Another Foreign Asset Manager exiting Competitive Indian Mutual Fund Industry

4 Feb, 2012
Finance

The Indian Mutual Fund and Asset Management Companies are  facing tough times and foreign asset managers are exiting in droves. Fidelity has put up  its $2 billion of funds on the auction block  trying to find a buyer as it exists India. This is only after a couple of months when Blackstone another of the trillion dollar asset managers existed the Indian business. In 2008 during the boom times, every Tom Dick and Harry of the asset management business wanted to get a piece of the Indian pie. The local brokerages were commanding super high valuations while growth and profits seemed endless.

However the Fairy Tale has ended with most MF companies reporting losses and declining revenues from higher competition . With Technology changing the face of the financial industry, its only the very nimble who have been making money .Others are trying to diversify into related areas to retain profitability. Fidelity one of the largest asset managers has a good presence in India but wants to exit. It has a technology services back end operation as well which it has been trying to sell for a long time. However in case of the MF it should have better luck given the size of the corpus . It is trying to get a 10% of the AUM as the sell price for its Indian business.

Indian Stock Brokers going Bankrupt

The Indian Stock Brokers have seen a very tough past couple of years after the Lehman crisis.Most of the larger listed Indian  investment banking companies have seen their valuation and stock prices keep touching all time lows.The reason is that competition has been fierce as a number of domestic and foreign brokerages entered the financial industry in 2008 during the boom.While the stock market volumes have gone down substantially the number of players fighting for a shrinking pie have  gone up.

While the larger stock brokers have seen reduced profits,the smaller ones have had to shut down or sell.This trend has been exacerbated last year with the rise of computer controlled algorithmic trading.Most of these small brokers which used arbitraging strategy to generate profits have seen their main business evaporate.Retail investors in India have also avoided the stock market which has become a corruption landmine.With even top institutions like GMO,Goldman becoming victims of frauds,individual investors have no chance.Also market operators have made the Indian stock market a pump and dump heaven even as SEBI takes a long time to crack down on the abuses.

Other reasons for the failure are

a) Decrease in cash volumes which decreases the brokerage

b) Securities transaction tax

c) Importance of Technology which requires higher investment

The Top Asset Management companies in India are:

