Fund houses expand businesses to global addresses

Local fund houses are expanding their fund management and advisory businesses to overseas destinations to boost profits and to expand their asset base. Encouraged by a good investor response to Indian assets — especially equities and realty — leading fund houses are now in the process of opening branch offices in tony addresses world-wide, according to fund managers.

Top fund houses, such as Reliance Mutual Fund, ICICI Prudential Mutual Fund, Birla Sunlife Mutual Fund, HDFC and UTI, have plans to open offices in the UK, the US, Singapore, Japan and the Gulf. Most fund houses are now selling their offshore products through foreign distributors by paying huge commissions. Domestic funds are setting up overseas branches to establish a “better connect” with investors in those countries. They are trying to position themselves from being plain investment advisors to foreign investment banks to offshore fund managers.

“Having permanent establishments in foreign countries — from where you raise money — reflect your long-term commitment towards investors in those countries,” said Sundeep Sikka, CEO, Reliance Mutual Fund, which has subsidiary offices in Malaysia, Singapore, the UK, Dubai and Mauritius.

According to Mr Sikka, Indian fund houses are getting a significant amount of money from overseas investors. “Foreign investors are showing a good interest in Indian shares. Foreign investors are warming up to the idea of having an onshore fund manager to manage their investments in emerging markets, including India,” he said.

ICICI Pru MF and Birla Sunlife Mutual are also looking at options to start businesses in top cities. The aim of these funds is not to attract NRIs, but to service foreign investors. Kotak MF already has offices in London, New York and Dubai, while UTI Mutual Fund has offices in a few capitals in Europe, including London. Kotak MF and Birla Sunlife are managing a few India-focused funds from these destinations. According to fund managers, HDFC Mutual Fund is also looking to set up offices in the Gulf, after it received the mandate to advise Abu Dhabi Investment Authority (ADIA) on India investments.

“Selling mutual funds is becoming very difficult in India. The regulator has scalped our profit margins by a good measure; we are left with no option, but to approach overseas investors. We help these investors invest in Indian equities and real estate,” said the chief investment officer (CIO) of a bank-promoted fund house who spoke on the condition of anonymity.

According to the CIO, even foreign tie-ups are not helping Indian fund houses raise money from overseas investors. “Foreign partners don’t pass their clients to us... this is forcing us to seek our own clients in overseas markets,” the CIO added.

Managing foreign investors’ money is a high-margin business for most asset management companies. Depending on fund performance, foreign investors are charged anywhere between 2.5% and 4% as asset management charges by domestic fund houses. Investment advisory business yields just about 1-1.5% as advisor fees. Apart from funds, subsidiary (branch) offices also sell private equity and PMS products (after getting regulatory approvals) in foreign markets.

Local fund houses are now expecting large inflows into their offshore funds over the next few months. India-focused funds have managed superb returns over the past one year, making it very popular among foreign investors. About 75 India-dedicated offshore funds beat the Sensex, which gained about 17% in one year. About 37 funds returned more than 25% — the average category returns posted by domestic equity funds.

Source: http://economictimes.indiatimes.com/Personal-Finance/Fund-houses-set-sail-for-tony-global-addresses/articleshow/6527692.cms

Fund houses say no to zero exit load

Domestic fund houses have expressed reservations against making equity schemes free of exit load, fearing this will be suicidal for a struggling and unstable fund market. The fund houses said this would increase churning of portfolios and hurt existing investors.

The concerns surfaced after Bharti AXA Mutual fund last week reduced the exit load on its equity schemes to zero. The fund house, which made the move effective from September 1, said this would provide investors the comfort of exiting whenever they want due to the current volatility in the equity segment.

At present, fund houses charge an exit load of one per cent for a one-year investment.

At a time fund houses are losing business due to last year’s ban on entry load, industry players say zero exit load will worsen the situation.The first four months of the current financial year have seen a net outflow of Rs 7,613 crore compared with a net inflow of Rs 7,290 crore in the corresponding period last year. “No exit load will lead to an increase in inflow-outflow of funds and benefit only unscrupulous investors. Mutual fund schemes will become a trading arena for them. This will affect other investors who will start taking short-term calls on their investments,” said a chief executive officer (CEO) of a mid-sized fund house.

