Optimism won't come back in a hurry: Anand Shah

The next three months would continue to be challenging for Indian shares, but there is a possibility of positives emerging from both local and global markets thereafter, says Anand Shah, chief investment officer at BNP Paribas Mutual Fund, in an interview with Mehul Shah. Edited excerpts:

Looking at the domestic and global events, where are the markets headed for in the next six-nine months?
From the last year to this one, while the challenges on the macro front remain, valuations have turned favorable. However, valuations alone cannot be a trigger for the markets to rally. Beyond three-six months, there is a possibility of positives emerging from both local and global markets. On the global front, we expect the uncertainty surrounding the European crisis getting resolved to a certain extent. On the domestic front, inflation is expected to decline, leading to interest rates being cut, along with measures taken by the government (we will have a Budget in between) to kick start investments and keep the consumption momentum going. In short, the next three months would continue to be challenging. But, given the current valuations, investors looking at India from a 5-10 year perspective may want to start investing.

What key positives are you expecting for the markets in the next few months?
We are not really expecting the optimism to come back in a hurry. But, one needs to be watchful about when the pessimism peaks. That would be the first step when the market would stop falling and show the first bounce. Because, today, the news flow, be it the local or the global front, isn’t getting better. We do not have a specific time horizon, but eventually, interest rates are expected to fall. Commodity prices should fall. Oil and metal prices should fall. That’s when the Indian consumption story will start kicking again. As the environment globally gets stable, even the foreign funds will start trickling in.

Analysts have been cutting the Sensex earnings estimates for FY13 and there could be further downward revisions. Do you think valuations have become really attractive?
Definitely, the markets are not at rock bottom valuations. While they corrected last year, we have segments that have appreciated and became more expensive. So, overall, price-to-earnings (P/E) ratios have not shrunk to levels for us to say we are at the extreme bottom. At the same time, the earnings downgrade cycle continues. So, while we are optimistic from a 6-12 month perspective, it doesn’t mean the market can’t correct further, given there is a room for valuations to shrink.

Which sectors you are betting on right now?
We like select companies and segments within the consumption space from a longer-term perspective. For example, telecom, which has continued to do well on the volume front, has now the pricing also looking up. Private sector banks and a few non-banking financial companies (NBFCs) that have their non performing assets under control may do well if interest rates were to fall.

Within the FMCG space, we are looking at some companies that have a significant pricing power, especially in the consumer staples space. We also like quite a few consumption companies, where the raw material pressures are coming down. With the depreciation in rupee, there may be segments within information technology (IT), pharmaceuticals, textiles that would benefit. There are stock picking opportunities in this market and we are trying to benefit from them.

Given the severe correction in stock prices, do you think there are opportunities for investors in the capital goods/engineering/infrastructure space?
Even as there are no blanket opportunities in the infrastructure space, there exist selective ones. Very clearly, what’s happening in the infra sector has a lot to do with the slowdown in the government or private capex, along with debt on their balance sheet, rising interest rates, global uncertainty, environmental issues, rising commodity prices, etc. Hence, a variety of factors have led to the correction in stock prices.

So, we are looking at all the factors that may have hurt the sector. We are definitely looking at select utilities and companies with assets on ground. Quite a few road projects look interesting.

Which kind of sectors/companies are a strict no-no in this environment?
Very clearly, we don’t like companies with stretched balance sheets — those that are undercapitalised and would need to raise money in this market. Such companies would be avoided at this point in time. Within sectors, we are looking at global commodities which are off our list. We have minimal exposure to metals. We are very selective within the banking space. Real estate is another segment we do not have exposure to. Also, companies with a huge exposure to capex cycle, like capital goods, are off our list.

Source: http://www.business-standard.com/india/news/the-optimism-wont-come-back-inhurry-anand-shah/461397/

MFs want breather amid spate of regulatory changes

Consistent regulatory changes over the past few years have started taking a toll on the Indian mutual fund industry. Though, most executives at fund houses admit that the steps are aimed at growing the industry, they complain in private that "there is no breathing space left ".

Earlier, soon after taking over as chief executive at Association of Mutual Funds in India (Amfi), HN Sinor had acknowledged the fact that regulatory changes were "too many and too soon", making industry unsettled.

"We have an astute regulator who understands the problem of industry and is concerned how to grow it. But problem lies when new circulars are issued and we wonder how to go about it," says chief executive officer (CEO) of a mid-sized fund house, who did not wish to be named.

UK Sinha, who took over Sebi's chairmanship last year in February, headed UTI Mutual Fund as CMD.

