Pramerica’s DART to nimbly move between debt and equity—but it may not hit the bull’s eye

he newly-entered fund house Pramerica Mutual Fund’s new fund offer comes with an option of a ‘dynamic plan’ that adjusts the fund’s exposure in tune with market valuation. It is a marketing gimmick—as the examples of three other funds show

Pramerica Mutual Fund, sponsored by the US-based Prudential Financial firm which received the Securities and Exchange Board of India (SEBI) approval to enter the mutual fund business in India last month, has filed a draft offer document to launch the ‘Pramerica Growth Fund’. Pramerica has also filed its draft offer document with the regulator for its ‘Pramerica Liquid Fund’ and Pramerica ‘Ultra Short Term Bond Fund’ on 16 June 2010.

The ‘Pramerica Growth Fund’ scheme comes with two plans. The first one is an equity plan and the second is dynamic. The Equity Plan will invest 35% of its portfolio in debt and 65% in equity. Around 60% of this portfolio will be mainly invested in large-cap companies which comprise the top 75% of the total market capitalisation of the National Stock Exchange (NSE).

Under the dynamic plan, 30% of the portfolio will have exposure to equity and up to 70% in debt. The debt portion of the dynamic plan will be actively managed while the equity portfolio of the plan will closely replicate the equity investments of the ‘Equity Plan’.

The fund house will use Pramerica Dynamic Asset Rebalancing Tool (‘Pramerica DART’ tool) which will determine the allocation between equity and debt. According to the prospectus, Pramerica DART works on the philosophy of mean reversion. The theory of mean revision suggests that prices and returns eventually move back towards the long-term average. Such an average can be the historical average of price or return.

The model factors in three elements like fundamentals, liquidity and volatility. DART assigns a score which indicates whether the stocks are undervalued or over-valued. Based on these scores, the model then calculates the optimum equity-debt mix.

Will DART hit the bull’s eye? Ideas of moving between equity and debt are old and usually add no value to investors. Tata Mutual Fund had launched a similar fund called ‘Tata Equity Management Fund’ in June 2006 which came up with a novel method of pre-deciding the exact quantum of hedging under different market conditions. TEMF, like anybody else, banked on historical data of high and low P/Es to determine degrees of overvaluation. Moneylife had previously reported about the scheme when it was first launched. (Read here: http://www.moneylife.in/article/81/5319.html). This was too simplistic and the scheme has not lived up to its promise. The fund has posted 9.14% return since inception while its benchmark S&P CNX Nifty has posted 18.96% since the fund’s inception.

How have the other funds with similar strategies done? HSBC had launched its ‘HSBC Dynamic Fund’ in August 2007. This fund is benchmarked against the BSE 200. The fund has posted -1.79% returns since inception while its benchmark has yielded 7.53% returns since the fund’s inception.

Similarly, ICICI Prudential launched ‘ICICI Dynamic Fund’ in October 2002. The scheme is benchmarked against the S&P CNX Nifty. The fund has yielded 34.98% since inception while its benchmark has yielded a whopping 58.07% return in the same period.

The ability of fund managers to time the market is a myth, as these three examples show. But fund companies never tire of marketing them, as the Pramerica example shows

Equity funds underperform the rise but buck the fall during the recent round trip of the Sensex

The Sensex rose more than 2,000 points in the Feb-April period and then gave up all the gains thereafter in April-May. How did equity funds do during this period?
The Sensex went up from 15,725 on 5th February this year to its peak of 18,047 on 7th April and quickly fell back to 15,960 on 25th May. The mutual fund sector's performance in this round trip was a study of contrasts. In the rally of 14% in the Feb-April period, only 49 equity diversified growth schemes out of 216 schemes outperformed their respective benchmarks.

This stands in sharp contrast to the performance during the decline of 11% in the April-May period when as many as 174 schemes outperformed their benchmarks. This shows that funds have been conservative with their portfolio construction. By and large they have stayed away from highly volatile stocks that ensured an outperformance during the recent market decline.

The top performer among the 216 schemes during the rally was Canara Robeco Force Fund. Its Net Asset Value (NAV) was up 17% over the period while its benchmark, S&P Nifty was up 14%. Birla Sun Life Long Term Advantage Fund - Series 1 was second with NAV rise of 16%, while BSE500, its benchmark, changed 13%. Templeton India Growth Fund (up 16%), Escorts Growth Plan (up 15%), IDFC Strategic Sector (50-50) Equity Fund-Plan A (up 15%) were among the top five. Out of the 49 schemes, which outperformed their benchmarks, 21 schemes have beaten the Sensex.

Schemes of JM Financial Mutual Fund have been laggards in any market scenario. It repeated this unique distinction during this short rally too. JM Core 11 Fund, JM Emerging Leaders Fund, JM Small & Mid-Cap Fund were among the bottom five. Their NAV yielded a return of 6%, 5% and 3% respectively while their benchmark BSE Sensex, BSE200, CNX Midcap were up between 13-14%. Sahara REAL Fund and SBI Magnum Midcap Fund were the others in the bottom five. Their returns rose 7% and 6% respectively.

Following this rally, the Sensex tumbled 11% between 7th April and 25th May. In this fall, out of the 216 schemes, the NAVs of two schemes actually were up: DSP BlackRock Micro Cap Fund and HSBC Small Cap Fund. The first was up 3% and the second 2% while their benchmark, BSE Small Cap, fell 9%. Others among the top five outperformers were dividend yield plans-Escorts High Yield Equity Plan (1%), Tata Dividend Yield Fund (3%) and ING Dividend Yield Fund (3%) while their benchmark CNX100, Sensex and BSE200 fell 10%, 11% and 10% respectively.

Among the worst performers during this decline were Bharti AXA Equity Fund, Franklin India High Growth Companies Fund, Reliance Natural Resources Fund, Birla Sun Life Special Situations Fund and Religare AGILE Fund. Remember these names. They have stocks that are inherently more volatile.

