Exit consistent underperformers

The Securities and Exchange Board of India Chairman U K Sinha’s concerns about consistent underperformers in the mutual fund industry should encourage investors to relook at their portfolios.

Sinha’s views have already found some takers. “If a fund is under-performing for five years, then the simple option is to exit it. The minimum expectation is that a fund would beat the benchmark,” says Surajit Mishra, executive vice-president and national head (mutual funds), Bajaj Capital.

But there is a problem. With the Bombay Stock Exchange Sensitive Index, or Sensex being range-bound in the last three years, it would be difficult for investors to decide whether to exit at a loss or not. And should they wait for a non-performer for five years? Since August 2011, the Sensex has been between 15,000 and 18,000 points. Also, since 2009, the index has moved between 15,000 and 21,000.

The bigger problem is that some of the outperformers during the boom period of 2006-2008, for instance many JM Mutual Fund schemes, are among the worst performers in the past three years. JM Mutual Fund’s JM Core 11, JM Equity, JM Multistrategy, JM Tax Gain, L&T Infrastructure, LIC Nomura MF Equity and Sahara REAL are some schemes which have consistently given lower returns than their respective benchmarks.

Some of these schemes give high returns, doubling or trebling, during boom times, which make up for investors’ losses in the lean period.

The call, as a result, is a tough one. First, investors have to cross the psychological barrier of booking losses. Most refuse to exit mutual funds or investment-oriented insurance plans because they want to, at least, get back the principal amount.

However, before entering any scheme, investors need to look at the scheme’s performance, ideally over five to seven years because it will give an idea on how the scheme has performed in bull as well as bear cycles.

Then, the assets under management (AUM) are another good indicator, especially for risk-averse investors. For one, a bigger AUM indicates the scheme has been attracting funds.

Finally, look at the current performance, in terms of net asset value (NAV) of the scheme and compare it with peers and the benchmark index. If there has been a sharp change in strategy, one needs to enquire with the distributor or fund house if the fund manager has quit or the fund house has changed its strategy.

For instance, Franklin Templeton Equity Income, which manages Rs 1,000 crore, was launched in 2006. The scheme's one-year returns are -4.34 per cent, almost in line with its benchmark BSE 200’s fall of 4.40 per cent (June 22), according to data from Value Research. However, the scheme has returned seven per cent per annum in five years whereas the benchmark index has returned 17.42 per cent. But over the same period, it is better than category average of 5.55 per cent. Since launch, it has returned 11 per cent.

In other words, while over time, it has not beaten the benchmark, it is more or less in line as far as recent performance goes. Taking a call on such funds is quite difficult unless one speaks to the distributor/fund house for changes that could have taken place.

If you are already invested, look at the NAV of the scheme and see how much it has fallen below their initial investment. If the NAV is close to the invested amount then it might make sense to wait for a while before exiting. But if the NAV is very low compared to the investment, they could book losses.“If the money loss is beyond the comfort level of the investor and if the fund is not in the best performing category then investors should exit,” says Mishra.

“In case 50 per cent of a fund's schemes are under-performing, then investors can look at exiting from these schemes and moving to other schemes of the same fund house,” suggests Suresh Sadagopan, a certified financial planner. He argues that at a given point in time, it is possible that some schemes are under performing even for the best performing AMCs. It is suggested that investors go through their portfolios once a quarter.

Most importantly, if you are looking at safety and do not want to consistently compare you scheme’s performance with peers and benchmark, choose index funds. This will help keep the returns in line with broader indices, plus or minus five per cent.

Source: http://www.business-standard.com/india/news/exit-consistent-underperformers/478486/

“Trustee must ensure that money is managed well”

While the returns continue to remain a challenge due to the volatile markets, the Sebi chairman pulled up several fund houses for underperformance on a consistent basis. “The industry has stagnated over the last five years because of the weak markets and several domestic and global factors,” said Nimesh Shah, MD & CEO, ICICI Prudential AMC in an interview to Sandeep Singh of The Indian Express. Excerpts:

How do you see Sebi's move to pull up mutual funds for underperformance?

I think that it is a very good move. If we are charging a fee and Sebi is allowing us to charge it then we are responsible that the money is invested properly. If some AMC is not able to generate returns then the trustee can give the money to some other AMC. It is the trustee's job to see that there are adequate processes in place so that the money that has been given by the investors is managed well.

What should the investors do during the current volatility in the equity markets?

