Fund managers say some small-sized plans needed

They believe there still exists a niche market for thematic and sectoral funds despite their small size and merging such schemes should be avoided

Though the capital market regulator, Securities and Exchange Board of India (Sebi), has been nudging mutual funds (MFs) to consolidate their schemes, fund houses don’t seem to be rushing for it. Fund managers believe that though some of their schemes have tiny corpuses, they are used by large investors opportunistically.

Says Lalit Nambiar, senior fund manager, UTI Asset Management Co. Ltd: “In developed markets, sector funds capture a lot of mind share and fund allocation; especially from institutional investors and high networth individuals. This could be the way forward in India as well, though it will take maybe two-three years for that to happen.”

Fund managers say that there still exists a niche market for thematic and sector funds despite their small size. The Indian MF industry currently has nearly Rs. 6.4 trillion across around 1,000 schemes. A closer look shows that there are at least 200 schemes with assets under management (AUM) of less than Rs. 250 crore each.

The case for mergers

Typically, a small-sized scheme is a good candidate for mergers, especially if it is not much different in terms of its investment philosophy from its larger peer. Says A. Balasubramanian, chief executive officer, Birla Sun Life Asset Management Co. Ltd: “I check whether there is an overlap of objectives between two or more schemes in terms of portfolio construction and stock selection; if the fund manager is doing the same job or not. In this process, some investors lose out, but ultimately, long-term investors benefit.”

Adds Kalpen Parikh, deputy chief executive officer, IDFC Asset Management Co. Ltd: “Sebi is guiding in the right direction; it talks about clear-cut mandate for one scheme rather than having three-four schemes with the same mandate. So the trend (for rationalization) is rising.”

Once the board of trustees of an AMC zeroes in on the schemes that need to be merged, they approach the regulator for approval. After Sebi approves, the fund houses send letters to the investors of schemes that are to be merged providing them an exit option in case they disagree with the fund house’s decision. After the exit option period gets over, the smaller scheme get merged with the bigger one.

The case for tactical investment

However, fund houses largely avoid merging thematic and sectoral funds into other funds such as a diversified fund.

Take the case of ICICI Prudential Asset Management Co. Ltd. The fund house launched ICICI Prudential FMCG Fund and ICICI Prudential Technology Fund in years 1999 and 2000, respectively.

On average, the corpuses of these funds have been in the range of Rs. 65 crore to Rs. 95 crore for at least the last four years. “These funds are largely used as tactical positions by most investors. But we have an in-house person who looks at these two sectors,” says S. Naren, chief investment officer (equity), ICICI Prudential AMC.

A dedicated analyst in fund management can double up as a fund manager for a scheme that tracks the analyst’s sector.

For instance, in 2007 Goldman Sachs Bank BeES’—an exchange-traded fund that tracks the CNX Banking index—corpus size crossed Rs. 7,000 crore at the start of the year and averaged at least Rs. 5,000 crore, pitching it among India’s largest equity schemes in those few months. In 2010, its average AUM dropped to about Rs. 64 crore; latest data available at Value Research, an MF tracker, shows its size at Rs. 140 crore.

In 2006, foreign institutional investors were big investors in this scheme as many had reportedly reached a ceiling on the direct stock they could own and were looking for alternative means to get exposure to the sector.

Hence, investors chase performance and sector funds feed into that need.

Different voices: Not all agree though. Says Balasubramanian: “I don’t think many people use these funds for strategic purposes. In any case, consolidation is not mandatory, it is only advisable.” Within Birla AMC’s bouquet of funds, there is Birla MNC Fund, a Rs. 250 crore (the fund house has total assets in excess of Rs. 64,000 crore) scheme which the fund house claims is an unique theme.

This fund invests only in multinational companies. Balasubramanian says that there are some investors who prefer to invest in “well-managed multinational companies who have free cash flows or where the international parent is very strong”. For its unique theme, the fund house wants to retain this scheme and asserts that demand is there.

Clearly, merging schemes is not as simple as it sounds. But as long as duplication doesn’t happen and every scheme has a purpose, retaining small-sized schemes is fine.

Source: http://www.livemint.com/2011/11/16201910/Fund-managers-say-some-smalls.html

Headless UTI AMC struggles to retain investors

Fund house sees assets fall by about 7% since U.K. Sinha’s departure even as mutual fund industry’s assets grow.