A majority of the CEOs Business Standard spoke to denied any possibility of following the no-exit-load strategy. They said exit load was a deterrent for investors to stick with their investments for at least a year. Serious investors, they added, would not come to equity funds if exit load was removed.

“The overall impact won’t be good for investors as well as the fund houses. The existing investors will be hit as the net asset value will become more volatile if new investors start taking trading calls,” said the CEO a top fund house.

The executive director of an independent body which tracks the industry said, “The move to introduce zero exit load is an unfortunate and strange development when fund houses are hardly getting anything from their current business. It will invite speculators to equity funds.”

Mutual funds should not be taken as an opportunistic investment, said the CEO of another mid-size fund house. Rather, he added, it was an asset allocation tool for those with a long-term perspective. “I do not know what purpose will it serve,” he said.

Some small fund houses which have not reached a critical size in terms of equity assets are worried. They said bigger fund houses might not have any impact on their funds. “However, for a small fund house like ours, such a move from our peer may bring undue competition for attracting more funds,” said the CEO of a fund house which manages around Rs 100 crore.

Source: http://www.business-standard.com/india/news/fund-houses-say-no-to-zero-exit-load/407574/

Q&A: Sanjay Sinha, CEO, L&T Mutual Fund

Sanjay Sinha, CEO, L&T Mutual Fund, tells Neha Pandey the price-to-earnings ratios of Sensex and Nifty look fairly valued. Edited excerpts:

Where do you see the markets in short-, medium- and long-term?
If three factors — liquidity, valuations and events — are supportive, there is a possibility of revisiting the highs of 2008 before this financial year ends. Between one and three years, we expect an annualised return of 15-20 per cent.

Over five years, two things will guide the markets: First, compared to the global markets, the Indian markets have a strong possibility of outperformance; and second, if the strong growth trajectory that we have entered into extends beyond five years, Indian equities will outperform.

How does price-to-earnings (PE) ratios of Sensex and Nifty look?
At present, we are fairly valued. We are at 17 times the PE ratio for financial year 2010-11. The earnings projection for financial year 2011-12 is 14 times, which is below average compared with what Sensex and Nifty managed last season. On forward perspective, they are undervalued and there is room for more.

Are there any sectors that have been laggards and are expected to bounce?
We have a contrarian call on metals. This is an extremely high-beta sector, which makes investors feel scared. But, the International Monetary Fund has hinted at 4.5 per cent growth for the global economy. This will result in high demand for commodities and so the prices might not stay firm.

Where do you see the interest rates cycle and inflation?
Both will moderate by year-end. The base effect will come into play, and with a good monsoon, corporate expansion or the supply side pressure on inflation should mitigate. Today, liquidity is very tight and is affecting interest rates. With an increase in government spending, liquidity should improve and rates should moderate.

What should a first-time investor opt for?
An investor should always begin with a systematic investment plan (SIP). Since your income comes in tranches, your savings must be built in a similar way. Start your SIP the day you start earning and plan it till your retirement. However, the components of SIP can keep changing throughout your career.

A lump sum investment is made by those who want to make an opportunistic play in the equity market. However, if you want to create wealth over a long term to counter inflation, stagger your investments with a clear balance between different assets classes. Meanwhile, you can gain an expertise in stocks and then invest directly.

How do you rate a daily SIP (DIP) versus a monthly SIP?
DIP deals with volatile market conditions. At times, investors are edged to enter the market because of fluctuations, which can be mastered with rupee-cost averaging. If you feel that by allocating money on a monthly basis, you are unable to capture the rupee-cost averaging due to volatility in intra-month, DIP is an option for you. When markets become volatile, you can supplement your SIP with DIP or substitute it.

Source: http://www.business-standard.com/india/news/qa-sanjay-sinha-ceo-lt-mutual-fund/407148/

Churn in the mutual fund industry

Forecasts about the market are as bad as guaranteed returns. Both fail spectacularly. Yet on a particularly wet and gloomy September in Delhi, with the debris of CWG 2010 littered all round, just as one feels the event will finally compensate for all the present woes, the chop and change in the mutual fund industry, too, one feels, will be worth the pain.