Volatility is here to stay so the question is can you invest in funds that will benefit from volatility. We want our funds to benefit from volatility and we are focussed on funds that will benefit from it. There is no point cribbing about volatility as it is the new order and you have to adapt to it. I just want to beat the benchmark and be in the top quartile.

What is your investment strategy at these times?

We follow active change in asset allocation between debt and equity depending on the level of the market. Whenever the markets go up the fund will sell-off equity and go into the debt and when it goes down we will buy the equities back. We have introduced a science that it should be based on price to book value. Based on fundamentals, the asset allocation call is taken. My fund manager does not take a call but there is a formula to it which is based on back testing done since 1997. We have come to the conclusion that at what levels of price-to-book ratios are fairly valued, undervalued or overvalued and change our positions based on this. These are statistical arithmetic calls.

What is your take on the distributor regulation?

The regulator has to control any malpractice that impacts the investor in a negative way. If someone is doing a wrong job then he should be taken to task. I think that even if entry load comes, the churning of portfolio will keep on happening because if a distributor earns by churning then s/he will continue with it.

We need to find a way to incentivise the distributor so that s/he looks to build an AUM that creates a good trail income for her/him.

What are the factors that are affecting the mutual fund industry?

As of now the products for investors are good, however in the process of giving good products, somewhere the commercial requirement of the manufacturer and distributors have been slighltly affected and the number of distributors in the business has reduced dramatically.

The industry has stagnated over the last five years because of the weak markets and domestic and global factors and mutual funds are only relative performers and not absolute performers. The big issue is that common man is not investing in mutual funds.

Source: http://www.indianexpress.com/news/trustee-must-ensure-that-money-is-managed-well/966256/0

Wake up call for MF industry

The mutual fund (MF) industry which has been going through a rough patch in the last three years is facing the stick once again. While there were a slew of fund offerings recently, the multiplicity of similar schemes, non-performance, complacency and lack of pro-investor steps have come under the regulatory scanner.

Last week, during the annual Mutual Fund Summit organised by the Confederation of Indian Industry, Securities and Exchange Board of India (Sebi) Chairman UK Sinha raised concerns over nine fund houses with half or more of their schemes having underperformed their respective benchmarks and nine others with less than half of the schemes underperforming consistently over the last three years.

While Sinha did not name the fund houses, his wake-up call was loud and clear: “while an investor is free to move out from that scheme, if the performance is not good and this is happening on a continuous and long-term basis, then it becomes a matter for Sebi to take on and where ever we are finding such things we are going to ask questions to the fund managers, CEOs and if needed the AMC board and their trustees.” The presence of a large number of similar schemes has ended up diluting the basic fundamentals of simplicity and ease of investing, because of which investors choose MFs instead of investing directly in bonds or buying stocks from stock exchanges. Too many schemes have ended up confusing the minds of investors.

44 FUND HOUSES, 4,400 SCHEMES

The MF industry has seen the number of fund houses grow from 32 to 44 over the last six years. The number of schemes has grown from 779 to 4,473 (counting various options of a single scheme as separate schemes) in the same period. Further, there have been 18 new entrants through the joint-venture (JV) or acquisition route. The growth in the industry and several new entrants, both Indian and foreign, demonstrate the potential of the mutual fund business in India.

However, in a rush to launch new funds to attract more investors during the bull run from 2005 to 2007, fund houses probably forgot that there are a limited number of key differentiators among various schemes. While exotic names were given to many schemes and an attempt was made to make them look unique, fund houses faltered on the most important factor for investors — delivery of returns. A recent PwC report on MF industry in India said, “with many seemingly similar offerings from multiple MFs unable to clearly communicate their superiority, a less informed investor may find it difficult to make a choice. This uncertainty leads to a weakened ‘pull’ for the product.” During the financial year 2011-12, the MF industry, shrank by 1.6 per cent in terms of assets under management due to the redemptions by investors and stiff global and local market conditions.

CONSOLIDATION

The NFO boom that happened a few years ago has left behind a proliferation of schemes, many with overlapping objectives and investments. There are about 160 equity schemes with less than R 100 crore AuM, more than 100 schemes with less than R 50 crore as AuM and about 42 schemes with less than R 10 crore as AuM. “Overlapping schemes may be analysed and the possibility of merging overlapping schemes, or discontinuing such schemes could be evaluated,” says Gautam Mehra, Leader-Asset Management, PwC.

