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Pravin Palande
Pravin Palande
I look at markets as numbers because numbers don't lie
Man cycles past residential buildings under construction in Kolkata

Image Courtesy: REUTERS/Rupak De Chowdhuri

According to the Economic Times the real estate market has corrected by 30 percent.

Is that good enough reason for you to run to the nearest home loan bank, wave your monthly salary slip at them and ask for a loan? After all, only last year one of your friends bought a 2-BHK flat in Borivli (Mumbai) for ₹2.2 crore, and if the Economic Times is right, something similar would cost you around ₹1.5 crore now. Perhaps you should pause before lacing up your running shoes.

Ashutosh Limaye, who handles research at JLL India, a real estate consulting firm, agrees that there are pockets where you will find that prices have fallen, but calling it a huge correction is going too far. He says, “If there is a correction then it should be across the board for everyone without asking for any discounts. There should be no connection with the developer and no cash transactions. Even if one aspect is missing out of these three parameters, I will consider this as a deal-specific discount.”

For instance, developers are ready to give you discounts where the structures are still being built, but getting one in a completed project is extremely difficult. Though the same is not true for buildings that are old: Extremely crowded areas in Mumbai like Borivli, Dadar or Ghatkopar have seen some minor price falls over the quarter ended March 2014. According to MagicBricks.com, rates in Ghatkopar west are down by 5.4 percent.

Limaye says that this data is based on secondary market sales, where the rationale for selling is not easy to understand. “The seller here sells on reference rates and sentiments, unlike the rates of new projects. When we look at changes in prices, we always go with new projects and primary rates.”

We looked at the data for Mumbai to understand if there was any genuine fall in real estate prices. The big picture? To our surprise, prices in most cases have only gone up. There has been a jump of around 2 to 4 percent in areas closer to Chembur and Kanjurmarg, thanks to improved connectivity with south Mumbai, the Bandra-Kurla Complex and the western suburbs.

One of the surest bellwethers for real estate prices in Mumbai is Lower Parel. Over the last quarter, prices haven’t dropped. In fact they’ve moved up by 7 percent.

Navin Kumar, Executive Director, Milestone Capital Advisors, says “If there is a big correction, then there has to be consumption. Buyers will always rush in immediately if there is a correction. Since there is no data on increased consumption, I don’t see this as a correction.”

Real estate investment is generally for the longer term. Investors typically wait for at least three years before they see serious returns. So we looked at data for three years on MagicBricks.com. Interestingly, since December 2010, the real estate prices in some areas of Mumbai are up by 33 percent or 10 percent annually for the last three years.

Mumbai Area Jan-Mar 2014 Oct-Dec 2013 Oct-Dec 2010 Q-o-Q return (%) CAGR (%) 3-year return (%)
Altamount Road 75152 - 54419 - 10 38
Andheri West 21724 21253 15162 2 12 43
Borivali West 14613 - 11551 - 8 27
Dadar West 31178 31493 25266 -1 7 23
Ghatkopar East 15231 16107 11549 -5 9 32
Kanjurmarg East 14809 14290 - 4 - -
Powai 19851 19743 15623 1 8 27
Chembur 17118 16556 11992 3 12 43
Bandra West 43436 43438 30046 0 12 45
Lower Parel 34238 31978 27031 7 8 27
₹/sq foot

Source MagicBricks.com

S.Naren, the chief investment officer – equities at ICICI Prudential mutual funds is taking a big bet on Cairn India, a global E&P company which has seen its stock price fall by 12 percent over the last year. In comparison, the BSE Sensex has moved up by 21 percent.

The May 2013 fact sheet of the mutual fund shows that Cairn India accounts for 10.53% in his Dynamic Fund. Cairn India accounts for a fourth of India’s oil production and has an exploration acreage of 42210 sq/kms. When it comes to valuations, it is exactly the stock that a fund manager like Naren is on the look out for. Cairn India trades at a P/E multiple of 3.7 times which is lower than the industry P/E of 12.

The market in general is giving a very high valuation to sectors like FMCG, Pharma and quality banks which are being traded at a earnings multiple at around 30 times, fund managers are having a tough time looking for value.

Naren who is known for his fundamental analysis and long term investment philosophy finds the market very expensive at these levels. In general, he has looked for quality at a reasonable price but this is one market he feels that is difficult to understand.

This has to do with the fact that all the quality stocks now has huge FII flows. These are investors who are ready to give higher valuation to stocks as long as they deliver quality. Most of these investors are ready to wait in case the market falters or the companies spook them in terms of growth rates. They know it that India is a growth market and eventually they will get the returns if they are ready to wait for the long term. On the other hand Naren has decided to stay away from this rally. This has also affected the returns for the Dynamic Fund. Over the last one year the fund has underperformed the the BSE 100 which returned 22% while the returns of the fund were lower at 12%.

