Hi, one of my favourite asset classes during times when Equity Markets were on a bull run or were volatile was ARBITRAGE SCHEMES. I had tried to allocate some portion of my clients portfolio in these schemes and made them part of the core portfolio. This gave both stability and consistent returns to my clients. Arbitrage schemes were the flavours when equity markets were on a roll. To recapitulate; these schemes follow the strategy as mentioned below:
This class of investment gives market neutral returns without taking any directional exposures to the underlying stocks & shares.
For an investor this is nothing but a BUY & SELL transaction i.e. lending money which is secured & without taking any price risks.
• Difference between the SPOT & FORWARD rate is nothing but interest rate ( traditionally known as Badla).
• This is similar to Reverse REPO undertaken by RBI with Banks or SWAP transactions in the Forex market.
• Difference between the SPOT & The FORWARD price is COST of CARRY or the interest rate.
• In the Futures market, all the trades are done on the exchange either BSE or NSE to ensure performance. However, if an investor enters into a Futures contract with a broker directly, who is a Member of any of the above named Exchanges, he runs the risk of broker default & there is no guarantee from the Exchange. Under the said circumstances, the investor is only protected to the max. of Rs.10 lacs under the Investor Protection Fund & hence is never fully protected.
• As opposed to this, if an Investor invests in Futures market through the Mutual Fund route, the Exchange transfers the transactions from participating Brokers to the Custodians & custodians are banks with large networth.
As you will recall, during bull period of equity markets, Fund managers got opportunities of locking in arbitrage returns varying between 10-15% p.a. and then unwinding the same on the expiry date or rolling it over to the next month ( if next month gave similar opportunities of locking in arbitrage returns); thereby generating close to 10-12 % tax free returns in the hands of the investors (As these schemes invest 80% in Arbitrage and 20% in Money Market, these schemes are treated as equity schemes for tax treatment purposes but with a risk profile of a liquid scheme).
Even in current times of bearish markets where arbitrage returns are as low as 5-6% & futures are going into negative, Fund Managers have been able to generate very decent higher single digit or lower double digit returns. The said is possible when Fund Manager locks in lower arbitrage yields of 40/50 bps i.e. 5-6% p.a. and when the same stock future goes into negative on days markets correct, they unwind the position earlier than 30 days.
Lets understand this better with following example:
Day 1: Buy Cash @Rs.100 & Sell Future @Rs.100.50
On day 15 Future goes into negative and quotes at say Rs.99.50; In such a situation the Fund Manager unwinds the position on day 15 and makes a clean Rs.1/- on the whole transaction ( Rs.0.50 locked in on day 1 and Rs.0.50 when Future quotes at discount) and that too in 15 days and lets the unwound position earn additional money market returns over next 15 days i.e. till the end of the month.
The above is called discount arbitrage (though not called officially, but is used as a common parlance in the Arbitrage Markets). As you will see from the returns comparative given below, that even in these bearish equity market days, the said asset class has generated very handsome returns.
If one invests in the said schemes with 6 months view, one should expect post tax return of close to 8.50-9.00% p.a. (which in the current market conditions is not available in any other asset class, except for Income/G Sec schemes with some intermittent volatility).
Let me spell out the advantages and analyse point by point whether assumptions mentioned have been proven correct or not.
Major advantages of Investing in Futures Market through the Mutual Fund Route are as follows:
1. Rate of Return is quite high. Generally Liquid plus returns. If the Fund does not get any arbitrage opportunity, then, the funds are invested in Fixed Income Securities like Liquid Funds.
2. Investment in these Schemes through the Mutual Fund routes reduces the credit risk to practically nil as the counter parties are Custodians & not the brokers.
3. If an investor invests in say Corporate Bonds; the investor is running the risks of corporate defaults. However, through this route the risk is on the Exchange which is as good as taking a Sovereign risk.
4. This is one way of diversifying your investments portfolio.
5. Investment through the Mutual Fund route has an obvious tax advantage vis a vis direct investment in the same product.
6. It is simpler to deal in complex products through the Mutual Fund route vis a vis investing directly.
Though the said product is an Equity related product, it has no price risks, credit risks, etc generally attached to this segment of investment. It is for all practical purposes a risk free investment that has the potential to give far superior returns than Liquid Funds with all the features of safety, liquidity, etc. associated with Liquid fund schemes.
Let us analyse based on some parameters & assumptions whether what we had predicted for the said asset class has been proven correct or not:
1. Has it generated higher returns than liquid & other debt schemes? Following Chart will make it clearer:
2. There have been no credit or liquidity risks even during market meltdowns from May 11’2006.
3. This was a good diversification strategy as most of the asset classes had some risks like interest rate & credit risk attached to them. The said product gave excellent returns without either of the risks attached.
4. It was a much simpler way of dealing with a complex product like this & let the professionals handle the same. They have been able to enhance returns on both counts
a. Identifying right arbitrage opportunities &
b. Enhancing returns by squaring off positions before expiry; thereby enhancing returns further.
5. It is more tax efficient way of getting into arbitrage schemes than doing it directly.
6. None of the months have Arbitrage Funds given negative returns. What this means is the Redemption NAV of each subsequent months have been higher than the previous month.-Following slide showing 1/3/6 month rolling returns will prove this assumption right
Tuesday, March 17, 2009
Five basics for a solid financial future
The stark truth about managing our money these days is that we are mostly on our own. Few employers want us around for 40 years, so our income is likely to have ups and downs and disappear altogether for brief periods between jobs. Saving for retirement is now mostly our responsibility, too. Health insurance, for those of us who have it and manage to keep it, requires increasingly large amounts of money out of our pockets. The list goes on and on. At the same time, all sorts of individuals and institutions have smelled opportunity and lined up to peddle their wares, resulting in an explosion of credit cards, bank products and advisers of various stripes. Some of this is helpful because competition has led to lower costs. But in other instances - say, newfangled adjustable-rate mortgages - the result has been painful.
Complicating all of this is the housing downturn, which has affected the largest asset in many portfolios. Rising fuel and food prices along with tougher loan standards do not help. Given the stakes, it is hard to avoid the persistent low-grade fear that we have made wrong choices or cannot find the right ones, even though they are out there somewhere.
"There's no guarantee that the choices will be available, attractive or appropriate for everyone," said Jacob S Hacker, a political science professor at Yale University and author of "The Great Risk Shift," which looked at how corporations and governments have pushed financial responsibility onto individuals.
So as I take on the Your Money column (and later this year, a companion personal finance site at nytimes.com), I want to devote some space to treating the subject in much the same way that this newspaper's critics treat new films or restaurants. Important new offerings - whether mutual funds or a shopping search engine - will merit a review. And one by one, we will figure out what is worth using and what is best to ignore. Until then, here are five basic guidelines. Think of them as the first principles of Your Money, guidance that can be useful in making just about any financial decision.
Topics
1.Investing is simple
2.Have the talk
Investing is simple
The author Michael Pollan offered an elegant seven-word mantra in his best-selling book "In Defense of Food" that provides clarity amid the bounty of choices on supermarket shelves: "Eat food. Not too much. Mostly plants." Boiling down investing is a similar exercise: Index (mostly). Save a tonne. Reallocate infrequently.
For most of us, investing in index mutual funds and similar vehicles - and sticking with them - is the hardest part of the mantra to accept. It would seem that with such an array of choices, we should be able to create portfolios that can outperform the market averages.
The fact is, however, besting the overall market in most investment classes is nearly impossible over long periods of time. Sure, it may be fun to try. But if you enjoy that sort of thing, do it with a tiny piece of your portfolio. And remember to call it what it actually is: gambling.
The rest of us should save as much as we can in a collection of low-cost index funds. Divide the money among stocks, bonds and other investments according to your time horizon and risk tolerance. Then adjust that allocation occasionally. Opinions vary on the frequency, but most experts agree that adjusting the mix more often than every 6 to 12 months is unnecessary and possibly costly.
It still may be worth paying for help
Investing, however, is only one small part of your financial life. Mortgages, taxes, college savings, insurance and debt are a few of the hugely important tasks we have to figure out.
