India delivered better returns than most: Madhusudan Kela, Head-Equities, Reliance Mutual Fund

His rise within the organisation as well as in the fund management industry has been dramatic. But for the past few months, there has beenspeculation that Madhusudan Kela, head-equities, Reliance Mutual Fund, is quitting. Untrue, insists Mr Kela. In an interview with ET, he says that he is still bullish on the big picture India story. However, in the short term, global sentiment will prevail, he cautions.

How do you see the market playing out near term in light of global developments?

In the next 6-12 months, the market will still be ruled by global sentiment. The ongoing debt crisis in Europe can have a meaningful impact on markets globally as in India, if the situation worsens. If one or two Eurozone countries were to default or the euro as a currency breaks down, there will be chaos.

Similarly, if there is slowdown in China, the Indian market will be impacted. Currently, the Indian market is trading at a 25% premium to China. If China’s earnings multiple contracts, there could be a valuation challenge for India as well. However, we have seen over the past six years that the market has produced significantly better returns than most countries in the world. The India story is getting stronger.

For instance, this year, you will see a significant fiscal consolidation, which was a major worry for the market. Over the next 2-3 years, the gas and oil reserves will materialise and this will further improve our fiscal position. And the real dark horse could be the UID project which can significantly prune the subsidies and improve tax collection. And hopefully, the pilferage will reduce. I believe a 8-9% growth with more reforms from the government looks real in the next five years.

How steep do you expect the correction, if it does come through, to be?

If the situation in global markets worsens, we could even see a 15-20% correction in Indian shares. But since India’s fundamentals are only getting better, and viewed in the global context, overseas fund managers will be compelled to increase their exposure to India. Any meaningful correction will be a great buying opportunity for retail investors with a long-term view on equities.

Which are the sectors that interest you?

We continue to remain overweight on the pharma sector. We are bullish on companies which will benefit from the domestic consumption story in India. We like public sector banks. They have underperformed the market for a while due to concerns over rising bond yields and hence marked-to-market losses on the bond portfolio.

Our view is that PSU banks can grow their loan books 25% for each of the next three years, and they have the capital adequacy to meet the loan demand. The stocks are available at 1.2-1.5 times their book value, and you can’t go wrong if you have a 2-3-year perspective.

There is a lot of pessimism about the telecom sector, more so after the recent 3G bids. Would you take a contrarian view?

Much of the bad news in the sector is behind us. If these stocks see any sharp correction, we would definitely buy them. The stock prices may have underperformed over the past couple of years, but the customer base has more than doubled during the same period.

What about mid-cap stocks in general? Would you still go for them in current market conditions?

Yes, if there are opportunities, we will continue to invest in companies with scalable business models, with earnings growth faster than large-caps, and available relatively cheaper to large-caps.

Your strategy of betting on mid-caps in a big way has been criticised by your peers. They accuse you of boosting portfolio returns by buying into firms with low-floating stock.

Companies like Siemens and Jindal Steel & Power were mid-caps when we first bought them. Not only have they delivered better returns, but are now ranked among the large caps. But I must admit that there have been some wrong bets as well. We have tweaked our mid-cap strategy a bit. We will not buy into very small companies, and would focus on companies with a minimum m-cap of Rs 1,000-1,500 crore.

Locally, what are the factors that could dampen sentiment for stocks?

Below average monsoon would rank high on that list. The reforms process needs to be accelerated. The government has shown resolve, but it needs to build on it, especially in terms of attracting more FDI flows. Rising instances of Maoist and Naxalite attacks could make foreign fund managers nervous. We are highly dependent on inflows at this stage, because there is not much money coming in locally.

How much cash on an average would you be keeping in your portfolio? Your strategy of aggressive cash positions last year was criticised in industry circles.

We will use it more as a tool to improve the portfolio mix. We will not shy away from keeping a higher cash level than our peers if market conditions warrant. But it will not be as high (25%) as was the case last year.