In such a situation Naren is looking towards Cairn India to deliver.

It is a bet backed by conviction. Only a few months ago he was in a similar situation.

In October 2012 he had taken a similar exposure to Bharti Airtel when the stock was completely out of flavour amongst investors. The stock was down by 40 percentage while the Sensex had moved up by 15 percentage over the last one year. The fund manager saw that there was a lot of value on the telecom growth story and invested into the stock through the Dynamic Equity fund. No one was buying the story when the fund started investing in Bharti at around Rs 260 in August 2012. In the next four month the stock moved up by 34% and thus gave a huge booster to the Dynamic Fund.

Though it may look like the Dynamic Equity Fund will miss out on the quality rally that is now experienced by the market, It will be a good idea to go by the guts of S.Naren. It may take him some time for the fund to deliver performance. But given time, the long term investor can still benefit by investing into this fund even at this levels.

Jiju Vidyadharan, Director Funds & Fixed Income Research at Crisil

Jiju Vidyadharan, Director Funds & Fixed Income Research at CRISIL

The last five years have been very painful for the markets with annual returns hovering around 3 percent. Most funds have managed to only marginally beat this benchmark return while others simply languished.

UTI mutual fund is one of the few fund houses that has managed to give good returns in a lacklustre market. The fund has topped Crisil’s quarterly ranking for mutual funds with seven of the schemes in the top cluster for the quarter ended March 2013.

The UTI dividend yield fund, MNC fund and opportunities fund have clocked a return of more than 10% for the last five years. We spoke to Jiju Vidyadharan, Director Funds & Fixed Income Research at Crisil about why UTI has been such a consistent performer.

UTI Fund

FI: Is it really difficult to achieve lower risks and higher returns in the Indian markets?

JV: Some of UTI AMC’s funds have lower volatility in returns. UTI MNC Fund, for instance, has the least volatility of 12.61 percent across all equity funds managed by UTI, over the past three years. The key reason for this trend has been their investments in defensive sectors, which have a lower volatility as compared to the broad market.

FI: When the market has been flat at around 3 percent for the last five years, both dividend yield growth fund and UTI opportunities have managed to return around 10 percent. What has really worked for them?

JV: Over the past three years, UTI Lifestyle fund generated returns of 9.57 percent over the last 3 years ended March 2013. The fund had 21 percent exposure to defensives and 11 percent to finance, which helped it outperform the category. The fund is ranked Crisil Fund Rank 1 as per the Crisil Mutual Fund Ranking for March 2013.

UTI Opportunities fund had 17 percent average exposure to defensives and also had 9 percent exposure to cement during the same period, which helped it generate 7.74 percent returns during the three year period. The fund is also ranked Crisil Fund Rank 1.

UTI Dividend Yield Fund, on the other hand, has yielded returns of 4.68 percent during the same period. This is similar to the category average. Exposure to Oil and gas and Auto sectors lowered the return for the fund. The fund is ranked Crisil Fund 3 as per the Crisil Mutual Fund Ranking for March 2013.

FI: The fund managers in UTI have not taken concentrated risks. How does CRISIL look at concentration of risks in general and how does UTI fit in?

JV: For Equity funds, CRISIL uses diversity score/ Herfindahl’s index as the parameter to measure industry concentration and company concentration. Crisil’s scoring on each parameter is relative among the peer set. Only a few UTI funds are ranked 1 and 2 on both company and industry concentration. This indicates that they are relatively less diversified as compared to peers.

FI: In terms of liquidity parameters how does UTI opportunities and lifestyle fund fare in your ranking?

JV: Crisil evaluates liquidity based on the trading volume over the past six months for stocks in the portfolio. Crisil’s scoring on each parameter is relative among the peer set.

UTI Opportunities fund and UTI India Lifestyle fund have parametric ranks of 5 and 3 respectively on Equity liquidity as per the Crisil Mutual Fund Ranking for March 2013. This indicates that the liquidity of the stocks.

Standard Chartered plc will open a window from May 31 to June 7, 2013 where Indian Depository Receipt (IDR) holders can convert their holding into shares of the company. A foreign company can access Indian securities market for raising funds through the issue of Indian Depository Receipts and StanChart is the only foreign company that has issued IDRs.

Many of these investors have been holding the IDRs for more than a year, when the arbitrage opportunity was much bigger than the present 14 percent. The IDR is trading at a discount to its London price in the Indian markets. Several Indian investors have been waiting to cash in on the arbitrage opportunity ((buying in one market and simultaneously selling in another, profiting from a temporary difference) which could yield around 14.4% on exercise of the IDRs.

