MF industry AUM falls

At present, liquidity is tight in the market mainly on account of advance tax outflows and the Reserve Bank of India buying out Indian rupees and thereby sucking out liquidity

Tough times continue for the Rs. 6.70 trillion Indian mutual funds (MF) industry. The overall assets under management (AUM) fell by about 2.43% between January and March. There are 44 asset management companies (AMCs) in India, of which 41 have completed a year. Of these 41, only 12 AMCs gained money; rest lost assets.

Reliance Capital Asset Management Co. Ltd—India’s second largest fund house with assets over Rs. 80,232 crore—lost the most in the last quarter. It lost close to Rs. 4,068.4 crore. Typically, money moves out of MFs in March-end as a lot of fixed maturity plans mature. At present, liquidity is tight in the market mainly on account of advance tax outflows and the Reserve Bank of India buying out Indian rupees and thereby sucking out liquidity. Among the fund houses that gained the most was India’s largest fund house, HDFC Asset Management Co. Ltd. It gained Rs. 1,348.6 crore.

Source: http://www.livemint.com/2012/04/04200048/MF-industry-AUM-falls.html

Sensex has strong bottom at 16000: Morgan Stanley MF

In April, the Indian market will be keenly watching the RBI policy action. There are hopes for a rate cut. Jayesh Gandhi, executive director of Morgan Stanley Mutual Fund expects Indian equities to inch higher led by interest rate easing. He sees 16,000 as a strong base for the Sensex. "We need clear direction from RBI on interest rates," he adds.

The Indian has been volatile over the last few days. In an interview to CNBC-TV18, Gandhi says, in the short-term, the market movement will continue to be determined by global cues. "Global liquidity will remain supportive for equities," he asserts.

He feels the emerging scenario and the key variables is turning positive for Indian equities from a medium-term to long-term point of view.

According to him, the Indian Market continues to be driven by consumption growth. Gandhi remains cautious on PSUs, given the lack of policy certainty.

Power, he says, is a long-term play due to high gestation. He expects power companies to outperform, once rates ease.

Below is the edited transcript of his interview on CNBC-TV18. Also watch the accompanying video.

Q: What is the prognosis for the market, after this up and down ride? Are you guys working with the range-bound scenario or do you think liquidity will push the markets higher, perhaps beyond 5,600?

A: Short-term movements in the market are difficult to predict. So, I would only stick my neck out for the medium-term to long-term. In the short-term, we will track probably the global environment or the global equity markets, which is what has been the principal source of the rally, since beginning of the year and that continues.

From my point of view, the emerging scenario and the key variables is turning positive for Indian equities from a medium-term to long-term point of view. That is very interesting. That, to my mind, will drive equity market performance with 12-18 months view.

Q: If you had to give us some sort of a target for the index by the time this year ends up, what are you working with at this point?

A: It is difficult for me to give you targets, especially on a yearly basis. But I would still fancy us making atleast double-digit returns even from current levels in the next 12-18 months kind of time horizon.

A couple of key changes, which are happening on the ground level, at the fundamental level for the Indian economy, are significantly better than what we saw in the last twelve months. If you look at the global environment, if you look at the changes in the import mix that we have, gold imports declining, also the fact that we would probably see interest rates cool off, all these factors to my mind will drive equity performance much better than what we have seen in the last twelve months.

Q: Also, likely that it provides a cushion for the market, do you think it is unlikely we breach the lows we have seen in this year?

A: 16,000-15,500 on the Sensex seems to be a pretty strong bottom. Atleast on the valuation front, we seem to be hitting a patch, which suggest that valuations are at ten-year low at those levels.

Corporate profits have been rising. My sense is that we will probably see corporate profit growth in line with normal GDP growth, 10-15% range in the next twelve months. That has not been the case in the last twelve months. That is predominantly the reason why we have seen valuations come off. But valuations can go down a tad lower, not more.

Q: What is it that you hear now in terms of flows and the interest coming into India? When you talk to some of your colleagues on Morgan Stanley global, does it look like some of the General Anti-Avoidance Rule (GAAR) confusion has been cleared up and whether or not liquidity is going to remain abundant?

