GalaTime

• Mint: Banks woo wealthy customers with PE, gold fund offerings

ICICI Bank is one of many Indian banks devising alternative investment options such as private equity (PE), structured products with a capital guarantee, and gold for high networth individuals (HNIs) at a time when returns from investments in equities and real estate have turned volatile.

Also read: India to become trillion-dollar wealth management mkt by 2012

“The bullish sentiments on the real estate market have died down. Gold is coming up as a good investment option. We are seeing growing interest from individuals to invest in 1kg gold biscuits. Traditionally, gold has always given a return in excess of 8% annually,”

Hmm. Do review the structured products in detail, before committing funds.

• Business Standard: Hedging: 120 firms caught napping

Data culled from the unaudited first quarter results reveal that these 120 companies set aside Rs 8,900 crore for currency fluctuations, exotic derivative products and mark-to-market (MTM) losses to hedge their exports.

The companies took foreign currency loans through external commercial borrowing (ECBs). This increased the cost of funds as the new accounting norms forced borrowers to make provisions for MTM losses following the rupee depreciation. Besides, the meltdown in the global equity markets hurt FCCBs issuers the most. The investors have postponed their conversion plans as shares of most high premium FCCBs are trading at a huge discount.

The MTM losses of the 120 companies show that realised losses on account of derivative products and revenue hedging are modest at Rs 1,700 crore, while the unrealised or MTM losses due to currency fluctuations are higher at Rs 7,200 crore.

Damned if you hedge, damned if you don’t.

• CXO Advisory: Combining Momentum and Roll Return Signals for Commodity Futures

They test combinations that iteratively buy backwardated (positive roll return) winners and short contangoed (negative roll return) losers.

Trend following rules with formation periods of one, three and 12 months and a holding period of one month (Mom1-1, Mom3-1 and Mom12-1) are the best momentum strategies.

The best roll return strategy (TS1) buys the 20% of commodities with the most positive roll returns and shorts the 20% with the most negative roll returns each month.

Time to test this on Indian commodity markets.

• NY Times: Booming China Suddenly Worries That a Slowdown Is Taking Hold

• Economic Times: Now, broking cos will run PMS for free

In a last ditch attempt to retain money in structured portfolio schemes, brokerages have begun to float portfolio schemes that entail no asset management charges.

“Investors were not keen on sharing profits when the market was soaring; profit sharing then created a negative impression in the minds of investors. But with the market now on a downtrend, investors are coming into terms with the new fee concept,”

About time!

• Business Standard: Cement industry sees prolonged pain ahead

The Rs 85,000 crore domestic cement industry is fast realising the painful situation it is getting into, as the GDP growth rate is on a slippery path and over 70 million tonnes of fresh capacities are in the pipeline in the next two years.

The capacity utilisation is expected to come down by as much as 85 per cent in the current financial year from 95 per cent in the previous financial year due to capacity addition and expected slowdown in the construction and housing sectors.

The 203.51 million tonne industry is expected to add 45 million tonnes in FY09 . . . dispatches in 2007-08 were 167.67 million tonnes.

As expected, see earlier post: Cement production, consumption & price trends

• Hindu Business Line: Mall development slows in second quarter

The second quarter saw new mall supply of about two million sq ft, less than the anticipated six million sq ft. The shortfall was mainly due to delays in completion of interior finishing and fit-outs, and the ongoing liquidity squeeze.

“Despite lack of quality space in the market, the top eight cities in India are currently witnessing around 18 per cent vacancy across the 40 million sq ft of operational malls. This can be attributed to the fact that most of the supply has come within the same micro-markets targeting the same catchments, thereby creating an oversupply within respective neighbourhoods,”

• DNA: PMS investors are in for a rude shock

. . . every time a PMS fund manager buys or sells the shares, there is an incidence of capital gains tax on the investor, irrespective of whether the investor chooses to redeem his investment with the PMS or not.

PMS is a pass-through where the ultimate tax incidence is upon the investor. This is because, unlike a mutual fund, which has a separate identity conferred by the IT Act (Sec. 10 (23)(D), a PMS is just a service provided by the fund manager who acts like the agent of the customer or investor and for which he is paid a fee.

