GLobal Market

USA

Dow Jones Industrial Average

The Dow is consolidating between 11000 and 11200. Upward breakout would signal another advance, but Twiggs Money Flow (21-day) reversal below the long-term rising trendline warns of a correction. In the long term, the target for the advance is 11500*, while reversal below primary support at 9900 is most unlikely.

* Target calculation: 10700 + ( 10700 - 9900 ) = 11500

S&P 500

S&P 500 recovered above short-term support at 1190, but threat of a correction will only be dispelled by breakout above 1220 — signaling an advance to 1250*. Twiggs Money Flow (13-week) reversal below the rising trendline indicates short-term selling pressure. Retracement to test support at 1150 remains likely, but reversal below primary support at 1050 is most unlikely.

* Target calculation: 1150 + ( 1150 - 1050 ) = 1250

Transport

UPS leads the charge, with all three transport indicators signaling a primary up-trend.

* Target calculation: 4300 + ( 4300 - 3800 ) = 4800

Technology

The Nasdaq 100, having reached its target*, is consolidating between 2000 and 2060. Twiggs Money Flow (13-week) breakout below the rising trendline indicates selling pressure. Reversal below 2000 would warn of retracement to test support at 1900.

* Target calculation: 1900 + ( 1900 - 1750 ) = 2050
 

Canada: TSX

The TSX Composite is consolidating between its new support level at 12000 and resistance at 12300. Upward breakout would signal an advance to 13000*, while reversal below 12000 would warn of a correction. Rising Twiggs Money Flow (13-week) indicates buying pressure, favoring an upside breakout.

* Target calculation: 12000 + ( 12000 - 11000 ) = 13000

United Kingdom: FTSE

The FTSE 100 is testing support at 5550, with Twiggs Money Flow (21-day) below zero indicating selling pressure. If support breaks, expect a test of 5280.

* Target calculation: 5500 + ( 5500 - 5000 ) = 6000

Germany: DAX

The DAX is testing support at 6050. Reversal above 6300 would signal an advance to 6600*, while a fall below 6050 would warn of a correction. Twiggs Money Flow (21-day) reversal below zero would confirm the correction.

* Target calculation: 6000 + ( 6000 - 5400 ) = 6600

India: Sensex

The Sensex is testing short-term support at 17400 on Tuesday; breakout would signal a correction to test primary support at 15800. Twiggs Money Flow (21-day) falling below zero strengthens the correction warning. Recovery above 18000 is now unlikely, but would signal an advance to 19800*.

* Target calculation: 17800 + ( 17800 - 15800 ) = 19800

Japan: Nikkei

The Nikkei 225 is closed until Wednesday, but Friday saw a recovery above support at 11000. Breakout above 11200 would signal an advance to 12000*. Bearish divergence on Twiggs Money Flow (21-day), however, warns of selling pressure — and reversal below zero would indicate a correction. Failure of support at 10900 (and penetration of the rising trendline) would confirm the correction.

* Target calculation: 11000 + ( 11000 - 10000 ) = 12000

South Korea

The Seoul Composite is headed for another test of support at 1700 after respecting resistance at 1750. Rising Twiggs Money Flow (21-day) indicates buying pressure. Recovery above 1750 would signal an advance to 1900*. Reversal below 1700 is less likely, but would warn of a correction.

* Target calculation: 1720 + ( 1720 - 1550 ) = 1910
 

China

The Shanghai Composite Index closed below primary support at 2900, signaling a primary down-trend. Twiggs Money Flow (13-week) reversal below zero would confirm. Expect further support at the August 2009 low of 2650.

* Target calculations: 2900 - ( 3150 - 2900 ) = 2650
The Shenzhen Composite Index is falling sharply, but has yet to penetrate support at 1100 — confirming the Shanghai Index. Twiggs Money Flow (13-week) bearish divergence indicates selling pressure.

The Hang Seng Index is already in a primary down-trend. Having respected resistance at 21000 early Tuesday, reversal below 20800 would confirm another test of primary support at 19500. In the longer term, failure of 19500 would offer a target of the July 2009 low at 17000*. Twiggs Money Flow (13-week) reversal below zero indicates rising selling pressure.

