Sensex at 2½-year high with 103-point gain

Indian equity indices on Wednesday shrugged off weak global markets to end the day at their highest levels since February 2008. Domestic markets remained weak throughout the day; however, buying from the foreign funds during the last hour of of trading helped the market close with gains. Technology stocks led the 103-point gain for Sensex on the back of higher-than expected earnings of US-based Cognizant Technology Services, which boosted outlook for Indian IT companies focussed on these markets.

The 30-share Sensex of the Bombay Stock Exchange (BSE) added 102.61 points to end the day at 18,217.44. The broader S&P CNX Nifty of National Stock Exchange (NSE) gained 28.30 points to close the day at 5,467.85.

According to the provisional figures provided by the Bombay Stock Exchange (BSE), foreign institutional investors (FII) bought stocks worth over Rs 688 crore on Wednesday. In just three days of August, FIIs were net buyers to the tune of approximately Rs 2,000 crore. For the year till date, FIIs have bought over $11 billion worth of equities and received close to 46% of net inflows into Asian market outside Japan and China. Foreign fund inflows into Indian markets have climbed 40% this year, making Sensex the most expensive in Asia excluding Japan and BRIC markets.

Said Navneet Munot, CIO at SBI Mutual Fund: “Overall, the economy is in good shape and markets are also fairly valued at these levels. While investors are taking long positions in the market, one has to remain cautious of the global events.”

“The exploration of large-caps in India is done,” said Richard C Kang, who helps manages $120 million in equities at Emerging Global in New York. According to him, India’s smallest companies may deliver investors the best returns as foreign inflows have pushed the benchmark index’s valuation to the highest among BRIC nations. “As the bull market extends, investors are more willing to take on additional risks and explore midcaps and small caps,” he said.

Most Asian markets were down on Wednesday following weaker- than-estimated US home sales and factory orders, which renewed concerns about the strength of the global economy.

Source: http://www.financialexpress.com/news/Sensex-at-2--year-high-with-103-point-gain/656130/

Front Running: Is it insider trading or not?

Is it insider trading when a trader acts on prior information on a stock?

HDFC Mutual Fund recently came under the Security and Exchange Board of India’s (Sebi) scanner for front running. The dealer was banned from trading. Front running involves a trader in a securities firm acting on prior information that is almost equivalent to insider trading. Can this activity be curbed?

It spooks the investors

The biggest pension funds who want to invest into Indian markets worry about front running. Their prime concern is processes and how Indian AMCs (asset management companies) are keeping themselves clean. This is getting to be a reputation problem and it looks like this problem cannot be stopped, at least for now.

Scale of the crime

If there is a pipeline with a capacity of 10,000 litres that comes to your housing society colony and one person steals a litre or two from this pipeline, will the harm be substantial enough for the society? If a mutual fund wants to buy 1 lakh shares of company A and the dealer puts in his personal order ahead of the fund and makes profits, will this harm the investors in the mutual fund? The damage will be miniscule. There’s no point in spending too much efforts trying to catch this trader. And if this trader starts making a lot of money in a short span of time, he will get noticed. There is no way he can escape. It is like stealing 500 litres of water from the same pipeline. Someone will notice that theft.

Control

That totally depends on the processes. Front running is like day trading. So if the processes are strong and the dealer is tracked at all levels from the time he gets the information to the time he executes the trade, it will be easy to catch him if he is front running. Eg: If he knows a fund is going to buy one lakh shares of stock A, he will put his order minutes before the fund’s order goes through. If the dealer were to be made “incommunicado” then there is no way he can relay this information. Sebi has put up an investigative report on how the front running exactly took place inside HDFC MF on its Web site.

Anticipate Human Behaviour

Most funds say that the systems and processes are proper but one individual can beat these systems by being unethical. The argument is unacceptable. If systems are proper that means front running should not be possible. There will always be some individuals who will try to beat the system. Process have to be continuously upgraded to catch these people.

What the Law Says

Front running is not insider trading but comes close to it. It comes under the charge of prohibition and protection of fraudulent and unfair trade, Sebi Regulation 2003 (prohibition and prevention of fraudulent and unfair trade relating to securities market). Penalty for the crime will mean a ban from dealing in the market and a monetary penalty of Rs. 25 crore or three times the trade committed by the investor.

Source:

FIIs turn attention to mid-, small-cap stocks

Foreign institutional investors are increasingly looking at mid-cap and small-cap ideas.

Mr Richard C. Kang, CIO of Emerging Global Shares, a company that constructs exchange traded funds on the Dow Jones, said: “Mid-cap and small-cap stocks that cater to India's domestic consumption are among the best bets going forward.”

