‘Upside in large-cap stocks is limited from here on'

The scope for positive surprises in earnings growth next year is limited. 2009 was the year of beta. 2010 will depend on alpha generation, which is never easy.

PANKAJ TIBREWAL, FUND MANAGER, PRINCIPAL MUTUAL FUND

What did the top performing equity fund for the year, Principal Emerging Bluechip Fund, do to manage its stunning 156 per cent return over the past year? Well, it got off the starting block when pessimism was at its extreme, bought the most beaten down sectors and took brave calls on highly leveraged companies, explains Mr Pankaj Tibrewal, Fund Manager, Principal Mutual Fund.

Excerpts from an interview:

Principal Emerging Bluechip Fund is the top performing equity fund for the year. What are the sector and stock choices that powered these returns?
If you go back to when we launched the fund, the time was just right from an investment perspective, but quite bad, from a market perspective. Stock selection has played a vital role in the fund's returns of about 146 per cent for a year.

One factor which helped us was the mandate the fund had, of investing up to 30 per cent of its portfolio in large-cap stocks in the initial months. As our view was that large-caps would lead any rally, we fully used this leeway in the initial months. By March 2009, however, pessimism was at an extreme and we took the call that the market was oversold. If you ask me today whether we expected the market to double from those levels, the honest answer is ‘No'.

From a fund management perspective however, this has been one of the most difficult years to manage money. In January, you had the Satyam scam, in March there was extreme pessimism about global recession and in May the uncertainty of elections… Yet the returns that you today see for this calendar year came mainly from the first half, where the market view was so uncertain. To retain the conviction to buy at that point in time and to remain fully invested in the fund, was no easy task.

On sector choices, we took a few early calls to invest in sectors that were hit the hardest. One of these choices was metal stocks.

The other call that we took was unearthing quality companies with high leverage that had been severely punished. We took the view if the capital market were to revive again, companies with reasonable management, good businesses and business models could de-leverage quickly and would be re-rated. Those stocks have today become the darlings of the market!

During the height of the crisis you will remember that even technology stocks were beaten down as doubts were cast on the outsourcing model. So, wherever we bet on stocks or sectors during a phase of extreme pessimism, it worked out well.

What is your take on mid-cap stock valuations? Mid-cap indices are today trading at a PE multiple of about 19 times. Does that offer sufficient margin of comfort to invest in mid-cap stocks?
My view is that the upside in large-cap stocks is limited from here on. Most stocks in the BSE Sensex index are today discounting 2011 earnings, with the market factoring in an earnings growth of 20 per cent for that year. If you break down those earnings, you will find that they are coming mainly from energy, financials and metals, which are expected to contribute 75 per cent of the earnings growth.

Now there are a lot of ifs and buts to that growth. One problem is with the commodity cycle, where you do not know the shape of things to come. That makes me believe that the scope for positive surprises in earnings growth next year is limited. Yes, liquidity can drive markets for extended periods of time. But the call on liquidity is always a tough one.

There are however, many sectors where there is a clear valuation discrepancy between large and mid-cap stocks. The trend of mid-cap stocks outperforming is already evident.

If you look at the second half of this calendar year the index has moved only by 13-14 per cent but there are stocks that have moved 45-50 per cent. I think there are a good number of mid-cap stocks which would give you great returns over the next 6-12 months.

What is your view on the market for 2010?
I feel the market may not fall drastically. But near-term consolidation cannot be ruled out. If that happens it will be a stock pickers market.

If you look back at the previous bull run, you will find that 2002 and 2004 were the only years when the market moved less than 25 per cent. In both these years, the markets consolidated in a narrow range. When that happens, you always have to work a little harder to dig out stocks with a superior earnings story.

2010, I believe will be that kind of a market. The broader market will be range-bound with volatility picking up from time to time. 2009 was the year of beta, 2010 will depend on alpha generation, which is never easy.

What is your sense of earnings performance from Indian companies in recent quarters. While profits are improving, the topline for companies seems sluggish. Is that a worry?
It is. My sense is that, going forward into 2011, the bulk of the raw material cost savings and operating leverage may have played out for companies. The trend of earnings surprises from companies may end by December quarter this year. Earnings, from there on, will depend only on two factors — lower leverage, which can reduce interest costs, and topline growth.

