Mutual funds' sectoral preferences as of Nov 2016

A story I wrote last month as a journalist in the organisation I work
for currently:


[C] ANALYSIS: Bargain buying by MFs cushions pharma, IT, auto stocks
Cogencis, Monday, Dec 26

By Rajesh Gajra
NEW DELHI - When sector indices for information technology, consumer
durables, pharmaceuticals and auto stocks fell by more than 5% each between
August and November, domestic mutual fund investors saw it as an opportunity
to invest in them.
But the rising index for the oil and gas sector in the same period didn't
evince a similar interest from mutual funds that collectively make for one of
the largest domestic institutional investors, and account for around 10% of
the free-float market capitalisation of NSE worth about 50 trln rupees.
The investing trend by India's mutual funds provided cushion to falling
sectors and prevented the runaway rise of oil and gas stocks, an analysis of
sector-wise fund holding value data from Cogencis Corporate Fundamental
Database showed.
The Nifty IT index fell 7.0% from its average closing level in August to
that in November. In the same period, mutual funds' exposure went up by 8.8%
to 353.96 bln rupees from 325.47 bln rupees.
When S&P BSE Consumer Durables index and Nifty Pharma index fell around
5.5% each in this period, mutual funds increased their exposure to the stocks
in the two indices by around 7.5% each, to 36.3 bln rupees and 286.1 bln
rupees, respectively (see table).
Mutual fund holdings in stocks of Nifty FMCG and S&P BSE Capital Goods
fell, but not as much as the index fell in value during Aug-Nov.

AUG 31-NOV 30
=============
Sector Index    Index value     MF holding value         MF holding in Nov
                              (percentage change)                          (in bln rupees)
Nifty IT                    -4.3             8.8                                         354
Nifty Auto                -7.9             6.2                                         412
Nifty Pharma            -3.6            7.7                                         286
Nifty FMCG             -9.4            -1.6                                       211
BSE Cap Goods         -7.7           -1.3                                      324
BSE Cons. Dur.          -9.7           7.5                                         36
Nifty Bank                 -5.9            0.9                                     1003
BSE Oil & Gas           8.1             3.6                                      287

From August to November, S&P BSE Oil and Gas Index rose by nearly 10% but
mutual funds' exposure went up only by just 3.6% to 287.0 bln rupees on
account of profit booking.
The value of mutual fund holdings in stocks of Nifty Bank index rose a
nominal 0.9% in November to 1.0 trln rupees from August even though the index
fell by nearly 6%. Banks stocks accounted for 20% of mutual funds' total
equity exposure.

MEDIUM-TERM TREND
In the last one year, mutual funds have pared their exposure to the
realty sector. The value of their holdings in Nifty Realty stocks fell 4.3%
to 8.7 bln rupees in November from 9.1 bln a year ago, even though the index
rose by 3.2% in this period.
Exposure of mutual funds rose the highest on year in Nifty Metal stocks
to 73%, more than the 57% increase in the value of the index.
In the case of Nifty FMCG, S&P BSE Consumer Durables and Nifty Pharma
indices, the mutual fund holdings went up in value significantly even though
all the three indices recorded on-year fall (see table).
Funds are using the current slide in these indices to increase exposure
as they expect them to do well over the next 3-4 years.

NOV 30 2015-NOV 30 2016
=======================
Sector Index                 Avg index value                      MF holding
                                                    (percentage change)
Nifty IT                               -10.0                                         0.3
Nifty Pharma                        -3.6                                       28.5
BSE Cons. Dur.                    -9.5                                        36.2
BSE Cap Goods                   -3.7                                          2.5
Nifty FMCG                          1.0                                        39.9
Nifty Bank                             6.9                                        20.8
BSE Oil & Gas                    28.3                                       22.5

The analysis showed that among diversified indices, mutual funds
preferred large-cap and mid-cap stocks over small-caps.
From August to November, mutual fund holdings in Nifty 50 stocks went up
2.6%, even though the index itself lost 4.5% in value.
Nifty Mid-cap 100 Index fell by 1.0% but mutual funds' exposure increased
a little by 0.9%.
The small-cap stocks index, Nifty Small-cap 100, fell 3.1% in the same
period and mutual fund exposure also fell by 2.1%. End

us fda warning letter to sun pharma

Late last week's development covered in my story on Monday this week. 

