Sundaram Rural India failed to keep up benchmark index

The rural India may have anchored the country out of the global economic storm last year, but one of the few mutual fund schemes that focus on the hinterland, Sundaram BNP Paribas Rural India, is all at sea with many investors abandoning it.
Launched in April 2006, the fund’s objective was to predominantly invest in companies that gain from an expansion in the economic activity in rural India. It has however seen its asset size shrink from more than Rs 1,000 crore in Dec ’06 to less than Rs 300 crore in Aug ’09.

PERFORMANCE
Since its launch Sundaram Rural India has delivered just about 22% absolute returns till date, which is nearly half of about 43% returns posted by the Sensex and Nifty, and even 37% returns by its benchmark index, the BSE 500, during this period. This despite the fact that this fund had earlier outperformed the market indices in the first two years after its launch. It generated about 20% returns in 2006 against BSE 500’s 16%, while in 2007 it posted more than 68% returns, way ahead of the BSE 500’s 62%, Sensex’s 46% and Nifty’s 53%.
The fund, however, saw its fund value tumble by 62% in 2008 when BSE 500 fell by around 58% and the Sensex and the Nifty lost about 52% each in that one year when markets around the world crumbled like a pack of cards.
Here one can conveniently argue that the fund’s high beta of 1.08 explains to some extent its larger-than-market fall in the bear run. However, a logical counter argument to this is that a high beta also implies that the fund ought to perform better than the market in an upturn. The same, however, is not reflected in the performance of Sundaram Rural India so far this year. The fund has managed to generate just about 50% returns since January against the market returns of nearly 64%.

PORTFOLIO
Despite its rural focus, it is difficult to distinguish this fund’s portfolio with that of any other diversified equity scheme. This is because almost all large companies have a presence in rural India as all of them are looking for a pan-India presence with the village folks driving demand in everything from mobile phones to cars and bikes. Sundaram Rural India’s portfolio also comprises popular companies like Bharti Airtel, Punjab National Bank, SBI, Tata Motors, Maruti Suzuki, L&T , Mahindra & Mahindra and Hero Honda Motors, among others – stocks highly popular with any other diversified equity scheme. Thus, Sundaram Rural India is not threads apart from any other diversified equity scheme. But what differentiates it from the rest is its sectoral allocation.
This fund has always been heavy on consumer goods segment and has been increasing its exposure in this particular sector since Jan ’09. Today, more than onefourth of its portfolio is dedicated to this sector that includes consumer goods and sugar stocks. Recently it has hiked its exposure in sugar to more than 10% of the portfolio. Given the rising demand for sugar, if the sugar stocks are to see a further run-up , this fund is sure to benefit. The other prominent sectors include fertilizers and automobiles that account for about 15% each of the fund’s portfolio. The fund currently is well-diversified to accommodate around 40 stocks.

OUR VIEW
A different investment theme is not enough to attract investors unless it is backed by a lively performance. Rural India may be categorised as a different thematic fund. It however fails to compete even with its sibling funds like Select Focus, CAPEX and SMILE that have been recognized amongst some of the outstanding diversified equity schemes of the country today. Sundaram Rural India, thus, needs to put in a lot of hard work to match the performance of other schemes in Sundaram’s basket.

Source: http://economictimes.indiatimes.com/articleshow/5007660.cms

FMPs back by popular demand

Many a times, we have seen actors returning to screen under popular demand of their fans. Particularly popular on television, this is a tried and tested method of enhancing the actor’s as well the show’s popularity. In quite a similar fashion – although not in a similar context – a mutual fund category is back by popular demand as well. The fund category that I am talking about is the Fixed Maturity Plans (FMP).
FMPs were once a highly dominant product, but seemed to be breathing their last breaths last year. Somehow, they survived and managed to revive themselves and since then, they have seen a surprisingly fast-paced recuperation. The primary reason behind the FMPs’ revival has been that they are a set of products that cater to a real need and hence, the market has found ways of producing it.
For a long time, such fixed term funds were used primarily by large corporates to park money. However, over time, even smaller companies and high net worth individuals began opting for FMPs. Particularly with bank fixed deposits (FD) returns going down, FMPs have started to make sense as the better alternative. The recent high number of offer documents for fixed term funds filled with Securities and Exchange Board of India (Sebi) – 12 in the first half of August – is enough vindication for this category’s growing market.
Apart from their well know tax efficiency, FMPs have a number of other benefits over bank deposits as well. FMPs are closed-end funds, hence limiting liquidity. Investments in FMPs can be done only during the new fund offer (NFO) period and funds can be redeemed only after completion of the fixed term. Furthermore, returns on FMPs are also predictable. Until last year, fund companies gave out an indicative yield, which has now been disallowed by Sebi. Yet, investors get enough clues about the kind of returns an FMP is likely to fetch.
The expected returns of an FMP can be foreseen to a certain extent because these funds invest in debt papers with the intent of holding them till they mature. This means that despite any fluctuation in interest rates and the resulting impact on the market value of the paper, the actual returns that will be earned can be known. The only problem an FMP can face is a debt becoming bad. While this is a real risk, there have been no major fallouts because of it as yet. There have been FMPs that had invested heavily in papers of shaky real estate companies, but the previous year’s crisis has taught fund managers the importance of constructing FMP portfolios carefully.
All said and done, despite its issues, FMPs deliver a lot, to both its investors as well as the companies that these funds invest in. And herein lays the second reason behind the revival of the FMPs. In India, there is no active bond market. Companies need to find actual investors to invest in their debt and they do that through FMPs. In effect, FMPs become debt brokers. The fact there India should have a highly liquid debt market wherein bonds can be sold and bought is another story. We don't have such a market but FMPs have become a unique solution for it. So be it the first reason or the second, it seems like FMPs might encounter hiccups, but are here to stay.