* Target calculations: 19500 - ( 22000 - 19500 ) = 17000

Commodities & Resources Stocks

The Baltic Dry Index is hovering above primary support at 2560, but rates may be distorted by abnormally high Capesize vessel deliveries.

Capesize vessels are typically used for iron ore shipments, while the smaller Panamax class are used to ship coal and wheat. Capesize means the vessel is too large to traverse the Panama canal. The current abnormal situation is reflected by Panamax rates higher than Capesize rates.

The Baltic Panamax Index remains in a healthy up-trend. We will only take signals from the (composite) Dry Index when confirmed by the Panamax index. Shipments of resources remain in a primary up-trend. Reversal of the BPI below its rising trendline, however, would warn of trend weakness.
 

Australia: ASX

The All Ordinaries is undergoing a correction, having broken the rising trendline and support at 4900. Twiggs Money Flow (21-day) falling below zero confirms the signal. Expect a test of primary support at 4500.

The ASX 200 paints a similar picture. Twiggs Money Flow (13-week) reversal below zero would strengthen the bear signal.

IRDA to roll out vehicle insurance tracking system

The Insurance Regulatory and Development Authority (IRDA) plans to unveil a web-based system in order to track vehicle insurance status in a month's time. IRDA will be launching the system formally from June 9 and will have a database of all the insured vehicles from across India. Meanwhile, the data will also be shared with the transport and police authorities in different States. Meaning, that the Road Transport Authority (RTA) in every State will have way in to the insurance status of different vehicles on the road. They can also launch a drive to track down challan defaulters. The good thing for insurance companies is that the centralised data will help them avoid duplications or multiple claims. Moreover, the system will make a big difference for the vehicle owners and general insurers. The premium per policy is expected to decline, as all vehicles will now have to be insured. The third-party insurance procedure will now be efficient, especially for victims of hit-and-run cases. The system may help reduce insurers' losses as these claims will be settled from a 'Solatium Fund' now while currently, the insurers pay for losses caused by the uninsured vehicles. The new system will also help them verify the insurance status of any vehicle, as the data are to be shared with the transport authorities and the police. Earlier, it was said that many insurance companies were taken by surprise, as the Insurance Regulatory & Development Authority (IRDA) changes disclosures norms regarding Unit-Linked Insurance Plans (ULIPs) under the head of controlled fund. As per the investment guidelines, investments under controlled funds are regulated by IRDA. For example, 50 % of the traditional policies fund is invested in government securities, 15 % in infrastructure and 35 % in equity and other approved securities. Meanwhile, IRDA had said that the Initial Public Offer (IPO) guidelines for the insurance sector are likely to come by next month. Mr. J Harinarayan, Chairman of IRDA said the IPO guidelines could take a month-time and the final decision would be taken by Securities and Exchange Board of India (SEBI). Mr. Harinarayan said that the valuation norms for the company has been finalised and sent to the Institute of Actuaries. Once Institute of Actuaries committee clears the valuation norms, it will be sent to SEBI and then the market regulator would take a final call. Before issuing the final norms, IRDA, which has been working on the guidelines along with SEBI, is likely to come out with a draft for public comments. The Insurance Regulatory and Development Authority (IRDA) is a national agency of the Government of India, based in Hyderabad. It was formed by an act of Indian Parliament known as IRDA Act 1999, which was amended in 2002 to incorporate some emerging requirements. Mission of IRDA as stated in the act is "to protect the interests of the policyholders, to regulate, promote and ensure orderly growth of the insurance industry and for matters connected therewith or incidental thereto."

Will index funds behave themselves?