Latest case of US FDA action affecting an Indian pharma co.  https://t.co/kVEPsESGdE pic.twitter.com/4VrvBJPnJC

— Rajesh Gajra (@JournalistRGaj) December 21, 2015

5th & 6th wireless telecom operator in india may merge

 
Earlier this week, I wrote this:

Reliance Communications and Aircel may merge their wireless biz. https://t.co/YaV0HrMNSI pic.twitter.com/FxJEUsCSFY

— Rajesh Gajra (@JournalistRGaj) December 23, 2015

do not look down upon a stock exiting a big index

Here is something I wrote, two months back, in the newspaper I worked for then, on the impact of stocks entering or exiting a benchmark equity index such as Nifty 50 (click anywhere on this sentence to read the article/story)

 

when an investing strategy is found in an index

Index investing can offer interesting strategies. In a story/article I wrote, around two months back, for the newspaper I work for currently, I explain some of them for Indian investors.

Here is what I wrote:

When a strategy is found in an index

Rajesh Gajra

FC Research Bureau

January 26, 2015

 

In our domestic equity market, there are broad market indices, there are sectoral indices, there are thematic indices and then there is a new breed of indices known as strategy indices. FC Research Bureau decodes a few of the strategy indices which have come into existence in the domestic market in the past few years only.

National Stock Exchange of India (NSE) offers, as per its definition of strategy indices, 13 such indices, but FCRB covers only four interesting ones -- NV20, CNX Low Volatility, CNX Alpha and CNX High Beta.

NV20 index is a value index made up of 20 stocks which is aimed to capture the most liquid value stocks from the 50-stock CNX Nifty index. The current set stocks in this index comes from eight sectors and captures around 30 per cent of the aggregate market cap of all NSE-listed stocks. This stands apart from CNX Nifty's coverage of 23 sectors and 50 per cent of aggregate market cap at NSE.

In our analysis of returns, 20-stock NV20 has performed better than the parent index of 50-stock CNX Nifty from where its members come from, in the medium-term period of four years. From its average value in 2010 to its average value in 2014, NV20 recorded an absolute return of 50.7 per cent, while the corresponding return which CNX Nifty delivered was 34.8 per cent.

Clearly, the value universe from NV20, as defined and culled by its index methodology, has outperformed the returns from a healthy mix of value and growth companies in the liquid large-cap stocks universe from CNX Nifty index.

But different strategies unravel different results across various tenures. CNX Low Volatility index, for instance, offers the option of another interesting strategy to investors.

This index captures the 50 least volatile stocks meeting a joint criteria of the 300-most largest stocks in terms of free-float market cap and 300-most traded stocks based on the last six months turnover. Volatility among the eligible stocks is calculated using one year trailing prices, and the least volatile stocks are selected.

There is a belief among a section of investing community that low volatile stocks tend to perform better in the long run. So, how has CNX Low Volatility index fared? In the four year period from 2010 to 2014, and based on average of the values of the index in a calendar year, CNX Low Volatility delivered a 4-year absolute return of 121.0 per cent.

Clearly, this level of return is far higher than CNX Nifty's corresponding four-year absolute return of 34.8 per cent. What is more interesting is that in the short term the low volatility index has struggled to match the performance of the diversified, large-cap universe. From calendar 2013 to calendar 2014, CNX Low Volatility index delivered 23.2 per cent return on its yearly average values, while the broad-based CNX Nifty delivered 24.4 per cent.

