Do dynamic funds work for you?

A good dynamic fund can absolve you of the headache of timing the markets, but invest at least for five years

Wouldn’t you love to buy equities when markets are at a low and sell them when markets are at a high? As basic as this stock market mantra is, it’s easier said than done. It is hard to resist temptation when markets are near their peak and it’s tough to find the courage to jump into equity markets when they’re falling.

There’s an alternative. If you do not mind taking the mutual fund (MF) route, dynamic (equity-oriented) funds switch your money between equity and debt markets. Apart from the existing six such schemes in the market, two new schemes were launched in November 2010. Pramerica Asset Managers Pvt. Ltd launched Pramerica Dynamic Fund (PDF) and Principal PnB Asset Management Co. (AMC) Ltd launched Principal Smart Equity Fund (PSE). Should you look at them?

Playing on both sides

Dynamic funds switch between different asset classes, depending on their attractiveness. Even hybrid funds do that, but they can’t switch rapidly between asset classes—they’re typically true to one asset class such as equity in case of balanced funds and dip their hands sparingly in other asset classes. Dynamic funds aim to switch aggressively between equity and debt and are more opportunistic.

In rising equity markets, they invest more in equity and less in debt and cash. But when markets start to fall, these funds sell equities and get into cash. “Investors do not take full benefits of rising markets because at higher levels, they do not book profits adequately. Also, at lower levels, people hesitate to invest in equities; they aren’t sure when they should invest; they miss the rally,” says Rajat Jain, chief investment officer, Principal PnB AMC. These funds switch dispassionately, he adds.

Take the case of Franklin Templeton Dynamic PE Ratio Fund of Funds (FTDP). When the Sensex was around 10,000 levels in March 2009, FTDP had invested 91% of its corpus in equities. Now that the Sensex is around 20,000 levels, it has only 30% invested in equities; the rest is in debt.

Not all dynamic funds are alike. Some such as HSBC Dynamic Fund (HDF) switch between equity and cash depending on how their fund manager perceives the markets. Others such as FTDP look at indicators such aas the Nifty’s price-earnings (P-E) multiple to determine how heated the markets are. Apart from determining their asset allocation, they also differ in terms of how they invest. For instance, FTDP is a fund of funds scheme (that invests in other funds) and splits its corpus between Franklin India Bluechip Fund (a large-cap equity scheme) and Templeton India Income Fund (an income scheme); both schemes from its own fund house.

After determining its equity and debt split, UTI—Variable Investment Scheme—Index Linked Plan (UTIV) manages its equity component passively. It invests its entire corpus in shares of companies—and in exactly the same proportion— as they lie in the Sensex. Others such as HSBC Dynamic Fund allow their fund managers to determine the equity and debt split and also to pick and choose equity and debt scrips in which the scheme would invest in.

Freedom at a cost

Schemes such as HDF, which actively manage the equity-debt switch, usually restrict the fund manager’s freedom to exit equities—even in the face of excessive market volatility—and sit on cash. “To be able to exit equities and sit entirely on cash is a very bold move that can go horribly wrong, if the fund manager has the freedom to do so. If the markets jump back, the fund manager is caught off-guard and underperforms badly,” says Nilesh Shah, deputy chief executive officer, ICICI Prudential Asset Management Co. Ltd. Therefore, though ICICI Prudential Dynamic Fund (IDF) has not explicitly stated the parameters that will determine its equity-debt split in its scheme information document, internally the MF looks at the price-to-book value (PBV) ratio of the Nifty. Higher the PBV, lower will be its allocation to equity.

Tushar Pradhan, chief investment officer, HSBC Asset Management (India) Pvt. Ltd, is cautious, too, when it comes to the fund manager’s freedom in dynamic funds. Though he joined the MF only in June 2009, he is mindful of how badly the fund house was punished for sitting on excess cash between March and May 2009. During that time equity markets rebounded and shot up; fund houses such as HSBC MF with high cash levels lost out miserably. “Unless you have a view that the Indian equity markets are going to fare very badly in years to come, there’s isn’t merit in having too much cash in a portfolio,” says Pradhan.

