MFs look beyond India as asset managers launch schemes with global exposure

 Mutual funds (MFs) are latching on to the global diversification theme, with at least three fund houses launching schemes that invest in global equities in the past few weeks.

Earlier this month, Edelweiss Asset Management announced a partnership with MSCI Inc to launch Edelweiss MSCI India Domestic & World Healthcare 45 Index Fund. The thematic passive index fund is designed with the objective of providing Indian investors access to both Indian and global healthcare companies. The NFO closes on October 20.

Seventy per cent of the fund’s weightage is on Indian healthcare, comprising top 25 stocks based on full market cap. The remaining 30 per cent weightage will be on 20 stocks listed in the US, which comprise top 5 stocks based on full market cap from four sub-industries each - pharmaceuticals, healthcare equipment, biotechnology and life sciences tools and services. A few of the top holdings of the underlying fund include Apollo Hospitals, Cipla, Dr Reddy’s Laboratories, Jubilant Life science, Biocon and Pfizer.

Radhika Gupta, MD & CEO, Edelweiss Asset Management said: “We believe that this fund will provide investors with an easy, low cost and undiluted access to promising healthcare companies in India and around the world. Given the rise in lifestyle diseases and the uptick in spending to treat them, the healthcare sector is primed to grow steadily over the next decade.”

Principal Asset Management has hit the market with Principal Large Cap Fund, an open-ended equity scheme predominantly investing in large cap stocks. The fund will allocate 80-85 per cent of its corpus to the top 100 Indian large-cap stocks by market cap and invest up to 15 per cent in US stocks with a market cap higher than $50 billion.

“Our research indicates that a composite index of 15% of the S&P 500 (INR) Index and 85 per cent of the Nifty 100 Index outperforms the Indian indices in multiple trailing periods and has lower volatility. The allocation to US large-cap companies would comprise up to 15 stocks from around 4 to 6 sectors and include stable and high growth businesses with a global brand franchise,’’ said Rajat Jain, chief investment officer, Principal Asset Management.

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According to experts, a globally diversified portfolio will help investors take advantage of market cycles in different economies, while also mitigating a single-country risk. US equities remain the top choice for market players owing to the strength and dynamism of the local economy, capital investment, and global diversification. Structurally, the US market is exposed to high-growth industries and over 50 per cent of markets earnings are derived from overseas.

“Diversification usually brings down volatility. By investing overwhelmingly in their own country investors potentially miss out on investment opportunities outside. While the Indian economy has been performing relatively well, the fact is India’s GDP and market cap are just over 3 per cent of global GDP/market cap,” said Mustafa Sagun, CIO, Principal Global Equities, adding that the Indian rupee's depreciation against the US dollar can also contribute to returns for funds that invest in US equities.

Early last month, Axis AMC announced its first dedicated global feeder fund Axis Global Equity Alpha Fund of Fund, an open ended scheme that will invest in Schroder International Selection Fund Global Equity Alpha (SISFGEA). This was the third scheme from the Axis AMC stable after Axis Growth Opportunities Fund and Axis ESG Equity Fund that provide exposure to global equities. SISFGEA, managed by the Schroders Global Equities team based in London, uses a bottom-up approach to pick quality growth companies that offer a sustainable competitive advantage, but are currently mispriced. The fund does not restrict itself to US equities.

Earlier this year, Motilal Oswal Asset Management launched an index fund that tracks the S&P 500 and Edelweiss had launched Edelweiss US Technology Equity Fund of Fund (FOF).

There are 40 international funds in the market currently with total assets of about Rs 5,800 crore, according to Value Research. Thirty two of these are equity-oriented and nine of them focus on the US market.

Inflows to equity MFs touch 11-month high of Rs 10,730 cr in February

Inflows into equity mutual funds surged to Rs 10,730 crore in February, the highest level in 11 months, even as the broader market witnessed heavy volatility amid concerns over the impact of coronavirus.

Overall, the mutual fund industry witnessed a net outflow of Rs 1,985 crore across all segments, mainly owing to withdrawal from liquid or money market category.

In comparison, an inflow of Rs 1.2 trillion was seen in January.

Net inflows into equity and equity-linked schemes rose from Rs 7,547 crore in January to Rs 10,760 crore in February, data by the Association of Mutual Funds in India showed on Wednesday.

This is the highest since March 2019, when equity schemes attracted an inflow to the tune of Rs11,756 crore.

The inflow is well spread between the category of funds such as large-cap, mid-cap, small-cap and multi-cap, among others.

Large-cap, mid-cap and small-cap funds saw inflows of Rs 1,607 crore, Rs 1,451 crore and Rs 1,498 crore, respectively during the month under review.