The mutual fund industry seems to be waking up to the virtues of index investing. IDFC Mutual Fund is launching one and IDBI Mutual Fund is launching another. But index funds have not covered themselves with glory so far. Not only do index funds do not accurately track the movements of their underlying benchmark indices, leading to what is called tracking error, but some funds make nonsense of index funds by trying to actively manage such funds, when all they are supposed to do is passively follow the index. This gives rise to “outperformers” among index funds—a contradiction in terms.
HDFC Index Fund managed a return of 21.13% over 10 years when the Nifty has gone up 17.10%. ICICI Prudential Index Fund managed a return of 21.48% over eight years with growth in the Nifty at 20.15% and UTI Nifty Fund managed returns of 13.38% over 10 years with growth in the Nifty at 12.92%.

This outperformance could be partially due to an element of active management. To enhance returns, ICICI Prudential Index Fund invested 15.48% of Rs96.6 crore in the futures market on 31 March 2010. UTI Nifty Fund too has put some money in futures and bank deposits. This shows how index funds are trying to manage money actively to outperform the benchmark and show greater returns. They are also known to be trying to time the market, something that explains underperfomance (fund managers are bad at timing) leading to tracking error in some cases.

Among the index funds, LIC MF Index Fund recorded a return of 1.01% against 24.24% of the underlying index, leading to a tracking error of 23.23% as on 26th April. Birla Sun Life Index Fund recorded a return of 9.83% as against 25.06% return of the index, leading to an error of 15.23%. — Zeeshan Mardani

Fee Based Model

The insurance watchdog did the right thing, asking life insurers to disclose the commission paid to agents selling unit-linked insurance plans (Ulips). This is a logical step after the cap on Ulip charges.

The move will bring in more transparency, discourage mis-selling of Ulips and help investors take informed decisions. The disclosure on commissions will also blunt the sting in the spat between the Insurance Regulatory and Development Authority (Irda) and market regulator Sebi over Ulips.

Mutual funds that Ulips compete with launched a vehement attack on insurers for charging hefty upfront commissions to drive Ulip sales. Irda has, therefore, been forced to tighten regulation. True, in an under-insured country like India, there has to be an incentive to market insurance products.

However, a commission as high as 40% of the premium on insurance covers defies logic. Insurance companies should lower commissions and eventually transit to a fee-based model.

A government committee on investor awareness has recommended a fee-based model for all financial products. The suggestion would allow an investor to negotiate charges directly with the agent. Ideally, this is the way a financial product like Ulip should be sold.

An agent who offers a service to the investor should charge a fee that is mutually agreed upon, and not solely fixed by the seller of the financial product. Sure, this would make the task of agents more difficult.

But they should reconcile to that correction. Sebi has already shown the way. It scrapped entry loads on mutual funds, paving the way for investors to negotiate charges directly with distributors.
  
The pension fund regulator has gone a step further and adopted a load-free model. However, such a model runs the risk of slow offtake. Fees are in order. Investors need choice and better disclosures in financial products to take informed decisions.

In a country where many do not understand the difference between term insurance and investment-linked insurance, the regulator should go all out to enhance disclosure that would serve to raise the level of financial literacy as well.

MFs pull out Rs 5.8k cr from mkt

Mutual Funds (MFs), including UTI, lowered their holdings in 15 Sensex (^BSESN : 17690.62 -54.66) companies in the quarter ended March 2010, an analysis by FE has shown. MF holdings in Hindalco Industries (HINDALC0.NS : 142 0) fell the most, decreasing to 2.93%, a fall of 2.5%, from 5.43% in the previous quarter. "Mutual funds offloaded bluechip shares after facing redemption pressures." said Kishor P Ostwal, CMD, CNI Research.
MFs divested Rs 5,796 crore worth of equities in the quarter ended March 31 on the back of redemptions from its unit holders.
M & M, Hero Honda Motor, Tata Steel (TATASTL.BO : 647.45 -9.45), ACC (ACC.NS : 900.25 -8.75), Infosys Technologies (INFOSYS.BO : 2741.65 +0.95) and Reliance Infrastructure were among the other companies where MFs offloaded. ITC's latest share holding pattern was not available. The second highest decrease in stake was registered in M & M, from 5.81% to 4.16%, in the fourth quarter. In ACC, the stake fell from 1.74% to 1.22% during the above period. Public sector giant ONGC (ONGC.NS : 1045.15 +27.15) saw MF holdings decrease marginally from 2.26% to 2.21%.
MFs hiked stake in Grasim Industries followed by HDFC Bank, Larsen & Toubro and BHEL (BHEL.NS : 2474.5 -33.1). For the private sector giant Reliance Industries (RELIANCE.NS : 1062 -10), MF holdings increased from 2.42% to 2.61% during the quarter.
The average share of MFs stake in total of 29 Sensex companies decreased from 4.08% to 3.95% during the March quarter.

