.
Compounded annual returns on the MSCI India Value Index (the key benchmark for value-style managers, Source: MSCI Barra) for a ten-year period at nearly 17 per cent, are at almost double the returns delivered by the MSCI India Growth Index (8 per cent).
A ten-year analysis shows that though growth stocks have made the most of the bull markets during their momentum years, value stocks did much better in containing falls during the inevitable reversal.
Given the tendency of the Indian market to swing (without warning) from a bull to a bear phase once every few years, it is the MSCI Value Index that has built up a better long-term track record than the Growth Index, till date.
For equity investors keen to build wealth over the long term, containing losses in a market fall may be as important as participation in upside during a bull phase. The message is, if you are looking at reasonable returns along with a less bumpy ride in the stock market, have a ‘value’ tilt to your portfolio.

Another reason why investors may be better off owning under-valued stocks in market conditions such as this is that value stocks have usually led the initial leg of a market recovery from a bear phase.
As Indian markets commenced a new bull market after bottoming out in April 2003, the MSCI Value index climbed by 101 per cent in the eight months that followed, while the Growth index rose by just 77 per cent. Value stocks would also have delivered better returns after the May 2004 correction.
Value strategies also posted lower losses than growth-led ones during the vicious downturns in equities. The MSCI India Value index (decline of 42 per cent) fell much less than the Growth index (down 67 per cent) in the aftermath of the dotcom bubble.
This pattern was again repeated in the meltdown between January and November 2008, when the Growth Index plunged by 64 per cent while the Value Index got away with a 55 per cent decline.

So what are the implications of the above trends for retail investors looking to rejig their portfolios?
With recent stock price gains driven mainly by re-rating of PE multiples (as the earnings picture remains quite bleak for many sectors), use the recent market rally to book profits in the more expensive stocks in your portfolio. That may also mean reducing exposure to the stiffly valued “defensive” stocks among FMCGs, power generation and pharmaceutical companies. Within sectors, switch to those that are available at less demanding valuations.
While adding cheaper stocks to your portfolio, beware of value ‘traps’— stocks that are trading at a low valuation, but could yet get cheaper as the company’s business or liquidity conditions deteriorate. Stocks of commodity companies (they appear cheap because of a high earnings base, which won’t be sustained), realty companies (who may post sharp profit falls) and the highly leveraged companies appear to be classic value traps in today’s context. If you find selecting value stocks a tricky proposition, take the mutual fund route. Most fund managers in the Indian context tend to be “growth oriented”. But value-focussed funds such as Templeton India Growth Fund, ICICI Pru Discovery Fund and UTI Dividend Yield Fund make a good addition to your portfolio.

Source: http://www.thehindubusinessline.com/iw/2009/04/26/stories/2009042650500700.htm

Markets are waiting for a clear picture on the political front

Indian markets have started looking attractive; fresh inflows are being witnessed from foreign institutional investors (FIIs) and markets are rallying upwards. Mahesh Patil, equity co-head, Birla Sun Life Mutual Fund, while speaking Chirag Madia of The Financial Express, says that once the election results come out on May 16, a clear picture will emerge. He also says that the Indian Mutual Fund (MF) industry is on the path of a gradual recovery post the redemption pressure during October-November last year. Excerpts:

•What are the factors which are leading the domestic market in the current scenario?
Indian markets are following global markets and the liquidity problems that we faced during the last year are slowly getting over. Apart from that, we are growing at a rate of over 5-6% and till now quarterly earnings have also been better than expected.
I think that overall, the condition is improving and that’s the reason we are witnessing and upward rally in domestic markets. I don’t think that there might be much negative news from the quarter’s results which are currently on. There are very low chances that Indian equity bourses will again touch the lows witnessed during the October-November last year. Markets are likely to remain in the range of 8,500-12,000 for the next few weeks.