  1. UTI Asset Management Co. Ltd. – UTI Asset Management Co. Ltd. (UTIAMC) is a company incorporated under The Companies Act, 1956. It came into existence in 2002, as the Asset Management Company of the UTI Mutual Fund. The paid up capital of UTIAMC has been subscribed by four sponsors: State Bank of India, Life Insurance Corporation of India, Bank of Baroda and Punjab National Bank. UTIAMC, apart from managing the schemes of UTI Mutual Fund, also manages the schemes transferred/migrated from the erstwhile Unit Trust of India.
  2. Reliance Capital Asset Management Ltd. -  It is one of India’s leading and amongst most valuable financial services companies in the private sector. Reliance Capital Asset Management Limited, a wholly owned subsidiary of Reliance Capital Limited, acts as the AMC to the Reliance Mutual fund. Reliance Capital has interests in asset management and mutual funds; life and general insurance; commercial finance; stock broking; investment banking; wealth management services; distribution of financial products; exchanges; private equity; asset reconstruction; proprietary investments and other activities in financial services. Reliance Capital has a net worth of Rs. 7,810 crore and total assets of Rs. 31,994 crore  as on March 31, 2011.
  3. SBI Funds Management Pvt. Ltd. -  SBI Funds Management Pvt. Ltd. is one of the leading fund houses in the country. SBI Funds Management Pvt. Ltd. is a joint venture between ‘The State Bank of India’ and Société Générale Asset Management (France), one of the world’s leading fund management companies. SBI Funds management manages over Rs 38,782 crores of assets and has a diverse profile of investors making their investments. In 20 years of operation, the fund has launched 38 schemes with consistent returns.
  4. HDFC Asset Management Co. Ltd. – was incorporated in 1999, and was approved to act as an Asset Management Company for the HDFC Mutual Fund by SEBI. In terms of the Investment Management Agreement, the Trustee has appointed the HDFC Asset Management Company Limited to manage the Mutual Fund. The paid up capital of the AMC is Rs. 25.169 crore. The shareholding pattern is Housing Development Finance Corporation Limited 59.98%, Standard Life Investments Limited 39.99% & Other Shareholders 0.03%. The AMC also provides portfolio management / advisory services and activities are not in conflict with those of the Mutual Fund.
  5. ICICI Prudential Asset Management Co. Ltd. – is a privately owned investment manager. ICICI Prudential Asset Management Company Ltd. is a joint venture between ICICI Bank & Prudential Plc, one of the United Kingdom’s largest players in the financial services sectors. It manages separate client-focused equity, fixed income, and balanced mutual funds. As an Asset Management Company, the company has over 15 years of experience and are currently managing a comprehensive range of schemes of more than 46 Mutual funds and a wide range of PMS Products for its investors, spread across the country.
  6. Franklin Templeton Asset Management (India) Pvt. Ltd. - Franklin Templeton which is one of the biggest Global Asset Managers has a major presence in India as well.It is one of the oldest players in the India.
  7. Birla Sun Life Asset Management Co. Ltd. - is the investment manager of Birla Sun Life Mutual Fund. The Fund offers an array of savings and investment products for its individual, corporate and institutional investors and also manages two offshore funds. The fund house  had an average assets of over Rs.65,000 crore including offshore funds (as on 31 March 2010). It is  ranked amongst the top five asset management companies in the country.
  8. Sundaram BNP Paribas Asset management Co. Ltd. -  is a privately owned investment manager, being a joint venture between Sundaram Finance and French bank BNP Paribas. It invests in the public equity and fixed income markets of India. The firm employs fundamental and quantitative analysis stock picking & in-house and external research to make its investments. The average assets under management was Rs. 12,827 crores as on March 31,2008.
  9. TATA Asset Management Ltd. - The company’s principal activity is to act as investment manager to the Tata Mutual Fund. It has a client base of over 1 million people.  The company manages funds across the entire risk-return basis. These include equity funds, balanced funds and debt funds.
  10. DSP BlackRock Investment Managers Pvt. Ltd.- DSP BlackRock Mutual Fund was set up as a Trust and the sponsors are DSP ADIKO Holdings Pvt. Ltd. & DSP HMK Holdings Pvt. Ltd. (collectively) and BlackRock Inc. DSP BlackRock Investment Managers Pvt. Ltd. is the investment manager to DSP BlackRock Mutual Fund.It invests in variety of equity related, fixed income & hybrid schemes.

Fidelity

Fidelity Investments Worldwide is in talks to sell its mutual fund business in India, a person with direct knowledge of the development said on condition of anonymity. Fidelity is seeking a valuation of Rs. 1000 crore for its asset management arm.
Fidelity started operations in India in 2004 and managed assets worth close to Rs. 9000 crore as of December 2011 according to data from the Association of Mutual Funds of India (AMFI).

Blackstone

The Blackstone Group, one of the largest private equity groups globally, is exiting its biggest India-focused close-ended mutual fund scheme: India Fund Inc.The company will transfer the management of the fund to Aberdeen Asset Management Asia. The deal awaits stockholders’ approval on November 16. Another scheme, the Asia Tigers Fund of $60 million, is also being sold to Aberdeen. Besides the change in management, the deal size was not disclosed.

Indian Stock Brokers go Bankrupt with Rise of Algorithmic Trading

6 Jan, 2012
Finance

The Indian Stock Brokers have seen a very tough past couple of years after the Lehman crisis.Most of the larger listed Indian  investment banking companies have seen their valuation and stock prices keep touching all time lows.The reason is that competition has been fierce as a number of domestic and foreign brokerages entered the financial industry in 2008 during the boom.While the stock market volumes have gone down substantially the number of players fighting for a shrinking pie have  gone up.