DSP BlackRock Micro Cap Opens The Door For New Investor......

DSP BlackRock Micro Cap Fund, the only Closed Ended Fund in the Equity basket of DSP BlackRock Mutual Fund, has become an Open Ended Fund from today viz. from 15^th June, 2010. The Fund is now made Open Ended for daily transactions from today onwards.

DSP BlackRock Micro Cap Fund was launched in June, 2007 and the units were offered at Rs. 10/- per unit. The NAV of DSP BlackRock Micro Cap Fund as on 14^th June, 2010 was Rs. 14.765 per unit registering a gain of 14.52% CAGR since inception, one of the best performing Funds in the Equity Fund category in last 3 years.

Background:

As the name of the Fund indicates, DSP BlackRock Micro Cap Fund was launched with an objective to generate long term capital appreciation from a portfolio primarily constituted of Companies not forming part of Top 300 Companies by market capitalization.

The Fund has generated very good returns since its inception (14.52% CAGR) in the respective category mainly because of the better stock selection and active fund management by the experienced fund management team of DSP BlackRock Investment Managers Pvt. Ltd. The following is the return snapshot of the Fund for your information.

Attached herewith please find

(a)   The latest Single Pager of DSP BlackRock Micro Cap Fund.

(b)   The latest Portfolio of DSP BlackRock Micro Cap Fund as of 31^st May, 2010.

(c)   A detailed Presentation on DSP BlackRock Micro Cap Fund explaining its positioning, performance, rationale and opportunities in the Micro Cap segment.

We hope this information will be useful to you to showcase DSP BlackRock Micro Cap Fund to create wealth for your esteemed investors.

We solicit your wholehearted support in the promotion of DSP BlackRock Micro Cap Fund on its re-opening from today for further subscription.

Mutual Funds line up index funds

Fund houses are in a race to launch index funds to shore up their assets under management (AUM). The latest to join is ICICI Prudential Mutual Fund which has floated a new open-ended fund named Nifty Junior Index Fund. The new fund offer (NFO) opened on 10th June 2010 and closes on 21st June 2010. ICICI had launched ICICI Pru Index Fund in February 2002. The scheme is benchmarked against the S&P CNX Nifty.

Over the past decade, there have been only about 20 index funds. But suddenly in the last few months, four new index funds have hit the market. Taurus Mutual Fund launched Taurus Index Fund; IDFC Mutual Fund introduced the passively managed IDFC Nifty Fund in April 2010; and in May 2010, IDBI Asset Management Company (AMC) launched IDBI Nifty Index Fund as its first fund offering.

ICICI Pru's fund will be benchmarked against the CNX Nifty Junior Index and will invest 90% of its corpus in the underlying Nifty Junior Index stocks and 10% in debt and money market instruments.  The CNX Nifty Junior consists of 50 stocks and represents about 12% of the free-float market capitalisation as on 31 December 2009.

The scheme carries a 0.25% exit load if redeemed or switched less than seven days after investing.  Investors can choose growth or dividend option. The Fund bears a maximum annual expense of 1.50%, depending on the corpus of the fund.
Index funds are supposed to exactly replicate their benchmark and outperform most actively managed funds.

Most of the index funds are benchmarked against Nifty or Sensex. The Nifty Junior index is much more volatile than these two main indices. Nifty Junior rises sharply in a bull run and falls as sharply when the market crashes. From the bottom of October 2008 to the peak of April 2004, the Nifty was up 113% whereas the Nifty Junior was up 206%. Earlier, the Nifty Junior had crashed 73% from January 2008 to October 2008 while the Nifty had declined 61% in the same period.   
 
The Fund will compete against the much cheaper 'Junior BeES' launched by Benchmark Mutual Fund, which launched India's first mid-cap index fund in the year 2003.

Principal to launch pension fund in October

Principal Financial Group (PFG), the largest pension player in the United States, is looking to launch its pension business in India.
“We already have fairly advanced plans and will launch this programme in October,” said Norman Sorensen, president and chief executive officer of Principal International Group, a division of the Principal Financial Group.
Chances are that PFG will set up a separate company to launch pension plans. “We don’t know yet as the structure is yet to be defined. However, we believe the expertise that we have on a global basis in this area is so significant that we can bring to bear an independent company,” Sorensen said.
If PFC does set up a separate company to manage its pension fund business, it will be the first instance of a private pension fund company in India, soliciting as well managing money for building a retirement corpus.
Currently six pension fund managers manage money for the money raised under the New Pension Scheme. These are SBI Pension Funds, UTI Retirement Solutions, IDFC Pension Funds, ICICI Prudential Pension Funds, Kotak Mahindra Pension Fund and Reliance Capital Pension Fund.
These pension funds just manage the money raised under NPS, and have nothing to do with raising or soliciting that money from investors.
The other option is to launch the business through Principal Mutual Fund, a joint venture that Principal has with Punjab National Bank and Vijaya Bank.
On whether this business will be regulated by Securities and Exchange Board of India (Sebi), Sorensen said, “Sure. There is no reason to regulate it otherwise”.
Currently pension plans are offered by insurance companies, which are regulated by the Insurance and Regulatory Development Authority of India (Irda). However, Franklin Templeton Mutual Fund does offer a pension plan regulated by Sebi.
PFG manages $300 billion worldwide (The entire Indian mutual fund industry manages around $169 billion). “In Brazil we are the number two pension player and we manage $18 billion in pensions. In China, we manage only $6 billion. In Mexico and Malaysia we manage $5 billion and $6 billion, respectively,” said Sorensen.
So what exactly is PFG’s plan?
“We have something in the United States called target funds. We intend to introduce those funds in India,” said Sorensen. “Target funds basically target your age. A 25-year-old who has a target date of retirement of 2050, is likely to invest in target retirement fund 2050. And that’s why the name. The fund will probably begin with 80% investment into equity and with age the allocation to equity will come down. It basically increases the conservatism of the investment portfolio as your age grows,” he added.
Also, the investment for these pension plans is so carried out thatit is better than average performance. “It does not intend to at any point be number one in the market. Why? Because then you take more risk,” said Swanson.
And what will happen to the accumulated money on retirement? Well it all depends on the individual who invests in the pension plan. “This is absolutely retirement money but it is up to you what you do with that money afterwards,” said Sorensen.
“The idea behind the retirement plan is to provide income until you pass away. The money can be put into an immediate annuity, so that it provides fixed income or it can be invested in some very conservative fund. And we would not recommend equity of course,” he explained.
How is this product different from pension plans offered by insurance companies?
“There is no restriction on withdrawal unlike some of these pension plans,” said Sorensen. “Some people decide to take out some money before retirement, (which is) not necessarily a wise thing because the money seizes to accumulate,” he added.
Pension plans of insurance companies come with a lock in of 5 years. Over and above this, at maturity, an individual who is holding a pension plan from an insurance company has to necessarily buy immediate annuities using two third of the corpus. The remaining one-third can be withdrawn.