The contrast to low volatility is generally seen in high-beta stocks which move far more than the index stocks. There is an index to track this -- CNX High Beta index.

With the same basic criteria as that of CNX Low Volatility index, except for the difference of capturing the stocks with the highest beta instead of lowest volatility, the CNX High Beta index has been volatile as far as its short-term and medium-term returns are concerned. In the four-year period from 2010 to 2014, it has given an absolute return of -16.4 per cent, a negative rate of return, while in the one-year period from 2013 to 2014, it delivered a rate of return of 24.7 per cent. The result is obvious -- in both the time periods CNX High Beta failed to exceed the returns given by broad-based CNX Nifty index.

CNX Alpha is another index which aims to attract investors seeking alpha returns from the equity market. The 50-stock CNX Alpha, which comprises of 50 most alpha stocks from a universe of 300 largest and liquid stocks, has delivered a four-year return of 70.2 per cent from 2010 to 2014 and a one-year return of 38.7 per cent from 2013 to 2014. True to its objectives, the CNX Alpha index managed to outperform the broad-based CNX Nifty index.

Currently, not all the strategy indices are directly actionable by investors. But there are two mutual fund schemes connected with two strategy indices which are with Securities and Exchange Board of India for approval. Around a year back, Motilal Oswal Mutual Fund submitted a draft proposal for regulatory approval for a index product tracking the CNX 100 Equal Weight index which is one of the 13 strategy indices which NSE offers. In this month, Reliance Mutual Fund has submitted a draft offer document for R*Share NV20 ETF which will mimick the returns of the NV20 index.

BSE, the second largest stock exchange in the country, too has a bouquet of seven investment strategy indices which includes S&P BSE SME index and S&P BSE Dollex 30. The choice for investors is clearly good currently but the choice of actionable products is still limited.

lessons for the indian life insurance industry

I recently wrote on what lessons behold for the life insurance industry players in India on account for a recent rush in market-linked policies surrenders in an editorial contribution in the newspaper I present work for.

Here is what I wrote:

Insurance lessons

The surrender rush in ulips is not a problem. It is a symptom of an old problem

The means to an end is as important as the end itself. The life insurance industry, as this paper reported in Monday's front page, is in the throes of high surrenders taking place in unit-linked insurance policies (ulips). This is evidently on the back of rising net asset values of the equity-oriented ulips which has activated investors' ability to surrender nothwithing the high surrender charges of about three per cent.

 

Some of the insurance companies appear to be cribbing that this is having a crippling effect on their business. But, really, there is a need for honest introspection by the big players in the insurance industry. Surrenders taking place at a very high rate is the creation of the insurance companies and their agents in their attempts to get new business by any means even if it meant mis-leading the non-savvy investors.

 

Mis-selling was the norm in the life insurance industry till at least 2010 when the insurance regulator, Irda, stepped in to reign in exorbitant commission charges and unfair surrender terms and charges. But this applied to new policies sold therefrom and so old policyholders were still tied up with the dreadful old regime.

The exact details of which ulip investors are surrendering their policies are not known but it is possible a big chunk of them may be from the pre-2010 period. The front-loading of fund management and other charges in them meant any investor wanting to surrender in the first 3-4 years of the policy would get even less than the value of their investments. With four years behind and stock market indices touching higher and higher peaks every week the hit to investors who would want to surrender is not that high as it was till a year ago.

But the issue is not that the stock market conditions have been conducive for such a happening in insurance ulips or other traditional policies. The real question to ask is why so many investors are motivated to surrender their policies.

 

It is clearly the large amount of mis-selling by insurance companies and their agents which took place in the past, with no real accountability or regulatory desire to take action, which is forcing to investors to get out when they can. Instead of blaming the policyholders for the redemption pressure, the insurance companies need to see the pain undergone by these very policyholders as they, once stuck with a mis-sold policy involving a high annual premium, were forced to renew for a few years in order to get back a significant portion of what was their due.

