of Mutual Funds
G. V. Satya Sekhar
G.V.SatyaSekhar
The Management of
Mutual Funds
ISBN 978-3-319-33999-3
ISBN 978-3-319-34000-5
DOI 10.1007/978-3-319-34000-5
(eBook)
Contents
Introduction
Review ofLiterature
37
Corporate Governance
61
Benchmarking
95
Asset Management
109
Portfolio Management
133
149
167
vi
Contents
Bibliography
171
Index
177
List of Figures
vii
List of Tables
Table 1.1
Table 1.2
Table 1.3
Table 1.4
Table 1.5
Table 4.1
Table 4.2
Table 4.3
Table 4.4
Table 4.5
Table 4.6
14
15
15
18
20
101
101
102
102
103
103
ix
List of Tables
Table 4.7
Table 4.8
Table 4.9
Table 4.10
Table 5.1
Table 5.2
Table 5.3
Table 5.4
Table 5.5
Table 5.6.
Table 5.7
Table 5.8
Table 5.9
Table 5.10
Table 5.11
Table 5.12
Table 6.1
Table 6.2
Table 6.3
Table 6.4
Table 6.5
Table 6.6
Table 6.7
Table 6.8
Table 6.9
Table 6.10
Table 6.11
Table 6.12
Table 6.13
Table 6.14
Table 6.15
Table 6.16
Table 7.1
Table 7.2
104
104
105
105
114
118
120
121
124
124
125
125
125
126
126
126
140
141
141
142
142
143
144
144
144
145
145
145
146
146
146
147
157
159
1
Introduction
Background
Introduction
It is interesting to note that many of these schemes invest in a single security that matures at a particular date, and most single investor
schemes are likely to be in this category. Such schemes are a negation of
the very concept of mutual funds, where expert investment managers are
supposed to hedge risk by investing in a basket of securities. Between
schemes that have just one investor and inter-corporate deposits in the
guise of mutual funds walking away with tax advantages, it is clear that
the Securities Exchange Board of India (SEBI) rules need a serious reexamination. It may also be useful to understand why retail investors are
not interested in mutual funds and to examine persistent charges that
many fund managers tend to front run their investment decisions despite
compliance rules.
In India, regulation of the financial sector has evolved as a product
of planned development, where the mobilization of savings and corresponding investments take place through the public sector at predetermined prices.
It is impossible for an investor, or for a trustee, to closely monitor
the management of the fund. Since monitoring inputs is not feasible,
the only way in which control can be exercised is by monitoring performance. The investor could try to select managers who have exhibited consistent returns in the past. A nave comparison of returns across
alternative funds, which is often done in India, is not helpful when there
are differences in the levels of risk adopted by different funds. Scientific
performance evaluation is necessary to examine the problem.
REGULATOR/
MONITORING
AUTHORITY
SPONSOR-
TRUSTEE-
Supports fund
Creates fund
MUTUAL FUND
ORGANISATION &
Corporate Governance
FUND MANAGER /
Bench marking
AMC-Asset Management
Company
PORTFOLIO MANAGEMENT
DISTRIBUTOR
/Markeng and promong
SCHEMES/ Opons
Ready to invest
2.1
(a) Fund Sponsor: A sponsor is a person who, acting alone or in combination with another corporate body, establishes a mutual fund. In order
to register with SEBI as a mutual fund, the sponsor should have a sound
financial track record of over five years and integrity in all his business
transactions. Following its registration, in accordance with SEBI regulations, the sponsor forms a trust, appoints a Board of Trustees and an asset
management company (AMC) as a fund manager. Further, a custodian
is appointed to handle custodial services for the funds schemes. The
sponsor should contribute at least 40 % of the net worth of the AMC,
provided that any person who holds 40 % or more of the net worth of
an AMC should be deemed to be a sponsor, and is therefore required to
fulfill the eligibility criteria specified in the SEBI regulations.
(b) Trustees: The mutual fund can either be managed by the Board of
Trustees, which is a body of individuals, or by a Trust Company,
which is a corporate body. Most of the funds in India are managed by
(c)
(d)
(e)
(f )
Introduction
Introduction
3.1
(a) Mutual funds, like securities investments, are subject to market and
other risks and there can be no assurance that the objectives of any of
the schemes of the fund will be achieved.
(b) The NAV of units issued under the schemes can go up or down
depending on the factors and forces affecting capital markets, and
may also be affected by changes in the general level of interest rates.
(c) The past performance of the mutual funds managed by the sponsors
and their affiliates/associates is not necessarily indicative of the future
performance of the schemes.
(d) The sponsors are not responsible or liable for any loss resulting from
the operation of the schemes beyond the initial contribution of an
amount of Rs. 1 lakh made by the sponsors towards setting up the
fund or such other accretions and additions that may be made to the
initial corpus set up by the sponsors.
(e) The liquidity of the schemes investments may be restricted by trading volumes, settlement periods and transfer procedures. In the event
of an inordinately large number of redemption requests or of a
restructuring of any of the schemes portfolios, the time taken by the
fund for redemption of units may become significant. Investors are
also requested to peruse the risk factors and special considerations.
The right to limit redemptions is detailed in the offer documents of
the respective schemes of the fund.
Adriaan Van Ketwich, a Dutch merchant, theorized in 1774 that diversification would increase the appeal of investments to smaller investors with
minimal capital. The investment company Socit Gnrale des PaysBas Pour favoriser lindustrie nationale,2, launched in the Netherlands
in 1822 by King William I, may be treated as the first mutual fund.
The name of van Ketwichs fund, Eendragt Maakt Magt, translates as
unity creates strength. The next wave of near-mutual funds included
an investment trust launched in Switzerland in 1849, followed by similar
vehicles created in Scotland in the 1880s. The idea of pooling resources
and spreading risk using closed-end investments soon took root in Great
Britain and France, making its way to the United States in the 1890s. The
Boston Personal Property Trust, formed in 1893, was the first closed-end
fund in the USA.
1
2
Satya Sekhar, GV (2014), The Indian Mutual Fund Industry, Palgrave Macmillan.
Robert O Edmister (1980), Financial Institutions Markets and Management, McGraw Hill.
Introduction
Harry C Sauvan (1973), Investment Management, Prentice Hall Inc., 4th edn.
Investment Companies report by U.S.Securities and Exchange Commission, Dec, 2007.
10
Later, State Street Investors started its own fund in 1924 with Richard
Paine, Richard Saltonstall and Paul Cabot at the helm. Saltonstall was
also affiliated with Scudder, Stevens and Clark, an outfit that would
launch the first no-load fund in 1928. A momentous year in the history
of the mutual fund, 1928 also saw the launch of the Wellington Fund,
which was the first mutual fund to include stocks and bonds, as opposed
to direct merchant bank-style investments in business and trade.
It was during the 1920s that investment companies first became important in the USA.They had existed since the 1890s, but by 1923 there
were only 15 with total assets of no more than $15 million. However, as
stock prices soared in the late 1920s, and small investors rushed to get in
on the action, investment companies mushroomed. By 1929, there were
some 400, with $3 billion assets. Most of these early investment companies were closed-end companies. Some offered families of trusts with
differing investment objectives, much like the mutual funds of today. The
stock market collapse between 1929 and 1933 was, of course, a catastrophe for the investment companies.
In the UK and the USA, regulators are putting more emphasis on
transparency of commissions offered by mutual fund organizations rather
than a ban on offering commission to the investors.5 Mark Carhart (1997)
found that nearly 1,500 US mutual funds underperformed the market in
approximately half the years between 1962 and 1992.6
The 1930s saw the relatively rapid growth of companies which opted
for open-ended schemes, partly because of the disrepute into which the
closed-end companies had fallen. The Massachusetts Investors Trust fund
was formed in Boston in 1924. It promised to redeem its shares at net
asset value less $2 per share. Interest in mutual funds picked up again
after World War II, when the stock market revived. During the period
19451965, mutual funds grew at an average rate of 18 % a year. There
were around 270 funds with $50 billion, and the number of shareholders
grew from 3 million to over 50 million.
5
Rajan Mehata (2003), Indian Mutual Fund Industry-Challenging Issues, Chartered Financial
Analyst, December, pp.3233.
6
Mark Carhart (1997), On Persistence in Mutual Fund Performance, Journal of Finance, March,
5682.
Introduction
11
The mutual fund industry in India originated by way of the establishment of the Unit Trust of India (UTI), an initiative of the government of
India and the countrys Reserve Bank (RBI).This has led to the emergence
of mutual funds as the preferred investment vehicle. The Indian mutual
fund industry has been growing, but is still not big enough to make its
presence felt. A thorough understanding of the growth process of the
mutual fund industry can be broadly divided into four distinct phases.