Seven reasons gold rally will continue:Jeff Nichols

A few months ago most analysts were skeptical about $1500 an ounce for gold by end of 2010, however, the recent rally in gold coupled with economic uncertainties have forced those who earlier disputed the bullish forecasts to jump on the bandwagon, according to Jeffrey Nichols, Senior Economic Advisor to Rosland Capital and Managing Director of American Precious Metals Advisors

US inflationary policies: The US monetary and fiscal policies are inflation. Official federal debt, now around $12.8 trillion is only a small part of Washington's actual obligations.Off-budget and unfunded future liabilities are another $108 trillio, Jeff Nicols said. So the end result would be higher inflation, currency depreciation and higher gold prices.

European crisis: Europe's sovereign debt crisis will continue to favour gold. The European Central Bank's loss of anti-inflationary credibility and the questionable future of the euro has diminished the European common currency's appeal as a reserve asset and dollar-substitute in the world economic order.

Central Banks and gold buying: Central banks have become net buyers since 2009 after several years of selling an average 400 tons per year. And official sector will continue to be net buyer of gold for years to come, Jeff Nichols said. Last year, the People’s Bank of China (PBOC) announced it had been buying gold regularly from domestic mine production for several years — but did not report these purchases in its official reserve accounts.

Rising investment demand:Rising private-sector investment demand for gold from across the old industrialized world: Private investors in the United States and Europe, both individuals and institutions, are buying more gold reflecting the same concerns and fears that are driving central banks to accumulate the metal.Substantial physical investment demand is seen across Germany, Switzerland, France, the UK and other countries, Jeff Nichols said.

India, China investment demand: Moderate growth in disposable personal incomes could result in rising gold purchases in China and India where gold is a preferred medium of investment and savings for households

Rise of ETFs: The growth of gold exchange-traded funds allow investors to purchase gold via an equity-like vehicle and there are more than 18 such frunds traded on many stock exchanges around the world- and a new gold ETF is just now being launched in Japan. Jeff Nichols said these new products and distribution channels will result in far more gold investment offtake in the years ahead, so much so that the potential future price is far greater than most analysts and investors today think reasonable.

Declining world gold-mine production: Global gold-mine production has been in a downtrend for decades. Despite a small uptick last year and possibly again this year, the fall in world mine output will continue for at least for the next five years or more.

The ebb in mine production reflects many factors, including the depletion of existing deposits, the continuing drop in ore grades, the decline in operating depths at many mines, the rise in energy and labor costs, the expense and time required to meet increasingly restrictive environmental regulations, unfriendly government attitudes toward foreign investment in some gold-producing countries, and the lack of financing available to many gold-mining exploration and development, Jeff Nichols concluded.

Insurance firms to tap market?

he much-awaited guidelines comprising listing norms for life insurance companies is likely to be ready in the next few weeks, with several insurers such as ICICI (ICICIBANK.NS : 826.6 +17.25) Prudential and HDFC Standard completing 10 years of operation. However, companies, which have not completed 10 years, would also be allowed to launch their initial public offerings.At present, life insurance companies are not allowed to raise funds through the market.
"It is in the final stages and the guidelines would be put up soon," a senior government official, who did not wish to be identified, told Hindustan Times.
At present, the foreign direct investment (FDI) limit for the sector is capped at 26 per cent. The Insurance Amendment Bill, which seeks to raise it to 49 per cent is pending before Parliament, and it may not be taken up on a priority basis, sources said.
The Insurance Regulatory and Development Authority (IRDA) has already come up with both valuation and disclosure norms comprising solvency levels and claim settlement on a half-yearly basis. The Institute of Actuaries of India had also looked into the issue. "Life insurance business is capital-intensive and we hope the listing guidelines are issued at the earliest as the FDI limit has also remained at 26 per cent," a senior executive of a Delhi-based life insurance firm.

Sebi panel may bar MFs from selling eq.uity products..

A COMMITTEE of market regulator Sebi will consider the issue of restricting mutual funds from selling an equity product that involves betting on future prices.

   The Sebi Mutual Fund Advisory Committee is concerned that this is not mutual funds' core activity and may take a decision on May 31. Equity options is a derivative product where investors bet on future value of stocks or their indices and Sebi is against mutual funds getting into the hedging business, as it could suffer losses.

   In a letter sent to all fund houses recently, Sebi had sought proposals from asset management companies (AMCs), regarding selling of equity options and an increased disclosure of their investment in this segment, sources in fund houses said. Mutual funds have already submitted their view to Sebi and they may be reviewed at the Sebi's Mutual Fund Advisory Committee meeting scheduled on May 31. "MF industry body Association of Mutual Funds of India (Amfi) has already submitted its views in consultation with industry players. The proposal would be discussed on May 31," a Sebi source said on condition of anonymity.

   The market regulator on its part wants the fund houses to control the risk exposure and clearly demarcate their risky exposure, he added. Industry players said, Sebi has been looking at ways and means of regulating distribution of MF products and also MFs investment in derivatives..