Since early January, the stock markets have fallen. Hence investors who had invested in PMS and have stayed invested without booking capital losses, have seen the value of their portfolios fall by around 30%.” In a double whammy of sorts, they also need to pay short-term capital gains tax.

• Business Standard: Credit card dues surge 87 per cent

. . . credit card outstanding rose 87 per cent to Rs 26,596 crore, with Rs 12,375 crore added between May 25, 2007 and May 23 this year. The rise was 45 per cent till May 2007. Banks are already complaining of rising defaults on unsecured advances such as credit cards and personal loans.

The flow of housing loans too has slowed down to 13.8 per cent till May-end this year, compared to 21.6 per cent last year. As of May 23, 2008, total outstanding home loans were estimated at Rs 2,62,486 crore, Rs 31,70 crore higher than the level at the end of May last year.

I imagine this will get worse in the near future.

• BCA Research: Natural Gas: Stay Bullish

• DNA: Sebi slaps curbs on PMS practitioners

Sebi asked PMS houses not to pool assets of investors the way mutual funds do and also increased the minimum networth requirement for floating a PMS house.

The networth required to float a PMS scheme has been increased to Rs 2 crore from Rs 50 lakh earlier, purportedly to weed out the smaller players.

The number of PMS players has shot up to 205 as on March 31, 2008, from just 18 in 1999. These include several small and mid-size brokerage firms. This is unlike in the markets abroad, where PMS is run primarily by asset management companies.

• Bloomberg: Libor Set for Overhaul as Credibility Is Doubted

The benchmark interest rate for at least $347 trillion of derivatives and 6 million U.S. mortgages is set for its biggest shakeup in a decade on concern that banks misquoted their true borrowing costs.

. . . complaints by investors that financial institutions weren’t telling the truth about their funding costs after rising mortgage defaults contaminated credit markets and drove up borrowing costs.

Libor rates jumped after the association said April 16 that any member banks found to be misquoting rates will be banned.

. . . some lenders were manipulating the rates to prevent their borrowing costs from escalating.

Oops!

• Business Standard: IT tuned to manage wealth

In 2006, India’s HNI population, or people whose wealth is more than a million dollars, crossed 100,000, which made it the second-fastest growing HNI segment in the world, after Singapore, where the growth was 21%.

The burden of handling administrative tasks can take up to two-thirds of a wealth manager’s time . . . For TCS, wealth management is one of the focus areas among the top four high growth areas in the financial sector for the next three-four years. “While the market is still nascent, we are expecting that this segment will make us grow at 30-40 per cent but that is because the base is small.”

• Bloomberg: Dollar Rises Against Commodity Currencies as Oil, Gold Slump

The dollar traded at the highest level in at least three weeks against currencies of commodity- producing nations from Australia to Norway after prices of raw materials tumbled on speculation the global economy is slowing.

Commodities’ tumble and the dollar’s rebound gained momentum after the Federal Reserve on March 18 cut interest rates by 0.75% to 2.25%. The move was less than the full-point cut some traders expected, sapping demand for oil and gold as a hedge against quicker inflation.

Gold posted its biggest weekly drop since 1990, falling from a record $1,032.70 an ounce on March 17. Oil has dropped 8.9% from a record this week, and copper had its biggest weekly slide in 10 months.

• Economic Times: MFs push fixed plans despite lower margins

March is the season for FMPs as investors seek ‘double indexation benefit’, which will lower their capital gains tax liability . . . thanks to the income-tax rules, it is possible for an FMP investor to earn indexation benefit for two years (as investments are spread over two financial years) on capital gains. This is despite investment tenure being only 13 or 14 months.

. . . around Rs 80,000 crore of assets are in the form of FMPs. And anywhere from 5-15 basis points (0.05-0.15%) is what the asset management company is making from it annually. In contrast, asset management fees are as high as 1.25% for equity assets. Yet, the fund house seems to be launching FMPs back-to-back, as it boosts their overall assets under management.

