|»5 Minute Wrap Up by Equitymaster|
On This Day - 27 FEBRUARY 2013
A much needed reform in mutual fund industry
In this issue:
Despite protests from AMCs, Securities and Exchange Board of India (SEBI) did manage to do away with the steep entry loads and distributor commissions. This did resolve the problem of mis-selling of mutual fund schemes to an extent. NFO launches automatically dried up as SEBI's new rules made fund houses wary. Also with no commissions, the schemes failed to elicit distributor interest. But even then several non performing fund houses continued to rake in asset management fees.
Consider some statistics. Around one-third of equity schemes have underperformed their benchmark indices. Not just in the short term but also over three-year and five-year periods. According to Mint, 117 out of 329 open-ended equity schemes underperformed their benchmark indices in the past year. 98 of 298 schemes underperformed in the past three years. 80 out of 209 schemes underperformed in the past five years. Needless to say that thousands of investors who have invested in the underperforming schemes have lost trust in equities. In fact many may have resolved to never invest in equities again.
But a new diktat from the SEBI could bring in the much needed sense of responsibility amongst the laggard mutual funds. The regulator wants these fund houses to be answerable for their underperformance. If not willing to do so, they must wind up. It has pulled up several AMCs that have been managing hundreds of non-performing equity schemes for years. Plus those that despite underperformance have the audacity to seek approval for new schemes. It wants the concerned AMCs to explain why they should be allowed to charge fees despite underperformance against the benchmark index. Very rightly so! We welcome the move and believe that linking mutual fund fees with their track record is the best way to attract Indian investors.
One may expect that a shale gas glut might make US indifferent to oil security in the Middle East. Or that China with its growing need for oil imports may replace US in this regard. However, the actual trend suggests something different. Despite the shale gas boom, the US is becoming more and more reliant on oil imports from Gulf region. In fact, the share of Gulf oil supplies in US imports recently touched nine year high level. This is because US refineries are still tuned to process heavier Gulf oil. Hence, even though overall crude demand is down in US since 2004, the crude oil imports from Gulf are rising. Also, keeping in mind the high sensitivity of global oil prices to instability, we believe US will remain involved in Middle Eastern oil security.
The government opened up the foreign direct investment (FDI) in retail recently. And this is the key reason behind such an expected improvement in demand during 2013. Increasing demand for mall space is likely to push up the leasing rates as well. Thus, it appears that 2013 could well witness a turnaround in the commercial real estate market.
The US Fed has been one of the most profitable banks in the world. It pretty much pays for its own expenses and doles out a hefty dividend to the US Treasury at the end of the year. As per CNN Money, the bank has remitted an average of US$ 81 bn over the past 3 years. But as interest rates would undoubtedly increase in the coming years, this situation will reverse. The interest payments on the debt would hurt its profitability. At the same time it would have to start selling the bonds that it has been issuing. Since there would be a flood of bonds at that time, the bank would have to incur substantial losses on the sale as well. Though thanks to accounting, the bank can defer this loss and adjust it against its profitable years whenever it comes out of the books. But a book entry will not change the fact that the bank will be in losses. Pity the US policymakers are not even thinking about this aspect and are just continuing to print money recklessly. Money that is cheap but is not helping in any way to solve the purpose for which it is being printed.
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