Mutual funds in selling mode

Mutual funds (MFs) sold shares worth Rs 112.80 crore on Thursday, 2 February 2012, compared with inflow of Rs 184.50 crore on Wednesday, 1 February 2012.

The net outflow of Rs 112.80 crore on 2 February 2012 was a result of gross purchases Rs 802.70 crore and gross sales Rs 915.50 crore. The BSE Sensex had risen 131.27 points, or 0.76% to settle at 17,431.85 on that day, its highest closing level since 8 November 2011.

Mutual funds have bought shares worth Rs 71.70 crore in February 2012 so far (till 2 February 2012). They had sold shares worth Rs 1858.40 crore in January 2012.

Source: http://www.adityabirlamoney.com/news/533171/10/22,24/Mutual-Funds-Reports/Mutual-funds-in-selling-mode

Fund managers suffer loss; stocks stage a surprise rally

The surprise stock market bounce in January caught many fund managers napping, resulting in various equity schemes underperforming their benchmarks during the month. These fund managers had stocked up on shares of consumer goods, pharma and auto companies - the winners in 2011 - in their portfolios, but the new year rally was led by a fresh lot, including infrastructure and metals, which were mostly laggards last year.

Their inability to shuffle their portfolios in a short period caused their schemes to underperform the benchmarks. Out of the 275-odd diversified equity funds, 155 have underperformed key indices over the past one month.

"Most fund managers were caught off guard... The rally happened purely on the back of strong foreign portfolio inflows, which continued to come in throughout January," said PVK Mohan, equities head at Principal Mutual Fund, adding, "Many funds could have underperformed because of their exposure to defensive stocks." Foreign institutional investors have invested over Rs 13,000 crore in Indian stocks this year.

Though one month is a short time to gauge a fund's performance, analysts said fund managers had erred in committing too much to the gainers of 2011, especially when valuations were expensive. The situation revived memories of March 2009 when the start of the rally caught most fund managers unawares. Then, many of them were sitting on cash but were unwilling to invest as they were not sure whether the worst was over.

While the 30-share Sensex has gained over 12% in January, sectoral indices like BSE Bankex, BSE Metal and BSE Realty have gained 25-28% last month. ET Construction index - which includes top infrastructure and engineering companies - has gained over 35% in January alone, while FMCG firms have gained just about 1- 3%.

A senior official of a bank-sponsored mutual fund said most fund managers started aligning their portfolios after the first week of January, fearing a repeat of March 2009. It takes about 8-12 trading sessions for a fund manager to align a portfolio of 40 stocks.

Money managers take more time to align larger portfolios. It takes about 17-21 days for a fund manager to align a portfolio of 80 stocks, say analysts.

"We're aligning our portfolios to changing market conditions. We've increased our exposure to interest rate sensitive sectors. We'll be able to put up a better performance this year," said Navneet Munot, chief investment officer, SBI Mutual Fund.

PVK Mohan of Principal Mutual is also reworking his portfolio, making minor changes in weight ages and allocations. "We're not moving out of defensives totally... We're not out of the woods completely. We'll have to wait for election and then Budget before taking a directional call," he said.

Source: http://economictimes.indiatimes.com/markets/analysis/fund-managers-miss-bus-as-stocks-stage-a-surprise-rally/articleshow/11734075.cms

Sensex to touch 20,000-mark by June: Survey

The stock market barometer Sensex could rise to the 20,000 points-mark by June, up from the present 17,000-level, despite subdued business confidence, a survey by JP Morgan Asset Management has said.

"Indian investors and advisors appear unaffected by the recent volatility in stock markets. Forty-eight per cent of retail investors and 76 per cent of advisors expect the benchmark index to trade between 17,000 and 20,000 in June, 2012," JP Morgan Asset Management said in a report titled, 'Investor Confidence Index'.

JP Morgan AMC said investment by retail investors in mutual funds has revived significantly since the last quarter. The index showed no signs of revival in the current quarter and remained almost flat between July and December, 2011.

"Although the overall investment sentiment currently appears subdued, the optimism about global and Indian economic growth is improving marginally. Most interestingly, corporate, advisors and HNIs are now more optimistic than they were in July, 2011, even as the mass of retail investors have become more pessimistic," the survey added.