At present, HDF goes a maximum of 20% in cash (10% only for all other HSBC equity-oriented schemes) as a “tactical call” if the fund manager has a negative view on the market. On the other hand, if fund managers have freedom to choose the equity-debt split, most prefer to be heavy in equities to be able to retain the equity tax advantage; schemes that invest at least 65% of their corpuses in equities qualify as equity schemes and do not impose long-term capital gains tax.

Do dynamic strategies work?

To check whether dynamic fund strategies work or not, you’ve got to first check the level of flexibility with which these funds can switch between equity and debt. For instance, of the six dynamic funds present in the Indian MF industry, only two schemes— FTDP and UTIV—can switch completely to cash. Both these have been around for more than five years. Of the two, FTDP has a better track record; it gave a return of 17.75% in the past five years. UTIV managed to give just 3.73% in the same period. Newly launched PDF and PSE, too, can completely exit from the equity markets and sit on cash.

“Typically, dynamic funds underperform pure equity funds in continuously rising equity markets because these funds sell equities and get into cash as equity markets go up,” says Arvind Bansal, vice-president and head (multi-manager investments), ING Investment Management (india) Pvt. Ltd, that manages ING OptiMix Asset Allocator Multi Manager FoF (IOMM). In 2007, on the back of rising equity markets, FTDP returned 27.42% against 40% returned by balanced funds on average. The fund got saved in 2008 when equity markets crashed; it lost 25% against an average loss of 37% by balanced funds. Overall, though, the fund seems to have got its act in place; it returned 18% in the past five years against 15% category average returns by balanced funds. IDF has done well across time periods, but that is mainly because it restricted its cash levels to up to 35% and actively managed its equity portfolio.

PDF aims to be different. It doesn’t just limit itself to one parameter such as the equity market’s P-E multiple. It takes into account several parameters such as fundamental (earnings growth, inflation, interest rates), liquidity (money supply, currency valuations) and volatility (details from the derivatives market) parameters to arrive at its stated equity-debt split. “To ascertain whether the markets are overheated or not, it is necessary to look at a whole host of factors and not just P-E,” said Vijai Mantri, chief executive officer, Pramerica Asset Managers. However, K.N. Sivasubramanian, chief investment officer, Franklin Equity India, Franklin Templeton Asset Management India Pvt. Ltd, says: “The need of the hour is to have simple products. Nifty’s P-E (FTDP refers to it) is derived by the P-E of individual companies from within Nifty, which makes it a good indicator. FTDPEF’s model has been tested through markets cycles and is reflected in the fund’s performance.” While PDF’s formula ascertains its present equity exposure at about 70%, FTDP’s equity exposure at present is 30%. Time will tell who is right and who’s not.

What should you do?

A well-managed dynamic fund can absolve you of the headache of timing the markets, if at all you get affected by market volatility. If that’s your concern, it bodes well if your dynamic fund depends on a formula that ascertains its equity-debt split. In future, expect more exotic funds—such as PDF and IOMM—to be launched. “We at HSBC too are reviewing our products and contemplating to introduce an algorithm or some parameter that the fund manager can follow blindly. In this case, the fund manager can fully focus on picking and choosing scrips. The headache of asset allocation will then be left on a formula that will also be sufficiently back-tested,” says Pradhan. He says that dynamic funds are tricky to manage and fund managers have to be very careful. “If we go by short-term volatility and shift to cash, but the market rises for the next two years or so, we burn ourselves badly.”

Opt for dynamic funds only if you have the appetite to invest for at least five years. “It is a fill-it, shut-it, forget-it product,” says Shah.

Source: http://www.livemint.com/2010/11/29213434/Do-dynamic-funds-work-for-you.html

Liquid fund NAV lock possible only after MFs get money

Capital market regulator Sebi said that investors in liquid funds would no longer get the net asset value NAV of the day before the application date, if the mutual fund doesn’t get the application and money before 2:00 pm. Sebi, in a circular on Friday, said liquid-fund investors would only get the NAV of the day, just before the day on which the mutual fund has received the money irrespective of the time of submitting the application.

“It is observed that mutual funds are deploying funds without receiving clear funds in the scheme account. As a matter of good practice and to avoid systemic risk, it has been decided to modify certain provisions ,” said Sebi.

