The Mutual Funds are at it again... Beware!

Jul 10, 2009

In this issue:
» Warren Buffett wants a second stimulus
» Tata Motors positive on JLR turnaround
» Infosys posts better than expected numbers
» Economists don't believe India at too much risk
» ...and more!!
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The mutual funds seem to be at it again. Allow us to explain why. Most of us must be aware about the latest SEBI directive asking entry loads to be banned. However, the ban only comes into effect from August 1, 2009 and if a leading business daily is to be believed, most mutual funds have started abusing to the fullest, this small window of opportunity. In other words, they have hiked brokerages for distributors to as much as 3-4% so that as much money can be mopped up as possible before a lull of about 3-4 months sets in. Hence, if you are looking to invest in a mutual fund over the next 15-20 days, chances are that you could be hooked on to a fund, which is paying your distributor the highest brokerage and not the one which is good for you from a long-term perspective. And it is not just small funds we are talking about, the newspaper further adds that the top ten fund houses were taking this route aggressively and some fund houses have even gone to the extent of offering target based commissions. Old habits die hard, don't they?

There is no doubt in anyone's mind that the G8 summit being held in Italy has economic stimulus as its central theme. And there are diverging views emerging on it. While there are some countries like Germany who are warning that it's time to go back to days of a sustainable budget and put in plan an exit strategy, the US and the UK are squarely on the other side of the table. Pointing towards the fact that unemployment is still high and stock markets are behaving increasingly wobbly, they argue that the recovery is too fragile currently and additional stimulus measures do indeed need to be considered.

They have also found a supporter in the form of IMF, who in its latest report has maintained that the rebound is likely to be 'sluggish' and hence, governments should continue with the stimulus measures. As per Bloomberg, ever since the onset of the crisis, nearly US$ 2 trillion have been pumped into economies across the globe in what could be termed as the biggest borrowing spree in 60 years. But it has barely helped. Such has been the damage from the crisis that most economies, especially the developed ones are likely to witness negative growth rates for few more quarters to come. Hopefully, the G8 summit paves the way for even more stimulus measures.

Even for a management that has seen and conquered many a cyclical downturn in the past, this could have been a little too much to handle. We are talking about Tata Motors' buyout of JLR (Jaguar Land Rover), where doubts over the sagacity of the deal have risen manifold what with the marquee brands posting losses and encountering difficulties raising funds. However, Mr. Ravi Kant, Tata Motors' Vice Chairman is undeterred. In an interview to a news channel, he sounded optimistic about the future of the UK based subsidiary and added that JLR would start making profits in two years, proving wrong the current notion that the Tatas overpaid for the deal. Important to add that the man's thoughts echoed that of one Mr. Joel Stern, the co founder of the firm that devised the value measuring metric EVA, who some months back had stated that Tatas' buying was indeed at a fabulous price and once they have enough equity to carry through into 2-3 years from now, they will be fine. Well, only time will tell who turns out to be correct, these two gentlemen or the critics.

 Chart of the day
Sensex, the key Indian benchmark has had a fantastic run since March, the month the latest rally on the Indian bourses seems to have begun. Even though the index has scaled an impressive 68%, its returns have lagged those of the top five best performing sectoral indices, all of which have soared upwards of 75%. The best performing though has been the metals space as the BSE Metals index has returned an astonishing 130% in a space of few months. However, we believe it's more a case of markets correcting some of its pessimism rather than improved fundamentals.

Source: Prowess
Returns calculated from March 5,2009 to July 9, 2009

What does one do when the first attempt at stimulating the economy does not seem to be working out? Try again, and do it better this time. That seems to be Warren Buffett's message to Obama. He is of the opinion that taking care of too many stakeholders while designing the package has diluted its impact and that a second dose is needed.

Moreover, as per reports in the American media, the US$ 787 bn economic stimulus package is not proving to be as effective as expected. However, in our opinion, we should not jump to any conclusions. After all, only about 10% of the money has been distributed so far. The balance amount might actually be employed in a better fashion. Whatever the eventual pattern of spending, the old adage is likely to hold true - "You can't please everyone."

S&P has recently been quite vocal about the fact that it may downgrade India's sovereign credit rating to junk grade from its current investment grade. S&P's rationale for this is that India's high fiscal deficit is not sustainable in the medium term and a downgrade would be imminent if the government continues to spend beyond its means. However, a DNA report throws light on the fact that many economists in India care little about this downgrade. In fact in recent times, many of these agencies have come under severe criticism for giving an investment rating to the very derivatives that were the cause of the credit crisis. In light of this, it is quite plausible that these agencies are now adopting an ultra cautious stance and a potential downgrade to India may just be one of such measures.

