Will this improve the performance of mutual funds?

Jun 22, 2011

In this issue:
» Are valuations in emerging markets crazy?
» More trouble for real estate companies
» Global economy is populated with zombies
» US must create more jobs
» ...and more!

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The SEBI in recent times has made various proposals aimed at protecting the interest of retail investors. This is also to bring transparency to the way companies, mutual funds and stockmarkets function. In keeping with this trend another proposal appears to be on the cards. SEBI may make it mandatory for asset management companies (AMCs) to disclose the track record of their fund managers while promoting or selling equity-oriented schemes.

The rationale behind this move is to enable investors in making informed decisions while investing in various mutual fund schemes. What has further acted as a catalyst for SEBI to consider such a proposal is the poor track record of various mutual funds. Two-thirds of the equity oriented mutual fund schemes have underperformed the benchmark indices Sensex and Nifty over 3 and 5-year periods. Thus, if this proposal does get implemented AMCs may be required to disclose the track record of their fund managers in all their scheme-related documents, advertisements, promotions, as well as on the websites of SEBI and the Association of Mutual Funds in India. This will be in addition to their own websites. All of which is sure to crank up the pressure on fund managers to ensure that various schemes live up to their promise of beating the benchmark indices in terms of returns.

We believe that such a step bodes well in increasing the transparency in the way mutual funds are run. Indeed, those fund managers who have been investing in good quality stocks from a long term perspective should be able to perform well on a consistent basis. And those who have been eyeing short term gains will be forced to rethink their strategies. But the matter does not end here.

Although SEBI is getting the act going in terms of protecting the rights of investors, the latter are also expected to take responsibility when it comes to making investments in mutual funds. Investors should do their homework by looking at the performing history of mutual funds for at least 5 to 10 years. They should compare this with the performance vis-a-vis their peers and the benchmark indices. Moreover, the kind of stocks that mutual funds are investing in should also form an important criterion while investing.

Do you think that SEBI's proposal of disclosing track record of fund managers while promoting mutual fund schemes is a step in the right direction? Share with us or post your comments on our Facebook page.

 Chart of the day
Growth in GDP is the most closely watched indicator in any economy. But it does not amount to much if there is no marked difference on the standard of living of the citizens as well. And this can happen only if rise in GDP is followed by rise in GDP per person as well. As today's chart of the day shows, China and India have seen the GDP per person of their economies rise at a faster pace than some of its peers in the last decade. And this has been despite an increase in population growth in both these Asian economies over the same period.

Data Source: The Economist

The legendary Warren Buffett calls this ratio the best single measure of where valuations stand at any given moment. A write up in the FT has used the very same ratio to highlight how emerging markets like India could be trading at crazy valuation levels. And what more, based on this ratio, these markets could even be all set for a sharp reversal of fortune. Now, what exactly is this ratio? Well, it is nothing but the country's stock market capitalisation to its GDP ratio. It is believed that alarm bells should start ringing should any country cross the 100% mark on this one. In other words, it market cap of the entire stock market equals or exceeds the country's GDP, it is a sign that the markets have turned overvalued. Of course, not all countries are created equal. Hence, different countries might lead to slightly different levels of equitisation. So, what is the verdict on emerging markets? The write up argues that as recently as 2003, many emerging markets, including the four BRIC nations, had ratios below 50%. However, quite a few of them, including India, are now trading at more than 80% levels. It should be noted that this is the level above which long term returns have proved lousy for the US. Hence, there is no reason why a similar fate should not await emerging market investors.

While we don't know about other countries, Indian stock markets don't look all that expensive from a long term perspective. Of course, it has risen from the low levels of 50%. But that was more a case of gross undervaluation than the current one being that of gross overvaluation. Thus, decent returns can still be had if one invests in fundamentally strong companies run by honest management and available at attractive valuations.

Ghost cities in China have made enough news to make investors wary of the property bubble in the economy. But a look at the statistics in India would suggest that Indian realty too is beset with problems of its own. There are nearly 930,000 under construction residential units in the country. Half of these that are scheduled for delivery between 2011 and 2013 are likely to be delayed by up to 18 months. Rising construction costs, labour scarcity and shortage of funds are taking a toll on the Indian real estate industry. As the projects get delayed, home loan borrowers are struggling to keep up with the rising EMIs. For the builders too, spiraling costs and cash crunch is making execution difficult. Between 2009 and 2011, the cost of construction material has risen nearly 25%. Steel, cement, bricks and labour constitute nearly 73% of the overall cost of an apartment. The daily wages of labourers have also gone up by 30%. Given such a scenario, there seems to be little way out for the builders than to slash prices to ensure quicker realizations. While this can ensure steady cash flows for the builders, faster execution will also help prospective home buyers.

