Category: Mutual Funds Review

Sensing Trouble or whatever, some smart fund managers sold Satyam Computers. HDFC Tax Saver and HSBC Equity completely exited their positions in Satyam as on Dec-31st 2008. HDFc Long Term Advantage Fund reducedi ts esposure but didn’t completely exit Satyam in Dec-08. IDFC and Kotak fund managers also completely exitted Satyam in Dec-08.

However, HDFC Top 200 and HDFC Equity funds increased their exposure to Satyam [less than 2.5% of total assets] in the month of Dec-08. Both th funds are managed by Sr. fund Manager Prashant Jain. In the last 12 months his over aggressive investment bet on ICICI Bank has already led to the under performance of both of these funds compared to Reliance Growth Fund.

However, we need to take a macro view on the fund and the management before taking any extreme decision of switching like Dhirendra Kumar recommends. Here is Satyam’s complete holding picture by Domestic Mutual Funds.[PDF]

Update on Feb-5-2009:
HDFC Mutual Fund has sold 50 Lakh Shares of Satyam Computers on Jan-2nd. So the loss from Satyam is negligible in the funds we recommend. Economic Times of Feb-05 carries an article on who all sold Satyam before Jan-7th when the stock crashed.

We have been recommending SIPs in HDFC Funds and one HSBC Fund too. I am not sure how this review got slipped even though the required data was ready in Mid October.

The Sensex has been at the same levels when compard on Sept-30 of 2006 and Sept-30th of 2008 – 12,454 and 12,860 levels. So neat enough to compare the performance of fund managers ?

HDFC Equity Fund:
In Sept-06, 10 years SIP returns was 40.22%, while the same has fallen to 30.31% in Sept-08.

HDFC Top 200 Fund:
In Sept-06, 10 years SIP returns was 33.5%, while the same has fallen to 27.35% in Sept-08.

Now does this means the fund manager underperformed ? No, Not yet. What has happened is during the course of our SIP investments, we continued to BUY units when the SENSEX was 18,000, 20,000 etc. The carnage in the equity markets was really bad and personally I would have expected the fund manager to anticipate and move towards cash. However, he did not, but held on to Good Companies except ICICI Bank which has led to some under performance.

Here is the performance of other 3 funds at the end of Sept-08 and Sept-06,
HDFC Tax Saver Fund Growth – 2008 and 2006
HDFC Long Term Advantage Fund Growth – 2008 and 2006
HSBC Equity Fund Growth – 2008

HSBC Equity Fund is fairly new compared to the other four, but SIP should help one to get comparable returns in the long run as their fund manager is equally smart and experienced.

Here is a brief excerpt from Bharti AXA Investment Managers presentation on expectations from the Indian Equity Markets.

The global economic slowdown has seen commodity prices tumbling down in the recent past. This has led to fall in inflationary concerns world over. In India the sharp depreciation in rupee since August 08 has however counter balanced a significant part of the fall in international prices. But still inflation has come down to single digits.

The flight to safety saw flow of capital towards the USD and yen leading to their strengthening. India also got impacted severely with FII’s pulling out ~Rs55000crs on a ytd basis.

Issues Concerning India:
Export tonnage, rail freight traffic, auto production, foreign tourist arrivals are at a very slow or negative growth rates. Exports saw negative growth in Oct 2008, last seen in Oct 2002. Commercial vehicle sales collapsed in the month of October. Corporate tax which constitute 35% of the Total tax revenue declined by 20% YoY in October.

How Long Does the Pain Last:
Historically looking at the indicators, the markets should be bottoming out in next couple of months. Market has on previous occasions taken 6 months to recover from market crash. Measures being taken by Obama in terms of TARP representing ~5% of GDP should help stimulate the economy along with other bailout packages. Also Oil at USD50 on average for the next 12 months represents a gain in purchasing power of nearly USD200 billion. In India with majority outflows done and valuations at an attractive levels the markets should also see a bounce back.