6.1
The Unit Trust of India (UTI) started its operations in 1963, with the
enactment of the UTI Act in parliament. The then Finance Minister,
Mr. T.T. Krishnamacharya, who piloted the bill, made it clear that
UTI would provide an opportunity for the middle and lower income
groups to acquire without much difficulty, property in the form of
shares, this institution is intended to cater mainly to the needs of individual investors, whose means are small. UTI started its operations
in 1963 with the premier scheme, an open-ended unit scheme, popularly referred to as US-64, being launched on July 1, 1964. In the
very first year it garnered Rs. 24.67 crore. This is an example of a load
fund scheme along with CANCIGO and CANGILT. UTI came forward with a number of schemes in the first phase itself, owing to the
immense popularity of its US-64; while UTI launched a re-investment
plan (automatic re-investment of dividends to US-64 unit holders)
in 19661967 and 1971, which provided insurance benefits besides
growth of investment.
However, in 1978 UTI was delinked from the RBI, and the Industrial
Development Bank of India (IDBI) took over the regulatory and administrative control in its place. At the end of 1988 UTI had Rs. 6,700 crore
of assets under management.
12
6.2
Introduction
13
100
93.9
72.5
86.16
49.65
62.20
84.92
Percentage (%)
132
1,488
897
3,274
4,105
1,964
6.1
27.85
13.84
50.35
37.80
15.08
Percentage (%)
RBI annual report, 19941995, the data represents resource mobilization by year
1,261.06
2,059.4
3,855
5,583.5
4,122.1
6,753.1
11,057
19861987
19871988
19881989
19891990
19901991
19911992
19921993
UTI
Year
Other public
sector
organizations
1,261.06
2,191.40
5,343.00
6,480.50
7,396.10
10,858.40
13,021.00
Total
100
100
100
100
100
100
100
Percentage (%)
14
The Management of Mutual Funds
Introduction
15
Year
Savings
mobilized
(Rs. Crore)
Simple
index
No. of
investors
(in Lakhs)
Simple
index
Mobilization of
savings per
investor (Rs)
19871988
19881989
19891990
19901991
19911992
19921993
4,814
7,162
12,553
21,301
27,193
37,887
100
148.8
260.8
442.4
564.28
787
31.01
40.5
52.95
81.65
117.5
248.5
100
130.6
170.7
263.3
379
801
15,525
17,683
23,708
26,089
23,143
15,246
6.3
Foreign partner
Alliance capital, USA
Cazenove Fund Management
Company, UK
Pioneer group Inc, USA
Prudential Corporation, USA
Foreign and colonial Emerging
Markets Ltd, UK
Newton Asset Management, UK
Franklin Templeton
Zurich Finance, Mauritius
The mutual fund industry saw major growth in the decade 19932003.
The amendment of the Banking Regulation act during 1987 permitting
public sector banks and financial institutions to set up mutual funds
brought in significant changes. Since 1993 the government has allowed
private sector companies to enter the industry, which has led to a new era
in which Indian investors have been given a wider choice of fund families. The first mutual fund regulation act came into existence in 1993,
and under this all mutual funds (except UTI) were to be registered and
governed. Table 1.3 depicts a select private sector mutual fund and its
foreign partners.
16
Mathur KBL (2004), Regulation of Indias Financial Sector: The States Role, Economic and
Political Weekly, 20 March, pp.125358.
Introduction
17
and the subsequent IPO boom changed all this. With retail investors tasting the power of equity, a spate of private equity funds made their debut in
19941995. Funds such as Apple Midas, Gold Share and Morgan Stanley
Growth Fund drew retail investors in large numbers. After the upsets of
19941995, many more private sector funds threw their hat into the ring,
some of them big global names such as Alliance Capital, the Templeton
Group, Newton and Principal Financial. With a lull in the equity market,
fund houses spent this period expanding their portfolio of debt offerings.
Alongside the debt funds came the gilt, liquid, cash funds and treasury
management plans to cater to high net worth and corporate investors.
There was also a slew of balanced and hybrid fund launches. During this
period, assured return schemes from the UTI and the bank-sponsored
funds were buffeted by controversy. This was followed by the crisis in US
64 bonds. These events helped drive the concept of market-linked returns
firmly into the minds of investors, and this put private sector fund houses
firmly back on the radar screens of investors. The assets under management
of private sector mutual funds have crossed Rs. 50,000 crore in August
2002. At the end of August, these funds had assets of Rs. 51,820 crore with
a share of 48.2 %. The following are the other pointers from fund flows
into and out of mutual funds in August 2002. Net inflows were higher in
August than in the last six months at Rs. 3,801 crore. Sales were Rs. 21,314
crore and repurchases/redemption Rs. 17,513 crore. Almost the entire net
flows were into income schemes, with regular income schemes taking in
Rs. 3,119 crore and short-term funds of Rs. 845 crore. Balanced funds
witnessed outflows while equity funds had marginal inflows.
6.4
In February 2003, following the repeal of the Unit Trust of India Act
1963, UTI was split into two separate entities. One was the specific
undertaking of UTI with assets under management (AUM) of Rs. 29,835
crore as of the end of January 2003, which badly represented the assets
of the US-64 scheme. The specified undertaking of UTI functions under
an administrator and under the rules framed by the government of India,
and does not come under the purview of the mutual fund regulations.
18
Beginning of the
year
I
II
III
IV
1964
1988
1994
Jan. 2003
25
6700
61,028
1,21,805
The second is the UTI MF Ltd, sponsored by SBI, PNB, BOB and
LIC. It is registered with SEBI and functions under the mutual fund
regulations. With the bifurcation of the erstwhile UTI in March 2000,
there were more than Rs. 76,000 crore of assets under management and a
UTI mutual fund was set up, conforming to the SEBI mutual fund regulations. With recent mergers taking place among different private sector
funds, the mutual fund industry had entered the current phase of consolidation and growth. The different phases of growth of the mutual fund
industry and their assets at the beginning of each phase are presented in
Table 1.4. At the end of January 2003, there were 33 mutual funds with
total assets of Rs. 121,805 crore.
The number of mutual fund houses went on increasing, with many
foreign mutual funds setting up funds in India and the industry witnessing several mergers and acquisitions. UTI with Rs. 44,541 crore of
assets under management was way ahead of other mutual funds. The
reform measures were initiated in India in 1993 with three objectives: to
protect investors so as to generate the confidence necessary for mobilizing resources and to generate competition; to improve efficiency; and to
promote innovations.8
In the last ten years the mutual fund industry in India has had a most successful phase, some research showing that the growth in the number of
schemes offered by Indian mutual funds has risen from 403in 20022003
8
Vyuptakesh Sharan (2007), Reforming Mutual Funds in India, Indian Journal of Commerce,
60(4), OctoberDecember, pp.7787.
Introduction
19
UTI
6,628
7,702
9,368
20,617
20,740
29,519
35,488
56,584
48,754
80,218
67,189
58,922
69,450
74,233
92,751
Year
20002001
20012002
20022003
20032004
20042005
20052006
20062007
20072008
20082009
20092010
20102011
20112012
20122013
20132014
20142015
7.32 %
7.66 %
8.57 %
14.77 %
13.86 %
12.73 %
10.88 %
10.29 %
10.10 %
10.94 %
9.89 %
9.06 %
8.53 %
8.22 %
7.81 %
Percentage
58,017
51,434
43,351
11,912
11,374
20,829
28,725
45,908
50,607
83,295
55,453
52,032
69,393
84,189
91,428
Others
64.05 %
51.13 %
39.66 %
8.53 %
7.60 %
8.98 %
8.80 %
8.35 %
10.48 %
11.36 %
8.16 %
8.00 %
8.52 %
9.32 %
7.70 %
Percentage
Private
28.64 %
41.21 %
51.77 %
76.70 %
78.53 %
78.29 %
80.32 %
81.35 %
79.42 %
77.69 %
81.95 %
82.94 %
82.95 %
82.46 %
84.49 %
Percentage
90,587
100,594
109,299
139,616
149,600
231,862
326,292
549,666
482,827
732,934
679,462
650,227
814,299
902,961
1,187,477
Total
20
The Management of Mutual Funds
Introduction
21
declined to 7.81 % by the year 20142015. In the case of private sector mutual funds, this situation was reversed, with their contribution of
26.64 % during 20002001 was significantly raised to 81.31 % by the
year 20072008.
22
Introduction
23
depending on the terms of the agreement, also collects income/dividends on the securities. Some of the other associated assignments of
custodians are:
Ensuring delivery of scrips only on receipt of payment and payment only upon receipt of scrips.
