When will we analyse MF inflows-outflows correctly?

July 30th, 2010

Mutual funds assets under management (AUM) data published by the Association of Mutual Funds in India (AMFI) every month has been news item for all financial journalists. Unceremoniously, journalists interpret the AUM’s inflows and outflows attributing to banks and corporate sector as major culprit. The financial experts supply appropriate quotes to respective reporters to authenticate news analysis.
However, the interpretation turns out to be careless work if reporters analyse the monthly AUM data more carefully, and with the help of supportive information provided by the AMFI.  The heavy redemption at the end of quarter has been more or less mandatory with the mutual funds debt schemes contain 45 per cent portfolio with one to three month maturity. Another 21 per cent debt portfolio expires between 3-6 and 6-12 months.

Historical evidence suggests that debt funds face outflows at the end of every quarter mostly on account of redemption of fixed maturity plans. With MFs floating time-bound fixed maturity plans (FMPs) to attract investments from the corporate sector and banks, the maturity of such schemes also increases outflows. Nevertheless, quarterly outflows become inflows immediately next month in the short term MFs schemes.

The corporate sector has 46.48 per cent shares in the Mutual Funds AUM of Rs 614,547 crore as per the AMFI data dated March 31, 2010. Of the total exposure of the corporate sector, almost 68 per cent (Rs 193,383 crore) has been parked in debt schemes which has maturity period up to 3 months. Banks and financial institutions, however does not have very high exposure (Rs 48,800 crore) in mutual funds. Of the total exposure Rs 30,800 crore has been for short term duration.

So, outflows in the mutual funds schemes may not be entirely withdrawal, but on account of an unavoidable redemptions. The following quotes for June 2010 outflow become factually incorrect when an expert say, “The combined effect of banks withdrawing funds from mid-month itself, and corporations taking out money to meet their advance tax payment requirements, delivered a huge blow to the mutual fund industry in June”

“Usually during the quarter end, 10 per cent of the assets are pulled out by banks from liquid funds,” says …

A debt fund manager, requesting anonymity said, “Typically the money moves out toward the month end. This time it moved out in the middle of the month and hence the outflow was seen”.

Asked when these funds would return to the industry, the fund manager said, “The money will come back if the liquidity turns positive money. But will it come back. My guess is a large part may not come back at all. The assets will not go back to May level.”

There was sensible quote which say “Also, the usual quarter-end phenomenon had an impact on treasury management schemes, as normally companies tend to spruce up balance-sheets ahead of every quarter”.

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Big bang gain?

May 18th, 2009

Led by a landslide victory by the Congress, the UPA has returned to power, with a strong coalition that removes a huge overhang among investors. I had indicated in my previous blog that markets will revisit October 2008 lows if the new government has to take support of the Third Front, which includes Left. The Indian voter turnout to be smarter voted for stability, defeated communal forces and sideline Left for their anti-development economic policies.

The expectation from the new government is reflected in the first trading day after election results on Saturday with the benchmark indices frozen to upper limit of 15 per cent in just nine seconds and trading was halted for the day. Investors now expect big bang economic reform with key pending bills such as insurance and pension to be passed. The market expected to be firm from here and the FII inflows expected to increase due to political stability.

If the corporate earnings cycle improves, we may revisit January 8, 2008 Sensex high of 21,000 any time in the next 12 months. Most US macro data and credit market indicators are showing some improvement. However, incremental gains are modest and indicate continued growth contraction ahead following two quarters of GDP decline of -6.4% (QoQ) and -6.1% (QoQ) during the fourth quarter of 2008 and the first of 2009.

However, the historical evidence shows investors entering the equity market at lower level get a market return of over 50 per cent within six months and the recent slowdown considerably thereafter. Investors entering the equity market after 150 per cent performance get a modest return after three-five years. According to a Credit Suisse report, if you buy the market after a drop of 40 per cent, the probability of posting a positive return after three years is over 70 per cent. After five years, it goes up to over 80 per cent, against close to 40 per cent if you buy after a long rally.

The Sensex has appreciated by 75 per cent in two months from its low of 8,160 on March 9, 2009. So, the short-term upside is limited and for long term gains, economic recovery is the pre-condition.

