IT emerges as second best choice for fund managers

Fund managers are betting big on the information technology (IT) sector. Sharp currency depreciation against the dollar, witnessed in the December quarter, and relatively better macro economic numbers from the US market, have bolstered fund managers’ confidence of buying into the sector from the near-term as well from the long-term perspective.

Securities and Exchange Board of India (Sebi) statistics show for the month ended December 31, allocation of equity assets in software rose by double digits, 10.5 per cent, or Rs 17,871 crore. This made IT stocks fund managers’ second-best choice after banking.

Moreover, during the October-December period when the rupee depreciated 8.4 per cent against the dollar, fund managers increased their exposure in the sector by 200 basis points (one basis point is one-hundredth part of a percentage point).

Sadanand Shetty, senior fund manager (equity) at Taurus Mutual Fund, says, “In the benchmark indices, several IT stocks have a substantial weightage and fund managers did not want to lose out. Rupee depreciation, along with positive macro-economic numbers from the US, made IT stocks a must buy during the December quarter.”

Around two-thirds of IT companies’ revenues come from the US market. Interestingly, during the December quarter, economists had even talked about the rupee reaching as high as 58-60 against the dollar. This also propelled fund managers to go for a buy, the as currency movement could drive companies’ profitability.

However, fund managers say in such an uncertain global situation, their preference would be only with the large-cap IT counters - which have scalable capacity and have the US as the major revenue generator.

For instance, in software major Infosys, large mutual fund equity schemes and including HDFC Top 200, HDFC Equity, ICICI Prudential Dyanamic and Franklin India Bluechip have allocated between six and 10 per cent of their total equity assets.

Kaushik Dani, equity head, Peerless Mutual Fund, says, “There was skepticism till the September quarter about how the situation would pan out globally. But as the US economy started showing a relatively better situation, coupled with our depreciating currency, IT stocks became a natural hedge to overall portfolios. Though volume growth was stable, currency movement added an upside flip.”

Fund managers say despite weaker guidance from Infosys, it’s better to take buy calls in large-cap stocks, as pains in other sectors are deep. “Even with slow growth, IT looks relatively better,” says the chief investment officer of a foreign fund house.

Other fund managers agree. “IT still looks better. Stocks are available at decent valuations,” adds Dani. They add the rupee may continue to be in a weak zone, which will help IT companies. They see counters like Infosys, Tata Consultancy Services, Cognizant, Wipro and HCL scoring over mid-cap IT stocks.

Source: http://www.business-standard.com/india/news/it-emerges-as-second-best-choice-for-fund-managers/462647/

'H1CY12 favourable to pick quality stocks for long-term'

Market participants would rather leave behind the ghost of the past, especially the massacre of 2011, and welcome 2012 with new hopes and aspirations. While investors still stay wary of equity markets, mutual funds are gearing for a fresh start. Like they say, after all, experience does make you wiser!

Moneycontrol.com along with rating agency, Crisil embarks on a journey to uncover MF Superstars across various categories this New Year. Starting the year with focus on largecap funds, Moneycontrol.com spoke with the management of Fidelity India Growth Fund, a nominee to the MF Superstar.

Ashu Suyash, managing director and country head of Fidelity Worldwide Investment highlights the strategies of the open-ended equity fund that has a portfolio of over 50 blue chip stocks.

She says that the market volatility that one sees today should be seen as a time of opportunity rather than a time to stay away from markets or to redeem mutual funds.

According to Suyash, the key performance drivers for 2012 could be a steady improvement in infrastructure spending, progress on goods and services tax (GST), range-bound crude oil prices, and reasonable capital flows.

Below are the questions and answers of the interview. Wait for the video!

Q: Is this a good time to invest lump sum in equity schemes given the sharp correction in share prices over the past few months?