Adds another fund manager. "We are grappling with changes which have come in a very short span of time. The changes have thrown the whole industry's business model out of gear. We are trying to acclimatize with the new norms but it needs time and (we) cannot expect overnight improvement," he says.

Abolition of entry load on equity schemes was the turning point making distributors wary of selling MF products. Thereon followed stringent KYC norms, new debt valuation norms on weighted average market price, due-diligence of distributors, guidelines on transaction charges, mandate to banks to reduce their exposure in liquid funds to not more than 10% of their networth, KYC norms for foreign investors and the consolidated account statement.

Other chief executives, Business Standard spoke to, say it is hard to keep a count of changes. "I get confused amid so many changes and cannot keep track of them at a given point of time," explains a restless top official.

To a large extent it sounds true. For instance, different versions, conflicting interpretations, lack of understanding whenever Securities and Exchange Board of India (Sebi) puts up a circular has become too often. One of latest norms of single account statement is a clear example when fund managers had conflicting interpretations of the circular.

Industry's top CEOs, in a recent meeting with Sebi, requested that instead of continuous regulatory changes, a proper road map should be drawn up so that the industry is aware of the shape of things to come.

According to Dhruva Chatterjee, senior research analyst at fund tracker Morningstar India, "Fund managers are feeling the heat because of the bad year for equity markets and mutual funds. Most of the regulatory changes are in favour of investors. Primarily, barring a few, all are on marketing and distribution front which have hit the balance sheets of several fund houses."

Industry needs stability in terms of regulations rather than issuing circulars one after another, says CEO of one of the oldest fund houses. There should be cajoling and hand holding as these are initial times for the industry to grow, he further adds.

Another issue which fund managers cited and have recently apprised the regulator too is discussing the pros and cons before issuing statements. "Once circular is issued, it is hard for the regulator to take it back for whatever reason. Our point is, industry should be told and discussed with before any regulatory changes come up," he says.

Source: http://business-standard.com/india/news/mfs-want-breathing-space-amid-spateregulatory-changes/154893/on

Investing in fund of funds

When markets behave like they have in 2011, the one who loses less is called a winner. Fund of Funds by their very design are meant to lose less. Still, only 1 per cent of the Indian mutual fund industry's AUMs are made up of Fund of Funds (FoF). One would think there must be a good reason for it. Actually, allow me to give you three. But first, what is a FoF?

At its simplest - a mutual fund that invests in other funds is a fund of funds. Conceptually it does what you do, create a portfolio of funds. The difference being, when you buy funds yourself, you buy them individually and hold and track them separately, while when you buy a fund of funds, you hold just one fund which in turn holds other mutual funds inside it.

Coming back to the reasons; first is plain boring mathematics. Because it holds many funds in it, a fund of funds will not deliver performance equal to or better than the single best performing fund that it has invested in. The return of a fund of funds will always be closer to the weighted average returns of the funds it has invested in, quite like the return of your own portfolio of funds.

And by the very same logic, a FoF will not go down as much as the worst performing fund it holds inside it. For this very reason, fund of funds are known to give superior risk adjusted returns.

Secondly, FoF until very recently were perceived as competition by distributors. If one single fund of funds itself can buy, hold, sell, over-weight, under-weight the funds it invests in, then how will a distributor add value to the investor. This misplaced perception has begun changing in the last one year. FoF AUMs have more than doubled in the last 15 months to over R 8,000 crore as of Oct'11.

Thirdly, the larger share of fund of funds currently available in India actually invest in funds of only their own fund house. This limits the diversification benefits an investor aims for when he himself buys mutual funds from different fund houses. Globally, several fund of funds pick the best of breed funds from across different fund houses and put them together into one. These are called Multi Manager fund of funds. It's like putting together the best cricket players from across the world into one team.

Fund of funds bring several advantages too. Briefly, it's a great way to start investing into mutual funds for a first time investor. No need to worry on how to pick, retain or change a fund. If you are an SIP investor, just a Rs 1,000 SIP could actually give you access to 4-5 best of breed managers in one funds of funds Vs you having to take out Rs 1,000 minimum subscription for every manager you will invest in separately by yourself.

And for those who already hold too many funds and see managing them a hassle, they too can simplify and consolidate their holdings through a fund of funds, as long as they can find one that is similar in objectives to the funds they hold. And the good news is that options do exist.

Amongst the least known but significant advantages of a fund of funds is the short term capital gains tax that you can save. If I assume that you do change some if not all the funds you hold at least once within the first 12 months of investing in them, the gains you make on them become taxable.

However, when a fund of funds manager changes any fund it has invested in, there is no tax liability that 

accrues on to you.