While the larger stock brokers have seen reduced profits,the smaller ones have had to shut down or sell.This trend has been exacerbated last year with the rise of computer controlled algorithmic trading.Most of these small brokers which used arbitraging strategy to generate profits have seen their main business evaporate.Retail investors in India have also avoided the stock market which has become a corruption landmine.With even top institutions like GMO,Goldman becoming victims of frauds,individual investors have no chance.Also market operators have made the Indian stock market a pump and dump heaven even as SEBI takes a long time to crack down on the abuses.

Other reasons for the failure are

a) Decrease in cash volumes which decreases the brokerage

b) Securities transaction tax

c) Importance of Technology which requires higher investment

Read about the major Financial Companies in India and the Top Banks in India

Indian Stock Market Issues

1) Corruption- Scandals and Scams seem to be hitting India daily with stocks taking massive hits.The Third  Largest Indian Conglomerate Owner recently paid the highest fine in history to settle insider trading charges.Note that group has seen the biggest losses in the last 2 years with stocks losing 80-90% of their value.

2) Inflation - The Indian Central Bank has been guilty of being behind the curve in raising interest rates like some of the other counterparts in Asia.As a result,inflation has been flaring into double digits.Food inflation is touching nearly 18% in a country where 80% of the citizens make less than $2/day

3) Income Inequality – Keeps on increasing as the businessmen-politician-bureacrat nexus drains India dry.$2 Billion home coexists with most of the world’s hungry

4) Social Unrest (Naxalism) – India’s PM recently said that Naxalism was India’s biggest problem .This home grown terrorism is due to massive poverty and disillusionment in the tribal and rural areas of the country.

5) Oil Price – As Oil Prices touch $100/barrel,India’s problems seem to multiply.India imports 80-90% of its massive and increasing oil requirements. India gives subsidy on oil products leading to monetary and fiscal headache for the government.If it raise the domestic prices,it leads to political and inflation problems.If it does,it leads to massive losses for PSU Oil companies and increasing fiscal deficit.

Here are some links for  Indian Stock Market Investing Pitfalls

Securitization emerges as New Funding Model for Capital Intensive Solar Energy Projects

3 Jan, 2012
Solar Energy

Securitization has emerged as New Funding Model for Capital Intensive Solar Energy Projects.In India Welspun Energy which is a solar developer with a solar plant in Gujarat has managed to securitize the project.Securitization in finance refers to pooling of various cash flows generated from different assets such as mortgages,recievables etc.Note Securitization has become a dirty word in finance as subprime property mortgages  in the US were sold as AAA security products.However in case of Solar Energy they may prove to be a boon.Note financing of debt has become a big problem in building solar farms.Securitization can be an ideal way forward as it spreads the risks and allows the loans to be given to solar developers.

Securitization according to Wikipedia

Securitization is the financial practice of pooling various types of contractual debt such as residential mortgages, commercial mortgages, auto loans or credit card debt obligations and selling said consolidated debt as bonds, pass-through securities, or Collateralized mortgage obligation (CMOs), to various investors. The principal and interest on the debt, underlying the security, is paid back to the various investors regularly

 

Indian Banks Reluctant to Lend to Solar Projects

Indian Banks have raised concerns over lending money to Solar Projects in India.The main problem arises from the fact that State Electricity Boards (SEBs) are counter-parties to the P0wer Purchase Agreements (PPAs) signed by the developers.Most of the State Electricity Distributors are in poor financial shape and have been known to frequently default on their financial obligations.This means that the cash flows of the Solar Project will depend on entities with poor financial reputation.Note the debt financing of the projects is non-recourse which means that Banks have only the Financed Project as collatarel.With the Solar Energy still being almost 3-4 times more expensive than normal Electricity Prices,it means the banks will  suffer a big loss.With almost 70-75% of the estimated $2.2 Billion in the first phase of the PV projects to be financed by debt,this represents a big hurdle for the success of Solar Energy.The government needs to come out with some sort of arrangement of guarantees for the smooth functioning of the Solar Mission and instill confidence amongst investors and Banks.