Regular reconciliation of assets to accounting records.
Timely resolution of discrepancies and failures.
Ensuring securities are properly registered or recorded.
Depending on the volume of transactions there may be co-custodians
for a mutual fund. These custodians are entitled to receive custodianship
fees, based on the average weekly value of net assets or sale and purchase
of securities, along with per certificate custody charges.
(b) AMC (Investment Manager): The sponsor or the trustees appoint an
AMC to manage the affairs of the mutual fund. The AMC manages
all the schemes of the fund. An AMC can only act as a trustee of one
mutual fund. An AMC is not permitted to undertake any business
activity except management and advisory services to offshore funds,
pension funds, provident funds, venture capital funds, management
of insurance funds, financial consultancy and exchange of research
on a commercial basis, if these activities are not in conflict with the
activities of the mutual fund. It can also operate as an underwriter
provided it is registered under SEBI (Merchant Bankers) Regulations.
To ensure efficient management, SEBI requires that existing AMCs
should have a sound track record (good net worth, dividend paying capacity, profitability, etc.), a good general reputation and fairness
in transaction. The directors of an AMC should be experts in relevant
fields, such as portfolio management, investment analysis and financial
administration, because all AMCs are involved in these three activities.
An AMC is expected to operate independently. SEBI regulations require
that at least 50 % of directors do not have any association with sponsor
or trustees. The AMCs chairman should be an independent person. To
24
ensure the stake that sponsors hold in the AMC, it is required that at least
40 % of its net worth should be contributed by the former AMC, itself
being financially sound, and that it should have a net worth of at least
Rs. 10 crore.
9.1
Portfolio Classication
Here, classification is on the basis of nature and type of securities and the
objective of investment.
(a) Income funds: The aim of income funds is to provide safety of
investments and regular income to investors. Such schemes invest
predominantly in income-bearing instruments such as bonds, debentures, government securities and commercial paper. The return as
well as the risk is lower in income funds as compared to growth
funds.
(b) Growth funds: The main objective of growth funds is capital appreciation over the medium to long term. They invest most of the corpus in equity shares with significant growth potential and they offer
a higher return to investors in the long term. They assume the risks
associated with equity investments. There is no guarantee or assurance
of returns. These schemes are usually closed-ended and listed on
stock exchanges.
(c) Balanced funds: The aim of a balanced scheme is to provide both
capital appreciation and regular income. They divide their investment between equity shares and fixed price instruments in such a
proportion that the portfolio is balanced. The portfolio of such funds
usually comprises companies with good profit and dividend track
records. Their exposure to risk is moderate and they offer a reasonable rate of return.
(d) Money market mutual funds: They specialize in investing in shortterm money market instruments such as treasury bills, and certificate
of deposits. The objective of such funds is high liquidity with a low
rate of return.
9.1.1
Introduction
25
Geographical Classification
9.1.2
Others
(a) Sectoral: These funds invest in specific core sectors such as energy,
telecommunications, IT, construction, transportation and financial
services. Some of these newly opened-up sectors offer good investment potential.
(b) Tax saving schemes: Tax-saving schemes are designed on the basis
of tax policy, with special tax incentives to investors. Mutual funds
have introduced a number of tax saving schemes. These are closedended schemes and investments are made for ten years, although
investors can avail themselves of encashment facilities after three
years. These schemes contain various options such as income, growth
or capital application. The latest scheme to be offered is the
Systematic Withdrawal Plan (SWP), which enables investors to
reduce their tax incidence on dividends from as high as 30 % to as
low as 3 to 4 %.
26
(c) Equity-linked savings scheme (ELSS): In order to encourage investors to invest in the equity market, the government has given tax
concessions through special schemes. Investment in these schemes
entitles the investor to claim an income tax rebate, but these schemes
carry a lock-in period before the end of which funds cannot be
withdrawn.
(d) Special schemes: Mutual funds have launched special schemes to
cater to the special needs of investors. UTI has launched special
schemes such as Childrens Gift Growth Fund, 1986, Housing Unit
Scheme, 1992 and Venture Capital Funds.
(e) Gilt funds: Mutual funds which deal exclusively in gilts are called
gilt funds. With a view to creating a wider investor base for government securities, the RBI encouraged them. These funds are provided
with liquidity support by the RBI.
(f ) Load funds: Mutual funds incur certain expenses for brokerage,
marketing and communication, for example. These expenses are
known as load and are recovered by the fund when it sells the units
to investors or re-purchases the units from withholders. In other
words, load is a sales charge, or commission, assessed by mutual
funds to cover their selling costs. Loads can be of two types: front end
and back end. Front-end load, or sale load, is a charge collected when
an investor enters the scheme. Back-end load, or re-purchase, is a
charge collected when the investor leaves the scheme. Schemes that
do not charge a load (where the AMC bears the load during the
launch of the scheme) are called no-load schemes. However, these
no-load schemes can include an exit load if the unit holder leaves
before a stipulated period laid down in the initial offer. This is to
prevent short-term investments and redemptions. Some funds may
charge different loads to investors depending upon the time the
investor has remained. The longer the investor stays, the smaller the
exit load charged. This is known as contingent deferred sales charge
(CDSL). It is a back-end (exit load) fee imposed by certain funds on
shares redeemed within a specific period following their purchase
and is usually assessed on a sliding scale.
(g) Index funds: An index fund is a mutual fund which invests in securities in the index on which it is based, such as BSE Sensex or S&P CNX
Nifty. It invests only in those shares which comprise the market index
Introduction
27
28
10
Introduction
29
30
(f ) Investor Protection: SEBI has ensured safeguard measures for investors, with more and more transparency being required. Unit certificates are to be issued to investors no more than six weeks after the
date of closure of the subscription list. SEBI requests that if some
units are submitted for transfer, such transfer is to be executed within
30 days. Dividend warrants against the scheme are to be dispatched
within 42 days of the declaration of the dividend. SEBI also states
that repurchase proceeds should be dispatched within ten working
days of the date of redemption. Above all, SEBI regularly conducts
inspections of mutual funds to ensure that their operating policies
are not against the interests of investors. SEBI has put a ban on
AMCs issuing new schemes by default.
SEBI will take necessary action if an AMC commits fraudulent
practices.
11
In the USA, mutual funds have been labeled as the bank deposits of
the 1990s. Mutual funds have changed the American financial landscape by offering a menu of investment choice, and some companies
such as Fidelity Investments, Vanguard and Merrill Lynch are very popular. The Americans have been pouring over $1 billion every day into
these funds.
Turning now to financial institutions, it is clear that they can
contribute to financial stability by increasing the sophistication of
their risk management systems to match the growing complexity of
domestic and international financial markets, to help ensure that
their actions do not have a negative impact on other participants in
global financial markets. Financial market participants, in turn, have
a responsibility to impose greater market discipline on financial institutions by rewarding those that have better risk management systems
and disclosure practices, and punishing those whose systems are weak.
Achieving both of these objectives will inevitably require meaningful
Introduction
31
32
11.1
12
Introduction
33
34
13
Summary
Introduction
35
2
Review ofLiterature
Corporate Governance
The Investment Company Institute published Global corporate governance issues for mutual funds after conducting a survey of the legal,
regulatory and practical framework of corporate governance.1 This survey allows a comparison of the strengths and weaknesses of corporate
governance systems in different jurisdictions. At the same time, it is
not intended to suggest that a mutual fund should avoid investing in a
market because of the corporate governance practices in that particular
jurisdiction. Hence, the appropriateness of a foreign equity security as a
Investment Company Institute, Global Corporate Governance Issues for Mutual Funds, 2000.
37
38
2 Review ofLiterature
39
40
China, and his sample size consisted of 288 firm-year observations over
the period from 2006 to 2010. It examines the ways in which governance
mechanisms enhance board effectiveness under the contractual form of
Chinas FMC.
Jingjing Yang, Jing Chi and Martin Young published a study of internal and external corporate governance mechanisms in China.11 They
state that Chinese regulatory bodies have made considerable efforts to
improve the corporate governance of listed firms. This study revealed
that most of the governance instruments that are effective in developed
nations are less effective in China. They attribute this ineffectiveness
to the large stake of the state in listed firms, and strong political connections between listed firms and the government. They argue that the
lack of a truly independent judicial system also causes disturbance in
China, and provide some suggestions for making corporate governance
more effective.
Benchmarking
2 Review ofLiterature
41
42
2 Review ofLiterature
43
Asset Management
Massimo Massa and Lei Xhang (2008) explored the importance of organizational structure on mutual funds asset management companies.22
Their study found that more hierarchical structures invest less in firms
located closer to them and deliver lower performance. An additional layer
in hierarchical structure reduces the average performance by 24 basis
points per month.
