We see financials as one of most promising sectors: Krishna Sanghvi

Krishna Sanghvi, Head of Equities, Kotak AMC in an exclusive interview with Harsha Jethmalani of Myiris.com, spoke about performance of his funds, FII inflow, sectors likely to emerge as star performers, etc.

Krishna Sanghvi joined the Kotak group in May 1997 in the Auto Finance subsidiary, Kotak Mahindra Primus, handling credit risk management. Post this; he moved on to Kotak Mahindra Old Mutual Life Insurance as an advisor to the Life insurance subsidiary, managing the debt and equity portfolios. He joined Kotak Mahindra AMC in February 2006 and has been handling equity schemes for Kotak Mutual fund since January 2007. He has over 13 years of experience in the financial markets of which 11 years are at Kotak Mahindra group.

Could you throw some light on the structure of your research team? What according to you goes into good portfolio construction?

We have a buy side research team with 8 research analysts and they cover more than 200 companies stocks across the sectors and across the market capitalization. Each analyst is tracking a sector(s) and stocks there in.

Portfolio construction involves a reasonable mix of sectors and stocks so that it offers diversification to investors and not make them exposed to individual themes / sectors / stocks. Portfolio construction considers the a healthy mix of some aggressive and some defensive stocks so that it generates returns and tries to minimize the downside risks.

How frequently do you churn portfolio for Kotak 30 Fund? The fund is betting on Financials, Energy, and Technology sectors what is outlook for these sectors?

We seek to manage the fund based on our views and outlook on markets and stocks and as such do not have any churn criteria.

We see financials as one of the most promising sectors in terms of growth in credit and earnings. A healthy economy growing at 8% will really provide this industry with the credit growth prospects of 20% and we still have a sizable population that needs to be covered under formal banking channels. Energy is again a promising sector led by de-regulation process announced by government as well as the view that considering global economic outlook (mainly USA & Europe) of a muted growth the crude oil is also likely to remain range bound. Technology is also interesting considering the offshoring opportunities available in western world.

How would you rate the performance of Kotak Opportunities Fund as against its peers? What is the highest individual stock and sector exposure you can take in this fund?

The fund has been performing reasonably well in terms of its track record vis a vis peers as well as the benchmark. The individual stock exposures are capped currently at 5% of the portfolios while sector exposures are capped currently at 25% of fund. We do review the limits based on the sector / stock weights in the underlying benchmark.

What is the general consensus on equity markets? Are money managers still underweight on equities now?

No we do not think money managers are underweight on Indian equities. The equity markets are clearly cheering the growth outlook for the Indian economy. The investor appetite especially of global investors has turned positive on relative growth for India as Indian economy is set to double in next 5-6 years. While valuations may appear a bit premium in near term, we believe that earnings growth will come in to support the valuations.

Market gains this year have been driven mainly by expanding PE multiples for stocks. Are you concerned that the market is too expensive today?

The PE expansion was bound to happen as a reaction to the PE contraction that was seen around 15-18 months back. While markets are getting into above average valuations zone, it is still lower than historic highs recorded on valuation perspective. Also, we think that valuations must be looked into with a forward perspective and on visibility of earnings growth and that`s where a comfort is in place that in the short term valuations may appear a bit premium but we believe that earnings growth will come in to support the valuations. We think the investor`s worry on Indian markets is mainly on account of markets having risen quickly in a reasonably short time.

Foreign fund houses have invested over Rs 710 billion (USD 15.6 billion) so far this year and analysts believe that FII investment in stock markets will cross the last year`s record level. What is your take on this?

We believe that investment flows usually reflect the investor`s faith in sustainability of GDP growth and earnings growth on a relative basis. At the current juncture of global economy. Indian economy - having demonstrated its resilience in past 2 years - ranks among the fastest growing economies in world. This has led to a reasonable investor attention and money; both short term as well as long term. We think this is quite healthy for the Indian economy and markets.

