Fund management fees rise with markets

Management fees to equity fund managers and investment advisors rose 42 per cent, or Rs 224 crore, in the first half of financial year 2009-10.

Fund houses pay management fees on the basis of assets and since assets under management (AUM) of equity schemes have risen 75 per cent, or Rs 83,000 crore, in the first half of the current year, fund managers’ fees have gone up to Rs 759 crore.

The over 100 per cent rise in markets during the period has led to a considerable increase in assets of equity funds. This resulted in higher payment towards management fees, said Anil Chopra, Group CEO, Bajaj Capital.

In the second half of 2008-09, fund houses paid lower fees (Rs 535 crore) to their managers due to the over 50 per cent decline in value of equity portfolios, he added. In the first half of 2008-09, when the market fell off its peak, excessive portfolio churning led to higher administration expenditure. Also, outflow due to management fees stood at Rs 891 crore.

The record shows that fund managers and investment advisers’ remuneration varies in a volatile market. In 2007-08, when the Sensex moved up from 12,000 to 21,000, fund houses paid Rs 1,673 crore to fund managers. Conversely, in the second half of 2008-09, when the Sensex fell to 8,000-10,000, the fees dropped to Rs 535 crore.

During a lean period, inflow into equity funds through new fund offerings (NFOs) and sale of existing schemes fell sharply from Rs 52,701 crore in 2007-08 to Rs 4,084 crore in 2008-09. Mutual fund investors were cautious in the rising market too and subscribed to no more than Rs 5,344 crore of NFOs in the first half of 2009-10.

The turnover of mutual funds on the bourses declined sharply from Rs 2.46 lakh crore in the second half of 2007-08 to Rs 1.61 lakh crore in the first half of 2008-09, and Rs 1.19 lakh crore in the second half of 2008-09. With the BSE-500 index appreciating around 125 per cent from its 52-week low on March 9, 2009, the MFs’ turnover on BSE and NSE has more than doubled to Rs 2.75 lakh crore since April 1.

Reliance MF topped in the list of fees, with payment of Rs 132 crore, followed by UTI MF (Rs 86 crore), HDFC MF (Rs 81 crore), SBI MF (Rs 68 crore) and Franklin Templeton MF (Rs 61 crore).

Size does matter, sometimes

All offer documents of fund houses run a mandatory declaration: “Mutual funds are subject to market risk. Read the offer document carefully before investing.” But ‘market risk’ per se is not all that the investor should be worrying about, especially those who are investing in an existing fund.
   
Experts advise one should look at past performance, choice of stocks and the Sharpe ratio (returns to risk per unit), among others.

Other factors such as liquidity, corpus size, average maturity, turnover rates, low expense ratio, load structure should also be kept in mind before finally zeroing in on a scheme. Schemes with higher liquidity, lower average maturity and low turnover rate are preferred.

It is always advisable to select a scheme with a well-diversified portfolio rather than a concentrated portfolio, as it carries lesser risk. Portfolios can be judged on the basis of a company and sector/ industry concentration.

However, there are a lot of equity diversified funds with large corpuses. The question is – does a large corpus limit the fund manager’s ability to give better returns and, therefore, should an investor look at a fund with say, a corpus of less than Rs 1,000 crore?

Though a large corpus denotes investors’ confidence in the scheme, there is a flip-side to it as well. Experts say a huge corpus may not be easy to manage and a fund manager is likely to run out of investment avenues to deploy cash. For example, sometimes arbitrage funds refuse to take more money because they lack investment opportunities.

“If the corpus size is huge, funds tend to underperform the index, and since such schemes invest in more number of stocks, it becomes difficult for the fund manager to track stocks,” said D Sundarajan, chief executive officer, Trendy Investments.

Fund managers, however, feel that a large corpus may limit the performance of a fund, but only in some cases. Sanjay Sinha, chief executive officer, DBS Chola Asset Management Company, said, “The corpus size should not be a material factor for selecting a scheme. Track record and the portfolio of the scheme are important factors."

In case of a large-cap fund or an index fund, experts say, the corpus size is of little importance because large-cap stocks have more liquidity. For instance, the average daily turnover of Reliance Industries and Infosys has been Rs 961 crore and Rs 312 crore (in the last one month), respectively.