The survey conducted among 1,635 retail investors, 50 corporate treasuries and 282 advisors said retail investment activity in mutual funds has picked up by 9 percentage points vis-a-vis the previous quarter to reach 70 per cent, while in stocks, it fell by 6 percentage points.

Risk-averse investors have shown less preference for stocks (down from 70 per cent in March, 2011, to 56 per cent in December), but increased preference for mutual funds (from 44 per cent to 68 per cent), according to the survey.

In addition, rising gold prices appear to have affected investment activity in gold. As a result, the percentage of investors investing in this asset class has fallen by 19 percentage points since December, 2010.

"The weak investment sentiment is probably a reflection of volatility surrounding the country's macroeconomic environment. "The Sensex downslide, rupee depreciation, a ballooning fiscal deficit, high inflation rates, combined with rising global uncertainty, triggered by deepening of the euro zone crisis, have hurt the investment sentiment," JP Morgan Asset Management MD and CEO Nandkumar Surti said.

The index published jointly by JP Morgan and ValueNotes, was conducted in December across Mumbai, the Delhi/NCR, Kolkata, Chennai, Ahmedabad, Bangalore, Pune and Hyderabad. The survey focused on business and investment outlook for the following six months.

Source: http://economictimes.indiatimes.com/markets/analysis/sensex-to-touch-20000-mark-by-june-survey/articleshow/11716200.cms

Fidelity looks at India AMC business exit

The increasing cost of acquiring assets due to a tight regulatory environment and six years without any profits have forced one of the biggest names in asset management to look for exit options in India.

Fidelity Investments is in talks to sell its domestic mutual fund business in the country. Fidelity managed assets of Rs 8,800 crore as of end-December 2011, according to data from the Association of Mutual Funds in India, making it the 15th largest company in India’s competitive asset management business.

Fidelity’s India fund management arm, launched in 2004, circulated a ‘request for proposal’ to companies interested in buying the asset last week, according to people familiar with the development.

When contacted, a Fidelity spokesperson said, “Fidelity Worldwide Investment is conducting a strategic review of its onshore asset management business in India; as with strategic reviews, all options are being covered. The review is underway and it is too preliminary to discuss any outcome.” 

“India is probably the only country, where there is no entry load. In other countries, even management fee is higher. As a global organisation, Fidelity will look at the return on every dollar invested. If the return on their dollar is better elsewhere, they will do that,” said a local asset manager.

In FY11, Fidelity was the second largest loss-making fund house after Axis Mutual Fund. It booked a loss of Rs 62.39 crore in FY11 against a loss of Rs 27.56 crore in the previous financial year. Recently, Nippon Life had valued Reliance Mutual Fund at 6.6 per cent of its assets under management.

Analysts say despite the losses, Fidelity has a good chance of getting a similar or even better valuation of its assets, as 70 per cent of its corpus is in equity funds. The flagship, Fidelity Equity Fund, managed Rs 3,370 crore as of December 2011. The Special Situations Fund managed Rs 795 crore. Fidelity India Value Fund and Fidelity Growth Fund are other major equity schemes.

Though Fidelity has a decent bouquet of schemes in both debt and equity, it has not convincingly crossed the Rs 10,000-crore mark of assets under management, considered a ballpark breakeven point for the industry.

A sharp fall in the equity markets and recent regulatory changes, such as the removal of the entry load, or a commission charged by a mutual fund distributor for selling a product, have made the going difficult. Many fund houses also booked heavy losses following the mark-to-market rules on debt instruments in FY11.

The news has taken the industry by surprise, as only smaller names were seen susceptible to exits. "If Fidelity ends up selling its India business, it would be an indication of just how difficult it is to manage money in India," said the chief marketing officer (CMO) of a leading fund house.

The CMO of a mid-sized fund house said, "We cannot rule out the possibility of more consolidation in the industry, given the cost pressure and increasing competition over the past few years."

