Soaring crude oil prices are the biggest risk: Swati Kulkarni

Interview with Fund manager, UTI Mutual Fund

Firm crude oil prices, depreciating rupee and ballooning current account deficit are expected to keep the economic growth rate at around seven per cent for another year, says Swati Kulkarni, fund manager, UTI Mutual Fund in an interview with Priya Kansara Pandya. Edited excerpts:

Where are the Indian markets headed in 2012?
We are positive on Indian markets as the valuation is now comfortable at 13x FY13 earnings, which is close to the historical average. The downside from the current levels seems to be limited. However, in the near-term, we expect range-bound movement.

What are the likely triggers for an upside and what is the probability of that event happening?
Softening of commodity prices, manageable inflation levels and a pick-up in the investment cycle can lead to an upside. It is difficult to predict the probability as a lot depends on crude prices and other global events. However, given the below-normal world economic growth, the demand side support for a structurally high level of crude seems unlikely. We expect crude prices to remain range-bound.

So, that means there will be less pressure on the rupee?
The rupee is under pressure because of the current account deficit and capital flows, which have been volatile. The probability of rupee crossing 54 levels is grim. We expect it to remain between 52-54 levels in the medium-term.

What are key risks to the Indian economy?
The first and the biggest risk, of course, is the price of crude oil. I feel the budgeted estimates for oil subsidies may be inadequate. The second biggest risk we see is weak investment cycle, which has not seen a pick-up for some time now. This could affect consumption and future employment potential, which in turn could affect economic growth. As a result, this will keep our growth at seven per cent for another year or so.

However, I would like to put a caveat here that everything does not look gloomy at this point in time. All these concerns are fine when you are trading at 21-22 times. We are trading at much lower levels.

After raising rates 13 times between March 2010 and October 2011, the Reserve Bank of India (RBI) has not guaranteed further rate cuts after the surprise 50 basis points cut in April. Will it succeed in kickstarting growth?
We should understand that the rate hikes did not happen at one go. So, we should also be patient for rate correction and let it happen over a period of time. RBI cannot take quick steps without addressing the real problems. Currently, the base effect for inflation is expected to be favourable for some time.

But strong consumption, rising crude oil prices and current account deficit can again put pressure. By the end of this calendar year, there is a likelihood of inflation surfacing again due to supply side constraints and structural issues. Further, if fiscal deficit continues to balloon then what is the guarantee that these rate cuts will not lead to further inflation? Certain asset bubbles can be created. Thus, I feel, RBI is going in the right direction. Rather than 25 bps, having a 50 bps rate cut may have a better visible transmission.

Do you expect any more rate cuts going ahead?
We don’t expect that as fiscal correction is necessary. But at least from hereon, I don’t expect interest rates to go up further. They seem to have peaked and that trend is clear.

Which sectors are expected to do well in the coming quarters?
Besides consumption, cement and pharma sectors are expected to do well. However, energy will not do well due to price controls and stressed global petrochemical margins. Also, the engineering sector could remain subdued as order inflow momentum is yet to pick up pace.

What has been your strategy in the past six months and will that continue?
In past six months, we have reduced exposure from rate insensitive sectors like information technology (IT) and shifted to auto and banks assuming that interest rate cycle is peaking out. That would continue. Others, more or less, remain the same.

We had neutral position on consumer. We preferred cement to construction and real estate stocks. However, with likely peaking of interest rates, we may review this preference.

Source: http://www.business-standard.com/india/news/soaring-crude-oil-prices-arebiggest-risk-swati-kulkarni-/472489/

We need to review entry load ban decision again: Amfi CEO HN Sinor

Capital market regulator Sebi and industry players will have to review some of its past decisions, including the ban on entry load, if they want mutual funds to have larger retail participation and deeper geographical reach, said HN Sinor, chief executive of the Association of Mutual Funds in India or Amfi. In an interview with ET, Sinor said Fidelity Mutual Fund's move to exit India and the recent exit of chief executives of four asset management companies are worrisome. Edited excerpts:

Not many are hopeful about the health of the Indian mutual fund industry. What's your view?