But for mid- or small-cap funds, a very big corpus may create problems for the fund manager. For example, the fund manager of a mid-cap scheme with a corpus size of Rs 250 crore would find it easier to invest this money. But if the corpus shoots up to, say Rs 1,000 crore, the fund manager is likely to get stuck because his mandate is to invest in mid- and small-cap companies. And these stocks are quite illiquid.

For example, the average daily turnover of Torrent Power (mid-cap) and South Indian Bank (small-cap) was Rs 22.27 crore and 6.89 crore in the last one month.

Add to it the strict regulation that the scheme cannot invest more than a certain percentage in a single stock can make things more difficult. Rajat Jain, chief investment officer (equity), Principal Mutual Fund, said, “In the mid-cap space, hardly 3-4 per cent of stocks can give really good returns. And, for those schemes with large corpus, it may become difficult to invest in such space.”

ITC reviewing options on EIH equity

Counter offer, stake sale being mulled.

  Cigarettes-to-hospitality group ITC is reviewing its approach on equity in EIH, which runs the Oberoi chain of hotels.

Speaking to Business Standard, ITC Chairman Y C Deveshwar said, “We are rethinking, which would mean making a counter offer or selling our stake. In both cases, the board will decide. However, I am not disposed towards a hostile takeover.”

Earlier, on the sidelines of the CII-ITC Sustainability Summit, Deveshwar said the company was open to increasing stake in EIH. Asked about investor Analjit Singh’s reported plans to buy another 17 per cent stake in EIH, Deveshwar said, “If somebody else is entering the fray I do not discount, we can do our re-thinking. If any new event takes place, I am not saying that we will stop thinking.”

An EIH spokesperson said the company would not comment on the basis of speculation.

ITC has a 14.98 per cent stake in EIH, a shade less than the Securities and Exchange Board of India (Sebi) threshold limit of 15 per cent, that triggers a mandatory open offer for another 20 per cent.

ITC has been buying EIH shares through its investment arm, Russell Credit, since 2000. Deveshwar announced at ITC’s last annual general meeting (AGM) that the company was not in favour of a hostile takeover for EIH and even suggested joining hands for a joint ownership or marketing, but that was prior to the news of Analjit Singh buying into EIH. Subsequently, EIH Chairman P R S Oberoi responded at his AGM that it was up to ITC to make a proposal.

Last month, news broke that Oberoi had signed a non-disclosure pact for a deal that would see the Oberoi family, which owned a 43 per cent stake in EIH, selling over 17 per cent to Singh for around Rs 1,250 crore.

Singh, who already holds a 5 per cent stake in the hospitality major, would have to make a mandatory open offer for an additional 20 per cent stake. This means Singh’s stake will be more than the Oberoi family’s 26 per cent.

Non-cigarette FMCG biz: PTI adds: ITC said it could take a decade for its non-cigarette fast moving consumer goods (FMCG) business to be profitable as it continues to expand product portfolio, thereby requiring fresh investments in brand building.

The company saw its non-cigarette FMCG business registering a loss of Rs 184.79 crore in the first half of this fiscal, an improvement from a loss of Rs 239.16 crore in the same period last year.

Godrej's Nano: Chotukool

The world’s lowest-cost refrigerator will be launched in March.

Sunderraman says the idea to target the bottom of the pyramid customers was given shape at a workshop with Clayton M Christensen, Harvard University professor, best known for his ideas on disruptive innovation. The idea discussed in the workshop was to involve villagers right from the design to selling of the product.

The company did that in right earnest ever since it unveiled the first prototype of Chotukool in September last year. The product has gone in for several alterations after every little detail, including pricing and colour (red and blue were the clear winners) was discussed with a select group of villagers and micro-finance institutions.

The Godrej group is betting big on Chotukool. “It will certainly help us in overtaking competition,” says Sunderraman. The group lost its leadership position to Korean giants LG and Samsung and Whirlpool of the US a few years ago. Godrej & Boyce is currently the fourth largest player in the over three million units market.

But analysts say the cheapest segment is not the largest selling category in refrigerators. The largest selling category with over 50 per cent market share is the 160 to 170 litre size models priced at about Rs 6,500 to Rs 7,500. Hence, making Chotukool a success will be a long haul for the group, more so in a category which needs volumes to compensate for the ultra-thin margins.

But Sunderraman is unfazed. “We are trying to create a market segment which would evolve gradually. Eventually, it should have a significant share of the market,” he says.