Many investors in ulip and other traditional life policy have. in the past, even lost their entire investments by not renewing their policies since they could not even afford to pay the high premium amounts at the time of yearly renewal. In each and every such case the insurance industry gleefully pocketed the premiums already paid by those investors and it was like a free money for them.

But the chickens are now coming home to roost. Those investors who had the ability to renew and wait for a few years have now decided 'no more' and are getting out. It does not mean they are naive in their timing of exit. A lot of them could very well to re-invest their redeemed money back in equities through non-insurance channels such as equity mutual fund schemes. 

 

This hopefully will sensitise the insurance industry to the real needs of investors and not get blinded by the competitive fervour to show high growth rates in premium collections.

two contrasting ways at apply continuous asset allocation

Asset allocation is interesting but to do it on a continuous basis, year after year, requires an investor to be aware of some complex elements.

Here is a story on this subject which I contributed recently in the newspaper I work for presently:

Two contrasting ways to apply new asset allocations
Not much is understood about the application method of dynamic asset allocations. Here is a primer.

With financial planning taking firm roots among investors the concept of asset allocation is no longer an alien one. There is, however, some confusion of its actual application in the process of continuous investing. Investing is a continuous process for investors in their working years as they keep generating fresh investible surpluses from their earnings.

How to apply dynamic asset allocations. Asset allocation disciplines an investor since it compels her to think clearly and decide on how much to invest in equities, debt, gold and other asset classes. But it is not a one-time process since dynamic, age-based financial planning requires her to allocate different percentages every year or every few years.

The question facing such investors is whether the new asset allocations should be applied only to the fresh investible surplus or also to the existing, accumulated investment portfolio from the previously-allocated percentages. There are two views on this.

Applying new allocations to accumulated investments as well. One view is similar to portfolio re-balancing. Says Rahul Mantri, certified financial planner and founder of Midas Touch, a Pune-based advisory firm, "we provide new asset allocation advise to our clients after an interval of five years and we advise the new allocations to be applied to both--to the existing portfolio as well as to any new investible surplus from thereon." In Mantri's firm's asset allocation re-jig equities get lower percentages as the client's age increases. "You need to skew your entire portfolio towards debt as you approach the retirement age of 60 years. When you reach retirement we believe equities should not make up for more than 10 per cent of your accumulated portfolio," says Mantri.

Only on fresh investible surpluses. There is another view which says changing asset allocations should not be applied to earlier investments and should only apply to new investments made from new investible surpluses. So, for instance, a new investor, say 27 years old, invests Rs 50,000 for the first time and of this she deploys 60 per cent in equities, 30 per cent in debt and 10 per cent in gold. Say, she follows these same allocations every time she has fresh investible surplus from her annual salary. But when she attains 33 years of age, say, she decides to tweak her allocation ratios to 50:35:15 in equities:debt:gold.

Her current portfolio, accumulated over the previous five years, would have grown to some amount. But she will not touch this portfolio to apply the new allocations although she may want to re-jig existing securities in each asset class based on her chosen investment philosophy for each asset class from various styles such as 'buy and hold' and 'book profits in some and re-invest in other'.

She will, instead, apply her new allocations only to the investments she makes from the new investible surpluses she generates from the salary she earns in her 34th year and thereafter. After five years, when she is in her 39th year, she may decide to apply newly-changed allocations to her investible surplus from her 39th year salary onwards. This cycle will continue.

The justification her is that an equity exposure taken when she was 27 years old will fetch her far higher annualised return than any new investible surplus she deploys in equities in her 40s and 50s.

indian government's obsession with curbing physical gold investments

India's finance minister, Chidambaram, in today's budget, reiterated his dismay at the widening current account deficit. Imports of gold, along with crude petroleum imports and coal imports, were touted to be the drivers of a ballooning import bill of the country.