Experts believe that while the Sebi had issued a circular in 2010 stating that consolidation or merger should not be seen as a change in the fundamental attributes of the surviving schemes if some conditions are met, the absence of an income-tax neutrality and the STT levy are dampeners which should be removed to facilitate merger of schemes.

Companies like IDFC MF, Franklin Templeton MF, UTI MF, Kotak AMC, ICICI Pru AMC, BNP Paribas and L&T MF have merged some of the schemes in the past. “There are schemes with just a few crore of assets under management. It is difficult for a fund manager to create a diversified portfolio through such a small asset size,” said Dhirendra Kumar, CEO, Value Research.

SILVER LINING

The volatile market conditions in the last two-three years have led to withdrawals by investors to the tune of R 49,000 crore in FY 2010-11 and R 22,023 crore FY 2011-12, leading to a further drop in AuM, in addition to the drop caused by adverse market movements. Despite so much volatility in the equity markets, many MFs were able to deliver much better returns than their benchmark indices. For example, if we look at annualised returns over last three years of some of the top performing schemes, ICICI Pru Discovery gave 23 per cent returns, IDFC Premier Equity gave 19.6 per cent returns and Tata Div Yield gave 19.32 per cent returns.

Sinha’s comments should come as a wake up call for the MF industry which has been deliberating on merger of schemes since last five years, but without much action. It would be good for the investors if the MF houses reduce their total number of funds and have a consolidated offering in each category. “We merged six equity schemes last year. That is the way forward for all asset management companies. The industry should move towards providing solutions to investors and not launch plethora of products,” said Sanjay Sachdev, President and CEO, Tata MF.

What’s the way forward? Consolidation and clear positioning of products might help rekindle the interest of investors — who turned their back towards equity markets in general and mutual funds in particular due to poor returns — in investing through mutual funds.

Source: http://www.indianexpress.com/news/wake-up-call-for-mf-industry/966205/0

Mutual Funds: Sebi switches into micro-regulating mode

Redemptions by investors, alongside adverse global and domestic woes have resulted in a 16.5 per cent shrinkage in the size of the Indian mutual fund industry. From Rs 703,669 crore in March 2011, the industry's assets under management (AUM) have come down to Rs 587,659 crore in March 2012.

A gathering of mutual fund industry insiders was delighted and cheered when Upendra Kumar Sinha, Chairman of the Securities and Exchange Board of India (SEBI) sympathised that "We at Sebi are concerned about the state of the mutual funds' industry."

Sinha was speaking at the eighth annual mutual fund summit, organised by the Confederation of Indian Industry (CII), in Mumbai. The gathering seemed even more happy when Sinha mentioned that Sebihad suggested to the government that investments under the Rajiv Gandhi Equity Savings Scheme, announced in the union budget this year, be routed through the mutual fund route.

But this happiness did not last for long. Sinha denied that Sebi regulations are the reason for the dilapidated state of the Indian mutual fund industry . "Sebihas not been on a regulatory overdrive, if the industry feels so," Sinha insisted.

And then came the thrashing from Sinha, which is unlikely from a regulator. Although he didn't name any particular asset management company (AMC) as an offender, Sinha said that Sebi's inspection had uncovered nine AMCs whose majority of schemes (over 50 per cent or even all the schemes) have been underperforming their respective scheme benchmarks for three years in a row. Sinha further added that there are other nine AMCs where up to 50 per cent of the schemes have underperformed their benchmarks for three years.

"This cannot be allowed by regulator to go on and on and such fund houses must take corrective action," said Sinha. On its part, Sinha added that Sebiwill engage with fund house chiefs and fund managers whose schemes are consistently underperforming benchmarks. "There can be short-term vagaries but consistent underperformance is a matter of concern," Sinha said, giving the example of one scheme which has underperformed since its inception.

And underperformance was not Sinha's only critical observation. "There are conflicting situations," he said, citing a case where one single investor accounted for over 25 per cent - the maximum permissible limit - of a particular scheme's AUM. Sinha cited another case of non-compliance where portion of a particular mutual fund scheme's AUM was invested in a fixed deposit of a bank which was one of the investors in the same scheme.

"Majority of the industry is not violating," says Sinha. "This is a small group of AMCs which are not following the rules," he added. But Sinha has sent a clear signal that Sebi is intolerant. "Going forward we plan to do the inspections more intensely," said Sinha. Clearly, Sebi has switched into micro-regulating mode.