Ten IDRs represent one share of Standard Chartered. This is how the math works:

Indian IDR price = Rs 118.55

Standard Chartered stock price in London: 16.10 pounds

Standard Chartered stock price in Indian rupee: 16.10 x 83.88 (pound value in rupees) = Rs 1,350.46

10 IDRs will be equal to 1 share which works out to Rs 1185.5

Even if investors buy the IDR at Rs 1,185 and sell it at around Rs 1,350 they can get a return of 14.4%.

Many Indian mutual funds already have Standard Chartered as the largest holding in their portfolio. They are waiting for the window to open where they can quickly profit from the opportunity. Many of these investors have been holding the IDRs for more than a year, when the arbitrage opportunity was much bigger than the present 14%.

The British bank will open up this window for conversion at least once in a year, so investors in India can convert their IDRs into shares. Standard Chartered plc listed IDRs on Indian market in June 2010.

Akshaya Tritiya on Monday was a big day for Gold ETFs (exchange-traded funds). Goldman Sachs’ GoldBees, the biggest of them, notched up a turnover of Rs 525 crore. The ETF’s price, however, price fell by 1.15 percent to Rs 2,560. The average daily turnover for the fund is around Rs 13 crore.

World gold prices are falling and that is reflected in Indian gold ETFs, which generally follow London prices. Since 20 March this year, gold has fallen 10 percent. But, over the last five years gold ETFs have returned 18 percent annually, compared to 3 percent for the Nifty.

So should one keep buying gold as prices go down?
Gold has a negative relationship with equity. In times of crisis, gold as an investment performs better than equity. If we look at annual rolling returns data for gold and the Nifty for the last four years, gold was in negative return territory 21 times and the Nifty was in negative territory 285 times. The total data set had 1,007 points.

After the world economy went into a tizzy because of the Lehman crisis, gold as an asset class has only grown. Indian gold ETFs are now worth Rs 10,600 crore, far bigger than the index ETFs which hold assets to the extent of Rs 1,500 crore. There are now around 14 schemes that allow Indian investors to participate in gold ETFs. Motilal Oswal has an ETF that allows investors to redeem in physical gold.

As the world economy is showing signs of recovery, there is the possibility of gold funds losing some of their sheen, as money will be directed to equity or fixed income. In fact there are many who believe that gold can even fall further.

A Societe Generale report says that this is clearly the end of the gold era. The report argues that since 2000, gold returns have been much higher compared to the rest of the century and if we look at the one year rolling returns of gold in US dollar, since the end of the Bretton Woods system in 1971, negative returns occurred around 38 percent of the time and large losses occurred 18 percent of the time.

The report further points out that since the global economy is on the road to recovery, this could again be negative for gold. There are five drivers for a positive global economy which include advanced de-leveraging (debt reduction), repair of credit channels and reduced policy uncertainty.

But all is still not well with Europe, with countries like Spain and Italy showing prolonged periods of political uncertainty. Inflation is still a worry.

So should one keep buying gold as prices go down?
Since gold has a very strong negative relationship with equity markets, it probably makes sense to have some 5-10 percent in gold ETFs or other investment products as a hedge. Since the world economy is not out of the woods yet, it probably makes sense to hold a little gold- but not as jewellery.

Incidentally, Indians and Chinese account for more than 70 percent of the gold jewellery market across the world and that is not exactly a good thing.

State Bank of India’s move to launch fixed deposits with a maturity of just three days is likely to lure away part of the surplus cash of corporates that usually ended up with mutual funds. The country’s biggest bank has not yet revealed the interest rate it would offer on these ultra-short FDs but some expect it to be in the range of 4-4.5%.  SBI had earlier launched fixed deposits of seven days that fetched a return of 7.5% per annum and immediately collected around Rs 30000 crore.

Companies normally prefer liquid funds to park excess cash because they are tax efficient and there are no exit costs. Liquid funds are debt funds which invest in practically zero-risk government securities.  Current investment in liquid funds below one-month tenures is around Rs 1.61 lakh crore, three-fourths of which is corporate money. SBI now plans to target very short term money with its new product. On December 2012, the bank had total deposits of Rs 11.56 lakh crore, 16% more than the previous year.  Short term FDs could be a good instrument for the bank as it could help its reserve liquidity management.

Liquidity in the banking system is often tight and government borrowing is on the rise. The central government alone is expected to borrow Rs 6.29 lakh crore in 2013-14 compared to Rs 5.8 lakh crore in the last fiscal year. Banks would need to mobilize more deposits to fund the huge borrowing programme. Term deposits have better float (money that the bank can invest) than current accounts and the money can be invested in government securities or the call money market, earning the bank a neat profit.

“I think the three-day fixed deposit, when launched, will be a huge competition to the liquid fund industry and, going by the success we had with the seven-day product, we are very confident about this move,” says Krishnakumar, managing director, SBI.