Welspun Approached to Sell Security Backed by Solar Revenue

Welspun Energy Ltd., India’s biggest solar photovoltaic developer, was approached by a bank proposing to use revenue from its first plant to create a security of the kind often used to raise funds for projects such as toll roads. The company, which won bidding for 55 megawatts of solar photovoltaic capacity in two central government auctions, more than any other company, completed its first 15-megawatt plant in Gujarat in October with financing from ICICI Bank Ltd. (ICICIBC)

“When you compare a wind, solar or road asset, you know what the toll is if your car passes through, you know what the solar or wind price is for every unit that’s delivered,” he said in July. “It’s like an annuity. What’s your variable? It’s the amount of wind or sun or traffic flow on a highway.”

 

Other Innovative Funding Models

While Standard Debt and Equity have normally been used to fund solar projects,Sunpower has also sold bonds backed by a large solar plant.These bonds were backed by the collateral of the solar plant.Note most solar farms are built using project finance in which the debt is not backed by the solar developer but the solar project is given as collateral for getting the debt financing.

SunPower closes €195.2m bond for Italian solar power plant

SunPower Corp has closed its €195.2 million solar bond issuance associated with the company’s 44 MW Montalto di Castro solar park in Italy.The proceeds will be used to pay for the development and construction of the solar park, which is now complete and connected to the local electrical grid.

Read more about Solar Power in India

Which is Best Place to Invest Money in India in 2012 – Bonds,Stocks,Gold or Real Estate?

7 Dec, 2011
Finance

Investing Money in India right now is a very confusing matter given the large number of choices and the lack of attractiveness of different assets due to different reasons.There are hundreds of voices seemingly intelligent but who are selling their own books.If you turn on the finance new channels they will keep saying buy stocks for the long term as if a normal investor can make money by buying stocks for the short term.Gold proponents will say that it has been a great investment over the last several years and with the US,European systemic shocks it will remain so.However the rapid uptrend in gold prices has made it a somewhat risky investment.Investing in Gold is also not easy given the wide array of choices like Gold ETFs,physical or futures.So lets see each asset class with its pros and cons

Stocks

Cons

Has not gone anywhere in the last 2-3 years and the macro headwinds of inflation,bad government ,sky high interest rates has not made the conditions great either.Lack of good quality management in India and corruption has made investing in mid cap and small caps extremely risky.

Pros

India’s GDP growth rate continues to be one of the best in the world and the company earnings should grow alongwith that .P/E multiples have moderated somewhat

Real Estate

Cons

India’s Real Estate is a bubble in my view given the total disconnect between rental yields and prices.Also black money and regulations keep prices artificially high.Even if the prices don’t come down ,it looks unlikely that real estate can outperform.

Pros

Demand which is huge but lack of buying power is the biggest problem here.Corruption is rampant which makes it a dampener with lack of liquidity.

Gold

Pros

Its a good investment in times when confidence in fiat currency and governments is so low.Monetary easing has kept its attractiveness high ,also negative and low interest rates from governments in the west keeps a floor

Cons

The sharp run up in prices in the last decade and volatility are the negative factors here.However Gold seems a good investment compared to stocks and real estate currently

Bonds

Pros

High interest rates make it attractive along with the fact that we are near the peak of the interest cycles.Fixed deposits are also giving very high returns.

Cons

Can’t think of many ,the only thing to be careful is of investing in low quality bonds given the fact that some companies renege on paying out and laws in India are not that great either.

 

Gold Bees ETF India Review

4 Nov, 2011
Finance

Goldman Sachs GoldBees – A bit of history

The Bees lineup of ETFs was started by Benchmark Asset Management Company which was a unique Indian AMC in the sense that it focused on ETFs at a time when the major Indian AMCs did not care a hoot.However ETFs in India are starting to catch on rapidly as Indian mutual funds under perform despite their very high expense ratios.Recognizing this trend of growing AUM of ETFs,Goldman Sachs acquired the still small Benchmark.With effect from 14th July 2011, both Benchmark Asset Management Company Private Limited and Benchmark Trustee Company Private Limited became a part of the Goldman Sachs group. Goldman Sachs is a leading global investment banking, securities and investment management firm that provides a wide range of services worldwide to a substantial and diversified client base that includes corporations, financial institutions, governments and high-net-worth individuals. It was founded in 1869 & is one of the oldest and largest investment banking firms.