Mid-cap stocks have seen an increase in foreign institutional investors' stakes in the first quarter of FY-11; 145 out of the 267 mid-cap stocks that are part of BSE Midcap index saw an increase in their holding, while 113 saw foreign investors exiting.

Favourites

Some of the counters that witnessed increase in FIIs holding include Dewan Housing, Kalpataru Power, Hindustan National Glass, Infotech Enterprises and Shree Renuka Sugars. Among others, GTL, Indiabulls Real Estate, India Infoline, Aban Offshore and Indiabulls Financial saw biggest drop.

In the BSE small-cap index, 184 stocks saw anincrease in FII holding and a similar number witnessed exit by FIIs.

The FII stakes in 142 small-cap companies remained unchanged.

Foreign fund inflows have reached Rs 50,276 crore or about $11 billion so far this year.

The BSE Sensex climbed 4.6 per cent this year while the BSE Midcap jumped 12 per cent and the BSE Small-cap soared 13.86 per cent. The BSE-500 index moved up by 7 per cent.

“We have invested in Amtek India, UCO Bank, Indian Bank, Patni Computers and Dish TV in our portfolio that caters to the India Small Cap ETF that was launched a fortnight ago on NYSE,” said Mr Richard C. Kang.

Amtek is a case of increasing capacity utilisation and has one of the best debt equity ratios of 0.48 in the auto components business, said an auto analyst with a leading mutual fund.

The auto components business is expected to see a capex of Rs 13,000 crore in FY-11and a growth of 15-16 per cent in FY-11 and 17-18 per cent in FY-12, according to a Crisil estimate.

UCO Bank

UCO Bank is expected to grow due to higher net interest margins, overall business growth and an attractive valuation at a price-to-adjusted-book value of 1.6, said Mr Alok B. Agarwal, Head of Research at Mata Securities.

Source: http://www.thehindubusinessline.com/2010/08/05/stories/2010080553081000.htm

AMCs park liquid-plus funds into group firms

A few asset management companies (AMCs) are learnt to have transferred a slice of their holdings in liquid-plus schemes to the books of their group companies, to avoid potential losses that could arise from the stricter mark-to-market rule for debt securities that has become effective since August 1. The new rule requires fund houses to mark the prices of the securities with maturities of over 91 days, to market rates.

Liquid-plus schemes have a maturity of more than 91 days, while liquid schemes invest in debt instruments with maturity of less than 91 days.

By selling the bonds to the group company, the risk of volatility will be transferred to the books of the division buying those bonds. Closer to maturity, the transaction will be reversed.

“The transaction as such is not illegal, but a few months later, these funds will be going around bragging to potential investors that their schemes were the least volatile,” said an industry observer, adding that smaller fund houses will not be able to do such deals. “That is misleading the investors,” the person said.

Last week, fund houses had approached Sebi, requesting the regulator for an extension of the August 1 deadline for the new debt valuation norms. The general perception is that interest rates are likely to rise in the near term. When interest rates rise, bond prices fall, and this impacts the net asset value (NAV) of bond funds. Fund managers are worried that a decline in NAVs could spark off a vicious circle, as investors redeem their money, forcing fund managers to sell the bonds at a discount, which in turn causes the NAVs to decline further.

Roughly, a third of the Rs 6.72 lakh crore managed by the mutual fund industry is in liquid plus schemes. A liquid-plus scheme is more popular than liquid schemes, as they offer better returns and are taxed at a lower rate. A dividend distribution tax of 28.33% is charged on liquid funds while it is 22% for other debt schemes, including liquid plus schemes.

Such arrangements were common during the meltdown in money market mutual funds in late 2008, when mutual funds had heavily invested in the bonds of real estate companies. When the property market soured, real estate companies were unable to redeem their bonds. Many investors suffered a loss on their capital —something unusual for debt schemes — as the bonds had to be sold at a loss. Compounding the fund managers’ woes was the illiquid nature of bonds.

Faced with no buyers, many fund houses got their parent companies to buy out their unsaleable bond portfolios.

Some industry players feel a volatility rating, which is prevalent in international markets, could check such deals. That is because rating agencies that issue the grade, also conduct random checks on the portfolio to ensure that all rules are being adhered to.

Source: http://economictimes.indiatimes.com/personal-finance/mutual-funds/mf-news/AMCs-park-liquid-plus-funds-into-group-firms/articleshow/6254317.cms

Debt fund NAVs fall as new norms set in

On the first day of change in valuation norms for debt schemes, 24% of such funds reported a fall in NAVs as compared to last Friday.

Long-term debt category funds, namely medium and short-term funds, took a beating while liquid plus schemes (barring two) saw a rise in NAV.

However, it is also quite likely the fall in NAV for these funds could have taken place for reasons other than valuation norms change.