The latter can, after all, only come from price or volumes. It will take time for pricing power to come back to producers, given that the global environment remains quite weak. In that scenario, you really need to focus on volume growth.

The theme we are looking at is: Which sectors can deliver volume growth in FY11, assuming prices stay flat or decline? Companies and sectors that show good volume growth may be the ones to enjoy premium valuations going ahead.

How big a risk do rising interest rates pose to the earnings outlook?
If you go back in history, there is usually a 12-15 month lag between changes in interest rates and the earnings response to it. In recent months, a good number of companies have been able to raise equity to repay debt. Our calculations show that even if you factor in equity dilution and weigh that against interest rate savings for companies, they may be able to deliver earnings growth. Capital raising is a blessing in disguise for highly leveraged companies. So which are the sectors you are bullish on at this juncture?

They would be consumption related sectors-FMCG, retail, financial services, where volume growth would not be a challenge. In the infrastructure space, we see potential in companies which own assets such as power plants, airports and ports, though valuations are not exactly cheap. In the downturn, we saw that companies that only work on a cash contract basis were hit harder as their margins were squeezed both by interest rates and raw material costs. Companies that own assets may see a dip in revenues during a slowdown, but they can always come back quickly once a recovery begins. They also face fewer risks from interest rates or raw material prices.

Source: http://www.thehindubusinessline.com/iw/2009/12/20/stories/2009122050610700.htm

Domestic MFs plan international funds

Domestic mutual funds are again scouting investment opportunities abroad, mostly in emerging markets, as they plan to launch international funds, after more than a year. At least three fund houses-- SBI Mutual Fund, UTI Mutual Fund and Mirae Asset Mutual Fund— are planning to launch international funds soon.

UTI Mutual Fund is planning to launch its international fund, with focus on emerging markets, along with T Rowe Price, which recently bought 26 per cent stake in it. This will be UTI MF’s first international fund, and also its first fund with T Rowe Price.

“Many retail as well as high net worth investors want to invest in overseas markets to diversify their portfolios. The launch of an international fund will depend on liquidity and other market conditions,” said Joydeep Bhattacharya, chief marketing officer, UTI AMC. SBI Mutual fund is hoping to launch its emerging markets international fund by 2010. “Today, there are a lot of investment opportunities outside India for investors who want to have long-term investment plans. There are good opportunities outside India, like carbon credit based investments, among others,” said a source at SBI MF. Both UTI and SBI MF had earlier filed initial papers for international funds with Sebi, but their plans were on hold for more than a year due to the global financial crisis.

Mirae Asset Mutual Fund has filed a draft offer document with Sebi last month for Mirae Asset Korea Discovery Fund, with an investment objective “to generate long-term capital appreciation by investing predominantly in units of Mirae Asset Korea Equity Fund and or units of other MF schemes, units of exchange traded schemes that focus on investing in equities and equity related securities of companies domiciled in or having their area of primary activity in Korea.” In September, Mirae Asset MF had launched Mirae Asset China Advantage Fund, with focus on equities and equity-related securities of companies domiciled in or having their area of primary activity in China and Hong Kong.

Some other MF houses may also launch international funds. “We are evaluating the option as it could be good for investors willing to diversify their portfolio,” said Vikas Sachdev, country head of Bharti AXA MF. Most international fund investments from India are routed through a feeder fund, with an option to invest fully or partly in the international markets. However, for retaining tax advantages, they must invest at least 65 per cent of assets in Indian securities.

“More money is to be made in emerging economies than in developed world. While emerging economies will grow faster, without a meaningful recovery in the US, it will be difficult for countries like India to grow rapidly. Stocks of the developed economies are available at low prices and one can look at launching an international fund with a mix of emerging markets and developed economies. Some allocation can be made to this fund by investors,” said Waqar Naqvi, CEO of Taurus MF. Now, more than a dozen MF houses offer international funds, with majority being lunched in 2007. After the global financial meltdown, no domestic mutual fund house had launched an international MF scheme.

Source: http://www.business-standard.com/india/news/domestic-mfs-plan-international-funds/380139/

Safe bets in Indian debt market

India’s debt market may be in its nascent stage with limited opportunities, but you can still find some safe bets, say Gaurav Pai & Preeti Kulkarni

It’s hardly a secret that the Indian debt markets are still in the nascent stage and offer limited opportunities for individual investors looking to incorporate debt in their portfolio.