Alex Frino and David R.Gallagher (2002), Is Index Performance Achievable?: An Analysis of
Australian Equity Index Funds, Abacus, Vol. 38(2): pp.200214.
21
David E Allen and Victor Soucik (2003), Some Evidence on the performance benchmarking of
Australian Fixed Interest Funds, Proceedings of Modelling and simulation society of Australia and
New Zealand International Congress on Simulation, pp.122126
22
Massimo Massa and Lee Xhang (2008), The Effects of Organizational Structure on Asset
Management, http://ssrn.com/abstract=1328189.
20
44
Portfolio Management
Diane Del Guercio and Paula A.Tkacs study (2000) deduces the effectiveness of investors manager selection criteria by estimating the relation
between manager asset flow and performance. 26 They write that pension
fund clients use quantitatively sophisticated measures like Jensens alpha,
Manuel Ammann and Michael Verhofen (2008), The Impact of Prior Performance on the RiskTaking of Mutual Fund Manager. Annals of Finance, Issue 5, pp.6990.
24
David M Smith (2009), The Economics of Mutual Funds, Chapter-3 of forthcoming in John A
Haslem (ed.) A Companion to Mutual Funds, John Wiley Sons, USA.
25
Lalik K Bansal (1997), Mutual Fund- Management and Working, Deep & Deep Publishers,
New Delhi.
26
Diane Del Guercio and Paula A. Tkac (2000), The Determinants of the Flow of Funds of
Managed Portfolios: Mutual Funds versus Pension Funds, Federal Reserve Bank of Atlanta Working
Paper 200021 November.
23
2 Review ofLiterature
45
46
It was found that majority of the mutual funds have substantially under-
performed the chosen benchmark. His model also implies an interesting
relationship between performance indices and risk sensitivities. For the
three year data, the empirical analysis shows that portfolio performance
indices are related to their estimated risk sensitivities in an open-upward
quadratic curve.
Treynor and Mazuy (1966) identified a test of the ability of investment
managers to anticipate market movements.28 Their study used the investment performance outcomes of 57 investment managers, and found no
statistical evidence that the investment managers of any of the sample
funds had successfully outguessed the market. It also exhibited that the
investment managers had no ability to predict the market as a whole but
could identify underpriced securities.
Bauman and Miller (1995) considered the persistence of pension
fund investment fund performance by type of investment style.29
They utilized a quartile positioning method since they noticed that
speculators give careful consideration to specialists and money
related periodicals venture execution rankings of common subsidizes
and annuity stores. They found that portfolios overseen by venture
guides demonstrated steadier execution, which is measured by quartile rankings over business sector cycles, and that assets overseen by
banks and insurance agencies demonstrated the least consistency. This
study controlled for the impacts of turnover of key chiefs by confining
the example to those assets with the same administrator for the whole
period of study.
Yoon K.Choi (2006) proposed a motivation-perfect portfolio execution
assessment measure.30 In this model, a portfolio manager, who is averse to
take risk,is appointed to deal with an asset, and his portfolio development
and data-gathering exertions are not specifically detectable to financial speTreynor Jack L and Mazuy, Kay K (1966), Can Mutual Funds Outguess the Markets, Harvard
Business Review, 44:, pp.13136.
29
Bauman, W.S., & Miller, R.E. (1995), Portfolio Performance Rankings in Stock Market Cycles.
Financial Analysts Journal, 51, pp.7987.
30
Yoon K Choi, (2006) Relative Portfolio Performance Evaluation and Incentive Structure, Journal
of Business, Vol. 79, No. 2, pp.90321.
28
2 Review ofLiterature
47
cialists in which supervisors are to amplify speculators net returns in administrative remuneration. He considers the impact of authoritative components,
for example the financial matters of scale, on motivating force, and hence on
the performance of the fund.
Eleni Thanou (2008) inspected 17 Greek equity mutual funds and
their risk-adjusted overall performance during the period 1997 to
2005.31 The study assessed the execution of every asset, taking into
account the CAPM execution system, the Treynor and Sharpe Indexes
for the nine year time frame and additionally for three sub-periods
that showed distinctive business sector attributes. It is found that the
market timing ability and the performance of mutual fund is inter
linked.
Mohit Gupta and Agarwal (2009) concentrated on the portfolio
creation and industry grouping of 18 equity-linked savings scheme
(ELSS) plans from April 2006 to April 2007.32 Mutual fund industry
concentration was the variable utilized as a part of order or group creation. This activity was re-hashed every month for the period under
study. Finally, portfolio execution was analyzed alongside file reserve,
the arrangement of three haphazardly picked assets of the earlier
month, and the arrival and danger parameters of ELSS classification
in general.
Sandra Ramirez, Jesus Sierra Jimenez and Jonathan Witmer looked
at the potential vulnerabilities in Canadian long haul open-end mutual
funds.33 It inspects vulnerabilities inside the mutual fund area and then
surveys the vulnerabilities that could leak from the segment into the
Canadian monetary framework. In general, they find that these vulnerabilities are restricted.
Eleni Thanou (2008), Mutual Fund Evaluation During Up and Down Market Conditions: The
Case of Greek Equity Mutual Funds, International Research Journal of Finance and Economics,
Issue 13.
32
Mohit Gupta and Navdeep Aggarwal (2009), Mutual Fund Portfolio Creation using Industry
Concentration, The ICFAI Journal of Management Research, Vol. Viii, No. 3, 2009, pp.720.
33
Sandra Ramirez, Jesus Sierra Jimenez and Jonathan Witmer(2015), Canadian Open-End Mutual
Funds: An Assessment of Potential Vulnerabilities, Bank of Canada, Financial system review, June
pp.4755
31
48
Friend, Brown, Herman and Vickers (1962) offered the first empirical
analysis of mutual funds performance.34 This study found that average
returns by mutual funds were similar to those delivered by the benchmark
index. It observed that the managed funds were not able to outsmart the
benchmark index, which indicated the presence of market efficiency in
the stock markets.
Sharpe (1964) developed the Sharp Index,35 which is based on capital asset prices, market conditions with the help of risk and return
probabilities.
Sp =
E ( Rp ) Rf
( Rp )
E ( Rp ) Rf
2 Review ofLiterature
49
capacities,37 and found no factual confirmation that the speculation managers had effectively outguessed the business sector. Treynor and Mazuy
built up a reasonable and elite model to gauge investment managers market timing ability. This plan is acquired by including squared additional
arrival in the overabundance return rendition of the capital resource estimating model as given below:
(R
R ft ) = + p ( Rmt R ft ) + yp ( Rmt R ft ) e pt
2+
pt
Where:
Rpt: monthly return on the fund,
Rft: monthly return on 91 days treasury bills,
Rmt: monthly return on market index,
Ept: error term
This model involves running a regression model with excess investment return as a dependent variable and the excess market return and
squared excess market return as independent variables. The value of the
coefficient of squared excess return acts as a measure of market timing
abilities that has been tested for significance by using a t-test. Significant
and positive values provide evidence in support of the investment managers successful market timing abilities.
Michael C.Jensen (1967) finds that these funds are not able to predict
security prices well enough to out-perform a buy and hold policy.38 The
Jensen Model states that given the additional assumption that the capital
market is in equilibrium, all three models yield the following expression
for the expected one period return on any security (or portfolio) j:
E ( R j ) = RF + J E ( Rm ) RF
50
J = cov(j RJ, RM)/2RM = the measure of risk (hereafter called systematic risk), which the asset pricing model implies is crucial in determining
the prices of risky assets.
E(RM) = the expected one-period return on the market portfolio,
which consists of an investment in each asset in the market in proportion
to its fraction of the total value of all assets in the market. It implies that
the expected return on any asset is equal to the risk-free rate plus a risk
premium given by the product of the systematic risk of the asset and the
risk premium on the market portfolio.
Smith and Tito (1969) conducted a study into 38 funds for 19581967
and published results relating to the performance of mutual funds.39
Fama (1972) devised a mechanism for segregation of part of an observed
investment return owing to managers ability to pick up the best securities at a given level of risk, partly through the prediction of general market price movements.40 In Famas decomposition performance evaluation
measure of portfolio, overall performance can be attributed to selectivity
and risk. The performance owing to selectivity is decomposed into net
selectivity and diversification. The difference between actual return and
risk-free return indicates overall performance:
Rp Rf
Wherein
Rp: actual return on the portfolio, which is monthly average return of
fund.
Rf: monthly average return on treasury bills 91 days.
