Big funds score on safety

HDFC Top 200 has been on most distributors’ recommended fund list. However, Renu Pothen, head of research at Fundsupermart.com, removed the fund from her list last month. Other funds removed were HDFC Equity Fund, Principal Global Opportunities Fund, DSP BlackRock India TIGER Fund and ICICI Prudential FMCG Fund.

Pothen argues, “These funds are very large. For instance, both the HDFC funds have assets under management (AUM) of around Rs 10,000 crore. And we feel that their ability to give as good returns as compared to smaller funds is limited, as such funds with bigger AUMs are giving lower returns.”

When returns of the top 10 mutual fund schemes (according to AUM) are compared with 10 schemes, having AUM between Rs 500 crore and Rs 1,000 crore, it’s seen that funds with smaller AUM don’t fare as well as the top 10 schemes do. In the past year, bigger funds have lost 33 per cent, whereas smaller ones have shed 41 per cent. Similarly, in three, five and 10 years, bigger ones gained 249, 98 and 141.5 per cent, while smaller ones gained 205.5, 57.5 and 145 per cent, respectively.

However, the results are mixed when individual funds are compared. According to data from mutual fund rating agency Value Research, HDFC Top 200 (AUM Rs 11,381 crore) has lost nearly five per cent in the past year. In comparison, Reliance Top 200 Retail (AUM Rs 829.65 crore) has lost nearly four per cent in the same period. Similarly, Fidelity Equity (AUM Rs 3,401 crore) has lost nearly five per cent in the past year, but Birla Sun Life Equity (AUM Rs 750 crore) lost nine per cent.

Lalit Nambiar, senior vice-president and fund manager, head (research), UTI AMC, says, “Smaller funds are nimble and, hence, it’s easy to invest money in these to earn good returns. With larger funds, there is capacity constraint, and you will have to buy the same stocks again and again. As a result, getting consistent returns becomes a problem.” However, Nambiar says data does not show this trend clearly.

Pothen suggests new investors take to smaller funds, while existing ones can stay put in bigger funds. Ideally, one should look at a fund’s returns and its track record. Older the fund, the safer it is.

Sanjay Sachdev, president and chief executive officer of Tata Asset Management, takes the middle path. “There is no thumb rule that larger AUMs are a demerit. But larger funds do become difficult to manage after a point, especially in times of stress,” he says. Indian markets have lesser depth compared to their foreign counterparts. Therefore, liquidity can become an issue. “Moreover, opportunities to invest Rs 8,000-10,000 crore over a period of time may just diminish. In stressful times, you cannot take out such huge amounts in two-three days if there is huge redemption and you’ll be in a soup,” Sachdev explains.

Some others feel this phenomenon is largely restricted to mid- and small-cap funds. “In the mid-cap space, there are not many stocks that can help you produce good returns year after year. Therefore, if the fund size increases, there are chances it becomes illiquid. And, it is important for these funds to maintain an optimum size,” says Dhruva Raj Chatterji, senior research analyst at Morningstar India. A larger mid-cap fund can’t invest only in select mid-cap stocks due to concentration risk in those stocks. This defeats the investment mandate and impacts the performance.

Also, in case of thematic funds, their size can be a spoilsport. Fund managers may not be able to take many autonomous bets in this case, as there is a fixed number of stocks to play with.

Source: http://www.business-standard.com/india/news/big-funds-scoresafety/473117/

Rethink loads, make them really zero

An unambiguous signal that there are no loads will help the fund industry move on

When U.K. Sinha took over as the capital markets regulator in February 2011, there was a pervasive expectation that the upfront commissions embedded in the price of a mutual fund would be back. His UTI Mutual Fund (UTIMF) and Association of Mutual Funds in India (Amfi) stints were taken as an indication that he would be more “reasonable” than his predecessor, C.B. Bhave, who banned loads in mutual funds, stunning the then Rs. 6.1 trillion industry. The presence of the load—an invisible payout from the investor’s money at entry or exit—has been proved to encourage sales of the heaviest load products and churning (when the seller moves money in and out of financial products to harvest the charge sitting in the product), both of which are harmful to the investor.

Though the “load versus no-load argument” has been on since 2009, there is a sudden pick-up of the pro-load buzz in the industry. Triggered by industry association Amfi CEO H.N. Sinor’s statement last week asking for a review of the ban on entry loads in mutual funds, the chatter is now online. I believe the current push to reinstate loads is part of a plan where the second scene is being played out. The first scene unfolded when fund houses, after months of negotiation with the regulator, agreed in June 2011 that a Rs. 150 charge for first-time investors and Rs. 100 for existing ones would solve the industry’s problems of not being able to grow beyond the top 10 cities. Industry insiders had admitted in private that this was just to get the window to open a crack and the push to open it fully will come a bit later. Well, that’s what’s happening now. The industry is lobbying to open that Rs. 100 window wider.

There are several reasons why the Securities and Exchange Board of India (Sebi) agreeing to this push would be regressive. One, if it were loads that sold a product, India would be a fully insured country today. For more than half a century in India, life insurance products have paid Rs. 40 on Rs. 100 as load or commission, but less than 20% of the insurable population is covered. Worse, the products sold have not been in retail consumer interest—the average Indian is under-insured and holding inflation-unfriendly investment products due to this load structure. Clearly, just throwing money will not ensure reach.

Two, one part of the industry seems to be adjusting well to the absence of loads and a step back would hurt this process of a more mature industry. The net inflow into equity funds for 2011-12 has been Rs. 834 crore in a year that markets dropped 10%. Mutual fund inflows are linked to markets and falling markets make it difficult to garner funds. This positive inflow has come a year after the industry lost Rs. 13,000 crore due to the impact of the no-load rule. This is the time to build on the strengths and not revert to an inferior system.

Three, the residual loads left in the product are still doing more harm and good. Asset management companies (AMCs) are paying out an average 75 basis points of the amount invested out of the annual charge or their capital and giving another 75 basis points from the trail that would come at the end of the year, as upfront commission to their large distributors. This skews behaviour—a little over Rs. 65,000 crore came into equity funds in 2010-11 and about Rs. 80,000 crore was redeemed. The same money is being rotated in and out of funds, earning some distributors large commissions. These are mainly banks—HSBC earned almost Rs. 120 crore as commission from mutual funds in 2010-11, at number two was HDFC Bank at just over Rs. 115 crore. Seven of the top 10 commission earners were banks with a total income from this of more than Rs. 500 crore.

What industry needs is an unambiguous message that loads in any form are banned. Not from the investor or the mutual fund. This should be done in all retail-facing financial products, not just funds. The funds should look at their neighbours and see what loss of confidence can really do to a market. The life insurance industry shrank 9% in 2011-12, with the numbers for the private sector being much worse. It sold lemons in the form of unit-linked insurance plans and as investors lose faith, the industry suffers. At its worst, the mutual fund industry lost just over 2% of assets under management (just talking about equity here as that is the true retail product) in 2010-11; the recovery began in 2011-12.

We need an incentive that will align the interests of all the players in this equation. We needn’t take the route Australia has taken and ban all payouts from investors’ money, but keep the trail commission as the method of compensation, other than fees. This is one payment that aligns the interest of all three parts of this triangle—the investor (who benefits as funds show growth), the seller (who benefits on rising income from a growing asset base because the funds recommended did really work) and the manufacturer (who gets consistent income based on performance). Why is this so difficult to understand or implement?

Source: http://www.livemint.com/2012/05/01203241/Rethink-loads-make-them-reall.html