Opinion is divided among corporate investors on why they may opt for an FD that would get them lower returns than liquid funds. A trader at one of India’s largest corporate treasuries says many companies keep funds in SBI’s FD products to keep the behemoth happy. He says it is merely to maintain a good relationship with the bank which would be lending to practically every major company in the country.

A senior official from a PSU oil marketing company had a different opinion. “We prefer the seven-day FDs as compared to a liquid fund because we think that the FDs are safer as there is no volatility of returns,” he says. He feels that the three-day FD is a product that he would look forward to for investing his short-term surplus.

“Three-day FDs are more liquid compared to seven-day FDs. However, liquid funds provide liquidity of one day. Barring few funds, there are no exit loads on liquid funds. Hence assuming yields to be the same, dividend option of liquid funds would continue to be better for corporates,” says Mukesh Agarwal, President, CRISIL Research.

Liquid funds fetch around 9 per cent annualized for a seven-day period as compared to 7 days FD which return 7.5%.  Corporates have invested in the fixed deposit because these have zero risk weightage.  While short-term capital gains from liquid funds (growth option) and interest earnings from FDs are taxed at the same rate of 33.99%, most corporate investors prefer the dividends option of liquid funds owing to the lower effective tax rate of 25.37%. But the mutual fund industry fears the FDs will take away at least some money that would have otherwise come to it.

While Forbes India’s Investment Special gives you the big picture, we don’t forget the small stuff: Stuff that is valuable and can help you preserve and enhance your capital. So, last year we created two stock portfolio: One for those who need stability, and the other for those who like a bit of adrenalin.

The Capital Preservation Portfolio (CPP) last year was a list of 15 companies with strong fundamentals for those seeking stability; and the Cheap, Cheerful and Contrarian Portfolio (CCCP)—for the adrenaline seeker—had companies that had hit rock bottom prices in 2011.

Now it has been almost a year, and we decided to look at the performance of these two portfolios to see if they have performed to our expectation. The simple answer is yes. The CPP has given a return of 25 percent and the CCCP portfolio has returned 27 percent over the past one year.

We decided to look at these portfolios in detail, and are giving you a lowdown on how both portfolios performed against their respective benchmark.

CPP:  This comprises large cap companies with some exceptions. Our basic rule was to look at companies that have been profitable throughout the past decade and have managed to protect shareholder wealth. If an investor had invested Rs 1,000 in each of these 15 companies, by the end of 11 years she would have made Rs 2.9 lakh or 32 percent annually. That is more than twice the number when compared to the BSE Sensex, which delivered 14 percent during the same period.

Over the past year, the CPP returned 25 percent, Outperforming the Sensex. Two of the companies we had strongly recommended—Infosys and Hero Motorcorp—failed to perform. But we believe in the management of these companies and we expect them to start scaling in the year to come.

What we got right
The smartest of fund managers were betting on FMCG for the past two years. We got this theme right with four companies: Godrej Consumers returned 84 percent over the past year, VST 71 percent, Asian Paints 66 percent and P&G 35 percent. Castrol India delivered a return of 39% after a bonus issues of 1:1 shares.

All these stocks are trading at high valuations but, again, we would like to believe they still have the steam to deliver for the coming year. Most of the professional fund managers will stay away from these companies. This is a portfolio for the super long-term investor, and even with high valuations they remain attractive.

Capital preservation portfolio

Capital preservation portfolio

 

CCCP: This portfolio is for the investor who likes to go against the market. These are companies that had hit rock bottom on the bourses at the end of last year. The only way forward for them was up. While the Forbes India portfolio is a defensive play, with the guidance of our consulting editor, Sanjoy Bhattacharya, we decided to go on the offensive. This portfolio is more intuitive and more cheerful. These companies are well managed and their fundamentals are intact. But they were ignored by the markets. These companies were available at cheap valuations.

The CCCP has delivered 27 percent over the past one year, while the BSE 200 index returned 29 percent. What is interesting to note is that, in general, the large cap funds have given around 17 percent on an average over the same period.

What really worked for us is the fact that stocks like Shriram Transport and Berger Paints, which were generally ignored by the market earlier, were back into action and moved up by 60 percent over the past one year. Will these stocks go up further?

Although these stocks still have some serious growth left in them, we would like to look at some other alternatives as well.

Gujarat Gas IL&FS Investment (one of the few private equity companies listed in the market) and Ador Fontech were the companies that failed to perform. Will they do well in the future? We believe they will.

 

cheap, cheerful and contrarian portfolio

cheap, cheerful and contrarian portfolio

 

What next?
We are now looking at a theme for investing in 2013. We believe the year might be a difficult one in which to invest in equity markets. To understand investing for the future we had some of the biggest fund managers in our office who shared their views with us.