UTI Asset Management Co. Ltd (UTI AMC), an offshoot of the now defunct Unit Trust of India, the county’s oldest fund house, is seeing a sharp erosion of assets under management (AUM) and investor base as the search continues for a chairman and managing director to replace U.K. Sinha, who took over as chairman of the capital market regulator in mid-February.

A successor for Sinha has proved to be elusive. Since his departure, UTI AMC’s assets have declined by about 7%, to Rs.62,580 crore from Rs.67,189 crore, pulling it one notch down to fifth place in the pecking order of Indian money managers, after HDFC Asset Management Co. Ltd, Reliance Capital Asset Management Ltd, ICICI Prudential Asset Management Co. Ltd and Birla Sun Life Asset Management Co. Ltd.

Between March and October, India’s benchmark equity index Sensex dropped 4% and the mutual fund industry’s assets grew by at least Rs.12,000 crore to Rs.7.12 trillion. Equities account for roughly 40% of the industry’s assets.

UTI AMC has been losing investor accounts in the thousands every month. It lost at least 83,350 folios, or investor accounts, since September 2010 with the overall figure dropping from 99,71,036 to 98,87,686 in September 2011.

During this period, UTI AMC’s peers have significantly augmented their investor base. For instance, HDFC Mutual Fund saw its folio count growing by 4,80,000 to 46,80,610 and Reliance Mutual Fund by 1,80,000 to 74,30,653.

While most mutual funds raised money selling fixed maturity products, or FMPs, in a high interest rate scenario, UTI AMC’s market share has fallen because it could not launch any new fund since mid-February as the Securities and Exchange Board of India, or Sebi, requires a CMD to be in place for this.

In the first 10 months of this year, some 551 schemes have been launched by the industry, garnering Rs.90,212 crore and of these, 503 are FMPs.

Investors prefer debt instruments in a rising interest scenario as they earn reasonably high returns while the equity market is falling. The Reserve Bank of India has raised its policy rate seven times by 2.25 percentage points since January this year. Sensex has lost about 18% since January.

“We have expressed our concerns over UTI AMC due to the absence of a chief,” Sinha told Mint last week.

Along with the erosion in AUM and profit, the fund house is also grappling with rising labour trouble. Besides this, two of its board members—Prithvi Haldea and Anita Ramachandran—have quit.

UTI AMC’s net profit for fiscal 2011 fell by 19.24% to Rs.137.5 crore, from Rs.170.27 crore in fiscal 2010.

The company currently does not have an adequate number of independent directors on its board. Following the resignations of Haldea and Ramachandran, its single largest shareholder, US-based asset management firm T. Rowe Price Global Investment Services Ltd, has two representatives on the board.

P.R. Khanna, Sachit Jain and Pradeep Gupta are the other board members.

Several newspapers and television channels have reported that two senior executives of the firm, who are part of a panel that is overseeing the fund house in the absence of a helmsman, are in the race for the top post at a rival fund. But UTI AMC denied the report, saying none of its senior management members, including members of the committee of executives that is running the fund, has been looking for a change.

A four-member committee of executives, consisting of Jaideep Bhattacharya, chief marketing officer; Imtiyazur Rehman, chief financial officer; Anoop Bhaskar, head of equity; and Amandeep Chopra, head of fixed income business, is running its day-to-day operations.

The crux of the issue is: who will become the next chairman and managing director of UTI AMC?

Before Sinha left for Sebi, UTI AMC’s five shareholders—Life Insurance Corp. of India (LIC), State Bank of India (SBI), Punjab National Bank, Bank of Baroda and T. Rowe Price—converted the human resource and compensation committee of the board into a search committee.

Haldea, Ramchandran and James Sellers Riepe were members of this committee.

The board also appointed executive search firm Egon Zehnder to recommend a suitable candidate for the top job to this panel.

After screening close to three dozen candidates, the firm zeroed in on two names— the managing director and country head of a US asset management firm, and the country head and chief executive of a US insurer, which runs a bouquet of businesses in India.

But the government, which owns the majority stake in the firm indirectly through the three state-owned banks and LIC, backed Jitesh Khosla, an Indian Administrative Service (IAS) officer of the Assam cadre.