Besides, gold ETFs saw the highest inflows of Rs 1,483 crore in February amid selloff in the equity markets. This was in comparison to Rs 202 crore inflow seen in the safe haven instrument.

Interestingly, investments into gold ETFs have been rising for the fourth straight month.

The assets under management of the 42-players mutual fund industry dropped by 2.3 per cent to Rs 27.23 lakh crore in February-end from Rs 27.86 lakh crore in January-end.

Mutual funds better voting share, avoid taking companies head-on

Mutual funds (MFs) may be still hesitant to take on India Inc head-on, but their share of votes against managements has seen an uptick in the last calendar year.

The percentage of ‘against’ votes has risen to 4.23 per cent in calendar year 2019, the highest in the past five years for which data was analyzed. The figure was 3.4 per cent in 2018. In developed markets, institutional investors typically vote against five to 10 per cent of management resolutions.

The percentage of ‘abstain’ votes, on the other hand, dipped to 10.9 per cent last year from 12.5 per cent in the year before last. Abstain votes have been as high as 20 per cent at different periods in the past.

Big is not necessarily better when it comes to voting. Only 3.3 per cent of the votes of the top 10 fund houses were cast against managements. Six of these — Aditya Birla Sun Life, HDFC MF, ICICI Prudential MF, Kotak MF, IDFC MF and Axis MF — cast less than one per cent of their votes this way.

The way Indian MFs vote assumes significance, as they have grown in clout over the years. With an equity corpus in excess of Rs 7.8 trillion, MFs are increasingly dictating market direction. Net MF inflows totalled Rs 1.65 trillion in the past two years, nearly 2.5 times that of the Rs 67,098 crore inflows from foreign portfolio investors, historically the dominant price setters.

MFs manage liquid assets for several companies, in hundreds of crores. This could, say experts, dissuade fund houses from going against the managements, as the companies in question might then withdraw the amounts parked in these funds. Also, many MFs are themselves owned by large corporates, a potential conflict of interest while voting.

Interestingly, Franklin Templeton MF, a foreign fund house, has taken the lead in voting on shareholder resolutions. In the past two years, the fund house has voted on about 14,400 resolutions, which is 22 per cent of the total resolutions of the top 10 fund houses. It also tops with 1,259 or 8.7 per cent of ‘against’ votes.

“As long-term investors, corporate governance and management quality are of great interest to us. Franklin Templeton has a clearly defined proxy voting policy based on well-known principles of governance such as independence of the board, prudent capital allocation decisions, minority shareholder friendliness and fair practices and adherence to well-established environmental, social and governance principles,” said Anand Radhakrishnan, managing director & chief investment officer – Emerging Markets Equity - India, Franklin Templeton.

Globally, institutional investors, including activist funds, tend to collaborate and put pressure on the management for changes or look for changes in the top management. The level of collaboration among long-term institutional investors such as pension funds is even higher. In the US, for instance, it is common for funds to take a stand on issues such as climate change, board diversity and appointment of directors.

Dec equity MF inflows dip 50% to Rs 12,000 cr on valuation, growth concerns

Investors poured nearly Rs 12,000 crore into equity oriented mutual funds in the three months ended December 2019, a sharp slump of 50 per cent from the preceding quarter, on worries over stock valuations as well as stuttering economic growth.

Notably, all categories of equity funds, including large-cap, mid-cap, small-cap and dividend yield funds, saw a drop in flows compared to the preceding quarter.

According to a Morningstar report, total flows in equity mutual funds stood at Rs 11,837 crore for the quarter ended December as against Rs 23,874 crore in the September quarter.

During April-June quarter, inflows in such schemes stood at Rs 17,500 crore.

The asset base of equity funds, on the other hand, rose by 6 per cent to Rs 7.7 lakh crore for the quarter ended December.

"Although the flows were positive, the sharp fall in equity flows could be attributed to concerns around over-valuations of some of the underlying stocks held by funds, polarised performances of some of the heavy-weighted stocks in the indexes, which camouflages the performance of the other under-performing stocks, and concerns regarding the steady fall in the GDP growth of the country that have been witnessed in the past few months," the report noted.

Over 30 per cent of the net equity flows have been directed toward the large-cap category, as this segment has been the most resilient over the past year and delivered good returns.

However, inflows in large-cap funds plunged by 42 per cent to Rs 3,500 crore for the period under review, from Rs 6,000 crore seen in July-September.

Until this quarter, large-cap equities had continued to see steady rise in flows as investors continued to align their investments to these funds relative to mid-cap and small-cap counterparts, which saw significant corrections in some of the underlying stocks.

Mid-cap funds saw infusion to the tune of Rs 2,688 crore in the period under review, from Rs 3,738 crore in the preceding three months, translating into a decline of 28 per cent.