Given that mid and small-cap stocks are more sensitive to interest rates do you anticipate any slowdown in earnings due to increase in interest rate?

We do not anticipate any major impact on profitability due to increase in interest rates at present. The business growth can take care of interest costs. The only risk can be from any major hike in commodity prices that may impact the working capital and interest costs thereon.

What macro factors are you keeping an eye on?

GDP / IIP Growth, Fiscal Deficit, Current account deficit, inflation, interest rates, currency movements.

Source: http://www.myiris.com/shares/company/ceo/showDetailInt.php?filer=20101006153736707&sec=fm

Want investment advice? Ask for the menu card

Looking for advice on how and where to investin mutual funds?

First, order for the menu card.

Huh? Yes, it’s the result of new Securities and Exchange Board of India (Sebi) norms that require investors to pay up commission to agents directly, unlike earlier where a portion of the investment made used to be handed over to the distributor as commission directly.

It is learnt that a distributor incentral Mumbai is handing out pamphlets to people stating “Fee for mutual fund form — Rs 25, Investment only (cheque collection) — Rs 100, mutual fund advice — Rs 250 per investment. For monthly and yearly advice fees, contact us....”

Other independent financial advisors (IFAs) are forming groups and mulling a standard charge across the board. “Pursuant to the present Sebi regulatory issues and the need to charge

the clients for the advice and levels of services offered by us,

we are in the process of preparing a tariff card and notice to

investors based on Sebi notifications (on) the need/ practice to charge fee,” a mail sent to DNA Money by a group of IFAs said.

There are 63 IFAs who form this group.

Another network operating in Mumbai called MF Chain, which involves around 25-odd distributors in the city holding large chunks of assets under them too have decided on a fee structure.

“Location-wise the assets are segregated. So, a distributor servicing in Bandra will not service a client in Borivali as that area is serviced by another distributor,” said a source privy to the information.

“There is a price list that is formed. Because these distributors are operating all across the city it will not be possible for investors to negotiate,” said the source.

He claimed the entire idea to is just like other associations that are run by barbers, laundry operators in Mumbai. “The rates are fixed,” he said.

“As an IFA he can knock out 30% of his competition by fixing rates across. The competition will not be from IFAs, it will be from banks and national distributors,” he added.

Delhi too has a broker syndicate called DFDA, where leading independent financial advisors unite to earn asset under management muscle. “Their agenda is sangathan mey shakti hai (there is strength where there is unity),” a head of a mutual fund house said.

Other distributors too have started asking for yearly fee from investors. Kirit Nagda, who runs Relationship Life & Services, told DNA Money on an earlier occasion, “We have started charging a yearly fee of Rs 2,000 per family.”

Many have realised that when they ask for per transaction fee, they are not sure whether the client will come back to them the next time. “A yearly fee ensures that the client will come to me for each transaction during the year,” said a distributor.

There is another Vadodra-based advisor Durgesh Pandya, has now initiated a life-time advisory fee of Rs 40,000. “Some of my customers have agreed to pay up,” he claims. But asked aren’t people wary of him not continuing in the industry forever, he replies, “People trust me as they have been investing through me for the past five years now. They also invest crores in each transaction, so if you see on a per transaction basis the advisory for life-time turns out to be cheap for them.”

This fixing of fee is against the idea of Sebi. C B Bhave, chairman of Sebi had said while addressing the mutual fund summit last month, “Don’t tell the investor how much he has to pay. Investors should be able to negotiate a fee for the value that the advisor is providing.”

Source: http://www.dnaindia.com/money/report_want-investment-advice-ask-for-the-menu-card_1417988

Fund managers' reaction to RBI rate hike

RBI has raised key rates by up to 50 bps. Check out what the fund managers have to say.

Navneet Munot, chief investment officer, SBI Mutual Fund

The rate hikes underscore the strong demand in the economy. The investment cycle is showing strong signs of picking up, as there are capacity constraints in most sectors. Going forward, investment will be a bigger driver of growth than consumption.