The overall performance further can be bifurcated into performance
owing to selectivity and risk. Thus,
Rp Rf = Rp Rp ( p ) + Rp ( p ) ( Rf )
2 Review ofLiterature
51
52
Et ri ,t +1 r f ,t +1 = Vi I / 2 + Vim + ( 1) Vih
Where:
Etri, t+1: log return on asset,
r f,t+1:log return on riskless asset,
Vii denotes Vart(ri,t+1), is the agents coefficient of relative risk
aversion,
Vim denotes Covt(ri,t+1, rm,t+1), and
the parameter: = 1 exp (c w) and c w is the mean log consumption to wealth ratio.
Alexander (2004) has suggested a new dimension called modified
approach for risk-adjusted performance of mutual funds.50 Martin Eling
(2006) focused on data envelopment analysis (DEA), presented as an
alternative method for hedge fund performance measurement.51 George
Comer (2006) examined the stock market timing ability of two samples
of hybrid mutual funds.52 It was found that bond indices and a bond
timing variable are included in a multifactor analysis of performance
measurement.
2 Review ofLiterature
53
Yoon K Choi (2006), Relative Portfolio Performance Evaluation and Incentive Structure, Journal
of Business, Vol. 79, No. 2, pp.90321.
54
Ramesh Chander (2006), Informational Efficiency, Parameter Stationarity and Bench Mark
Consistency of Investment Performance, The ICFAI Journal of Applied Finance, March.
55
Gajendra Sidana (2007), Classifying Mutual Funds in India: Some results from clustering,
Indian Journal of Economics and Business, Vol.II.No.2.
56
Coates John C. and Hubbard Glenn R (2007), Competition in the mutual fund industry:
Evidence and implications for policy, Discussion paper No. 592, Aug, Source: http://ssrn.com/
abstract=1005426.
57
Cehng-Ru Wu, Hsin-Yuan Chang & Li-Syuan Wu (2008), A Framework of assessable mutual
fund performance, Journal of Modeling in Management, Vol. 3, No. 2, pp.12539.
53
54
2 Review ofLiterature
55
= R f + ( R p R f ) ( Sm / Sp ) Rm
In this formula:
Rf: monthly return on three-month treasury bills,
Rp: monthly return on fund portfolio
Rm: monthly return on the benchmark index,
Sp: standard deviation of portfolio ps return
Sm: standard deviation of return on the benchmark index
This model is used for short-term investment analysis. The performance is compared with its benchmark on a monthly basis.
Baker Kent H, John A. Haslem and David M Smith, Performance and Characteristics of
Actively Managed Institutional Equity Mutual Funds, Electronic copy source: http://ssrn.com/
abstract=1124577.
65
Khurshid SMZ, Rohit and Sing GP (2009), Level and trends of competition among the mutual
funds in India, Research Journal of Business Management, Vol3. Issue 2, pp.47-67.
66
Sunil Wahal and Alber (Yan) Wang (2010), Competition among Mutual Funds, Journal of
Financial Economics, March, source: http://ssrn.com/abstract=1130822.
67
Statman M (2000), Socially responsible Mutual Funds, Financial Analysts Journal, Vol. 56,
pp.3038.
64
56
Elango (20003), Which fund yields more returns? A Comparative analysis on the NAV
Performance of Select Public v/s Private/Foreign Open-ended Mutual Fund Schemes in India,
Mutual Funds.
69
Modigliani, Franco and Modigliani, Leah(1997), Risk Adjusted Performance, Journal of
Portfolio Management, pp.4554
68
2 Review ofLiterature
57
risk return and therefore the market return. The effect of this adjustment
is reported below:
M 2 = *Rp Rm
In this formulae:
* Rp = expected return,
Rf = risk-free return,
Sdm = standard deviation of market portfolio
Sdp = standard deviation of managed portfolio
58
2 Review ofLiterature
59
Amisano, Gianni and Savona, Roberto, Imperfect Predictability and Mutual Fund Dynamics:
How Managers Use Predictors in Changing Systematic Risk (March 2008). ECB Working Paper
No. 881. Available at SSRN: http://ssrn.com/abstract=1103484.
74
3
Corporate Governance
Introduction
61
62
during the year 1998, the relief packages had to be worked out by the
Government. UTI faced a severe crisis owing to irregularities in management, the non-disclosure policy of US-64 and so on. In the wake of
this, the issue of corporate governance in India was studied in depth and
dealt with by the Confederation of Indian Industries (CII), Associated
Chamber of Commerce and Industry (ASSOCHAM) and the Securities
and Exchange Board of India (SEBI).
Modern corporate governance originated in the aftermath of the
Watergate scandal in the USA. It was found that control failures had
allowed several major corporations to make illegal political contributions
and to bribe government officials. The UK also saw explosive growth
in earnings in the 1980s, ending the decade in a memorably disastrous
manner. These corporate failures arose primarily out of poorly managed
business practices.
It is impossible for an investor, or for a trustee, to closely monitor
a fund manager and ensure that decisions are being made in his best
interest. Since monitoring inputs is not feasible, the only device through
which control can be exercised is the monitoring of performance. An
investor can try to select fund managers who have exhibited the highest
returns in the past, and fire fund managers who fail to perform. A nave
comparison of returns across alternative funds, which is often done in
India, is incorrect when there are differences in the levels of risk adopted
by different funds. Scientific performance evaluation is necessary when
examining this problem. When a manager obtains good returns, it could
often be because he was just lucky, and when a manager gets bad returns,
it could often be because he was unlucky. In this context, we can say that
some of these fund managers are lagging behind in adopting good corporate governance practices.
3 Corporate Governance
63
3.1
Australia
64
the Australian Stock Exchange (ASX) and other public non-listed corporate entities. Australian listed companies generally have a unitary board
structure with a balance of executive and non-executive directors and a
separate chief executive and chairman. The ASX Corporate Governance
Council is a central reference point that allows companies to understand
stakeholder expectations. In order to promote and restore investor confidence, ASX convened the ASX Corporate Governance Council in August
2002. Its purpose is to develop recommendations which reflect international best practice. The following enactments will govern corporate
governance in Australia.
The Corporate Law Reform Program Act 1999: This introduced a
statutory business judgment rule, re-wrote many of the provisions
about directors duties, revolutionized the rules on take overs and fundraising, and clarified some issues about accounting standards and the
rules generated by accounting standards setting bodies.
The Financial Service Reforms Act 2001: Introduced standardized
regulation for all people and companies that deal in financial products
or that give investment advice.
The Corporate Law Simplifications Act 1995: Amongst many other
reforms, this provided for a new form of company in Australia, the one
person company consisting of one director and one shareholder. The
aim was to provide greater flexibility for small businesses that wished
to incorporate in Australia.
3.2
Canada
3 Corporate Governance
65
coordinates provincial securities regulation through national instruments. The main regulatory framework for open-ended mutual funds
is contained in National Instrument 81102 (NI 81102), which
includes operational requirements regarding custodianship of a funds
assets, the structure of portfolio management fees and redemption of a
funds shares.
Fixed-income mutual funds represent a non-negligible proportion of
Canadian corporate and government fixed-income markets. A sell-off
triggered by outflows could, at least in principle, cause significant price
volatility in these markets. Nevertheless, redemption behavior during
past periods of stress was contained, suggesting that this potential vulnerability is limited.
Although many Canadian fund management firms are affiliated to a
major bank, these banks are unlikely to suffer losses from stress in any of
the management firms funds, since funds and their management firms
are separate legal entities and there is no implicit expectation that a longterm mutual funds price would be supported to maintain a certain value.
Mutual fund managers in Canada run the gamut from very large to
extremely small. Of the 65 mutual fund managers for which we have upto-date statistics:
13 mutual fund managers have in excess of $10 billion in assets under
administration.
17 managers have between $1 billion and $10 billion in assets under
administration.
17 managers have between $100 million and $1 billion in assets under
administration.
18 managers have less than $100 million in assets under
administration.
The largest mutual fund manager in Canada has over $40 billion in
assets under administration, while another large mutual fund manager
offers a line-up of 150 mutual funds. In contrast, many small mutual
fund managers have less than $100 million in assets under administration and manage fewer than ten mutual funds. Needless to say, there
are vast differences in size between the largest and smallest players in
this market.
66
3.3
Denmark
3.4
3 Corporate Governance
67
In England, the main corporate entities are the private company and
the public company. A Societas Europaea (SE) can also be registered in
the UK.Most legal requirements for directors apply equally to private
and public companies.
In May 1991, the London Stock Exchange set up a committee under
the chairmanship of Sir Adrian Cadbury to help raise the standards of
corporate governance and the level of confidence in financial reporting
and auditing. The committee investigated the accountability of Boards of
Directors to shareholders and to society. It submitted its report and the
associated code of best practices in December 1992. Being a pioneering
report on corporate governance, it would perhaps be in order to make a
brief reference to its recommendations, which are in the nature of guidelines relating to, among other things, Boards of Directors and reporting
and control.