A: We believe in a long-term and disciplined approach to investing. The last few months have witnessed significant volatility over lingering concerns over rising fiscal deficits in the euro zone and the ability of the governments to deal with these. Indian equities too have seen a notable decline due to global headwinds and domestic factors such as sustained inflationary pressures and higher interest rates as well as slowdown in the reforms process. In such scenario, market volatility should be seen as a time of opportunity rather than a time to stay away from markets or to redeem mutual funds. History has shown that panic selling can crystallise losses, which are exacerbated when subsequent rebounds in the market are missed. This is because during volatile periods, markets can swing in both directions; remaining calm and taking a long term view is the key. This can be best achieved through regular investing, or the systematic investment plans, wherein monthly investment amount tends to be low. Longer term investors pay an average price for units over time and this helps beat volatility.

Q: What do you see as the key concerns for the stock market over the next 4-6 months?

A: Growth expectations for India have declined in tandem with the fall in industrial production, high funding costs, and slowing global economic growth.  Nonetheless, a slower growth rate in India will still be considerably in excess of growth achieved in the developed world.  We are hopeful that the policy environment will improve in light of the marked deterioration in the growth outlook, as that has historically acted as catalyst for the government to push through tough reform measures. Meanwhile, inflationary pressures have eased due to the higher base effect and a decline in food prices, although core inflation will continue to present a challenge and any renewed currency depreciation could offset softer commodity prices. This should be followed by monetary policy easing which could be supportive for equities. Amongst key performance drivers that we would look out for in 2012 could be a steady improvement in infrastructure spending, progress on goods and services tax (GST), range-bound crude oil prices, and reasonable capital flows. India's economy is domestic growth oriented which is likely to limit the impact of a slowdown in western economies.

Furthermore, to some extent the policy challenges, high inflation and global risk are already priced into the market. In general corporate balance sheets are healthy and quite a few top quality companies are currently trading at attractive valuations. Many companies are entering 2012 in much better shape than they did the financial crisis of 2008. As always, when economic conditions get tough, strong companies get stronger and our investment team remains focused, despite the macro uncertainty, on picking individually attractive companies from a long term perspective. We are finding some attractive valuations which give us an opportunity to buy long term growth businesses at cheap levels.

Notwithstanding the disappointment on the growth front, over time we expect India to continue to liberalise, offering a longer term supportive environment for the next round of economic expansion. Against this backdrop, the first half of 2012 is expected to present an opportunity to build positions in top quality companies that have a long-term competitive edge, whilst prudently managing portfolio risk. Recent hiccups notwithstanding, long term growth drivers remain intact. Favourable demographics, increasing urbanisation, low household debt and robust growth in domestic consumption are all ongoing favourable trends which increasingly the market has chosen to ignore - thereby offering opportunity.

Q: Will your bottom-up approach to stock picking work in the current scenario where certain sectors themselves are under pressure?

A: The premise of bottom up approach to stock picking is based on focusing on a company's fundamentals, its execution strategy, competitive advantage and quality of management team among others. This approach is the best way to identify a potential stock irrespective of market volatility and whether the sector is beaten down. A strong company will perform well even when conditions get tough. This disciplined approach has helped us both during good and bad times.

Q: Would you suggest that people stay minimum cash as your fund suggests or should investors wait a bit longer to get into equities?

A: As said earlier, investors should adopt a disciplined approach wherein based on their investment goals and risk appetite, amounts can be set aside every month than trying to time the market. Since our equity funds are 'equity' funds and form part of the 'equity' asset allocation from an investor point of view we do not encourage that our Portfolio Managers make big cash calls.

Q: How long do you think before the corporate investment cycle starts picking up?

A: The sovereign debt crisis in Europe has been a dent on business confidence. Added to this, domestic factors such as slowdown in domestic demand, high material prices which hurt margins, lack of policy reforms and volatility in financial markets have hurt the corporate investment cycle. Notwithstanding the unfavorable policy environment, declining inflationary risks coupled with lower interest rates could bode well for business sentiment and a revival in capex cycle.

Source: http://www.moneycontrol.com/news/mf-interview/39h1fy12-favourable-to-pick-quality-stocks-for-long-term39_653263.html

Expect 20% returns from equities in 2012 - Aviral Gupta, equities fund manager, Indiabulls Mutual Fund

Indian stocks could return about 20% in 2012 on the back of lower interest rates, improved reforms and cheap valuations, said Aviral Gupta, equities fund manager at Indiabulls Mutual Fund.