Source: http://economictimes.indiatimes.com/opinion/interviews/India-delivered-better-returns-than-most-Madhusudan-Kela-Head-Equities-Reliance-Mutual-Fund/articleshow/6044698.cms

Mutual funds hit a hurdle on regulatory changes

The past one year has been trying times for the mutual fund industry. Mutual funds, on the path of recovery from the ills of economicdownturn, were hit by a barrage of regulatory changes, a good number of them limiting the operational scope of mutual funds.

Just when the industry was coming to terms with the clampdown on fixed maturity plans (FMPs) and inter-scheme transfers , the Securities and Exchange Board Of India (Sebi) dealt another blow in the form of entry-load ban.

Despite serious protests from mutual fund distributors — numbering over 70,000, the regulator imposed the ban from August 1. Sebi further asked fund houses to disclose all commission, trail or other benefits received by them (from asset management companies) for advising a particular scheme to an investor.

Almost a year into the entry load ban, mutual fund distributors are still unsure as to how they go about doing their business. According to independent financial advisors (IFAs), generous investors pay 0.5-1 % as fee for selling a mutual fund scheme. If the investor makes an investment worth Rs 50,000, the distributor gets just around Rs 250 (at 0.5%) as their commission.

“It is not worth our effort to sell funds at such low commission payouts,” said a Mumbai-based distributor. There are also worries of cheques (given by investors) getting bounced (that increases the cost of recovery) or not being remunerated at all by investors. The Sebi mandate to disclose commission, trail or other benefits received by the distributor/advisor is also not in the right spirit.

Large-size distributors are still offering “extra toppings” to recommend schemes. These include small cash incentives, event sponsorships, advertisements in in-house magazines (of the distributor), expensive gifts and sponsored tours.

Lack of proper incentives for distributing equity mutual funds are prompting distributors to hard-sell insurance policies, company deposits and portfolio management schemes.

After distributors, Sebi has now trained its guns on fund houses; the first step was to discourage fund houses from raising exit load on mutual funds. It dealt another blow to fund houses asking them to pay upfront commission to distributors from their own profits and not from the expense pool.

In a ‘confidential’ email communique, the regulator directed fund houses not to charge upfront commissions to the overall 2.5% expense charges, which until recently was split in equal proportions to meet asset management charges and expenses (including upfront commission, transfer agent charges and marketing expenses).

Just a week ago, at the board meet on mutual funds, the regulator told asset management companies (AMCs) not to indulge in ‘dynamic pricing’ while managing debt funds. Fund houses, in their bid to attract more investments, do not levy asset management charges on institutional investors when portfolio yields come off sharply.

Likewise, when yields go up significantly , fund houses charge a higher expense ratio on institutional portfolios, making good the loss (of fund management charges) they have suffered when yields go down. The market regulator has told fund houses to stop this practice and limit changes in fees to 5 basis points on a daily basis (or 0.05%), or 0.5% in a year.

According to sources, this is not a good move for the industry. “The competitive edge of debt funds, which are striving hard to get institutional money, can only be maintained if pricing strategies are left to the fund house,” said the marketing head of a bank-promoted fund house.

“We maintain our competitive edge by discounting expense charges to institutional investors. If dynamic prices are taken away, there will be nothing to differentiate among fund houses, at least for the bulk investor,” the marketing head said.

The regulator also quashed the mutual fund industry’s demand to allow flexibility in the use of the expense ratio of 2.25%, which mutual funds deduct annually from investors’ net assets value (NAV). Mutual funds made a proposal to Sebi to do away with all cost bifurcations within the expense ratio charged on equity funds.

The regulator agreed to remove all cost bifurcations, but wanted mutual funds to reduce the expense ratio to 1.5% (from 2.25%). This was not acceptable to AMFI and members of participating mutual funds. The Sebi mutual fund panel decided to maintain status quo on expense ratio at 2.25%.