Khosla also happens to be the brother of Omita Paul, adviser to finance minister Pranab Mukherjee. Until a few months back, Khosla was an officer on special duty in the Indian Institute of Corporate Affairs.

The banks and LIC stepped in as sponsors in 2002 when Unit Trust of India crumbled under the burden of assured return schemes and was split into two separate entities—UTI AMC and the Special Undertaking of UTI. The four new shareholders picked up stakes in equal proportion and UTI AMC came under regulations of Sebi. Now, they hold 18.5% each and T. Rowe Price 26%.

There has been speculation in the media about Khosla’s appointment.

A person with knowledge of the situation said on condition of anonymity that although the search committee did not find him suitable initially, he will become the next UTI AMC chief as the shareholders have shed their inhibitions about accepting him.

There was speculation, too, that the top post would be split into two with Khosla being appointed chairman and another executive as managing director, but the government is not willing to accept that.

“Some shareholders wanted a person with adequate experience in the industry and not an IAS officer to be appointed as the chief,” said a senior UTI AMC official on condition of anonymity. “T. Rowe Price, too, was concerned about the appointment process, but the government hinted that it could buy out its stake through one of UTI AMC’s existing shareholders.”

In an email response to Mint, T. Rowe Price said: “As we have stated, the process for selecting a new CMD is ongoing, and we continue to have faith in the board of UTI and the board-led search process. We respectfully decline any further comment at this time.”

People with knowledge of developments in UTI AMC said another contentious issue is Khosla’s unwillingness to quit the IAS cadre to take the top job at the fund house. Under the norms, an IAS officer needs to quit the service to join a regulatory entity. But previous UTI chief M. Damodaran, who later headed Sebi, did not quit the IAS. Sinha too quit long after he took over as boss.

Dhirendra Kumar, CEO of Value Research Online Ltd, a Delhi-based mutual fund tracker, criticized the idea of appointing an IAS officer as the chief of a fund house where a foreign entity is the single biggest stakeholder.

“There are multiple issues. A big loss for the fund house over the past eight-nine months is its inability to launch FMPs which is the flavour of the season,” Kumar added.

Khosla is likely to be appointed CEO after the company’s board meets later this month, said two persons with direct knowledge of the matter.

“We have written to the shareholders that having a CMD immediately is most important at the moment. We have conveyed our concerns to the shareholders. We have requested them to reply early and they will do it soon,” said one of the directors on the board of UTI AMC who did not want to be named.

If the shareholders want to reopen the selection process, there will be further delays, leading to demoralization of UTI employees and loss of business.

Three people familiar with UTI AMC’s functions—two of them are employees—said the fund house has been plagued by multiple issues since the split of the erstwhile Unit Trust of India.

The fund house planned an initial public offering, or IPO, in 2008 but the plan was scrapped. They (the three people mentioned above) also alleged that the firm has violated norms by not mentioning employees stock option, or ESOP, schemes in its audited balance sheets.

In the IPO prospectus filed with Sebi, UTI AMC mentioned ESOPs.

The scheme was approved by the shareholders in the general meetings in 2007 and the company has since granted stock options to its employees, the prospectus said.

But the company’s financial statements, auditor’s reports and balance sheets do not mention the status of ESOPs.

Going by the guidance note on accounting for employee share-based payments of Institute of Chartered Accountants in India, it is mandatory for every company to disclose the status of ESOPs in such reports.

A spokesperson for UTI AMC declined to comment on the issue.

The money manager’s trade union has been raising uncomfortable questions about its recruitment policies and selective pay hikes and promotions and opaque performance appraisal process. UTI declined comment on these aspects too.

In 2009, T. Rowe Price bought a 26% stake in UTI AMC for $140 million (around Rs.652 crore), valuing the fund house at around Rs.2,500 crore. According to UTI AMC officials, SBI wanted to buy the stake and was willing to offer a better price, but management was not willing to hand over the AMC to one of its existing promoters. The officials didn’t want to be named.

The fall in UTI AMC’s AUM and investor folio count will lower its valuation, but the four sponsors will not be hugely affected—they have their own fund houses that stand to gain from UTI AMC’s loss. Besides, they have partially recovered their investment in UTI.