"There's negligible shock-value in the system now. We expect things to improve on both global and domestic fronts going ahead,"" Mr Gupta said.

Mr Gupta expects a slew of policy reforms post the Assembly elections. He expects the government to increase allocation to infrastructure sector and continue with its rural development programme, despite the huge fiscal deficit.

"Government will restart reforms post-election. We expect several infrastructure projects to be commissioned post March this year. The government will continue with its rural development programmes like NREGA... This will support the rural consumption story in a big way," Mr Gupta said.

Mr Gupta does not expect too much of negative news-flows from Europe and US. "Eurozone negative shock-value has come down significantly from last year... Data from US is largely positive. Their big worries - housing and unemployment - seem to be bottoming out already," Mr Gupta said.

Rate cuts and lower inflation numbers will drive up Indian shares in the coming months, Mr Gupta said. Falling commodity prices coupled with low interest rates and increasing demand will help Indian companies to improve their earnings, Mr Gupta said.

Mr Gupta is also comfortable with current stock valuations. The Sensex is currently trading at 11 - 12 times forward earnings multiple - much lower than historical average of 15 - 16 times forward earnings.

According to him, barring telecom and power, which will continue to face strong headwinds, investors can buy frontline companies in any sector. Mr Gupta is bullish on IT, banks, FMCG, pharma and other rate sensitives.

Foreign portfolio investors too, seem to have turned positive on Indian stocks. Strong third quarter results from private lender HDFC Bank and two wheeler makers - Bajaj Auto and Hero MotoCorp - contributed to the upbeat mood, boosted by foreign institutional buying to the tune of Rs 630 crore on Thursday. So far in 2012, these investors have pumped in over $1 billion (Rs 5,023 crore), compared with $385 million of net sales in the whole of 2011.

However, according to a recent survey conducted by Bank of America Merrill Lynch (BofAML), emerging market fund managers continue to remain underweight on India. About 61% of the fund managers polled said they were not comfortable investing in Indian equities. Emerging market fund managers have been underweight on India for 17 consecutive months, the BofAML survey said. Brazil, China, Indonesia, and Russia continued to be consensus 'overweight' among foreign investors.

Source: http://articles.economictimes.indiatimes.com/2012-01-20/news/30647358_1_aviral-gupta-indian-equities-fund-managers

Risk-reward ratio in favour of debt schemes: Saurabh Nanavati

Indian Mutual Fund industry has failed to attract retail investors and situation does not seem to be improving. Despite several efforts from the regulator and the industry body Amfi, fund houses continue to find it hard to bring in retail money. Saurabh Nanavati, chief executive officer, Religare Mutual Fund, talks about fundamental problems plaguing the industry. He says that it's better to have less investors but with right reasons. Edited excerpts from a conversation with Chandan Kishore Kant

Why is the industry unable to attract retail money?
Combination of factors is keeping retail away. We have very low level of financial literacy and this continues to worry in such volatile market conditions. Fundamentally, retail in India has always been taught that one should enter markets at times of initial public offers for equities or new fund offers in mutual funds at Rs 10 per unit or share and on listing, sell it. That's not right. Investors should fundamentally buy into a stock or a mutual fund because of the past track record, if convinced about the theme. Secondly, stay invested for a longer period. If one keeps doing ins and outs, I don’t think it is a good strategy to be adopted.

When do you expect retail investors to come back to equities?
There is a big difference from investors' perspective. In 2008, deposit rates were five-six per cent and people yet came back to the equity markets in 2009 for a short span. However, right now, coming to equities is not in favour of retail. Unless, fixed deposit rates come at least below eight per cent - a trigger point, it's hard to see retail coming back to equities. Safe return of 8-8.5 per cent is a big psychologically benchmark in retail investors' mind-set.

What went wrong? Are lessons learnt now?
Money is there with people, no doubt about it. However, statistics show that fresh money is fundamentally received through new launches. In other competitive financial products too, half of the folios or policies are getting lapsed after three years. Why? Because they have been wrongly sold. These are serious issues. The regulator is playing its role and we as a industry need to play our role. What I believe as an asset manager is, it's better to have two investors coming in for a right reason than 10 investors coming for a wrong reason. Else, we are not building up a good base. Unfortunately, we have never spoken about it for past years in our markets, both equity and mutual funds. We will go through these years of pain, which is a transition phase, before we see brighter future and investors come with a right reason.