Unlike banks, the AMC business has a fragmented structure - it's like a three-legged stool. You have manufacturers on one side, distributors on the second and transfer agents on the third. And on top of this three-legged stool sits the investor. You've to create a 'win-win' situation for all the three legs of the stool. There has to be something for everybody in this business. If you need mutual funds to reach out to larger geographies, we will have to review the cost structure. And if there's some push there, perhaps, we may again see some good days.

By cost structure, do you mean entry load?

One mistake Sebi made was to implement the entry load ban in a cut-and-dry manner. They should have implemented it in a slow, phased manner. The decision to ban the entry load was seen very positively by many; many said it was an investor- friendly move... many also complained about it. In those days Sebi and Amfi felt, the Indian enterprise was very smart and would find a way to come around it.

But today, after two years, I realise, we've not been able to adjust our business model to the entry load ban. We need to dispassionately review the (entry load ban) decision once again. I am not taking any sides here... I am just taking a view from the top. We've to expand this industry, and for doing that if we have to bite the bullet, we should bite the bullet.

Are you suggesting a roll-back of entry load?

We should at least initiate a discussion on that. Saying an emphatic 'no' to this, to my mind, is not a solution today. Any business settles down after 6-8 months of policy changes, but it has not happened here.

Distributors are not seeing it worthwhile to sell mutual funds. Manufacturers are finding it difficult to expand or penetrate beyond 20 cities. It does not make a business case for manufacturers to go and sell the product in Timbuktu to collect just Rs 5 - 10 lakh of investments. In such cases their costs would be very high. Why will manufacturers go to far-flung towns when they can garner a much larger amount at a lower cost from Ghatkopar? It doesn't make sense for fund houses to go beyond the top-20 cities within the current expense ratio.

But Sebi officials say distributors are still making money selling funds.

If you look at the commission pay-outs of distributors, there are just about 200 distributors who draw a gross revenue of over Rs 1 crore. Of the 200, the top-20 are institutions and banks. At an individual level, there are only 185 IFAs whose gross revenue exceeds Rs 1 crore. Of the 16,000-odd active distributors, only 185 are earning a reasonable sum of money selling funds. What will others do? They will resort to tricks like deliberate churning of portfolios or mis-selling of funds. It's this environment which is pushing them to do something which is not right. Globally, there's a cost attached to this business and it is borne by investors.

Are you talking to the regulator for a roll-back?

Sebi has been very receptive to any kind of ideas. But then it's difficult for any regulator to undo something. We need to kick-off the debate once again. We've to discuss it in a dispassionate manner.

How are mutual funds sold in other countries?

Frontloading in Singapore is about 3%; their expense ratio works out to about 2.5%. Investors there pay in excess of 5% to asset managers. Asset management business in India is the cheapest in the world. Cost to investors is lower than anywhere else in the world. We need to look at this aspect with a little open mind. My counterparts in other countries, who have plans to ban frontloading, are closely watching the impact of entry load ban in India. They're not very confident after seeing the India experience. UK came out with a consultative paper in 2009, but now I hear they have postponed their plans.

Fidelity's exit too has not gone well with the fund management industry.

Confidence level is very low in the industry. After Fidelity's decision to move out and the quick exit of four CEOs, even we're a little worried. If officials desert the industry like this, we have a big problem at hand.

Source: http://economictimes.indiatimes.com/opinion/interviews/we-need-to-review-entry-load-ban-decision-again-amfi-ceo-hn-sinor/articleshow/12860300.cms?curpg=2

Reliance MF schemes emerge as top three performers for Q1-2012

Mutual funds are considered a better investment option due to relatively better safety of capital, but they have also scored over the direct stock market investments in terms of returns to investors.

As per a performance analysis of stock market benchmarks and mutual fund equity schemes, as many as 50 large equity MF schemes, with an average asset size of at least Rs 1,000 crore, have given better returns than the market barometer Sensex during the first quarter of 2012.