The return of the domestic retail investor could possibly be the biggest story of the upcoming festival season. After the pain, as the retail investors come back into the mutual funds, they will face a far cleaner landscape to park their investments. With the spectre of being short-changed gone, the investors will now have a reason to believe in the vehicle they have been riding. While every country has its own pattern of investment preferences, one is sure that as soon as the turnaround happens in the world economy, the graph for investments made into the mutual fund industry will soar. Will this also benefit the insurance industry? One cannot be sanguine. The rules of the game are still being written and the insurance companies have yet to take a hair cut.

As of now, the current spectacle in the mutual fund business is messy. There is no doubt that the churn in the mutual fund industry has been the biggest gamechanger in the Indian financial market for a long time. This churn has been painfully cutting into the balance sheet of several fund houses. For sure, it has also cut into the interest level within the middle class for investing in the stock markets through mutual funds. The middle class, which feeds the retail investor category, is the bulwark of the Indian financial sector story and its absence has ensured there could be no extended rally in the stock markets for a long time.

That this has happened in the span of two years, which have been the worst periods for the financial sector globally, has not eased matters. Still, at a point when the financial sector is not throwing up news to gladden us, there are two straws in the wind that makes one believe things could pan out well. In terms of impact, while the introduction of dematerialised shares changed the technology of the Indian securities market, the clearing up of the mutual fund space is likely to alter the very dynamics of the Indian market as a means to build long-term wealth.

An early straw in the wind is the re-emergence of growth in financial sector investment by households in the latest national income numbers. Despite the global economic turmoil, financial assets as a percentage of domestic savings have risen to 11.9% in 2009-10 from 10.4% in 2008-09. Aggregate savings for this fiscal are also higher so far. The disaggregated numbers for the current year will, of course, not come in soon but matching the rise in the financial assets with the flat trajectory of bank deposits means that money is not chasing the banks.

In the current fiscal, instead, RBI data shows cash with the public has risen, disproportionately more than that channelled into bank deposits. Sure, in the same period, assets-under-management of the mutual funds have fallen for most months, except for August. Overall, this would imply that the interest in the financial sector is back with the public.

The second straw in the wind could be if—and this is a big if—retail investors lap up the Coal India public issue—India’s largest ever. The issue is coming after a string of lemons. So, in October, a change in the investment pattern will unequivocally show that investors are here to stay.

As the Indian markets gathered steam post-2003, more and more retail investors began to find the virtues of investing through mutual funds. The funds also discovered them. The number of public offers soared accordingly and the types of investment vehicles also widened fast.

Predictably enough, as the numbers invested in the schemes rose, complaints about mis-selling and high costs also zoomed. It was at this point that Sebi intervened. The one thing that the market regulator could not factor in then was the simultaneous onset of the global meltdown. Just as it took away the fun from the market, the gloom of the financial crisis worsened the confidence of the investors.

From 2008, almost as soon as CB Bhave became the chairman of Sebi in February, the regulator has moved in for what some of company CEOs called a “demolition job”. But while some of the companies complained privately about the strict regulations that Sebi rang in one after another, it appears the investors disappeared more due to the broader economic crisis.

Sebi had reason to wade into the fortunes of the mutual fund industry when it did. The Indian stock market rests on two major countervailing powers—the foreign institutional investors and the domestic ones. The latter basically included the mutual funds. The FIIs are a heterogenous set, and beyond setting the rules of what constituted a fund and the extent of market exposure, Sebi has little jurisdiction over them.

To set a timeline for a happy ending is dicey. But the makings of a good story are already in place. As one suspects, this could happen soon. The market regulator can then take pride in a job well done.

Source: http://www.financialexpress.com/news/churn-in-the-mutual-fund-industry/677979/0

Wooing MF investors with ‘go demat' drive

With mutual fund investors now having the choice of converting their folios into dematerialised accounts, registrars and broking firms are going all out to attract investors into holding demat accounts with them.