So, look out for our Investment Special available from January 11, 2013, where you will have Prashant Jain of HDFC MF,S Naren of ICICI Prudential MF, Kenneth Andrade of IDFC, and Ajit Dayal of Quantum MF discussing investments for the year. The discussion was moderated by Ramesh Damani. We will carry excerpts from the conversations in our magazine, and the full versions online.

Also, expect a brand new theme for the Forbes India portfolios for 2013. Again, we will have a conservative portfolio for the weak at heart and the contrarian portfolio for those who are in the habit of bungee jumping.

 

 

Ajit Dayal, Chairman and Founder of Quantum Mutual Fund

Ajit Dayal is not happy with the way mutual funds are sold in the country

Ajit Dayal, Chairman, Quantum mutual fund has very strong opinions about the way mutual funds are sold in India. He did an email interview with Forbes India about the new SEBI guidelines for the mutual fund industry and also about Quantum Long Term Equity fund, his flagship equity fund which has the lowest expense ratio amongst all actively managed  funds. Some excerpts:

Do you think the direct plan- that allows investors to invest directly in mutual funds will be successful? 

The direct plan is one of the best things that SEBI has done for investors who know which mutual funds they wish to invest in. They do not need to unnecessarily pay large sums of money to distributors for filling in the forms. Calculations suggest that every time an investor places Rs 1 lakh in a mutual fund and uses a distributor to fill in the form, the investor is likely to have lost a Maruti car over a 15 to 20 year period – depending on what assumptions one makes about the size of the distribution fees. Investors must recognise that a mutual fund can have good returns at some point in time – but these returns are not known and are not predictable. Costs are known and defined. The lower the cost or the expense ratio, the greater is the amount of the investor’s money that finds its way into the market to generate returns.

Are you in favour of the direct plan or the distributor plan?

The direct plan offers every investor the lower-cost option. Distributors must earn money legitimately for sensible advice they pass on to their client base. The distributors play a crucial role in the financial service industry and they must get rewarded for it. But their rewards must be clearly stated and not opaque. Distributors advice must be based on what is good for the client, not on what gives the best commissions. As long as there is advice given and as long as the fee is clearly stated and known, the distributor plan will be welcome.

Your equity fund has operated on an expense ratio of 1.25%. Will you continue to maintain this low ratio and how do you manage it while other funds cannot?

Our objective is keeping our costs low – and transparent. It is a shame that we are the only fund house that has chosen the path of refusing to bow down to the power of the distribution channels. Our costs are lower because we have no distribution fees. We have not paid for the distribution community’s holidays to Singapore and Malaysia, we have not given any distributor bonuses like cars and suit lengths – all these costs used to be passed on to the investors; without the investors knowing about it! As a fund house we refused to be part of this system and have “suffered” the label of being small. But we love that label because with that label comes the recognition of working for our investors, not for the high-cost distribution channels.

You are completely against the rise in expense ratio that has been allowed by SEBI (3% for funds that are lower than Rs 100 crore). But other mutual funds are saying that it is the step in the right direction?

A mutual fund should have economies of scale. If Maruti was to have a factory that can make one million cars each year but chose to make only 100,000 cars in a year, then the cost per car will be high because Maruti will have that larger fixed cost of its plant and its machinery being spread over only 100,000 cars. Now, let’s assume that Maruti was to run at full capacity and make one million cars. Then shouldn’t the cost per car reduce? The mutual fund industry must have lower cost with larger size. But here we find that the costs remain high irrespective of the size whether it is a fund with big corpus or a fund with small corpus. There are funds with AuM of over Rs 9,000 crore of assets but the expense ratio is 1.7%. The Quantum Long Term Equity Fund has assets of approximately Rs. 135 crore (as on 31st Oct 2012) and our expense ratio is 1.25%. That is because the other fund houses – have distributors to pay. Not that these fund houses are complaining, the larger fund assets allows better remuneration to all stakeholders, so everyone is laughing all the way to the bank – at the cost of the investor! Pay the distributors, but declare how much you pay them.

How will you expand into smaller towns (beyond the top 15) without a higher expense ratio? How much of your AUM in the equity fund comes from smaller towns?

At Quantum we have never restricted ourselves and always tried to reach out to as many people as we can. Even though we have our offices only in Mumbai and a recently opened presence in Chennai, we believe our state-of-the-art online investment portal is our branch that reaches out to every location which has an internet connection.

Nevertheless, our share of total AUM from beyond the top 15 cities is around 19%. We are proud of the fact that we have our investor base spread across all parts of India, right from Andaman and Nicobar Islands to Mizoram,Sikkim and other small parts of the country.

We believe what it takes to increase our investor count is not just an aggressive sales strategy but a thoughtful investment process that aims to secure the investor’s money and earn better returns.

In order to make investments hassle-free and convenient we offer our investors an online platform that is a complete paperless, allowing them to make investments with just a few clicks.