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Sensex may hit new low, post elections

April 16th, 2009

Summer looms as a critical period for the local markets due to the political uncertainty following the general elections. In May 2004, the market collapsed almost 30 per cent post elections, when Sonia Gandhi was chosen to lead the congress parliamentary party amid fall of the NDA. This time, the general perception is that the “third front” will emerge as king maker. If that happens, it may ensure the end of the pre-election market rally and bring about a new low thereafter.

Technical analysts say that the current bounce back is being seen as a bear market rally that will be very difficult to sustain even otherwise.  Although the recent gains in stock prices brought some cheer with a 30 per cent appreciation in global benchmark indices, the market is still not out of the woods. Corporate earnings for the fourth quarter may be worse than the third quarter and the guidance for 2009-10 by Infosys Technologies also indicates that corporate outlook may not even in 2009-10.

The bear markets prior to 2000 have recorded eight counter-trend rallies in excess of 15 per cent while the most recent 2000-02 bear market saw three counter-trend rallies of 20 per cent. The current bounce is just the third in excess of 20 per cent since May 2008.

Historically, it is to be noted that in the secular bear market in US commencing 1937, a 64 per cent counter-trend rally ensued the following year before the market eventually took out new lows, indicates Deutsche Bank Global Research.

The current counter-trend is in excess of 38 per cent since the benchmark indices, the Sensex and the Nifty, hit multiyear lows on March 9, 2009. It is also worth mentioning that counter-trend in excess of 24 per cent between October 27, 2008 and November 10, 2008 took more than three months for the October 27 low to be breached. If this pattern persists, a retest of the recent low of 8,160 in the Sensex may occur after the election results if the “third front” become king maker.

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Recession and stock prices

March 18th, 2009

The impact of a downturn on share prices has been varied. In the 2001 tech recession, seven out of ten sectors lost more than average (65 per cent) of their value between the Sensex peak of February 14, 2000 and low of September 21, 2001. Sectors affected by the meltdown of internet bubble of 2000 fared even worse with information, communication and entertainment sectors losing more than 75 per cent of their value in the recession of 2001.

The implication of current downturn seems to be far reaching than 2001 with eight out of ten sectors having lost more than 65 per cent of their peak value of January 8, 2008. The housing bubble in the US in 2004 to 2006 has led the current recession as subprime housing lenders defaulted due to sharp correction in property prices. The US subprime default has already destroyed $50 trillion of shareholders’ wealth across the globe since January 2008 and still there no light at the end of tunnel.

The 1980–82 and 1990–91 recessions affected valuations less severely. Only one sector lost more than a third of its value in both of these downturns (energy in 1980-82 and financials in 1990-91), and most sectors suffered losses of 5 to 15 per cent. The current recession, which was mainly caused on account of financial default in the US, has affected all consumer discretionary sectors such as automobiles, airlines, retailing and textiles. The value destruction has been across all sectors but consumer related sectors are punished more.

All the past global recessions have provided opportunity to buy equity for bountiful returns over the next few years. In 2001, tech stock prices had crashed by an average of 65 per cent with almost 98 per cent stocks witnessing value erosion. However, in the next eight years, between September 21, 2001 and January 8, 2008 valuation rocketed by over 1000 per cent. Even at the current prices, the average gain from listed securities is still a whopping 300 per cent.

This time things are different though, with almost all global indices trading at multi-year lows. As of now recovery in stock prices is very remote as all economic indicators are showing no signs of improvement, History suggests some possible indicators of the beginning of a recovery coming from the consumer sector. In three of the four most recent recessions, higher consumer discretionary and IT spending led the way.

When real operating profit growth resumes in these sectors, it may be a useful indication that the economy is turning around. However, there is very little evidence that the contraction in the US economy is slowing. The fourth quarter GDP was revised downward, showing that the economy contracted at an annualised rate of 6.2 per cent during the most recent quarter.

Things have now improved, and a bear market rally is on. The big question is when will equity markets return to normal?

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How are FIIs’ flows captured?