Source: http://businesstoday.intoday.in/story/sebi-switches-into-micro-regulating-mode-for-nutual-funds/1/185730.html

Sebi raises concerns about MF sector, performance of schemes

Sebi chairman U.K. Sinha says 50% of the schemes of nine fund houses have underperformed their benchmark indices and there were nine other fund houses where up to 50% of the schemes were underperformed by their respective benchmark indices

The Securities and Exchange Board of India (Sebi) on Thursday raised concerns about the performance of mutual fund (MF) schemes and non-compliance at some fund houses in the Rs 6.64 trillion asset management industry that has been demanding friendlier regulations ever since the regulator scrapped entry fees in August 2009.

While acknowledging sluggish investment sentiment in the market, Sebi said it’s also concerned about the industry and has reached out to stakeholders in recent months for suggestions to revive the industry’s growth. While doing this, the capital market regulator felt that the industry should also highlight the performance of its schemes. According to Sebi, there were several fund houses whose schemes were beaten by their own benchmark indices.

“This should be a cause of concern. Sebi is going to engage with these fund houses... as to why on a consistent basis their schemes have not performed,” said U.K. Sinha, chairman, Sebi.

He said over 50% of the schemes of nine fund houses have underperformed their benchmark indices and there were nine other fund houses where up to 50% of the schemes were underperformed by their respective benchmark indices.

“Some AMCs’ (asset management companies) schemes have underperformed since inception. Sebi will engage with them and ask what measures they are taking to address the issue. We will perhaps review their performance on a half-yearly or annual basis,” Sinha said at industry lobby Confederation of Indian Industry’s annual mutual fund summit.

Moreover, Sebi was concerned about fund houses flouting regulations on several fronts in recent months. “One scheme even had a single entity investing at least 25% of the assets under management (AUM) in the scheme. Then we found that a mutual fund was investing money in the fixed deposit of a large bank, which itself is an investor in the fund,” Sinha said. Rules stipulate that a single investor can only invest up to 25% of the AUM in a mutual fund scheme.

Sinha said the losses of certain mutual fund schemes were being transferred to other schemes. “This can’t go on and Sebi will not be silent on these issues,” Sinha said.

At least three fund houses refused to comment citing the sensitivity of the issue.

Sinha reiterated that the regulator will not come in the way of the industry’s growth.

The market regulator recently met members of the mutual fund industry for suggestions on reviving growth. Sinha said that Sebi will shortly take actions in line with the suggestions it received.

“We have received several suggestions and most of them (industry participants) are against reintroduction of entry loads,” he said.

Removed by Sebi in August 2009, entry fees were charges (up to 2.25%) that mutual funds collected at the time of investment from the investor, and eventually passed on to the distributor as commissions.

“We have been advocating for a variable load. There are different types of investors with varied appetite and needs. So we need a variable load structure in place,” said Anthony Heredia, managing director, Morgan Stanley Investment Management Pvt. Ltd. “But the overall growth story of the fund industry is intact. For instance, once the interest rates come down, we should start seeing the return of bond funds. The next 12-18 months could be difficult for the markets, but we see a strong five-year story with the asset base multiplying manifold at this rate of growth and savings behaviour in the economy.”

Sinha urged the industry to bring in pension-oriented funds as they have a large pool of money and a longer investment horizon.

Sebi said that it is in discussions with the income tax authorities to treat such mutual fund schemes at par with pension products in terms of tax rebates. But the industry sounded reluctant to introduce such products.

“Pension money comes in as investments for 20 years. Fund managers want immediate commissions,” said Dhirendra Kumar, chief executive officer, Value Research Online, a Delhi-based mutual fund tracker.

The regulator is also in the process of formalizing regulations for investment advisers. Indian financial regulators have been working on a comprehensive set of regulations for investment advisory services that straddle financial products. Last year, Sebi had circulated a concept paper on investment advisory regulations.

Sinha said that Sebi officials recently met those of the Financial Stability and Development Council (FSDC), which has broadly accepted Sebi’s suggestions on investment advisory, and the market regulator will shortly introduce the final set of rules.

The regulator is also working on guidelines for initial public offerings (IPOs), Sinha said. “We are looking at how to increase the penetration of IPOs and ensure enhanced investor protection. We will come out with detailed guidelines in two-three months. Our job is to ensure that the rules of the game are played properly.”

Taking note of slowing foreign investment through participatory notes or PNs, Sinha said the regulator and the government are actively trying to encourage foreign investment through the recently introduced channel called qualified foreign investor route.

Source: http://www.livemint.com/2012/06/21130104/Sebi-raises-concerns-about-MF.html?h=A1