A: On GAAR, I think there is still fair amount of uncertainty. I think that is going to remain for some more time. That apart, there is a fair amount of interest in emerging markets. There is lot of interest in India as well, especially because we have done so badly last year. Our valuations are at ten-year low levels.

India is one of the few markets globally, which is domestically driven. Corporate profits have been rising in India, although not in the last year but if you look at the historical ten year trend. So, there is fair amount of interest in India, there is fair amount of interest to invest in India.

Obviously near-term issues in terms of large government borrowings, our inability to take hardcore reforms like petrol price increases, diesel price increases etc are all factors, which are limiting the flows in a way. That is limiting the interest of the money that is flowing in. So, my sense is that if India were to take some high visibility reforms, there would be money coming to India in a big way.

Last year has been particularly bad for emerging markets, but yet we did not see that great outflow. Infact for the full year we were virtually flat. This year we have seen fair amount of inflows. I think the interest will continue, there is no two ways about it.

Q: So, if one wanted to capitalize on this optimistic view that you have on the market, how would you approach it with respect to specific sectors? What looks like a good opportunity at this point?

A: There are multiple opportunities in a market at this point of time. The best way to play the market is create a diversified portfolio. That is what we have.

In terms of sectors, we are overweight pharmaceuticals. We also like domestic consumption names, discretionary as well as some staple names. We also are overweight on software services. Basically, we are overweight in companies and sectors where there is decent visibility of demand i.e. the top-line growth and also the strong balance sheets. These are the companies, which will deliver returns irrespective of the market cycles. Markets have been very volatile in last few years. That volatility does not seem to be going away in a hurry. So, the best way to play is to look at companies, which have decent earnings momentum built into them because of the inherent strength of the business model rather than chase cyclical names.

Sectors, which we are underweight on currently, are metals, oil and gas and also some of the domestic infrastructure names like industrials etc because we don't see industrial cycle picking up in a hurry. What I think will change in next six months would be a significantly positive view, which has to be driven by the bond markets, towards the Indian financials because we should, if not immediately, in next three months or six months time look at a significant decline in interest rates. If that does materialise then the view on banking and financials will change for the better. That is when we will also look to make some changes in the portfolio.

Q: What you are expecting from the policy this time around? If you are expecting an easing of rates, do you think it will come in the April policy or do you think we will have to wait longer?

A: Second-guessing the Central Bank is very difficult. The bond markets are, in a way, expecting 25 bps or round about there reduction in interest rates. But I think the domestic liquidity situation is what we need to look at.

In Q1, liquidity situation should ease i.e. short-term interest rate should come off significantly. I think the commentary will be more important than the rate cut. Rate cut also will help, but commentary will be more important as well.

Q: How worried are you about the indications from the bond market? How tough do you think it is going to be for equities to perform over the course of this year, given what is happening on the fixed income side?

A: I am not an expert on bonds, but I will give you my two bets. I think the bond markets are going to continue to challenge RBI and push RBI to do OMOs because we have such a large borrowing programme. Also, it is more skewed towards first half. You see the volatile environment in the bond markets to continue.

I am focusing more on is how the short-term rates behave and how the liquidity situation improves, I think that should change for the better over the course of this month or even next two-three months. Liquidity should improve and short-term interest rates should cool off. That should steepen the yield curve.

Government is the largest borrower in the market today. Government is also the reason why bond yields are so high. So, government with RBI can very well ensure that the yields don't run up or go beyond 9% or you don't have a wild card situation in the bond market.

My sense is that RBI is at work here. They will continue to ensure that yields remain in a range. They may not soften very quickly, but as the year progresses, my sense is that we will see yields come off and of course some bit of rate cut will also reduce the yields. So, I am pretty positive on the bond markets from a 12-month perspective. Immediately, I think we have some challenges.

Q: How would you approach some of the PSU entities now, given what has happened both in terms of governmental intervention and generally the fact that corporate governance seems to becoming bigger issue for many of these companies? Do you think the whole clutch becomes an avoid?