Source: http://economictimes.indiatimes.com/Features/Financial-Times/Mutual-funds-hit-a-hurdle-on-regulatory-changes/articleshow/6042494.cms?curpg=1

Right selling vs mis-selling in MFs

In mutual funds, intrinsic complexity and the absence of a physical product make it that much more imperative for institutions to be cognizant about potential mis-selling and implement a mechanism that would rest on the principles of right selling

Do I have to be like Ceasar’s wife and be above suspicion,” said a bank CEO on the subject of mis-selling. Instinctively, I felt that the point was missed. If you ask a banker about prevention of fraud or cash being stolen, the response would include charts, drawings, tables and process flows to impress you how robust the system is. However, on the question of right selling vs mis-selling, beyond the cliched “moral high-ground” and waxing eloquence, there is no attempt to implement a systemic solution.

Given the dominance of banks and other institutions distributing mutual funds in India, is there an institutional mechanism possible to guard against mis-selling? And, if so, what should it look like?

In mutual funds, intrinsic complexity and the absence of a physical product make it that much more imperative for institutions to be cognizant about potential mis-selling and implement a mechanism that would rest on the principles of right selling, the violation of which could result in mis-selling. For this, there would have to be some basic steps. One, each customer has to be profiled based on his risk appetite and investment objectives. Two, each product has to be profiled to reflect the customer category it is suited for. Three, there are potential conflicts in mapping the profiles of the products and customers. Four, it is the responsibility of the intermediary to recognize the potential conflicts and implement checks to ensure that these do not become real conflicts to the disadvantage of the investors. Five, it warrants an organizational mechanism to recognize these different roles and responsibilities and build in checks through a stringent compliance process. Six, it warrants a management oversight to ensure integrity for such systems to work efficiently and effectively.

To implement this framework, it is necessary to label roles and responsibilities. These include managers handling sales/relationship management, products, customer profiling, compliance, management, audit and board. Once that is done, it is important to identify and analyse potential areas of mis-selling and build preventive mechanisms.

Taking the customer on board: This should include implementation of know your customer norms, obtaining sufficient and accurate information to assess the customer, look at his risk profile and investment objectives, categorize him, putting in place mechanisms for feedback on efficacy, and ensuring that information about customers is reviewed periodically.

Product evaluation: The institution should create a universe of products that are evaluated and are investment worthy. The products should be reviewed for its risk level and should be assigned to a pre-defined customer risk profile category. Also, there should be a written record of the suitability of the product to that particular customer category.

Transaction: The institution should provide documentation to every client covering two aspects: one, product recommendation indicating its appropriateness for that customer category and two, a statement of the fees (one-time and ongoing) earned by that institution from that product. Further, it should obtain the client’s acknowledgement. When the product is sold from a client’s portfolio or switched to another product, the institution should document the reasons—was it the client’s requirement, or was the product taken off the approved list or was there a need to realign his portfolio.

When a customer buys a product that is not in the universe of recommended products, then the client should acknowledge and confirm that the decision is the customer’s and that he does not seek advice from the institution. It would help the institution to receive no fees—other than reimbursement of transacting costs—for such investments.

Compliance process: The difference between right selling and mis-selling is the difference between compliance in spirit versus form. The process is challenging here due to many conflicts—between the institution’s objectives for business and profit against that of the client and the conflict between the investment worthiness of a product and attractiveness of the commission structure. The key, therefore, is in recognizing that these potential conflicts of interests exist and putting in place review processes.

A sales/relationship manager should neither determine the customer profile nor the product profile. This role should be monitored for correctness in matching products to customers. Further, there should be no freedom to undertake “execution only” transactions. Under the principles of “maker–checker”, compliance should ensure that any discretionary authority is one level removed from customer engagement.