Goldman Sachs Gold ETF Fund& Investment Objective,Dividend Policy:

Goldman Sachs Gold ETF is an open ended gold scheme. It was previously known as Gold Benchmark Exchange Traded Scheme.The Benchmark or the newly named Goldman Sachs Gold BeES is the most widely traded gold ETF in the Indian market.The minium lot size is 1 gram of gold which is the unit size while the Creation Unit is 1000 units or 1 kg of gold. Performance wise, it is giving better returns than the others.

The fund offers only Growth Option. However, the Trustee may still declare Dividend from time to time in accordance with the Dividend Policy.The investment objective of Goldman Sachs Gold Exchange Traded Scheme (GS Gold BeES) is to provide returns that, before expenses, closely correspond to the returns provided by domestic price of gold through physical gold

GoldBees Things to Remember

  • Type of Fund – Non-Equity Exchange Traded Fund Linked to Gold
  • Investment – Physical Gold
  • AMC – Goldman Sachs Asset Management (India) Private Limited
  • Fund Manager – Vishal Jain
  • Benchmark – Domestic Price of Gold
  • Exchange Listed – National Stock Exchange
  • Inception Date – March 8, 2007
  • NSE Symbol – GOLDBEES.NS
  • BSE Code – 590095
  • Pricing (Per Unit) – 1 gram of gold
  • Creation Unit – 1,000
  • Expense Ratio – 1%
  • Entry / Exit Load – Nil
  • AUM – Rs.2,254.97 (in crores)
  • No. Of Investors – 153,165

GoldBees Asset Allocation

Physical gold – 90% to 100%
Money Market Instruments, securitised debts, bonds, including cash at call – 0% to 10%.

GoldBees Units & Exchange

The Units of the Schemes are listed on the Capital Market Segment of the National Stock Exchange of India Ltd. On NSE, the Units of Schemes can be Purchased / sold in a minimum lot of 1 Unit and in multiples thereof. The Fund creates / Redeems Units of the Schemes in Creation (1000) Unit size (minimum) by exchange of underlying Securities and Cash Component.

GoldBees Performance

Compounded Annualized Returns as on July 29, 2011:
GS Gold BeES – 21.78%, Domestic Price of Gold 22.88% (Since Inception)
GS Gold BeES – 21.66%, Domestic Price of Gold 22.76% (Last Three Years)
GS Gold BeES – 29.49%, Domestic Price of Gold 30.81% (Last One Year)
GS Gold BeES – 15.44%, Domestic Price of Gold 16.01% (Last Six Months)
GS Gold BeES – 4.53%, Domestic Price of Gold 4.80% (Last Three Months)
GS Gold BeES – 5.49%, Domestic Price of Gold 5.57% (Last One Month)

Returns since inception are calculated from the date of allotment i.e. July 8, 2003. Dividends are assumed to be reinvested at the prevailing NAV. After payment of Dividend, NAV will fall to the extent of the payout and statutory levy (if applicable).

The performance of Gold Bees is probably the best amongst the Indian Gold ETF Funds and its expense ratio is the lowest as well.Though a number of Indian Mutual Fund Companies have launched their own Gold ETF offerings ,they have nothing new on offer and most of them are worst in terms of expense ratio and performance.

How to Trade GS Gold BeES

On the NSE :
The minimum Lot Size is 1 Unit. The applicable price is the price available on NSE
Any Investor is eligible for trading. One should know the NSE ticker of the ETF then he needs to contact the broker, place an order & receive the units on T+2 days. It functions just like any other share.

Directly with the Fund :
Only Authorised Participants are eligible to trade here & the minimum Lot Size is 1000 units. The Price is 1 kilogram of physical gold of 99.5% purity and cash.

GoldBees ETF India Review

Benchmark Gold ETF Gold BeEs is the best ETF option amongst the ETFs available in India due to its very low expense ratio of 1% compared to the 2.5% charged by most of the other ETFs.Note Benchmark is the best asset management company in terms of the variety and expense of ETFs.I would recommend Gold BeEs is the preferred investment vehicle of choice for buying Gold in India.Last of all Gold BeEs has the most volume which means it has the least impact cost while buying and selling the Gold ETF.

