Mutual Fund Roundup: February 2011

Market Overview

The bears like the last month (January 2011) continued to tighten their grip on the Indian equity markets (BSE Sensex), in the month of February 2011 too. The BSE Sensex corrected by -2.8%, and so did the S&P CNX Nifty (corrected by -3.1%). The Indian equity market seemed uncomfortable as WPI inflation still remained above the comfort levels of the RBI, despite the marginal drop witnessed in January data (8.23% in January 2011). Moreover, worries of food inflation still sailing in the double-digit terrain (10.39% for the week ended February 19, 2011) prevailed, as it may keep pressures on WPI inflation still remaining above the comfort level of the RBI. Dismaying industrial growth, as revealed by the IIP data (1.6% in December 2010 - data released in February 2011) also distressed the markets, and encouraged the bears dominate the bulls.

 

Rising prices of crude oil (taking them over the $ 100 per barrel mark), due to the political unrest in Egypt and Libya also remained a concern for the Indian equity markets, because fundamentally India imports 80% of its crude oil requirements.

 

In the U.S. even though the jobless rate came down (to 9.0% in January 2011), as the economy trailed on the path of recovery; the U.S. dollar weakened which led to investors’ taking refuge under the precious yellow metal - gold. This in a way also revealed that investors’ are not ruling out the fact that the economic recovery (in the U.S) is "wobbly". Gold thus continued to remain bold, by displaying its secular uptrend.

 

Like the last couple of months, crude oil prices too continued to maintain it sky rocketing journey as the prices climbed up by 13.7% since the commodity asset class looked to be the favourite investment destination for most foreigners. Moreover, the political unrest in Egypt and Libya, threatened to destabilise the oil-rich Gulf region as supplies to oil consuming nations was impacted. (Oil prices are sensitive to the supply disruptions)

 

In the Budget 2011 as the Government announced the net borrowing figures of 3,43,000 crore, (which was low than the market estimate of 3,80,000 crore), bond yields dropped across the yield curve on the budget day. Moreover, the inflation estimates for average inflation of 5% for 2011-12 (as against 9% for 2010-11) eased major concerns for the bond markets. The 10-Yr G-Sec yield softened to 8.01% as February 28, 2011.

 

Monthly Market Roundup

	As on Feb 28, 2011	As on Jan 31, 2011	Change	% Change
BSE Sensex	17,823.4	18,327.8	(504.4)	-2.8%
S&P CNX Nifty	5,333.3	5,505.9	(172.7)	-3.1%
CNX Midcap	7,370.1	7,922.5	(552.4)	-7.0%  <img alt="" width="11" height="10" https:="" data.personalfn.com="" images="" down.gif"="">
Gold (/10 gram)	20,800.0	19,945.0	855.0	4.3%
Re/US $	45.3	45.9	0.6	1.4%
Crude Oil ($/BBL)	112.1	98.6	13.5	13.7%
10-Yr G-Sec (%)	8.01	8.15	(0.14)	14 bps
1-Yr FDs	7.00% - 9.00%

(Monthly change as on February 28, 2011)
(Source: ACE MF, PersonalFN Research)

 

The graph hereunder clearly depicts that FIIs too remained nervous about WPI inflation staying above the comfort levels of RBI, rise in crude oil prices and drop in IIP number (to 1.6% in December 2010 from 2.7% in November 2010). The drop in the IIP was due to the following:

 

• Decelerating manufacturing growth: The manufacturing index which is the principal component of the IIP (constitutes around 80% of the index) slipped further in December 2010 to 1.0% (from 3.2% registered) in November 2010. However, when assessed for the period ending April 2010 to December 2010, the manufacturing grew 9.1% as compared to 8.9% for the period ending April 2009 to December 2009..


• Mixed sectoral performance: The capital goods sector too took a beating and posted a negative growth of 13.7% as against +12.82% in the previous month. Also, the consumer non-durables registered a negative growth of 1.1% for December 2010. However, consumer durables reflected a strong growth of 18.5% in December 2010 from 4.4% in November 2010. Collectively this resulted in the consumer goods posting a growth of 3.9% in December 2010.

 

BSE Sensex vs FII inflows

 

(Source: ACE MF , PersonalFN Research)

 

During the month FIIs were net sellers in the Indian equity markets to the tune of 4,586 crore, thus following the same trait as last month, where they were net sellers in the Indian equity markets to the tune of 4,813 crore.