The regulator said that investors would be allotted units in liquid schemes only if an application is submitted before 2:00 pm, entire investment fund is credited to the bank account before the cut-off time and the money is available without any credit facility. The same conditions would be applicable for allotment of units during switching to other schemes such as liquid plus or other debt schemes.

Investors in liquid schemes, mainly companies, have widely followed a practice , where they submitted the application before the cutoff time and simultaneously directed the fund house to switch to liquid plus scheme. This helps investors get the previous day’s NAV of the liquid scheme and get returns of the liquid plus scheme of the same day.

Mutual fund officials said that the Sebi move is likely to affect flows into liquid schemes, where companies park their idle money. A top official of a bank-promoted mutual fund, on condition of anonymity, said, “Let’s assume that the investor has made the RTGS payment order at 10:00 am in the morning, but the mutual fund gets it only after the cutoff time of 2:00 pm, the investor will not get the previous day’s NAV. All the more, his money will lie idle with us for a day.” Real-Time Gross Settlement (RTGS) is the fastest way to transfer money between banks.

A fixed income fund manager of another bank-promoted mutual fund said, “Now, there will be bigger fights between fund houses and companies (investors) over the timing. Companies and high net worth investors are never known to transfer money on time and often blame us for the delay.”

According to Dhirendra Kumar of Value Research , the Sebi move could create a logistical problem. “Banks do not have the necessary infrastructure to deliver the funds by 2.00 pm. The Sebi move will basically impair the flexibility to move their money across schemes during the day,” said Mr Kumar. Mutual funds are already reeling under the impact of a Sebi’s move in August 2009 to ban them from charging investors, in their equity schemes, an initial fee to pay distributors. The step has resulted in distributors selling fewer equity schemes. Sebi, in the circular on Friday, also said that interval plans would mandatorily be listed and investors could redeem only during the specified transaction period — the period during which both subscription and redemption may be made to and from the scheme.

“It has been noticed that certain scheme information documents provide that the subscription to the scheme can be made during a specific period (known as specified transaction period) and the repurchase of units is permitted on all business days subject to applicable loads (except for redemption during specified transaction period when no load is charged),” the circular said.

“As per the current regulation, there is no restriction on tenure of securities in which interval scheme can invest. This read with daily redemption option may result in asset liability mismatch,” it said.

Source: http://economictimes.indiatimes.com/markets/regulation/Liquid-fund-NAV-lock-possible-only-after-MFs-get-money/articleshow/6998829.cms

Infra spend, capex will drive growth : Principal MF

With the thrust on infrastructure and pick-up in capex, we will see leadership returning to that sector.

With the markets correcting, identifying sectors and stocks that are likely to lead from here will be rewarding for investors. Business Line spoke to Mr P.V.K. Mohan, Head-Equities, Principal Mutual Fund, to hear his views on the sectors that drove the market and the ones that could be the outperformers from here on.

Excerpts from the interview:

In the Indian market different sectors tend to drive each leg of a stock market rally. What in your view are the promising sectors for the next few years?

I think the traditional sectors will do well. Clearly, this rally was led by financials, and sectors related to the consumer space, such as automobiles. These sectors will probably continue to do well. In terms of leadership, one sector that performed well between 2004 and 2008 was infrastructure, though it completely underperformed in this rally.

Now, if the country has to get back to the growth trajectory of 8-9 per cent, there is an urgent need for infrastructure spending. The capex from the private sector needs to pick up. So we will see leadership coming back to that sector. Consumption is one pillar of the economy and it is on a strong track. We are seeing this in durables and in some of the FMCG space.

Our view over the medium term is more of a bottom-up view and not about sectors as a whole. If you look at the long term, I would bet on agri-based stocks. We have seen fertilisers doing well. Going forward, we will see tractor and seed companies join in too.

Do you anticipate expansion in capital expenditure and how is that going to help capital goods sector?

We had one leg of growth from the revival of the economy and some priming of economy by government expenditure. Given the deficit concerns, I think clearly it's the time for the private sector to take on the capex mantle. Even in infrastructure, the role of the private sector is critical. Currently it not involved in a big way, but we are seeing the green shoots. When the auto industry is running at 100 per cent capacity, and the durables industry is at full capacity, it tells us that clearly there is a need for expansion. We see Tata Steel is going ahead with expansion. We see better times ahead for capital goods and infrastructure.