My blog post of January 3, this year (2013), dwelled on the adverse effects of subsidising gold purchases. The link to that post is here -->    
http://natant.blogspot.in/2013/01/life-in-financial-markets-adverse.html

Early this month (February 2013) I contributed another editorial, in the newspaper I presently work for, on the issue of gold imports. This time, I wrote about RBI's effort to curb investments in physical gold. I believe it should be the government of India which should raise the import duty (customs tax) on gold and related products further (it is at an absurdly low rate even currently notwithstanding a recent marginal hike) and bring it at par with the average customs duty imposed on all non-gold imports. Additionally, it is not investments in gold which is a problem but the Indian culture of buying gold during marriages which is a problem. Much of that buying is through black money. The finance minister should get his Income Tax department to do far more than they are doing to tax those gold purchases.

Here is what I wrote in the editorial:


Who is more obsessed with gold?

RBI is desperate to curb gold imports so that rupee fall can be stemmed. But ad-hoc measures do not help in long term.

One only hopes that the central bank of our country is not feeling nostalgia over an old legislation called Gold Control Act, 1968, which was repealed in 1990. If RBI is indeed feeling so, it is for the wrong reasons and as a knee-jerk reaction to sustained weakening of the country's currency against the US dollar. With the alarming rise in the gap between exports and imports caused in part by rising imports of gold, and its consequent weakening impact on the Indian rupee. 

Alarm bells at RBI and other quarters have been ringing for the past several months. Now, a RBI working group has come out with its comprehensive report on issues related to gold imports and gold loans NBFCs (non-banking financial companies) in India. As expected, all its major recommendations have one objective -- prevent or deter further imports of gold into the country. But this single-point obsession of RBI has now begun to jar. Of course, reduced gold imports will curtail the existing high level of current account deficit, but RBI's most primary concern is that of stemming any further fall in the rupee. 

So, the question which needs to be asked whether, if global events change dramatically in the near future or medium term leading to an intense strengthening of the rupee, the various gold import-stemming products and ideas being hard sold now will be reversible. One, therefore, hopes RBI is not missing the wood for the trees. To the extent gold imports are aided on account of very low custom duty rate, even after it was recently hiked a little, there is a strong case to raise it the levels other imported goods face. 

Coming to the RBI working group's report, it began by stating that the basis of its central message was Indians’ obsession for large investment in physical gold. This could be half-truth because the obsession to acquire gold is there but it is not so much for investment purpose as for owning it in the form of jewellery for cultural reasons such as giving it in dowry during marriages and passing it down to future generations. It is also a form of holding black money. To the extent such acquisition is based on illegitimate or illegal grounds the objective is better served by a far better enforcement of the laws, including the taxation law, to deter future violators and bring to account existing ones. 

Going after investors in gold alone is not a smart thing to do. Investors, here and worldwide, include many who are vulnerable to wrong understanding of price movements. The price of gold has appreciated rapidly in the past few years and many investors tend to believe that this trend will go on forever, like they tend to do when equity markets are in the grips of bulls, and so they pump in more investments into it. Asset classes see cycles of bull and bear phases and gold is no exception. Even if gold is seen to be immune, at times, it is mainly on account of heavy instability in world economies and gold is seen to be a safe asset to hold. 

Why should RBI or anyone deny that freedom to an investor to hold what he perceives to be a safe asset regardless of whether his perception is sound or not? To be sure, some of the measures proposed by the RBI panel are progressive, regardless of RBI's motive. For instance, the proposal to allow banks to buy back gold coins is a step in the right direction. On a stand-alone basis, whatever progressive measures need to be taken with regard to gold-based acquisition, holding and financing should be taken and those specific recommendations of the panel should be adopted. 

But RBI needs to learn some lessons from the past. When the equity market was highly pumped up in 2007-08 thanks primarily to massive FII net inflows, the rupee had strengthened to such a level that RBI had pressurised Sebi to restrict the FII flows by banning participatory notes. At that time, exporters were getting hurt due to a strong rupee. The P-note ban was reversed later on. 