Perhaps the best thing a versatile professional - whether it is a financial planner, accountant, stockbroker or lawyer - does is provide discipline. It is difficult to get most of this stuff right. And to get it done at the right time. Professionals help make sure it all happens on schedule.
Most of us would rather avoid paying for help. Many financial planners charge 1 percent of a client's assets annually for advice on anything and everything, including investing. So if you have $200,000 saved for retirement, that is $2,000 a year.
The best defense I have ever heard for this level of compensation comes from Roger Streit, a financial planner at Key Financial Solutions in Roseland, NJ. He says that only 1% of us are wise enough and regimented enough to manage our own financial affairs. The other 99%, meanwhile, could almost certainly improve their investment performance at least 1 percent, thus justifying the annual fee.
Sure, this sounds self-serving. But it is also probably true.
Peers may know more than professionals
Financial planners may not have all the answers, or the best answers, all of the time. Moreover, they tend to be stronger on core areas of money management like insurance and taxes and less so on day-to-day financial decisions.
Thankfully, a number of web communities and blogs have grown up around almost every aspect of spending and saving. Travelers and collectors of frequent-flier miles have FlyerTalk. FatWallet is terrific on credit cards. Another site, the Bank Deals blog, is a great resource for new high-rate account offerings. A separate site, Consumerist (both the blog posts and the comments), is strong on advice for anyone who feels as if they have gotten a bad deal from a particular retailer or service provider. And committed index-fund investors hang out at the Bogleheads investment forum.
Reading all these sites regularly is impossible. But they are great for researching particular questions, and most of the expert consumers who congregate there are open to inquiries from newcomers (as long as you search the archives first to make sure the answer isn't there already).
Everything can (and should) be automated
One of the great consumer-friendly innovations in the world of money in recent years has been the automation of bill paying. Practically every utility, mortgage lender and credit card company now has a way of getting its money each month without you lifting a finger. Most will take the money directly from a bank account, and many also allow payment with a credit or debit card.
As a result, I do not need a monthly bill-paying session anymore. The electric and mortgage companies debit my bank account each month. The cable, cellphone and other companies charge my credit card, which helps me to collect piles of rewards. Then the credit card companies pull the full balance from my bank account, too, just as the mortgage company does.
This has a number of advantages: no stamps, no envelopes, no late fees. But the real gift is that I do not have to worry about getting it all done. And with the time I win back, I can do things that are a lot more fun. Automating the payments can have some hitches. It is tempting to neglect to look at the bills once they start paying themselves.
It is a pain to turn the whole bill-paying machinery off and on again if you switch bank accounts. And you need to be sure you have enough of a cash cushion in your primary checking account to prevent overdrafts.
Have the talk
As fewer people have pensions and more retirees live longer, an increasing number of people may need financial help from their children. The question is whether your parents will be among them. Trying to pry financial information out of your parents does not make for a pleasant conversation. But the fact is, we are entitled to demand some answers if our parents do not initiate the discussion themselves.
This is not a case for callousness. They took care of us for 20 or so years, and we will take care of them, too, if it comes to that. But it is not fair of them to withhold warnings of deteriorating finances. If we do not know what is coming, we cannot help them plan for it. Just as we should talk about money with our parents, we should be less reticent about discussing it with others.
NY Times / Ron Lieber
Complicating all of this is the housing downturn, which has affected the largest asset in many portfolios. Rising fuel and food prices along with tougher loan standards do not help. Given the stakes, it is hard to avoid the persistent low-grade fear that we have made wrong choices or cannot find the right ones, even though they are out there somewhere.
"There's no guarantee that the choices will be available, attractive or appropriate for everyone," said Jacob S Hacker, a political science professor at Yale University and author of "The Great Risk Shift," which looked at how corporations and governments have pushed financial responsibility onto individuals.
So as I take on the Your Money column (and later this year, a companion personal finance site at nytimes.com), I want to devote some space to treating the subject in much the same way that this newspaper's critics treat new films or restaurants. Important new offerings - whether mutual funds or a shopping search engine - will merit a review. And one by one, we will figure out what is worth using and what is best to ignore. Until then, here are five basic guidelines. Think of them as the first principles of Your Money, guidance that can be useful in making just about any financial decision.
Topics
1.Investing is simple
2.Have the talk
Investing is simple
The author Michael Pollan offered an elegant seven-word mantra in his best-selling book "In Defense of Food" that provides clarity amid the bounty of choices on supermarket shelves: "Eat food. Not too much. Mostly plants." Boiling down investing is a similar exercise: Index (mostly). Save a tonne. Reallocate infrequently.
For most of us, investing in index mutual funds and similar vehicles - and sticking with them - is the hardest part of the mantra to accept. It would seem that with such an array of choices, we should be able to create portfolios that can outperform the market averages.
The fact is, however, besting the overall market in most investment classes is nearly impossible over long periods of time. Sure, it may be fun to try. But if you enjoy that sort of thing, do it with a tiny piece of your portfolio. And remember to call it what it actually is: gambling.
The rest of us should save as much as we can in a collection of low-cost index funds. Divide the money among stocks, bonds and other investments according to your time horizon and risk tolerance. Then adjust that allocation occasionally. Opinions vary on the frequency, but most experts agree that adjusting the mix more often than every 6 to 12 months is unnecessary and possibly costly.
It still may be worth paying for help
Investing, however, is only one small part of your financial life. Mortgages, taxes, college savings, insurance and debt are a few of the hugely important tasks we have to figure out.
Perhaps the best thing a versatile professional - whether it is a financial planner, accountant, stockbroker or lawyer - does is provide discipline. It is difficult to get most of this stuff right. And to get it done at the right time. Professionals help make sure it all happens on schedule.
Most of us would rather avoid paying for help. Many financial planners charge 1 percent of a client's assets annually for advice on anything and everything, including investing. So if you have $200,000 saved for retirement, that is $2,000 a year.
The best defense I have ever heard for this level of compensation comes from Roger Streit, a financial planner at Key Financial Solutions in Roseland, NJ. He says that only 1% of us are wise enough and regimented enough to manage our own financial affairs. The other 99%, meanwhile, could almost certainly improve their investment performance at least 1 percent, thus justifying the annual fee.
Sure, this sounds self-serving. But it is also probably true.
Peers may know more than professionals
Financial planners may not have all the answers, or the best answers, all of the time. Moreover, they tend to be stronger on core areas of money management like insurance and taxes and less so on day-to-day financial decisions.
Thankfully, a number of web communities and blogs have grown up around almost every aspect of spending and saving. Travelers and collectors of frequent-flier miles have FlyerTalk. FatWallet is terrific on credit cards. Another site, the Bank Deals blog, is a great resource for new high-rate account offerings. A separate site, Consumerist (both the blog posts and the comments), is strong on advice for anyone who feels as if they have gotten a bad deal from a particular retailer or service provider. And committed index-fund investors hang out at the Bogleheads investment forum.
Reading all these sites regularly is impossible. But they are great for researching particular questions, and most of the expert consumers who congregate there are open to inquiries from newcomers (as long as you search the archives first to make sure the answer isn't there already).
Everything can (and should) be automated
One of the great consumer-friendly innovations in the world of money in recent years has been the automation of bill paying. Practically every utility, mortgage lender and credit card company now has a way of getting its money each month without you lifting a finger. Most will take the money directly from a bank account, and many also allow payment with a credit or debit card.
As a result, I do not need a monthly bill-paying session anymore. The electric and mortgage companies debit my bank account each month. The cable, cellphone and other companies charge my credit card, which helps me to collect piles of rewards. Then the credit card companies pull the full balance from my bank account, too, just as the mortgage company does.
This has a number of advantages: no stamps, no envelopes, no late fees. But the real gift is that I do not have to worry about getting it all done. And with the time I win back, I can do things that are a lot more fun. Automating the payments can have some hitches. It is tempting to neglect to look at the bills once they start paying themselves.
It is a pain to turn the whole bill-paying machinery off and on again if you switch bank accounts. And you need to be sure you have enough of a cash cushion in your primary checking account to prevent overdrafts.