•Despite the upward rally in Indian markets, there is sense of fear in the mind of investors as a huge amount of profit booking is taking place and investors are waiting for political uncertainties to ease...
Yes, there might be some pauses in the market as general elections results are awaited. We can also say that till before the election results, markets are likely to remain under pressure and there will be clear picture of where we are heading; it will emerge only after the results are declared on May 16. If the Congress-led UPA or BJP-led NDA comes to power, there are chances that markets will run ahead. If the third front takes office, then markets are likely to see some downward corrections.

•Recently, the RBI, in its monetary policy, cut the repo and reverse repo rates by 25 basis points. Do you think this will have any major impact on the markets?
I think the central bank has taken the right step by slashing the repo and reverse repo rates; there are chances that interest rates will start coming down from here. However, it is essential to point out that it may not have a huge impact on the markets. The markets will wait till results of the elections are announced.

•FIIs are entering the market yet again. Do you see increased inflows from them after the election results are announced?
I think that risk appetite is increasing slowly and FIIs are coming in as they feel that this is the only market that has some future growth prospect. With interest rates going down, they feel this is the right time to invest in the market as well. Apart from that, FIIs are also doing a good amount of profit booking. So, once we have clear picture on political front, we will witness more inflows from FIIs.

•After the tremendous redemption pressure seen by various fund houses last year, the MF industry’s AUM is improving. Despite that, investors are shying away from investing in MF schemes…
The MF industry, in line with the equity indices, has shown some smart recovery.
Gradually, people have realised that we are coming out of the financial crisis. People are waiting for the right time to invest in MFs, and I think this is the right time.

•More and more mutual fund houses are increasing their exposure to large-cap stocks. What are the reasons for this?
Various factors are playing in the minds of fund managers, like corporate governance and most importantly, the liquidity issue. These factors are good in large-cap stocks compared to small-cap stocks. Apart from that, mid-cop stocks have also given some fabulous returns in the past.

•During January and February this year, we witnessed several fund houses holding cash. But, in the last month, they have started deploying the cash in the market. Also, despite, an upward rally in the markets, fund houses are not offering new equity schemes. When do you see new equity schemes flowing in the markets?
Markets have improved in the last one month. So, fund houses think that this is the right time to invest. Now onwards, there might not be much correction in the markets and we feel that, investing at this time might give good returns to investors.
We haven’t seen much inflow in equity schemes, compared to debt schemes. But, I think that we will start witnessing new equity schemes being launched by various fund houses in the coming days. We too are coming out with an equity combined with debt scheme very soon.

Source: http://www.financialexpress.com/news/markets-are-waiting-for-a-clear-picture-on-the-political-front/450567/0#

DSP BlackRock World Energy Fund looks Sebi's approval

Open ended fund of funds scheme, investing in international fund
DSP BlackRock Mutual Fund has filed offer document with Securities and Exchange Board of India (Sebi) to launch DSP BlackRock World Energy Fund, an open-ended fund of funds scheme, investing in international fund. The face value of the new issue will be Rs 10 per unit.
The primary investment objective of the scheme is to seek capital appreciation by investing predominantly in the units of BlackRock Global Funds – World Energy Fund and BlackRock Global Funds – New Energy Fund. The scheme may, at the discretion of the investment manager, also invest in the units of other similar overseas mutual fund schemes, which may constitute a significant part of its corpus. The scheme may also invest a certain portion of its corpus in money market securities and/or money market/liquid schemes of DSP BlackRock Mutual Fund, in order to meet liquidity requirements from time to time.
Features of the scheme
Investment option: The scheme offers two plans viz. regular and institutional plan with growth and dividend option. The dividend option further offers dividend payout and dividend reinvest facility.
Minimum application amount: The minimum investment amount under regular plan will be Rs 5000 and in multiples of Re 1 thereafter and under institutional plan will be Rs 5 crore and in multiples of Re 1 thereafter.
The scheme seeks to collect a minimum subscription amount of Rs 1 crore during NFO period.
Asset allocation: The scheme will invest 50-100% in units of BlackRock Global Funds (BGF)-World Energy Fund (WEF) or other similar overseas mutual fund scheme(s) with high risk profile. It will invest 0- 30% in units of BlackRock Global Funds (BGF)-New Energy Fund (NEF) or other similar overseas mutual fund scheme(s) with high risk profile (in the shares of BGF – WEF and BGF - NEF, an Undertaking for Collective Investment in Transferable Securities (UCITS) III fund). It will also invest 0-20% in money market securities and/or units of money market/liquid schemes of DSP BlackRock Mutual Fund with low to medium risk.
Load structure:
Regular Plan:
Entry load: The scheme will levy an entry load of 2.25% for investments less than Rs. 5 crore of the initial value of Rs. 10/- during NFO/applicable NAV during continuous offer. For investments of Rs. 5 crore and above, no entry load will be charged.
No entry load on direct applications, i.e. applications not routed through a distributor/agent/broker.
Exit load: 1% will be the exit load for holding period less than 6 months from the date of allotment. 0.50% exit load for holding period more than 6 months but less than 12 months from the date of allotment. While no exit load will be levied for holding period more than 12 months.
Institutional Plan: There will be no entry load and exit load.
Benchmark index: 70% MSCI World Energy (Net) and 30% MSCI World (Net).
Fund Manager: Aditya Merchant will be fund manager for the scheme.