Krishna Sanghavi, head of equities, Kotak Mahindra AMC

There is no doubt about the growth in the economy. And the rate hikes were very much in line with expectations. But from a stock perspective, the more crucial issue is whether the growth in corporate earnings will meet market expectations.

Anoop Bhaskar, head-equity, UTI Mutual Fund

The rate hikes don’t change our view on (shares of) interest rate-sensitive sectors. In India, demand for consumer loans is influenced more by availability, rather than cost of funds. As long as income visibility is good, there will be strong demand for retail loans

Anand Shah, head-equities, Canara Robeco AMC

The message from the RBI to banks is clear: be less aggressive in lending. Banks with a better CASA ratio and strong branch network will benefit in a scenario, where cost of funds increases. At the same time, NBFCs could be adversely hit.

Vetri Subramanium, head-equity, Funds Religare AMC

The monetary policy clearly signals that RBI is more worried about containing inflation at the moment. We expect more rate hikes — 75-100 bps — over the next nine months. The net interest margin of banks could shrink due to flattening of the yield curve

Source: http://economictimes.indiatimes.com/news/economy/policy/Fund-managers-reaction-to-RBI-rate-hike/articleshow/6225237.cms

MFs: Where are the investors?

There are just 10 mn MF investors compared to 60 mn homes with life insurance.

For an industry boasting 38 active players spread across 150 cities, with over Rs 6.7 lakh crore of average assets under management (AAUM) in June, mutual funds in this country have barely 10 million investors. Perhaps, even less.

The data till June-end available on the website of the Association for Mutual Funds in India (Amfi) showed the MF industry had almost 48 million folios. Amfi started publishing data of the number of folios with fund houses in November last year.

One folio is equivalent to investing in a single scheme. Industry experts admit most MF investors have at least four-five schemes, which translates into four-five folios per person. In many cases, this number is much more. In fact, there are customers with 100-150 schemes.

“The MF industry, as a whole, has been unable to convey the message to investors about its attractiveness,” said Rajeev Deep Bajaj, vice-chairman and managing director, Bajaj Capital, adding that the number of investors has stayed static for almost six months. Between November 2009 and June-end, the industry added only 70,503 folios.

If one looks at numbers from the Centre for Monitoring Indian Economy (CMIE), the number of MF investors is even lower. As on December 2009, CMIE’s Consumer Pyramids estimated that out of 235 million households, only two million invested in MFs. CMIE assumes one household has five members, but it’s unrealistic to assume all five would have invested in MFs.

In comparison, 87.66 million households invest in gold. The life insurance industry has 59.7 million households covered by insurance policies. Close to 46.06 million households have fixed deposits. Only 0.39 per cent, or 920,000, households directly invest in equities, according to CMIE.

Though there are 17 million demat accounts with NSDL and CDSL, only a handful seem active. Among the top five fund houses, UTI Mutual Fund, which has been there for over four decades, had slightly over 10 million folios, the highest. The other four are Reliance MF with 7.40 million; HDFC MF with 4.04 million; ICICI Prudential MF with 2.94 million; and Birla SunLife MF with 2.47 million folios.

Both distributors and fund houses are fighting to attract the same customer.

The good part is that though a large part of the money – almost 75 per cent – is in the debt segment, a bulk of retail folios are for equities and balanced funds – 43.56 million. This implies that investors are willing to put money in equities.

Hemant Rustagi, CEO, Wiseinvest Advisors, said, “There have been limitations, in terms of operations, lack of advisors in numbers and quality and phases of extreme volatility in stock markets. Still, the highest growth has been there in equities.” The lack of penetration is mainly due to the fact that MFs need to be pushed, aggressively sometimes. “Many investors still find MFs complex. There should be an industry association platform to promote them,” added Bajaj.