Investors in equity mutual funds are not making money. Is debt category getting dominant?
True. Even, people investing through SIPs for last five years are making negative returns. This way, retail investors will not have confidence. On the other hand, with 10 per cent return in banks' fixed deposits, why would he take risk by investing in equities? In current scenario, equities may promise 12 per cent positive returns as well as negative returns too. The risk-reward-ratio is clearly in favour of debt schemes and FDs, that’s why last two year’s retail has been systematically moving towards debt. Clearly, debt is a no brainer for the Indian investors at this point of time.

How do you see this year panning out for the mutual fund industry?
Next one year is going to be tough. Last two months were probably the worst months and the trend is yet on the decline. It definitely looks like this slowdown will continue for at least next six months, both from the markets' perspective as well as clients' perspective. We are grappling with lot of regulatory changes, which have come up in a short span of time. This has thrown the industry's and the distributors’ business model out of gear in terms of acclimatising to new norms. Most important is what course of action our government takes on policy decisions.

Source: http://www.business-standard.com/india/news/risk-reward-ratio-in-favourdebt-schemes-saurabh-nanavati/462239/

Silence is a virtue for MFs

Like the average Indian citizen, mutual funds have a view on everything but do not take the effort to make it count by voting. The abysmal voting record of Rs 7 lakh crore Indian mutual fund industry has come to the fore in an analysis by Institutional Investors Advisory Services (IIAS).

An analysis of voting pattern of the 41 asset management companies (AMCs) whose voting patterns were reviewed, 11 have either completely abstained or not voted on any shareholder resolution in FY11. Of the remaining 30 AMCs, several voted only on a sub-set of resolutions put forth to shareholders for approval.

Of around 3,600 annual/ extra-ordinary general meetings (AGM/EGM)/ Postal ballots/ Court convened meetings voted by the mutual fund houses, over 61 per cent of the time fund houses abstained votes, 38 per cent of the time they voted ‘for’ the proposals put up, and the remainder (less than one per cent of the votes cast) were ‘against’ the proposals put forth for shareholder approvals.

UTI Asset Management, HDFC Asset Management and Morgan Stanley are the only fund houses to have voted against in the AGM. In EGM and postal ballots, foreign fund houses Fidelity and Franklin Templeton were active with eight votes each against key resolutions.

“A welcome beginning has been made,” said Amit Tandon, managing director, IIAS. “While funds have begun to vote, they now need to add more muscle to their voting.” he added.

IIAS found fund houses had voted for or abstained from voting even in a number of shareholder-unfriendly resolutions. For example, most fund houses abstained or voted for in the resolution on the proposed sale of Piramal Healthcare’s domestic formulations business to Abbot.

According to IIAS, “The slump sale instead of a demerger, restricted the cash pile to Piramal while increasing tax burden.” Similarly, fund houses did not demonstrate their concerns through votes in remuneration of promoters of Sun TV, issue of warrants to a promoter entity of Apollo Hospitals and reappointment of auditors in Hindalco, the agency said.

The AMCs cite a number of reasons for voting with the management. Many are of the opinion that they do not have the required percentage of votes to have a resolution against the management to be passed. Some are also of the opinion that this might limit their access to the corporate’s management and other legitimate requests for information required for investment analysis, thereby adversely affecting their business relationships with corporates.

“We are not arguing that investors become activist. But, it is important for investors to clearly spell out where they stand on issues, be it executive compensation, dilution, unbridled borrowings, mergers with unlisted companies, and a host of issues where the interests of institutional investors diverges from that of ‘promoter shareholders’,” the IIAS report said.

According to the agency, the most effective way of conveying this is not a one-on-one conversation but a shareholder meeting. “After all, the investors owe it to themselves that their voice be heard. But the investors also have a fiduciary responsibility, which will be fulfilled only if their vote is counted,” it said.

Source: http://www.business-standard.com/india/news/silence-isvirtue-for-mfs/462236/