Best Equity Funds

Actively managed schemes have done better than passively managed ones

There is much debate in the US regarding active versus passive fund management. Passive fund managers buy stocks according to their weightage in the index. Therefore, such index schemes are expected to deliver returns that are close to those of the index. As the fund manager does not have to put in much effort, the cost structure of these schemes is lower than that of actively managed schemes. In the US, costs of passively managed schemes are around 0.20% to 0.30%—significantly lower than the cost of actively managed schemes which is around 1%. In India, the cost for index schemes goes up to 1.50%; for other equity schemes, the costs are capped at 2.50%. The new mutual fund regulations are expected to increase these. Adjusting for costs, it is natural for an index scheme to underperform the benchmark by as much as 1.50% (unless, of course, the scheme allows the fund manager to deviate from the mandate and invest in other stocks). This underperformance would compound over time leaving you short of your goal if you had planned to take advantage of a long-term rise in the index.

If you expected a lump-sum investment of say Rs1 lakh to grow at 12%, the long-term average return of the Sensex, at the end of 15 years, you would have expected to accumulate a corpus of around Rs5 lakh. But had you invested this amount in an index scheme, adjusted for costs, you would have been left with just Rs4 lakh. As much as Rs1 lakh would have been eaten up in fund costs, that too, for just buying the Sensex stocks. Therefore, passive investing does not seem a feasible option if you are looking for high returns or even returns equal to those of the index.

You need to choose actively-managed funds whose managers aim to beat the benchmark indices by using a variety of techniques to pick stocks and time the market. Some will outperform their benchmarks while others will fail. In the US, over long periods, actively managed schemes do not do better than passive schemes. We doubted that it would be any different in India but there are several funds that beat the index. We recently looked at five five-year rolling periods with quarterly frequency. The average returns of 64% of the large-cap and multi–cap equity schemes (5.95%) beat Nifty (5.13%). How have index schemes performed in this period? A couple of schemes averaged above 5%; the rest of the 14 schemes averaged a return in the range of 1.41% to 4.92%.

Take a look at three-year rolling periods and five-year rolling periods with quarterly frequency from February 2005 to August 2012. In the active fund management segment, we have considered only large-cap and multi-cap schemes. There were 54 such schemes and 16 index schemes. In the three-year as well as five-year rolling periods, actively managed schemes beat the index by an average of two percentage points. Out of the 19 three-year rolling periods and the 11 five-year rolling periods, actively managed schemes underperformed the index schemes in just one three-year period.

Which schemes have performed the best?

There are more than 300 equity diversified schemes to choose from. We considered only large-cap oriented and multi-cap oriented schemes as the risk is much lower in these schemes compared to other schemes. A majority of the assets of these schemes are invested in large stable companies; hence, the returns are less volatile than those of small-cap or mid-cap schemes. But choosing the right scheme is important as well.

Out of these 54 schemes, there were 11 schemes which failed to beat the benchmark in even a single period. The top 20 schemes, in terms of average returns, beat their benchmark on all occasions. The top 10 of this category delivered an average return of 16.45% whereas the bottom 10 averaged just 6.47%.

Two schemes of HDFC Mutual Fund led the list—one large-cap (HDFC Top 200) and a mutli-cap scheme  (HDFC Equity Fund). The returns of these two schemes averaged 18.04% and 17.68%, respectively. Both these schemes, which were initially managed solely by Prashant Jain since June 2003, are now managed by him and Rakesh Vyas (since May 2012). The top five portfolio holdings (August 2012) of both the schemes are similar and include stocks of State bank of India, ICICI Bank, ITC, Infosys and Larsen & Toubro.

Following closely behind is the large-cap scheme of DSP Blackrock—DSP Blackrock Top 100 Equity. This scheme has averaged a return of 16.98% in the 11 rolling periods. Its top five holdings include HDFC Bank, Reliance Industries, Tata Motors, Hindustan Unilever and Bharat Petroleum.