Have the talk
As fewer people have pensions and more retirees live longer, an increasing number of people may need financial help from their children. The question is whether your parents will be among them. Trying to pry financial information out of your parents does not make for a pleasant conversation. But the fact is, we are entitled to demand some answers if our parents do not initiate the discussion themselves.
This is not a case for callousness. They took care of us for 20 or so years, and we will take care of them, too, if it comes to that. But it is not fair of them to withhold warnings of deteriorating finances. If we do not know what is coming, we cannot help them plan for it. Just as we should talk about money with our parents, we should be less reticent about discussing it with others.
NY Times / Ron Lieber
The emotional investor
The emotional investor
If you are caught in a dilemma whether to further invest in a weak stock in which you have lost, say, more than Rs 1 lakh, so that you can average out your investments or put your money in a promising company that could reap you rich dividends, which would you choose? It's a dilemma that faces many of us and often comes in the way of making a rational investment decision.
Very often, investors choose the former to cover up losses in their portfolio or just hold on to the stock in the hope that it will bounce back soon. Behavioural finance experts say investors tend to behave in this way because the pain of loss far exceeds the pleasure from gains. It's this emotion of loss aversion that many investors unwittingly succumb to when making investment decisions. Often, not understanding one's emotions when investing in the stock market leads to big financial losses for investors
Plenty of research has gone into how emotions affect investment decisions of individuals. Emotions are shaped by a lot of influences in our daily lives, including basic things like how we react to money or how our parents reacted to money. Emotions also determine how we react to different situations. Says Parag Parikh, stock broker and author of Stocks to Riches (Tata McGraw-Hill): It also stems ourselves and seek immediate pleasure or whether we can postpone pleasure. It's how you deal with these emotions that will determine whether you will make money or lose your shirt during these tough times.
Markets are not efficient in the short term: Long-time broker Parag Parikh and author of Stocks to Riches explains how individual investors behave in the short run and how they can use emotions to their advantage.
On emotional biases: People are influenced by various emotions and one of them is sunkcost fallacy , which results in putting good money after bad. You essentially want to justify your earlier decision and soothe your ego. If you bought a bad stock and bought more after its price fell, it's this fallacy at work. When you average out, you may be prone to sunk-cost fallacy . On the other hand, you can use the effect to your advantage by averaging downwards in a good stock.
On investing today: Often, people find it difficult to understand stock markets. It's said that markets are efficient. But behavioural economists believe that markets are not efficient in the short run. It's precisely in such times that people don't make rational decisions. When these days a liquidator is selling stocks at any price, can you imagine the potential you have when you invest today? Right now, everyone wants to avoid a loss while it may be the time to buy.
On market emotions: If I sell a share after the market falls, I make a loss. So, my actions have produced a loss for me. But other shareholders, by merely holding the same shares, too, see their values plummet. It's when you don't do anything and yet there's a reaction, then you get confused. This is when greed and fear overcome us. Right now, everyone wants to avoid a loss, which is known as loss aversion in behavioural finance. This is the time to buy.
Topics
1.Weigh your emotions
2.Balance the decisions
Weigh your emotions
Consider the gambler's fallacy that nearly everyone from housewives to corporate head honchos falls for. Say, you are playing a game of coin tossing and nine times out of nine, the coin shows heads. What are the chances that it will show heads on the next toss? Many might think it's slim because it showed heads nine times out of nine previously. Yet, the chances are fifty-fifty the same as the last coin toss or the previous nine coin tosses. Each wager is unique to the chances that it gives an investor and it has got nothing to do with the previous results. This is where investors can recognise that each investment is different. If you had been winning on a particular stock before, it does not mean that you will win the next time you invest in the same. It calls for a fresh understanding of the market conditions and the circumstances that will allow your stock to do well.
Investors get easily swayed by another similar emotion: the sunkcost fallacy . This means that investors are throwing in good money after bad. On the other hand, if your investment is in a weak stock, then no matter how much you invest in it, chances are that you will still lose money. But sometimes you can use this psychological effect to your advantage. Let's say you buy a gym membership for a year rather than for a month. Here you sink the money for a year, but it psychologically forces you to go to the gym rather than forego a huge sum. In investing, it works when an individual investor rupee costaverages on a good stock.
A common trap investors fall into when they are driven by emotions is when they try to recover a loss. At such times, an investor has to commit a bigger sum of money to recover his loss in the market. In doing so, he fails to recognise that his risk capital and exposure to the market has increased.
Balance the decisions
The first step to clearing the mental cobwebs is to make a note of why you are taking the decision in the first place. There are some key questions you should ask yourself before taking a decision to invest. Do you want to recover your losses? Do you find the investment worthy at the current market prices? Are you keeping away from the stock market for fear of losing money? Or are you investing right now because you find stocks very attractive? Are you afraid of losing money or are you afraid of taking risks?
It's not difficult to understand your emotions over time. Question every investment decision you make with your own experience. Ask hard questions about the prospects of the company and whether the price you are paying for it is right. Circumstances can change for a company (as the Satyam episode has shown), so not every investment might turn out to be right. Shrug off your losses and move on to the next story. As Parikh puts it: Don't get married to your stocks.
On the other hand, don't latch on to every new idea that comes your way at the cost of your old ones that might still have potential, but rather weigh your investment decisions before you take a call. The key to wealth building is to balance your investment decisions with your objectives and the circumstances of the market. Exploit the emotions of the market when there's an opportunity. Chances are that it will leave you better placed than the rest of the market and well-prepared for further opportunities or downturns.
Reproduced From Business Today. © 2009. LMIL. All rights reserved
If you are caught in a dilemma whether to further invest in a weak stock in which you have lost, say, more than Rs 1 lakh, so that you can average out your investments or put your money in a promising company that could reap you rich dividends, which would you choose? It's a dilemma that faces many of us and often comes in the way of making a rational investment decision.
Very often, investors choose the former to cover up losses in their portfolio or just hold on to the stock in the hope that it will bounce back soon. Behavioural finance experts say investors tend to behave in this way because the pain of loss far exceeds the pleasure from gains. It's this emotion of loss aversion that many investors unwittingly succumb to when making investment decisions. Often, not understanding one's emotions when investing in the stock market leads to big financial losses for investors
Plenty of research has gone into how emotions affect investment decisions of individuals. Emotions are shaped by a lot of influences in our daily lives, including basic things like how we react to money or how our parents reacted to money. Emotions also determine how we react to different situations. Says Parag Parikh, stock broker and author of Stocks to Riches (Tata McGraw-Hill): It also stems ourselves and seek immediate pleasure or whether we can postpone pleasure. It's how you deal with these emotions that will determine whether you will make money or lose your shirt during these tough times.
Markets are not efficient in the short term: Long-time broker Parag Parikh and author of Stocks to Riches explains how individual investors behave in the short run and how they can use emotions to their advantage.
On emotional biases: People are influenced by various emotions and one of them is sunkcost fallacy , which results in putting good money after bad. You essentially want to justify your earlier decision and soothe your ego. If you bought a bad stock and bought more after its price fell, it's this fallacy at work. When you average out, you may be prone to sunk-cost fallacy . On the other hand, you can use the effect to your advantage by averaging downwards in a good stock.
On investing today: Often, people find it difficult to understand stock markets. It's said that markets are efficient. But behavioural economists believe that markets are not efficient in the short run. It's precisely in such times that people don't make rational decisions. When these days a liquidator is selling stocks at any price, can you imagine the potential you have when you invest today? Right now, everyone wants to avoid a loss while it may be the time to buy.
On market emotions: If I sell a share after the market falls, I make a loss. So, my actions have produced a loss for me. But other shareholders, by merely holding the same shares, too, see their values plummet. It's when you don't do anything and yet there's a reaction, then you get confused. This is when greed and fear overcome us. Right now, everyone wants to avoid a loss, which is known as loss aversion in behavioural finance. This is the time to buy.
