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Very interesting article in DNA today: Gold ETFs lack lustre for MF distributors

. . . in addition to the slump in gold prices, lack of interest from MF distributors is the key reason for the pause in gold ETF offerings (NFOs).

Mutual fund distributors claim that they have nothing to gain from selling gold ETFs. “The entry load has been high for both the NFOs till now. People say, why should I pay an entry load during the NFO when I don’t have to pay any after the gold ETF is listed on the exchange?”

Another distributor laments that if one invests during the NFO, the distributor has to fill in all the know-your-customer documents and hardly gets any commission for the trouble taken.

The money in gold ETFs is made by brokers, when investors purchase and sell units, and not by distributors.

Poor distributors - they aren’t getting a cut of your money, don’t you feel bad for them?

On another note, look at today’s intraday chart for the UTI Gold Fund (GOLDSHARE):

Both charts (one from Yahoo Finance, another from NSE) show a fast drop to 873, followed by a jump to 898 and then back to ~880 as the market opened. In fact, the official low for the day (per the NSE) is 860, although that doesn’t show up in the NSE chart.

What was that all about? A bunch of stop loss and limit sell orders being cleaned up? The rest of the day has seen very tight (and low volume) price action between 880 and 885.

Traders beware!

Both Mint & Business Standard ran articles on the issues with valuation of real estate stocks & funds:

Mint: Valuing realty stocks is not easy

But earnings may not be the right way to value a company’s stock. As the DLF management has pointed out, the reason they chose to sell a portion of their commercial assets to a group company, in spite of normally leasing such assets, was to show the earnings potential in the asset. Earnings in a year depend, therefore, on whether an asset is sold or leased out. That’s the reason analysts prefer net asset value (NAV) as the key driver of real estate stocks.

Market experts say the DLF issue has improved the sentiment for real-estate stocks. But in an interesting twist, bankers to the DLF issue now point to Unitech’s share price and the fact that it is trading at a premium to its NAV to justify DLF’s IPO pricing. With each company propping up each other’s valuations, it’s evident that the markets still have a long way to go in learning how to value real-estate stocks.

Unitech to DLF: “You scratch my back, Ill scratch yours”

Business Standard: Valuation blues for realty funds

Lack of uniform valuation and disclosure standards could dampen the enthusiasm of investors in real estate mutual funds (REMFs).

. . . accuracy of land valuation is the most critical element in the market performance of realty firms and REITs.

Something to keep in mind as we figure out whether to join the DLF IPO bandwagon at Rs 550 per share!

• Capital Markets Lab: Dedicated to Scientific Observations in Financial Markets

A nice collection of articles, like this one - Bleed or Blowup? Why Do We Prefer Asymmetric Payoffs?: We link the acceptance of the occasional large loss for a steady small profit (as opposed to the opposite payoff) to elements of prospect theory and the research on well-being and the hedonic treadmill effects.

• Are Cover Stories Effective Contrarian Indicators?

Statistical testing implied that positive stories generally indicate the end of superior performance and negative news generally indicates the end of poor performance.

• DailySpeculations: Last Suppers for a Lifetime

8. When the markets are not open or the market isn’t acting right for you then study past trades and memorise the actions you took and piece together the trade again looking for the lesson.

14. Be aware of views you are taking on a trade. Look at it always as if it’s the first time you have seen it and review an open trade every day as if you have just placed it.

A couple of days ago, I write a post on the upcoming replacement of Hero Honda (HH) by Mahindra & Mahindra (M&M) in the BSE Sensex-30 market index. A natural follow up question is: how will this impact index mutual funds and ETFs?

Although this news has been announced (the BSE announces any changes to the Sensex six weeks prior to the effective date), the actual replacement will occur only on July 9. Does this mean that all funds that track the Sensex will together dump HH and buy M&M on July 6th/9th? And we can all make gobs of money by selling naked puts on M&M and naked calls on HH?

The short answer: No!

Let me explain using the example of ICICI Prudential SPIcE fund, a passively managed ETF (Exchange Traded Fund) that seeks to replicate the BSE Sensex-30 index. The fund’s offer document tells us why the addition/removal of stocks from the Sensex may not be an obvious trading opportunity:

Page 31: The SENSEX ETF/“SPIcE” may hold upto 10% of their total assets in stocks not included in the corresponding Underlying Index. For example, the AMC may invest in stocks not included in the relevant Underlying Index in order to reflect various corporate actions (such as mergers) and other changes in the relevant Underlying Index (such as reconstitutions, additions, deletions and these holdings will be in anticipation and in the direction of impending changes in the underlying index).

This means that the fund can start selling HH and buying M&M as early as the announcement date (May 29) and/or continue doing so after the effective date (July 9).

Page 10: “Tracking Error” is defined as the standard deviation of the difference between daily returns of the index and the NAV of the Scheme. Tracking Error may arise due to the following reasons:

• Corporate actions such as rights, merger, change in constituents etc.

Under normal circumstances, such tracking errors are not expected to exceed 2% per annum.

Again, the ETF has enough leeway that it can spread its sales/purchases of HH/M&M over a multi-week period, and safely avoid unfavorable entry points.

Page 42: The Scheme may also use various hedging and derivative products from time to time, as are available and permitted by SEBI, in an attempt to protect and enhance the interests of the Unitholders at all times.

Yet another way for the ETF to hedge any large down/up moves in HH/M&M respectively.

Bottom-line: There may not be an easy money-making strategy here. But do keep an eye on both stocks nevertheless.

• Financial Express: Stock appreciation rights soften ESOP blow

Companies are exploring stock appreciation rights (SAR) to get over the blow dealt by finance minister P Chidambaram on employee stock option (ESOP) plans in this year’s Budget.

In SAR, a company gives its employees a formal option to profit from any appreciation in the value of its shares. It is, therefore, a stock option. But, it is different from Esops that do not require employees to pay for the SAR when it is offered. Instead, they pay when they exercise their right to buy it.

• Mint: Venture capitalists ready wallets to revive funding for start-ups

Venture capital firms, led by Silicon Valley’s best of breed, have raised close to $2 billion (Rs8,000 crore) for investment in India since January 2006.

Key target areas include product development, the Internet and mobile, and next- generation outsourcing services. Some of it will fund consumer services businesses in the retail, hospitality, health-care, entertainment and media sectors.

Most are looking to invest between $200,000 and $5 million per company. The typical investment model would be to enter a company with seed funding, which could be as small as $75,000, and scale up as the company grows. The investment horizon in each company would be three-five years.

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I continue to troll the housing section of Bangalore Craigslist for more real estate ‘buy vs. rent’ data points, such as this one:

Rent: Rs 14000 per month (including maintenance)

Buy: Rs 53 lakhs + registration (say ~10%)

Assume we fully finance this with a loan of Rs 58 lakhs, with a fixed interest rate of 13% over a tenure of 20 years. Per HDFC’s EMI calculator, the monthly installment works out to Rs 68,000.

The EMI/Rent ratio is 4.9; conversely the Price/Rent ratio (think of it as analogous to the P/E ratio for stocks) is Purchase Price / Annual rent = Rs 58 lakhs / Rs 1.68 lakhs ~ 35.

Yet another metric would be the rental yield: If you buy it today for Rs 58 lakhs and immediately rent it out at Rs 14,000 per month, your annual rental yield will be less than 3%! As a buyer, you better pray for some serious price appreciation.

Any takers?