Source: http://www.financialexpress.com/news/fmps-back-by-popular-demand/516582/0

Fund valuations head south

Entry load ban prompts many buyers to look at near-zero or pay-to-buy models.

Weighed down by a ban on charging investors entry load, mutual funds, specially those with low assets, have seen valuations nosedive.
Industry experts said valuations were down almost 50 per cent, from 5 to 6 per cent of assets under management (AUM) to 3 per cent after the October 2008 crisis because buyers were looking at asset quality rather than size.

MUTUAL STRESS POINTS

• Valuations hit because asset size does not ensure income.
• Cost of acquiring customers/assets hit by an upfront fee and higher trail commission.
• Many AMC balance sheets are already strained.
• Overdependence on debt where income is much lower.

In fact, unlike earlier years, asset size no longer warrants great valuations. “I don’t see why anyone should pay on sheer asset size anymore because it does not ensure income,” the chief of a leading fund house said.
In the heydays, asset management companies attracted high valuations. For example, Infrastructure Development Finance Corporation (IDFC) bought Standard Chartered Mutual Fund for around Rs 830 crore, or a whopping 5.7 per cent of its assets in April 2008.
But buyers can now expect to snap up funds at near-zero, or even be paid to buy a fund house. For example, last November, Lotus Mutual Fund had to pay Religare Rs 50-100 crore to take over its liabilities.
Things have worsened since then because of the entry loan ban by the Securities and Exchange Board of India (Sebi) on August 1. Experts said going forward, more such deals could take place, if not at pay-to-buy, but at 100 to 150 basis points of the AUM.
Already, there are talks that DBS Chola and Bharti Axa could be looking for buyers. And industry experts said there could be more players looking to exit. “Six to seven fund houses are looking for buyers, but valuation is the main issue,” said the chief investment officer (CIO) of a leading fund house.
After the entry load ban, Asset Management Companies (AMCs) face a catch-22 situation. To ensure fresh inflows and compete with big guns such as Reliance Mutual Fund and HDFC Mutual Fund, they need to pay distributors upfront fees plus a higher trail commission.
At the same time, the extra cost to ensure inflows will mean their already-strained balance sheets will continue to bleed. Sanjoy Banerjee, executive director, ICRA Online, said, “The industry's profitability was already extremely poor, according to the 2007-08 numbers. Things could get worse now.”
And although AMCs have only 25 per cent of their money in equities, it was their main source of income.
Earlier, the cost of garnering new clients was borne by the investor, in the form of the 2.25 per cent entry load on equity funds. As a result, fund houses were able to retain the 90 basis point to 1 per cent annual fund management fees in an equity scheme.
This income will be under severe pressure because the upfront payment of 50 to 75 basis points to distributors will have to be paid out of this.
Also, fund houses paying higher trail commission than the 0.50 to 0.75 per cent may have to bear the burden from management fees or the AMC’s capital.
In liquid and short-term debt schemes, in which most of the money lies, the average fund management fees range from 10 basis points to 50 basis points, depending on the type of fund.
And medium- and long-term debt schemes earn 75 basis points to 1 per cent.
Importantly, the upfront fees will have to be paid regularly by AMCs because of the high churn. “The average investor stays for only two or three years in equity and even less in debt.
The industry will have to continue incurring these high costs to acquire clients. Many AMCs may not be able to continue taking this hit,” said an industry expert.
Further, a large part of the assets is with a few top funds. At present, there are 36 AMCs. Out of the total Rs 7.48 lakh crore of AUM in August, 15 funds control Rs 6.72 lakh crore.
That means 21 AMCs have only Rs 75,000 crore, of which Rs 53,000 crore is in debt or debt-oriented schemes.
Industry experts blamed some fund houses for this mess. “Many fund houses went into the business with a ‘build-to-sell’ intention instead of a ‘build-to-operate’ motive. So assets were built using the wholesale route in debt funds where large-scale inflows and outflows take place making AMCs very unstable,” said a CIO.
Consolidation, thus, is on the cards. Banerjee felt that since small doesn’t make sense anymore, the industry could ultimately have 20 or 25 good players with staying power.
In fact, experts believed that the players waiting in the wings would have to do some serious rethinking because the timeline for becoming profitable would become much longer than the five or seven years which was the earlier target.
As Banerjee put it, “Sebi’s measures will means AMCs would have to work towards profitability. This, as a natural progression, would mean a healthier industry.