   Selling an option usually involve huge losses as the underwriter gets exposed to unlimited risks when market becomes volatile or collapses or hits the upper circuit. The objective of Sebi could be to ensure that MFs can hedge by buying options, but they should not underwrite the option as it is not the core business of MFs to take risk this way.

‘Flash Crash’ Shows How Mutual Funds and ETFs Differ

The market’s sudden drop on May 6 was stunning for investors to watch. While it had a far-reaching effect, it primarily has thrust exchange traded funds (ETFs) into the spotlight. But is that fair? Chuck Jaffe for MarketWatch reports that the meltdown only highlighted the differences between ETFs and mutual funds, showing why some investors may choose one or the other:

• ETFs are mutual funds that trade like stocks. They are priced minute-by-minute throughout the day; if you want in or out, you should get the market price the moment you pull the trigger. Some brokerages are taking expenses down to 0, helping investors that want to make the trade.With mutual funds, all transactions are made at the next closing price. [Comparing the Costs of Both Funds.]
• ETFs, typically, are focused on indexing — although there are more actively managed offerings all the time — while traditional funds focus more on active management. [Taking the Best of Both Worlds.]

Vanguard Group founder and index investing legend Jack Bogle has long said that ETF investors tend to trade at the wrong time instead of buying and holding in order to capitalize on the broader trend, and his words are once again being brought to the fore.
With all due respect to Bogle and others who are critical of ETFs in the wake of the crash, we disagree.

• First, to suggest that mutual fund investors are better served because they offer end-of-day pricing is mind-boggling. Without even getting into that argument, the benefits that ETFs offer over mutual funds still make them far more appealing and better for investors. You can’t beat their transparency, low-cost, tax efficiency and ease of use. On top of that, intraday liquidity is a superior feature that makes ETFs leaps and bounds better than mutual funds. Why wait until the end of the day to do what you want to do now?
• Second, Bogle is assuming that most investors don’t have the mental capacity to handle ETFs, but that is simply not true. Pointing fingers at ETFs and their users is just silly. Just because  there are some bad drivers on the road does not mean that all drivers need to be painted with the same broad and insulting brush.

Oil Drops Toward $68 as Risk Aversion Returns

Oil extended a drop towards $68 on Tuesday on growing concern that Europe's debt crisis would derail the global economic recovery, prompting investors to sell riskier assets in a flight to dollar safety.

The greenback gained almost 0.8 percent against a basket of currencies on Tuesday, while Japan's Nikkei average fell 3.1 percent to its lowest close in six months following a steep drop on Wall Street.

U.S. light, sweet crude [CLC1  67.799995    -2.41  (-3.43%)   ] for July delivery fell as much as $2.16 to $68.05 a barrel and was down on the day.

London Brent crude  [LCOC1  68.79    -2.38  (-3.34%)   ] slid.

"The market got ahead of itself, building in a lot of anticipation that the economy and oil demand would recover," said Tony Nunan, a risk manager with Tokyo-based Mitsubishi, referring to U.S. crude's 19-month high above $87 hit in early May.

"The fact that the dollar is strengthening is a sign of risk aversion and deleveraging. People are moving away from crude oil," Nunan said, adding that Fibonacci chart analysis showed prices would head towards $66.24.

Europe's fumbling response to a debt crisis in Greece and bulging deficits in other euro zone countries has unnerved markets over the past six weeks, and the central bank takeover of a small Spanish lender at the weekend stoked fears of a wider meltdown.

The crisis has overshadowed positive economic indicators showing that emerging and OECD nations are returning to growth after the worst recession of the post-war era.

"A lot of the economic indicators are positive, but the reality is that we have to admit that oil supply is keeping ahead of demand," Nunan said.

Last Thursday, U.S. crude touched $64.24, the lowest for a front-month contract since prices fell to $62.76 on July 30, 2009. The June contract expired that day.

"Demand is recovering, but OPEC has been slipping steadily over its production target," Nunan said.

Most estimates suggest production from the Organization of the Petroleum Exporting Countries has been rising since early 2009 as higher oil prices have encouraged members to relax adherence to output cuts announced in December 2008.

OPEC's compliance with the 4.2 million bpd of promised cutbacks has fallen to around 51 percent, according to Reuters estimates.

OPEC is worried about the oil price fall and is watching market developments closely, but it is too early to say if the producer group needs to take any action, Libya's top oil official said on Monday.

But Kuwait's Oil Minister Sheikh Ahmad al-Abdullah al Sabah said on Tuesday OPEC was not concerned about the recent drop in prices and had no plans to call an extraordinary meeting.

Oil Spill Off Singapore

A tanker and a bulk carrier collided in Malaysian waters off Singapore on Tuesday at 6:05 am (11:05 pm London time on Monday), Malaysian coast guard officials said, spilling 2,000 metric tons of oil close to the world's largest bunkering port.

The tanker Bunga Kelana 3 was carrying light crude oil and condensate when it was involved in the collision with bulk carrier MV Waily in waters between Malaysia and Singapore.

A preliminary Reuters survey showed analysts were divided over the direction of U.S. oil inventories last week.

The poll of six analysts called for an average drawdown of 100,000 barrels, but the group was evenly divided on how inventories shifted.

Distillate stockpiles including heating oil and diesel probably climbed 300,000 barrels, the poll showed, while views were mixed on whether gasoline supplies shrank or grew.

The analysts issued their forecasts ahead of weekly inventory data from industry group American Petroleum Institute, due on Tuesday at 4:30 pm New York time, and government statistics from the Energy Information Administration scheduled at 10:30 am New York time on Wednesday.