Though new players have entered the market, they have been not been able to add many new investors. Look at one new player, Axis Mutual Fund. In November, it had 491 folios in income/debt schemes. At present, the number of folios is 158,694. At the same time, the total number of folios between November and May rose by only 70,000 (from 47.87 million to 47.94 million). And, many other players gained folios as well. For example, HDFC Mutual Fund’s folios rose by almost 400,000 in the same period. Clearly, the same investor has multiple folios.

Source: http://www.business-standard.com/india/news/mfsareinvestors/402204/

MFs now don't find it economical to service small retail investors

It’s now getting close to a year since the SEBI’s abolition of entry load on mutual fund loads. Over this year, much has been said and written about how an old business model will have to change and how people will transition to a new one and so on.

But looking at what has happened, one negative impact of SEBI’s directive is very clear. It is now utterly uneconomic for anyone in the mutual fund industry to serve smaller retail investors. Unless some unforeseen miracle happens, from now on, mutual fund investment is an activity that will be entirely limited to wealthy individuals.

Let’s see why this is so. Consider an investor who is a typical starting small saver in my experience. He would probably invest something in the range of Rs 10,000. If he’s figured things out a bit better, he would also start an SIP (systematic investment plan), probably about Rs 2,000 a month for a period of one year, to begin with. As things stand now, the advisor who has done the job of convincing this investor to invest stands to get about remunerated with about Rs 75, to begin with. Later, after a year, he starts getting a continuous commission of about Rs 25 a month, likely paid quarterly.

This is the trail commission for the total accumulated investment of Rs 34,000 as well as an estimated gain of 10% a year. Eventually, the customer might invest more and the money will accumulate. However, that requires a certain period of customer support and hand-holding and contact. The question is, is there money in the system to pay for these services?

If you multiply the above numbers by five or ten, then there is. A rich investor — the word rich is now taboo, so, we now use the awkward euphemism high net worth individual — who puts in Rs 1 lakh and then Rs 10,000 or 20,000 a month would be a customer who would not find any problem in being serviced well. However, at the basic level, there isn’t.

Is there no way that a customer can be serviced at lower investment levels? There is, but only if that customer already has some other financial connection with the service provider and the cost of customer contact and acquisition can be amortised over a larger business. In practice, this means banks. It’s only your bank that could find it economic to sell you a mutual fund for a small amount. Unfortunately, that’s not a great solution for the customer. Of all the various kinds of entities that distribute mutual funds, banks have the worst track record of systematic mis-selling. In any case, banks are far more interested in guiding all possible customers towards products with the highest possible commissions.

In effect, that’s the situation now. Simple business economics, combined with the way mutual fund regulations have evolved, has ensured that the small investor is unlikely to become a mutual fund customer.

Mind you, this is not an argument for creating upfront incentives. No matter what today’s problems are, it must not be forgotten that the root of all mis-selling in all financial products is distorted incentives.

Therefore, higher upfront commissions — or any upfront commissions at all — are certainly not a solution. From the investor’s point of view, the best outcome is a long period of good returns and the only solution is a compensation system that rewards the intermediary for that.

Source: http://economictimes.indiatimes.com/personal-finance/mutual-funds/analysis/MFs-now-dont-find-it-economical-to-service-small-retail-investors/articleshow/6157209.cms

Fund Flows into India hit highest levels in 11 weeks

Investors cheer arrival of monsoon, says EPFR Global.

Global flows into India hit their highest levels in 11 weeks, as investors responded to the arrival of monsoon in the country, according to EPFR Global. Overall, going into the second week of July, global equity markets were staging a modest recovery, as investors shrugged off fears of a double-dip recession and went bargain-hunting.

“In case of Asia ex-Japan equity funds, investors responded to the arrival of India’s monsoon and also to the signing of an Economic Cooperation Framework Agreement by Taiwan and China, which could open doors for a $100-billion increase in cross-straits trade,” said the latest release from EPFR Global. Flows into India hit their highest in 11 weeks, while Taiwan equity funds enjoyed their second-best week year-to-date, more than offsetting the modest outflows from China equity funds, it added.