Registrars and broking firms, which have the responsibility of converting these accounts, are leaving no stone unturned in this pursuit. Some registrars are even willing to take a hit on their books for it.

cost of conversion

“We are taking the entire hit of the conversion on our books. The cost of converting the paperwork into an online account is Rs 3 and that of the courier service is Rs 25 per scheme. If we provide both services, then the conversion cost comes down to Rs 25 per scheme. We are not charging the investors for the service, nor will the fund houses reimburse us,” explained Mr Rakesh Goyal, Senior Vice-President, Bonanza Portfolio.

Bonanza has an investor base of about 1.75 lakh depository participants and about 3 lakh investors availing the services of its broking firm.

“It's a very calculated move. Our aim is to attract other potential investors. Currently we handle equity AUM worth Rs 2 lakh crore through mutual funds and we aim to bring in about Rs 5,000 crore more into the fold,” Mr Goyal added.

But not all registrars and broking firms are too excited about this move for now. Though they agree there are advantages to it, they say that there is also a flip side to it.

“Earlier, it was possible for the investors to interact with the fund houses directly. The non-demat way of transacting meant that investors got customised services from the fund houses. They could log on to the Web site of the AMC and avail themselves of their services. But that would not be possible in the demat account format. There would be an intermediary involved,” said a spokesperson for a leading registrar company.

But keeping in mind the advantages for the investors, most broking firms and registrars are likely to follow suit and provide demat services to their investors.

“Eventually, all broking firms will have to do the same. Any broking firm will want to provide these services as it gets total control of the entire transaction. Earlier the investor had to deal with a large number of people for these transactions. Also, broking firms having control over the transaction process means that purchase of each unit will start yielding brokerage income, which was not possible before,” said Mr Prakash Diwan, Head of Institutional Equity, Networth Stock Broking.

Not a big hit

However, Mr Diwan believes that the hit on the books is not that big.

“First of all the number of investors not holding DP accounts is very small. The challenge will be to get those investors who avail of our services but do not have a DP account with us,” he added.

Source: http://www.thehindubusinessline.com/2010/09/08/stories/2010090850671000.htm

Analysts warn of short-term volatility, correction in markets

Acombination of local and global factors is adding short-term uncertainty to Indian stock markets and the next two months will be fraught with volatility, according to fund managers and analysts, many of whom are predicting a decline of 5-10%.

That’s despite growth prospects for Asia’s third largest economy remaining intact. The government expects the economy to post 8.5% growth in the current fiscal.

The Sensex, India’s benchmark equity index, has gained some 4% this calendar year in comparison with a 3% decline for the MSCI World index. Last fortnight, it hit a 30-month high of 18,454.9 and has been hovering at those levels since.

State-owned Coal India Ltd’s `17,700 crore initial public offering, India’s largest new share sale, will be the key, investors say.

“The real test will be Coal India,” said Nandan Chakraborty, managing director of institutional equity research at Enam Securities Ltd. “Once it hits, we’ll have to wait and see if markets fall or rise.” He does not expect a correction to be more than 5% if it happens, but warns of short-term volatility.

“We expect the markets to correct by 7-8%”, said Nischal Maheshwari, head of research at Edelweiss Securities Ltd.

The reasons are obvious. The economic situation looks grim in the US and Europe. A weak US recovery will affect risk appetite and slow the pace of foreign institutional investor (FII) inflows into the country, if not reverse it.

“Bond yields in Europe have been rising again and the uncertainty regarding global recovery has emerged as a major risk and could impact FII inflows,” said Ullal Ravindra Bhat, managing director of the Indian arm of Dalton Strategic Partnership Llp, a global fund registered as an FII in India.

FIIs have pumped in some $13 billion (`60,710 crore) so far this year, with $2.5 billion coming in August alone. But the global nervousness poses a big question mark on the continued strength of these inflows despite a good set of domestic numbers, such as 8.8% first quarter economic growth and slowing of inflation.