Birla Sun Life Frontline Equity Fund, which invests mainly in large-cap stocks, returned an average of 16.69% in the period of our analysis. Its top five holdings include ITC, ICICI Bank, Reliance Industries, Larsen & Toubro and Infosys. HDFC Growth, another multi-cap scheme from HDFC Mutual Fund, delivered an average return slightly lower than the scheme from Birla Sun Life with 16.65%. The top five holdings of this scheme are similar to those of the other HDFC Mutual Fund’s schemes except that Divi’s Laboratories is included.

The other schemes, which have recorded returns higher than the category average, are: ICICI Prudential Dynamic Plan, Reliance Growth, Templeton India Growth Fund, Canara Robeco Equity Diversified and Franklin India Bluechip. The returns of these schemes averaged 15% to 16%.

Index Schemes

Topping the list of index schemes was HDFC Index Fund - Sensex Plus Plan. This is not a pure index scheme. The scheme takes the liberty of investing 10% to 20% in stocks that are not present in the Sensex and has succeeded in delivering above par returns. The scheme delivered an average return of 13.81% when the benchmark index averaged around 10.87%. ICICI Prudential Index Fund followed with a return of 12.41%. Two schemes from Franklin India based on the Sensex and Nifty delivered an average of 10.9% each. Tata Index Fund—Nifty Plan is one of the better performing index schemes from Tata Mutual Fund, delivering an average return of 10.68%. The three other schemes with returns close to those of their benchmark index were: UTI Nifty Fund, Canara Robeco Nifty Index and Birla Sun Life Index Fund.

Don’t bet on your index scheme to deliver a return in line with its benchmark index’s. The fund management of LIC Nomura MF has grossly failed at passive investing as well—failing to deliver even positive returns in certain periods when other index schemes have averaged 2%-3%.

Source: http://www.moneylife.in/article/best-equity-funds/28821.html

Cheaper option may not be better

Retail investors, I am afraid, may end up losing more than they gain.

The introduction of “direct” plan, which will come into effect from 1 January 2013, in all mutual fund (MF) schemes has started to give insomnia to distributors. In a circular that the capital markets regulator, Securities and Exchange Board of India (Sebi), issued on 13 September, it said that all fund houses have to provide a “direct” option in all their schemes, catering to investors who wish to invest with a fund house directly without any distributor’s help. The direct plan will, therefore, have a lower expense ratio and a different net asset value (NAV). Typically, while the asset management companies pay upfront charges to distributors from their own pockets, they pay the trail fees (for as long as the investor stays invested in the scheme) out of the total expense ratio (the current upper limit is 2.5%) that fund houses charge you, the investor. Sebi thinks that if investors avoid distributors, they should not pay agent charges.

The first brunt, as I pointed out in one of my earlier columns (http://tinyurl.com/96svjhn), will be felt by debt funds, especially liquid funds. Typically, at least 95% of investors in liquid funds are companies and institutions. So distributors who service these clients—let us call them institutional distributors—will face a direct threat to their livelihood and existence.

Assume a liquid fund’s total expense ratio (TER) is 60 basis points (bps), of which 15 bps is trail fee paid to distributors. Its direct plan, therefore, will have a TER of 45 bps. If a large company invests Rs.1,000 crore in the normal plan, it gets Rs.1,065.5 crore after a year, assuming the fund returns 7%, in the direct plan compared with Rs.1,064 crore in its normal plan (with embedded distributor charges). That’s a saving of Rs.1.50 crore, straightaway.

Why will institutions then go via distributors? Once the board of directors come to know of the massive savings, industry sources feel they will mandate their treasury departments to save these costs, shun the distributors and invest directly. High net worth individuals and savvy investors may follow suit.

Institutional distributors, such as Mata Securities India Pvt. Ltd, SPA Capital Services Ltd, JM Financial Services Ltd and Enam Securities Pvt. Ltd, are running scared right now. If their clients shift to the direct option, these distributors stop earning trail fees. Years spent, if any, in acquiring the client, retaining and servicing them will now lead to the client opting for a cheaper option, just because there is one.

But will the clients shift? I won’t be surprised if they do. A former employee in the sales and marketing division of Franklin Templeton Asset Management (India) Pvt. Ltd tells me that when they had launched an institutional plan (a first in the MF industry at that time) in one of their debt funds (whose expense ratio was just 10 bps cheaper than the normal plan, which later on came to be known as the “retail” plan), almost “the whole industry” launched a similar plan. “There is zero doubt in my mind that, of the 40-50% of investors that constitute the institutional pie, about 80% will move to the direct option,” he says, on condition of anonymity. At most, the companies will hire a person or two to look specifically into its treasury investments into MFs.