But can some of the not-so-progressive and desperate measures being mooted now to curb gold imports and stem net outflow of rupee be that easily reversible when the tide turns later? Ad-hocism by any financial regulator is never wise. 

adverse effects of subsidising gold purchases

For too long, and for no genuine purpose other than pampering the rich and affluent, the government of India has been subsidising the purchase of gold (which in volume terms would involve the rich and affluent accounting for a big chunk of it) by keeping the import duty (customs tariff) on gold at zero or near-zero levels which leads to a lower price of the domestic price of gold.

Here is something I wrote early last month in an editorial contribution in the newspaper I presently work for:


Golden problems
Rising imports of gold continue to raise hackles of policy makers and banking regulators

The gold import curb debate, which started a few months back, is only set to intensify in the next many weeks or as long as macro-economic concerns on the rising levels of current account deficit and the rupee appreciation. Last week on Saturday, three former Reserve Bank of India governors and the present one were all present together on one panel discussing banking and economic matters. 

Of these four distinguished experts two of them, former RBI governors, thought it fit to dissuade the government from curbing imports on gold; one former one did not comment and the current governor explained RBI's current desire to see gold imports level controlled. C Rangarjan, former RBI governor, and current chairman of prime minister's economic advisory council, was the most vocal against having any gold import curbs strongly stating that it was ineffective to fight against what he believed was a deep-rooted propensity of Indians to buy or have gold. 

He even believed and referred to un-named revenue department sources telling him of a rise in smuggling-related gold seizures being higher than normal in the last three months due to a slight raising in excise duty on gold. While it may not be wise to argue with him on this matter given what YV Reddy, another former RBI governor, saying (in the same panel discussion) about there being none knowing about gold in the history of India's gold management more than Rangarajan, the other side of the story is equally relevant and important. 

This side was well articulated by the current RBI governor, D Subbarao, who said RBI was concerned about gold and lending against gold by non-bank finance companies because of financial stability concerns and also due to the pressure it puts on the current current account or capital account. 

Gold imports have certainly gone up sharply in the last one year and contributed signficantly to the gap between sharply-rising imports, led by petroleum products and gold, and stagnating exports. It is fair to find the true cause by debating whether this is led by, as most believe, by population's deep-rooted propensity for having gold or not. 

But it is also fair to pose the question whether a rapidly rising current account deficit will deeply hurt our national economy and our rupee currency or not. Both the sides of the debate are valid points. Strangely, though, no one seems to be questioning the never-ending concessions in import rates being granted to gold imports. 

The import tariff on gold and other precious metals, in different forms and shapes and whether domestically consumed or re-exported is 10 per cent. But for a large part of the past couple of decades this rate has been exempted in full, that is, there is zero customs duty. The gold rush is also partly due to it being exempt from basic levies which are otherwise collected from all other imported products. 

Thus former RBI governor Reddy's poser that if Mercedes Benz and aftershave lotion can be imported, why not gold, is flawed. The Mercedes car and aftershave lotion is imported after payment of the levied customs duties. Gold is imported without any duties or extremely low rates of it, and this is done in the name of "public interest" if one reads the exemption-related phrase in the customs department's notifications. 

Forget the impact on current account deficit this has had in the form of sustained rise in gold imports the loss it has caused the country's ex-chequer has been stunning. In 2011-12, for instance, customs duty foregone on gold and diamond was around Rs 57,000 crore and this was about 15 per cent higher than the previous year's level of foregone customs duty. 

This is a prominent and almost-permanent member in the government's list of items which sees the highest levels of tax incentives and which results in the highest quantume of revenues foregone. Import of gold, therefore, should not be curbed but at the very least the concessions on customs duties should be immediately removed.

tax implications for debt fund investors

Differential tax treatments inevitably hurt investors who do not understand them. One area this happens is in the investments made in the debt, or income, schemes of mutual funds. Months ago I wrote an advisory story/article on this issue it in the newspaper I presently work for.