However to make investments easy for those individuals who are not able to access internet, we have a cheque pick-up facility available across India, so that investors don’t have to worry about submitting their applications or cheques to our office.

You say that you have managed to build the AUM based on a very small team of around 25 people while others require an army of thousands. What is it that you are doing different?

Since we last met, our team has grown. We now have 51 people who make calls and respond to emails besides servicing our Customers. What we are doing differently is using technology to reach out to people. We are not selling the Quantum Mutual Funds, we merely encourage people to think about what we are saying – and doing. And then make a more informed decision. Our team does not have a monthly or quarterly or annual target for collecting money. Our approach is to ensure that our team-based research process and our fund managers make the best investment decisions with a long term view. The marketing and “sales” people have to explain why we do what we do; the investor service and compliance teams have to ensure that we are not breaking any laws and, in fact, are setting ethical standards of practice that go beyond what is required. As a mutual fund house our priority is to safeguard our investor’s money and aim to earn maximum returns for them and not earn attractive remunerations for ourselves.  We ensure that the members of our boards have the freedom to ask us anything and reprimand us if we stray from our objectives. We are the only fund house in India where all the members of the Board of Trustees are independent.

How much of your equity fund AUM is associated to SIP money?

Our AUM is a pure retail AUM. Since all our investors are retail investors, it has been our understanding that SIP Investments work well with retail investors as they do away with the hassles and paperwork of investing through other modes of investments and are popular for reducing risk because of ‘Rupee cost averaging’.  At Quantum our SIP starts from as low as Rs. 100/- and transfers can be made on a daily, weekly, monthly or quarterly basis depending upon the SIP chosen by you and the options available. Therefore, keeping with the trend of retail investment the share of SIP money and SIP investors is quite high as compared to industry average. As of September 30th, 2012 around 60% of our transactions were processed under SIP while around 40% of our folios are under SIP.

Do you believe that an advisory model is better than the distributor model? Why?

Certainly, it is this belief that backs our pride in being the only fund house in India to avoid distributor route. While we always say that we are not against the distributor route but we are against the lack of transparency in the distribution system. We are not against paying distributors commission – our problem is that the commission paid is not disclosed.

On the other hand with our direct to investor model we don’t “sell” our schemes to our investors, rather we want them to understand the scheme thoroughly and decide for themselves without getting influenced, unlike the distributor route whose only aim to earn his commission. What makes us stand apart from the distributor route is that we aim to educate our investors through various mediums like our online communications, relationship managers, Path to Profit meets held in different parts of India, etc. As a process, we have always tried to give our investors a thorough knowledge of what is it that they are putting their money into. Our relationship managers don’t force their product to the prospective investor, but will explain him the pros and cons of investing in such a scheme and let him evaluate if the investment objective of the scheme matches to his own investment objective and that ultimately his goals are met. Here our strategy is to garner informed investor who may invest a lesser sum rather than just gathering a huge corpus.  In that sense we ‘advise” investors.India needs a generational change of discarding the old “your money is my money” distribution model and moving to a more transparent advisory model where the client knows how much the distributor or advisor is getting paid. And the service – the advice given – can be measured for its outcome.

Do you think that the step for higher expenses will be detrimental to the mutual fund industry?

Investors need products that are simple to understand, not injurious to their financial and mental health; the products need to have sensible risk-return characteristics and they should be low cost. Anything which strays from this approach is bad for long term investors. Besides mutual fund products needn’t be sold but investors should invest based on their investment objectives and risk appetite. The Industry is in panic because the number of folios and the number of investors have been declining. Of course it will: bad products coupled with push-selling techniques lead to bad outcomes. The solution for making the mutual fund industry flourish is to do what is good for the investor. The mutual fund industry has been losing out to the life insurance industry which is a shame. The ULIP products also had hidden costs. Mutual funds are superior products: there is reporting, there is diligent overview of performance, there is liquidity and ease of entry and exit, there is a track record and a history of performance. But the mutual fund industry has unfortunately surrendered to the high AUM targets led by distributors and, in return, got their shot-in-the-arm boosts of higher AUM. But there was mis-selling, churning and pushing of high-cost products. India needs its retail investors to invest in the stock markets. But we, as an industry, have to focus on the long term.

Many people say that “Had you used the distributor your AUM of the equity fund would have gone up by 5 times since your performance is good”.  They say that investors are missing on a good fund. Your comment.

Had we used a distributor our expenses would have been higher by at least 2% each year, and our track record would have suffered – then this question wouldn’t have probably been asked! No, we did the morally correct thing: we refused to be part of the opaque relationship between the fund houses and the distributors. Our customer base will grow, provided we keep our costs low and work in the interests of the customers. Of that we are confident. We believe that doing good things results in good outcomes – for all – over the long term.