Out of the 588 debt schemes, over 139 schemes saw dip in their NAV on August 2 compared to July 30. Since most funds don’t declare NAVs on Sundays, so July 30 figures were taken for the study. Market regulator Securities and Exchange Board of India (Sebi) had earlier mandated all fund houses to mark-to-market all debt securities with remaining maturity of over 91 days from August 1. Earlier, it was 182 days. And higher interest rate scenario in the economy seems to have hit some debt funds, which now have to mark-to-market instead of smoothening interest inflows through the method of amortisation.

Sebi had deferred the deadline for its implementation to August 1 from July 1, and interestingly, liquid plus schemes had seen huge redemption in June. Scuh schemes were structured few years back to benefit from the earlier valuation loophole.

With the new Sebi rule in place, most fund managers have been proactive in order to protect losses for existing investors. K. Ramakumar, head, fixed income at Sundaram BNP Paribas Mutual Fund said, “We had already started marking-to market the portfolio from July itself based on the new rule. He added Sundaram schemes did not fluctuate much. NAV of Sundaram BNP Paribas Income plus, which is a liquid plus scheme, rose a tad 0.02% on August 2.

The highest fall in NAV was seen in LIC Bond fund, a medium term debt fund by 2.97%.

Source: http://www.financialexpress.com/news/Debt-fund-NAVs-fall-as-new-norms-set-in/655700/

Gilt funds would be a viable investment opportunity from a one year and beyond perspective

Kotak Mahindra Asset Management Company (KMAMC), a wholly owned subsidiary of Kotak Mahindra Bank, is the Asset Manager for Kotak Mahindra Mutual Fund. KMAMC started operations in December 1998 and has over 10 lakh investors in various schemes. Kotak Mahindra Mutual Fund manages average AUM of Rs 28636.86 crore as on June 2010. To know more about current scenario of Indian fixed income markets and investment options available to retail investors, Capital Market's D. Emerson Mcenley conducted an e-mail interview with Lakshmi Iyer - Head (Fixed Income and Products), Kotak AMC. Excerpts:

1) Give us an insight on the current scenario of fixed income markets in India? Share with us the views on G-Sec bonds and corporate bond spreads. How much percentage of your schemes portfolio has investment in corporate bonds?

The fixed income market in India is currently grappling with the transition in monetary policy from an accommodative mode to a normalized mode. In the process, benchmark interest rates are being increased. Consequently, the g-sec and corporate bond markets have been negatively impacted. Benchmark 10yr yields have risen to 7.85% levels. Also we have migrated from a liquidity surplus system to a deficient liquidity scenario which has lead to the shorter end of the yield curve spike up on an average 1.5%-2% over the last couple of months.

2) Which is the more lucrative investment option-short to medium term g-secs or corporate bonds, in current market scenario? Is it advisable to invest in long term government securities, in the wake of rising interest rates in the economy?

With 10yr benchmark g-sec yield approaching the 8% yield levels, it is our view that gilt funds would be a viable investment opportunity from a 1yr and beyond perspective.

3) What is your view on global bond market? What are the likely consequences of the forex-market trends for bond market yields?

Most of the global economies are still grappling with subdued growth which could inhibit them from raising rates in a hurry. This would be supportive for global bond yields which have been seen in the past few months. Even the US 10yr benchmark yield is currently trading at sub 3% levels.

As far as Indian markets are concerned the $ Rupee movements would be keenly watched. An orderly movement in forex market would be required for stable bond markets.

4) What's your take on the inflations numbers? How would inflation impact the debt market?

Inflation continues to be an area of concern as highlighted in the recent monetary policy review. There are concerns of inflation being more generalized in nature which could further aggravate the situation. Apart from significant evidence of demand-side pressures as seen in higher prices of non-food manufactured products, structural bottlenecks in commodities (pulses, milk, and vegetables) and de-regulation of petrol prices have resulted in higher inflation expectations. Also, the outlook on inflation would be guided by rainfall, commodity prices & domestic demand going forward.

The RBI has upward revised its guidance on inflation to 6% from 5.5% by the end of this financial year.

One of the ways to combat rising inflation is also to affect a hike in key benchmark rates which was one of the foremost reasons quoted by the RBI also for a mid meeting hike done last month. Hence rising inflation means rising interest rates, thereby negatively impacting debt markets.

5) What are the investment options available to retail investors, within the fixed income market, at this stage?

Rising interest rates should not be a reason for investors to shy away from the fixed income market. One must appreciate the fact in fixed income one does not lose his capital, unless there is a credit default as the higher yields tend to compensate for capital loss on account of lower prices. Fixed maturity plans offered by fund houses are a good way to benefit from the rising interest rate scenario.