The developed countries are yet to come out of the recession and the rupee appears to be strong. How will this impact the IT sector?

The currency part is a definite headwind for the IT sector. Having said that, the largest part of business at this point is coming from the US. Demand conditions are pretty good there. Corporates are sitting on huge cash reserves. There is the political expediency of anti-offshoring talk on and off. But this model works well for both the Indian companies and for the country looking to cut costs. Very recently the UK government revalidated a contract with TCS after talking out against offshoring jobs. They have to place the order if they want to cut the deficit and costs.

So, I think the demand side is good but on the costs side, salary, attrition and rupee appreciation are the challenges the industry has to live with. The bigger guys will be able to deal with the challenges, but the smaller players will have volatile performance. The industry has shown the ability to meet challenges on earlier occasions, but the margins are likely to take little bit of hit. This sector will be a market performer.

In a highly inflationary and rising interest rate scenario, what is your call on banking and finance?

I think with rising interest rates, typically in a high growth or in strong economy, the banks were always in a position to pass on the costs to the customer. I think today they are in spot where the cost of CASA is higher; and the lending rate may rise. Financials at this point of time may see some compression in the spreads.

Nevertheless, they will remain healthy, if the economy grows at 8-9 per cent, they will be able to manage the margin. In the NBFCs space, those that are well-capitalised can tide over the problem. So in financials, size is going to play a role.

Auto sales continue to be robust, with a normal monsoon. How is this sector likely to pan out?

We are positive on the sector. Two factors are driving the sector, one is rural demand, helped by NREGA. Two the MSP prices are raising. So farmers with a not-so-great monsoon last year have seen their farm incomes go up because of the realisations. Given that India has structural deficits in agriculture, prices will remain buoyant. So, that is a very important contributor for the demand and it is visible in two- wheelers. Even for companies like Maruti, 15-20 per cent of the sales are now being derived from the rural segment; this was in single digits a few years back. In the urban market, due to the faster replacement cycle, bank funding coming back, better job security, due to wage inflation, the EMI culture is coming back. So, autos will continue to do well. On the commercial side, light trucks will see strong growth because of the last-mile connectivity. Overall, we feel that the growth momentum is positive and will remain so.

Source: http://www.thehindubusinessline.com/iw/2010/11/28/stories/2010112850970800.htm

Scam: Sundaram MF waits 'n' watches

Sundaram Mutual Fund, a unit of BNP Paribas’s former partner in India, said it will “wait and see” before deciding what to do with investments in a brokerage involved in a probe into bribes and improper loans.

“We will take a commercial call, keeping the long-term interests of our investors in mind,” TP Raman, managing director at Sundaram Mutual, said in a phone interview on Thursday.

Sundaram Mutual, a unit of Sundaram Finance, manages three funds that own a combined 1.49% stake in Money Matters Financial Services, the Mumbai-based brokerage, according to data compiled by Bloomberg. Shares of Money Matters tumbled by their 20% limit for a second day, reaching Rs 427.05 in intraday trade.

Rajesh Sharma, chairman of Money Matters, was on Wednesday taken into custody by India’s federal investigating agency for allegedly conspiring with others to bribe state-run lenders’ executives in exchange for loans for clients and confidential information.

Executives at Money Matters weren’t available at their offices, which have been sealed by the agency.

Separately, India Infoline advised Money Matters Financial Services for a sale of shares to large investors this year and hasn’t used the securities firm for debt syndication or lending money.

“We did our due diligence but you cannot do an investigation,” India Infoline’s Chairman Nirmal Jain said in a phone interview from his office in Mumbai on Thursday. “As an investment banker, we did our job.”

Rajesh Sharma, chairman of Mumbai-based Money Matters, was among eight people arrested by India’s federal investigating agency on Wednesday following a probe into bribes and improper loan disbursals.

India Infoline shares sank 15%, the most in 19 months, to Rs 91.3 as of the 3:30 pm close in Mumbai.

Money Matters fell% for the second day on the Bombay Stock Exchange to close at Rs 427.05.