Here is what I wrote:

Extract optimum returns from your debt fund

Tax implications affect net return of debt fund investors. So choose carefully between growth and dividend options.

Having a little or lot of your investments in low-risk fixed income instruments appears to most to be an easy task but it takes a lot of understanding of the complexities of returns in terms of tax liability, timing, interest rate fluctuations and other factors to be able to pull it off in the most prudent way.  Till a few years ago the simplest way to have a low-risk fixed income investment exposure was to put money into bank deposits available in multiple tenures from a few months to a few years.

But in recent years as increasing number of retail investors have got conscious of the option of debt funds offered by the domestic mutual funds such as open-ended funds--liquid, short term income, income and monthly income plans--and close-ended debt funds--fixed maturity plans and interval the need to understand the complexities has become quite essential.

After making the choice of debt funds an investor would face the next daunting task of choosing between  the three options of growth, dividend payout and dividend reinvestment every debt fund offers. A debt fund has a common portfolio for investors in it irrespective of the option they choose. So the gross return on all the three options largely stays the same. But the net return after factoring in tax implications and opportunity cost varies.

You do not pay an tax on the dividends declared by debt funds whether and paid out to you or re-invested in the form of fresh purchases. But since the fund has to pay a dividend distribution tax (DDT)—27.04 per cent if it is a liquid fund and 13.52 per cent if it is a non-liquid debt fund, the fund’s net asset value is less by the DDT.

Growth option, where no dividends are declared and the NAV rises by the accumulated earnings of the debt fund,  works the best if your intended investment period is more than one year as you will then bear only a long-term capital gains tax of 10 per cent without indexation or 20 per cent with indexation which will be lower than the DDT of 13.52 per cent.

Dividend payout in debt funds works best if you intend redeeming your investment in less than a year if dividends are regularly declared and you don’t incur any short-term capital gains. The DDT of 13.52 per cent in non-liquid debt funds works out to be lower than your tax liability if you are in the 20 per cent or 30 per cent tax slab as short-term capital gains are added to your total income.

Dividend re-investments serve no useful purpose for debt fund investors as it requires you to continuously juggle with the time horizon of your initial and subsequent dividend re-investments. Watch out, though, as most debt funds compulsorily re-invest your dividends even if you have selected the dividend payout if the dividend amount is small. Also, many internet-based MF distributors do not keep the dividend pay-out enabled for a vast majority of debt funds.

benchmark nifty etf investors suffer post-acquisition by goldman sachs

In the Indian mutual fund industry, till last year, there was one asset management company whom one could count on to come up with useful passively-managed products and serve their existing one well. This was the Benchmark Mutual Fund managed by Benchmark Asset Management Company (BAMC) which kicked off operations in 2002 with India's first ETF on the 50-stock Nifty index.BAMC was committed to offer only passively-managed products such as ETFs and index funds, and nothing else.

Therefore, it came as a shock last year (2011) when it became known the top management and shareholders of BAMC were selling out the fund and schemes to Goldman Sachs.  It became clear to ETF investors that Goldman Sachs will not be interested in doing much justice to the running of ETF schemes and will expend their time and energies in coming out with, and managing, actively-managed schemes. 

This is already seen to be happening. After acquiring Benchmark Mutual Fund in July 2011, Goldman Sachs India Mutual Fund, the new name of the fund, began filing offer documents with the regulator for the launch of actively-managed equity schemes. The first one was launched last month (October 2012).

But what is the most dismaying is that investors in the erstwhile Benchmark Nifty ETF, now known as GS Nifty ETF, are being hit due to the deliberate negligence of Goldman Sachs.  Sadly, the shareholders and management of BAMC betrayed the trust put in it by the investors by selling out to Goldman Sachs and got big cash as a result.