Japan equity funds also posted outflows, the seventh time in the past nine weeks, as a dip in domestic capital spending, questions about the effect of the yen’s appreciation on exports and uncertainty about the new administration’s economic policy made investors cautious.

EPFR global-tracked bond funds absorbed $3.64 billion and money market funds another $33.5 billion (a 78-week high), while equity funds posted combined net redemptions of $11.25 billion.

Meanwhile, two of the four major EPFR global-tracked emerging markets fund groups managed to post inflows during the week ended July 7, with GEM equity funds taking in $517 million and Asia ex-Japan equity funds $124 million, while EMEA (Emerging Europe, Middle-east and Africa) and Latin America Funds recorded modest outflows.

Redemptions from Latin America equity funds, which have recorded 13 consecutive weeks of outflows, were driven by concerns that the region’s second-largest economy, Mexico, might stumble due to a faltering US recovery.

Meanwhile, EMEA equity funds saw their modest three-week inflow streak getting snapped, as investors pulled more money out of funds with Russian and Emerging Europe mandates than they committed to ones with an African, Middle Eastern or Turkish focus. Africa regional funds absorbed fresh money for the 44th straight week.

However, worse-than-expected US labour and housing market data and fear of what stress tests of major European banks will reveal continued to weigh on the sentiment towards major developed markets.

Europe equity funds were the only major EPFR global-tracked developed markets equity funds to post inflows during the week, snapping a four-week outflow streak, as investors continued to shift from regional funds to ones investing in individual markets. The UK, Germany and France equity funds accounted for the lion’s share of the $387 million flowed into this fund group.

Global equity funds kicked off July by recording outflows for the ninth time in 10 weeks. Pacific equity funds, the other major diversified developed markets fund group, suffered net redemptions for the third straight week.

The lure of gold and precious metals, as a hedge against uncertainty, helped commodity sector funds top the list of EPFR global-tracked sector funds once again, with investors committing $419 million to this fund group in early July, helping the year-to-date inflows to cross the $11-billion mark.

The defensively-perceived consumer goods sector funds were the second-biggest absorbers of fresh money, pulling in $226 million.

Most other sector fund groups, however, posted outflows. Real estate sector funds surrendered over $500 million, as commercial and residential sales in the US struggled to overcome the drag caused by high unemployment and unwinding of key stimulus measures. Technology sector funds saw year-to-date flows sink into the negative territory on concerns over demand in the second half of CY10, while regulatory uncertainties kept financial sector funds under pressure.

Source: http://www.business-standard.com/india/news/fund-flows-into-india-hit-highest-levels-in-11-weeks/401021/

Sebi wants MFs to charge single levy

Fund houses may soon have to stop charging variable fees, a move that could benefit retail investors

The Securities and Exchange Board of India, or Sebi, is set to ban asset management companies (AMCs) from launching multiple investment plans catering separately to different classes of investors under a single scheme, in a move that could alter the country’s investment landscape.

A Sebi official, who did not want to be named as he’s not authorized to talk to the media, toldMint that the regulator will not allow any AMC to launch such multiple plans under one fund going forward, to ensure that fund houses give up the practice of levying different expense structures for different categories of investors.

Liquid funds and liquid-plus funds (later renamed ultra short-term funds) typically have separate plans under single schemes. The charges are different under different plans, though the portfolio under the scheme remains the same.

The move may administer another shock to the Rs6.75 trillion mutual fund industry, already reeling from the ban on entry loads imposed in August. Nearly Rs3.5 trillion, or 50% of the industry’s assets, are managed under liquid and liquid-plus schemes.

“Sebi wants AMCs to stop launching different plans with non-uniform expense structures under a single scheme,” the official said. “Single-plan schemes with single expense structures are required to ensure that there is no discrimination between small and big investors.”

Recently, the regulator sent letters to the AMCs, saying, “It is observed that some mutual fund schemes have different expense structures for different investor classes, e.g. retail/institutional/super-institutional plans, while there are other schemes that charge a single expense structure for the scheme. This practice has led to concerns of subsidization of one investor class by another and charging of different fees for managing the same portfolio of securities.”