In 2003-04, the four sponsor-shareholders bought equal stakes in the fund house for nearly Rs.1,300 crore. For selling a 6.25% stake to T. Rowe Price each shareholder received Rs.163 crore, double what they had paid (Rs. 81.25 crore) when they took over as sponsors of UTI AMC in 2003-04.

Management has been trying to bolster morale at the fund house and woo new investors through initiatives like Swatantra but the void at the top has for long paralyzed the firm.

Swatantra is an initiative for creating awareness about the concepts of financial planning and benefits of investing in mutual funds.

All UTI AMC’s campaigns have a common punch line— Kisne sikhai India ko investment ki bhasha? (Who taught India the language of investment?).

Going by the steady erosion of assets and investor base, UTI AMC’s boast doesn’t seem to be impressing customers.

Source: http://www.livemint.com/2011/11/16220900/Headless-UTI-AMC-struggles-to.html?atype=tp

Can other asset classes outperform the equity market over the long haul?

The volatility in equities, both local and global, has prompted many investors to exit equities and shift to other asset classes such as gold and commodities. But is this a desirable shift? Can other asset classes outperform the equity market over the long haul?

In this edition of the ET Investor's Guide Quarterly Mutual Fund Tracker, our panel of experts provides a perspective on the state of the market and their views on other asset classes, in interviews with ET.

QUESTIONS
Q1: Where is the Indian equity market headed given the current global uncertainties?

Q2: How will equity investments fare as an asset class?

Q3: How will the global equity market perform?

Q4: Will gold as an asset class outperform?

Q5: Will real estate investments pay off?

Q6: Is commodity investment a sensible option?

Q7: How much should an investor set aside for personal investment?

ANSWERS

SANDESH KIRKIRE, Chief Executive Officer, Kotak Mahindra Asset Management

1. We have seen these similar market levels in 2007 last quarter. But if you see the valuations, the market is much cheaper today. The domestic consumption part of the economy is doing well. What, however, is not doing well is domestic investment, especially in the infrastructure space.

And a lot of reasons can be blamed for it - policy paralysis, high interest rates resulting in corporate India going slow with projects etc. But from a retail investors' perspective, these are the times one should be looking at for investing for a long period.

2. Buying equity means buying ownership of the company and for an owner shortterm hiccups should not be a great botheration. If investors look at the performance of systematic investing in equity MFs over 8-10 year period, huge wealth has been created. Investors should look at that kind of a time frame. If you do not have that kind of an investment horizon, you should not be looking at equity.

3. One needs to select a right market to invest. Developed markets struggle to outperform the emerging ones. India is one of the fastest-growing economies. So I guess majority of investment should be centred here. But some exposure can be taken in the international markets.

4. Gold as a commodity has no use other than hedging. Unlike other commodities, it has no commercial usage. One cannot put a lot of money in gold but some investment is desired as gold is a hedge to global financial markets.

5. Real Estate is not accessable to a retail investor. You have real estate funds that are not retail in nature. As far as physical purchase is concerned, it is difficult to transact in property. I am not sure if real estate is a viable investment option for a retail investor. If one is buying for capital appreciation, firstly it is difficult to liquidate and secondly this asset class may not see growth for a long time.

6. Commodities are purely leverage. When one is buying commodities, one is buying future. The impact on correction is massive. It's like borrowing money to play in the market. I don't think a retail investor should even think about it. Commodity prices are influenced by something happening in some part of the globe. To illustrate, oil demand has gone up 3% from October 2008 till date but oil prices are up 300%. This financialisation of commodities market is harmful.

7. About 50-60% of my portfolio is allocated to Indian equities while 35-40% is in fixed income products that include bank deposits. Investment in gold would be around 5%.

SHANKARAN NAREN, Chief Investment Officer, ICICI Prudential Asset Management

1. The market will be volatile due to the events in Europe. As far as the domestic economy is concerned, the monsoon has been the single biggest positive phenomenon, which has helped agricultural production. But high crude oil prices are clearly a negative for the economy. The direct tax collections have also been disappointing. As far as inflation is concerned, our guess is that the worst is over and the rates should move southwards by March 12.

2. Valuations are pretty attractive in the domestic market today. This is a good opportunity for investor to increase their allocation to equity systematically though SIPs and STPs. Overall investment trend in India shows that Indian investors are grossly under invested in equities vis-a-vis other asset classes.

