Energy sector may take few more years to deliver

Equity markets go through extremely good and weak periods. It's based on what point in time you set the valuation. We are in an extremely challenging local environment and that has impacted the performance of key companies. SATISH RAMANATHAN, HEAD, EQUITIES, SUNDARAM MUTUAL FUND

Managing equity in uncertain times is a challenge for any fund manager. In an interview with Business Line Mr Satish Ramanathan, Head of Equities, Sundaram Mutual Fund, spoke about the underperforming sectors and about the performance of Sundaram funds that have exposure to these sectors.

Excerpts from the interview:

Infrastructure based funds have given very poor returns. Is it advisable for investors to move out of such funds? Or should AMCs dilute the theme and make it more broad-based?

The performance of infrastructure funds has been disappointing over the past one year. The key learning is that infrastructure is not just about constructing projects. It is also not about taking up several projects and over-stretching yourself. It's about viable business with some cash-flow and investments.

The key takeaway for us is to invest in more mature companies like NTPC or GAIL or ONGC. It may be better to invest in slightly mature companies which have gone through the initial learning cycle. Going ahead, many of the funds and fund houses will not replicate the strategy they did in their previous tenure. They may back the large and stable companies than investing in smaller companies for growth purpose. So all this means that the rate of appreciation will come down and equally the volatility of the portfolio.

If you ask me whether infrastructure as theme is viable or not, the answer is it is very viable, provided you are selective. The second phase we are talking about is selectivity.

You should hold the right companies rather than looking at the sector. So, the first leg was about sectors but the second phase is about companies.

Investors buy theme funds for high growth. If you start buying only large-cap stocks, then the purpose may be defeated?

I did not imply that we will be looking only at large-cap companies. It's about selecting the right companies for the portfolio.

So if you have a company that is conservative and have profitable projects, we would prefer those instead of companies that take on number of unviable projects. It is about selecting the right companies and the right set of business models rather than having high-growth companies only for growth prospects.

So, from an investor's perspective since they have taken the conscious risk of investing in a theme fund or sector fund, unless their risk perception has changed, they should continue in the fund.

Schemes that invest in large cap stocks are now struggling to reward investors. Is it due to high valuations?

Equity markets go through extremely good and weak periods. It's based on what point in time you set the valuation.

Needless to say, we are in extremely challenging local environment and that had impacted the performance of key companies. Second point is that our political stability is also questioned and investor's sentiment is also low.

Retail participation has been very low for several years now and domestic inflows into equity are also low. The inflows are coming only through FIIs and they can be volatile. You also have a situation where the interest rate offered is at 10-10.5 per cent and it will dissuade any risk-taking.

Why should any investor walk in and invest in equity with all these risks when you can get assured return for 3-4 years. That is the key deterrent as we stand today. When the interest rate eases and comes down I am sure the risk appetite will come back into the market albeit slowly and money would move into equity market.

For how many quarters do you anticipate the Indian markets will be under pressure due to macro-economic concerns, domestic and global?

I expect weakness in the Indian markets to continue for next 6-12 months. But most of the weakness is internally created. On reversing some of the issues we can move forward quicker than anticipated.

The key thing we need to bear in the mind is that reduction in subsidies of petrol, fuel and fertilisers will help release of lot money for government's core development activities.

We can be cynical about this, but nevertheless what we need to bear in the mind is that government borrowing for petrol subsidy is going to come down when the fuel prices are passed on to public.

If we are little lucky and the crude oil price falls below $90, losses of oil marketing companies and State Electricity Boards are likely to come down significantly.

With concerns in the banking space which segment — public or private banks — do you expect will perform better?

For the PSU banks incentive to maintain asset quality and growth is not so high given that these banks' Chairmen keep changing often, and their commitment is only for 3-5 years. So the bank's growth and profitability can swing extremely. It is one of the key concerns I have in the PSU space. So it's more individual-centric than system driven.

The same holds good for private banks also, but there exists continuity of the same management and the targets are fairly aligned with the shareholders' expectations. For the long term I would bet on private banks.

Sundaram Energy Fund was launched almost four years ago, but is still below its face value. What should investors do with the fund? Are you planning any mandate change?

We are not planning to change the mandate of the fund. What has happened is very unfortunate. One, many of the projects are getting delayed due to environmental issues. Reliance Industries, which is a major holding in the portfolio, is getting impacted due to its KG D6 issue.

So, what has really happened in the energy space is that the stock prices have fallen 40-50 per cent. Considering that, our performance is satisfactory. It could have been far worse.

We have taken course correction along the way. But are we happy about our performance? Clearly not. I think some of these will reverse over time. Clearly it will take a minimum of one and a half years in terms of projects and delivery, given the significant project delays. Everything has slipped in the past two years. That was one reason why promoters, companies and fund under-delivered.

Source: http://www.thehindubusinessline.com/features/investment-world/mutual-funds/article2482455.ece

BRICS nations offer support to ailing economies via IMF

The Finance Ministers of Brics countries (Brazil, Russia, India, China and South Africa) on Thursday said they are open to the idea of providing support through the International Monetary Fund (IMF) or other financial institutions to address global economic challenges.