Source: http://www.indianexpress.com/news/scam-sundaram-mf-waits-n-watches/716114/2

Principal Mutual Fund announces launch of Principal SMART Equity Fund

Principal Mutual Fund has announced a new offering, Principal SMART Equity Fund, an open-ended equity scheme based on the P/E ratio of the S&P CNX Nifty Index. The scheme will be open for subscription from 26 November 2010 and will close on 10 December 2010. The fund performance will be benchmarked against the Crisil Balanced Fund Index.

Principal SMART Equity Fund, an open-ended equity scheme, is a P/E (Price to Earning Ratio) based fund which dynamically changes its asset allocation between equities and debt / money market instruments based on the weighted average price-earnings ratio (P/E ratio) of the S&P CNX Nifty Index (NSE Nifty). When the markets become expensive in terms of a set ‘P/E Ratio'; the scheme will reduce its allocation to equities and move assets into debt and / or money market instruments and vice versa. Such a strategy is expected to optimize the risk-return proposition for the long-term investor.

Speaking at the launch of the new fund Mr. Sudipto Roy, Business Head, Principal Mutual Fund said “Principal SMART Equity Fund is a product that aims to make the best of any market swing. It is based on the P/E based model that enables asset allocation to be managed by moving investments strategically across equities and debt based on certain pre-set conditions and time periods set by the fund. And all this is done ‘automatically' as part of the fund's strategy. We are confident about this product and look forward to a positive response from investors.”

Elaborating on the fund Mr. Rajat Jain, Chief Investment Officer, Principal Mutual Fund and Fund Manager said “The Principal SMART Equity Fund is a fund that follows the basic rule of investing – Buy Cheap and Sell Dear. Not many people are able to do it successfully, which is why you see a disconnect between returns of market and returns of the investor. This scheme does it for you, regularly and automatically, as defined in the scheme information document based on pre-set P/E ratio levels. This scheme is suited for investors looking for long term investments without worrying about market gyrations.”

The scheme offers two options viz. growth and dividend option.

The scheme would allocate upto 100% of assets in equity & equity related instruments of large cap companies with medium to high risk profile. It would at times allocate upto 100% of assets debt or money market securities and /or units of money market / liquid schemes of Principal Mutual Fund with low to medium risk profile.

Investment in derivatives shall be upto 50% of the net assets of the scheme. Deployment upto 50% of its total net assets of the scheme shall be in stock lending, which is subject to the SEBI regulations.

The minimum application amount is Rs 5000 and any amount Rs 1 thereafter. It also offers Systematic Investment Plan (SIP) for a minimum six installments of Rs 500 each.

The scheme will charge an exit load of 2% for exits upto 1 year, 1% for upto 2 years and nil for after 2 years.

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

Ban on entry load has hit small IFAs hard: Priya Ramarao

All financial advisors tell you that they are good. But are they? How can you evaluate their claims? Read on! In an exclusive interview with Pooja Chopra Goel of Myiris.com, Priya Ramarao, CFP CM, InvestmentYogi explores the business of financial planning and how investors can use it to their advantage.

What led you to opt for a certified financial planner (CFP) course and to choose a career in financial planning?
I previously worked in branch operations division in personal loans business. There, I used to interact daily with lot of customers coming from different walks of life, i.e. self-employed, salaried professionals, pensioners etc. I realized that there was a huge gap between what the customer needed and what was being offered to him. There are a vast majority of people who do not have access to personal finance advisory services. As it was always in my nature to help people, I felt I could do more than just selling loans. That`s how I got interest to enroll myself into CFP course. I obtained the certificate and now am working for InvestmentYogi.

How does a financial advisor make his living and is there any conflict of interest between him and his customers?
Trust is the most important element in an advisor-client relationship. An IFA must disclose any business agreement / compensation arrangements between the IFA and a 3rd party (which may be an AMC, a life insurer, and/or broker) to the client at the beginning of the agreement itself, to avoid conflicts of interest.

When someone approaches a financial advisor for the first time, what are the questions that they should ask?
When one approaches an IFA for the first time, the important points to note are the professional qualifications of the IFA (whether he/she is a certified to handle an individual`s personal finances) and the experience in handling client portfolios. It will help if an IFA can provide references of clients he/she has provided financial planning service to. Another important aspect to check is whether the IFA is making the client feel comfortable during the meeting; an ideal financial planner is one who has the client`s interests in mind.