But most experts say as the market matures in the coming years, debt could gain traction as one of the best investment avenues for investors.

“Investors, looking at options beyond the low returns of bank deposits and volatility of stocks, are increasingly eyeing debt issued by corporates,” said Rujan Panjwani, president of Edelweiss Group. “This has come at a time when corporates themselves are looking to raise funds. Fixed income products can bridge this gap effectively,” he said.

ET did a quick check on all the possible ways through which you can buy debt in your portfolio today. Most experts say yields on government bonds may not go beyond a particular level, making them good bets in the long run. Corporate debt too is currently offering high yields, making it a reliable option.

Ask Wealth Management Solutions head Nishant Agarwal is advising against investments in long-dated papers (6-10 years) since he expects them to hedge higher in the coming days. For an investor with an investment horizon of 6-12 months, he recommends short-term bonds and fixed maturity plans (in the next three months to benefit from double indexation).

Through Mutual Funds
Arjun Parthasarathy, head of fixed income at IDFC Mutual Fund points out that the biggest advantage of a mutual fund is the wide range of options available. “Those looking for an avenue to invest for the long term can look at long-term bond funds while those planning to park their money for the short term can consider liquid funds, which offer better returns than the savings bank rate,” he explains.

There are also short-term floaters and fixed maturity plans, whose yields go up along with the interest rates. Besides, institutional investors dominate the segment currently, and retail investors’ understanding of debt markets could be limited.

Through broker/Directly
This is a less popular option, but hardly the gigantic task it is made out to be. You can buy both government securities and corporate bonds through a bank or a bond house (a primary dealership like ICICI Securities PD or STCI or IDBI Gilts.)

This is not any more difficult than buying shares through a stock broker. All it requires is an investor to open a secondary constituent’s subsidiary general ledger (CSGL) account with a bank, after which the bank will hold all the government securities in an electronic form.

For buying corporate bonds, one can either participate in the primary market (i.e. when they are being first issued) or the secondary market (exchanges where they are traded.) This can also be done through a bank, bond house or a brokerage house that offers fixed income facilities. This, however, requires the investor to have a demat account.

An investor can buy government bonds with as little as Rs 10,000, the face value of a single government bond. To get subscriptions through the primary market for corporate bonds requires a large sum in the order of a few crores. However, investors can buy corporate bonds in the secondary market through much smaller ticket sizes, even less than a lakh.

Non-convertible debentures listed on stock exchanges like Tata Capital, L&T Finance, etc, in fact can be brought from NSE-affiliated brokers in ticket sizes as low as Rs 10,000.

Through PMS
One would need to sign an agreement with the PMS manager, who will open a separate bank account, demat account and a CSGL account. Government bonds are issued in the demat form with RBI functioning as the depository. Banks can open a sub-account (constituent SGL A/C) within their account for large investors.

The bonds will be sold or bought by the PMS manager on the investor’s behalf. Only large and more sophisticated investors have traditionally used this method.

Source: http://economictimes.indiatimes.com/Personal-Finance/Savings-Centre/Analysis/Safe-bets-in-Indian-debt-market/articleshow/5359997.cms?curpg=2

Tectonic shifts in the mutual fund industry

The regulator is tightening the manner in which the mutual fund industry is being run. In August 2009, the Securities & Exchange Board of India (Sebi) ordered that the entry load charged by the industry be removed and that distributors charge commission directly to investors. And there are many other regulations in the offing that would tighten the operations further. But then these changes have come with an intention. A senior Sebi official told FE that this was part of a plan to get more retail investors under the regulatory fold. And this is clearly because, over the years, the fund industry has been concentrating heavily on the corporate sector or institutional investors, and therefore retail investors have been rather neglected. The effort to reach out and even educate them, had taken a back seat.

India’s mutual fund industry has a unique distinction of having being dominated by institutional investors. These investors contribute to around 56% of total assets under management (AUM), according to a study carried out by an independent research agency Celent. This compares starkly with the US, where less than 15% of the AUM is routed through institutions. And even in China, institutional participation is lower—at around 30% of the AUM. The skew in India is mainly due to tax advantages offered for mutual fund investment, and the lack of alternative short-term investment opportunities for Indian corporations, the Celent study revealed.