StanChart ropes in six MFs as anchor investors for IDR issue

Standard Chartered Plc On Monday managed to rope in six anchor investors for its Rs 2,400 -2,760 crore Indian Depository Receipts (IDR) that are to be issued in the Indian market.
It would raise Rs 370 crore from issuing 36 million IDRs to six mutual funds at a price of Rs 104 per IDR. While Reliance Mutual Fund bought 10.57 million IDRs, ICICI (ICICIBANK.NS : 809.35 -22.75) Prudential AMC bought 9.61 million, HDFC AMC 6.03 million, Franklin Templeton MF 4.80 million, Birla Sun Life AMC 3.55 million and Sundaram BNP Paribas 1.40 million IDRs.
The company had fixed the price band for the issue in the range of Rs 100 - 115 per IDR, hoping to raise up to Rs 2,760 crore at the upper end of the price band. The company had reserved around 30% of the QIB (Qualified Institutional Buyers), including mutual funds, to be allocated to anchor investors on a discretionary basis.
Interestingly, among all categories of investors, only mutual funds have been exempt from any kind of taxation - be it short-term or long-term capital gains tax.
Of the total issue size, 30% have been reserved for retail investors, while not more than 18% of the issue has been reserved for high net-worth individuals. Retail investors have been offered a 5% discount to the final issue price that will be finalised later through the book-building process.
Standard Chartered is the first overseas entity to raise funds from the Indian market through the issue of IDR. Ten IDRs will be equal to one share of the bank, whose shares are listed already on the London and Hong Kong stock exchange.

‘India Growth Story Is Broad-Based And Localised’

The Boston-based firm made its debut deal in India last month by investing $30 million in Krishidhan Seeds Limited.
Summit Partners, the growth equity investment firm founded in 1984, has raised more than $11 billion in capital and has provided growth equity, recapitalization and management buyout financing to over 300 growing companies across a range of industries and geographies. Summit Partners’ portfolio companies have completed nearly 125 public offerings and more than 125 strategic sales or mergers. The Boston-based firm, with a 25-year PE track record, made its debut deal in India last month by investing $30 million in Krishidhan Seeds Limited. Amit Chaturvedy, vice-president of Summit Partners, talks about the firm’s investment strategies and India office plans in an e-mail interview to VCCircle. Excerpts:-
Do you think there was a delay in Summit Partners entering the Indian PE space?India is an entrepreneurial growth market, so our growth investment strategy is a natural fit. We have been looking at the Indian market since 2008 to find the right opportunity: A rapidly growing company with a visionary management team that sees value in bringing a global, experienced growth equity investor to its Board.  Krishidhan Seeds fits that profile.
What is your view on investing in India? As an investor, you always evaluate your investment thesis and consider the risks and rewards. Investing in India is no different as compared to other countries in that sense. The risks we always consider are market risk, management risk, and execution risk.
How do you assess the current environment in India as far as investments are concerned? Has it improved much?
India seems to have recovered much faster from the financial crisis as compared to other major economies of the world.  We are finding many attractive companies in this geographic market.  Indian growth is broad based and localized, and this makes it a stable long-term growth story.
Regulatory and tax issues are more complex in India, as compared to what we have seen in the US and Europe. Indian regulators are working hard to streamline processes and provide more clarity in laws governing the various industry sectors.
What are your investment strategies for India?We are focused on companies in sectors including healthcare, education, consumer products, agriculture, telecom and power. Our exit options in India are primarily public offerings and sale to another strategic/financial investor.  We are growth equity investors and are equally comfortable taking minority or majority positions. Anyway, at this moment, we do not have plans for an Asia-specific fund. The Indian economy is a strong and resilient growth story, and it is a good market for us given our long and successful track record as growth equity investors. Our Indian investments provide a natural route for our Limited Partners to increase their exposure to this market. We are looking at companies that are seeking Rs 50-500 crore of investment.
What is the rationale behind your investment in Krishidhan Seeds? India is one of the major agrarian economies of the world with a growing population and rising per capita income that have put significant pressure on its agricultural productivity.  Krishidhan Seeds’ research-driven products increase farm productivity and offer Indian farmers a strong value proposition – which will increase as more than 125 hybrids in the pipeline are released over the next three years.  We are very impressed with Krishidhan’s R&D commitment, growth trajectory, its dynamic management team, and well controlled business operations through SAP, and we look forward to a successful partnership.
In India, how many deals is Summit eyeing this year? 
We recently closed our first investment in Krishidhan Seeds for $30 million.  We are looking at a number of other attractive opportunities and we don’t have a specific target as to the number of investments made or capital invested.
How do you rate Indian entrepreneurs?
As a growth equity investor with 26 years of investment experience with rapidly growing and profitable businesses, Summit Partners sees a significant opportunity in the Indian market.  India’s strong entrepreneurial tradition, combined with a fast-growing economy, means there are many companies that can benefit from Summit’s capital investment, strategic advice and industry expertise.
What are the major hurdles in handling portfolio firms in India?
Indian companies frequently focus on growing the top-line – and justifiably so, as many sectors in India continue to evolve.  This leaves company managements with limited bandwidth to focus on corporate governance, MIS systems, and financial controls for easy data extraction and timely reporting. This issue can be addressed over time with the strong commitment of the management team.
Will Summit Partners eye investments in listed firms (PIPE deals)? Yes, we are selectively looking at PIPE transactions in India.  We are using the same investment criteria – the company should be rapidly growing, profitable and have a talented management team running the business.  Our major focus area is privately held companies where we can participate at the board level, provide strategic guidance, and make a substantial positive impact to the future value of the business.
Are there plans to set up an office in India?
We have plans to establish an India office in 2011.  We have a team of five investment professionals focused on Indian investments, and we plan to incrementally build on that team.

Billionaire Ambani Brothers Agree to Seek ‘Harmony,’ Gas Deal

RIL, ADAG cancel 2006 non-compete agreements, hope to work in harmony.
It took a gentle nudge from the Supreme Court earlier this month to signal an end to the most publicised corporate war in India. Five years after going public with “ownership issues” and more in India’s richest family, the Ambani brothers today took a big step towards reconciliation of their feud that had made headlines and dragged in several government functionaries.