Going Ahead, 3rd quarter earnings are expected to be disappointing on yoy basis. We may see further downgrades in earnings which could put further pressure on markets. With ~27% of the Sensex weight in cyclical further downside in earnings is possible. However with declining interest rate scenario, Interest cost which was a major expense for the company would come down going forward. Macro factors like decrease in inflation, BOP, Currency stability and recovery in funding markets and revival of capex cycle should help the future corporate earnings in FY10.

With majority FII selling behind us and domestic flows expected to remain intact Bharti Axa expects India to decouple from redemption flows caused by deleveraging activities internationally. As compared to other economies India is far lesser leveraged and this should bode well for resilience of Indian economy.

hedge funds de-leveraging will continue to keep pressure on the markets. headline news is likely to be gloomy over the next 2-3 months. In the absence of BUYING interest amidst relentless selling will lead to further downside – 15% to 20% from current levels.

The next few months will offer great buying opportunities for those with liquidity and those with the courage of conviction that this financial crisis will be subdued by the end of 2009 and pave the way for stable markets in 2010.

India’s economic growth may slowdown to 6% and corporate earnings growth to 10%, much of this is already factored into. Waiting for arrival of good economic news maybe in-appropriate as stock markets may have already rallied sharply by then. The best time to BUY in Mr. Nagnath’s opinion is over the next 3 months. However, investors who BUY in the next 3 months should have to hold them at least for a period of 12 – 18 months to exit.

In the first week of Nov-08, SENSEX broke its losing streak and rallied from a low of 8,509 on Oct-27th to 10,536 on Nov-10th – a gain of 23.82%.

We decided to find the performance of Mutual Funds we have recommended here and some randomly chosen funds with ratings of 4/5 stars. None of the mutual fund returns have beaten SENSEX in this relief rally, mainly due to the fact that the rally was concentrated in few Index heavyweights. This doesn’t mean you desert your Mutual Funds investments 🙂

Here is the Data of various Funds HDFC, ICICI, Reliance, DSP BlackRock, Franklin, Kotak, Fidelity and Birla Sun etc.

Prashant Jain, Sr. Fund Manager and CIO of HDFC Asset Mgmt company says that this is the best time to invest in the Indian market if you are looking at a 24+ months horizon. He lives by what he preaches and holds more than 98% of his assets in Equities. Excerpts from his Q&A:

• On the Macro, U.S has a very high deficit going forward and its an over-leveraged economy which has lead to series of problems. The Indian GDP will continue to grow at atleast 6% [Worst Case] while that of US will be less than 2% or may even go negative. Once the trend is clear, the de-coupling of valuations will surface among over-sentimental analysts who have reacted in India.
• The Good News to India is fall in global commodity prices, really especially the Crude Oil which helps bring down the Indian fiscal deficit. This will calm down the Inflation and will go back to 6% or 7%.
• Earlier, SENSEX of 14,000 was seen as base case. however, at 11,000, this is the best time to invest as valuations extremely low.In a high growth economy like ours, these dips should be treated as a fantastic opportunity to invest.
• How India will sail through the current Global Crisis? India’s export GDP is less than 10%. Investment of Indian entities exposed to sub-prime is very very low / nil in most cases. FDI as percentage to Indian GDP is once again very low and most of the Indian industry is dependent on internal savings. In short term, there is a liquidity crisis in the market which will be resolved. If India was facing genuine banking problems then interest rates would be rising, which is not the case. If interest rates were to touch 20% then you can expect BSE SENSEx forward P/E to touch 5 [Currently trading at 11]
• FIIs have damaged the Indian market by sudden withdrawal. Historically, Indian institutions and investors BUY when they SELL.
• ICICI Bank is held by all the HDFC Funds. Its Balance sheet is extremely strong and Management has indicated that there is no disruption of its normal banking activity. ICICI is the largest private insurance company and this subsidiary alone accounts for its Share Price quoted on the bourses on Friday. It is mere reputation knock that has taken place.
• Real Estate should cool off very soon and Homes should become affordable in the next 12 months.
• Investors should not panic and switch to Debt funds, should rather be patient and continue to BUY Equity funds with 12+ months horizon.

We do like to endorse Mr. Jain’s views and continue to recommend investing in Equities. However, don’t expect returns in short-term.