February 24th, 2009

Foreign institutional investments in Indian companies through primary and secondary markets doesn’t appear to be an accurate benchmark of the real FII inflows/outflows in Indian equities. Securities and Exchange Board of India’s (Sebi) daily trend in FII investments captures all activities undertaken by FIIs in the Indian securities market, including trades done in secondary market, primary market and activities such as right/bonus issues, private placement, mergers and acquisitions etc.

This means Sebi’s FII data is the buying and selling of securities in the primary and secondary capital market, and not the money that comes in or leaves the country as assumed by media and investors. If FII inflows/outflows are buys/sells on equity markets, then there is possibility that net inflows/outflows on a given day could be just a book entry.

The Sebi data on FII investments is in rupee terms and dollar value is only conversion of rupee/dollar rate of the day. Does it mean that inflows/outflows into India and out of India are not available? I tried to get an answer from Sebi through an e-mail almost a month ago, but I haven’t got a reply yet.

When I enquired with RBI about net foreign currency data on FII activities in Indian equity markets (primary and secondary markets, not FDI), RBI said FII inflows/outflows data is source from Sebi. However, as per Sebi’s definition, the FII data is just buy/sell on equity markets and not real flows.

Also, FIIs have been trading heavily in futures and options with their open interest positions varying 35-45 per cent. So they must be making or losing money on their trading in F&O. Where are these inflows and outflows accounted?

Is it that the profit made in the F&O segment gets diverted to buy shares in the secondary markets or shares from primary markets? Even their investment in preferential offers and qualified institutional placement (QIP) issues appears to be purchases through the Indian money recycled. For last one year, FIIs were net sellers on the cash as well as the F&O segment, indicating huge outflows. But nowhere this is getting reflected in term of outflows in foreign currency.

So, my gut feeling is that FIIs’ inflows/outflows may be very little in the last three years and most of the money they have made in F&O markets has been recycled in the cash market. The foreign fund data sourced from EPFR (Emerging Portfolio Fund Research) shows that India dedicated funds have seen outflow of $2 billion in 2008, and though it is not strictly comparable, Sebi’s outflow of $13 billion is still substantially lower.

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Average AUM is ambiguous

December 6th, 2008

The sharp drop in mutual fund’s assets in November 2008 hit the headline of the business and general newspapers on December 3, when the Association of Mutual Funds in India (AMFI) on December 2 announced average assets under management (AAUM) for the month of November 2008. The AMFI data show that the AAUM of 36 mutual funds for November 2008 declined to Rs 402,029 crore or by Rs 29,873 crore over the October AAUM of Rs 431,902 crore.

The media reporters, with no scent of data research, flashed news of seven per cent decline in AAUM in November 2008 due to heavy redemptions. However, the AMFI puts AUM data for November 2008 on its website on December 5 which shows that AUMs as on November 30, 2008 increased by Rs 10,401 crore to Rs 405,112 crore from Rs 394,711 crore as on October 31, 2008. This means that mutual funds witnessed net inflows in November and hence there were no net outflows.

The average assets under management (AAUM) is an ambiguous term which only indicates the average figure for the month based on sales proceeds from existing and new schemes and redemptions and repurchases of old schemes during the month. So, the AAUM numbers differ from the assets under management (AUM) at the end of the month. The fund houses prefers the AAUM as there are chances that AUM as on date could be decline because of redemption of interval or short terms funds.

The mutual funds, which witnessed a sharp declined in AUM of Rs 88,568 crore in October 2008 due to outflow of Rs 46,793 crore in income funds and value erosion of Rs 41,775 crore in equity related schemes, recorded inflows in November in liquid and money markets schemes. However, despite net inflow of 13,790 crore during the month, the AUM rose by Rs 10,401 crore largely due to value erosion in equity related schemes.

The mutual fund industry would like to forget financial year 2008-09 as its AUM in the past eight months has declined by a whopping Rs 189,898 crore from Rs 595,010 crore as on April 30, 2008 to Rs 405,112 crore as on November 30, 2008 mostly due to value erosions in equity related funds as outflows in income and gilt funds were around Rs 40,000 crore.

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