The Disclosure Rules apply to all companies listed on the LSE.The
Prospectus Rules implement Directive 2003/71/EC on the prospectus to
be published when securities are offered to the public or admitted to trading and set out when a prospectus is required. They apply to any public
offer of transferable securities in the EU or for the admission of these
securities to trading on an EU-regulated market. In the UK this includes
companies listed, or applying to list, on the LSE.The Combined Code
on Corporate Governance applies to listed companies. Its provisions are
not mandatory. However, companies should include a statement in their
annual report indicating that they comply with the Combined Code and
how they do this, or stating that they do not comply and give reasons
for this. AIM companies are also encouraged by institutional investors
to adhere to the Combined Code. The Quoted Companies Alliance has
published a set of corporate governance guidelines for AIM companies.
These are intended as a minimum standard and comprise some simple
principles and recommendations for reporting corporate governance
matters. Guidelines are also issued by bodies that represent institutional
investors. These apply to listed companies and, in some respects, go further than the Combined Code. Although the guidelines are informal,
institutional investors can oppose any corporate actions that contravene
them. In the context of takeovers of public companies, these are the City
68
Code on Takeovers and Mergers and the rules of the Takeover Panel.
The Financial Services and Markets Act 2000 (FSMA) and the FSAs
Code of Market Conduct regulate, for listed companies, the disclosure
and use of confidential and price-sensitive information, and actions that
could create a false market. The FSAs Disclosure Rules which regulate,
for listed companies, public disclosure of confidential and price-sensitive
information concerning the company. The Disclosure Rules also require
that transactions in shares or related securities in the issuer be reported
to directors, persons discharging management responsibilities and connected persons.
3.5
France
France passed two laws, in 2001 and 2003, that were intended to
strengthen the legal position on corporate governance: the NRE law
(on new economic regulations) dated May 15, 2001, and the LSF, dated
August 1, 2003. These laws provide a basic framework, specifically targeting transparency and ethics within companies. The regulations include
the following:
Companies whose shares are traded on a regulated market, and any of
their subsidiaries, are obliged to publish details of executive pay;
Publicity relating to stock options;
The expansion of the approval procedure for related parties
transactions;
The management committee can intervene in the context of a public
offering, and participate in general meetings;
New limitations on the number of executive mandates for limited
companies that can be held by one person;
Publicity of shareholder agreements;
The audit profession can no longer be self-regulated, and audit and
consulting activities must be kept separate;
The chairs of limited companies and firms which are traded on a public market must draw up a report on the conditions governing the
preparation and organization of the work of the Board of Directors
and of internal controls procedures;
3 Corporate Governance
69
3.6
Germany
70
3.7
Hungary
3.8
New Zealand
New Zealands corporate governance system is relatively unusual by international standards in a number of respects. First, unlike the financial systems of many countries, in New Zealand the banks form a very dominant
part of the financial sector. Registered banks, of which there are currently
3 Corporate Governance
71
18, represent the lions share of the total financial system; and of the 18
registered banks, only about five banks could be regarded as systemically
important, together holding more than 80 % of total registered bank assets.
The New Zealand methodology is a compelling method for advancing
a sound money-related framework. It diminishes the ethical dangers connected with customary saving money supervision, and reinforces the viability of business sector discipline on banks. New Zealands way of dealing
with money-related division control creates a domain that is helpful for
strong business sector disciplines. This is accomplished through various
measures,including the advancement of a generally open, contestable
saving money segment, and an aggressively unbiased way of dealing with
controlempowering banks and non-banks to contend on to a great
extent approach termsand the non-attendance of store protection.
Whats more, the Reserve Banks way of dealing with reacting to a bank
disappointment focuses on the significance of having the capacity to deal
with it in ways that keep away from the requirement for an administration financed safeguard, and serves as a guarantee for shareholders, subordinated creditors and senior creditors, including contributors.
3.9
Scotland
The Scottish parliament has administrative authority for all other areas
relating to Scotland and has limited power to vary income tax, but has
never exercised this power. Scottish parliament can defer devolved matters
back to Westminster to be considered as part of UK legislation by passing a
legislative consent motion if UK-wide legislation is considered to be more
appropriate. The programs of legislation enacted by the Scottish parliament
have diverged in the provision of public services from those of the UK.
72
tion. All countries in our study have re-organized their regulatory systems covering the fund management industry in the form of independent
and centralized systems, incorporating different regulatory regimes and
functions that had previously been spread over various agencies such as
ministries of finance and central banks. The Asian countries have also
completed enacting laws that have significantly liberalized the fund management industry and revised establishment criteria. As noted below, in
Indonesia regulation of the mutual fund industry has not yet been centralized, and there is no unitary regulatory framework. The Central Bank,
Ministry of Finance and Capital Market Supervisory Agency will share
the responsibility for regulation.
4.1
Indonesia
Indonesia is in the process of centralizing and has established a committee for the integration of regulatory units. This transition is in line with
the regulatory trend in more mature financial marketsfor example, the
UKs Financial Services and Markets Act of 2000 (FSMA) and Japans Act
of Investment Trust and Investment Corporation, which were promulgated based on the principle of regulation by function.
4.2
Bhutan
3 Corporate Governance
73
still at an incipient stage. The housing industry remains its biggest sector,
but increasingly more commercial ventures are being undertaken. The
Indo-Bhutan Friendship arrangement expresses the hope that the administration of the Kingdom of Bhutan and the legislature of the Republic of
India might coordinate with each other in order to enhance their national
advantages. The Indo-Bhutan kinship bargain of 2007 reinforces Bhutans
status as a free and sovereign country. However, corporate administration
in Bhutan is still at the stage of being created.
The Royal Securities Exchange of Bhutan (RSEB) was consolidated
in 1993 under the Companies Act, 1982 and the Financial Institutions
Act, 1992. Its underlying Nu2 million approved capital was given by the
Bank of Bhutan, the Bhutan National Bank, the Bhutan Development
Finance Corporation and the Royal Insurance Corporation of Bhutan
the four organizations with business firms that were then authorized to
serve as merchant specialists. The RSEB is presently claimed by these
four merchant representative individuals. Initial public offerings (IPOs)
of shares must take place through the RSEB. By the end of 2011, 22
organizations had been recorded on the RSEB.The trade had minimal
auxiliary exchanging. The RSEB additionally has essential offerings of a
great deal of government andRoyal Monetary Authority (RMA) obligation, and it had four corporate securities toward the end of 2011.
The government established the National Pension and Provident Fund
(NPPF) in March 2000 as an autonomous agency responsible for administering the pension and provident fund plan for the civil service, corporate employees and the armed forces.1 With assets of more than Nu12
billion in 2011, the NPPF is the largest institutional investor in Bhutan
and has fiduciary responsibility for managing its investments. Because
the capital market was underdeveloped and the availability of investment
instruments was limited, the RMA mandated the NPPF at the funds
inception in 2001 to undertake limited lending activities. Following
adoption of the Financial Services Act in June 2011, however, the RMA
directed the NPPF to end lending activities from June 2014. This necessitates a major re-orientation of NPPFs business plan and an assessment
of options for a re-structuring.
1
http://www.adb.org/sites/default/files/project-document/75150/46300-001-bhu-tar.pdf.
74
4.3
Korea
4.4
Malaysia
In Malaysia, the regulation of the investment fund industry was centralized with the establishment of the Securities Commission (SC)
in March 1993, coupled with the implementation of the Securities
Commission Regulations in 1996. The Securities Commission adopted
a full disclosure-based regulatory framework in May 2003, and accelerated the assessment of applications for the issuance of unit trusts and
prospectus registration, and reinforced disclosure and reporting requirements. The regulations also allow third-party distribution and the licens2
3 Corporate Governance
75
ing of tied agents involved in the distribution of unit trusts, and allowed
stock brokerage companies to manage unit trusts. These changes provided substantial impetus to growth and development in the industry.
The Malaysian Capital Market Master Plan has served as a guideline for
the financial sector since 2010, and encourages the continued liberalization of mutual funds that began in 1997. The Federation of Malaysian
Unit Trust Managers seeks to develop the industry by improving the
regulatory and legal environment for unit trusts, with a view to formulating business policies beneficial to the industry, providing information
and assistance to its members, and promoting awareness of the industry
among the general public.