Management process: The key areas that influence the behaviour and outcome of team members are the incentive structure and compensation oriented towards customer retention. There should be no emphasis on transaction revenue as it encourages portfolio churn and conflicts with customer interest. It is also important to create an environment that encourages transparency in relationships with customers as well as fund houses. Customer franchise is built over the long term—building a system that encourages doing the right things daily certainly helps.

Source: http://www.livemint.com/2010/06/02212527/Right-selling-vs-misselling-i.html

Retail investors' holding period in MF equity schemes improves

Those holding up to one year has grown marginally.

Retail investors are taking a longer term view of mutual fund equity schemes than more informed institutional investors.

Data published by the Association of Mutual Funds in India (AMFI) show that the holding period of retail investors in equity schemes is becoming longer than that of high net-worth individuals (HNIs), foreign institutional investors (FIIs), banks or financial institutions and companies.

The numbers released by AMFI on holding periods for March indicates that number of retail investors holding equity mutual funds for more than 24 months has witnessed substantial improvement. Of the total retail investors, 62.5 per cent preferred to hold on to their MF investment for longer period in stark contrast to 46 per cent reported in March 2009.

The change in attitude could be due to two reasons. One, it could be on account of MF agents not advising their clients to churn their portfolio, on account of waning interest due to lower commission payable on new business. Two, those who invested in late 2007 are yet to see substantial appreciation in their investment (in the last 30 months the BSE Sensex has gained just 10 per cent). Similar trend is seen in the holdings of HNIs. The number of HNIs holding equity schemes for more than 24 months has recorded an increase.

Fewer number of retail investors held on to their investments between 12 and 24 months. Only 16 per cent of the retail investors-held their equity assets for this duration. This is 19 percentage lower compared with the corresponding period last year. Similar trend was witnessed in HNIs holdings. Of their total investment, 10 per cent or Rs 4,493 crore was held for 12-24 months against 37.9 per cent or Rs 10,606 crore reported last year.

The number of those holding up to one year period has grown marginally. This low growth is surprising given the steep appreciation in NAV in this period. Twenty-one per cent of the retail investors held on to their investment for a year against 18 per cent in the previous year. 21 per cent of HNIs held on to their investment for this period as opposed to 25 per cent reported last year.

Investor's folio and AUM

In the last one year MF investors closed 7,75,980 folios (accounts), of this retail investors accounted for 6,12,694 folios. According to the March report, retail investors folios stood at 4,02,93,410 compared with 4,09,06,104 folios reported in March 2009.

The number of account closures is unexpected given the market rally, MF equity assets moved up by 82 per cent or Rs 90,298 crore in the past year. For the same corresponding period, BSE Sensex moved up by 80 per cent. Of the change in AUM, retail investment accounted for 69 per cent or Rs 62,286 crore.

Source: http://www.thehindubusinessline.com/2010/06/10/stories/2010061053581200.htm

Pramerica Asset Managers appoints R Gopalakrishnan as head of equities

Pramerica Asset Managers Pvt Ltd, the Indian asset management venture of US-based Prudential Financial, Inc (PFI), on Tuesday announced that Ravi Gopalakrishnan has been appointed as head of equities.

As the head of equities, Ravi will report to Vijai Mantri, managing director and CEO of Pramerica Asset Managers Pvt Ltd. In this role, he will be responsible for managing the equity portfolios and the equity research function.

Ravi brings to this position more than 19 years of experience in the Indian asset management industry and has participated in its evolution and explosive growth over the last few years. Prior to this position, Ravi worked with UTI Investment Advisory Services, UBS, Sun F&C, Tata AMC, Principal PNB AMC and Hudson Fairfax Group, a US-based hedge fund Company. In June 2007, Ravi was named one of the 20 Rising Stars of Hedge Funds by Institutional Investor. He holds a Master of Science in Finance from Drexel University, USA and Master of Business Administration from Bradley University, USA.