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In separate statements, Mukesh Ambani-led Reliance Industries (RIL) and the Anil Ambani-led Reliance ADA Group announced the two groups had cancelled all non-compete agreements — a step they hoped would lead to cooperation between them. The non-compete pacts were signed in 2006. As a goodwill gesture, RIL said it would not enter the gas-based power generation arena till 2022, for which the two sides would enter a separate agreement.
Both groups also said they hoped to reach a conclusion soon on the gas supply agreement between RIL and Reliance Natural Resources (RNRL), at the heart of their dispute. The earlier agreement, taken to court, between the two brothers concerned the price, quantity and tenure of gas supplies by RIL. It called for 28 million units of gas a day to be sold to RNRL at $2.34 per unit for 17 years.
The announcement comes weeks after the Supreme Court ruled in Mukesh Ambani’s favour in the dispute over gas pricing and asked the two brothers to renegotiate their gas agreement within the frame work of government policies and prices.
“RIL and Reliance ADA Group are hopeful and confident that all these steps will create an overall environment of harmony, co-operation and collaboration between the two groups, thereby further enhancing overall value for shareholders of both groups,” both the groups said.
 

BUSINESS INTERESTS
ANIL AMBANI	MUKESH AMBANI
* Financial services	* Oil, gas, petrochemicals
* Telecom	* Textile
* Infrastructure	* Retail
* Media & DTH	* SEZs, ports & gas terminals
* Power	* Life sciences & biotechnology
* Healthcare	* IPL
*Combined mkt cap Rs 1,08,792 cr (*as on May 21, 2010)	*Combined mkt cap Rs 3,26,717 cr
POSSIBLE OVERLAPS IN FUTURE
* Telecom
* Financial services
* Power (non-gas)
* Infrastructure
* Media & Entertainment

Sources familiar with the development said the agreement, approved by the boards of both the companies, came after long discussions between the two brothers separately, but spokespersons of either did not confirm this.
The announcement to break the ice also came within days of Anil Ambani meeting Prime Minister Manmohan Singh and top cabinet ministers. His elder brother also did the same within a few days. It is reliably learnt the prime minister had repeatedly advised the two brothers to sort out their differences “in national interest”. When the younger Ambani sought his intervention, the prime minister reportedly told the brothers they should seek their mother’s advise and sort out differences.
The statements said “the cancellation of the existing non-compete agreement will provide enhanced operational and financial flexibility to both groups and greater ability to participate in high growth sectors such as oil and gas, petrochemical, telecom, power and financial services”.
RIL said these developments will eliminate any room for further disputes between the two groups, on matters relating to the scope and interpretation of the non-compete obligations.
This means RIL will now be also able to enter into growth sectors such as telecommunications and financial services, among others. Sources close to the development explained the agreement had been signed to allow younger brother Anil Ambani’s telecommunication business to grow.
“The agreement has been signed to help the younger brother’s business to grow. Also, RIL thinks there are growth sectors like finance, which RIL might want to get into in future,” said a source.
According to the settlement reached between the two brothers in 2006, Mukesh got the jewel, Reliance Industries, which has interests in oil and gas exploration, petrochemicals, infrastructure and textiles. Anil got the telecom, power and financial services businesses.
The non-compete pact was one reason why Reliance Communications (RCom), ADAG company, had to call off merger talks with South Africa’s MTN group, after RIL threatened to block the sale if it wasn’t given the first option to buy shares in RCom.
Meanwhile, S P Tulsian, an independent investment consultant, said this was more positive for RIL than R-ADAG, because this gives the former an opportunity to look into expansion in other areas, which they were not allowed to do earlier.
“You can’t rule out the possibility of Reliance entering in sectors such as telecom,” he said, adding Reliance shares were expected to open up on Monday.

Upfront commissions were making everybody think short-term. They will think long-term now”

The Securities and Exchange Board of India is confident that the mutual fund industry will emerge stronger and more investor-oriented following the slew of recent fundamental regulatory changes made that affected the fund industry badly so far. “The changes will force everyone to think hard on how to develop a robust long-term business model,” says KN Vaidyanathan, an executive director of SEBI, in an exclusive interview to Moneylife.
Following the regulatory changes over the last 12 months the business model of mutual funds has been profoundly affected. Fund companies have been losing assets while well-established selling and distribution strategies of fund houses have gone haywire since upfront commissions and the various ways in which intermediaries were being compensated, have been plugged. How does the regulator view these changes, especially since we are witnessing a continuous decline in equity assets over the last few months, since SEBI has a development role to play as well? “The industry will adjust. Maybe the asset size will shrink but that may be good for all, especially the serious players,” says Mr Vaidyanathan. “The industry is full of bright people. I am sure they will put their heads down and work out a better business model. That would be good for all—including the investors.”

SEBI is pushing fund companies to face the new reality which Mr Vaidyanathan goes on to articulate as follows: “The challenge for the fund industry thereafter is to find out where the scale will come from. According to me it will come from simplicity, distribution and technology.” According to him, fund companies must offer simple products with low volatility based on asset allocation, distribute the products through large distributors and ensure that their operations are backed by the best technology, which reduces cost. “That may also mean that those who were not serious would exit.”

Ever since SEBI has changed the business model of the fund companies by changing the way mutual funds are sold, equity funds are losing money. This has led to market speculation that SEBI may partially relax the regulations, allowing for some upfront commissions. “A large number of people (mainly the sponsors) keep checking whether SEBI will revisit the policy of scrapping entry loads because they argue ‘it has not worked’.”

However, when asked, Mr Vaidyanathan asserted with a simple: “No. That is a closed chapter.”
Having changed how the funds are being distributed, SEBI is changing how the funds would be created. In the first couple of decades of growth of mutual funds, fund companies have launched almost similar products, which confuse investors. SEBI is already making some changes in the fund-approval process which will change this. “It is their business, but I guess funds will have to change. One of the things we are asking funds to do is to explain clearly how fund A is different from fund B. This has to be done for all the funds that are being sold today no matter when they were launched. They have to redo their Key Information Memorandum (KIM).”