DSP BlackRock MF unveils Focus 25 Fund

DSP BlackRock Mutual Fund has launched a new fund DSP BlackRock Focus 25 Fund, an open ended equity growth scheme. The face value of the new issue will be Rs 10 per unit. The New Fund Offer (NFO) will be open for subscription from April 23 to May 21, 2010. The scheme re-opens for continuous sale and repurchase not later than June 20, 2010.

The primary investment objective of the Scheme is to generate long-term capital growth from a portfolio of equity and equity-related securities including equity derivatives. The portfolio will largely consist of companies, which are amongst the top 200 companies by market capitalisation. The portfolio will limit exposure to companies beyond the top 200 companies by market capitalization up to 20 percent of the net asset value.

The scheme offers growth and dividend option. Dividend option offers payout and reinvestment facility. The minimum investment amount is Rs. 5000 and in multiples of Re. 1 thereafter. Entry load for the scheme will be nil. The exit load will be one percent for holding period less than 12 months and nil for holding period above and up to 12 months.

The scheme will allocate 65 percent to 100 percent of assets in equity and equity related securities, which are amongst the top 200 companies by market capitalization. It would invest up to 0-20 percent of assets in equity and equity related securities, which are beyond the top 200 companies by market capitalization. It would further allocate up to 35 percent of assets in debt securities, money market securities and cash and cash equivalents. The scheme's performance would be benchmarked against BSE Sensex. The scheme would be managed by Apoorva Shah

SEBI raps AMCs for pampering distributors

Market watchdog Securities and Exchange Board of India (SEBI) is working to stop the unethical practice of mutual fund houses lavishing distributors with expensive incentives such as cash payouts and expensive foreign junkets in return for peddling their products. Besides finding such rewards unethical, SEBI is also examining whether these incentives are being funded by investors’ money in the name of fund expenses, a top SEBI official told PTI. SEBI is apparently contemplating strong remedial measures to keep such practices in check.

Moneylife was among the first to have highlighted how fund companies were in competition to organise lavish junkets for their distributors, unable to incentivise distributors through entry loads, post the ban. As SEBI has rightly pointed out, the bigger question is who ultimately paid for these fancy trips and cash emoluments? Deducting such expenses from investors’ money was a common practice earlier, till the regulator came down heavily on AMCs and prevented the fund industry from making investors pay for such extravaganzas. So, AMCs were supposed to bear the expenses on their own, but suspicions still abound whether fund houses are draining the investors’ kitty through some subverted measures.

There have been several instances of such dole-outs, ranging from the subtle to the outrageously lavish. For those distributors who had raked in the maximum moolah, HDFC Mutual Fund had organised a trip to Italy for four days. Earlier, Reliance Mutual Fund took some of its distributors to Kashmir while HSBC took them to Kerala for a long weekend. According to distributors, Templeton was running a scheme wherein any distributor who achieves his target was entitled to a foreign trip.

Others have been offering cash incentives to distributors. As an ‘early bird incentive’ to proactive distributors, Religare offered cash emoluments for certain number of applications received before a certain date for its Religare Monthly Income Plan (MIP) Plus. The same product had another incentive structure in place depending on the volumes gathered by the distributor. For single applications up to Rs99,999, distributors were offered 0.75% as commission. For mobilising applications worth Rs1,00,000-Rs4,99,999, the commission offered was 1% and so forth.

However, as we have pointed out earlier, while extravagant incentivisation of distributors is unethical, offering innovative incentives is an unavoidable outcome of the current regime. Small incentives to distributors are necessary for the survival of the mutual fund industry. In the absence of such incentives, the industry may well come to a virtual standstill.