4.5
Philippines
4.6
Singapore
4.7
UAE
76
UAE are hereditary for the Al Nahyan clan of Abu Dhabi and the Al
Makotum clan of Dubai respectively. The supreme council consists of
the rulers of the seven emirates. Petroleum and natural gas exports till
play an important role in the economy, especially in Abu Dhabi. A massive construction boom, an expanding manufacturing base and a thriving service sector are helping the UAE.At present $350 billion worth
of active construction projects are being undertaken by UAE.In third
place is the tourism industry.
4.8
China
3 Corporate Governance
77
4.9
Thailand
The Securities and Exchange Commission (SEC) regulates the unit trust
industry in Thailand. Since August 2003 all financial institutions have
been allowed to apply for mutual-fund management licenses, although
only through separate entities in which they own at least 75 %. In
February 2005 the SEC and the Association of Investment Management
Companies (AIMC) proposed additional risk disclosures for mutual
funds operating in Thailand. Principal regulatory restrictions in the fund
management industry in the region can be summarized as entry criteria
such as minimum capital requirements, minimum number of investors
to establish the fund, number of years of experience as a fund manager
and limits on asset allocation. However, the specifics of the regulations
vary to a great extent among countries. For example, the minimum capital requirement for an asset management company is US $12 million in
China, US $1 million in Korea.
4.10
India
78
3 Corporate Governance
79
5.1
Vyuptakesh Sharan, Reforming Mutual Funds in India, The Indian Journal of Commerce, Vol.
No. 60 No. 4, OctoberDecember, 2007 pp.7787.
80
The specifications regarding the valuation of the collateral have been prescribed in the guidelines to minimize the risk involved in securities lending transactions. To ensure adequate checks and balances regarding the
securities lending transactions, the requirement of reporting to trustees
and SEBI has been stipulated.
5.2
The Report on the Committee of Derivatives recommended the participation by mutual funds in derivative trading for the purposes of hedging and portfolio balancing. The Securities and Exchange Board of India
(Mutual Funds) Regulations 1996 were amended to allow mutual funds
to participate in derivatives trading whenever this is introduced.
Mutual funds cannot invest more than 10 % of the total net assets of a
scheme in the short-term deposits of a single bank, the Securities and
Exchange Board of India said on April 16, 2007.5 Announcing guidelines
for parking of funds in short-term deposits of scheduled commercial banks
(SCBs) by mutual funds, the regulator said that investment cap would also
take into account the deposit schemes of the banks subsidiaries. The SEBI
has also defined short term for funds investment purposes as a period
not exceeding 91 days. Besides, the parking of funds in short-term deposits of all SCBs has been capped at 15 % of the net asset value (NAV) of a
scheme, which can be raised to 20 % with prior approval of the trustees.
The parking of funds in short-term deposits of associate and sponsor SCBs
together should not exceed 20 % of total deployment by the MF in shortterm deposits, it added. The SEBI said that these guidelines are aimed at
ensuring that funds collected in a scheme are invested as per the investment
objective stated in the offer document of a mutual fund scheme.
5
3 Corporate Governance
81
The first major salvo of SEBI was to scrap the entry load with effect from
August 1, 2009. Entry loads are upfront payments from the investors
pocket along with his investment in a specific mutual fund scheme. By
scrapping this, SEBI allowed investors to decide the commission paid to
distributors. Besides this, voluntary service from distributors and advisors to sell mutual funds has virtually stopped. Investor education is the
joint responsibility of all fund houses, the Association of Mutual Funds
of India (AMFI) and the regulator, and in fact the government and every
entity that believes mutual fund industry growth is an important requirement for the overall health of an investment group.
SEBI also announced exit load rules, which bar mutual funds from
having different exit load structures for various classes of investors. This
measure is aimed at helping small investors. SEBI also introduced norms
for valuation of debt securities and the simplification of offer documents
and the Key Information Memorandum, making sure they are all investor friendly.6
6
Sridhar AN, Indian Mutual Fund Industry Winds of Change, Chartered Financial Analyst, Jan
2010.
82
SEBI 2014:
NEW CORPORATE GOVERNANCE NORMS; MUTUAL FUND
POLICY, 2014: SEBIs new norms that were effective from October
1, 2014 move in the right direction and go a long way towards changing the corporate governance paradigm. The norms empower minority shareholders to be more informed and to easily exercise their votes,
said Shriram Subramanian, founder and managing director of In
Govern Research Services, a proxy advisory firm.
A person cant be an independent director in more than seven companies and cannot accept stock options from them, according to new
rules issued by SEBI. The SEBI board also made it mandatory for
companies to disclose CEO compensation.
The new rules restrict the tenure of independent directors to two fiveyear terms. Directors nominated by the companys promoter cannot
be classified as independent directors.
Companies have to disclose remuneration policies of CEOs and executive directors, related-party transactions and appointment and resignations of independent directors.
These rules are aimed at aligning corporate governance norms to best
global practices and to the new Companies Act of 2013, said SEBI
chairman UK Sinha. We have decided that there will be a compensation committee that has to be headed by an independent director. The
committee will first [have to] put in place a remuneration policy and
it will be fixing the remuneration of key managerial persons.
SEBI stated that if a person is a full-time director in a listed company,
then he can only be on three boards. If somebody has already been
independent director for more than five years, then he can get only
one extra term of five years, Sinha said. The regulator has also made it
mandatory for companies to have an orderly succession plan for
appointments to the board and senior management, a whistle-blowing
policy and to appoint at least one woman director on its board, besides
empowering minority shareholders to approve related-party
transactions.
Some of these changes may attract criticism. Recently, HDFC chairman Deepak Parekh criticized any move to cap the number of board
3 Corporate Governance
83
84
(e)
(f )
(g)
(h)
The SEBI board also cleared new KYC registration agency (KRA) regulations that would make it easier for the investors to comply with know
your client (KYC) requirements across various segments of the capital
markets.
3 Corporate Governance
85
The approval by SEBI board to the new corporate governance norms follows months-long discussion among various stakeholders on draft regulations released last year.
The new norms seek to check excessive salaries paid to top executives of
listed companies by requiring them to justify such payments, as also all
related party transactions with entities linked to promoters and directors.
86
also appoint and enter into an agreement with the custodian for the custody of assets. This is yet another area related to investment.
AMFI first began with creating awareness, followed by education, then
certification with the help of National Stock Exchanges Capital Market
Certification Module (NCFM) as well as by conducting manual tests in
association with the Indian Institute of Capital Markets and the Institute
of Banking Personnel Selection.
AMFI introduced the process to register the intermediaries who have passed
the certification test as AMFI Registered Mutual Fund Advisors (ARMFA),
thus laying the foundation for an organized industry and allotting each intermediary a unique code-AMFI Registration Number along with an identity
card. SEBI, recognizing the importance of this initiative, has made registration with AMFI after passing the AMFI Certification Test compulsory
for intermediaries. Thus all AMFI Certified Intermediaries engaged in the
marketing and selling of mutual fund schemes are required to be registered
with AMFI.In order to promote best practices and ethical standards in the
business of sale of mutual fund schemes, AMFI has formulated broad guidelines and norms including a code of ethics for the intermediaries, which will
be applicable to ARMFA.Besides this, AMFI authorized M/s. Computer
Age Management Services Pvt Ltd (CAMS) to act as processing agent on its
behalf for the purpose of AMFI Registration Number (ARN).
Corporate Governance Policy on Exercising Voting Rights
BackgroundUnit Trust of India Mutual Fund: A Case Study7
UTI Asset Management Company Ltd (UTI AMC), the Investment
Manager of UTI Mutual Fund (UTI MF), in its fiduciary capacity acts in
the best interests of its unit holders which, inter alia, includes exercising
voting rights attached to the equity shares in which mutual fund schemes
invest.
7
http://www.utimf.com/aboutus/Documents/Corp_Govern_Policy_on_Excers_the_Voting_
Rights.pdf.
3 Corporate Governance
87
88
3 Corporate Governance
89
90
UTI AMC will generally follow the voting policy as detailed above,
but if the relevant facts and circumstances so warrant, it may act differently to protect the interests of its unit holders.
Conflict of Interest Policy for investment in Group Companies of UTI
AMC and investment in Companies which have invested in the Schemes
of UTI MF:
Investment by the Schemes of UTI MF in the Group Companies of
UTI AMC, if any, will be made in accordance with the SEBI (Mutual
Funds) Regulations 1996 and reports for such investments will also be
filed with SEBI as required under these Regulations. In such cases, UTI
AMC also recognizes that there may be potential conflict of interest when
UTI AMC will have to make a decision for voting on Resolutions of
(a) Entities including the group companies of UTI AMC or otherwise
with which it may have some relationship, and
(b) Companies that have substantial investments in the units of the
scheme/s of UTI MF.