There is a view that no loads and reduction in upfront commissions have really hurt small IFAs and the retail business. Is this a view that you also share?
At the face of it, the moves proposed to remove loads and upfront commission may appear to benefit the investor. However, we should not forget that the majority of the mutual fund penetration has been through the MF agents/advisors and will continue to do so. Mutual fund is a product that necessitates quality advice. We need to strike a balance between quality advice provided by agents/advisors and their compensation arrangement. The current trail commission is too low a motivation to bring in new business. One way to do this is to provide quality training in financial products to the agent/advisors. NISM (National Institute of Securities Markets; established by SEBI and FPSB, India) has already acted in this direction and have come out with a unique certification program for small IFAs called `Certification Examination for Financial Advisors`. It is expected to serve as skill assessment mechanism as well as help facilitate the augmentation for competent financial advisors in the country

Out of the several changes that advisors now have to face, which one is a more difficult one to cope with?
Among the major changes that have been brought into force, such as ban on entry loads, investor complaint disclosure facility (on fund`s website), ASBA facility, DTC implementation from April 2012, and uniform exit loads - the ban on entry loads for new and existing mutual fund schemes may undoubtedly be the difficult one to cope with for small IFAs. However, there are other ways in which an IFA can earn his due, such as, charging a flat fee for his service. But for this, they need to broaden their products & services basket and upgrade their skills and knowledge for value-added services.

What are your plans for 2011 in terms of product portfolio, new services, client segments etc?
InvestmentYogi plans to expand its services both online and offline. We will give users a 360 degree view of their finances and continue rolling out new and innovative products online. Our goal is that over the next 5 years, we will help over 2 million middle class Indians save by helping them make smart investment choices.

What is your take on current market situation? What are the key factors that will drive the stock markets in 2011? What is your advice to retail investors now?
Although there is no doubt about India`s long term growth and the fantastic performance of Indian stock market over the last couple of years, the current market is still not completely immune from future global shocks. The market has been scaling new heights with FIIs(foreign institutional investors) push and investors should be cautious and understand that once there appears any weak global economy outlook or even a stock market correction, as is the case now, FIIs will take the first flight, pulling the market down along with the investor`s hard-earned money. Therefore, it is wise to diversify your investments across asset classes always to reduce the risk of loss from any one asset class.

Is there anything else you would like to share with our readers?
Most people don`t plan for the future. Not that everyone have the same amount of goals to be seriously sitting down and planning for the years ahead. But having a plan in place atleast with respect to personal insurance will remove half the worry and stress that a working individual goes through in his/her life. Also, it is important that investors have basic level of financial knowledge and not rely totally on the friends, relatives and IFAs for finance related advice, as each person has his/her unique risk appetite, investment preferences, and therefore, the advice on where to invest cannot be a generalized one. Investors can make us of investor camps/workshops, online resources to improve their financial literacy.

Source: http://www.myiris.com/newsCentre/storyShow.php?fileR=20101124115104173&dir=2010/11/24&secID=livenews

Foreign investors will continue to buy: Franklin Templeton

KN Sivasubramanian is chief investment officer (CIO), Franklin Equity-India, Franklin Templeton Investments , which manages assets of over Rs 38,000 crore in India besides acting as advisor to offshore funds managing around $2 billion of equity assets. In an interview with ET , he says that there is increased confidence in the Indian economy and global investors will continue to buy selectively at these levels even if the liquidity situation changes. Excerpts:

How do you see the second round of quantitative easing affecting emerging markets like India?

Despite the recent correction, most stocks are trading marginally higher than the fair value based on the long-term averages. Most of the excess global liquidity is finding its way into emerging markets. However, future direction of the market will depend on earnings growth. In India , for long-term and overseas investors, there is increased confidence about the economy and we feel that global investors will continue to buy selectively.

What could reverse the trend in inflows?

Given that a lot of the rally is dependent on global liquidity and risk appetite, any weakening of global sentiment will impact inflows. Having said that, this would only be a temporary phenomenon and longterm inflows will continue to track the strong fundamentals. There is a dichotomy among foreign and domestic investors, of late. While foreign investors have continued to invest in the Indian market, domestic investors, including retail, have either been selling or sitting on the sidelines.