Source: http://www.business-standard.com/india/news/fund-valuations-head-south/370011/

Lessons from the world financial crisis

(D. H. Pai Panandiker is President of RPG Foundation. The views expressed in this column are his own)
By D. H. Pai Panandiker
The collapse of Lehman triggered the world financial crisis this time last year. Stock markets crashed; credit was frozen and banks were scurrying for cash; crude oil prices dipped and gold prices shot up; investment shrank.
Finally, the financial crisis translated into recession with severe loss of employment and income. With the inter-linking of economies no country escaped these drastic consequences.
India was hit badly but avoided recession. Nevertheless growth dropped and is yet to recover. FIIs repatriated more than $13 billion and deepened the fall in stock prices.
Sensex plunged 62 per cent, much more than Dow Jones. The RBI had to draw down reserves. The rupee fell 20 per cent, industrial production declined and exports slumped.
Indian banks, except probably two, did not have exposure to sub-prime debt since they did not have much international business. Besides, the regulations of RBI did not permit excessive debt:equity ratio. Hence Indian banks were largely unaffected.
The international crisis prompted the Indian Government to act. That was more to avert recession than to back up the financial system.
Stimulus packages were introduced mainly aimed at increasing demand by reducing excise duties and increasing investment in infrastructure. The RBI did pump in liquidity with cuts in CRR, SLR, and the repo and reverse repo rates. Recovery has started but progress is slow.
There are lessons to learn from the crisis and new initiative to be taken.
First, with large infusion of cash by Federal Reserve, it is likely that the dollar will weaken in future against other currencies. RBI has a large part of its foreign exchange reserves in dollars and should therefore change the composition of reserves in favour of the euro and gold.
Second, although most banks are owned by Government, they should be financially sound on their own. Therefore the capital base of banks has to be sound and conform to the new Basel standards. Banks should be modernized and to attain economic size through mergers.
Third, financial supervision has to be strong. That also requires that there should be coordination among the concerned agencies like the RBI, fiscal authorities, Sebi, etc.
Fourth, regulation should go hand in hand with innovation of financial instruments. The financial crisis was to a large extent spurred by financial instruments like Collateralized debt obligations (CDO).
Fifth, RBI should keep constant watch on liquidity requirements. The financial system in the U.S. would have collapsed but for the timely release of cash by Federal Reserve. The measures taken by RBI were a little too late.
Sixth, Government should curb fiscal deficit to ease pressure on the market and continue to take steps to open up the economy, whether in respect of trade, convertibility of the rupee, external commercial borrowing and foreign investment, since the benefits would be much more than the safety of a closed system.
It appears that the worst is now over and the salvage operations are complete. It is time to reform the system to enable it function smoothly and efficiently under good supervision.

Source: http://in.reuters.com/article/economicNews/idINIndia-42327820090909?sp=true

India stk fund inflows drop as entry fee ban bites

Net collections by Indian stock funds turned negative for the first time in four months in August, a month after the market regulator banned entry fees by mutual funds, limiting their ability to pay distributors.
The Securities and Exchange Board of India in July directed mutual funds to abolish front-end or entry fees from August 1, a move aimed at cutting costs for investors and to discourage aggressive selling.
However, the step has irked distributors, who bring more than 90 percent of the business to money managers and have threatened to stop selling mutual funds, given the potential loss in fees.
"Under the new norms, distributors are no longer likely to get higher commission from AMCs and, therefore, mutual fund business, especially sale of equity funds, has become an unattractive proposition," said Chintamani Dagade, a senior research analyst with Morningstar.
He said equity markets trading at higher levels would have also held investors back from investing.
Indian stock funds recorded a 1.18 billion rupees net outflow in August, the sharpest monthly decline in 2009, after three straight months of robust flows on back of a strong rebound in domestic shares.
Inflows into existing funds dropped by more than a third to its lowest since April.

