GalaTime

• Hindu: Some exchange traded funds out of sync with Nifty!

UTI Mutual Fund’s exchange-traded fund - UTI Sunder and Quantum Fund’s exchange-traded fund - QNifty both of which are supposed to track S&P CNX Nifty and trade at close to one-tenth the value of Nifty have been moving out of sync with the index in recent trading sessions. UTI Sunder closed at Rs 440 and QNifty closed at Rs 351.05 on Thursday, both at significant premiums to Nifty which closed at 3358.50 (The most commonly traded ETF – Nifty BeES closed at Rs 337).

What’s going on? This is too big to call ‘tracking error’. Illiquidity + no arbitrage opportunity => Nonsensical prices!

• Zero Hedge: The Quants’ Role In Perpetuating Market Distortions

… vast systematic volumes of quant strategies in various time frames have become a destabilizing factor due to a convergence of strategies. In the end, the only way to win is to buy stocks that go up and sell stocks that go down and all strategies, no matter how many PhDs portfolio managers are involved, and so quants had to be in the same stocks, at the same time, swinging the market widely under their own weight. The bigger funds took the lead and the goal of smaller ones become to figure out what bigger guys will do the next day.

How is that any different from AAA CDOs constructed from sub-prime RMBS. Rating agencies made flawed assumptions, and now the prop risk managers allocating the bulk of the trading capital for the de jour hot quant manager, are making comparable mistakes, disguised as “assumptions” yet again. 

• Big Picture: US Dollar Index Since March 2008 Bottom
   

Isn’t it funny that mainstream media across the world has highlighted bearishness on the dollar since its bottom?

From the NSE / Benchmark Funds:

Benchmark Mutual Fund launches Shariah BeES, the first Exchange Traded Fund (ETF) in India benchmarked against the S&P CNX Nifty Shariah Index. The NFO will be open from 4th February 2009 to 25th February 2009.

Shariah-compliance

Business activities related to the following are excluded-:
Pork
Alcohol
Gambling
Financials
Advertising and Media (newspapers are allowed, sub-industries are analyzed individually)
Pornography
Tobacco
Trading of gold and silver as cash on deferred basis
(The above industries are not considered Islamic and would not be appropriate for
investment for observant Muslims).

Leverage Compliance
This compliance is measured as:
Debt / Market Value of Equity (12 Month average) < 33 %;

Cash Compliance
There are compliances with reference to cash holdings. These are:
Accounts Receivables / Market value of Equity (12 Month average) < 49 %;
(Cash + Interest Bearing Securities) / Market value of Equity (12 Month average) <33%;

Very interesting. Btw, Shariah-compliant investments total around $65 billion worldwide. Huge!

With everyone and their grandmother commenting on the 0.25% rate cuts by the US Fed, thanks to Charles Kirk for creating a summary of the better commentary:

“Thinking as a trader, the most counter-intuitive outcome here would be a resumption of the Santa rally and run into year end. It’s just become my favored scenario, because it seems so outlandish after the Fed news.” - Alan Farley

“Dollars to donuts, perhaps literally, the FOMC couldn’t cut fitty without invoking the wrath of foreign holders of dollar denominated assets. As it is, we’re in a pretty pinch.” - Todd Harrison

• World Economic Forum: India @ Risk 2007

Six risk factors:

1) Economic Impact of Demographics – India is facing a demographic dividend. What must be done to ensure it does not turn into a
demographic liability? Can the “inequality trap” be overcome and inclusive growth achieved?

2) Loss of Freshwater (quantity and quality) – How best can India cope with increasing freshwater insecurity?

3) Economic Shocks and Oil Peaks – How vulnerable is India to external economic turbulence? What exogenous crises would risk derailing India’s growth prospects (e.g. an oil price shock)?

4) Geopolitical Risks: Globalization vs Protectionism – What happens if there is a backlash or retrenchment from globalization? With the explosion of expectations, can India keep up with its own aspirations?

5) Climate Change: The Environment and Challenges to India’s Growth – Can India balance the complex trade-offs between the environment and growth?