How do you look at the mutual fund industry five years down the line?

We are optimists. We believe that good will win over the not-so-good. And this makes us believe that what we are doing alone today will be the mainstream, the norm, tomorrow. The mutual fund industry will wake up and realize that there is a moral path, a correct path, which we need to walk on. Having said that, we are realists! Many of the global financial firms in business today should have been shut down after the collapse of Lehman and AIG and the exposure of their criminal-like conduct. But they have become stronger and their lobbyists have the ears of the regulators and the politicians – globally. The financial world is more dangerous today than it was in 2008. So, the dreamer in us says the mutual fund industry and the crucial distribution channels will be booming for all the right reasons. The realist in us makes us warn you to “watch your wallet”!

Scott Patterson

The impact of technology on trading stocks has reached such a level that regulators across the world are a worried lot. Most of them are not able to figure out how to track the changes in technology that has become harmful to long term investors, especially those who are putting their savings in mutual funds or pension funds. Today stocks are traded at a tremendous speed of 100 microseconds and some exchanges are investing into technology to further increase performance. Traders on the other hand are using technology to front-run stocks or sometimes put in false orders that ends up fooling serious investors.

Scott Patterson, an investigative journalist with the Wall Street Journal has tracked the impact of technology on Wall Street through his latest book Dark Pools. His earlier book, The Quants, talked about geeks and mathematicians on Wall Street. In Dark Pools he tells us a story about programmers, geeks and crooks, who have used technology to the hilt to make a quick buck on Wall Street. Scott Patterson spoke to Pravin Palande of ForbesIndia about the book and how he went about tracking the geeks on Wall Street. Some Excerpts

 

Your book Dark Pools introduces us to a Neuromancer cyberpunk kind of a world where individual smart programmers or sometime data thieves are in a position to create havoc for big firms like Goldman Sachs and Morgan Stanley. Why is it necessarily a bad thing?
It’s not necessarily a bad thing. But in certain circumstances, the way the market works now — at least in the US — our rapid-fire cyberpunk market doesn’t always work for the benefit of the long-term investor. Instead, the market seems increasingly designed to benefit extremely short-term investors — we’re talking fractions of a second — which by necessity eats away at the gains of others. Short-term, high-frequency firms are scalping off billions in profits every year. That money isn’t coming out of thin air.

You say that the entire market has become a dark pool where the regulator does not have the technology to track the algorithms. But when it comes to rogue trading, the regulators have always been caught sleeping – algorithmic trading or otherwise. What are your expectations out of the regulators?
I expect them to do their job, which is to keep their eye on the market and give investors the reassurance that the cop is on the beat. I understand the skepticism but that doesn’t mean that we in the media shouldn’t hound the regulators to the end of the earth when they aren’t doing their job.

Your book will be used by a lot of Indian brokers to prove to the Indian regulators to keep India away from the developments in high frequency trading or algorithmic trading. Is there something that you would like to tell the Indian regulator?
This is important. I am not universally against high-frequency trading. I think under the right circumstances it can be a benefit to investors, providing liquidity for efficient trading. Indeed, computer-driven trading is the future and there is no stopping it. What I am against is the insider privileges these firms get. Exchanges offer them many advantages in order to draw their flow. I also say that regulators need to keep up with these developments, and so far they haven’t. That needs to change.

How important is algorithmic trading to stock exchanges? Do they have a moral obligation to maintain ethics both in the lit pool and dark pool? Afterall, they are the ones who will gain the most if volumes increase.
Traders, short-term and long-term, absolutely need to behave ethically. That means — don’t cheat the system. Investors are jaded enough already. If they believe that they are being cheated, they’ll put their money elsewhere and that will hurt the ability of companies to raise cash on the capital markets. That’s why by bending the rules these firms ultimately are killing the golden goose — and themselves. They get too greedy.

There are always crooks in the market. They have been present since human beings started to trade with each other. Do you think that the crime in financial market is increasing with the advent of technology?
No, I just think it’s a new twist on the same old story. But let’s not give in to pessimism and say it’s always been like this so what can we do. We need to stay vigilant.

Dark Pools talks about Ray Kurzweil’s concept of singularity. If it is to be believed that computers are completely going to take over the financial markets because human beings are not in a position to deal with Big Data, should we deliberately slow down singularity?
I don’t necessarily agree with Kurzweil’s concept of singularity, but that doesn’t really matter. There is no slowing down the development of technology. It’s just not possible. What we need to do is be aware that technology is dramatically changing the way markets operate and be aware that some people are using it to rip off those who aren’t as sophisticated. We can’t let them win.