Do you think the market was running ahead of valuations, after seeing the second-quarter earnings?

The second-quarter results were along the expected lines. While some sectors, like cement and commodities, disappointed, consumption-related sectors continued to report good results. Also, the banking sector, which is a barometer of the economy, beat expectations. We have seen some impact on the margins of some companies due to a rise in input costs, like labour, raw material, among others. The impact of this hike in the input costs will be passed on to the end-user only with a lag effect. Markets, like India, are likely to enjoy valuation premiums due to the long-term growth potential, with the economy being driven by domestic demand.

In a market that has started factoring in growth numbers of FY13, how do you identify value?

We follow a bottom-up approach and focus on stock-picking . The investment style is a mix of growth and value. Our investment focus is on long-term wealth creation and we ignore short-term momentum stories.

Are you making any key changes to your portfolio allocations? Which are the sectors you are overweight and underweight on?

Our overall investment strategy has remained the same, with the broad themes being domestic consumption and investment — infra-structure spending and increasing capex. This is reflected in our top exposures — capital goods and financial sectors. We continue to remain overweight on materials, steel or nonferrous and some cement stocks. In the consumption space, we like telecom companies since we feel that current valuations are discounting all the negatives. While the pharma sector has been doing well, there are selective mid-cap stocks that are attractively valued. In the financial services space, we have exposure to broking companies and are positive on private banks.

What about the real estate sector?

We have very little exposure to this sector due to a lack of transparency. We like some South-based real estate players because of the revival in the demand from the IT/ITeS sector, which is expected to have a positive impact. But overall, we still feel that the sector doesn’t offer compelling valuations.

How do you think interest rates will move?

While the central bank has indicated a short-term pause, a lot will depend on how various factors pan out — inflation, global liquidity or risk appetite, capital flows, fiscal deficit and global commodity prices. Given that the trends in food inflation are being increasingly driven by structural factors, the government needs to address the bottlenecks for a long-term solution. The central bank is sensitive to the fact that the interest-rate environment shouldn’t derail economic growth trends.

How are AMCs coping with recent regulatory changes?

The asset management industry has witnessed margin pressures not only in India, but also globally due to the financial crisis and various regulatory actions since then. The fund houses and the distribution community are trying to adapt to the new dynamics. We think that long-term opportunity in any financial services business including the asset management business remains robust in the coming years in India due to the high savings rate and growing disposable incomes. India continues to be underserved in terms of financial services, given the low penetration of banking and financial services.

Source: http://economictimes.indiatimes.com/opinion/interviews/Foreign-investors-will-continue-to-buy-Franklin-Templeton/articleshow/6967219.cms?curpg=2

Principal Plans a New Fund

Principal Mutual Fund is all set to launch its Principal Smart Equity Fund, an open-ended equity scheme that will invest in equity or debt instruments depending on current market valuations. This way, the fund limit’s the fund manager’s role by automatically deciding on equity exposure based on pre-redefined PE (price to earnings) ratio of the NSE Nifty.

As per the fund’s mandate, the equity component of the portfolio would be 100 per cent for a PE multiple of up to 16. Subsequently, it will drop to zero and the scheme would be fully invested in debt once the weighted average PE crosses 28. Says Sudipto Roy, business head, Principal Mutual Fund; “We have seen that once the markets cross the PE of 26, it usually witnesses sharp corrections. Based on this observation, we have defined different levels of PE ratio to correspond to the equity exposure of the fund.”

The scheme is open for subscription from 26 November, 2010 to 10 December, 2010 with the equity component of the portfolio in large-cap stocks and the debt portion in money market securities and liquid schemes of Principal Mutual Fund. The fund levies an exit loads on redemption within two years. Usually, equity funds charge an exit load only on withdrawals within the first year. The scheme will charge an exit load of 2 per cent for redemption within a year and 1 per cent for redemption between one and two years. “Our objective is to encourage investors to stay in the fund for a long time for real chance of wealth creation.”

Source: http://www.valueresearchonline.com/story/h2_storyView.asp?str=15610