A: I don't know whether we can make that general statement for the entire basket PSUs. But by and large the business fundamentals for many of these PSUs have been poor. We have seen that across sectors. So, we have been very cautious in adding PSU names in our portfolio.

Ofcourse there are certain sectors where you cannot avoid, for example, oil and gas which has been predominantly dominated by public sector companies. Another example is state-owned banks, we can avoid but we can only avoid to a limited extent because the basic fundamental business momentum for many of these state-owned enterprises, state-owned companies is deteriorating. They are not able to keep pace with the technology changes, they are not able to keep pace with the manpower requirements and also the corporate governance issues. So that affects the overall long-term view on the stock. Ofcourse you find limited number of PSUs in the portfolio as well.

Q: As a theme, do you like power after the kind of efforts made by the government to solve issues like coal supply and ofcourse SEB losses etc?

A: Yes, we do like power as a long-term potential business opportunity in India. Also, we like business model for a few companies in India. However, many of these projects are very long gestation projects. Some of the issues that have cropped up in the last 12-18 months are issues could derail some of these projects. So, we are watching this sector very closely, watching the way these issues are getting resolved, particularly the fuel supply issue.

Another important factor for the sector is interest rates. Interest rates need to come off in many of these projects to become viable. I see that happening over a period of next twelve months. So, my sense is that over the medium-term, I think this sector should do very well, maybe near-term headwinds may continue.

What is important is the sector has seen such a large beating over the last twelve months that the stock valuations have become very attractive. So, there would be worthy picks with a long-term view in the sector.

Source: http://www.moneycontrol.com/news/mf-interview/sensex-has-strong-bottom-at-16000-morgan-stanley-mf_688718-2.html

Don't panic when faced with tricky situations

One of the biggest advantages of mutual funds (MFs) is their simplicity. Also, being transparent, well-regulated, tax-efficient and varied makes them an ideal investment option for investors. However, considering there are hundreds of schemes one can invest in, making the right investment decision is anything but easy.

One key ingredient to build a successful MF portfolio is to follow a well-defined selection process, in line with your risk profile, time horizon, asset allocation and investment objectives. Even if you have managed to build an ideal MF portfolio, you may still be faced with situations requiring deft handling. Here are a couple of such situations and how these need to be handled:

Takeover of schemes in the portfolio by another MF The most recent example of such a situation is an announcement by L&T MF to take over the schemes of Fidelity MF. If you have a scheme or schemes of Fidelity MF in your portfolio, you must be wondering what to do now.

First, it is important to understand that such consolidations are a part and parcel of an industry trying to find its feet. More, there have been examples of investors benefiting from successful mergers and acquisitions in the mutual fund industry. The prominent ones are HDFC MF’s takeover of schemes of Zurich MF and Franklin Templeton MF’s takeover of the schemes of Kothari Pioneer MF. L&T MF itself made its foray into the industry by taking over Cholamandalam MF

Second, if this deal gets regulatory approval, you will have an opportunity to exit from the schemes managed by Fidelity MF without paying any exit load (except investments under a lock-in period in a tax-savings scheme). However, the right way to deal with this situation would be to remain invested for 6-12 months to see how these schemes perform under the new management.

More, considering that Fidelity’s fund management team will continue to be a part of the set-up for some time and that a good portfolio build through a well established investment process doesn’t start performing poorly overnight, you won’t be taking too much of a risk by continuing in the schemes. However, it would be advisable to monitor the performance more actively than you might have been doing earlier. If these funds lag their peer group in term of performance after the review period, it would be time to act.

A successful fund manager leaves the fund Another situation that often causes dilemma in the minds of investors is when a successful fund manager leaves the fund. While in most cases, such a situation would ring alarm bells, it may not be wise to react immediately by redeeming holdings from the fund. For example, if one is invested either in an index fund or in a fund wherein the rules regarding what the fund manager can do are clearly spelt out, the change in fund manger may not have much impact on performance.