While the stock market benchmark index Sensex gained 12.6 per cent during the January-March 2012 quarter, the surge was higher for a total of 50 MF schemes and the top three performers belonged to Reliance Mutual Fund.

The returns were over 20 per cent for this period for as many as 11 such funds, including five Reliance MF schemes.

Even for the six-month period ending March 31, 2012, the returns were higher than Sensex for as many as 29 schemes.

Asked about the robust performance of Reliance MF schemes, Reliance Capital Asset Management CEO Sundeep Sikka told PTI: "We had made some changes in our portfolio and had aligned our portfolio according to market conditions, as a result of which our funds were able to post good returns."

While judging a MF scheme, investors should go for a fund house of fund manager who is able to manage the volatility of the markets and has a long term track record of giving good returns, Sikka noted.

The top three performers in the equity mutual fund space were from Reliance MF. Reliance Tax Saver (ELSS) fund posted returns of 26.07 per cent, followed by Reliance Banking Fund with returns of 26.06 per cent and Reliance Diversified Power sector fund with returns of 22.94 per cent.

Others in top 10 included HDFC Mid Cap Opportunities Fund (ranked fourth with returns of 22.71 per cent), ICICI Pru Discovery Fund (5th, 22.57 per cent), Reliance Vision (6th, 22.44 per cent), DSP BlackRock Small and Mid cap fund (7th, 22.18 per cent), UTI Infra fund (8th, 21.71 per cent), IDFC Sterling equity fund (9th, 21.36 per cent) and Reliance Equity Opportunities fund (10th, 21.01 per cent).

In the first quarter of this year the BSE benchmark index Sensex posted returns of 12.61 per cent, while the wide-based Nifty gave returns of 14.52 per cent. The BSE 100 index rose by 15.59 per cent during this period.

Source: http://economictimes.indiatimes.com/personal-finance/mutual-funds/mf-news/reliance-mf-schemes-emerge-as-top-three-performers-for-q1-2012/articleshow/12837567.cms

Why there are no 'star managers' in Indian mutual fund industry

Vicky Mehta, Senior Research Analyst, Morningstar India

An oft-repeated phrase in the Indian mutual fund industry is "we don't have a star manager culture; instead we follow a team-based, process-driven investment approach".

Fund companies avoid the term 'star manager' like the plague. They never miss an opportunity to proclaim the presence of a strong team and investment process. But are the latter and 'star managers' mutually exclusive? More importantly, what is so revolting about being a 'star manager'?

Think about it, isn't a 'star manager' only like any other professional who excels at his work? For instance, an equity fund manager who has consistently delivered an impressive showing over the long haul and across a market cycle, and who displays a sustainable level of skill, should qualify as a 'star manager'.

That isn't necessarily bad, is it? To draw a cricketing analogy - is having Sachin Tendulkar in the team a disadvantage, simply because he ranks among the best batsmen in the world?

The disapproval
Perhaps the disapproval for star managers stems from certain preconceived notions. For instance, being a star manager is associated with job-hopping. But that isn't always true.

Several of the best-ranked managers in the country have been associated with the same fund company for a decade or thereabouts. Maybe star managers are perceived as being mavericks and poor team players.

Again that hypothesis is questionable. Some of the best managers have built strong and stable investment teams. Several of them have also tended to adhere to an investment style that gels well with the fund company's approach.

Acknowledging key-man risk
Clearly there's more to this star manager aversion. Let's revisit the point about star managers and a team-based, process-driven approach being mutually exclusive.

Fund companies would like us to believe that all members in their investment teams think alike and every decision is based on consensus. But that's rarely the case. Let's not forget that investing is a personalised activity with no definite rights or wrongs.

This in turn, necessitates the presence of skilled managers. Furthermore, while the significance of a robust investment process cannot be overstated, it takes a proficient manager to skillfully execute the process. For instance, a model might throw up a list of 'investment-worthy' stocks; but it is the manager who decides which ones to buy.