Fund Action: Jubilant Organsosys; Rolta India; Yes Bank

Jubilant Organsosys: Deutsche Securities buys 19.16 lk shrs at Rs 120/sh.
Rolta India: Ward Ferry Mgmt sells 14.28 lk shrs at Rs 89.90/sh.
Yes Bank: Abhi Ambi Financial Svcs buys 40.9 lk shrs at Rs 82.50/sh.
Indiabulls Securities: Sandstone Cap India Master Fund buys 54.77 lk shrs at Rs 27/sh. Orient Global Cinnamon Cap sells 62.26 lk shrs at Rs 27/sh.Motherson Sumi: Samvardhana Motherson Fin buys 1.92 cr shrs at Rs 81.50/sh. Motherson sells 1.4 cr shrs at Rs 80.50/sh. Renu Sehgal sells 12.05 lk shrs at Rs 83/sh. Laksh Vaaman Sehgal sells 14.40 lk shrs at Rs 85/sh.
Ispat Industries: Jaypee Capital buys 4.08 lk shrs at Rs 13.90/sh.
K Sera Sera: Basmati Securities buys 2.2 lk shrs at Rs 10.35/sh.
Astral Poly: IDFC Mutual Fund 2.58 lk shrs at Rs 51.90/sh.
Parekh Aluminex: AAP Investments buys 3 lk shrs at Rs 56.10/sh. Merrill Lynch sells 3.47 lk shrs at Rs 56/sh.

Debt funds may bounce back on RBI's rate cuts

Debt funds may soon be back in vogue, thanks to yesterday’s rate cuts by the Reserve Bank of India (RBI). Experts opined that long-term debt fund returns would become more attractive going forward.

RBI slashed repo rate by 25 basis points to 4.75 per cent and reverse repo rate to 3.25 per cent. Repo is the rate at which RBI lends to banks while reverse repo is the rate at which banks park their surplus money with the central bank.

Government bonds reacted positively with benchmark government yields dropping to 6.18 per cent today.

However, fund managers said the outlook for liquid funds remained gloomy as short-term money market rates have come down due to the excessive liquidity in the system.

“Liquid funds will toe the line of money market rates. Three-month liquid fund returns are expected to be in the range of 4-5 per cent and six-month returns would come down to 5 per cent,” a fund manager said.

According to Value Research online, the returns for ultra short-term debt funds have come down to 1.42 per cent for the 3-month period. Liquid plus funds are curently yielding 8.40 per cent returns for one year.

Arvind Bansal, CIO (multi-manager funds), ING Investment Management, said that short-term funds may not see much of an upturn in sentiment. “Short-term rates have already come down significantly and spreads are on the higher side. For long-term funds, there is still some room left and yields may go down further.”

Long-term gilt and bond funds are expected to be benefited largely from these cuts. Medium- and long-term gilt funds are giving returns of 16.18 per cent per annum. The best fund in the category is posting 40.59 per cent returns.