It is also important to look into the fund management style of the fund house, especially how much independence is given to the fund manager. Most big fund houses usually have guidelines that a manager must conform to. Besides, the process of investments is overseen by an investment committee. Therefore, a fund house following such an approach may not find it difficult to replace a good manager with another.

Even if it becomes clear that the former manger enjoyed considerable independence, a decision to exit should not be taken without finding as much as possible about the new manager. If he ran a different fund, check its record. Ideally, a new fund manager should be given at least six months or so to prove himself. Here again, if at the end of that period the fund has done poorly compared to its peers, it may be time to act.

Source: http://www.business-standard.com/india/news/dont-panic-when-facedtricky-situations/469900/

Franklin Templeton's Sivasubramanian KN: The Intelligent Investor

Superstar fund manager Sivasubramanian KN has helped one of India’s oldest fund houses give consistent returns. Now, he wants the next line of fund managers to take over

CAPTAIN OF THE SHIP Franklin Templeton’s Sivasubramanian at the Thiruvanmiyur Beach in Chennai. There is no light on the first floor of Century Center at Alwarpet as the city, like the rest of Tamil Nadu, suffers from frequent outages. But most people inside the Franklin Templeton mutual fund office don’t bother to move from their cubicles. They form silhouettes in the glow of their laptops and there is hardly any conversation. They continue to work. Considering that Uttar Pradesh has just declared its election results and the stock market is almost in a tizzy, the mood inside one of India’s largest fund houses is surprisingly serene. Sivasubramanian KN, chief investment officer-equity, sits quietly in a small conference room blessed by the afternoon Chennai sun. Like his team, he is nonchalant about the power situation in his office and in Uttar Pradesh. He doesn’t have any electronic device around him to keep a tab on the markets and doesn’t seem to be bothered about the way the Sensex was behaving that day. “Working in Chennai allows us to cut the noise and concentrate on our work,” he says softly. Sivasubramanian spends most of his time trying to spot companies that will make profits over the long term and also fit in his overall portfolio. Something he’s been doing with aplomb for nearly two decades. The Rs 5,000-crore Bluechip fund that Sivasubramanian managed is the oldest private sector mutual fund scheme in the country—it was floated in 1993—and has consistently outperformed the market. In the past 15 years, Bluechip has given a return of 22 percent, compared with a category average of 16. According to Morningstar India, it has a very high alpha (or excess returns against the benchmark index) at 6.89 percent. Most of its peers hover around the 3 percent mark. So, if you had invested Rs 10,000 in the Bluechip fund in March 2002, your money would have grown to Rs 93,000 now, against a category average of Rs 57,000. But what makes Sivasubramanian stand out is not just the stellar performance of the Bluechip fund. It is also the investment philosophy that he has managed to create at Franklin Templeton in India—one that’s based on sound logic and intensive research rather than individual brilliance. In other words, he’s trying to become irrelevant. This is a marked shift from the prevalent culture in the Indian mutual fund space where top fund managers create an aura around themselves and try to become indispensable. “He takes his craft very seriously, but doesn’t take himself seriously as a fund manager,” says Pramod Kumar, CEO of Wealth Advisors India, a Chennai-based independent investment advisory firm and a former colleague of Sivasubramanian. The Philosophy of Investment   The investment philosophy of Sivasubramanian has helped Franklin Templeton in two ways. One, it identified the next level of leaders at the fund house. The strong focus on research allowed analysts to become co-fund managers and learn the ropes of successfully managing a portfolio early on in their careers. Already, Anand Radhakrishnan, who was earlier the head of research, has taken over Bluechip and is managing it successfully since 2008. “The system is based on merit. Senior colleagues ensure that their knowledge is passed on and there is always a hand-holding that takes place so that juniors don’t have to reinvent the wheel,” says Radhakrishnan. Two, it helped Franklin Templeton weather the 2008 global economic crisis much better than most other funds which were seduced into investing in sectors that looked hot, but were not fundamentally sound. “We believe that research is more important than portfolio management. We want to develop research as a distinct platform for analysts,” says Sivasubramanian. The years since the crisis have been brutal for mutual funds to say the least with the European debt crisis, Japanese earthquake and political instability further weakening sentiment. The Sensex (the Bombay Stock Exchange’s benchmark index) has been brooding around the 17,000 mark and struggled to break the shackles. For most equity funds it has been a tough time as there is no momentum and there are no favourite sectors. The number of funds outperforming the index has been dwindling and almost 53 percent of the funds have fared poorly for the last three years. But even in such conditions, Franklin Templeton is one of the few funds that has managed to ride the tide and maintain its high performance regardless of the state of the markets. Again, this has been possible because of the strong focus on research and having analysts with complete knowledge of their sectors as co-fund managers.