Read about the Best Gold ETF Fund in India

Axis Gold ETF India Performance, Assets under Management, How to Trade, Risks Associated

1 Nov, 2011
Finance

Axis Gold ETF India Fund  Investment Objective

The Axis Gold ETF started in 2010 under the NSE Symbol AXISGOLD.The Scheme endeavors to generate returns that are in line with the performance of gold, subject to Tracking Errors. The corpus of the Scheme isinvested in Gold Bullion of fineness – 995 parts per 1,000 (99.5%) or higher. Further, the Scheme may also invest in gold related instruments (including derivatives related to gold) as per SEBI guidelines.

  • Face Value – Rs. 100
  • AMC – Axis Asset Management Company Ltd.
  • Trustee Company – Mutual Fund Trustee Limited
  • Custodian – Deutsche Bank AG
  • Exchanges for Trading – NSE and BSE
  • Fund Manager – Mr. Anurag Mittal
  • Scheme Type – Open ended Exchange Traded Fund
  • Benchmark – price of Gold
  • Dividends option – Yes
  • Assets Under Management- Rs.183 Crores as at March 2011
  • Tracking Error – 0.14%
  • Entry Load & Exit Load – Nil
  • Total Expense Ratio – 2.5%
  • Minimum Investment – 1 Unit (1gram of gold)
  • NAV – Every business day
  • Creation Unit – 1,000 units of the ETF.

Asset Allocation & Performance

Gold Bullion – 90% (minimum); 100% (maximum)
Bonds and Money Market instruments – 0% (minimum); 10% (maximum).

Performance in last 6 months -9.08 %
Performance since inception – 15.38%
Performance is based on NAVs as of May 20th 2011.

How to Trade

Online:

The units of the Scheme will be available in dematerialized form. Investors need to have a beneficiary account with the Depository Participant registered with NSDL / CDSL as may be indicated by the Fund at the time of launch. The units of the Scheme will be issued, traded and settled compulsorily in dematerialized form.

Through Stock Exchange:

Buying / Selling units on the stock exchange is just like trading any other normal listed securities. If an investor has bought units, an investor has to pay the purchase amount to the broker & when the investor sells units, he needs to deliver the units to the broker.

Certain Risks and Disadvantages of  Axis Gold ETF

  • The Biggest Disadvantage of Axis Gold ETF is its expense ratio of 2.5% which is the highest in India and makes no sense for a passive fund.Axis Gold ETF is only meant for investors who are not too knowledgeable or don’t have the time to do research on Gold ETFs.Not that Axis is the only one charging usurious expense ratios.Other fund houses like SBI are doing the same.I would recommend putting money in Goldman Sachs Bees and Kotak Gold ETF.
  • Market Risk – Since the NAV of AXISGOLD is closely related to the value of gold held by the scheme, it may fluctuate for several reasons like demand and supply of gold in India and in the global market, Indian and foreign exchange rates, interest rates, inflation trends, trading in gold as commodity, legal restrictions on the trade of gold that may be imposed by RBI or the Government of India.
  • Counter party Risk – India does not have an Exchange for trading physical gold. Therefore, the gold ETF may have to buy or sell gold from the open market, which may lead to counter party risks for trading and settlement.
  • Liquidity Risk – The gold ETF has to sell gold only to bullion bankers/traders who are authorized to buy gold. Though there are adequate number of players to whom the gold ETF can sell gold, it may have to resort to distress sale of gold if there is no or low demand for gold to meet its cash needs of redemption or expenses.
  • Risks associated with Physical gold – There is a risk that part or all of the scheme’s gold could be lost, damaged or stolen. This may have adverse impact on the operations of the scheme.

You can check out other options for investing in Gold ETF Funds in India

Best Gold ETF Fund in India

Goldman Sachs Gold Bees

SBI Gold ETF Fund

Kotak Gold ETF Fund

Reliance Gold ETF

How to Invest in Gold in India

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