Source: http://in.reuters.com/article/domesticNews/idINBOM44046320090911

Mr. Anand Shah, Head-Equities, Canara Robeco Mutual Fund

Canara Robeco is a JV between Canara Bank, a 100-year old premier bank in India and Robeco, an 80-year old Rabobank entity and an asset management specialist. It is one of the fastest Growing Asset Managers in India, clocking 94% growth year-on-year in AU M (June 2009 over June 2008). It is the Lipper’s Bond Fund House of the Year for 2008 in India. Canara Robeco has an experienced fund management team with over 75 years of experience amongst them in Equities and Fixed Income.
Mr. Anand Shah, Head-Equities, Canara Robeco Mutual Fund joined the firm in 2008. He has done his MBA from IIM-Lucknow. Prior to this, he has worked as a Fund Manager with Kotak Mutual Fund for more than 6 years. He also worked as a co Head-Equities with ICICI Prudential Mutual Fund.
Speaking with Yash Ved of India Infoline, Anand Shah says “Liquidity has taken the markets up so far, but we are not comfortable with the valuations right now.”

What is your view on the Indian stock market at this point of time? Where do you see the Sensex by March?
In the short term, we are cautious on the stock market. According to us, the market has factored in a lot of recovery in the economy, domestic & overseas. We don’t see a rosy picture for the global markets next year. The large fiscal stimulus that has supported the markets across the globe will be rolled back partly or completely depending upon the recovery. We see little bit of caution in the markets given the current valuations and fundamentals. Valuations are neither low nor very high. Liquidity has taken the markets up so far, but we are not comfortable with the valuations right now.

What is your view on the Indian economy?
The Indian economy is more resilient than several other global economies. India will continue to grow at a decent rate. India’s FY10 GDP could hit 7%, though we see monsoon affecting the GDP growth rate by 100-150 basis points.
In terms of global markets, whatever green shoots we are talking about is nothing but stabilization of the economic deceleration. The emergency stimulus measures taken by governments around the world will get rolled back next year. As a result, the global economy could actually see another dip in growth compared to this year.
That is where we see an impact on global equity markets which in turn will have some impact on the Indian markets as well.
The global markets have already revived. It is the liquidity that is driving the markets. Otherwise, actually, the markets should be in a correction mode.

What impact do you see from govt borrowing?
The Government has to increase tax revenues and reduce expenditure to keep the bond market stable.

What is your AUM?
Our AUM is Rs84bn. Out of this, around 10% - 12% is equity and rest is debt.

How do you see inflation and interest rates?
We see inflation going up to 6-7% by March 2010, if food inflation deteriorates further.

What is your view on the rupee? What kind of flows do you expect from FIIs?
In the short term, the rupee would depreciate and the dollar will appreciate, and in the long term, the rupee will appreciate vis–a-vis the dollar
India has always been one of the top receivers of global funds and will continue to get money from the foreign investors. There will be bouts of risk aversion which may lead to some outflows. It depends upon fiscal policies pursued by the Government and the status of recovers in the global economy.

Which are the sectors you are bullish and bearish on?
We are bullish on sectors that are linked to the domestic consumption. We are bullish on Telecom, Banking, Power and Pharma and Gas Utilities.
We are bearish on Global Commodities and Metals – sectors that are dependent on global demand.

Any NFO(s) in the near term?
Currently there are some products in pipeline and we would launch our funds as and when we see an opportunity.

What are your plans on the distribution side?
We have done well since 1-2 years of its existence. We have tie ups with most of the banks and also we see huge potential in our Canara Bank distribution.

What is your view on the bond market?
We already have the yield on the benchmark 10-year government bond at around 7.3%. Inflation is also inching up and is likely to be at 6-7% by March. So, our view is that by March, the benchmark 10-year yield could touch the 8% mark.

Source: http://www.indiainfoline.com/news/showleader.asp?storyId=836&lmn=1

Surviving Retirement

India’s most ambitious pension scheme has had a slow start. Giving it the power of 401(K) is the way to rev it up

Four months have passed since India’s New Pension Scheme was rolled out to the public with a big bang and what a whimper it has been. Only 1,500 people have joined the scheme and the corpus has touched a mere Rs. 2.5 crore. Early reports indicate three major shortcomings are holding back the scheme’s wider adoption: The tax liability on retirement, the limit of six in the choice of fund managers and the fact it is not an employer-sponsored scheme.