Source: http://economictimes.indiatimes.com/Corporate-Announcement//articleshow/6023144.cms

Market may find a new level in about 3 months

Japanese major Nomura entered India in 2007 and then beefed up operations in the country after taking over Lehman Brothers’ Asia business in 2008. Last year, it bought a 35% stake in LIC Mutual Fund. Aggressively hiring, Nomura is emerging as an active player. Speaking to George Smith Alexander, Nomura Holdings deputy president & chief operating officer Takumi Shibata said the firm may launch an infrastructure fund in India even as it plans to hire more for its investment bank and back office operations here.

Any plans to launch a PE fund here?

We are working on an infrastructure fund. For the Indian economy, there is a need to invest more on infrastructure to support this growth. Long-term money is very essential for infrastructure. We are looking at raising funds from global investors as well. We do not know the size of the fund yet but it is not going to be a small fund.

You have been hiring aggressively. Will that continue?

We have to. We have around 3,000 people in India and 130 people in investment banking. We have been hiring quality people at all levels. We have hired around 10 people in the last two months and looking at hiring around 10-15 people in the coming months too in investment banking. Therefore, we are looking at a 10-15% increase. We want to continue to grow and benefit from the global network. We need to reinforce our sales and trading activities over here. Powai, in Mumbai, has the capacity for 4,000 people, but as of now, we have only 2,800 people. We will be increasing the number of people there. Our commitment to India is long-term too.

What are the plans going with the JV with LIC Mutual Fund?

We have been able to finish all the required approval processes. The next phase is to launch the joint venture and the details are being worked out. It will carry the name of LIC Nomura Mutual Fund. We will be able to bring in the benefit of IT and equity fund management infrastructure. We will bring in strong equity capability and LIC will bring in their expertise on the fixed income side. So this is a very good combination.

Are you bringing in your own people into the joint venture?

Yes, we will be bringing in our people and everything will be decided by the joint venture. Some will come from Nomura, some will come from outside. It is actually a very exciting story now.

What about retail broking?

We will look at various opportunities, though there is no such plan as of now. The most important thing is that we do things right so that we build out. We have just established a new group in Tokyo whose job is to look at retail opportunity beyond Japan. I don’t expect anything to come out from them in the very immediate future. They would look at the business opportunities here and I would be very surprised if they don’t look at India. An economy of 300-400 million middle class people is a very attractive market for anyone from the manufacturing side, fund management and private banking potential.

With the economies in the West slowing down, wouldn’t some of the export-oriented economies in Asia see a slowdown?

If we have to divide the world into four, we have the Americas, Europe, Asia and Africa. It is only Europe which is facing the current crisis. What the world needs to do now is, see that a collapse doesn’t happen in Europe and contagion is contained. The growth in countries like China, India and Indonesia are in large parts supported by domestic consumption. Of course, the relative dependence of China on exports is somewhat greater.

We are also sensing a recovery of the US economy. It’s a fragile economy. The risk is a positive surprise on the upside in the States. A 3% growth is a good one. In Europe, because of the decline in the value of euro as a currency, we sense that there are winners inside the eurozone such as manufacture of exports of products coming out from Germany, the Netherlands and northern part of Europe. While we might see total stagnation of the economy in certain parts of Europe, we are not predicting a disaster.

Where are Japanese investors putting their money?

Like other investors across the world, they are staying on the sidelines, especially in the period after the turbulence caused by the Greek debt crisis. We have started seeing a trickle of activity from the retail side — taking positions in currencies, equities, fixed income where they see value. Some currencies went through a huge decline like Australian dollars, we are yet to see a trickling of demand for the euro but people are looking at euro investment opportunities as to when it would become satisfactorily cheap.

You can also say institutions around the world are standing on the sidelines. The big question is whether it’s a three-day cure or a three-year cure and the truth lies somewhere in between. I may be wrong, but I believe it may be a three-month cure. It’s not that the problem would be solved in a three-month period, but the market would probably find a new level of activities in a reasonably short period of time.