Topics
1.Weigh your emotions
2.Balance the decisions
Weigh your emotions
Consider the gambler's fallacy that nearly everyone from housewives to corporate head honchos falls for. Say, you are playing a game of coin tossing and nine times out of nine, the coin shows heads. What are the chances that it will show heads on the next toss? Many might think it's slim because it showed heads nine times out of nine previously. Yet, the chances are fifty-fifty the same as the last coin toss or the previous nine coin tosses. Each wager is unique to the chances that it gives an investor and it has got nothing to do with the previous results. This is where investors can recognise that each investment is different. If you had been winning on a particular stock before, it does not mean that you will win the next time you invest in the same. It calls for a fresh understanding of the market conditions and the circumstances that will allow your stock to do well.
Investors get easily swayed by another similar emotion: the sunkcost fallacy . This means that investors are throwing in good money after bad. On the other hand, if your investment is in a weak stock, then no matter how much you invest in it, chances are that you will still lose money. But sometimes you can use this psychological effect to your advantage. Let's say you buy a gym membership for a year rather than for a month. Here you sink the money for a year, but it psychologically forces you to go to the gym rather than forego a huge sum. In investing, it works when an individual investor rupee costaverages on a good stock.
A common trap investors fall into when they are driven by emotions is when they try to recover a loss. At such times, an investor has to commit a bigger sum of money to recover his loss in the market. In doing so, he fails to recognise that his risk capital and exposure to the market has increased.
Balance the decisions
The first step to clearing the mental cobwebs is to make a note of why you are taking the decision in the first place. There are some key questions you should ask yourself before taking a decision to invest. Do you want to recover your losses? Do you find the investment worthy at the current market prices? Are you keeping away from the stock market for fear of losing money? Or are you investing right now because you find stocks very attractive? Are you afraid of losing money or are you afraid of taking risks?
It's not difficult to understand your emotions over time. Question every investment decision you make with your own experience. Ask hard questions about the prospects of the company and whether the price you are paying for it is right. Circumstances can change for a company (as the Satyam episode has shown), so not every investment might turn out to be right. Shrug off your losses and move on to the next story. As Parikh puts it: Don't get married to your stocks.
On the other hand, don't latch on to every new idea that comes your way at the cost of your old ones that might still have potential, but rather weigh your investment decisions before you take a call. The key to wealth building is to balance your investment decisions with your objectives and the circumstances of the market. Exploit the emotions of the market when there's an opportunity. Chances are that it will leave you better placed than the rest of the market and well-prepared for further opportunities or downturns.
Reproduced From Business Today. © 2009. LMIL. All rights reserved
Wednesday, March 4, 2009
Personal Tax: 10 things to do before March 31 Indian financial
Year runs from 1 April to 31 March. Accordingly, the Income-Tax Return is to be prepared and filed for the relevant financial year.
31st March is an important date as it marks the end of a financial year. The last few weeks are when we rush for the documents/investment proofs, based on which we compute our tax liability.
The income-tax department has done away with the requirement of filing any supporting documents like investment proofs, etc, along with the return of income. It is, however, prudent to collect the same before the end of the financial year and keep them in records for future reference. These would also be required, in case your return is picked up for assessment.
Here are ten things to do before March 31, 2009 i.e. before the current financial year ends:
1. Submit to your employer the proof of investments/expenses that you have incurred to claim deduction under Section 80C. These includes receipt for insurance premium paid, deposits made in your public provident fund account, investment made in equity-linked savings schemes, National Savings Certificates purchased, children’s tuition fees paid, etc. Your employer would require the details and the documentary proof to provide you the deduction under Section 80C.
2. If you are claiming deduction for house rent allowance, then ensure that you have submitted the necessary details and proofs like rent receipt, etc, to your employer for claiming the benefit.
3. Collect all your bank statements and Tax Deducted at Source (TDS) certificates, if any, from your bank. This will help you to compute interest income on bank deposits and pay balance tax, if any.
4. If you have a running home loan, you must collect the certificate of repayment of principal amount and the interest paid during the financial year from the bank/financial institution from which you have taken the housing loan. You are required to provide a computation to your employer specifying the income under the head ‘House Property’ along with the proof of interest and principal repayment, to claim deduction.
5. In case you have changed employment during the financial year and not collected your Form 16, then you should collect the same now.
6. If you have made a donation to any charitable organization during the year, then ensure that you collect a valid receipt to claim deduction u/s 80G.
7. If you are claiming deduction under Section 80D for payment of health insurance premium for self and family, then ensure that you have obtained receipt for the premium paid.
8. If you are claiming deduction for interest on educational loan then ensure that you have the necessary records to substantiate the same.
9. If you have sold/transferred any asset like house property, shares, mutual funds etc. then compute the capital gains and check the exemptions available to you. A distinction is to be made between long term and short term capital gains.
10. Compute your tax for the year and assess whether you are required to pay any balance tax.
These are few of the important steps that one should take care of while preparing one’s tax computation. It would be a good idea to take the necessary action now to avoid the last minute rush of collecting the details and ensuring that all the available exemptions/deductions are claimed.
31st March is an important date as it marks the end of a financial year. The last few weeks are when we rush for the documents/investment proofs, based on which we compute our tax liability.
The income-tax department has done away with the requirement of filing any supporting documents like investment proofs, etc, along with the return of income. It is, however, prudent to collect the same before the end of the financial year and keep them in records for future reference. These would also be required, in case your return is picked up for assessment.
Here are ten things to do before March 31, 2009 i.e. before the current financial year ends:
1. Submit to your employer the proof of investments/expenses that you have incurred to claim deduction under Section 80C. These includes receipt for insurance premium paid, deposits made in your public provident fund account, investment made in equity-linked savings schemes, National Savings Certificates purchased, children’s tuition fees paid, etc. Your employer would require the details and the documentary proof to provide you the deduction under Section 80C.
2. If you are claiming deduction for house rent allowance, then ensure that you have submitted the necessary details and proofs like rent receipt, etc, to your employer for claiming the benefit.
3. Collect all your bank statements and Tax Deducted at Source (TDS) certificates, if any, from your bank. This will help you to compute interest income on bank deposits and pay balance tax, if any.
4. If you have a running home loan, you must collect the certificate of repayment of principal amount and the interest paid during the financial year from the bank/financial institution from which you have taken the housing loan. You are required to provide a computation to your employer specifying the income under the head ‘House Property’ along with the proof of interest and principal repayment, to claim deduction.
5. In case you have changed employment during the financial year and not collected your Form 16, then you should collect the same now.
6. If you have made a donation to any charitable organization during the year, then ensure that you collect a valid receipt to claim deduction u/s 80G.
7. If you are claiming deduction under Section 80D for payment of health insurance premium for self and family, then ensure that you have obtained receipt for the premium paid.
8. If you are claiming deduction for interest on educational loan then ensure that you have the necessary records to substantiate the same.
9. If you have sold/transferred any asset like house property, shares, mutual funds etc. then compute the capital gains and check the exemptions available to you. A distinction is to be made between long term and short term capital gains.
10. Compute your tax for the year and assess whether you are required to pay any balance tax.
These are few of the important steps that one should take care of while preparing one’s tax computation. It would be a good idea to take the necessary action now to avoid the last minute rush of collecting the details and ensuring that all the available exemptions/deductions are claimed.
Saturday, January 31, 2009
Maket This Week
Indian bourses witnessed a strong rally on Tuesday, a day after Republic Day celebrations, and the Sensex surged by an impressive 330 points to close at 9004, while the broader Nifty registered a gain of 93 points to end strongly at 2771.
The market breadth was positive and the rally was led by banking stocks such as SBI, ICICI Bank, HDFC Bank. Although FIIs continued to be the sellers, domestic institutions and mutual funds turned net buyers.
The Reserve Bank of India, in its quarterly monetary policy review, on Tuesday left key rates unchanged and lowered the GDP growth rate projections to 7% from its earlier forecast of 7.5 % in view of recession in the USA and European countries.
The new board of Satyam Computers has appointed Goldman Sachs and Avendus Capital as investment bankers and asserted that the company will not be sold in parts. It has further assured that the employees will get their January salary on schedule.
One of the board members, Mr Manoharan, has stated that the board had no clue as to the motive behind L&T's bid to acquire Satyam, while asserting that the bid will be devised in a fair and transparent manner in consultation with SEBI and the Government.