In any case, Chotukool is bound to attract a huge new group of consumers in a country where fewer than one in five homes has a refrigerator. It is also in tune with what Management Guru C K Prahalad has been saying for some time now — serving the poorest of the world can and should be good for business.

Prahalad would be happy with the inventiveness of the people connected with Chotukool.

Sebi may widen PMS scope

The Securities and Exchange Board of India (Sebi) is examining the possibility of allowing inclusion of currency and interest rate futures in portfolio management services (PMS).

“We are looking at allowing exchange-traded derivatives to be part of PMS. However, no decision has been taken yet,” Sebi Executive Director RK Nair said

On the derivatives side, PMS are allowed to use only equity-related derivatives products such as stock futures for hedging their portfolios.

Hinting at further PMS reforms, Nair said PMS was not as tightly regulated as the mutual fund (MF) industry.

“When we compare general regulations (pertaining to MFs), there is a lot of leeway given to PMS. In terms of investor protection, PMS is not that tightly regulated,” he said at a seminar organised by the Indian Chamber of Commerce (ICC) on PMS here on Friday.

At present, there are 247 portfolio managers registered with Sebi, with total assets under management of about Rs 2.71 lakh crore serving 57,134 clients. Of this, Rs 2.35 lakh crore is invested in debt schemes, Rs 30,000 crore in equity, while Rs 6,000 crore is in other investment schemes, according to the latest Sebi data.

Nair said there were several intermediaries such as private equity and hedge funds which offer services similar to that of PMS. It was becoming a challenge for regulators to see if any systematic issues were involved in them, he said.

Sebi has, in recent years, taken several steps to regulate PMS by banning pooling of client assets, putting up capital adequacy ratio norms and enhancing the minimum net worth requirement for registration as a portfolio manager from Rs 50 lakh to Rs 2 crore.

“Sebi is looking at allowing newer products into the financial markets, but is a little conservative in introducing structured products. We are looking at reforming primary and the secondary markets to make them more fair and inclusive,” said Nair.

He said PMS should not partake functions of a mutual fund. He also said, “We are thinking if there is a need to increase the minimum investment amount of Rs 5 lakh for PMS.”

Of the 57,134 clients under PMS, about 48,000 are discretionary clients whereas 3,529 are non-discretionary ones as on October 2009.

All Perk-ed up

If you are in the age group of 18-25, ‘go snacking’ in between class lectures or office meetings must be part of your daily routine. Cadbury has just added a dash of glucose energy to it.

Last week, the leader in the chocolate market with a 70 per cent market share launched a new variant of its coated wafer brand, Perk. The new glucose energy chocolate also promises more for less.

The new Rs 5 Perk comes with 50 per cent more grammage at 21 grams. It is also available at a single serve pack of Rs 2 for 7.5 grams.

“This is a part of the core strategy that we have been pursuing to grow the market. As market leaders, we need to innovate to grow consumption,” says Cadbury India Executive Director (Strategy & HR) V Chandramouli.

Chandramauli is bang on. India’s per capita chocolate consumption is just 54 gm compared to the UK and US’ 10.5 kg and 10 kg, respectively.

Cadbury is hoping the more-for-less strategy will help increase that number by at least 5 per cent.

The small-pack strategy is already paying off. Dairy Milk Shot, which was introduced last year and costs Rs 2 per packet, has already contributed 15 per cent to Dairy Milk sales.

This is not the first time that Perk has changed. The brand was launched in 1995 in the chocolate wafer category as a snack that could be had anytime and anywhere.

Around the same time, Nestle introduced Kitkat. But after promising starts, both brands fizzled out as consumers thought they were paying for chocolate biscuits rather than chocolate.

Quick on the uptake, Cadbury relaunched Perk. While it maintained the wafer quality, its packaging changed to Cadbury’s trademark purple to prove it was pure chocolate. However, that initiative too was short-lived.

In 2000, Nestlé launched Munch and since then has been the leader in the category. In terms of pricing, Perk has followed Munch’s pricing of Rs 2 and Rs 5. Recently, Nestle launched a bigger pack priced at Rs 10.

After competing with Perk, Nestle Munch now has its sights set on Dairy Milk. For example, earlier this year, Cadbury came out with an ad for Dairy Milk around payday celebrations in the country. “Aaj pehli tarikh hai,” (Today is the first day of the month) was the premise of the ad. Soon enough, Munch came out with a campaign that announced “Khao bina tareekh dekhe,” (Eat without looking at the date).