3. In a volatile scenario, the more number of asset classes one has diversified the finances into, the better. Certainly, one should allocate investment in both domestic as well as international markets. This will give you a different pay off.

4. Gold is an asset class, which does well when global economies get into trouble and poorly when globally economies are fairing better. Although it is not a very new asset class for Indians, a view on this asset, for investment allocation is not very easy.

5. Real estate as an asset class is for the affluent. The prices are off the roof not only in the metros but also in the other smaller cities making this asset out of bound for most investors. My guess is that retail investors should look at equities as an investment avenue instead.

Having not delivered in the past four years, valuations in the equity market have become quite attractive. Alternatively, they can also look at fixed income instruments, at least till the time the interest rates begin to cool off.

6. It is difficult to comment on commodities as a pure asset class though we do invest in stocks of companies related to commodities.

7. Equity, both domestic and international, form the core of my investment portfolio followed by fixed income products. I do not invest in real estate and gold. Moreover, being unsure of commodities as an asset class, I have kept myself far away from it.

ASHU SUYASH, Country Head & Managing Director, India, Fidelity Worldwide Investments
1. The markets will be range bound for a while. But what is important here is that we do not anticipate any 2008 like downfall and this gives a lot of opportunities to the investors to invest provided they can stomach the volatility.

2. Clearly you cannot expect 60-70% kind of returns that you had after the recovery, but if you had to look at beating the inflation, which itself is 9%, no guaranteed fixed return product adjusted for tax is going to give a positive upside. Taking that into account, the mindset needs to take on board certain risk. And if one is ready to take on board this risk and volatility, equities are still appealing.

3. You cannot put everything in India nor all in the international market. Last year India was among one of the best performing markets, today it is among one of the worst performers. FIIs are optimistic on emerging markets and not only India. India's economic growth rates are very high today but the base is small compared to the US. Developed economies with large base and slow growth rate are not as volatile as we are. International equities can thus be considered for diversification.

4. Today everybody is willing to invest in gold without giving a thought that how soon are we going to see a similar rise. Gold deserves some allocation but one cannot go overboard investing in gold. While gold has outperformed, it has not outperformed equities over a longer haul. Investment in gold is a flight to safety and not to generate wealth.

5. Real estate for me is the necessity to own a house. Beyond that, I think there is nothing like mark to market in real estate because it is one of the most opaque markets and very difficult to liquidate in times of need. So, the big gains that we see on property will be of no use if one really needs the money but is unable to sell the property.

Unfortunately there are not enough liquid financial asset classes linked to real estate. So while real estate does deserve merit in the overall net worth of the investor, but beyond that I would personally worry if I had to put my retirement money in a house.

6. I doubt if retail investors in our country really understands commodity as an asset class. One should not invest in something one is unsure about and where you neither have historical data nor forecasts.

7. I am predominantly a mutual fund person. The largest allocation of my portfolio goes to equity mutual funds, including some offshore products available in India. For fixed income, I have a roughly even allocation to cash funds and bank deposits and a small percentage allocated to gold.

 NAVNEET MUNOT, Chief Investment Officer, SBI Asset Management

1. The equity market is expected to remain volatile on account of the events in the euro zone as well as the macro economic headwinds in the domestic market. However, while markets will continue to be range-bound, the valuations currently are fairly attractive for longterm investment point of view.

2. Given the kind of volatility, overall allocation to equities has gone down over the past couple of months in favour of other asset classes like gold, real estate and fixed income. Investors, however, should use the current volatility to their advantage and build their equity portfolios, as valuations are extremely attractive.

3. For retail investors, given the longterm opportunity in India, the focus should be domestic market. However, high net worth individuals, who have a larger portfolio and need to diversify to different geographies can invest 5-10% of their portfolio in international equity market.

4. It would be foolish to look at Gold as an investment option for absolute returns now since it has seen a lot of run-up already. However, one may use it as a hedge in their portfolio against any major turmoil in the capital market. So in my view, an allocation of 4-8% should more than suffice.

5. It's difficult to generalise on investment in real estate. It depends on many parameters like the location of the property. Moreover, liquidity is always an issue with this asset class. Notwithstanding the fact that real estate has witnessed a lot of capital appreciation over the past few years, it is nevertheless a difficult and inconvenient investment option.