If strong investment processes in isolation were adequate, all funds could have been run on quant models and managers would have been redundant. Here's what this boils down to - fund companies try to underplay the key-man risk associated with funds, by declaring that they don't have star managers.

At best it's a defense mechanism to ensure that they don't lose assets when a proficient manager exits. Neither would they like to acknowledge that a manager change can result in a change in the fund's character. Indeed, the degree of keyman risk varies and needs to be estimated on a case-by-case basis.

In some situations, it might be easy for a new manager to step in and run the fund as in the past; while in others, it may not be possible to do so. Nonetheless, it is naive to dismiss manager-risk as being immaterial.

Fund companies deny the existence of 'star managers' to understate key-man risk; investors on their part, must evaluate if the fund remains as good a bet, sans its 'star'.

Source: http://economictimes.indiatimes.com/personal-finance/mutual-funds/analysis/why-there-are-no-star-managers-in-indian-mutual-fund-industry/articleshow/12738218.cms?curpg=2

Lock in to FDs now or find other alternatives quickly

The higher than expected 50bps repo rate cut by the RBI will make banks re-price their deposit rates downward. The reason is that borrowing costs for banks in the overnight markets will be 50bps lower at around 8%, which is the repo rate and RBI has given banks leeway to access the MSF (Marginal Standing Facility) at 9% by letting them go below 2% of their SLR (Statutory Liquidity Ratio) limit.

Banks have to hold 24% of their deposits (NDTL or Net Demand and Time Liabilities) in government bonds as SLR. The banking system deposit base is around Rs 60 lakh crores. Banks are holding around 29% of their deposits in government bonds. Hence banks can technically borrowing 5% (the excess SLR) of Rs 60 lakh crores, which works out to around Rs 300,000 crores from the RBI at the repo rate of 8%. Banks can also borrow 2% of Rs 60 lakh crores, which works out Rs 1.2 lakh crores through the MSF window at 9%. Banks will not be worried about liquidity given the Rs 4.2 lakh crores leeway offered to them by RBI at 50bps lower rate of interest post the repo rate cut.

The easing policy signal given by the RBI through the repo rate cut coupled with access to liquidity will make banks lower their deposit rates. Banks by lowering deposit rates and keeping loan rates steady will increase their NIMs (Net Interest Margins). Higher NIM's will lead to higher profits for banks, which comes at the cost of lower rates of interest for depositors.

Fixed deposit (FD) investors should quickly lock on to FD rates before they are brought down. Investors should also increase the tenure of their FD's as they can then earn higher interest rates for a longer period of time.

FD investors should also look for alternative fixed income investments to counter the expected fall in deposit rates. Alternative investments include investing directly in fixed income securities issued by banks, Corporates and the Government of India or indirectly through fixed income mutual fund schemes.

The current yields on one year, two year, five year and ten year maturity AAA rated corporate bonds are 9.6%, 9.3%, 9.35% and 9.4% respectively and the yields are likely to come down on the back of easing policy rates and easing liquidity conditions. Fall in yields will also give capital gain benefits to investors leading to higher returns from investments in fixed income securities.

Government bond yields in the one year, two year, five year and ten year maturity segments are trading at levels of  8.3%, 8.3%, 8.35% and 8.4% respectively. The high borrowing program of the government will keep yields steady despite rate cuts, but yields will start trending down going forward leading to capital gains for investors.

Investors who cannot access the corporate bond and government securities market (Indian fixed income markets are not conducive for direct retail participation) should invest in mutual fund schemes that invest in fixed income securities. Investors looking to benefit from fall in corporate bond yields should invest in short term and long term income funds while investors looking to benefit from fall in government bond yields should invest in long term gilt funds.

Expected one year returns to investors if yields fall by 50bps in corporate bonds and government bonds will be around 9.5% post expenses in short term funds and around 11.5% in income funds. Government bond funds will generate around 11.5% as maturities in government bond funds are generally higher than income funds.

Source: http://www.moneycontrol.com/news/fixed-income-bank-deposits/lockto-fds-now-or-find-other-alternatives-quickly_694312.html