• Jim Cramer & NYMag: There Will Be Corn

Suddenly, it’s the farmers who are flush, at a time when Wall Street has turned mendicant. Suddenly, those who grow corn and wheat and soy have the upper hand, and it’s all because of a simple irony: This time, the government has decided to crucify mankind upon a cross of ethanol.

Agribusiness has been so starved for capital, so in the doldrums for decades, that most of the companies that service it have gone under or merged to the point that you’ve got players with little or no competition spewing gigantic, oligopolistic profits.

Where the biggest money’s being made is perhaps the most dicey business in the world: fertilizers. I say dicey because for so many years the industry’s been plagued by overcapacity. That, however, is history.

• US News: A Portfolio Warren Buffett Would Love

In business school, you’re taught that diversification is very important. But really, when you think about it, diversification has to do more with ignorance. If you are highly confident in your top five positions, why should you put more in your 10th position if you could put more in your best idea? Secondly, business schools teach that risk is volatility. We think volatility is opportunity.

Why haven’t you jumped into the foundering banking sector?
Our attention naturally goes to stressed areas, and we try and understand it. Now, today you have the banks and the insurers—very stressed. The problem, though, is we can’t figure it out. We don’t know the true assets and liabilities of these companies. I think some of the companies don’t even know.

• Business Standard: Short-term portfolios hit most by the fall

Portfolio management services (PMS) of leading brokerages have seen a major depletion in their assets. But this time around, short-term schemes – those which have an investment horizon of 6 to 8 months – were the most hit in the current fall.

There are no official data on assets handled by PMS schemes, but industry official reckon that the figure could be as high as Rs 10,000-15,000 crore.

While most of the PMS schemes were focused on small- and mid-cap stocks, the wipe-off in asset value is more for these schemes as small- and mid-cap stocks fell the most during this calendar year.

• Seeking Alpha: Hedge Hunters (Book Excerpt)
  

The market changes Ritter foresaw are the result of two trends: in-creased interest in fuel made from corn and other agricultural commodities, and huge inflows into commodities funds from institutional investors. Both have changed the very nature of how commodities trade.

As prices have steadily risen, more pension funds and other large investors have jumped in, buying into funds run by Goldman Sachs and other large financial services firms. The investors betting on commodities these days are doing so for the long haul because they foresee huge demand coming from China and emerging markets. These huge inflows make the market much less predictable in the short term, although in the longer term, the forces of supply and demand still apply.

• Bloomberg: AIG to Start Wealth Management, Mortgage Guarantees in India

The New York-based insurer plans to enter mortgage guarantee, wealth management and distressed asset recovery businesses and infrastructure investment.

India, Asia’s third-largest economy, expects to invest about $500 billion building roads, ports and power plants in the next five years to spur economic growth.

• Business Standard: IPO roulette

Of the 85 issues listed till date in 2007, 64 ended in positive territory on day one while 54 have managed that even on current market price.

“IPOs are not underpriced, the key factor driving the significant returns post-listing is the overwhelming demand for good quality paper. There is an excess of financial resources chasing fewer value-added opportunities.”

“A failed issue is not only expensive but is also a reflection of the reputation of the company, especially with the participation of large number of institutions.”

Excess subscriptions, then, are the norm and this is largely due to the presence of qualified institutional buyers, which have at least 50 per cent of the issue reserved for them. With oversubscription comes the bane of grey markets, where issues start trading before the IPO allotment takes place.

Fairly detailed article - lists all major IPOs, lots of statistics, etc.

• Bloomberg: Smart Money in India Rides on Small Companies

For those who want to benefit from a decade or two of India’s rapid economic transformation, it might be far more rewarding to invest in 10 unknown companies and see one of them make it to the benchmark in 10 years.

. . . combing the universe of 22,000 for-profit organizations — companies, partnerships and family- owned businesses — out of which at least 5,500 are “diamonds in the rough” . . .

• Economic Times: RBI calls for curbs on PN, PE inflows

RBI has called for a ban on incremental or fresh issuance of participatory notes (PNs) to overseas investors by foreign institutional investors (FIIs), tightening of due diligence norms for issuance of PNs, and some controls on other forms of capital such as private equity . . .