There is a twist. If fund houses feel that they need to go that extra mile to service institutional clients, they may add a charge to the direct plan, which would not otherwise apply to the normal (distributor) plan. As a result, the difference in the TER of the two plans may not be much after all.

In the meantime, three people associated with the distribution and MF industry (an MF industry professional-turned-banker, the head of one of India’s largest national distributors and the head of one of India’s largest institutional distributor) met a senior Sebi official last week to suggest an alternative. Their plan: let investors opt for the direct plan if they wish, but allow them to route their investments through their distributors who should be allowed to put his agent code on the application form. That way, distributors can charge a fee to clients and continue to service them since the investments will be under the distributor’s radar. The Sebi official seems to have told them that he will look into it.

Is it fair? In theory, a cheaper option for direct investments is a good idea. If you do not take the distributor’s help, why should you pay them? But a carte blanche introduction of direct plan may lead to misuse more than genuine benefit for the right people. Fund houses such as Quantum Asset Management Co. Ltd, which charge lower fees because they don’t pay distributor fees have survived so far. If, like in the US where fund houses are free to adopt either a no-load or a load model, the Indian MF industry is given a choice, then firms will be free to go the Quantum way if they feel strongly about agent compensation.

While retail investors may have been in Sebi’s minds when it thought of the “direct” plan, it is the institution that will reap the benefits. Retail investors, I am afraid, may end up losing more than they gain. Operational problems as well as lack of adequate knowledge in selecting the right fund may come to haunt them at a later date. A good agent can always guide and help the investor. But once an investor takes the direct route, there’s little an agent can do later if there’s a problem. Cheaper options may not be the better option, after all.

Source: http://www.livemint.com/Money/vOG97J9ZSYOddJUa09eb6O/Cheaper-option-may-not-be-better.html?google_editors_picks=true

We continue to like the consumption theme: Anand Shah

Interview with Chief investment officer, BNP Paribas Mutual Fund

With global liquidity on the rise due to measures by the US Federal Reserve and European Central bank, investors are beginning to favour riskier stocks. Anand Shah, chief investment officer of BNP Paribas Mutual Fund, tells Puneet Wadhwa he is bullish on the cement sector and select stocks from the auto and banking packs. Edited excerpts:

Besides positive global cues, key reforms/policy actions are driving the recent rally. Are we being over-optimistic? We do not believe markets are being more optimistic. But they are definitely less pessimistic. At the beginning of 2012, expectations were quite low and nobody believed that Indian equity markets could deliver positive returns.

Over the first seven months of 2012, the news flow further deteriorated with GDP (gross domestic product) numbers continuing to remain sluggish and macroeconomic indicators projecting a very weak growth. Policy making had further slowed down and policy uncertainty further increased (post the coal crisis). On the back of very low expectations, these very minimal reforms/policy actions helped the market sentiments and provided the much-needed boost.

Has the investment strategy changed from ‘sell on rise’ to a ‘buy on dips’? Has the government averted the ratings downgrade? We believe what has come through as policy reforms/policy actions so far has to be followed up with further measures to revive the infrastructure sector, investments and GDP growth. Until then, we are recommending investors to use the systematic investment plan (SIP) route to invest in equity funds.

Should investors have a debt strategy as well? For debt schemes, with an expectation of interest rate cuts, we believe investors should invest in corporate bond funds having a maturity of around two-three years.

Are you still betting on the consumption theme, even though high inflation and the rupee might dent the spending and consumption patterns? What about sectors like telecom, cement, infrastructure and capital goods? We continue to like the consumption theme. Though this sector has massively outperformed the market over the last three-four years, even from here, due to sustained earnings growth, a select few companies in the consumption theme can continue to deliver good returns to investors over the next three-four years as well. The earnings of these companies are helped by a growing middle class in India, its rising per capita income and pricing power.