The clues to solving this impasse may lie in the world’s most popular word in the context of retirement planning: 401(K). It refers to specific section in the US Internal Revenue Code but has become popular across the world as the mnemonic for retirement and pension plans. Many countries have their own version of 401(K). Image: Vidyanand Kamat

In fact, the six fund managers appointed by the Indian government to manage NPS claim the new scheme is actually India’s own 401(K), but a scrutiny of its features shows otherwise. So, what if India were to go all the way and adopt 401(K), complete with all the features of the tried and tested scheme?

The simple answer: NPS will take off in a big way and become de rigueur for pension planning by Indian families.

The launch of NPS on May 1 this year was a major leap for India. “This scheme allows investors to take their retirement planning in their own hands and it has a lot of future,” says Naval Bir Kumar, managing director of IDFC mutual fund, one of the six fund managers. And then he adds his pitch, “In a way, it is totally like the 401(K) plan of the US.”

But a full-fledged 401(K) plan would be sponsored by employers. That is, a company would set up the retirement scheme for its employees by deferring the wages. This would be done based on an individual’s choice of schemes from a wide variety of investments and fund managers — literally hundreds — that 401(K) covers. Since NPS doesn’t have these features, it is not a 401(K) yet, says Mukul Asher, professor of public policy at National University of Singapore and who had been involved in pension policy discussions in India.

Remove these lacunae and the potential is immense. “If the NPS was really like the 401(K) plan, then in the next 10 years the NPS can easily grow to Rs. 500 billion [Rs. 50,000 crore] as distribution and advisory does not become an issue at all,” says Norman Sorensen, president and CEO of Principal International, the biggest 401(K) manager in the US. He says the scheme should not be limited to just six managers but opened up to the entire fund management industry.

India should also avoid the pitfalls of US 401(K) such as automatic enrollment and volatile employer contribution.

Perhaps, the biggest hurdle now is that NPS collections are not made from the salary slips of workers. The entire organised sector in India is hooked on to the employee provident fund (EPF) scheme. “For the NPS to come through the corporate, all the other benefits will have to go,” says Professor Asher.That suggestion may not find favour with employees, but opening up NPS to many more fund managers and corporate sponsors will certainly take it mainstream. And the government can add some zing with a full income tax exemption.

Source: http://business.in.com/article/what-if/surviving-retirement/3652/1

Commission+fee likely in insurance, for now

Commission-based and fee-based models are likely to run simultaneously for financial products, especially from the insurance industry, during the transition to the new regime.

While commission is associated with agents, the fee-based model is meant for financial advisors. The transition to the new revenue model may take 18 months, but could even stretch to 24 months.
A view would be taken on an alternate revenue model soon, D Swarup, chairman of the Pension Fund Regulatory and Development Authority, told reporters on Wednesday.He said the committee headed by him will submit its final recommendation to the government by the end ofthis month.
The committee won't fix a price band or a cap on the fees for financial advisors, Swarup said. When suggested that this could lead to arbitrariness, he said, "It's more arbitrary for the regulator or the government to fix a band or a cap."
Fees should be driven by market forces, like in the case of other sectors, he said. "Bilateral negotiation between consumers and advisors would determine the fee."The insurance industry has been up in arms since the government-appointed Swarup Committee released its draft report favouring a phasing out of agents' commissions by April 2011. The idea is to make insurance a no-load product by then, as the New Pension Scheme and mutual funds already are.
Indications are that only one revenue model would operate after the transition period.After an open-house discussion with industry representatives, including severe objections to the proposed model, the PFRDA chief's tilt was clearly towards a fee-based system.
"One has to take a view on whether the US model is for us to follow," Swarup said, while stating that the pure-fee model of Australia held much more promise than the combination of fee and commission-based models in the US. The UK is also in the process of shifting to a fee-based model.
Swarup likened the proposed reforms in the financial sector to those in the telecom industry. The telecom sector has registered significant growth in India, while tariffs have continuously decreased, he said, adding, the same is expected in the financial sector as well.
The final call on the committee's recommendations will be taken by the government and the financial sector regulators, including Irda. The Swarup Committee's mandate is to suggest measures to protect and educate investors, rather than looking at the business side of things, Swarup said. More than 90% people dealing in investment products do not know how mutual funds work, also very few know the difference between equity and debt, he pointed out.
Estimates suggest that there are 30 lakh advisors and sellers in the country, and the number of investors is more than 19 crore. In 2007-08, as much as Rs 14,704 crore was paid out as commission to agents. The objective behind bringing in a fee-based structure is to introduce transparency in the market for investors.

Source: http://www.dnaindia.com/money/report_commissionfee-likely-in-insurance-for-now_1288920