“Rate cuts have come as a positive surprise for the markets. The yield curve has shifted downwards and it bodes well for both gilt and bond funds,” said K Ramkumar, fund manager, Sundaram BNP Paribas Mutual Fund.

Financial planners say it is better to invest in a long-term floating rate fund now as it offers lower volatility.

Floating rate funds are currently offering 8.76 per cent returns for one year.

Source: http://www.business-standard.com/india/storypage.php?autono=355962

Reserve Bank of India's Annual Policy Statement for the Year 2009-2010

IRBI12300

Publish at Scribd or explore others: Other leadership curriculum

Allianz, Bajaj Fin in India asset management venture

Germany's Allianz will take a 51 percent stake in an Indian asset management joint venture with financial services firm Bajaj Finserv as it extends its operations in Asia's third-largest economy
The German insurer's planned entry comes after a fiscal year when assets under management in India's 35-member mutual fund industry fell as a slowing economy and turbulent financial markets hit investment valuations and detered retail investors.
Allianz joins the likes of South Korea's Mirae Asset and France's Axa who have entered the industry in the last two years. Goldman Sachs has deferred plans to start mutual fund operations in India, and many more are going slow.
"We are delighted to extend our partnership to the mutual fund business, which may take about a year to commence operations," Rahul Bajaj, chairman of Bajaj Finserv said in a statement.
Allianz has minority stakes in two Indian insurance ventures, Bajaj Allianz Life Insurance Co Ltd and Bajaj Allianz General Insurance Co Ltd, and had told Reuters last August it was in talks with the Bajaj Group for an asset management venture.
India's mutual funds industry managed about $83 billion at the end of 2008/09 fiscal year in March, down from more than $100 billion a year earlier, data from the Association of Mutual Funds in India showed.

Source: http://in.reuters.com/article/domesticNews/idINBOM43454120090420

‘Stock prices reflected extreme pessimism’

In early March, there was a unipolar view that stocks would rally only after the elections. To us, that raised the risk of carrying high cash levels. We took a contrarian view that the markets could rally before the elections or maybe correct after it and deployed much of our cash. - SANJAY SINHA, CEO, DBS CHOLA MUTUAL FUND