Even in India, the retail investor segment contributes to around 45% of the AUM, while the high networth individual sub-segment accounts for more than half, which is around 23%. High networth individuals have access to wealth management services and are likely to adopt the advisory model. For the remaining 20% of small-ticket retail investment, the transaction model is better because advisory services do not find traction in this sub-segment, according to experts.

Fund houses, therefore, would have to take a close look at building up the non-metro base. Mutual funds are skewed towards the urban segment. The top eight cities, including the four metros (Mumbai, Delhi, Kolkata, and Chennai) followed by Bangalore, Hyderabad, Pune and Ahmedabad contribute 75% of the assets collected, while the share of the next 20 cities was only 20%.

And this skew has also been impacting profitability. So while the AUM has grown at a compounded rate of 25% since 2006, the profitability, as measured by total income as a percentage of AUM, has fallen. The profitability on-average in 2008, was 16.5 basis points. This is a drop of 27% in profitability since 2006, which was 23 basis points, says the Celent study. “This drop is primarily due to the growth in the income funds—a direct consequence of corporations becoming the primary target for the mutual funds,” the report says.

To consider a case, Reliance Mutual Fund has a lower-income as a percentage of AUM, mainly because of the composition of its funds—-a heavy dominance of institutional investments in its asset composition has led to short-term funds dominating its portfolio, resulting in the suppression in the fee. On the other hand, ICICI Prudential has been able to garner better retail participation, and this is reflected in the higher fees that it charges.

The writing on the wall is therefore clear. Fund houses will have to concentrate on building their retail portfolios and also take funds to all corners of the country. Merely concentrating on the corporate segment might not work in the days ahead, as the regulator gets stricter on commissions and also on the manner in which funds are structured to attract corporate investments.

Sebi chairman CB Bhave has consistently been emphasising the need for asset management companies to focus more on the retail segment. The regulator has not forgotten the fright witnessed during the previous year when the corporate houses led a pullout from the mutual funds sector as a liquidity crisis emerged.

Some fund houses have been working on this aspect and would be working with non-traditional distribution channels like non-government organisations (NGOs) to build distribution strength. Such initiatives will have to be taken to reduce the high dependence on the corporate segment.
Moreover, the regulator too is not taking things easy. It is planning to accumulate Rs 80 crore-100 crore for an investor- education fund. According to officials connected with the development, this decision will be taken by the regulator in the next month. “The issue has been pending for many months and the corpus will be raised by Sebi from asset management companies. The corpus will be used only for providing education in mutual funds throughout the country.”

Currently, several big fund-houses conduct investor education and awareness in several parts of the country. “Sebi plans to raise 0.01% of the asset under management (AUM) of each and every fund house. However, other details such as when the amount will be collected and how it will be used, will be chalked out by the Sebi in the coming days,” said a member of Sebi’s mutual fund advisory committee.

Already, distributors have started to shun fund-schemes and the fund industry continued to witness a downfall of inflows in equity schemes. Investment in mutual-fund schemes also saw a sharp decline of 68% in November, to over Rs 45,100 crore over the previous month, as investors preferred to stay away from equity-based funds.

At the end of November 2009, investors poured in funds worth only Rs 45,124 crore into several mutual fund schemes, with the maximum infusion coming into fixed-income plans, according to the data provided by the Association of Mutual Funds in India’s (Amfi). At the end of October, the total inflow stood at Rs 1.41 lakh crore.

The message is very clear. Mutual funds will have to get sharper and increase their retail reach.

Source: http://www.financialexpress.com/news/tectonic-shifts-in-the-mutual-fund-industry/555554/0

India no longer attractively valued, corrections expected: Fortis MF

``With markets trading at approximately 15 times PE multiples on FY11 estimates, we are wary of the fact that India is no longer attractively valued (within the emerging market basket) and any reversal of the carry trade could trigger corrections``, says Fortis Mutual Fund.

Highlighting the equity market scenario the AMC pointed out that the month of November witnessed the 5th consecutive month when DXY, a measure of value of USD as a basket of 6 major world currencies, closed lower.

The USD has been weak ever since the Federal Reserve has maintained its intent to keep liquidity high till the economy is back on track and unemployment rate starts ticking down.