One of the key issues for the fund industry is that while SEBI has banned upfront commissions for mutual funds, insurance companies were pushing their products, especially Unit-linked Insurance Products (ULIPs) with hefty upfront commissions.

The fund industry has been quietly complaining that this has tilted the playing field against them. Since banks and financial institutions make easier money selling other products, why would they sell mutual funds, goes their argument. Mr Vaidyanathan counters this as a myth. “People confuse between upfront and trail. Business models based on upfront will die. Irrespective of how the dispute between ULIPs vs mutual funds works out, the writing on the wall is clear. Upfront commissions and entry loads will become zero. It is a matter of time. Therefore what it leaves us with is trail commissions. There is nothing to match the attractiveness of trail commission of mutual funds because the trail is on the total kitty, not like the upfront commission on a single product. But that means everybody has to think long term, especially after upfront commissions are gone. Until now nobody was thinking long term.”

Revision in Fees for ARN Registration& Renewal for distributors

AMFI vide their  circular no. 35P/MEM-COR/3/10-11  dated May 19, 2010 has revised the ARN Registration and Renewal Fees wef 1st June 2010 for all category of distributors as mentioned in their appended circular.  As mentioned in yesterday's mail, the certification and examination  will be conducted by NISM wef 1st June 2010 as against AMFI.  The validity period of certification for non-individuals will be three years.

 

 

35P/MEM-COR/3/10-11                                                May 19, 2010
 
Dear All,
 
Re : Revision of fees – ARN Registration/ Renewal
 
The AMFI Board at its Meeting held on May 5, 2010 has decided to revise the fees for registration/ renewal of ARN with effect from June 1, 2010 as follows :-
 

Entity	ARN Registration Fees	ARN Renewal Fees
Banks/ NBFC/ Institutional Distributors	500,000	250,000
Public Ltd. Co.	500,000	250,000
Pvt. Ltd. Co.	50,000	25,000
Partnership Firm	25,000	12,500
Societies and Trusts/ HUF	25,000	12,500
Post Offices	15,000	7,500
Proprietorship Firms	10,000	5,000
Corporate Employees	5,000	2,500
Individual/Senior Citizens	5,000	2,500

 
It is further decided that the validity of ARN issued with effect from June 1, 2010 would be three years in case of non individual applicants. In case of individuals/ corporate employees, the validity period shall be computed from the date of receipt of application till the date of validity of AMFI/ NISM certificate.
  

 

 

3G auction ends, Govt to get Rs 67,719 cr windfall

ITS call For 3rd Generation

3G auction ends, Govt to get Rs 67,719 cr windfall
NDTV Correspondent & Agencies, 19 May, 2010

Auction for 3G licence ended on Wednesday, with bids for pan-India licence touching Rs 16,751 crore that ensures the government a revenue of Rs 67,719 crore.

No single bidder bid for a pan-India license and Delhi emerged the most valuable circle at Rs 3,317 crore, followed by Mumbai at Rs 3,247 crore. Among the major bidders, Idea paid nearly Rs 5,765 cr for 11 circles, Bharti paid Rs 12,290 cr for 13 circles, Vodafone paid Rs 11,617 crore for 9 circle while RCom paid Rs 8,583 crore for 13 circles.

The Winners:
Delhi: Vodafone, Bharti, Reliance Communications at Rs 3317 cr   
Mumbai: Reliance, Vodafone, Bharti Airtel at Rs 3247 cr   
Maharashtra: Tata Com, Idea, Vodafone at Rs 1258 cr  
Gujarat: Tata Com, Vodafone, Idea at Rs 1076 cr   
Andhra Pradesh: Bharti, Idea at Rs 1373 cr
Karnataka: Tata Telecommunication, Aircel, Bharti at Rs1580 cr
Tamil Nadu: Bharti, Vodafone, Aircel at Rs 1465 cr
Kolkata: Vodafone, Aircel, Reliance Communications at Rs 544 cr
Kerela: Idea cellular, Tata Telecommunications, Aircel at Rs 312.5 cr
Punjab: Idea Cellular, Reliance Communications, Tata Telecommunications, Aircel at Rs 322 cr
Haryana: Idea Cellular, Tata Telecommunications, Vodafone at Rs 222.6 cr
MP: Idea Cellular, Reliance Communications, Tata Telecommunications at Rs 258.4 cr   
Rajasthan: Reliance Communications, Bharti, Tata Telecommunications at Rs 321 cr   
U.P. (West): Bharti, Idea Cellular, Tata Telecommunications at Rs 514 cr   
U.P (East): Aircel, Idea Cellular, Vodafone at Rs 364.6 cr   

Today was the thirty-fourth day of the bidding. The government’s revenues from the 3G spectrum are much higher than its original estimates and even surpassed its revised estimates by a hefty amount. The 3G proceeds will help the government to bridge its fiscal deficit.The government had budgeted revenues of Rs 35,000 crore from sale of air waves for 3G and Broadband Wireless Access (BWA) put together.
The auction for Broadband Wireless Access (BWA) spectrum would begin soon after the 3G auction is over. The 3G auction had commenced on 9 April, 2010 and there were nine bidders in the fray for the slots of 3G spectrum on the block. The government auctioned three slots in 17 telecom service areas and four slots in the remaining five states of Punjab, Bihar, Orissa, Jammu and Kashmir and Himachal Pradesh.
BSNL and MTNL received spectrum outside the auction process, but the price would be determined by the auction price.
The third-generation spectrum allows subscribers to download hi-speed data and stream videos on mobile telephones. The successful bidders would be allotted air waves in September after the spectrum is vacated by the defence forces.
The 3G spectrum saw aggressive bidding by the telecom players as India remains one of the fastest growing mobile-services market by subscribers. With the addition of over 20 million new users in March, the mobile subscriber base in the country has jumped to 584.32 million customers. The number of telephone subscribers in India, both wireless and wireline combined, increased to 621.28 million at the end of March-2010 from 600.98 million in February 2010, thereby registering a growth rate of 3.38 per cent. With this, the overall Tele-density in India reached 52.74.
Telecom players hope that the 3G spectrum will ease capacity constraints and also increase the revenue per user, which has been falling due to intense completion in the sector.
For broadband wireless access, there are 11 operators are in the fray. The reserve price for BWA spectrum has been fixed at Rs 1,750 crore and only two slots of 20 MHz each are on the block.