Now if you combine all of the above benefits, it becomes easier to appreciate the rapid growth of FoF in India recently. FoF are now available here for single asset classes and for multiple asset classes too. Globally, fund of funds are often preferred by super HNIs for just two reasons - their superior risk adjusted returns and equally importantly, their convenience.

Source: http://www.indianexpress.com/news/investing-in-fund-of-funds/897338/0

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http://ciel.co.in/index.php

You will find Training calendar at left side bottom of the web. Just click on alert me and get registered you self for CPE program.

Mutual funds’ AAUM falls 4.35% in Q3

The Indian mutual fund industry saw fall of over 4.35% in its average assets under management (AAUM) for the October-December quarter following a lack of participation from retail investors.

According to data from the Association of Mutual Funds in India (AMFI), the total AAUM of 44 fund houses at the end of the October-December quarter stood at R6,817,07.83 crore, a fall of R31,033.89 crore against R7,127,41.73 crore for the July-September quarter.

HDFC Mutual Fund continued to retain its number one slot with an AAUM of over R88,628.02 crore. However, its AAUM for the December quarter was down by 3.48% against that in the previous quarter.

According to Crisil, as many as 24 out of 44 fund houses logged a fall in the average AAUM in the December quarter with Reliance Mutual Fund registering the highest fall in average AAUM in absolute terms by around R8,354.79 crore or 9.22% toR82,305.80 crore in the December quarter.

SBI Mutual Fund saw its average AUM falling by nearly R6,179.88 crore or 12.95% to R41,551.51 crore in the latest quarter. In percentage terms, Union KBC Mutual Fund saw the highest fall at around 37.87% to end with assets of R54,015 crore.

Among gainers, JP Morgan Mutual Fund registered the highest growth in average AUM, with its AUM rising R2,011.02 crore or 42.36% in the quarter to R 6,758.71 crore.

Deepak Chatterjee MD and CEO of SBI MF says, “Overall, the trend in the assets is declining, which is very dissatisfying and distressing. Also there is no fresh money flowing into the equity schemes , following weak equity markets. We are witnessing some growth on fixed income side, where retail investors are coming in fixed maturity plans (FMPs), but in the last few months they have remained out of equity funds.”

Crisil in its reports also states that mutual funds AAUM was down by 4.4% in Q42011 on withdrawals by corporates, banks and weak equities. The fall can be attributed to redemption by corporates and banks besides the ongoing slide in the equity market.

“Corporate withdrawals were on account of quarter-end advance tax payments, which were reported at around R30,000-40,000 crore for the December quarter, much lower than R68,000 crore in the September quarter. As per inflow-outflow trends seen in the past, corporates typically reverse these outflows in the month following the quarter end,” says Crisil report.

The report further adds “Banks withdrew due to two reasons; on account of balance sheet capital adequacy requirements for the quarter end and secondly due to Reserve Bank of India (RBI) circular to reduce banks’ exposure to short maturity mutual funds to 10% of their net worth by end-January 2012.

Banks’ investment in mutual funds fell to R49,300 crore as on December 16, 2011 as compared to R65,800 crore as on September 23, 2011.”

Source: http://www.financialexpress.com/news/mutual-funds-aaum-falls-4.35-in-q3/895878/0

Foreign investor participation likely to be limited: Experts

After allowing qualified foreign investors (QFIs) to invest in equities indirectly through the mutual fund (MF) route in August, the government on Sunday paved the way for QFIs to invest in Indian equities directly as well. Individual QFIs will soon be allowed to invest up to 5% of the paid-up capital in any company and up to 10% of the paid-up capital on aggregate basis (all foreign individuals put together). These limits are over and above the cap earmarked for foreign institutional investors (FIIs) and NRIs who can directly invest in the Indian equity market.

The government hopes that the move will help in widening the class of investors and reduce market volatility. It also hopes to attract more foreign funds. Amid slowing economic growth, FIIs pulled out as much as around Rs 2,800 crore in 2011 from the Indian stock markets.

Will QFIs invest?
Experts are of the view that the step is in the right direction but it would only have a meaningful impact in the long run. "A big chunk of investment in the stock market is driven by perception," said Aseem Dhru, MD and CEO, HDFC Securities Ltd. "Due to a slowing economy and lack of policy initiative, the perception about India is not very bullish overseas. Hence, not much investment will be made in the short run. But as Indian growth story is likely to attract investors in the long run, the move may counter the volatile behaviour of FIIs."

"Investment by foreign nationals would depend upon the way Indian growth pans out," said Jagannadham Thunuguntla, strategist and head of research at SMC Global Securities.

The limited impact the move may have in the near term can also be gauged from the fact that none of the MF firms have taken any initiative to expand their reach outside India despite government allowing QFIs to invest in equity schemes of MF houses last year. And probably this is the reason why the capital market has not reacted much to the news.

