Are open-ended mutual funds better than closed-end ones?

Over the past three years, open-ended funds in each category--large-cap, mid-cap and ELSS--have outperformed their closed-end peers. Open-ended funds also fared better in the falling markets

Effective 22 March, HSBC Unique Opportunities Fund (HUOF), an erstwhile closed-end fund that was launched in February 2007, became open-ended. A mid- and small-cap-oriented fund, HUOF was a three-year closed-end fund that had the option to convert into an open-ended type, after three years. In these three years, the scheme barely managed to return your principal; it returned just 0.13%, against open-ended mid-cap funds that returned 10.88%.

When the capital market regulator, the Securities and Exchange Board of India banned open-ended mutual fund (MF) schemes from amortizing their initial issue expenses in April 2006, fund houses started launching closed-end funds. They claimed that on account of the lock-in, closed-end funds would not allow premature withdrawals. This would result in a stable corpus and closed-end funds would, therefore, outperform open-ended funds in the long run. But did they live up to their promise?

Lost ground
Things did not go as planned. Over the past one, two and three years, open-ended large-cap, mid-cap and equity-linked saving schemes (ELSS) funds have outperformed their closed-end peers. Open-ended funds, on average, also outperformed their closed-end peers in the falling markets of 2008 and the rising markets of 2009. For instance, in the large-cap space, the best performing closed-end fund in 2009 was Birla Sun Life Pure Value Fund that returned 91%, against Principal Large Cap (an open-ended fund) that topped the large-cap open-ended space with returns of 110%.

The NFO game
Here’s why fund houses went on a spree to launch closed-end funds. Earlier, MF schemes were allowed to spend as much as 6% of amount they raised from the investors as initial issue expenses. A Rs1,000 crore new fund offer (NFO) would allow a fund to deduct Rs60 crore their initial issue expenses. Funds were allowed to amortize (write-off) this amount over a maximum period of five years.

Some high net worth investors and companies began to extract their share of pie too. They would often invest in these NFOs purely for listing gains that came with a bull run and make a hasty exit soon after the scheme reopens for subscription. Long term investors who stayed in the fund paid heavily due to higher costs.

Between April and December 2006, 10 closed-end funds were launched that garnered Rs7,764.25 crore against six open-ended funds that garnered Rs1,521 crore. In 2007, 32 closed-end funds were launched against 28 open-ended funds.

Premature withdrawals
Apart from the amortization of the NFO expenses, one of the reasons why closed-end funds suffered was their premature withdrawals. Many closed-end funds offered quarterly redemption window. Some, such as Tata Indo-Global Infrastructure Fund, offered monthly redemptions, defeating the purpose of a proper closed-end fund. Although premature withdrawals were penalized, investors withdrew systematically. For instance, Franklin India Smaller Companies Fund (FISCF), a five-year closed-end mid-cap fund, collected around Rs1,200 crore when it opened. On account of its half-yearly redemption window, investors withdrew money when markets started to fall. “Our experience has been that the liquidity windows did lead to redemptions and impact performance to some extent along with our stock picks”, says Sivasubramanian K.N., head of Franklin Equity Portfolio Management, Franklin Templeton Investments. As per its February-end factsheet, FISCF’s corpus is Rs585 crore. A rush for redemptions forces fund managers to sell liquid stocks. What remains are, typically, illiquid stocks that take time to recover. Says Nikhil Johri, managing director, Fortis Investment Management (India) Pvt. Ltd: “The problem with closed-end funds is that premature redemptions happen but no new money is allowed to enter the fund. Hence, many times, it tends to sit on far more cash than he ought to.”