 

Goldman Sachs Hands Clients Losses as Seven of Nine `Top' Trade Ideas Flop

(Bloomberg) -- Goldman Sachs Group Inc. racked up trading profits for itself every day last quarter. Clients who followed the firm’s investment advice fared far worse. Seven of the investment bank’s nine “recommended top trades for 2010” have been money losers for investors who adopted the New York-based firm’s advice, according to data compiled by Bloomberg from a Goldman Sachs research note sent yesterday. Clients who used the tips lost 14 percent buying the Polish zloty versus the Japanese yen, 9.4 percent buying Chinese stocks in Hong Kong and 9.8 percent trading the British pound against the New Zealand dollar.
The struggles for analysts at Goldman Sachs, which is fighting a fraud lawsuit from U.S. regulators who accuse the company of misleading investors in a mortgage-linked security, show the difficulty of predicting market movements as widening budget deficits, a fragile global economic recovery and tighter financial regulations increase volatility. Stock and currency fluctuations rose to the highest in a year this month as Europe pledged about $1 trillion to stop a debt crisis in the region.
“This says that Goldman’s guys are only human,” said Axel Merk, who oversees $500 million as president and chief investment officer of Merk Investments LLC in Palo Alto, California. “No one is always right. There are a lot of cross currents in this market.”
Gia Moron, a spokeswoman for Goldman Sachs, declined to comment.
China’s Bear Market
Goldman Sachs’s trading profits come from capturing bid- offer spreads when its traders act as intermediaries for clients, Gary Cohn, the firm’s president and chief operating officer, said last week in New York. Proprietary trading isn’t a main driver of earnings, he said.
The trade advice for customers is distributed by Goldman Sachs’s global markets economic research group. It tracks the performance of the trades in a daily research note. The time period of the recommendations is 12 months.
The performance this year is a reversal from 2009, when nine of Goldman Sachs’s 11 trading recommendations made money. Investors saw a 22 percent return owning Chinese stocks and a 12 percent gain buying the British pound versus the dollar, according to a Goldman Sachs note on Dec. 1.
Goldman Sachs analysts made eight trade recommendations for this year in December, including telling clients to buy the British pound against the New Zealand dollar. On April 1, Goldman Sachs added a ninth “top” trade, telling clients to buy Chinese stocks listed in Hong Kong and predicting the Hang Seng China Enterprises Index would rise 19 percent to 15,000.
Tough Analysis
Since then, the gauge has slid 9.4 percent to 11,426.18. The Shanghai Composite index has entered a bear market, losing about 21 percent this year. That’s the third biggest decline in the world after Greece and Cyprus. The decline accelerated this month on concern Greece, Spain and Portugal will struggle to finance their budget deficits and dismantle the euro.
The Chinese stock recommendation was made by a group led by Dominic Wilson, a senior Goldman Sachs economist in New York. Wilson cited inexpensive valuations and “robust” economic growth. He also said investors have already factored in the risk of higher interest rates in China.
Wilson wasn’t available to comment because he was out of the office traveling, according to an e-mail.
Exit Calls
“Emerging markets appear superior to the developed world, but the market isn’t trading that relationship,” said Eric Fine, who manages Van Eck Associates Corp.’s G-175 Strategies emerging-market hedge fund. “It may be that some assets are mispriced, but if the market starts to discount the end point of the game, such as the collapse of the euro, it’s not that mispriced.”
Analysts at Goldman Sachs recommended investors exit two trades in February, one involving interest-rate swap rates in the U.K. and another advising clients to buy credit-default swaps in Spain and sell similar contracts in Ireland. The first trade had a potential loss of 24 basis points and the other had a return of 2.9 percent, according to figures issued in the appendix of the research note in February.
Owning currencies that are tied to growth is the only remaining trade that has increased in value this year, according to Goldman Sachs. The Goldman Sachs FX Growth Index has climbed 3.4 percent since the firm made the recommendation in December.
Betting on Markets
Goldman Sachs makes more money from trading than any other Wall Street firm. In the first quarter, the bank’s $7.39 billion in revenue from trading fixed-income, currencies and commodities dwarfed the $5.52 billion made by its closest rival, Charlotte, North Carolina-based Bank of America Corp. In equities, Goldman Sachs’s $2.35 billion in revenue was about 50 percent higher than its nearest competitor.
Cohn told investors at a May 11 conference in New York that the firm lost money on only 11 days in the last 12 months. He said that uncanny streak of success refutes suspicions that the bank depends on proprietary bets with its own money.
“It is implausible that a proprietary-driven business model could be right 96 percent of the time,” Cohn said. Instead, he said the “simple answer” is that the firm makes money by capturing bid-offer spreads when acting as an intermediary for client trades.
Goldman Sachs executives have grappled before with questions about whether they’re better at making money for the firm than for their clients, according to an internal e-mail dated Sept. 26, 2007, that was released by a U.S. Senate subcommittee last month.
U.S. Lawsuit
The e-mail to Chief Executive Officer Lloyd Blankfein from Peter Kraus, who was then co-head of the company’s investment- management division, explains that individual investors, unlike institutional clients, occasionally make “comments like ur good at making money for urself but not us.”

The U.S. Securities and Exchange Commission filed a lawsuit against Goldman on April 16 accusing the company of misleading investors in a mortgage-linked asset. Goldman denies those allegations and said it will fight the charges.

 

http://www.bloomberg.com/apps/news?pid=20601087&sid=aF5tV7uvY0FU&pos=4

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