6. Commodity as an asset class is a good investment. However, being cyclical in nature, it makes sense for a retail investor to invest only if he or she closely tracks its movement. Another issue with investing in commodities is the absence of easy accessibility. Except for Gold ETFs, we do not have good vehicles to facilitate transaction in commodities.

7. Nearly 50% of my savings go to equities and a major chunk of the rest to fixed-income products. Gold is only for hedging and I allocate roughly 2-4% to this asset class.

Source: http://economictimes.indiatimes.com/articleshow/10706341.cms?prtpage=1

Uniform know-your-customer likely for entire financial sector

Soon, you may be able to buy mutual fund units, shares, insurance policies, bank deposits and other such financial products with a single Know Your Customer (KYC) compliance.

Financial Intelligence Unit-India (FIU-Ind), the national agency monitoring suspect financial transactions, has initiated discussions with different financial sector regulators to build a common database, which could be utilised by all financial services agencies.

On the sidelines of a conference, P K Tiwari, director, FIU-India, said: “The recent move by the capital market regulator, providing a common KYC for all securities market products, is a good initiative. It should be expanded across all other segments of the market.”

At present, each sectoral regulators -- the Securities and Exchange Board of India (Sebi), Insurance Regulatory and Development Authority, the Reserve Bank of India, Pension Funds Regulatory and Development Authority and the Forward Markets Commission have different KYC requirements. This means users are now required to fill in numerous columns in multiple forms every time they buy a new product.

"How many cards am I supposed to carry? In countries like Hong Kong, there is only one. It serves all the different purposes. But here we have PAN, TIN and UID. Each agency wants to promote its own product as the valid proof, creating duplication. If this could be avoided, it is welcome," said a chief compliance officer of a public sector bank.

Also, the data is collected and stored separately, thereby not giving a complete picture of a client's financial history to the intermediaries. This affects the quality of suspicious transactions' reports sent by these entities to the FIU.

“If there is a common repository, the principal officers would be able to access and check the client’s transactions in other regulatory domains. This will enable us to form and relay a more informed opinion to FIU,” said John Mathews, senior vice-president and head of client services, HDFC AMC. He said the system introduced by Sebi, to take effect from January 1, would be a good model.

In July, Sebi said the initial KYC would be undertaken only once for capital market products like mutual funds, shares, etc. It proposed a mechanism wherein one or more regulated KYC Registration Agency (KRA) would undertake a KYC exercise at the stage of account opening for all clients.

The benefits of a KRA system include the execution of a single and uniform KYC procedure across the securities market, saving of record-keeping space, a centralised storage and dissemination of data. Specific criteria and rules to identify 'beneficial ownership' is being worked out jointly by Sebi and a committee set up by the finance ministry.

It will also help in saving time and burden of procedures for clients, by undertaking the KYC procedure of identification only once, subject to periodic update.

This common KYC database will help the different regulators and intermediaries monitor suspicious transactions and terrorist financing more efficiently, experts said. However, there are some practical difficulties. Vikas Tandon, director-anti money laundering, South Asia, Citibank, said the financial inclusion objective of the government should also be kept in mind. "In capital markets, the PAN (income tax identification) has been accepted as the universal proof and made mandatory. However, in other areas this may not be possible. For example, banks have the obligation of financial inclusion. Such differences need to be addressed."

Indian financial institutions are expected to spend $1 billion (Rs 4,900 crore) in the next few years to strengthen the systems and processes for anti-money laundering measures. According to a study by the United Nations Office on Drugs and Crime, the estimated money laundering flow globally is close to $1.6 trillion, about 2.7 per cent of global GDP.

Though there is no specific data available for India, experts estimate the amount of money laundering to be one to two per cent of domestic GDP. "There are high levels of suspicious transactions. India is now doing what Singapore and Malaysia had done a few years before in implementing strong AML measures," said Mr Ian Selbie, solutions programme director for the Asia-Pacific at Unisys, a firm specialising in anti-money laundering and anti-fraud measures.

The financial industry will have to spend close to $100 million in installing the necessary software and together with training and other process, the required expenditure will be at least $1 billion.

Source: http://www.business-standard.com/india/news/uniform-know-your-customer-likely-for-entire-financial-sector/454911/