Fortis which oversees average AUM of nearly Rs 91 billion in November believes that this cheap liquidity has been feeding the carry trade in riskier assets like emerging market equities and commodities (both hard and soft) and Indian markets were no different - November saw a strong up move of 13% from the month lows.

Further foreign investors have been aggressive iwith cumulative USD 16 billion of inflows and good corporate results along with positive sound bytes from the political and bureaucracy with regards to tax reforms have sustained the euphoria.

Source: http://www.myiris.com/newsCentre/storyShow.php?fileR=20091218130503707&dir=2009/12/18&secID=livenews

Get the right advisor, see your investments grow

SEBI’s directive, removing entry loads on mutual funds from August 2009 has now put the onus on investors to decide how much their distributors’ services are worth. On their part, many distributors have prepared a tariff of rates for their services.

Since both sides are on the process of price discovery, various models are being tested in the market on which fees can be calculated. Some distributors have decided to offer free services for certain asset sizes while there are a few who charge a fee for every transaction, others with a deeper relationship charge annual advisory fees.

For the investor, these are confusing times as they try to figure out how much fees to pay and what kind of service to expect.

The beauty parade
The first step is to identify the right advisor. The best way to seek a reference from someone who is happy with his advisor’s services. You also need to figure out if he is competent enough to service the areas that you are looking at.

For instance, if you are a sophisticated investor and would like access to structured products, you need to know if your advisor can offer you the same or not. “It is very important to get the right advisor first, as the quality of the advisor can make a huge difference to your portfolio,” says Vishal Kapoor, head of wealth management at Standard Chartered Bank.

He further adds that the maximum fee difference between advisors would be a maximum of 200 basis points, which is negligible when compared to the impact a portfolio can have, based on the quality of advice.

A la carte
Broadly, there are three services which a financial planner provides to a client. The first part is the most crucial since it involves understanding the customer, diagnosing his needs and making a financial plan for him.

The second service provided is that of execution of the plan, wherein the advisor helps you in buying, selling redeeming, and such other operational aspects. The third service provided is the periodic review and advice given. Before you get your prescriptions from your advisor, find out what is the kind of service that he is offering.

Fees
When it comes to paying fees, there are various models available in the market today. There are financial planners who could make a detailed financial plan for you at a cost of Rs 2,500, while if it increases sophistication, the fees could extend up to Rs 15,000.

Once your plan is done, you could execute it through the same person, or use another organisation. Just like every doctor or lawyer is different and charges as per the value he gives you, so does an advisor. Then there are banks that charge fees based on the number of transactions the client does, or as a percentage of the average assets that the client maintains with them.

Take the case of ICICIdirect. Here if you have assets worth Rs 8 lakh with them, the services offered are free. However, if the assets with them is less than Rs 8 lakh, they charge you a transaction fee of Rs 100 for every transaction you do with them. Personalfn, which provides advisory services, could charge you anywhere upward of Rs 5,000 per annum, depending on the size of assets you maintain with them.

Source: http://economictimes.indiatimes.com/articleshow/5345649.cms?flstry=1

MFs told not to club new schemes with ongoing open-ended plans

The Securities and Exchange Board of India (Sebi) on Tuesday said fund houses will have to launch additional plans as separate schemes for any ongoing open-ended scheme, other than dividend and growth plans, which differ from the main scheme in terms of portfolio or maturity.

“Some of the mutual funds have launched additional plans of different maturity periods as a part of existing schemes. The mutual fund advisory committee recommended that the additional plans being launched under the existing schemes, which have substantially different characteristics from the main scheme, shall not be launched as part of an ongoing open-ended scheme, and should be launched as separate schemes,” said the Sebi circular.

The new guidelines will be applicable to all the additional plans that have been launched in the past and the plans/schemes to be launched in the future as a part of existing schemes, unless the fund house obtains a confirmation from the regulator that the additional plans do not have substantially different characteristics from the existing schemes.

Besides, mutual funds will be liable to pay interest to investors at 15% per annum in the event of failure to despatch the redemption or repurchase proceeds.

“You are advised to ensure that the interest for the period of delay in despatch of repurchase/redemption warrants is added to the proceeds when such payments are made to the investors,” said the regulator.