The telecom sector will be a key beneficiary of consolidation in the industry and rising tariffs. We continue to like the cement sector as it benefits from a rising housing demand in India. For sectors like infrastructure and capital goods, we continue to remain cautious due to high leverage and over capacity.

Is the time now right to look at stocks from auto and banking sectors, given the outlook for the economy and interest rates? We like a select few companies in both the auto and the banking space and agree that in a falling interest rate environment they will be the key beneficiaries.

With the Rajiv Gandhi Equity Savings Scheme including exchange-traded funds and mutual funds, do you see this generating enough enthusiasm among investors? We believe that actions/policy changes directed at increasing the reach and penetration of mutual funds among retail investors are positive and welcome. Since these changes have just been announced, we will wait to see the impact of these in enthusing retail investors to participate in mutual funds.

Source: http://www.business-standard.com/india/news/we-continue-to-likeconsumption-theme-anand-shah/487726/

US-based Inveso picks up 49% stake in Religare AMC for a tad below Rs 450 crore

US-based Invesco Ltd, a leading global player in the mutual fund industry has picked up 49% stake in Religare asset management company (RAMC) for about Rs 460 crore, valuing the company that has assets under management (AUM) of Rs 14,600 crore at about Rs 950 crore.

"The deal value is based on 6.4% of the closing AUM at the time of receiving regulatory approval. The fund house is currently managing AUM of Rs 14,600 crore, which is expected to cross Rs 15,000 crore by the time the approval comes," said a top executive of the company.

Invesco is a NYSE listed firm with asset under management of about $670 billion and market capitalisation of $11 billion.

"This investment is a validation of Religare's belief in the long term growth potential of the Indian financial services industry. We believe that both our retail and offshore businesses would be propelled to the next level of their growth journey," said Shachindra Nath, Group CEO, Religare Enterprises Limited. However, he refused to divulged the valuation of the deal.

"Our agreement with Religare will expand the comprehensive range of investment capabilities Invesco provides to our retail and institutional clients around the world, and further position both firms for long-term success," Invesco's President and CEO Martin L. Flanagan said in a statement.

This would be fourth transaction in last nine months in the mutual fund industry sending a strong signal that the Indian mutual fund industry is going through a consolidation phase. Tough business conditions are prompting Indian fund houses to strike partnership deals with stronger foreign institutions or cash- rich domestic companies that can bring in advisory and investment mandates.

This would be the first transaction in the mutual fund industry after market regulator Sebi gave a major relaxation to the mutual fund industry in August this year. Sebi has allowed asset management company to charge additional expense ratio (the charge levied by fund houses towards fund management fees and other expenses) for catering beyond a threshold limit in the smaller cities. It had also decided that service tax would be charged to ultimate investor, not to the AMC.

RAMC's valuation is rich compared to most deals involving domestic mutual funds in recent past. In January this year, Japan's Nippon Life Insurance bought a 26% stake in Anil Ambani-controlled Reliance Capital Asset Management, India's second-largest mutual fund in assets, for roughly Rs 1,450 crore, valuing the fund house at 6.8% of its total assets under management of Rs 82, 305 crore on December 31.

In April his year Britain's largest asset management company Schroders had picked up a 25% stake in Axis Bank-promoted Axis Mutual Fund for an undisclosed amount. The deal will help the Indian fund house access Schroders' global distribution network and advise overseas funds invested in Indian securities. A month before, L&T Mutual bought out Fidelity's India fund business for an undisclosed amount.

In December 2010, Paris-based Natixis Global Asset Management bought a 25% stake in IDFC Mutual Fund at 5.5% of its total assets. Earlier that year, US-based investment management firm T Rowe Price acquired a 26% strategic stake in UTI Asset Management Company for about 3.6% of its assets under management. In June 2010, Japan's Nomura bought a stake in LIC Mutual Fund for about 2.5% of fund's assets.

Religare had acquired the then ailing Lotus Mutual Fund in 2008 and subsequently renamed as Religare AMC. At the time of acquisition, Lotus had just over Rs 5,000 crore of AUM.

Source: http://economictimes.indiatimes.com/personal-finance/mutual-funds/mf-news/us-based-inveso-picks-up-49-stake-in-religare-amc-for-a-tad-below-rs-450-crore/articleshow/16568230.cms