Following a strong global sentiment, the markets continued to rally on Wednesday as the Sensex closed the session with a gain of 253 points at 9257. Similarly, the Nifty opened on a positive note, rose 78 points to end positively at 2850.
The share price of Satyam Computers on Wednesday surged by 17 per cent to Rs 55 on media reports that L&T might further enhance its stake. Apart from this, there was heavy short covering in this counter as Thursday would be the last day that Satyam shares will be traded in the F& O segment, said market participants.
In a late evening development on Thursday, Mr B.K. Modi, Chairman, Spice Group informed that Spice Innovation is interested in acquiring 51 per cent stake in Satyam.
Explaining the rationale behind the move, he said "they are also in the same line of business. our board had decided to look at Satyam even before the financial fraud came into light."
The benchmark Sensex ended Thursday's session marginally lower by 21 points at 9236 after paring the initial gains.
Similarly the Nifty faced resistance at higher levels and lost 25 points and closed at 2824.
According to data from SEBI, FIIs have been net sellers of equity for $1.2 billion in the month of January. They have been net sellers since January 7.
Apart from the worst fears over the gloabl economic recession, the Satyam episode had dampened FII sentment further, aver market players.
The Sensex on Friday gained 188 points supported by positive global trends and buying by domestic funds in blue-chip stocks to close 9424.24. The Nifty index also rose by 51 points to end firmer at 2874.80.
The market breadth was positive and the rally was led by banking stocks such as SBI, ICICI Bank, HDFC Bank. Although FIIs continued to be the sellers, domestic institutions and mutual funds turned net buyers.
The Reserve Bank of India, in its quarterly monetary policy review, on Tuesday left key rates unchanged and lowered the GDP growth rate projections to 7% from its earlier forecast of 7.5 % in view of recession in the USA and European countries.
The new board of Satyam Computers has appointed Goldman Sachs and Avendus Capital as investment bankers and asserted that the company will not be sold in parts. It has further assured that the employees will get their January salary on schedule.
One of the board members, Mr Manoharan, has stated that the board had no clue as to the motive behind L&T's bid to acquire Satyam, while asserting that the bid will be devised in a fair and transparent manner in consultation with SEBI and the Government.
Following a strong global sentiment, the markets continued to rally on Wednesday as the Sensex closed the session with a gain of 253 points at 9257. Similarly, the Nifty opened on a positive note, rose 78 points to end positively at 2850.
The share price of Satyam Computers on Wednesday surged by 17 per cent to Rs 55 on media reports that L&T might further enhance its stake. Apart from this, there was heavy short covering in this counter as Thursday would be the last day that Satyam shares will be traded in the F& O segment, said market participants.
In a late evening development on Thursday, Mr B.K. Modi, Chairman, Spice Group informed that Spice Innovation is interested in acquiring 51 per cent stake in Satyam.
Explaining the rationale behind the move, he said "they are also in the same line of business. our board had decided to look at Satyam even before the financial fraud came into light."
The benchmark Sensex ended Thursday's session marginally lower by 21 points at 9236 after paring the initial gains.
Similarly the Nifty faced resistance at higher levels and lost 25 points and closed at 2824.
According to data from SEBI, FIIs have been net sellers of equity for $1.2 billion in the month of January. They have been net sellers since January 7.
Apart from the worst fears over the gloabl economic recession, the Satyam episode had dampened FII sentment further, aver market players.
The Sensex on Friday gained 188 points supported by positive global trends and buying by domestic funds in blue-chip stocks to close 9424.24. The Nifty index also rose by 51 points to end firmer at 2874.80.
Thursday, January 15, 2009
Monday, January 12, 2009
Top honchos' cover puts insurers in a fix
With Satyam (SATYAM.BO : 34.25 10.4) founder and former chairman B Ramalinga Raju along with his brother and former chief financial officer (CFO) behind bars, the insurers are in state of quandary over the claim settlement of the country's largest directors' and officers' liability insurance policy (DandO) in the name of the top management of Satyam Computer Services.
ICICI (ICICIBANK.NS : 434.5 -22.1) Lombard General Insurance, Tata General Insurnace and New India Assurance have designed the Rs 400-crore DandO cover for the Satyam top management, who are being dragged to courts after Raju confessed about a Rs 7,000-crore fraud.
A DandO policy covers the cost of legal expenses of a policy holder in both domestic and overseas operations. Some leading corporates and private sector banks have bought these policies to protect their top management and members of their boards from any act of commission and omission committed in the discharge of their duties.
Two US law firms-Izard Nobel LLP and Vianale and Vianale LLP have also filed class action lawsuits against Satyam on behalf of shareholders of the software services firm's American depository receipts.
"A lawsuit seeking class action status has been filed in the United States district court for the Southern District of New York on behalf of those who purchased the ADRs of Satyam Computer between January 6, 2004 and January 6, 2009," Izard Nobel LLP said in a statement.
Another law firm Vianale and Vianale LLP has also announced that it has filed a class action lawsuit on behalf of purchasers of the American depository shares of Satyam Computer during the class period January 6, 2004 through January 6, 2009.
However, the insurers are now trying to find out the legal sanctity of Raju's confession, as any fraud committed intentionally by the holder of a DandO policy would not be entitled to any claim settlement.
Particularly the insurers are citing the official statement of the capital market regulator, Sebi, which has said that Raju's confession may not have a legal standing to convince a magistrate. Sebi said it needed to have its own investigation before filing complaint against the top management to implicate it.
Speaking to FE, insurers who have provided the DandO policy to Satyam said it would be now a long-drawn process to have any claim settlement under the policy.
In the US, DandO policy is one of the most bought policy by corporates against class action.
ICICI (ICICIBANK.NS : 434.5 -22.1) Lombard General Insurance, Tata General Insurnace and New India Assurance have designed the Rs 400-crore DandO cover for the Satyam top management, who are being dragged to courts after Raju confessed about a Rs 7,000-crore fraud.
A DandO policy covers the cost of legal expenses of a policy holder in both domestic and overseas operations. Some leading corporates and private sector banks have bought these policies to protect their top management and members of their boards from any act of commission and omission committed in the discharge of their duties.
Two US law firms-Izard Nobel LLP and Vianale and Vianale LLP have also filed class action lawsuits against Satyam on behalf of shareholders of the software services firm's American depository receipts.
"A lawsuit seeking class action status has been filed in the United States district court for the Southern District of New York on behalf of those who purchased the ADRs of Satyam Computer between January 6, 2004 and January 6, 2009," Izard Nobel LLP said in a statement.
Another law firm Vianale and Vianale LLP has also announced that it has filed a class action lawsuit on behalf of purchasers of the American depository shares of Satyam Computer during the class period January 6, 2004 through January 6, 2009.
However, the insurers are now trying to find out the legal sanctity of Raju's confession, as any fraud committed intentionally by the holder of a DandO policy would not be entitled to any claim settlement.
Particularly the insurers are citing the official statement of the capital market regulator, Sebi, which has said that Raju's confession may not have a legal standing to convince a magistrate. Sebi said it needed to have its own investigation before filing complaint against the top management to implicate it.
Speaking to FE, insurers who have provided the DandO policy to Satyam said it would be now a long-drawn process to have any claim settlement under the policy.
In the US, DandO policy is one of the most bought policy by corporates against class action.
Three Investor Lessons from the Satyam Scandal
The Satyam (SAY) scandal has provided a stark reminder to many about the dangers of investing. There are, however, diverging trains of thought on what to take away from this. One school says that this goes to show that the rest of the world is not that much unlike America and that an Enron or Madoff scandal can happen anywhere. Underlying this belief seems to be the idea that these sorts of scandals are somewhat random and unpredictable.
A second school of thought says this exposes the dangers of investing abroad and particularly in emerging markets where business culture, auditing standards, accounting rules, regulatory structures, and social customs can differ markedly from the United States. The thought here is that the developing world might not have quite as strong checks to insure accuracy of data reported by businesses and that American investors will inevitably experience a lack of awareness of many issues in any particular nation that might differ from the US.