6) Societal Risks: Infectious Diseases – What must be done to combat the spread of high-mortality disease and pandemics? What if India fails?

• NakedShorts: An ETN behaving badly: iPath MSCI India (INP)

the iPath MSCI India ETN is trading at a premium fast heading toward 25% of its underlying value.

The discrepancy has developed since India’s securities regulator moved in October to limit the influx of overseas capital into its stock markets (via P-Notes), and the consequent appreciation of its currency.

Barclays suspended issuance, sales and lending of INP on Oct. 26, citing the need to clarify the nature and impact of the new SEBI restrictions; on Nov. 5 it reopened for business—although hardly.

So, Economics 101: continuing strong demand for INP, in the absence of normal gravitational forces such as new issuance, combined with the inability to borrow stock for shorting, has sent the shares into low earth orbit.

Ironically, the best-known US-listed closed-end funds are currently trading at a discount to their NAVs. Blackstone’s $2.24 billion (at Jun. 30) India Fund (IFN) carried a 7.8% discount on Friday, Dec. 7, according to Nuveen’s ETFConnect, while Morgan Stanley’s $1 billion India Investment Fund (IIF) was trading at a discount of just under 5%.

Binita Metha has put together a nice list of investment options for US residents interested in India:

“Here’s a quick summary of the funds and ETN . . .

• India Fund from Blackstone group (IFN): Expense ratio of 1.41%
• India Investment Fund from Morgan Stanley (IIF): Expense ratio of 1.35%
• Matthews India Fund (MINDX): Annual operating fee of 1.34%
• EATON Vance Greater India Fund (ETGIX): Expense ratio of 2.14%
• Barclay’s iPath India MSCI Exchange Traded Note (INP): Yearly fee of 0.89%”

I have covered ETFs (as well as ADRs) before, but not the mutual funds. Let’s see what Binita has in store for Part 2.

I wrote earlier about the relatively new iPath MSCI India ETN (INP) - here’s a detailed post from James Picerno of The Capital Spectator blog on the differences between exchange traded funds (ETFs) and exchange traded notes (ETNs).

• Most ETFs are built as investment companies á la mutual funds. As such, ETFs represent ownership in a basket of securities. ETNs, by contrast, are promises to deliver a return that tracks an index. To be precise, iPath ETNs are debt securities issued by Barclays —senior, unsecured, unsubordinated 30-year debt securities.
• ETNs, like any debt security, carry credit risk—a distinguishing characteristic absent in ETFs.
• Holding an ETN in a taxable account for more than a year can offer superior tax treatment relative to an identical trade with certain ETFs.

The one thing common between both is their (current & expected) spectacularly rapid growth!

A couple of interesting reads from Ajay Shah:

• Monetary policy at the cross-roads
  • Looks at the problems with the RBI’s policy - most of which have impacted its inability to tame inflation, and could lead to further interest rate jumps.
• Paper on Indian ADRs
  • Looks at “inter-sectoral and inter-temporal characteristics in prices of such stocks of Indian origin that are being dually traded on the American and Indian stock exchanges”.

A while back, I wondered about arbitrage opportunities for ADRs. Seems that the legalities & overhead involved in such strategies would wipe out most of the profit potential.

Now that US investors have several options to invest in India in the form of ETFs/ETNs such as IIF, IFN & INP, the action has moved to Australia - a new Indian fund will be launched over the next few weeks. Per its prospectus, the India Equities Fund Limited (IEF) is seeking to raise up to $200 million to invest in companies listed on the two major Indian stock markets - the BSE & the NSE.

Note:

• The portfolio, which will be unhedged, will be managed by British fund manager Kotak Mahindra.
• Both Kotak Mahindra and Olympus Funds Management will receive a performance fee of 20% of positive returns, but to earn this the fund will have to beat both its benchmarks: one an absolute return of 20% a year and the other to beat the BSE 200 index (measured in Australian dollars).
• . . . fund that is mostly blue-chip in nature, with up to 20% in mid-caps.

I also learned that Australian investors have had another option - Fidelity India Fund - since September 2005.