 

Mutual Fund Overview

The domestic mutual funds, on the other hand despite being conscious about the fact that inflation and IIP numbers were dismaying, they participated in a much aggressive manner as valuations appeared attractive (after the 10.6% fall witnessed in the previous month). They bought to the tune of 2,025 crore, which was unlike the subdued participation seen in the previous month (where they bought to the tune of 199 crore).

 

BSE Sensex vs MF inflows

(Source: ACE MF, PersonalFN Research)

 

However most open-ended equity funds felt the pressure as the bears tightened their grip. Even a defensive sector such as FMCG, wasn’t spared which led to funds within such a sector / theme giving negative returns. Diversified equity funds too weren’t spared despite having a fairly diversified portfolio. Moreover investors too got nervous, which led to redemption pressure coming in. Balanced funds too gave negative returns, while Monthly Income Plans (MIPs) due to their debt composition gave positive returns. Similarly, offshore Fund of Funds (FOFs) gave positive returns as the developed nations - especially the U.S, continues to display signs of economic recovery and global commodity prices (especially crude oil) too were on a rise.

 

Monthly top gainers: Open-ended equity funds

Diversified Equity Funds	1-Mth	Sector Funds	1-Mth	ELSS	1-Mth
SBI Magnum Emerging Businesses (G)	-0.80%	ICICI Pru FMCG (G)	0.76%	Religare Tax Plan (G)	-2.68%
Principal Smart Equity Fund (G)	-1.34%	Sahara Banking & Financial Services (G)	-0.58%	Fidelity Tax Advt (G)	-2.76%
Edelweiss Absolute Return (G)	-1.61%	SBI Magnum FMCG	-0.80%	Franklin India Taxshield (G)	-3.03%

(1-Mth returns as on February 28, 2011)
(Source: ACE MF, PersonalFN Research)

 

 Monthly top gainers: Open-ended Fund of Funds

Fund of Funds	1-Mth
AIG World Gold (G)	7.75%
DSPBR World Gold-Reg (G)	5.71%
DSPBR World Energy-Reg (G)	4.83%

(1-Mth returns as on February 28, 2011)
(Source: ACE MF, PersonalFN Research)

 

 Monthly top gainers: Open-ended Hybrid Funds

Balanced Funds	1-Mth	Monthly Income Plans	1-Mth
HDFC Balanced (G)	-1.34%	Taurus MIP Advt-Reg (G)	0.63%
Sundaram Balanced Fund (G)	-1.60%	Sahara Classic (G)	0.63%
ING Balanced (G)	-2.11%	DWS Money Plus Advt-Reg (G)	0.52%

(1-Mth returns as on February 28, 2011)
(Source: ACE MF, PersonalFN Research )

 

 Monthly top gainers: Open-ended debt funds

Floating Rate Funds	1-Mth	Income Funds	1-Mth	Gilt funds	1-Mth
Short Term		Short Term		Short Term
Escorts FRF (G)	0.77%	ICICI Pru Banking & PSU Debt Fund-Premium Plus (G)	0.68%	Edelweiss Gilt (G)	0.96%
L&T FRF (G)	0.65%	JPMorgan India ST Income (G)	0.66%	HDFC Gilt-ST (G)	0.88%
Canara Robeco FRF (G)	0.65%	HDFC Medium Term Opp (G)	0.65%	Tata Gilt SMF (G)	0.77%
Long Term		Long Term		Long Term
Tata FRF-LTP (G)	0.48%	Sundaram Bond Saver (G)	1.21%	DWS Gilt Fund-Reg (G)	1.16%
HSBC FRF-LT-Reg (G)	0.57%	BNP Paribas Bond Fund (G)	1.13%	Birla SL Gilt Plus-PF (G)	1.09%
SBI Magnum Income FRP-LTP-Reg (G)	0.59%	DWS Premier Bond-Reg (G)	0.82%	L&T Gilt - Investment (G)	1.01%

 

Liquid Funds	1-Mth	Liquid Plus funds	1-Mth
Escorts Liquid Plan (G)	0.76%	Daiwa Treasury Advantage-Reg (G)	0.66%
IDFC Savings Advt-A (G)	0.69%	JM Money Mgr-Reg (G)	0.66%
IDFC Savings Advt-D (G)	0.68%	Tata Treasury Mgr-RIP (G)	0.65%

(1-Mth returns as on February 28, 2011)
(Source: ACE MF, PersonalFN Research )

 

In debt instruments, domestic mutual funds did continue to do some heavy buying to the tune of 21,442 crore thereby maintaining a similar buying aggression as seen in the last month (where they bought to the tune of 37,787 crore). This buying was seen as yields of both the short as well as the long tenor bonds inched up during most part of the month, since RBI increased policy rates (as expected) by 25 basis points (on January 25, 2011) in order to tame spiralling inflation. (But it didn’t bring much relief to the Government and the bonds markets as WPI inflation still remained stiff).