For my money, I am in the latter school of thought. This is not to suggest that one should completely shy away from investing in the rest of the world and the emerging markets; rather, one needs to be aware of the different risks involved by investing in the international sphere.
There are several reasons why I do not view this scandal as simply India’s version of Enron. Certainly, this event has rocked the Indian markets in the same sense that Enron did the American markets, but that does not mean the scandals are necessarily similar in nature and that this could happen in the United States any time. The nature of the fraud involved is key to me. If one were to examine the fraud cases in the United States, a lot of them involve complex schemes and companies taking advantage of auditors’ lack of knowledge about difficult-to-price assets. While auditors might work in particular industries more than others, they still do not have the expert knowledge of asset classes that one who works in an industry every day might have.
Look at a company like Intel (INTC), for instance, that produces high-tech devices that rapidly depreciate in value. From an auditor’s perspective, it might be difficult to tell the difference between a new chip with high-value and an obsolete chip with virtually no value. These types of situations can create opportunities for fraudsters.
While a lot of facts from the Satyam scandal are still missing and I imagine we will learn more over the coming weeks and months, the one particularly frightening thing about this is the seeming ease with which this fraud was committed. This does not appear to be a case of complicated and difficult-to-value assets vexing auditors. Satyam had a cash balance over $1 Billion and 94% of it was fictitious! Surely, one would think, that auditors should have noticed such a large amount of cash that did not seem to exist. Cash is a much more difficult asset to “fake” or create an illusion of heightened value on than microprocessors, oil supplies, or mortgage-backed securities. How could a massive store of missing cash escape the attention of auditors?
If a company could fake this much cash on its balance sheet without auditors even batting an eyelash, could this mean that any company in India is potentially vulnerable? It’s worthwhile to note that as a publicly-traded company traded on an American exchange, Satyam was subject to US Generally Accepted Accounting Principles (GAAP) and Sarbanes-Oxley. Yet, even this did not protect investors. But why?
There’s a whole host of possible reasons and it’s difficult to say what the truth behind the matter is without all the fact. Some possibilities:
(1) Satyam was audited by Price Waterhouse of Hyderabad, India, which is connected to PricewaterhouseCoopers. It’s not clear to me what sort of people would be brought in to do this audit, however. Obviously, you would need people familiar with US GAAP. Was the auditing staff largely based out of India? Or did PwC bring “experts” over from the United States?
There is potential for problems with either option you choose. Would Indian-educated accountants necessarily be familiar with US GAAP and GAAS on more than a shallow level? Keep in mind, these auditors could possibly only use these standards once per year while auditing Satyam. Perhaps an audit, while theoretically falling under American standards, is carried out more closely to Indian standards in actuality.
If Americans were brought in to examine Satyam, would they necessarily have more than a shallow understanding of Indian business practices, regulations, and cultural customs? Would the Americans be “taking the word” of people at Satyam due to their own lack of expertise?
(2) Another possibility is something about Indian business practices and the regulatory environment make it easy to conceal this type of thing from the view of auditors. As a foreigner, one is simply left guessing about conditions in a particular country. An American operates with a lot of assumptions that are mainly based on their own experiences in America; those assumptions may be completely invalid when carried over to a nation halfway across the globe.
(3) Its also possible that auditors or financial institutions were acting in collusion with Satyam. Thus far, there is no evidence of this, but it can’t be ruled out yet. Ironically, this would probably be the least damning of the options because it would suggest that there was a lack of effective checks involved here and this might be remediable. Though, it still might expose the ease with which such collusion could occur overseas.
These are just a few possibilities. I am sure there are many others and it all cuts into the harsh reality of investing: we are all making decisions based on limited information. The best we can do is maintain awareness of this and seek out investing strategies that minimize the effects of this. With that, I offer these thoughts on investing:
(1) When Investing in Emerging Markets, Be Aware of Heightened Risks from Greater Uncertainty
Personally, I have never analyzed any companies in India and do not have that much knowledge of the Indian market. However, I do examine a number of companies from China. One thing I’ve found is that the financial statements are not necessarily as illuminating as they might be for American companies, even when they are prepared in accordance with US GAAP. This goes back to a previous thought: accountants in foreign nations may not necessarily have that great of an understanding of American standards, culture, and laws. While this is true in an auditing capacity, it’s also true in an in-house capacity. A company may hire accountants who have limited understanding of American standards and culture.
On that note, one thing I’ve personally noticed from examining Chinese solar companies is that the financial statements for some of the companies are extremely difficult to understand and gather important information from. I found myself particularly vexed reading through Yingli Solar’s (YGE) 20-F filing. Due to this, I have shied away from Yingli personally. This does not mean that Yingli is a bad investment --- merely that I made a conscious decision based on a general feeling I got from reading the financial statements that the company might not have totally understood American investors. If this was the case, it was also possible the company did not fully understand American accounting standards. Based on this, I assigned a higher level of risk to Yingli.
I don’t mean to single out Yingli, as it may indeed be a great investment and I have encountered some very smart investors who think highly of the firm, but my thought was that if I was having particular difficulty understanding their disclosures, maybe I should steer clear rather than *assume* that everything was alright.
(2) Different Countries, Different Rules, Different Cultures, Different Education
Every country has its own set of laws and customs. However, most of us are not lawyers. Instead, we gain our understanding of the law through observation. We have a sense that something is not legal. We have a sense of what is acceptable and what is not. Those standards do not necessarily carry over to every nation. This might seem somewhat obvious in a way. What might be less obvious is that people born in another nation might have a completely different way of learning and a completely different education.
This becomes especially important when we are talking about accounting and auditing. Are Russian accountants necessarily well-schooled in American accounting standards? I have no clue how one becomes an accountant in Russia, but I imagine they have their own procedures and their own system of education and that it differs in many respects from the system here in America. If a company in Russia is traded on an American exchange, how does it find the accountants who are to do the American reporting? Are Russian accountants simply given a two-week crash course? Is an American brought over to teach others? Are Americans running the whole operation? As mentioned earlier, no matter which way you look at it, there are a potential host of problems.
The main takeaway here is to simply be aware that other nations operate differently and even abiding by American standards does not necessarily mean that all differences immediately disappear.
(3) Diversify, Diversify, Diversify!
The most important takeaway here is that investing involves a lot of uncertainty. No matter how skilled or knowledgeable you are in finance, accounting, business, or the particularly industry you are looking at, there is always something out there that you did not know about and that you will not anticipate. The best way to deal with this uncertainty is to mitigate the risks by diversifying your portfolio. This is true even if you are investing only in American companies, but I think it’s even more true when investing in emerging markets.
A few parting notes: while I would not necessarily discourage anyone from investing in emerging markets, I will suggest that it might be prudent to have a great deal of reluctance towards investing in India for the near-future. Until we know how the Satyam fraud went undetected by auditors for so many years and until we see some evidence that this is not happening all over India, I would veer away. Naturally, anyone is free to disagree with my assessment.
Finally, a lot of what I have offered here is speculation about what might be happening in overseas companies and auditing firms. If anything is not factual, feel free to inform me. My bigger point here is that sometimes, we don’t know all the facts. All the same, we should seek as many of those facts as we can get.
Disclosures: No position in SAY or any Indian/emerging market ETFs
A second school of thought says this exposes the dangers of investing abroad and particularly in emerging markets where business culture, auditing standards, accounting rules, regulatory structures, and social customs can differ markedly from the United States. The thought here is that the developing world might not have quite as strong checks to insure accuracy of data reported by businesses and that American investors will inevitably experience a lack of awareness of many issues in any particular nation that might differ from the US.
For my money, I am in the latter school of thought. This is not to suggest that one should completely shy away from investing in the rest of the world and the emerging markets; rather, one needs to be aware of the different risks involved by investing in the international sphere.
There are several reasons why I do not view this scandal as simply India’s version of Enron. Certainly, this event has rocked the Indian markets in the same sense that Enron did the American markets, but that does not mean the scandals are necessarily similar in nature and that this could happen in the United States any time. The nature of the fraud involved is key to me. If one were to examine the fraud cases in the United States, a lot of them involve complex schemes and companies taking advantage of auditors’ lack of knowledge about difficult-to-price assets. While auditors might work in particular industries more than others, they still do not have the expert knowledge of asset classes that one who works in an industry every day might have.