The CEO of a prominent fund advisory agreed, “Incentives should not be the whole and soul of selling a product. I think that SEBI’s concern is whether they (fund companies) are charging it to the scheme or not. I don’t think they are saying whether they should do it or not. If AMCs feel that they want to reward their agents, it is entirely at their discretion. As long as they are not charging it to the scheme, it is alright. SEBI’s intent is to draw a line between what is exorbitant and what is okay—which is perfect. There has to be some leeway for allowing AMCs to reward distributors.

HSBC MF gets off SEBI hook with a mere warning

Market regulator Securities and Exchange Board of India (SEBI) has let off HSBC Mutual Fund, HSBC Asset Management (India) Pvt Ltd (HSBC AMC) and its chief executive officer with a mere warning, despite finding them contravening regulations.
 In an order, SEBI's full-time director Dr KM Abraham said, “I hereby warn the Board of Trustees of HSBC Mutual Fund, HSBC Asset Management (India) Pvt Ltd and its chief executive officer that they shall strictly comply with the law governing their conduct and business of mutual funds in the securities market.” 

The matter relates to the HSBC Gilt Fund. It was alleged that in January 2009, HSBC AMC changed fundamental attributes of the scheme without following procedures. In a letter dated 3 March 2009, the AMC told the market regulator that it has made certain changes in the scheme. HSBC AMC said that it changed the name of the scheme to HSBC Guild Fund from HSBC Guild Fund-Short Term Plan, changed the benchmark index to 'I Sec Composite Index' from 'I Sec Si-Bex' and modified duration of the portfolio not exceeding 15 years from 'normally not exceeding 7 years'.

Following the changes, some investors complained to SEBI that their value of investments in the scheme had come down. They also alleged that the same was because of the abrupt changes in the investment objective such as shifting the investments from ultra short-term to long-term bonds of the scheme in January 2009.

There were some media reports which said that the Fund had shifted about 80% of its assets from ultra short-term to long-term bonds in a single day. The AMC cited liquidity crisis and the corresponding volatility of the assets under management, as the reasons for increasing the duration.

The AMC had launched a scheme called HSBC Gilt Fund during the year 2003. The scheme is an open-ended scheme, which sought to generate reasonable returns through investments in government securities (also referred to as G-Secs).

The said scheme had two plans—Long Term Plan and the Short Term Plan. In the offer document, it was mentioned that the Short Term Plan was suitable for investors seeking to obtain returns from a plan investing in gilts (including treasury bills) across the yield curve with the average maturity of the portfolio normally not exceeding seven years and modified duration of the portfolio normally not exceeding five years. The Long Term Plan was intended to suit investors with surpluses for medium to long periods and that the plan would invest in gilts (including treasury bills) across the yield curve with the average maturity of the portfolio normally not exceeding 20 years and modified duration of the portfolio normally not exceeding 12 years.

However, the AMC wound up the Long Term Plan after failing to get the minimum 20 investors mandated by SEBI and continued the Short Term Plan. Subsequently, the said plan underwent certain changes, the major change being the change of the modified duration from 'normally not exceeding 5 years' to 'not exceeding 15 years'.

The counsel for the AMC argued that it was specifically mentioned in the offer document that the average maturity and the modified duration could undergo a change in case the market conditions warrant and according to the views of the concerned fund manager and contended that SEBI did not object to the same while scrutinising the offer document.

Dr Abraham in his order said: "The noticees may be technically correct in stating that the changes made by them are not fundamental attributes, as per the aforesaid SEBI Circular, and therefore there is no legal compulsion on them to adhere to the procedure and manner prescribed under Regulation 18 (15A) of the Mutual Funds Regulations. However, the vital point that the noticee seems to have sadly overlooked is the aforesaid Regulations clearly extend to all changes that affect the interests of unit-holders."