"The Brics are open to consider, if necessary, providing support through the IMF or other international financial institutions in order to address the present challenges to global financial stability, depending on individual country circumstances," said a joint communique issued by the Brics finance ministers after their meeting here.

"We underscored the continuing need to maintain international policy coordination and coordination through the G-20," said the communique issued on the sidelines of the annual meeting of the International Monetary Fund and the World Bank.

"We also expressed our concern over the slow pace of quota and governance reforms, including in the area of surveillance in the IMF, and for the need for multilateral development banks to mobilise more resources for low income and developing countries," Indian Finance Minister Pranab Mukherjee told a crowded press conference addressed by the Brics finance ministers at IMF headquarters here.

Responding to questions, Mukherjee said the issue was raised and the consensus was that there should be serious efforts made by Europeans and others of the international community.

Brics will be part of that consensus building and Brics will contribute its own might and its own contribution to resolve the crisis along with G-20 and other members of the international community, the finance minister said.

"We discussed in terms of preparation, in terms of mutual work on those threats which we are facing. We are trying to escape the use of words like aid assistance, so on and so forth. We will work on the issue together with the European Union and between ourselves," the Russian Deputy Finance Minister, Segey Storchak, said.

"We must also move ahead with the comprehensive review of the quota formula by January, 2013, and the completion of the next review of quotas by January, 2014. This is needed to increase the legitimacy and effectiveness of the fund," the communique said.

"We reiterate our support for measures to protect the voice and representation of the IMF's poorest members. We call on the IMF to make its surveillance framework more integrated and evenhanded," it said. While Brics countries recovered quickly from the 2008-09 global financial crisis, some of them are now grappling with inflationary pressures and the growth prospects of all the countries have been dampened by global market instability, the communique said.

Source: http://economictimes.indiatimes.com/news/international-business/brics-nations-offer-support-to-ailing-economies-via-imf/articleshow/10098758.cms

Fund houses in a tizzy over transaction fee

Difficult to ascertain whether a person is a first-time investor or has invested in a mutual fund earlier

Almost a month after the capital market regulator, the Securities and Exchange Board of India (Sebi), allowed mutual fund (MF) distributors to charge a transaction fee from investors, the Indian MF industry faces a dilemma: How to ascertain whether a person is a first-time investor or has been with some MF scheme in the past.

As per a circular issued by Sebi on 22 August, MF distributors will now be able to charge Rs. 100 from existing investors (those that have already invested in some MF scheme earlier) and Rs. 150 from first-time MF investors. Both the charges kick in if the investment is Rs. 10,000 or above per subscription.

Joining the dots

In a meeting between all the registrar and transfer agents (RTAs) held over the phone early Thursday morning, they contemplated on three key issues.

According to data provided by Value Research , an MF tracking firm, there are eight RTAs apart from three fund houses that manage their RTA activities in-house through their sister companies.

Primarily, to make the distributor charge a reality, RTAs will need to share their data among one another. Industry sources indicate that they will mostly engage an outside firm with whom the RTAs would share their data. This firm will then run a check against all the RTAs to ascertain whether the investor has bought an MF scheme before or not. “The firm needs to run a check through the investor’s permanent account number (PAN) across data available with all RTAs,” said an MF’s chief executive officer, who refused to comment saying the issue is still being debated.

However, the confusion arises over investments made before July 2007 when PAN wasn’t compulsory for all. PAN was made compulsory for all MF investments of Rs. 50,000 and above, effective December 2004, and subsequently for all investments, effective July 2007. “So we still have a few investors who had invested in MFs prior to 2007 without submitting their PAN details,” adds a senior official of one of the leading RTAs, on condition of anonymity. He cannot be quoted as he is not the official spokesperson of the firm.

During the Thursday meeting among RTAs, they tentatively decided to refer to other investor details such as email addresses, postal addresses and bank mandates with those provided by investors who would invest henceforth to determine whether the said investor is already present in the database.

“This could also be tricky as bank mandates were also not compulsory once upon a time. Further, the investor would have changed his or her address, so there the problem arises as to how to map the details provided afresh vis-a-vis what’s already there in the system,” said the RTA official we spoke to.

Already the quantum of the distributor charge is a matter of heartburn among many distributors, who claim that the charge is too low. In a recent survey conducted across 755 distributors by Cafe Mutual, a Mumbai-based independent website that disseminate news and information on the Indian MF industry, 73.68% of distributors felt that these transaction charges will not impact the independent financial advisors’ decision to push MFs more aggressively than before.

What the MF industry appears to have decided is to maintain the no-transaction charge as status quo. Distributors will be allowed to “opt out” of accepting transaction charge, an option given by Sebi. Those distributors who wish to subscribe to the transaction charge will need to write to the Association of Mutual Funds in India (Amfi), the MF industry body, separately and Amfi will then pass on this list to all fund houses.

A uniform charge

Coming back to the quandary, another alternative that some fund houses are contemplating is to do away with the Rs. 150 charge for fresh investors and charge just Rs. 100 across investors. “This will eliminate the confusion of having to find out whether the investor has invested for the first time or has invested before,” says another chief executive of a government-owned fund house we spoke to. He too did not want to be quoted as he claims the matter is controversial.