IT bellwether Infosys posted its 1QFY10 numbers today and if the reaction of the stock markets was any indication, it seems to have done a pretty good job under the circumstances. The company has reported a 5% drop in net profits on a QoQ basis while the topline has come in lower by almost 3%. Also, despite adverse currency movements and billing pressures, the company has done well to expand its operating margins by 50 basis points on a QoQ basis. On a YoY basis, while sales were higher by 13%, bottomline growth has come in even more impressive at 17%. The company has also revised the revenue guidance for FY10 upwards, projecting a decline of around 4% as against the previous estimates of a decline of around 7% to 8%. The stock was trading higher by 4% at the time of writing.

In the meanwhile, after showing signs of closing in the positive, the Indian benchmark BSE-Sensex plunged into the negative territory and was trading 2% lower at the time of writing. Most of the major Asian indices have also ended the day in the negative. The European indices are also trading in the red currently.

 Today's investing mantra
"A second-class textile or department store company won't prosper simply because its managers are men that you would be pleased to see your daughter marry. However, an owner - or investor - can accomplish wonders if he manages to associate himself with such people in businesses that possess decent economic characteristics." - Warren Buffett

Clarification: Yesterday's edition has received a comment from one of our patrons pointing towards a possible misinterpretation of one of Warren Buffett's comments on buying excellent companies surrounded by unusual circumstances. We whole heartedly agree with the view and would like to inform the readers that the criteria spelt out in the comment is indeed not the only one that Warren Buffett looks at and there are a lot of other factors that go into it as well. Please accept our sincere apologies on the same.

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5 Responses to "The Mutual Funds are at it again... Beware!"

g e moorthy

Jul 11, 2009

I do agree with the article. But again the crooks of these distributors of MF's, are largely fools the rural people, who do not understand or will not be allowed to understand the happenings of our Financial industry.

We do not have any transparent system and the agents, the brokers, the distributors, are always make easy money by their peppy talks. Who bothers the money drained out from poor or rich ????



Jul 11, 2009

Kudos to EM for once again exposing the malpractices in MF industry!
Regarding deficit: In spite of recent bad record of rating agencies we can't ignore them simply because the FIIs make their investment decisions based on these ratings (whether right or wrong! and we know that it is the FIIs who are the movers and shakers in the Indian markets.
After election everyone seems to have forgotten about huge amount of black money abroad and now nobody is taking up the issue! Shows that it was only an election ploy and nobody was really serious about it. I request EM to take up this issue with the same vigour as they did for MF industry. SEBI is doing something to root out the malpractices in MF industry and maybe govt. will do something for brining in the black money. Well thats a lot of wishful thinking!


chandan karakoti

Jul 10, 2009

Hi!, I am commenting on india deficit.
India can fill up the gap,within this finnancial year,if present govt.mainly PM/FM/HM and judiciary play aggressive roll in :-1)Clear all pending curruption cases at war level.2)Zero tollereance and immdiate decison on new corruption cases.3)Get-capture fotune of black-money of indians in india and abroad.4)To meet the target fill up all vacancies in judiciary/anti-curruption departments with persons of national-pride irespective of religion/caste etc.5) process on unique ID card on war-level speed.6) Start imdtly with raids in Govt.officials who are known corrupt deptt or person.


Sudesh Devgan

Jul 10, 2009

i concur with the views of certain economists who do not bother about the rating of India. it is as fare to mention that these rating agencies are not prophets who do not have their vested interests while making certain such announcements. in the present cicumstances see the case of Waterhouse people who had fuull assesibility to the records of Satyam but still there was a scam which has proved one of the biggeat in the IT industry Hisory



Jul 10, 2009

Excellent write up!

One note on possible turnaround of Tata Motors:

Warren Buffet believes and says that turnarounds seldom turns!

Here is little bit of history for those who dont know the context: He made money by investing in GEICO when its share had come down from $68 to $2 due to poor management. Buffet bought 48% of the shares at that time in initial stages of his career (bought rest of GEICO in late 90s) influenced by his mentor's preference for GEICO who also served on GEICO's board at one time. New management of GEICO turned it around and as they say rest is history. GEICO being insurance company provided huge amount of float/insurance premium using which Buffet bought many companies/shares later.

This was an exception as Buffet himself admits. One major criteria he spells out for successful investment is to stay clear of turnarounds. Your team has time and again promoted Tata Motors as a multi bagger. Seeing financial conditions of the company and poor record of present management team, I differ. Ratan Tata's poor decision making is evident in mindless acquisitions and poor performance of Tata Motors and Tata Steel.

You have aptly ended note by saying "Well, only time will tell who turns out to be correct". Jury is still goint to be out for more such turnaround situations like Noida Toll Bridge, Maytas,...

Kudos for accepting criticism with open heart. Reminds me of MIT inviting George Soros to provide his contrarian views in one of his recent speeches. Contrary views and criticism provides more perspectives and inviting/publishing such is really commendable effort by your team.

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