The company's average assets under management have fallen slightly from Rs 9,100 crore at the beginning of last year, data showed, with the country's benchmark stock market index posting a drop of nearly 25 per cent in 2011. Lured by the long-term prospects of Asia's third largest economy, overseas fund managers, such as the US-based T Rowe Price Group Inc and Nippon, have been buying into Indian money managers. While T Rowe bought 26 per cent in UTI MF last year, earlier this month, Nippon Life bought a similar stake in Reliance Mutual Fund.

Dhruva Chatterji, senior analyst at Morningstar India, said, "Fidelity was considered a very established player in India. If the story turns out to be true (that Fidelity is on the block), it would be a worrying signal for the industry."

Source: http://business-standard.com/india/news/fidelity-looks-at-india-amc-business-exit/463299/

Placing Small Bets

Small-cap funds help spread risk, yet make gains.

If you had invested Rs 1 lakh in Crompton Greaves on 1 January 2002, your money would have grown to Rs 65 lakh by now. Back then, Crompton Greaves was a small capital goods company with a market capitalisation, or market cap, of Rs 115 crore and a stock price of Rs 1.80.

It has been one of the biggest wealth creators in the Indian stock market and given 52 per cent annualised return over the last 10 years. The company had a market cap of Rs 8,300 crore on 28 November 2011 while its stock was trading at Rs 123.

On 2 January 2002, Sesa Goa had a market cap of Rs 99 crore and its stock was at Rs 1.28. On 28 November 2011, the stock was trading at Rs 174 and the company's market cap was Rs 16,000 crore.

Scores of once small companies have over the years grown big, giving investors a 30-50 per cent annual return over 10-15 years and creating fortunes for investors. However, more often than not, we find ourselves at the wrong side of the fence and regret our inability to spot such stocks on time.

The number of small-cap stocks is large and finding a quality stock that can give high returns over a long period is tough even for equity analysts. One reason is that such stocks usually have a short history and are not tracked by many analysts and brokerage houses. Then there are risks such as low liquidity, governance concerns and competition from larger players.

If these factors scare you but you still want to gain from the upside potential of such stocks, small-cap mutual fund schemes are an ideal choice for you.

A typical small-cap fund invests over 50 per cent money in stocks of small companies. However, the fund manager can lower the exposure depending on market conditions. Mid-cap stocks form 25-35 per cent of the portfolio. A small portion, usually less than 10 per cent, is invested in large-cap stocks. Mutual fund schemes that invest a large part of their money in small-cap stocks also carry a higher risk.

RISK-RETURN TRADEOFF
It's a challenge for the fund manager to build a portfolio of quality small-cap stocks as the number of such companies listed on exchanges is huge. Also, many of them are little-known.

"The number of small companies listed on Indian stock exchanges may run into a few hundred. Out of this, 30-50 companies can be selected for investment. The challenge is that many of them may be under-researched by research/brokerage houses. One may have to rely extensively on primary research," says Dhiraj Sachdev, senior vice president and fund manager, equities, HSBC Asset Management India.

Another risk is low volumes, which makes these stocks illiquid. This means the fund manager may not be able to sell the shares as and when he wants. Small-cap funds are thus prone to liquidity risk. For example, the average number of daily traded shares in the CNX Small Cap index was 75 million compared to CNX Nifty's 141 million during the year ended 30 November 2011. CNX Nifty comprises large-cap stocks. Anyone investing in small-cap funds, therefore, should have a long investment horizon.

Small-cap companies see sudden rise and fall in stock prices and this is reflected in the net asset values, or NAVs, of funds investing in such stocks. "Due to small size, such companies are more prone to volatility," says Vinay Paharia, fund manager, Religare Mutual Fund. Paharia manages Religare Mid and Small Cap Fund.

Therefore, only investors with appetite for high risk should go for such funds. Besides, small-cap funds should form a small part of your portfolio.

Mutual funds investing in small-cap stocks can minimise the risk by diversifying across companies and sectors. Since mutual funds are managed by professional managers supported by teams of analysts and researchers, they are in a better position to select the right stocks, diversify across sectors and companies and react swiftly to changes in equity market conditions.