However, not many feel this is a viable option. Says V. Ramesh, deputy chief executive officer, Amfi: “I don’t think eliminating the Rs. 150 charge is an option. If Sebi has come up with Rs. 100 and Rs. 150 charge structure, it will need to be followed.”

The RTA official also said that since Sebi has made this mandatory, the onus is on the RTAs and the industry to find out a solution.

Source: http://www.livemint.com/2011/09/22222024/Fund-houses-in-a-tizzy-over-tr.html?h=B

Is the rupee depreciation affecting your fund NAV?

This week the Indian rupee touched a two-year low against the US dollar. So far this year, the rupee has declined 7.5% against the US dollar; since July, it has declined 7.5%. Traders expect rupee to decline further. Unless you have an export import business or you are a non-resident Indian or a foreign investor in the Indian financial markets, this news may not catch your attention.

But there is a part of your investments, unrelated to the above which may be affected by the sharp decline in rupee. If you invest in mutual funds (MFs) having exposure to international equities, chances are that a portion of their net asset values (NAVs) are being affected by the currency movement.

The currency effect

While taking advantage of currency movement is unlikely to be the main reason for investing in an equity fund that has exposure to international stocks, the fact is any substantial currency movement will affect the fund’s NAV.

This happens because you buy fund units in Indian rupees, but the international stocks that form part of the fund are bought in the local currency of the country. When you invest, your rupee is first converted to dollars and subsequently to the requisite currency of the country where the stock or fund units are bought. The opposite happens if you redeem.

If this was a straightforward rupee to dollar or vice-versa conversion, then a weakening rupee will have a positive impact on the NAV. However, life becomes difficult if the transaction involves a third currency; the rupee must depreciate against the US dollar more than the third currency has depreciated for it to add a positive edge to the overall returns. If on the other hand the third currency has appreciated and the rupee has declined against the dollar then the advantage because of this currency movement on the overall fund returns will be even greater.

So you need to consider the equation with the third currency to assess the overall impact on returns along with the sudden sharp decline in rupee per dollar on funds’ NAVs. Says Jaya Prakash K., head (products), Franklin Templeton Investments India, “Regional/global equity funds investing directly in overseas securities will be affected by the movement of individual currencies, trading and stock prices, rather than rupee’s behaviour against the US dollar alone.”

Other factors

There are other factors involved, the most important being the underlying asset class.

Typically, you would invest in a fund that has exposure to international equities for diversification. Says Laxmi Iyer, head (fixed income and products), Kotak Mahindra Asset Management Co. Ltd, “Investors choose these funds as an option for geographical diversification. Management of these funds is more to take advantage of that aspect and currency is more incidental.”

Many equity funds which have exposure to overseas markets, invest in commodity stocks, emerging market equities and stocks related to gold. The underlying stocks have their own dynamics which dictate return. For example, while gold mining stocks have done well, emerging market equities, particularly Asian equities, have done poorly and this is reflected in the overall returns. Gold funds on the other hand have performed well so the currency effect may not be that much.

In most cases, the effect on returns on account of currency movement is secondary, with the asset class performance being the primary factor. Moreover, there are too many variables to consider and it’s unlikely to be a linear correlation with fund returns.

Source: http://www.livemint.com/2011/09/21231044/Is-the-rupee-depreciation-affe.html?h=B

India corporate bond yields seen range-bound; new deals trickle in

Indian corporate bond yields were little changed in absence of fresh trigger as the market rates align to the federal bond yields after last week's policy rate hike.

India raised interest rates for the 12th time in 18 months and signalled more was to come, confounding expectations that it was coming to the end of its tightening cycle and putting it at odds with global peers focused on reviving weak demand.

"Some deals have started happening but the quantum is not very large as mutual funds and insurance companies are not actively investing because of paucity of funds," a dealer with a mutual fund said.

Activity in the primary market is expected to pick up gradually as the week unfolds, as Indian issuers ascertain the full impact of the monetary policy, and also finalise their fresh fund raising plans at start of a new quarter.

The National Bank for Agriculture and Rural Development ( NABARD) plans to raise at least 4.5 billion rupees through 1-year bond at 9.65 percent, a source with direct knowledge of the deal told Reuters on Wednesday.

India's Housing Development Finance Corp is planning to raise 2.5 billion rupees via placement of 10-year bonds at 9.60 percent with Calyon, a source with knowledge of the deal told Reuters on Wednesday.

The benchmark five-year yields and the 10-year corporate bond were lower 1 basis points at 9.46 percent and 9.47 percent, respectively.

The spread between the five-year corporate bond and government bond was 93.57 basis points from 94.24 basis points on Monday.

The spread between the 10-year corporate bond and government bond was at 94.00 basis points from 94.14 basis points at its previous close.

Total volume in corporate bonds was 14.42 billion rupees compared with 16.40 billion rupees on Tuesday.

Source:  http://economictimes.indiatimes.com/markets/bonds/india-corporate-bond-yields-seen-range-bound-new-deals-trickle-in/articleshow/10066950.cms