“Household spending (in the US) is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software is rising; however, investment in non-residential structures continues to be weak and employers remain reluctant to add to payrolls,” said the US Federal Reserve after its 10 August meeting.

“The pace of economic recovery is likely to be more modest in the near term than had been anticipated,” the Federal Open Market Committee, the policymaking body of the Fed, added.

Housing prices in the UK fell for a second month in a row in August, fuelling recovery concerns.

What’s also spooking the market is the fresh paper supply among emerging markets that could soak up some $100 billion of investor money in the next few months as new share sales such as the $25 billion offering from Brazil’s Petrobras.

This investor money would have otherwise gone into buying secondary market equities and propped up share prices. Indian firms are slated to raise some $5-7 billion by the end of the year, with the Coal India issue leading the way.

With new norms for unit-linked insurance plans, or Ulips, likely to stem investment flows from this sector, there are enough indications of a correction waiting to take place, experts said. A cap on Ulip distribution charges and guaranteed returns on pension products means there may be less money coming through this instrument and a greater portion of inflows going to the market, they added.

“There are reasons to believe that a moderate correction could be on the cards. One has to be mindful that whatever rally has happened has been largely driven by FIIs, who might not be pumping in as much money this month as they were doing earlier, owing to weaknesses in foreign markets”, Bhat said.

“Given the weakness in domestic institutional flows and the uncertainty surrounding the insurance sector, this might be enough to pull down markets,” he added.

At current levels, the Sensex is trading at 18 times the estimated earnings for the fiscal.

“The growth in earnings has been satisfactory, but there is some amount of valuation discomfort,” said S. Naren, chief investment officer of ICICI Prudential Asset Management Co., India’s second largest mutual fund with `90,179 crore worth of assets under management.

“The (corporate) results have not provided any reason for cheer in the first quarter, and outlook about corporate earnings remains tepid for the next two quarters while the GDP growth recovery has already been factored in,” said Saurabh Mukherjea, head of Indian equities at UK-based investment advisory firm Execution Noble.

“The only trigger for the market to go up could be the Q2 numbers, which would give us greater visibility about the potential for earnings growth in FY11 and FY12,” said Dipen Shah, senior vice-president, private client group research, Kotak Securities Ltd.

That would depend on whether firms are able to pass on increased raw material costs to consumers, the impact of interest costs and the execution of capital-intensive projects with fewer delays, he said.

Source: http://www.livemint.com/2010/09/05211601/Analysts-warn-of-shortterm-vo.html?atype=tp

Fund houses will have to tap non-metro markets to grow

As per the country head of Bharti AXA, Vikaas M Sachdeva, stock exchanges are a good alternate distribution models for mutual funds. He also says that mobile phone technology will turn out to be a decent distribution avenue going forward. In an interview to FE’s Saikat Neogi, he said by simplifying the communication and conversion process, a higher retail penetration in MFs can take place. Excerpts:

Do you think a retail consumer is really aware of all the charges that he pays to buy and keep mutual funds?

Information about costs of investing in mutual funds is widely available through various sources like Websites, distributors and online platforms. The Scheme Information document provides every detail with respect to the fund and the costs of running it. Most of the investors today have a fair idea about the cost structure in mutual funds, particularly in larger centres. However, their decision to invest is seldom based on the cost structure of the funds.

How do you think the online platform will help fund houses to reduce costs and benefit investors in the long run?

Online platforms are technology driven and hence the cost of servicing, operations and manpower would go down significantly in the long run. This would mainly service the “Do-it-yourself” customer who compares and invests on the basis of information available on the internet. While the online platforms offer many positives like ease of access, availability, transaction convenience and availability of data at the click of a button, the ‘do-it-yourself’ concept may not go well with retail investors. As behavioural finance states that for an investment purchase decision to be made, the average person requires the ‘reassurance’ of an influencer. The role that the platform can play as an influencer is limited. Hence, the quality of investment advice and financial planning a distributor brings to the table might not be present in this avenue.

What are the other alternative distribution models fund houses should be looking at after the ban on entry load?