The share of PNs in overall portfolio inflows as a percentage of total foreign portfolio flows rose from 32% late last year to 42% at the end of March ‘07, according to data maintained by the regulators. One estimate is that incremental PNs in July and August could aggregate to 70% of total inflows.

Killing the golden goose?

• Hindu Business Line: Registration must for investment advisers: SEBI draft

SEBI has suggested that registration be mandatory for all investment advisers, in its draft norms. It has framed draft SEBI (Investment Advisers) Regulations, 2007, which is placed in public domain for comments and suggestions.

The SEBI draft is here. Besides what Deepak said, all I would add is that in my posts on portfolio management services, I’ve constantly lamented the lack of performance disclosure on their part. If investors get access to this one thing, the SEBI proposal will have paid off.

Continuing the series of PMS posts, here is a look at the PMS by K R Choksey. For resident Indians, they offer 2 types of PMS; all details were extracted from this presentation.

• Minimum investment: Rs 10 lakhs

• Investment Strategy:
  • Diversified Large Cap
    • Invest in Stocks with Market Cap greater than Rs 3000 Crores
    • Maintain Exposure at 10% in a specific Stock & 20% in a specific sector
    • Book profits at regular intervals
    • Look for stocks with high liquidity, free float
  • Emerging Cap
    • Invest in Stocks with Market Cap between Rs 200-3000 Crores
    • Maintain Exposure at 10% in a specific Stock and 20% in aspecific sector
    • Buy and Hold, Low Churning
    • Diversification across various investment themes, sectors

• Fees
  • Fixed: 2% p.a. for 10 lakhs, drops to 1% p.a. for 1 crore
  • Performance-based: Ranging from 10% to 30% of profits, depending on returns, amount invested, etc. No performance fees charged if annual returns of PMS are < 25%.

• Performance: The returns do not look all that great when compared with indices; however, they point out that their risk profile is much better for the same level of returns.

I must say that this one provides more details than most of the PMS-es I have profiled in the past. Their domestic PMS has AUM of > Rs 250 crores.

They also offer a PMS service for non-resident Indians (NRIs) which includes the two types above and a third option - the ‘FlexiCap’ plan, which is essentially a stock-picking strategy with no contraints on market cap. The minimum investment amount is $25,000 while the fee structure is quite similar to that of the domestic PMS. Details here.

It has been a while since I last profiled a Portfolio Management Service; let us take a look at the equity PMS-es offered by Kotak Securities Limited. Unfortunately, they have chosen NOT to publicly disclose details such as the minimum amount to be invested, management fees or the profit sharing structure. I imagine that, like most things in life, these are negotiable.

• Origin
  • Market cap < Rs 2500 crores, Stocks of “growth oriented companies with sustainable business models backed by strong management capabilities”.

• Select Portfolio
  • Multi cap portfolio, stocks in sectors that are expected to be beneficiaries of demographic patterns & reforms; and infrastructure spending.

• SelectOptima
  • Market cap > Rs 4000 crores, Stock selection using criteria such as GARP, high ROI, etc.

• Klassic Portfolio - Flexi
  • Multi cap portfolio, based on the observation that “present market conditions hints at growth as a central premise to support valuations” - whatever that means.

• InvestGuard Plan
  • ‘CPPI Model’ - Invests across shares and fixed income products, moving from shares into fixed interest investments when the fund’s value drops below a predetermined “floor”. When markets start to move up, the product increases its holdings in shares, tapping into these growth opportunities.

• CORe Portfolio
  • Multi cap portfolio, stocks of companies in the business areas driven by consumerism, outsourcing, real estate plays as well as core infrastructure plays.

By the way, the website does not share any performance metrics either, except for this “risk-return profile” chart. This has been true of most of the PMS-es I looked at. Why not? Is it classified, top secret?

PS: They also offer a Mutual Fund PMS (KotakFreedom) with minimum investment of 5 lakhs, that gets you a relationship manager and their mutual fund research. Again, no data on fees, past performance, etc.