HOW THEY PERFORMED
There are four mutual fund schemes-Sundaram Select Small Cap, Reliance Small Cap, HSBC Small Cap and DSPBR Micro-Cap-which invest primarily (50 per cent or above) in small-cap stocks. None of them have a track record of five or more years. Only Sundaram Select Small Cap and HSBC Small Cap have completed three years.

In the one-year period up to 9 January 2012, the NAV of these funds fell 25 per cent on an average compared to the 38 per cent drop in the BSE Small Cap index. HSBC Small Cap fund fared the worst as its NAV dropped 42 per cent.

Sundaram Select Small Cap was the best performer with a return of -16 per cent. Sundaram Select Small Cap is a close-ended fund and its units are on offer for a limited period. Mid- and small-cap funds performed slightly better on the downside with an average -19 per cent return in the one-year period compared to the -29 per cent return delivered by the BSE Mid Cap index.

The average three-year return by small-cap funds as on 9 January 2012 was 25.5 per cent compared to 24 per cent by mid- and small-cap funds. The average return of large-cap funds in the past one year has been -19 per cent. The average three-year return by large-cap funds was 17.518 per cent on 9 January 2012.

ARE YOU GAME?
Those who wish to invest in small-cap funds should do so only if they have a long investment horizon and tolerance for volatility. Small-cap stocks suffer the steepest falls in a bear market and rise the most in a bull market. An investor should stay put for at least three-five years to allow the fund to gain from at least one bull run.

A small-cap fund will generally witness more frequent changes in its portfolio than a large-cap fund. It's better to go for schemes with a low turnover ratio, which measures how much the portfolio has been churned. A higher ratio means a higher trading cost.

Buy funds with lower volatility, which is measured by standard deviation (SD) and beta. The higher the SD and the beta, the more volatile the fund is. A better way to judge the performance of the fund is to check its Sharpe Ratio, which measures the risk-adjusted return. The higher the Sharpe Ratio, the better is the fund's performance. R-squared is the proportion of the fund's portfolio that moves in line with the benchmark index.

You can check these ratios in fund factsheets released by fund houses every month. These factsheets are also available on websites of mutual funds.

"Small-cap funds are good only for a portion of the portfolio. These funds are more volatile than large-cap funds. While there could be a possibility of higher returns from these funds, I think only a small percentage of wealth should be invested in such funds," says Raghvendra Nath, managing director, Ladder up Wealth Management.

There are many companies in the small-cap space that may become success stories in the future. Investing a small portion of your savings in the small-cap theme through mutual funds may give you a pleasant surprise.

Source: http://businesstoday.intoday.in/story/invest-small-cap-mutual-funds-companies-good-returns/1/21880.html

India corporate bond yields steady, liquidity stays tight

Indian corporate bond yields closed little changed on Monday, with investors preferring to stay on the sidelines as liquidity in the banking system remained tight.

The five-year benchmark corporate bond yield ended unchanged at 9.44 percent, while the 10-year bond closed 2 basis points lower at 9.30 percent.

Indian corporate credit issuance is expected to gradually recover this week after the central bank desisted from signaling any near term cut in policy rates, dousing hopes that borrowing costs will decline soon.

National Bank for Agriculture and Rural Development (NABARD) plans to raise 7 billion rupees through three-year bonds at 9.48 percent, three sources with direct knowledge of the deal said on Monday.

But traders said that issuance was slow because of tight liquidity conditions.

"A lot of issuers are waiting for better liquidity conditions to hit the market, especially in the private sector," a senior dealer with a mutual fund said.

Indian Railway Finance Corp (IRFC) received first-day bids for more than seven times the base amount offered in its sale of retail bonds, signaling continuing appetite for debt from state-own firms despite lower returns.

IRFC is looking to raise atleast 30 billion rupees via a 10- and 15-year tax-free public bond issue, which has a green shoe of 33 billion rupees.

The spread between the 10-year corporate bonds and government debt of the same maturity widened to 81.24 basis points from 77.26 basis points on Friday.

Total volume in the corporate bond market was 20.97 billion rupees, higher than Friday's 10.30 billion rupees.

Source: http://www.reuters.com/article/2012/01/30/india-markets-corpbonds-idUSL4E8CU4TY20120130