Japan’s debt to GDP ratio is quite high and it also has large deficits. Seeing the problems in Europe and an ageing population in Japan too, will this be a problem in the future?

We will have a problem if the government does not solve the problem over the next five years. It’s a five-year challenge as opposed to five months of challenge. The reason is that the debt financing of the Japanese government is funded by domestic savings and the domestic savings are much larger than public debt. As long as the Japanese nationals do not loose confidence in their own government to service debts, even if the debt to GDP ratio is high, it doesn’t cause panic.

And also a 5% sales tax is very low and shows that Japanese people know that there is room for tax hikes. There is a growing consensus in favour of a higher consumption tax, or to say the least, there is capacity for the government to raise taxes without creating huge problem as 5% is very low. So in the long-term, they need to sort out to address the question. They are safe short-term.

Source: http://economictimes.indiatimes.com/Opinion/Interviews/Market-may-find-a-new-level-in-about-3-months/articleshow/6018448.cms?curpg=2

Birla Sun Life MF to Modify Asset Allocation Pattern of Midcap Fund

Birla Sun Life Mutual Fund has decided to modify the asset allocation and investment pattern of Birla Sun Life Midcap Fund by increasing the cash allocation limits. The changes will be effective from 10 July 2010.

Proposed (Cash) Allocation Limits:

Accordingly the scheme will invest up to 20% of assets in cash, deposits & money market instruments including Mibor linked short term papers.

Existing (Cash) Allocation Limits:

The scheme invests up to 5% of assets in cash, deposits & money market instruments including Mibor linked short term papers.

Unit holders who do not wish to hold units in view of the aforesaid change may exit the scheme from 10 June 2010 to 9 July 2010 without any exit load, at the relevant applicable NAV.

Source: http://www.apollosindhoori.cmlinks.com/MutualFund/MFSnapShot.aspx?opt=9&SecId=10&SubSecId=22,24

Mirae Assets to launch 4 more products this fiscal

Mirae Assets today said it will come out with four new products by the end of the current fiscal as it aims to capitalise on the growing interest of investors in mutual funds.

"We will be filing for more products with the market regulator SEBI and expect to launch four funds this fiscal. The portfolio of these funds will be spread over debt and equity and will give an opportunity to invest in overseas markets," Mirae Asset Global Investments (India) Equity Head Gopal Agrawal told PTI.

The MF would be launching a BRIC Consumption Fund, a Balanced Fund, an Indo-China Consumption Fund and a Monthly Income Plan, details of which are still to be worked out, he said.

Mirae Assets, one of the top global players in the emerging markets, currently manages assets worth nearly Rs 300 crore. About 90 per cent of the MF's asset under management (AUM) is in equities.

The fund has recently launched its first overseas equity fund – China Fund, focused on CSI 300 Index stocks – for Indian investors.

"We want to give investors an opportunity to diversify their portfolio from the Indian markets to emerging economies like Brazil, Russia and China. These markets have huge return potential," he said.

Mirae Assets currently has four funds operational, with the latest being Mirae Asset Emerging Bluechip Fund. The New Fund Offer (NFO) of the said scheme would close on June 22 and the returns would be benchmarked against CNX Midcap Index.

On receipt of SEBI approval, the proposed Indo-China Consumption Fund is likely to allocate 65 per cent of corpus to capture Indian consumption stories in different sectors and the balance in the stocks of Chinese consumption-driven firms.

When asked if the fund is in need for any capital or is looking for a joint venture, Agrawal said, "We have sufficient income from our advisory business. We started with a capital of $50 million and as and when required we can look at consolidation opportunities."

Mirae Assets is a player in the country's Rs 8 lakh crore asset management business. Currently there are 37 players in the industry, cumulatively managing assets worth Rs 8.03 lakh crore at the end of May.

Source: http://www.business-standard.com/india/news/mirae-assets-to-launch-4-more-products-this-fiscal/97026/on