 

Performance across various categories of mutual funds

(1-Mth average returns of funds in various categories as on February 28, 2011)
(Source: ACE MF, PersonalFN Research)

 

The graph above, also displays the impact of the downturn of the markets in February 2011, across all categories of equity funds. However, gold ETFs and debt mutual funds delivered positive returns.

Other News and New Fund Offers

• In a measure to provide an impetus to the mutual fund industry, the Government (in Budget 2011-12) has now proposed in to allow foreign investors to invest in Indian mutual funds after them having met the KYC norms.
  
  This move while it may enable mutual fund houses to garner more Asset Under Management (AUM) as foreign investors participate in the Indian equity markets (through the mutual fund route), we believe that this may also bring in some wild swings in the flow of funds to the mutual fund industry (unless we get long term foreign investors).



 
• Upsetting the corporates investing in mutual funds, the Government (in Budget 2011-12) raised the Dividend Distribution Tax (DDT) for liquid funds from 25% to 30%, while for debt mutual funds from 20% to 30%, thereby attempting to remove the advantage which the corporates enjoyed by investing in liquid and debt mutual funds (for a period of less than 1 year) over Fixed Deposits.
  
  Hence now, we believe that mutual funds would not find it easy to attract short term surplus funds from corporates who park their surplus funds in liquid and debt mutual funds. However corporate who wish to park their long term funds (for a period of over 1 year) can still look at debt mutual funds by participating in the growth option as it still remains tax efficient (as it will continue to provide indexation benefit on long term capital gains).



 
• To put an end to years of easy money in the form of commission to institutional brokers or distributors who facilitate banks, corporate and insurance companies' investments in fixed income funds of mutual funds, the Securities and Exchange Board of India (SEBI) has written to mutual funds to differentiate commission payments to brokers who advise with insights and those who just facilitate investment without any fundamental reasoning on why such an investment has to be made.
  
  Interestingly, despite institutional investors such as banks and corporate treasuries who have the financial wisdom to choose the scheme they want to invest in, route their investments through a distributor, which many a times is a subsidiary company, in order to get the distributor commission from the fund house. This in a way affects the funds performance as they (institutional brokers) have a significant share of the funds in the fixed income schemes of mutual funds, though they (institutional brokers) are few in numbers.
  
  In our opinion, SEBI is doing the right thing in protecting the interest of investors' at large. We believe, that splitting the distribution fees into "advisor" and "execution" will result in less burden of commissions for the fund houses thereby resulting in better profitability of fund houses as well as good performance of the mutual fund schemes (as they would not have to succumb to erratic fund flows from these corporate entities). However, we feel that distinguishing between the institutional broker's "advisory" and mere" execution" role may be a daunting task.



 
• Mr. Milind Barve - Managing Director of HDFC Mutual Fund, was elected as the Chairman of Association of Mutual Funds in India (AMFI), while Mr. Sundeep Sikka - CEO of Reliance Mutual Fund, was appointed as the Vice-Chairman of the industry body till the next AGM. Mr. Barve now succeeds Mr. U.K. Sinha who is now the Chairman of the Securities and Exchange Board of India (SEBI).



 
• SEBI is planning to bring all research analysis activities by various entities and brokerages under a regulatory framework to ensure that such reports are prepared in an unbiased and transparent way and the authors of such reports make sufficient disclosures of their interests, addressing issues of potential conflict of interest.
  
  The regulations-likely to be named SEBI (Research Analysis) Regulations, 2011- will regulate all research analysis activities that tend to influence investment decisions of the public at large. It may thus even make it compulsory for analysts who write such reports to be registered with SEBI.



 
• A panel constituted by Securities and Exchange Board of India (SEBI) has proposed that the listed companies need to restate their financial statements if their auditor comes up with adverse comments, commonly called audit qualifications.
  
  In our opinion if such a proposal goes through, it would be in the interest of the policy holders as generally audit qualifications have a significant impact on the financial statements of the company. Moreover, it would provide the exchanges' an overarching authority to call for restatement of a company's accounts.

 

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