Is closed-end structure bad?
Experts are divided on whether or not the structure of a closed-end fund works. In the initial years of funds in india, when public sector banks launched their mutual fund houses, they launched closed-end funds, especially tax-saving funds, which matured after 5-10 years. Open-ended funds were not heard of in those days. Even private sector firm that entered the MF space in 1993 launched closed-end funds to begin with. Franklin India Bluechip Fund, one of Franklin Templeton India MF’s most successful funds, was launched as a three-year closed-end fund in December 1993. It became open-ended in January 1997 and did very well across market cycles. “The performance of the closed-end funds is also dependent on the structure, whether it is a pure closed-end one or with redemption windows”, adds Sivasubramanian.

“Closed-end funds like fixed maturity plans work very well since the present regulations do not allow premature withdrawals. The fund manager is therefore assured that panic selling—to meet premature redemptions—will not be necessary,” says Johri.

Not all agree though. Some experts feel that fund managers of closed-end funds tend to get lazy. Says Rakesh Goyal, senior vice-president, Bonanza Portfolio Ltd, a Mumbai-based financial services company: “Most fund managers of closed-end funds typically get money for a three-year period. They, however, take it for granted that this money is going to stick around for three years and markets would also keep rising. Hence, these funds are seldom actively managed against open-ended funds that are actively managed funds.” Goyal added that in 2006 and 2007, most MFs got “easy money” from investors as they paid high commission to distributors who convinced investors that equity markets would continue to rise.

Lack of monitoring can also affect closed-end funds. “Fund managers did not pay attention to their closed-end funds once money came in. They are usually told to pay more attention and hence actively manage open-ended funds as they can be constantly sold to investors and attract money”, says a chief executive officer of a fund house who did not want to be identified.

Money Matters take
The monetary benefit for MFs and distributors to launch closed-end equity funds is almost gone. Unless a closed-end fund offers something unique that no other successful open-ended scheme offers, avoid closed-end funds.

Source: http://www.livemint.com/2010/03/30214843/Are-openended-mutual-funds-be.html

Indian market is efficient enough for passive funds

Sanjiv Shah, executive director, Benchmark Asset Management Co Pvt Ltd, chats online about passively managed funds and why they are better. Log on next Wednesday to chat with another fund manager.

Saumya: With the markets being buoyant, what should be the investment strategy?
Shah: One’s investment philosophy should be based on asset allocation and on risk parameters. Another way of looking at investing in market is to follow the process of SIP’s (systematic investment plans) and VIP’s (value averaging).

Sara: How would you differentiate Nifty BeES from other index funds?
Shah: Nifty BeES are ETF’s (exchange-traded funds), therefore you can buy them at real time NAV (net asset value) on the exchange. Their tracking error is lower compared with other index funds and the expense ratio on ETF’s is lower compared with other index funds.

Djokovic: How do you market VIP to investors considering not many distributors, I hear, sell benchmark schemes?
Shah: We belive VIP is a very new concept offered only by Benchmark. It is much smarter way of investing regularly compared with SIP’s and the number of distributors selling it are increasing.

Sangeeta: Do you mind delving a bit on the asset allocation term for a layman?
Shah: Asset allocation is a process of distributing investments in a portfolio across various asset classes in order to achieve the highest investment return for the defined risk.

Starting point of asset allocation is defining risk budget or risk tolerance of the portfolio.

Djokovic: With IDBI mutual fund saying that they will launch passive funds, do you think fund houses are finally realizing the value of passive management?
Shah: Absolutely, our research shows an important point: Indian market is efficient enough and hence our performances of individual active managers are random, transient and unpredictable.

Source: http://www.livemint.com/2010/03/31210101/Indian-market-is-efficient-eno.html

Sebi rule takes wind out of MFs’ fund of fund sales

Domestic fund houses may no longer find it attractive to launch fund of funds (FoFs), following the recent Sebi rule barring them from revenue- sharing arrangements with the schemes into which they invest. An FoF is a mutual fund scheme that invests only in other mutual funds.

While the Sebi move could sound the death knell for international feeder funds — a fund that routes money into a scheme investing in overseas markets — some industry officials feel even funds that invest in domestic schemes could be affected. According to distributors, top fund houses like ICICI, Birla Sunlife, Franklin Templeton, Fidelity, DSP Blackrock and DWS are reconsidering their plans to launch FoFs.