Stock prices are reverting back to mean from a phase of extreme pessimism. But sectors which have bounced back in this rally may not be the ones which revive first, says Mr Sanjay Sinha, CEO of DBS Chola Mutual Fund, in an interview with Business Line. Mr Sinha also believes that with order flows from government projects likely to revive post-elections, this may not be the right time to hold a very defensive portfolio.
Excerpts from an interesting conversation:
There has been a view, based on economic data from the US, that the worst of this economic crisis is behind us. That is underpinning this stock market rally. What is your view on this?
There are three major pockets of economic activity in the world- the US is one and Europe and Japan are the other two. Data emerging from the US may be suggesting that it is now gearing up on a path of recovery. That cannot be said for UK and Japan as yet. Therefore, we cannot say with absolute confidence that the entire global economy is in a recovery mode. But the US does seem to be responding to stimulus measures and other steps taken by the government.
Is the current mood of optimism leading to the market ignoring negative news? The bad unemployment numbers from the US, for instance.
I believe the unemployment numbers would be a lag indicator of the economy rather than a lead indicator. Industries would first downsize in order to adjust to lower output; that is what reflects in unemployment data.
Once there is a productivity improvement, that reflects in better output and finally in the unemployment numbers. Going by that, there could even be further addition to the unemployment numbers. But an economic revival may well precede that.
The other part that you said, that the market is choosing to ignore data and is focusing on positive news alone; I do concede. But then, the markets tend to be more sensitive to the future than to the present or the past.
Therefore, if there is a sense of the macro economic conditions recovering, markets may begin to rally ahead of that. We have been in an extended period of pessimism. When one sees some vibrancy come into the market, then more optimism will come into the system. Factors such as the wealth effect leading to better spending and a better economy will follow.
But sometimes, these rallies are also false rallies. If you want to be absolutely certain of the outlook, then one would need to wait for the economic numbers to be consistently good for a period of time.
In India, the market has been buoyant though the earnings season is just round the corner. Do you think stock prices have discounted the worst case scenario on earnings?
If you see the way different sectors have corrected over the last year, prices do seem to have captured the differential impact (of the slowdown) on earnings of sectors. That is why some sectors such as real estate have corrected far more than others like, say — FMCGs.
But if you are talking of the recent rally, and asking if the stocks which have bounced back are going to see recovery ahead of others, that may not be the correct assessment. Investors are probably responding to just a low price, rather than to the sectoral outlook at this stage.
Is the market focusing too much on the near term? Cement and auto stocks have been marked up on the back of despatch and sales numbers over the last quarter.
I think cement and auto stocks had corrected significantly in anticipation that we will be in an extended downturn. But recent numbers seem to be negating that point of view. Stock prices are thus reverting back to their median levels.
If I have to extrapolate this to a broader market view, the overall market had given in to extreme pessimism, which was not warranted. India does have relative insulation from what is happening globally. That distinction needs to be made and is being made now. We do have elections coming up and that has put policy announcements on the back burner. That gives me optimism that policy imperatives will be pursued once the new government is in.
Regardless of what form that government will take, there are policy initiatives that will have to be taken. If you see the targets for the Twelfth Five Year Plan, we may now have to push through pending projects to keep to the timetable. You may see higher news flow after the elections on the order books of infrastructure and capital goods companies. That will have a cascading impact to connected sectors such as steel, cement and so on.
FIIs have been net buyers over the past month in Indian stocks. Is it correct to extrapolate this data and say risk appetite has revived?
Risk appetite has been restored globally, to some extent. Funds are flowing into the emerging markets and into India too. But to multiply a fortnight’s numbers and say that FII flows will be strong for year will not be realistic. The IMF and World Bank have both come out with the outlook that global GDP will be in positive territory for 2010, compared to 2009. If that is correct, the optimism will have to build up in the second half of 2009 itself. That could lead to better FII flows. India does continue to stand out as a great destination based on its macro outlook. I would not be surprised if 2008-09 ends with a positive FII flow as compared to 2008.
What stance have domestic institutions taken amid this rally?
The mutual fund (inflow) numbers have turned positive since the second half of March. There was also a fair amount of cash with mutual funds which is now getting deployed into stocks.
As far as insurance companies are concerned, there are two sets of strategies. The private sector insurance companies usually see a seasonal bunching up of inflows in the January-March quarter. That has largely been deployed in recent weeks.
On the other hand, public sector insurance companies have already deployed their funds and are playing a contrarian role in the markets, by being sellers. That’s why the ‘domestic institution’ action which you see in aggregate numbers show such fluctuation.
Many equity funds have not matched the benchmarks in this rally; but some of DBS Chola’s funds have. Why is this?
In the early part of March we saw that there was an unipolar view in the markets that stocks would rally only after the elections. To us, that raised the risk of carrying high cash levels. Therefore, we took a contrarian view that the markets could rally before the elections or maybe correct after it. Now, both these legs may play out.
The markets may rally in the run up to the elections on the back of global cues. We may come to a threshold level by the time election results are out. If the fear of an unstable coalition government at the Centre is not well-founded, then the markets may well gain momentum.
Basically, we took the call that timing the market to perfection may not be possible. Therefore, we almost completely deployed cash levels in our large cap funds. That paid off, because in the last rally, our funds have moved into the top quartile.
Are you sticking to a defensive position on your portfolios? What are your key sector bets now?
We had not created a very defensive position in our portfolio and therefore suffered in the meltdown. But the view we have to take now has to be prospective and not retrospective.
I believe that stocks or sectors that were battered for low order flows and so on would come back in a more stable scenario. We have created a portfolio around that. In alphabetical order, that would be auto, cement, construction, oil and gas and pharmaceuticals.

Source:http://www.thehindubusinessline.com/iw/2009/04/19/stories/2009041950300700.htm