"I am of the view that the board of trustees of the Fund and the Fund have contravened the provisions of Regulations 18(9) & 18(22) of the Mutual Funds Regulations and Clauses 2, 6 and 9 of the Code of Conduct laid down in the Fifth Schedule of the Mutual Funds Regulations. Further, the AMC has contravened Regulations 25(1) & 25 (16) of the Mutual Funds Regulations and Clauses 2, 6 and 9 of the said Code of Conduct. The Chief Executive Officer of the AMC having failed to ensure that the mutual fund complies with all the relevant legal provisions has contravened Regulation 25 (6A) of the Mutual Funds Regulations," Dr Abraham said in an 18-page order.

New biz for life insurance grew 25 pct in FY10

Led by state-owned LIC, new business for the life insurance industry recorded a growth of 25 per cent during 2009-10, overcoming the decline witnessed a year ago on account of the global financial meltdown.
According to industry sources, the 23 life insurers mopped up a first year premium of Rs 1.09 lakh crore in 2009-10 compared to Rs 87,108 crore in the previous year. In 2008-09, the insurers registered a degrowth of 6 per cent.
In 2009-10, Life Insurance Corporation collected a premium of Rs 70,891 crore compared to Rs 52,954 crore in 2008-09, thereby growing by around 34 per cent during the year. The market share of LIC has also increased to 65 per cent in 2009-10 compared to around 61 per cent in the previous year.
The other 22 private insurers mopped up a first year premium of Rs 38,399 crore in FY2010, compared to Rs 34,154 crore during the previous year, translating into a growth of over 12 per cent.
Among private life insurers, SBI (SBIN.NS : 2223.1 +117.3) Life emerged as the biggest player. The insurer collected Rs 7,041 crore as first year premium in the last fiscal compared to Rs 5,386 crore in 2008-09, thereby growing by over 30 per cent.
However, ICICI (ICICIBANK.NS : 943.85 -8.05) Prudential, which was at the top position in 2008-09, registered a 7 per cent degrowth during 2009-10.
It managed to mop up a Rs 6,334 crore premium in the last fiscal as against Rs 6,813 crore in 2008-09.
Among other big players, Reliance Life collected Rs 3,921 crore as first year premium in 2009-10, compared to Rs 3,541 crore in the previous year, thereby growing by over 10 per cent.

Equity funds pip Sensex in bull run

Equity fund managers do well in bull markets, but any signs of sideways or bearish sentiments, they underperform (or give lesser returns than that of) market returns, according to a study conducted by FE of decade long returns of diversified equity funds vis- -vis its benchmark indices.
For each (calendar) year, the returns of equity funds were compared with its benchmark indices which varied from Sensex (^BSESN : 17573.99 +101.43), BSE 100 to S&P CNX 500. In the bull market of 2009, when Sensex rallied 81%, almost all funds (97% of equity funds) outperformed (or gave more returns than) its benchmark index returns. But for the year 2010 till date, when the market has literally given no returns, the outperformance figure came down to 63%.
Long-term outperformance is key to the survival of fund managers and the fund management industry. Afterall, the mutual fund industry gets paid as management fees for its active fund management - which are typically 1-1.25% pa of assets.
But, any chances of sustained underperformance would mean the investors might shift to lower-cost index funds. In developed markets especially in US, a large proportion of equity funds are allocated towards index funds. This is because US fund managers are increasingly finding it difficult to beat markets year after year. However, in India, the case is different. In fact, in the entire bull market cycle, the outperformance figures have been around 92% on an average. What is worrisome though is what happens in a bear market.
The year 2008 was the worst year ever for the equity fund managers, when the markets tanked. Sensex fell by 52% in 2008 and only 4% of funds managed to give more returns than that of Sensex. In the bear market of 2001 and 2002, when Sensex corrected 18-20%, the outperformance was lower at 12% and 22% respectively. As a retail investor though, long term performance (3-5 year returns) is key - and here at least 80% have given more returns than that of its benchmark.
While this should keep the investors happy, a soul search also needs to be done as to how the returns were earned. While the long-term outperformance scorecard looks good for Indian equity fund managers, there is a crying need to stick to investment mandate.