According to the Sebi order, the Indian FoF will not be able to charge management fees on investments made by the target fund. The FoF fee structure adds up to around 3.25% annually. The fund house selling the scheme usually charges 75 basis points (0.75%) as commission from investors. It uses this money to meet marketing expenses, registrar fee and part of distributor commission. Separately, the target fund (where the money is invested) levies a fee of 1.5%-2.5% on investors in FoFs, a part of which is usually shared with the fund selling the scheme.

“By restricting revenue sharing, the regulator intends to stop asset management charges at two points. From what we understand, it will also impact domestic FoFs, which invest into local funds,” said Ashvin Parekh, national leader-financial services, Ernst & Young.

According to Mr Parekh, most domestic FoFs follow a two-level fee pattern. Both source fund and the target fund levies about 75 bps (each) on investors as fund management charges. “The second para of the Sebi order clarifies that AMCs shall not enter into any revenue-sharing arrangement with the underlying funds and shall not receive any revenue from them. This widens the case for domestic funds as well,” said Mr Parekh.

According to experts, through this order, Sebi intends to reduce charges on FoFs, and more specifically offshore FoFs, which have been charging investors heavily, but not yielding decent returns. One-year return on most FoFs has been in the range of 30-50%, much lower than category returns mapped by local funds.

According to industry sources, it will no longer be profitable for fund houses to launch FoFs. An FoF occupies a special place in the product suite, as it allows a fund house to showcase investment products and asset classes that are popular in other markets.

Domestic FoFs enable investors to invest across sectors and fund houses. Actually, most fund houses offering FoFs typically invest into their own sectoral funds, depriving investors an opportunity to have exposure to performing schemes run by other fund houses.

“The new changes will have implications for the viability of overseas feeder funds that fall under the FoF category, due to transfer pricing issues. But overseas funds being managed out of India will not be impacted. While this category accounts for a minor portion of industry assets today, we expect this to change over the coming years, given the benefits of international diversification,” said Jaya Prakash K, head-products, Franklin Templeton Investments.

Source: http://economictimes.indiatimes.com/Market-News/Sebi-rule-takes-wind-out-of-MFs-fund-of-fund-sales/articleshow/5748671.cms

Rel MF: turning distributors into financial advisers

To encourage distributors and empower them to offer advisory and be able to charge fee from investors, the country’s largest mutual fund player Reliance Mutual Fund has taken an initiative to help distributors become financial advisers through a certified financial planner (CFP) certification.

Reliance Mutual Fund has negotiated with the Financial Planning Standards Board (FPSB) to charge a significantly lower fee from distributors for the CFP certification programme.

The CFP programme along with its five levels of examination will cost a minimum Rs 23, 000.

The fund house will also refund the fee to distributors who clear the examination.

As of now, most distributors are product providers. “The biggest challenge now is how distributors charge fees and for that we want to turn them into financial advisers,” said said Sundeep Sikka, chief executive officer, Reliance Mutual Fund.

“We have negotiated a discounted fee for distributors, to encourage them to join the CFP programme and start working like advisers,” said Sikka.

“We have offered this to all our 40,000 distributors and 6,000 of them have already shown interest.” The fund house has rolled out this initiative in 20 cities and will take it to over 50 cities in the next year.

Ever since the mutual fund industry entered the regulatory regime of no-entry load, distributors have been crying foul.

While banks offering mutual fund products do charge an advisery fee from investors, distributors find themselves constrained. The industry has also seen distributors move towards selling Unit-Linked Insurance Policy.

“Since investor need will drive mutual funds, its merits like being cheap and tax efficient, will be strong pull factors,” said Sikka.