In a bid to improve the standard of disclosures in advertisements through hoardings/ posters, Sebi said these statements should be displayed in black letters of at least 8 inches height or covering 10% of the display area on white background. Likewise, in ads through audio-visual media the statement will have to be displayed for at least 2 seconds. The regulator has also been receiving proposals from mutual funds for merger of schemes.

“Such consolidations shall be viewed as changes in fundamental attributes of the related schemes and the mutual funds shall comply with the requirements laid in the Sebi regulations,” said Sebi.

Source: http://economictimes.indiatimes.com/personal-finance/mutual-funds/mf-news/MFs-told-not-to-club-new-schemes-with-ongoing-open-ended-plans/articleshow/5341797.cms

Quantum MF sees Sensex at close to 22,000 by June 2010

There have variations in Assets under management (AUM) collections by mutual funds in the past three months. There has been some impact on collections since direct sales agents were not given compensation. The Sebi has recently also allowed trading of mutual funds through the exchanges.

In an interview with CNBC-TV18, IV Subramanium, Director, Quantum Mutual Fund spoke about his reading of the markets, fund flows and his outlook on the market and sectors.

Q: What has been the experience in terms of AUM collections by mutual funds in the past three months? They have had to face some kind of vicissitude, first the DSAs were not given compensation and that brought its impact. Now trading through the NSE has been allowed. Basically how have been the fund collection trends?
A: Immediately after August when the new regulations were announced, there was a lot of hue and cry and there was some uncertainty on how the mutual funds would be distributed. You did find flows into the mutual funds declining because the touchpoints were not as effective as they were a year back.
But having said that for the last few months we have also seen things stabilizing and the flows have certainly improved. Going forward with new channels like the NSE and the BSE terminals, I think the touchpoints would definitely be far higher than we had in the past. That should really auger well for the mutual fund flows.

Q: We have seen mutual funds sell pretty aggressively above that 5,000 mark. Insurance companies have been buying, FII figures have been positive. If we see the last two weeks, the week ended December 4, MF’s were net sellers of Rs 430 crore and the week ended December 11 about Rs 1,100 crore. Is it pretty much skittish retail bringing about some redemption pressure or is there just lack of value above these 5,000 levels because this has just been a zone that we have been in for the past three months?
A: That depends on the strategy which each mutual fund follows. By and large if you look at people who follow value philosophy and as long as they find value in the market they will remain invested.
So having said that there are certain segments or certain pockets within the market like consumer discretionary and some of the media stocks or some of the IT stocks, they certainly look a bit expensive compared to their historical valuations. There could be some mutual funds out there wanting to cash out on those and wait for the broader markets to correct.
But it is very difficult to say as what exactly is driving this because each mutual fund follows its own strategies and there could also have been some redemption pressure not only from retail but I think it could also have been from some of the larger institutional players in the market. And that could have also resulted in cash levels going up in mutual funds.
Coming to Quantum, we have raised some cash and that is purely a function of valuations. We are still comfortable with the stocks which we hold in the portfolio but those which we sold were purely from a valuation point of view. And if the valuations look attractive going forward we will definitely redeploy the money back into the markets.

Q: We have a couple of interesting turning points on the horizon there will be the inevitable profit taking towards December 31 and then we get into an earnings season and the pre budget euphoria atleast normally. What kind of sectors would you put your money on, would it be a midcap index that you will back, or would you go with the heavies and would you basically be bullish?
A: I am extremely bullish even now. Somewhere in the middle of next year we can at least justify in terms of numbers that the market could reach levels of 21,000-22,000. So we don’t have a problem with the direction of the market.
But having said that, it depends on where you invest your money. So at this point I am less bullish on consumer discretionary particularly some of the automobile stocks. They have increased quite significantly over the past year and a half and so valuations look to be a bit expensive. I am still not comfortable with the real estate space and cement space.
Barring these three spaces I think most of the other areas we still find a lot of stocks which are attractively priced even at this point. Even if you look at their long term earnings potential they definitely look attractive to me.
So I am still bullish on the power stocks, we have investments in engineering and banks. We are extremely positive on the IT sector as well. So these are areas where we have invested. But we don’t take a call on the macro where the budget would be announced or when or what kind of a budget. We really look at company specific trigger points. As long as we find value in any company we go ahead and invest.

Source: http://www.moneycontrol.com/news/mf-interview/quantum-mf-sees-sensex-at-close-to-22000-by-june-2010_430724.html