Zombies seem to be more out of a sci-fi novel or a horror movie than an economic discussion. Yet, Morgan Stanley Asia chair Stephen Roach states that the global economy is populated with a new generation of zombies. These creatures are also known as the economic walking dead. He states that American consumers are in the early stages of an economic retrenchment. In 13 quarters since the beginning of 2008, America's annualised growth in consumption (adjusted for inflation) was just 0.5%. US consumers have never seen such a drastic cutback in spending, or been weak for such a long period post the World War.

Two rounds of quantitative easing haven't helped matters much. Neither have other forms of debt forgiveness. This zombie syndrome is the same one which was found in Japan's first lost decade. Here Japanese banks kept extending credit to a number of bankrupt companies. Thus, they helped delay restructuring and inevitable failure. The Fed wants consumers to start spending recklessly once again. Nations have been built on the American culture of excesses. But, the American public finally seems to be living within their means. It looks like the era of conspicuous consumption has ended. For some time at least.

The magic term for economic growth for US is 'create more jobs'. As per Bill Gross of PIMCO, US should be concentrating on employment growth. And all else will fall in place. He opines that US needs to revive its manufacturing sector. This is the area that can and will create jobs. For several years, US has been relying on the finance sector to drive the growth in its economy. However, with the crisis that gripped the country post 2007, this sector has been in doldrums. It is irrational to expect the finance sector to create employment opportunities afresh. Therefore, it is high time that US concentrates on reviving and boosting its manufacturing sector. This is what will help create jobs. This in turn would help boost the country's economic growth. And thus, US would emerge yet again as an economic giant.

Indian stock markets lost their opening gains and are trading flat with IT and consumer goods leading the pack of gainers and FMCG and consumer durables trading weak. At the time of writing, the BSE Sensex was trading up by just 22 points. All the major Asian indices barring New Zealand and India are trading in the green with Japan and Hong Kong leading the pack of gainers. Europe has also opened on a positive note.

 Todays' investing mantra
"The business schools reward difficult complex behavior more than simple behavior, but simple behavior is more effective." - Warren Buffett

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18 Responses to "Will this improve the performance of mutual funds?"

Eramangalath Asokan

Jun 29, 2011

Mutual Fund operators should creat and maintain a fund from which they should compensate the loss of investor up to the extent of the principal invested. Suppose an investor puts in Rs 50,000.00 in a steadily growing MF. By a crash of stockmarket the NAV will come down to such an extent that when the investor wants to withdraw he will find his capital has gone down, say even to the extent of Rs 25,000.00 In such a case the MF can compensate the loss and at least Rs 50,000.00 can be given back. Otherwise word of mouth propaganda will cause damage to all funds.



Jun 28, 2011

I believe that SEBI's move to make it mandatory for Mutual Fund houses to reveal the track records of all their fund managers is a really helpful directive and will benefit investors.


subramanian nilakantan

Jun 28, 2011

Can Financial experts, Fund Managers or even Warren Buffet
provide us the investors their valuable quotes ( a para of 150 words say) on 1. Entry 2.Exit 3. Not getting confused
4.Asset Allocation 5. PMS 6. Karma etc.
ofcourse thru your connectivity. Thnx,Rgds


Sarat Palat

Jun 25, 2011

Yes, it is a good move by SEBI.


shome suvra

Jun 23, 2011

The fund managers should look for the best portfolio at a given risk.Their track records should show that the funds are actively managed. Rupee cost averaging should be more popular.



Jun 22, 2011

Yes.It will serve two purposes.

1.The investor will be ready with more details to choose.
2.The manager will also be more careful about his performance since he will be able to attract more investors only if he has performed in the past.

I have one more point. In that case whenever a fund manager resigns and a new fund manager is appointed ,this information requires to be circulated to all the investors so that they can decide suitabley.


Ganesh K

Jun 22, 2011

Warren Buffet, as usual, is very right about valuation of stocks. Indian stocks are over valued. They are right valued at BSE Index between 14500 to 12500. But nobody including MFs like to hear this truth.



Jun 22, 2011

Good step. Definitely does no harm to the investor; provides info. in one place for a customer to get it...
I hope they will also disclose the duration that the person has been manning the fund...

Like (1)

Avinash Bhome

Jun 22, 2011


Please enlighten readers/investors as to how to check the track record for last 10 years of a particular MF or a scheme.

Can u introduce any such helpline for investors.

Like (1)

John Mathai

Jun 22, 2011

No, it would not make much difference. Today also the MF is sold on the past performance.

Like (1)
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