Source:http://www.hindustantimes.com/business-news/businessbankinginsurance/Rel-MF-turning-distributors-into-financial-advisers/Article1-524373.aspx

UBI, KBC to invest euro 50 m in AMC

Union Bank of India (UBI) and Belgium-based KBC Asset Management will invest euro 50 million (about Rs. 302.42 crore) in their proposed joint venture asset management company, a top official said.

The joint venture, Union KBC Asset Management, has received in-principal approval from market regulator Securities and Exchange Board of India (SEBI).

“The total capital investment in the joint venture will be euro 50 million. It will be the best-capitalised company in India,” KBC Group Chief Operating Officer Danny De Raeymaeker told reporters here on Friday at the formal inauguration of the head office of the newly-formed company. The joint venture would have Union Bank of India as the major stakeholder with 51 per cent while the balance would be with KBC Asset Management.

“We have received an in-principal approval for the proposed mutual fund joint venture and the final approval will be received in the next 4-5 months,” Union Bank CMD M. V. Nair said.

The company would have a dedicated sales force of 500 people who would be placed in an equal number of branches of Union Bank, Mr. Nair said. The company would be leveraging the reach of Union Bank for selling mutual fund products, he said.

“We have our branches but will also tie-up with other banks for distributing our products,” Mr. Nair said.

The newly-formed joint venture would offer capital protected investment funds and open-ended equity funds. “We will be offering innovative and structured products,” Union KBC Asset Management's Chief Executive Officer G. Pradeepkumar said. — PTI



Source:http://www.hindu.com/2010/03/28/stories/2010032861121700.htm

Govt banks make a dash to start mutual fund business

IDBI Bank and Union Bank are the latest entrants.

n less than 24 hours, two public sector players—IDBI Bank and Union Bank of India—announced their foray into over Rs 781,000-crore mutual fund (MF) industry, though both have taken different routes.

While IDBI Bank decided to go solo, Union Bank has partnered Belgian asset manager KBC. By doing so, Union Bank has followed peers such as State Bank of India, Bank of Baroda and Canara Bank that have tied up with foreign partners.

IDBI Bank announced the launch of its asset management business on Thursday, while Union Bank of India announced its entry on Friday.

Other than Union Bank of India, Bank of Baroda has a tie-up with Pioneer Investments, a global asset manager. Canara Bank has a joint venture with Robeco Groep NV of the Netherlands and, in SBI Mutual Fund, the partner is Société Générale Asset Management.

Most of the public sector banks forayed into the MF business in early 1990s, but could not compete with the private sector players once the sector was opened to them around the same time.

“You cannot expect a banker to run an asset management company. Different skill sets are required for it,” said Dhirendra Kumar, chief executive officer of Value Research.

Among the top 10 fund house in terms of asset under management, based on the Association of Mutual Funds in India’s February data, three are in the public sector, and among them, only SBI Mutual Fund is owned by a bank. Experts said initially the banks continued to focus on their lending business, but the rise of equity markets since 2003 led them to re-focus on the MF business.

“The launch of the asset management business is in line with the bank’s long-term vision to emerge as a leading universal bank. IDBI Bank’s established brand name and extensive branch network will enable our asset management company to grow at a fast pace and become a leading player in the business,” said Yogesh Agarwal, chairman and managing director, IDBI Bank, while launching the MF business in Mumbai yesterday.

Union Bank of India Chairman and Managing Director MV Nair said the current penetration level of asset management companies indicated the vast untapped potential. The fund house has a vision to be among the top 10 in five years. It is targeting an average asset under management of about Rs 12,000 crore in three years.

Kumar of Value Research said the huge distribution network of public sector banks through their branches was an advantage which would be difficult for a standalone asset management company to match.