Below is a news analysis I did recently for the newspaper I work on how the performance of GS Nifty ETF has lagged peers since the July 2011 acquisition.

Here is what I wrote:


Goldman Nifty ETF lags peers post-Benchmark acquisition

The re-christened Benchmark Nifty ETF gave 1.2 per cent return against 2.9 per cent of peers

Mutual fund investors run the risk of the performance of their schemes getting adversely affected when the asset management company (AMC) managing their schemes gets taken over by another AMC or see significant stake changes. At times, in real life, this risk does unveil itself, as investors in the first-ever exchange traded fund launched a decade ago have been discovering lately.

When Benchmark Mutual Fund launched its Nifty Exchange Traded Scheme (Nifty ETF) in 2002 it was the first ETF in the country. The mutual fund's investment manager, Benchmark Asset Management Company (BAMC) was taken over by the Goldman Sachs group with effect from July 14, 2011 and was effectively run by Goldman Sachs since then.

For one month BAMC stayed as a distinct company but as a part of the Goldman Sachs group. From August 22, 2011, Goldman Sachs Asset Management (India) formally took over the management of all the schemes managed by BAMC. But post-mid-July, the performance of its most popular scheme, Nifty ETF, has, for the most time in its decade-old history, under-performed the underlying benchmark index as well as its peer schemes.

This was revealed in a FC Research Bureau analysis comparing the performance of GS Nifty ETF before and after the July 2011 acquisition with that of Nifty Total Returns Index (Nifty TRI) and two of its Nifty ETF peer funds--Quantum Index Fund-Nifty ETF and Kotak Nifty ETF.

From the average of its net asset values of July 4 to July 13 last year to the average of its NAVs in the current month of November till the 9th, GS Nifty ETF has given an absolute return of 1.20 per cent, below that of corresponding Nifty TRI's return of 3.14 per cent, Quantum Nifty ETF's 2.95 per cent and Kotak Nifty ETF's 2.85 per cent.

The was not the case in the earlier comparable periods. In the 1-year period upto mid-July last year, GS Nifty ETF's return of 5.91 per cent was in sync with Nifty TRI's 6.16 per cent and a little ahead of Quantum Nifty ETF's 5.63 per cent and Kotak Nifty ETF's 5.82 per cent. The previous 1-year period from July 2009 to July 2010 also saw the same pattern (see table).

	GS Nifty ETF	Quantum                Nifty ETF	Kotak  Nifty ETF	TRI Nifty
Jul '11* to Nov '12**	1.20	2.95	2.85	3.14
Jul '10 to Jul '11*	5.91	5.63	5.82	6.16
Jul '09 to Jul '10	23.90	23.68	NA	24.77
Figures represent returns based on monthly average NAVs/index values
Nifty TRI: Nifty Total Returns Index
* till 13th
** till 9th
Source: Respective MF websites, NSE. Analysed by FC Research Bureau

Post-expenses, index-linked ETFs are supposed to mirror the returns of the underlying index's total returns values which includes the impact of dividends received from the member-companies of the index. The expense ratios range from 0.2 per cent to 0.5 per cent in the case of Indian mutual fund industry's ETFs.

A month before the Goldman Sachs acquisition of Benchmark MF, Benchmark Nifty ETF had a corpus of Rs 533 crore in June 2011. In September this year, the average corpus of (rechristened) GS Nifty ETF was Rs 563 crore.

Interestingly, in other comparable performance records of Goldman Sachs India MF's ETFs, no under-performance was seen. As per NAV data from Capitaline NAV, GS Bank ETF and Reliance Banking ETF, both linked to CNX Bank index, the absolute return from July 13 last year to November 9 this year was the same -- 4.36 per cent. Another ETF, linked to CNX PSU Banks index, the GS PSU Bank ETF has given a negative return of 15.2 per cent which is better than peer Kotak PSU Bank ETF's negative return of 16.10 per cent.