Thus, Cadbury’s latest salvo hasn’t surprised anybody. Perk Glucose Energy is also a part of an insight the company gained from a study that suggested that consumers wanted a tasty recharge.

Also, there’s a growing health awareness among consumers who have been shifting towards lighter chocolates, a category which is reportedly growing faster than pure chocolates. “We need a brand that is youth-centric and at the same time is powerful. The new Perk makes maximum sense in that context,” says Chandramouli.

On the brand building front, the company is spending about 10 per cent of sales on its 360 degree campaign – Naya Perk — which will encompass TV, outdoor, tieups and sampling activities. All this, the company hopes, will increase the market by about five per cent.

Mukesh tops Forbes India list with $32 bn fortune

Reliance Industries Chairman Mukesh Ambani is the richest man in India with $32 billion in net worth followed by steel tycoon Lakshmi Mittal and younger brother Anil Ambani, according to the Forbes annual rich list for the country.

NRI steel baron Mittal has been ranked at the second position with a net worth of $30 billion, while Mukesh's sibling Anil Ambani, whose wealth stood at $17.5 billion was ranked third.

Wipro Chairman Azim Premji and Essar Group's Shashi & Ravi Ruia are ranked fourth and fifth with net worth of $14.9 billion and $13.6 billion, respectively.

The magazine said the combined fortune of India's 100 richest is $276 billion, almost one-fourth of the country's GDP.

"Happier days are here again for India's super rich, thanks to a rebounding stock market, up two-thirds in the past year, and a still buoyant economy that's growing at least 6 per cent a year," the US business magazine said.

The nation is now home to 52 billionaires, up from 27 last year and only two short of what India had at the peak of its stock market boom in 2007.

Overall, the top three billionaries of India are worth $79.5 billion, which is $25.7 billion more than their combined sum a year ago.

However, Forbes said that the amount is "still far shy of their record total of $145 billion in 2007".

India's 100 richest are worth over 100 billion dollars more than the total net worth of 170 billion dollars of their counterparts in China. This is despite China having more billionaires -- 79 as against India's 52.

Besides, the richest Indian has a fortune more than five times the 5.8 billion dollars of China's richest citizen Wang Chuanfu. The list for China was compiled earlier this month. Since the, Chuanfu's wealth has further eroded.

The top-10 Indian billionaires are worth USD 155 billion, a 60 per cent increase over last year and four times that of China's top 10.

Others in the top ten club include-- realtor KP Singh (6th with 13.5 billion dollars), OP Jindal group Chairperson Savitri Jindal (7th with 12 billion dollars), telecon czar Sunil Mittal (8th with 8.2 billion dollars), Birla Group's Kumar Mangalam Birla (9th with 7.8 billion dollars), Adani group head Gautam Adani (10th with 6.4 billion dollars).

Forbes said the latest list reinforces the belief that India has scale and potential to produce billionaires faster than most of the countries on earth, if conditions in financial markets and economy were right.

It further noted that there was clear evidence about enterpreneurial capitalism "alive and kicking" in the country and the wealth creation was a broad-based phenomenon here.

However, there are only six women among the 100 richest and the wealthiest among them is Savitri Jindal.

The richest newcomers are two brothers-- Sudhir and Samir Mehta of Torrest Power, who are together ranked 23rd with a net worth of 2.02 billion dollars.

Media business veteran Kalanithi Maran, who heads Sun TV group, is ranked 20th and saw his wealth nearly doubling to 2.3 billion dollars.

Forbes said that a recovering real estate market was one of the biggest sources of wealth, as many as 14 from this scetor made it in the top-100 list. While 13 tycoons earned their net worth in pharmaceutical industry. These included Cyrus Poonawala and Biocon's Kiran Mazumdar Shaw, the country's richest self-made woman.

The IT sector also produced some of the richest in the country -- including Wipro's Azim Premji (4th), HCL group's Shiv Nadar (ranked 15th) and as many as five from Infosys alone.

Forbes said that Indian business tycoons did not go on a global hunt to expand their empires this year, unlike past two years, with an exception of Sunil Mittal who also failed in his endeavour to strike a mega-merger deal with South African telecom giant