Look at a company like Intel (INTC), for instance, that produces high-tech devices that rapidly depreciate in value. From an auditor’s perspective, it might be difficult to tell the difference between a new chip with high-value and an obsolete chip with virtually no value. These types of situations can create opportunities for fraudsters.
While a lot of facts from the Satyam scandal are still missing and I imagine we will learn more over the coming weeks and months, the one particularly frightening thing about this is the seeming ease with which this fraud was committed. This does not appear to be a case of complicated and difficult-to-value assets vexing auditors. Satyam had a cash balance over $1 Billion and 94% of it was fictitious! Surely, one would think, that auditors should have noticed such a large amount of cash that did not seem to exist. Cash is a much more difficult asset to “fake” or create an illusion of heightened value on than microprocessors, oil supplies, or mortgage-backed securities. How could a massive store of missing cash escape the attention of auditors?
If a company could fake this much cash on its balance sheet without auditors even batting an eyelash, could this mean that any company in India is potentially vulnerable? It’s worthwhile to note that as a publicly-traded company traded on an American exchange, Satyam was subject to US Generally Accepted Accounting Principles (GAAP) and Sarbanes-Oxley. Yet, even this did not protect investors. But why?
There’s a whole host of possible reasons and it’s difficult to say what the truth behind the matter is without all the fact. Some possibilities:
(1) Satyam was audited by Price Waterhouse of Hyderabad, India, which is connected to PricewaterhouseCoopers. It’s not clear to me what sort of people would be brought in to do this audit, however. Obviously, you would need people familiar with US GAAP. Was the auditing staff largely based out of India? Or did PwC bring “experts” over from the United States?
There is potential for problems with either option you choose. Would Indian-educated accountants necessarily be familiar with US GAAP and GAAS on more than a shallow level? Keep in mind, these auditors could possibly only use these standards once per year while auditing Satyam. Perhaps an audit, while theoretically falling under American standards, is carried out more closely to Indian standards in actuality.
If Americans were brought in to examine Satyam, would they necessarily have more than a shallow understanding of Indian business practices, regulations, and cultural customs? Would the Americans be “taking the word” of people at Satyam due to their own lack of expertise?
(2) Another possibility is something about Indian business practices and the regulatory environment make it easy to conceal this type of thing from the view of auditors. As a foreigner, one is simply left guessing about conditions in a particular country. An American operates with a lot of assumptions that are mainly based on their own experiences in America; those assumptions may be completely invalid when carried over to a nation halfway across the globe.
(3) Its also possible that auditors or financial institutions were acting in collusion with Satyam. Thus far, there is no evidence of this, but it can’t be ruled out yet. Ironically, this would probably be the least damning of the options because it would suggest that there was a lack of effective checks involved here and this might be remediable. Though, it still might expose the ease with which such collusion could occur overseas.
These are just a few possibilities. I am sure there are many others and it all cuts into the harsh reality of investing: we are all making decisions based on limited information. The best we can do is maintain awareness of this and seek out investing strategies that minimize the effects of this. With that, I offer these thoughts on investing:
(1) When Investing in Emerging Markets, Be Aware of Heightened Risks from Greater Uncertainty
Personally, I have never analyzed any companies in India and do not have that much knowledge of the Indian market. However, I do examine a number of companies from China. One thing I’ve found is that the financial statements are not necessarily as illuminating as they might be for American companies, even when they are prepared in accordance with US GAAP. This goes back to a previous thought: accountants in foreign nations may not necessarily have that great of an understanding of American standards, culture, and laws. While this is true in an auditing capacity, it’s also true in an in-house capacity. A company may hire accountants who have limited understanding of American standards and culture.
On that note, one thing I’ve personally noticed from examining Chinese solar companies is that the financial statements for some of the companies are extremely difficult to understand and gather important information from. I found myself particularly vexed reading through Yingli Solar’s (YGE) 20-F filing. Due to this, I have shied away from Yingli personally. This does not mean that Yingli is a bad investment --- merely that I made a conscious decision based on a general feeling I got from reading the financial statements that the company might not have totally understood American investors. If this was the case, it was also possible the company did not fully understand American accounting standards. Based on this, I assigned a higher level of risk to Yingli.
I don’t mean to single out Yingli, as it may indeed be a great investment and I have encountered some very smart investors who think highly of the firm, but my thought was that if I was having particular difficulty understanding their disclosures, maybe I should steer clear rather than *assume* that everything was alright.
(2) Different Countries, Different Rules, Different Cultures, Different Education
Every country has its own set of laws and customs. However, most of us are not lawyers. Instead, we gain our understanding of the law through observation. We have a sense that something is not legal. We have a sense of what is acceptable and what is not. Those standards do not necessarily carry over to every nation. This might seem somewhat obvious in a way. What might be less obvious is that people born in another nation might have a completely different way of learning and a completely different education.
This becomes especially important when we are talking about accounting and auditing. Are Russian accountants necessarily well-schooled in American accounting standards? I have no clue how one becomes an accountant in Russia, but I imagine they have their own procedures and their own system of education and that it differs in many respects from the system here in America. If a company in Russia is traded on an American exchange, how does it find the accountants who are to do the American reporting? Are Russian accountants simply given a two-week crash course? Is an American brought over to teach others? Are Americans running the whole operation? As mentioned earlier, no matter which way you look at it, there are a potential host of problems.
The main takeaway here is to simply be aware that other nations operate differently and even abiding by American standards does not necessarily mean that all differences immediately disappear.
(3) Diversify, Diversify, Diversify!
The most important takeaway here is that investing involves a lot of uncertainty. No matter how skilled or knowledgeable you are in finance, accounting, business, or the particularly industry you are looking at, there is always something out there that you did not know about and that you will not anticipate. The best way to deal with this uncertainty is to mitigate the risks by diversifying your portfolio. This is true even if you are investing only in American companies, but I think it’s even more true when investing in emerging markets.
A few parting notes: while I would not necessarily discourage anyone from investing in emerging markets, I will suggest that it might be prudent to have a great deal of reluctance towards investing in India for the near-future. Until we know how the Satyam fraud went undetected by auditors for so many years and until we see some evidence that this is not happening all over India, I would veer away. Naturally, anyone is free to disagree with my assessment.
Finally, a lot of what I have offered here is speculation about what might be happening in overseas companies and auditing firms. If anything is not factual, feel free to inform me. My bigger point here is that sometimes, we don’t know all the facts. All the same, we should seek as many of those facts as we can get.
Disclosures: No position in SAY or any Indian/emerging market ETFs
Thursday, January 8, 2009
MFs get extra-cautious after Satyam fracas
MUMBAI: The crisis over Satyam has left the mutual fund industry in the wilderness as to what extra precautionary measures can be taken to judge
the quality of a management while investing. Anticipating similar like fiasco in the future too, MFs plan to be more vigilant in scrutinising balance sheets.
Terming the incident as ‘detrimental to Indian Inc’ industry players are keeping close watch on all Satyam related developments, especially with respect to auditors and bankers of the company. “Auditor’s role is very crucial in this entire saga. We would like to hear from PwC as well as from all the bankers of the company. Their views will put more light into it. Based on that, we shall strengthen our efforts in judging corporate governance of a company,” said Waqar Naqvi, chief executive, Taurus Asset Management.
The balance sheet of Satyam carries inflated cash and bank balances of Rs. 5,361 crore as against Rs.5,040 crore and accrued interest of Rs.376 crore which is non-existent. Industry players express their helplessness over it. Said N K Garg, CEO, Sahara Mutual Fund, “It is not feasible for industry players to cross-check with every banker of a company about the cash in hand or any other item like accrued interest.”
However, Garg added, “it is not enough for MF investors to check only two pages of a balance sheet to draw a conclusion about a company. One will have to go through the schedules and notes of accounts mentioned with the balance sheet. Corporate governance gets 52% of the total scores in asset management in our house.”