Of late, stock exchanges are an alternate distribution models, apart from the online/offline models available currently. It is possible for potential investors to buy into a mutual fund at the prevailing NAV by just calling his stock broker or on the online platform. Although spoken about quite frequently, mobile phone technology has not become as fast or as user friendly as one would like it to be, but this is something which will turn out to be a decent distribution avenue going forward. But these technologies and their acceptance along with acceptance of mutual fund as an investment vehicle is a time consuming activity. Having said this, the flip side is also true. It is imperative for the distributor to continuously look favourably at mutual funds as an investment vehicle. We are still not at the tipping point in this country that there is a mass conversion into mutual funds because of brand pull, financial literacy or sheer convenience and hence, a sizeable dependence is still on the distributor.

Do you think there should be a standardisation of products and the number of schemes should come down so that an investor does not get baffled?

The key word is “simplification” rather than standardisation of products. By simplifying the communication and the conversion process, a higher retail penetration is perceived. Standardisation of the products might not be the best solution as it would result in stifling innovation. Since most of the investments for funds houses come from metros, how can fund houses tap the other markets to grow their asset under management. Traditionally, India is a high ‘saving’ nation. Private savings potential as given in the Morgan Stanley research is over 23%, although most of the money comes from the top 10-12 markets. However, a per our internal calculations, mutual fund penetration is hovering at around 5% mark. Even the seemingly large numbers that seem to be coming in from the top cities doesn’t match with the potential that the industry can absorb. MF penetration has to grow manifold for the industry to achieve higher reach. With respect to the other markets, the informed investor will still be able to invest through many sources like online platforms, but investing as a habit is not inculcated in the average Indian yet. It requires a large force to reach out to the hinterlands and hence the requirement of the financial advisor gets significant.

Source: http://www.indianexpress.com/news/fund-houses-will-have-to-tap-nonmetro-markets-to-grow/676902/0

Online applications to help mutual funds meet new NFO timeframes

The mutual fund (MF) industry, which has to deal with reduced timeframe for launch of new fund offers (NFOs) and allotments of units, is getting help from companies, registration and share transfer agents to meet the deadline smoothly.

In a first effort, after Securities and Exchange Board of India (SEBI), reduced the launch period for MFs to 15 days and the timeframe for allotment of units to five days, a technology to help funds comply with the norms has been launched.

Computer Age Management Services (CAMS), the registrar and transfer agent, has designed an offering whereby investors or distributors on their behalf can apply online during the NFO period.

This will shrink the time needed for CAMS to allot units to 1-5 days.
“This will be through its website and will be available
to subscribers and distributors of MFs,” a source told DNA. The firm is learnt to have made presentations to various asset managers, which are keen on the offering.

Explaining the product, the source said, “On the www.camsonline.com website, existing fund holders can put in their folio number and some of the details such name, address, numbers would be automatically filled in. For new customers they will have to fill up details, but still there is help in filling as when you write `10,000 in application, the amount in words is
automatically filled in.”

Upon filling the application online, one has to take prints and submit it at locations, which can be CAMS offices, asset managers and participating banks. The list of closest locations would be known while applying online. “As the time period is now reduced to five days the processing can be on a T+1 cycle (one day) after submission of physical documents,” the source said.

At present, fund houses collect physical applications from investors, send it to CAMS office in Chennai in the physical form and then process it to finally make the allotment. The online procedure will directly supply the information the same day to the Chennai back office and await the physical submission of forms.

The product shall be of use more in case of equity MFs than debt as the number of investors applying for debt MF NFOs may be in thousands, but in equity it is in lakhs due to high retail participation.

A MF official said, “We can manage with pre-NFO activities in the 15-day deadline set by SEBI from August 1, 2010. But processing of applications and allotting of units in five days was a task. People usually apply towards the end of the NFO period and then there is a lot of burden to handle. This should help us fix it.”

“However, the know-your-customer (KYC) verification wherein the identity of the person is to be verified before accepting a MF application will have to be completed either before or during applying online. You can subsequently do your KYC as well,” the source said.

Source: http://www.dnaindia.com/money/report_online-applications-to-help-mutual-funds-meet-new-nfo-timeframes_1433923