6) What is your debt schemes' investment philosophy? As a fixed income fund manager what are your major concerns now?

The philosophy for us at Kotak Mutual involves around managing liquidity, duration, and credit across all our fixed income schemes. Investments are done taking into consideration the investment objective of the respective schemes and more importantly the time the investor would intend to stay invested in the particular scheme. For instance our Kotak Liquid fund would maintain a very low average maturity given that the investor would come in to this fund for even 1 day. Also on an ongoing basis the macro economic variables as also domestic events are monitored to fine tune the portfolios accordingly. To give a case in point, in today's environment liquidity is the key, hence most of our fixed income portfolio have shortened durations.

The major concern today as a fixed income manager is the movement in yields in a very short span of time. The effective overnight rate from 3.75% in April (reverse repos) has moved to 5.75% (repos rate) in under 3 month's time. Hence the market is still realigning itself to this eventuality - though the rise in yields is an opportunity from an investor perspective.

7) Kindly share your views on the recent credit policy review.

The recent policy has narrowed the liquidity adjustment facility (LAF) corridor from 150 bps to 125 bps by hiking reverse repos by 50 bps and reverse repos by 25 bps. It is very clear that the RBI desires lower volatility and has hence chosen to narrow the corridor. The concerns on inflation also have been highlighted with RBI of the view that inflation is now generalized in nature. The positive this is that the RBI will now do a policy review 8 times in a year which would also remove a lot of guess work that usually prevails between two meetings (since the review was done every quarter ).

8) How would you define your overall approach in managing interest rate and credit rate risks in an income fund?

We as a fund house have been pretty conservative on credit exposures and would not see that approach change very significantly in the near future. Interest rate views are actively managed depending on a host domestic as also global variables. At the current juncture, given that the yields have backed up quite a bit, we would favor adding duration to our portfolio.

9) What is your take on Rupee over near and medium term?

Near term $ Rupee is likely to remain volatile with a weakening bias due to higher than expected current account deficit. Also after the recent run up in Indian equities, there could be some apprehensions on valuations in the near term which could stall inflows. However, long term for the rupee continues to be positive as the fundamental outlook for India as an investment destination sees no change. Infact the RBI has also upward revised its GDP guidance to 8.5% for the current financial year.

Source: http://www.indiainfoline.com/Markets/News/Gilt-funds-would-be-a-viable-investment-opportunity-from-a-one-year-and-beyond-perspective/3216411660

India Mutual Funds' Average Assets Slip 1.6% On Month In July

The average value of assets managed by Indian mutual funds in July slipped 1.6% from a month earlier.

Mutual funds' average assets under management fell to about INR6.65 trillion ($144.03 billion) in July from INR6.76 trillion at the end of June, data from the Association of Mutual Funds in India showed Tuesday.

Assets had dropped nearly 16% on month in June as banks and other companies withdrew investments from debt funds to meet cash needs, and also due to a proposed change in the method of valuation for certain debt securities.

But average assets under management at Reliance Mutual Fund, the largest Indian fund house by assets, rose a little under 1% to about INR1.02 trillion at the end of July. Its average assets had slipped nearly 15% in June from the previous month.

Source: http://www.automatedtrader.net/real-time-dow-jones/9414/india-mutual-funds039-average-assets-slip-16-on-month-in-july

Reliance MF assets rise in July; that of ICICI, UTI decline

The country's largest fund house, Reliance Mutual Fund, witnessed an increase of over Rs 800 crore in its average assets, while that off ICICI MF declined by Rs 5,000 crore in July.

According to data available with the Association of Mutual Funds in India (AMFI), Anil Ambani Group firm Reliance MF witnessed an addition of Rs 859 crore to its average assets under management (AAUM) at Rs 1,02,179 crore during the month.

Besides this, the country's third largest fund house, ICICI Mutual Fund, witnessed an erosion of Rs 5,080 crore from its AUM in July to Rs 68,715 crore.

UTI MF also saw its asset base declining by Rs 2,238 crore during July to Rs 62,208 crore.

Of the 33 fund houses that have so far disclosed their AUM figures, 18 have registered growth.

The assets of SBI MF grew by Rs 4,779 crore to Rs 38,513 crore while that of Baroda Pioneer MF rose by Rs 879 crore to Rs 3,954 crore.

However, certain fund houses -- including Birla SunLife MF, L&T MF, Tata MF and Taurus MF -- witnessed a substantial erosion from their asset book.

Source: http://economictimes.indiatimes.com/personal-finance/mutual-funds/mf-news/Reliance-MF-assets-rise-in-July-that-of-ICICI-UTI-decline/articleshow/6249310.cms