Source: http://www.business-standard.com/india/news/govt-banks-makedash-to-start-mutual-fund-business/389919/

Daiwa buys out Shinsei's MF arm

Barely a year after it commenced operations in India, Shinsei Bank Limited has decided to sell off its entire stake in Shinsei Asset Management Company (India), which manages Shinsei Mutual Fund (MF), to Daiwa Securities Group (comprising Daiwa Securities Group Inc and Daiwa AMC).
Shinsei AMC is promoted by Shinsei Bank of Japan. It holds 75 per cent stake in the AMC; 15 per cent is held by well-known investor Rakesh Jhunjhunwala and 1o per cent by Freedom Financial Services.
Under the agreement, the other two domestic share holders too will divest their stakes. Both the par

ties will apply to the Securities and Exchange Board of India (Sebi) for regulatory approval.
Sebi granted approval to Shinsei MF in February 2009. Its first fund was launched in June 2009. Shinsei AMC presently has three active funds – Shinsei Industry Leaders, Shinsei Liquid and Shinsei Treasury Advantage Fund.
The decision is part of Daiwa Securities Group’s plan to expand its business in Asia and to enter the Indian domestic asset management business.
Shinsei Bank is a leading diversified Japanese financial institution with total assets of US$ 124.9 billion on a consolidated basis (December 2009). Daiwa Group is also a leading financial services group from Japan. Daiwa is Japan’s second largest asset management company with over US$ 100 billion of assets under management.
Due to this development, Sanjay Sachdev, General Manager and Country Manager-India at Shinsei Asset Management has decided to quit.

Source: http://new.valueresearchonline.com/story/h2_storyView.asp?str=101333

NISM to conduct Association of Mutual Funds in India certification exam from June

Starting June 2010, the National Institute of Securities Markets (NISM), a division of the Securities & Exchanges Board of India (Sebi), will conduct the certification programme for professionals planning to enter the mutual funds industry.

So far, the Association of Mutual Funds in India (Amfi) has been deciding the syllabus and accepting registration formalities.
But now that the Sebi wants to bring all financial products certification programmes under one umbrella, the Amfi certification too will shift. “From June 1, 2010, the NISM will conduct the Amfi Certification,” A P Kurian, chairman of Amfi, who is retiring in September 2010, told DNA Money.

Amfi has not been able to update the regulatory blitzkrieg that the Sebi has bombarded the mutual fund industry with, since early 2009. The last update on the Amfi syllabus was done in 2006, after which a lot has changed on the Indian mutual fund slate.

Professor G Sethu, Sebi officer on special duty & in-charge of NISM, told DNA Money, “Amfi had last updated its syllabus some years ago and it is now time to include recent changes. In the regular case, Amfi itself would have done it, but we will do it now.”
Asked whether the registration for examination will change, Sethu said, “That procedure may change. We have not decided on it. Maybe the registration can come directly from Amfi.”

“We have to incorporate the changes that have taken place when we start looking at the workbook. They (the syllabus committee) will have to make it up to date,” Sethu added without defining the regulatory changes that would be adopted in the new version.

Until December 31, 2009, the Amfi certified 1.98 lakh individuals, of which 1.014 lakh have been registered as mutual fund agents.
It is learnt that NISM will continue to use the test administrators that the Amfi has been utilizing, which include the National Stock Exchange and Bombay Stock Exchange.

“The Amfi workbook covers what matters. However, we would be reviewing it for clarity, focus and current relevance after changes over a period of time. Objectives will reflect these changes.

Generally reviewing the syllabus of any certification is an annual feature, but in case of significant changes we might decide to review it when required,” said an NISM official not willing to be named.

Presently, the NISM conducts certification programmes for intermediaries in currency derivatives, registrar and transfer agents for stocks and registrar and share transfer agents for mutual funds.

The objective of the NISM is developing certification examinations for professionals employed in various segments of the Indian securities markets.

A newsletter of NISM stated early this year, “Of these NISM will shortly be launching Compliance (stock brokers) Certification Examination. NISM is also currently developing the course material for interest rate derivativesexamination.”

Source: http://www.dnaindia.com/money/report_nism-to-conduct-association-of-mutual-funds-in-india-certification-exam-from-june_1364973