As on 31 December, 2008, HDFC Growth and HDFC Equity had Satyam investment of 1.95% and 2.64% to their NAVs. Birla Sun Life Equity had 2.75%. Three schemes of UTI AMC and two schemes of Franklin Templeton had also holdings between 1.75% and 8%. As on November, 2008; Reliance Advantage fund and Reliance RSF had 1.19% and 2.83% respectively.
However, all those stakes have been brought down substantially in view of recent developments in Satyam. Most of the MFs offloaded their stake booking the loss to minimum possible extent when the scrip was traded at 3 digit figures on Wednesday in a losing streak. Fund houses refuse to be quoted on Satyam exposure.
Mentioned Sanjay Sinha, chief executive officer, DBS Cholamandalam Asset Management, “for investments, there is no ready formula to counter such situation. In determining the quality of management we do every needful exercise. Going ahead, there could see many such cases of deliberate frauds.”
In a probable solution to mitigate the risk of investment in such unprecedented fraud case, Anoop Bhaskar, head – equity, UTI Asset Management, presents a case. He said, “It is great learning experience for all of us as it is the first Indian company involved in a fraud of this magnitude. We need to concentrate more on diversification of portfolios. If fund managers restrict a particular company investment to the tune of 2-3 per cent investment, the loss gets limited.”
Going through the annals of ENRON and Worldcom, fund managers are not surprised over Satyam but are scouting for ways to put more focus on corporate governance.
the quality of a management while investing. Anticipating similar like fiasco in the future too, MFs plan to be more vigilant in scrutinising balance sheets.
Terming the incident as ‘detrimental to Indian Inc’ industry players are keeping close watch on all Satyam related developments, especially with respect to auditors and bankers of the company. “Auditor’s role is very crucial in this entire saga. We would like to hear from PwC as well as from all the bankers of the company. Their views will put more light into it. Based on that, we shall strengthen our efforts in judging corporate governance of a company,” said Waqar Naqvi, chief executive, Taurus Asset Management.
The balance sheet of Satyam carries inflated cash and bank balances of Rs. 5,361 crore as against Rs.5,040 crore and accrued interest of Rs.376 crore which is non-existent. Industry players express their helplessness over it. Said N K Garg, CEO, Sahara Mutual Fund, “It is not feasible for industry players to cross-check with every banker of a company about the cash in hand or any other item like accrued interest.”
However, Garg added, “it is not enough for MF investors to check only two pages of a balance sheet to draw a conclusion about a company. One will have to go through the schedules and notes of accounts mentioned with the balance sheet. Corporate governance gets 52% of the total scores in asset management in our house.”
As on 31 December, 2008, HDFC Growth and HDFC Equity had Satyam investment of 1.95% and 2.64% to their NAVs. Birla Sun Life Equity had 2.75%. Three schemes of UTI AMC and two schemes of Franklin Templeton had also holdings between 1.75% and 8%. As on November, 2008; Reliance Advantage fund and Reliance RSF had 1.19% and 2.83% respectively.
However, all those stakes have been brought down substantially in view of recent developments in Satyam. Most of the MFs offloaded their stake booking the loss to minimum possible extent when the scrip was traded at 3 digit figures on Wednesday in a losing streak. Fund houses refuse to be quoted on Satyam exposure.
Mentioned Sanjay Sinha, chief executive officer, DBS Cholamandalam Asset Management, “for investments, there is no ready formula to counter such situation. In determining the quality of management we do every needful exercise. Going ahead, there could see many such cases of deliberate frauds.”
In a probable solution to mitigate the risk of investment in such unprecedented fraud case, Anoop Bhaskar, head – equity, UTI Asset Management, presents a case. He said, “It is great learning experience for all of us as it is the first Indian company involved in a fraud of this magnitude. We need to concentrate more on diversification of portfolios. If fund managers restrict a particular company investment to the tune of 2-3 per cent investment, the loss gets limited.”
Going through the annals of ENRON and Worldcom, fund managers are not surprised over Satyam but are scouting for ways to put more focus on corporate governance.
Satyam's Valuation-CLSA
Hi,
Satyam's Founder and Chairman Ramalinga Raju has quit. In a letter to the Board and exchanges, he has admitted that:
Satyam over-stated cash assets: Rs50.4bn out of Rs53.6bn cash assets are "inflated or non-existent"
Satyam over-stated revenues: In Sep quarter, revenues were reported as Rs27bn whereas revenues were actually Rs21.12bn
Satyam over-stated operating profits: Real operating profits in Sep08 quarter were 3% of revenues, which were stated as 24% of revenues.
Satyam also has under-stated liabilities - more details in the attached release sent to the exchanges.
Satyam is now India's Enron. Recent chatter on value emerging in the Satyam stock based on cash per share has been rendered irrelevant. The independence of the Board was already in question, now the auditors' (PwC) complicity in what seems to be a multi-year mis-statement of financials will also be explored.
An embarrassing and shocking episode for Indian corporate governance continues to unravel, surprising all at every step. Legal measures may follow, and introspection too, by regulators, corporates, auditors, and of course, by analysts like us. The 10th January Board meeting now becomes irrelevant. When there is no cash, how can there be a buy back? And where did the cash go? Only an investigation can tell.
So much for the "moral outrage", which is the easy way out. Is there any way Satyam can be valued now? What about 50,000+ employees (is the count of employees real?), and hundreds of customers (the large ones are real for sure); and what about UPaid which had filed a forgery litigation against Satyam?
Book value becomes meaningless, with cash out and asset/debtors unknown or uncertain. A different approach could be that the business, or SOME PART OF THE BUSINESS, is real
M Cap per employee for Indian IT majors = $100-120k
Assume a 70% discount for Satyam
Assume Satyam DOES NOT have 50k+ employees but only 30k in reality
Satyam could be valued at = $120k x 0.3 x 30000 = $900m
Remove still unknown (yet to be disclosed) liabilities of $300m (assumed). Value becomes $600m or about Rs40 per share
Based on the declared real EPS for Sep quarter, and a 8x multiple, price could be Rs25 per share.
Satyam's Founder and Chairman Ramalinga Raju has quit. In a letter to the Board and exchanges, he has admitted that:
Satyam over-stated cash assets: Rs50.4bn out of Rs53.6bn cash assets are "inflated or non-existent"
Satyam over-stated revenues: In Sep quarter, revenues were reported as Rs27bn whereas revenues were actually Rs21.12bn
Satyam over-stated operating profits: Real operating profits in Sep08 quarter were 3% of revenues, which were stated as 24% of revenues.
Satyam also has under-stated liabilities - more details in the attached release sent to the exchanges.
Satyam is now India's Enron. Recent chatter on value emerging in the Satyam stock based on cash per share has been rendered irrelevant. The independence of the Board was already in question, now the auditors' (PwC) complicity in what seems to be a multi-year mis-statement of financials will also be explored.
An embarrassing and shocking episode for Indian corporate governance continues to unravel, surprising all at every step. Legal measures may follow, and introspection too, by regulators, corporates, auditors, and of course, by analysts like us. The 10th January Board meeting now becomes irrelevant. When there is no cash, how can there be a buy back? And where did the cash go? Only an investigation can tell.
So much for the "moral outrage", which is the easy way out. Is there any way Satyam can be valued now? What about 50,000+ employees (is the count of employees real?), and hundreds of customers (the large ones are real for sure); and what about UPaid which had filed a forgery litigation against Satyam?
Book value becomes meaningless, with cash out and asset/debtors unknown or uncertain. A different approach could be that the business, or SOME PART OF THE BUSINESS, is real
M Cap per employee for Indian IT majors = $100-120k
Assume a 70% discount for Satyam
Assume Satyam DOES NOT have 50k+ employees but only 30k in reality
Satyam could be valued at = $120k x 0.3 x 30000 = $900m
Remove still unknown (yet to be disclosed) liabilities of $300m (assumed). Value becomes $600m or about Rs40 per share
Based on the declared real EPS for Sep quarter, and a 8x multiple, price could be Rs25 per share.
Subscribe to:
Posts (Atom)