While there are crooks in the market there are also people like Josh Levine who want to make the market a transparent place. Are you trying to say that people like Levine are very few in numbers and that is a reason why we should be worried?
Josh Levine is an extremely unique, rare specimen in financial markets. He wasn’t out to make himself rich, he was truly driven by an idealistic vision. What happened, sadly, was that his acolytes used the brilliant tools and machines he created to enrich themselves and they threw away the vision of open and free markets. That’s Wall Street for you.

Why is it that finance is becoming more and more immoral. Over the last few years there have been scams where people did not think much about manipulating prices, interest rates and for that matter the LIBOR? What does this tell you about the future and the morality of the financial markets?
I don’t agree that it’s becoming more immoral. Finance has always been full of charlatans and thieves — that’s where the money is! It also has its fair share of good, decent people (don’t laugh please—it’s true). I think the recent financial and economic collapse has simply exposed a lot of illegal activity that had been going on for decades. Bernard Madoff started his scam in the 1980s, or even earlier. It wasn’t new.

Dark Pools is a fascinating read. When it comes to financial markets reporting, the book is a landmark. Would you like to tell us about how you went on gathering sources, understanding technological concepts, the reading that you did and finally writing the entire book?
I interviewed dozens of people, some of whom work on Wall Street today and some who have left. I asked them myriad questions about how the markets work and how they could be better. I sat behind traders and watched them operate. I also was lucky and met the right people. Persistence is very important. If someone tells you they don’t want to talk, don’t take no for an answer. Keep asking. Go to their office and knock on the door. Chase them down the street! Eventually they will give in. You have to be a pest, that’s in the job description.

You never really met Josh Levine but exchanged mails with him. Still you have managed to get very good information. How important is it for a reporter of your status to actually meet people face to face? DO you think in an electronic age we as reporters don’t need to travel and meet up the source?
I asked Josh Levine to meet me over and over again, but he always refused. It’s crucial to meet people face to face if at all possible. You get to look them in the eye, watch their body language. You also can develop a closer connection to them that can help in the future. There’s always the temptation to get information by email or over the phone—I do it myself. But if at all possible, get out the door and have a cup of coffee with your sources. Or better yet, a cold bottle of Singha!

Buying a house in a city like Mumbai or Delhi is becoming a very costly affair. While one can argue that income levels have gone up accordingly, the fact still remains that rising interest rates have taken a toll on the buyers EMI and the developers cost of construction making real estate costly.

But the global financial crisis of 2008 affected the Indian housing story. Corporate earnings were affected and many saw their jobs being threatened. Again, on the domestic side inflation became a big problem to manage and interest rates started to go up. This affected the ability of the home buyer to pay higher EMI and on the other side the construction cost went up by almost 40%. Again we were back into the gloomy days of unaffordable housing prices and low salary growth. Real estate consultants are abuzz with data about unsold housing stock that has kept on increasing in Delhi and Mumbai and if interest rates don’t come down the investors in these housing units will be in trouble.

Interestingly, the average income of a house buyer has crossed Rs 10 lakh as compared to Rs 2 lakh a decade ago so with a five times increase in salary, housing prices have kept in tune with this ratio. Over the last decade real estate prices have also gone up by five times.

Even if these numbers are satisfactory, there are a lot of questions that remain unanswered when it comes to affordable housing.

Pranay Vakil, Chairman of Knight Frank, a real estate consulting company answers some of the issues that ail affordable housing. Do listen to him.

 

 
 
Pravin Palande
The financial markets generate a lot of number on a per second basis. There are people who have made it a profession to convert this information into trends, buy-sell signals, charts and pivot tables. Over the last 18 years of financial journalism, I have realised that every number has a story to tell. And these numbers as a trend normally never lie. Im forever looking for these trends.
 
 
 
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August 24, 2014 08:58 am by bharat gala
dont buy a 2 bhk for 2 crores .instead invest the money in bank fd u will fetch a intrest of 160000. and rent atwo bhk for 30000 in place like andheri west lokhandwala.u will save 130000 every month ie 15 lakhs a year net savings 1.5 crores in 8 years cumilatively.after 8 yrs the 2 bhk will not be w...
August 17, 2014 20:18 pm by Rajesh
I agree with Raja this is a paid article - Prices for 2 BHK was never 2.2 crore in Borivli it was 1.5 and now it has dropped. All this price rise happened only in last 10 years. Nexus between Bldrs, Politicians and BMC is cause for all these. Prices will come down with Modi intervention and kicking...
August 05, 2014 17:23 pm by Nelson
it is all manipulated, it is the nexus between the agent bulider and investors.
August 02, 2014 07:44 am by Anagha
was that Nirmals mulund west project?
June 28, 2014 13:53 pm by Satish nikam
I am sorry to saymost real estate news is not real but manipulated,and that includes the so called international property consultants.You now where their interest lies.But the fact is mumbai real estate is down and out.,however you may try to boost it artifically.People just cannot afford the outlan...