The idea of having research analysts as co-fund managers was not a brainwave or something that Franklin Templeton followed right from the beginning in India. It was something that Sivasubramanian and his equally-distinguished colleague Sukumar Rajah stumbled upon when the Flexicap scheme was launched in 2005 and collected around Rs 3,000 crore in its new offer. Rajah and Sivasubramanian decided to take a stab at jointly managing the fund. The experiment was a brilliant success as it brought in a second, and possibly different, perspective on all decisions. More than anything else, succession planning was now easier as research analysts were exposed to portfolio management at an early stage.

All this has gone a long way in making Franklin Templeton, the only profit-making, foreign-owned asset management company (AMC) in India. So, how did this foreign fund survive in India when others have failed?

Acquisition And its After-Effects
The answer to that probably lies in the way it went about its acquisition of Pioneer ITI (Kothari Pioneer Mutual Fund). Though Franklin Templeton has been in India since 1996, it took over the assets of Pioneer ITI only in 2002. When it did so, it retained not just the employees, but also the distribution network of independent financial advisors that Pioneer ITI had assiduously built over the years. Franklin Templeton, in its earlier avatar, had been like most other foreign players—its schemes were sold through banks.

Besides Bluechip and Prima—the main schemes—Pioneer ITI gave Franklin Templeton two other valuable assets: Rajah and Sivasubramanian, two experienced fund managers known for their knack of picking winners.

“When you are acquiring something which you think is valuable to you, it is important that you give the investment team total independence. This has been Franklin Templeton’s approach across the globe and the investment team continued to function the way they used to earlier,” says Harshendu Bindal, president, Franklin Templeton Investments-India.  And that’s not all. The investment team was also allowed to operate out of Chennai, a move that helped retain the talent in the team as many of them preferred to work there.

One of the first decisions that the team took was to keep focussing on what it were really good at—investment research. “A researcher is better placed to take a call on individual companies compared to a portfolio manager as they [portfolio managers] have to look at too many companies,” says Sivasubramanian, who had himself begun his career at Pioneer ITI as a research analyst.

Currently, the fund has 10 research analysts and four fund managers, making Franklin Templeton’s equity investment team one of the biggest in the mutual fund industry. Five of the research analysts are co-fund managers.

It’s not that a research analyst’s job at Franklin Templeton is any different. Here too they have to create a model portfolio and give recommendations. But unlike most AMCs, they are paid on par with portfolio managers and the model portfolio they create is taken very seriously by the fund managers. Most other funds ignore the recommendations of their research teams and the portfolio managers are in total command.

“It is a place where research analysts get their skin in the game as portfolio managers very early in their career path. That doesn’t happen in other places,” says Anand Vasudevan who is head of research and also the co-fund manager of Flexicap and Bluechip.

In 2006, Radhakrishnan, the then head of research, was made the co-fund manager of Bluechip. In a year’s time he became the fund manager for Bluechip, taking over from Sivasubramanian who decided to play a passive role as co-fund manager. Radhakrishnan was handpicked by Sivasubramanian and Rajah for the job after he proved his mettle by bringing 10 hybrid funds of Franklin Templeton under one strategy.

By November 2010, Sivasubramanian was promoted as CIO and Rajah moved on to become the CIO for Franklin Asia equity.