The flows in the small-cap category halved to Rs 1,360 crore, from Rs 3,038 crore in the September quarter.

Overall, mutual fund flows have been growing consecutively for the past four quarters. Such funds witnessed a net infusion of Rs 1,28,463 crore in the third quarter of the ongoing financial year 2019-20, compared to Rs 46,578 crore in the preceding three months.

MFs added Rs 3.15 trn to asset base in 2019 on debt schemes, Sebi measures

Mutual funds have added a whopping Rs 3.15 trillion to their asset base in 2019 on the back of robust inflows in debt schemes and measures taken by regulator Sebi for boosting investor confidence.

The asset under management (AUM) of the industry rose by over 13 per cent (Rs 3.15 trillion) to Rs 26.77 trillion at the end of last month, up from Rs 23.62 trillion at the end of December 2018, as per the latest data available with the Association of Mutual Funds in India (Amfi).

The AUM growth seen by the 44-member mutual fund industry in 2019 is significantly higher than 7.5 per cent witnessed in 2018. However, the growth was much more higher at 32 per cent in 2017, when the asset base expanded by over Rs 5.4 trillion.

Industry experts said the double-digit growth is a positive sign given the negative sentiment about equity and fixed income securities. This growth should be primarily credited to inflows in debt-oriented schemes, steps taken by Sebi that boosted investor confidence, and to distributors for helping take the message of "mutual fund sahi hai" (mutual funds are right) to every nook and corner of the country.

"Growth we now see in AUM is largely attributed to debt-oriented schemes. The inflows in debt-oriented schemes have been surprisingly high and saved the year 2019 from becoming a 'dark-dull year of investing', as the year saw Sensex at its record high, investors chose to book profits and drew themselves away from all the negative aura that was around markets.

"While SIP (Systematic Investment Plan) inflows were impressive with around Rs 8,000-crore-plus, the overall equity excitement was missing. The positive side to this is that investors have not lost their complete faith in equity investments and trust the process of SIP," Quantum Mutual Fund CEO Jimmy Patel said.

The year 2019 marks the seventh consecutive yearly rise in the industry AUM after a drop during the two preceding years. The AUM of the industry has grown from Rs 8.22 trillion in November 2009 to Rs 27 trillion in November 2019, indicating an over three-fold jump in 10 years.

The year has also seen repayment issues and downgrades with certain companies, which affected investor sentiment. However, this has also resulted in investors becoming more aware about the overall risk involved with different categories of mutual funds and now choose funds based on their risk appetite.

In terms of asset size, HDFC MF continued to lead the pack with an AUM of Rs 3,82,517 crore (excluding fund of funds) at the end of December 2019, followed by ICICI Prudential MF (Rs 3,61,506 crore) and SBI MF (Rs 3,52,632 crore).

Going ahead, Patel said 2020 will be the year of SIPs, which will rule over lumpsum investments and millennials will start investing in mutual funds.

"If the regulatory framework and the supportive infrastructure is conducive there may be investment by mutual funds in commodities. Overall in my view one could expect a marginal growth in the year 2020. However, mutual fund as an avenue for investment is here to stay," he added.

Fixed maturity plans of mutual funds face risk of concentration: RBI report

The Reserve Bank of India's financial stability report (FSR) has pointed at the risk of concentrated exposures in fixed maturity plans (FMPs) of mutual funds (MFs) in light of certain FMPs 'defaulting' on the date of their maturity.

As part of its analysis of 'risky' investment profiles of FMPs and open-ended debt schemes, the FSR said, "For FMPs, top-five holdings across schemes formed at least 40 per cent of the aggregate corporate debt portfolio, whereas the concentration of both top-five and top-three investments with respect to open-ended debt schemes were lower."

The report also pointed out that the nature of recent FMP defaults had primarily involved debt obligations backed by pledging of shares of group companies.

According to the report, the reason for limited diversification in FMPs could be due to its smaller corpus. "Given that the corpus of FMPs is smaller, diversifying investments into smaller parcels may not be remunerative and hence... risk management is largely done through credit ratings. While such policies are sensible, as recent events demonstrated, idiosyncratic risks remain."

The analysis was conducted over 44 open-ended debt schemes belonging to top fund houses (accounting for 90 per cent of total assets) and 623 FMPs that were active as of December 31, 2018.

On the rating front, the study found that the rating profile of FMPs was better than open-ended debt schemes in terms of AAA-rated exposure. The central bank re-iterated the contagion risks that can arise from the disruption in MF funding. "MFs are the largest net provider of funds to the financial system. Hence, from a market interconnectivity perspective, MFs are intertwined intimately with the rest of the financial system. Consequently, any disruption in the MF market has immediate and significant spillovers in the asset markets," it said.