The letter adds, “In light of these concerns, we are in process of reviewing different expenses charged within the same scheme with same portfolio.”

Experts said Sebi’s move will hurt the profitability of fund houses, significantly impact the commissions of distributors, and may also disincentivize large institutional clients who have parked money across hundreds of liquid and liquid-plus schemes.

Liquid and liquid-plus schemes are those where the corpus is allocated in short-term papers and money market instruments such as certificates of deposit, commercial paper, pass-through certificates, and collateralized borrowing and lending obligations. Maturities range from overnight to 90 days, and give 3.75-5% returns. Institutional investors park money in such schemes to benefit from tax arbitrage.

Officials at three AMCs said that Sebi restrained them from launching separate plans under ultra short-term funds when they approached the regulator in recent months for filing offer documents.

“Sebi refused to approve multiple plans under a single scheme when we approached them with offer documents for a liquid fund and an ultra-short term fund. So, we’ve launched the liquid scheme with a single plan,” said the official at one of the three AMCs. Officials at the other two AMCs said, “Sebi wants single plans with single expense structure under a given scheme.”

All existing schemes with multiple plans will also be required to conform to the new norms, and do away with varying expense ratios.

According to the CEO of a foreign AMC, if fund houses are forced to launch single plans under single schemes, all class of investors will be required to pay the same expense ratio under a given scheme. “To have a single expense ratio structure, retail investors will be required to pay much lower than what they are paying now and large institutional investors will be required to pay higher than what they are paying now,” he said on condition of anonymity.

If institutional investors are required to pay higher expenses, it may lead to huge outflows of institutional money parked in liquid and liquid-plus schemes. On the flip side, it may attract more retail investors as they will be paying lower expense fees.

With average maturities narrowing after 1 August when new valuation norms for debt funds come into force, a lower expense ratio will bode well for retail investors. Following Sebi’s move, AMCs may hike the minimum investment for such schemes to avoid paying high distribution commission for small ticket-size plans. Also, exit loads may be imposed for ultra short-term funds to attract long-term money from the investors.

“Sebi wants us to bring more retail investors into such liquid and liquid-plus schemes. Lower expense ratio will ensure this,” said the chief marketing officer at a domestic fund house. Most of the officials did not want to be identified as the matter involves the regulator and is sensitive.

Typically, AMCs launch liquid and liquid-plus schemes with three different plans—retail, institutional and super-institutional. While retail plans cater to the small investor who can invest as low as Rs5,000, institutional plans cater to large investors that can invest Rs50 lakh to Rs5 crore. Super-institutional plans cater to those who can invest over Rs5 crore.

These three plans have three different expense ratios, the charge that AMCs levy on investors, on an annual basis, for managing their money as well as other costs such as brokerage, fees paid to the fund’s registrar and transfer agent (RTA), bank charges, custody charges, trustee fee, distributor charges, etc.

Sebi’s concern is over the practice of charging retail investors more than large investors. While retail plans typically charge an expense ratio of 60-70 basis points (one basis point is one-hundredth of a percentage point) annually, the institutional plan levies a charge of only 40-50 bps. Investors in super-institutional plans pay only 25-30 bps.

Most of the liquid and liquid-plus or ultra short-term schemes have a large difference in the cost structures of retail and super-institutional plans. For instance, in the HSBC Ultra Short Term Bond Fund, the institutional-plus plan charges an expense ratio of 0.4%, as against 1.05% under scheme’s institutional plan, and 1.3% under the retail plan.

Under all such schemes, only about 10 bps account for expenses against RTAs, bank charges, custody and trustee fees combined. The rest is shared between the AMC and its distributors, with most of the money going to the distributors.

The regulator may issue new norms banning multiple plans under a single scheme shortly after gathering feedback from the industry.

Source: http://www.livemint.com/2010/07/11224332/Sebi-wants-MFs-to-charge-singl.html