Big Shoes to Fill Sivasubramanian’s shoes were rather large for Radhakrishnan to fill when he took over Bluechip. But working closely with Sivasubramanian had taught him a few tricks. He realised that Sivasubramanian was a man of conviction. The moment he was convinced about a particular stock he put a lot of money into it. He maintained a concentrated portfolio and it was not unusual to see almost 7-8 percent of the funds invested into a single stock. “I think I’m conservative when it comes to portfolio management. I got to learn a lot from Sivasubramanian about how he goes on taking the concentrated bets,” says Radhakrishnan. Sivasubramanian himself is happy to play the mentor’s role and share the knowledge he has gained over the years with his team.

Like all others, it was in Mumbai that Sivasubramanian cut his teeth.  Working with the project finance team at IDBI taught him the skill to dissect financial statements and understand the importance of a company’s ability to repay debt over the long term. He also learnt the significance of cash flows as well as the ability to study new emerging businesses. But there was one thing that he never quite learned or appreciated—the daily commute between Andheri and Nariman Point on a Mumbai local. So, when he heard about an opening with Kothari Pioneer in Chennai he was keen to take it.

He wanted to go back to his parents and the quiet of Chennai.

Within a year of him joining as a research analyst with Kothari Pioneer, he was promoted to manage Bluechip. Soon Sukumar Rajah too joined as chief investment officer. Rajah had been advising the India Opportunities Fund, jointly managed by Indbank and Martin Currie, an international investment manager. He came into the Kothari team with a wealth of knowledge on emerging sectors. He was one of the earliest investors to take a bet on Infosys at the India Opportunities Fund. Before investing in Infosys, he had met the company’s management many times and also visited the company’s office.

Rajah believed that Infosys had a huge cost advantage over its US counterparts and started to invest in the company through the Prima fund too. By 1997, Infosys became the top holding of Prima.

Kothari Pioneer was the first fund to start an information technology fund in 1998. But when the sector began to show qualities of a bubble in 1999, it checked out. “We never sold out completely. We bought the sector much ahead of our peers and booked profits,” says Rajah.

HDFC Bank was another great pick of theirs. The stock was purchased when it was a midcap as both Sivasubramanian and Rajah believed that HDFC Bank had a great brand and would be able to raise deposits at competitive rates.

Sivasubramanian began to manage the Prima fund in 1997. In the same year they decided that Bluechip will concentrate on large-cap companies and Prima on small- and midcap ones. In many ways, it was more challenging for Sivasubramanian to manage the Prima fund as the portfolio needed more stocks to maintain diversification and ensure liquidity.  “If we liked a particular stock we have never shied away from investing into it even if it was illiquid. We would only limit the overall exposure to the illiquid component of the portfolio,” says Sivasubramanian.

Sivasubramanian also learned to interact with a company’s management better and ask the right kind of questions. He started to focus on businesses that were using or deploying capital smartly and avoided conglomerates that were getting into areas that were not their core. “Good companies will not be available, cheap and poor management is always punished,” Sivasubramanian says.

In 2007, the Bluechip fund did not perform as well as some of its peers. But that was because Sivasubramanian and Rajah decided against investing in the real estate sector. They were not convinced by it. The fund grew 47 percent against 60 percent for the BSE 100 index that year. But 2008 and the global financial crisis proved them right. The Bluechip fund fell too (no sector escaped unscathed), but not as much as its peers.

“Bluechip is quite value-conscious and does not shy away from exiting momentum driven sectors, when valuations breach its comfort zone. On the flipside, it also doesn’t shy from taking contrarian calls from time to time. One example would be its overweight position in telecom in 2010, when others were shying away from that space,” says Dhruva Chatterji, senior research analyst at Morningstar India.

People who have worked with Sivasubramanian vouch that he never gets excited by volatile trends in the market. But for now, Sivasubramanian and Rajah have built a powerful fund house that functions like a well-oiled machine. For them, it’s not about success or whether they complement each other as a team. What they want to do is build strong processes that will last long after them. It sure looks like they are trying really hard to make themselves redundant.

Source: http://forbesindia.com/article/boardroom/franklin-templetons-sivasubramanian-kn-the-intelligent-investor/32632/0