The other factor that could deter foreign investor from investing in India is exchange rate fluctuation. "While, it is relatively easier to evaluate a particular company, predicting currency movement would not be easy," said Vinay Agarwal, executive director, equities brokerages, Angel Broking Ltd.

Source: http://www.hindustantimes.com/business-news/Features/Foreign-investor-participation-likely-to-be-limited-Experts/Article1-792461.aspx

2012 will be a good year for debt funds: Dhirendra Kumar, Value Research

In an interview with ET Now, Dhirendra Kumar , CEO, Value Research, shares his outlook for mutual funds. Excerpts:

2011 has been a sort of write off for equity investors. What should they be doing with their fund portfolios right now? Is this the time for a cleanup and if yes, which funds should be done away with?

No, I do not think investors should be behaving in an erratic manner because one is faced with a declining value of the scale. One has to look at it, one should not lose the sense of proportion here. If you look at funds on an average, in fact 2011 was a year of contractions because we normally expect that large caps will be able to withstand a market decline much better followed by midcaps and small caps will see a massive erosion.

What we find is that small caps and midcaps were able to withstand the market decline much better than the large caps and large caps on every possible occasion or they were looking for an excuse to fall primarily because most of the big declines in a brief period came from FII actions. So that impacted large caps and that was visible.

That is why we see a little difference but investors need to really take lessons from 2011. If investors sided with funds, the emphasised funds in their portfolio which were not mainstream, for example the most popular fund in 2010 was the banking funds. Likewise in the year before that, investors still kept patience with an infrastructure fund which showed no symptoms and people are expecting for the good time to be back with those.

Investors have not exited these funds as aggressively as they should have in the hope that they will be able to recover even the money which came before 2008, that money stays there. So keeping away from anything which is stylish, fashionable and has lost its charm, investors need to really get out of those, but with a mainstream fund, it is time to stay on course and investors have largely remained that way. It is reflected in the consistent inflows into equity fund through 2011.

Whereas there is a serious case that via equity allocation, they need to be increased for 2011. Is there a case to also increase allocation to debt because if interest rates they correct which they will in 2012, debt funds will also surprise you?

Yes, it is going to be another good year for debt funds. Of course internal dynamics of debt funds will change. It will be unreasonable to expect the same kind of return what investors got from the liquid fund or the short term fund or the ultra short term fund. Those returns are unlikely to be met, but what I feel is that income funds will come on the forefront.

There will be an appreciation component and that gain will start or has already started in a certain sense with the change in outlook for the interest rates, but I do not think investors should behave, Indian investors typically they work in a fairly binary fashion. They either are fully into equity or fully into debt.

That is very undesirable way of allocating because you normally do it at the wrong time. Once the equity values are down, then you move to debt. I do not think one should behave that way. Fixed income should be part of anybody's allocation, but should one be heavily into debt because there are good times ahead? No, equities turn around when you least expect it and be prepared for the unexpected.

The positive surprise last year came in from global schemes run by several AMCs like a Birla Sun Life International gave an 8% return in 2011. How much allocation should investors have to such funds in their portfolios considering that local markets are likely to remain bearish at least towards the start of this year?

International funds do present a case and the fundamental case for international fund is that the reason why you invest in a mutual fund is to diversify and with these funds, you will be able to diversify across geographies. It just takes one step ahead. But the problem has been that the kind of funds available to Indian investor, the absence of a diversified vehicle.

We hardly have only the Birla Sun Life or the Principal Global Opportunity Fund. They are the only diversified vehicle. Otherwise everything is something exotic. You get a Brazil fund, you get a Latin America fund or you get specific geography or specific commodity, agriculture fund and things like that.

The absence of generic diversified vehicle which helps investors diversify across geography is not available, but it presents. Why it has not taken off so far in all these years, they have been available. Because Indian markets have done consistently well, have been through a bull phase ever since these were made available, but 2010-2011 is a reminder that you need to diversify and it could well be up to 25-30-40% and not necessarily from the viewpoint that outlook is bleak for India. It should be a fixed component. You just need to diversify for your returns to be more consistent.

What about gold ETFs because they have jumped a good 31% last year? What should be the percentage in the total corpus when gold has already surged each year for the past 11 years?

It was very difficult to resist gold and it should be a very small component, not exceeding 5-7%, but so far it has been that investors, what to see of investors even politicians in Tamil Nadu had needed gold in their manifesto to win.

Source: http://economictimes.indiatimes.com/opinion/interviews/2012-will-be-a-good-year-for-debt-funds-dhirendra-kumar-value-research/articleshow/11375646.cms