In such circumstances, UTI AMC will continue to review all voting
proposals, routine as well as non-routine, and perform its duties in a
responsible manner keeping in mind the best interests of unit holders, in
line with the regulatory requirement.
Circumstances Favoring Abstaining from Voting Depending upon the
agenda items, there can be instances where the UTI AMC may not attend
the meeting, if it is not impacting materially on either the shareholders
value or the interests of unit holders, for instance.
Applicability The policy applies to exercise the voting rights/proxy votes
by the nominated members of UTI AMC in the AGMs/EGMs of equity
shareholders of the investee company where the schemes of UTI MF
have investments.
3 Corporate Governance
91
Decision-Making Process UTI AMC has a well-laid-down decisionmaking process outlining criteria to vote in favor or against or to abstain
on the resolution/agenda items keeping in mind the interests of its
unit holders. A separate cell under Department of Fund Management
(Dealing) of UTI AMC would carry out operational activities related to
this subject.
UTI AMC may utilize the services of unaffiliated third party professional agencies for getting in-depth analyses of proposals, their
voting recommendation and services to exercise proxy voting and
maintenance of related data. Services of third party professional
agencies would be recommendatory in nature and not binding on
UTI AMC.UTI AMC would only make a final decision if voting on
proposals.
Review, Control and Modification The Boards of UTI AMC and UTI
Trustees will review the voting policy whenever there is need after changes
in statutory/regulatory guidelines and policies. UTI AMC management
may review and modify, if required, its decision-making process, delegation of power and internal control mechanism as per requirements from
time to time.
Reporting to the Board The Board of UTI AMC and UTI Trustees
would be apprised regarding voting exercised by UTI AMC on behalf of
its scheme on a yearly basis.
Disclosure and Record Keeping The data on voting exercised or otherwise is maintained in electronic/physical mode covering all equity holdings across all schemes of UTI MF and the same is disclosed on the UTI
MF website as well as in the annual report distributed to the unit holders
as per the format prescribed by SEBI from time to time.
92
http://www.ingovern.com/wp-content/uploads/2013/08/Mutual-Funds-Voting-Patterns-2013Analysis.pdf.
3 Corporate Governance
93
10
Conclusion
4
Benchmarking
Introduction
95
96
(b) find out how the fund fared in comparison with its peers (c) find out
the performance of the fund vis--vis the market benchmark.
Benchmarking: A Myth Bruce A.Costa, Keith Jakob, Scott J.Niblock
and Elisabeth Sinnewes study suggests that active Australian equity fund
managers do not out-perform their self-specified capitalization indexes
after risk and management fees and transaction costs.1 Alex Frino and
David R.Gallaghers study documents the existence of significant tracking error for Australian index funds. 2
We should understand that the benchmark fund is also based on market fluctuations; hence it cannot be taken for granted that it will always
perform better. Friend, Brown, Herman and Vickers (1962) offered the
first empirical analysis of mutual funds performance.3 This study found
that the average returns by mutual funds were similar to those delivered by the benchmark index. It concluded that since the managed funds
were not able to outsmart the benchmark index, it indicated the presence
of market efficiency in the stock markets. Eun, Kolodny and Resnicks
(1991) study used various benchmarks to link the Standard and Poors
(S&P) 500 Index, the Morgan Stanley Capital International World
Index, and a self-constructed index of US multinational firms.4
Ramesh Chanders (2006) study examined the investment performance of managed portfolios with regard to sustainability of such performance in relation to fund characteristics, parameter stationarity and
benchmark consistency.5
Bruce A Costa, Keith Jakob, Scott J Niblock and Elisabeth Sinnewe, Benchmarking the benchmarks: How do risk-adjusted returns of Australian mutual funds and indexes measure up?, Journal
of Asset Management 16, 386400 (November 2015) | doi:10.1057/jam.2015.29
2
Alex Frino and David R.Gallagher, Is Index Performance Achievable?: An Analysis of Australian
Equity Index Funds, Abacus, Vol. 38(2): pp.200214, 2002
3
Friend, I., F.E. Brown, E.S. Herman and D. Vickers (1962), A Study of Mutual Funds,
U.S.Government Printing Office, Washington, D.C.
4
Eun, C.S., R.Kolodny and B.G.Resnick (1991), U.S.Based International Mutual Funds: A
Performance Evaluation, The Journal of Portfolio Management 17, Spring, pp.8894.
5
Ramesh Chander (2006), Informational Efficiency, Parameter Stationarity and Bench Mark
Consistency of Investment Performance, The ICFAI Journal of Applied Finance, March.
1
4Benchmarking
97
The Statman Model is used for mutual funds using the following
equation6:
eSDAR ( excess standard deviation and adjusted return) = Rf+(Rp
Rf )(Sm/Sp)Rm
In this formula:
Rf: monthly return on three-month treasury bills,
Rp: monthly return on fund portfolio,
Rm: monthly return on the benchmark index,
Sp: standard deviation of portfolio ps return,
Sm: standard deviation of return on the benchmark index. This model
is used for short-term investment analysis. The performance is compared
with its benchmark on a monthly basis.
Chang etal (2003) identified a hedging factor in the equilibrium asset
pricing model and used it as a benchmark to construct a new performance measure.7 The model adopted by Jow-Ran Chang, Nao-Wei Hung
and Cheng-Few Lee is based on a competitive equilibrium version of the
inter-temporal asset pricing model derived in Campbell. The dynamic
asset pricing model incorporates hedging risk as well as market. Formally,
the pricing restrictions on asset i imported by the conditional version of
the model are:
Where:
Etri, t+1 ; is log return on asset,
r f,t+1 is log return on riskless asset,
Vii denotes Vart (ri,t+1),
is the agents coefficient of relative risk aversion,
Vim denotes Covt (ri,t+1, rm,t+1),
Vih=Covt(ri,t+1,(Et+1Et),j=1jrm,t+1+j),
Statman M, Socially responsible Mutual Funds, Financial Analysts Journal, Vol.56, 2000,
pp3038.
7
Jow-Ran Chang, Mao-Wei Hung & Cheng-few Lee (2003), An Intertemporal CAPM approach
to Evaluate Mutual Fund Performance, Review of Quantitative Finance and Accounting, 20:
425433.
6
98
the parameter:
=1exp(cw) and cw is the mean log consumption to wealth
ratio.
Benchmark Returns
Benchmark returns will give you a standard by which to make the comparison. It basically indicates what the fund has earned compared to what
it should have earned. A funds benchmark is an index that is chosen
by a fund company to serve as a standard for its returns. The market
watchdog, the Securities and Exchange Board of India (SEBI), has made
it mandatory for funds to declare a benchmark index. In effect, the fund
is saying that the benchmarks returns are its target and a fund should be
deemed to have done well if it manages to beat the benchmark.
Let us assume the fund is a diversified equity fund that has benchmarked itself against the Sensex; so the returns of this fund will be compared to the Sensex. If the markets are doing fabulously well and the
4Benchmarking
99
Sensex keeps climbing steadily upwards, then any less than fabulous
returns from the fund would actually be a disappointment.
If the Sensex rises by 10 % over two months and the funds net asset
value (NAV) rises by 12 %, it is said to have outperformed its benchmark. If the NAV rose by just 8 %, it is said to have underperformed
the benchmark.
But if the Sensex drops by 10 % over a period of two months and during that time, the funds NAV drops by only 6 %, then the fund is said
to have outperformed the benchmark.
A funds returns compared to its benchmark are called its benchmark
returns.
At the current high point in the stock market, almost every equity fund
has done extremely well but many of them have negative benchmark
returns, indicating that their performance is just a side-effect of the
markets rise rather than some brilliant work by the fund manager.
The following note was provided by India Index Services & Products
Limited (IISL) as a caution to investors:
IISL is not responsible for any errors or omissions or the results obtained
from the use of such index and in no event shall IISL have any liability to
any party for any damages of whatsoever nature (including loss of profit)
resulted to such party due to purchase or sale or otherwise of such product
benchmarked to such index.
100
Performance Comparison
withBenchmark FundsIndia
This section deals with analysis of select mutual funds and their
performance against a benchmark fund. The following schemes are considered for the study:
Table 4.1: UTI Equity Fund vs. S &P BSE 100
Table 4.2: SBI Blue Chip FundDirect Plan (G) vs. S&P BSE 100
Table 4.3: Birla Sunlife Frontline Equity Fund (G) vs. S&P BSE 100
Table 4.4: SBI Magnum Equity Fund (G) vs. NIFTY 50
Table 4.5: HDFC Equity Fund vs. NIFTY 50
Table 4.6: HDFC Index Fund-Sensex PlanDirect Plan vs. S&P BSE
Sensex
Table 4.7: HDFC Top 200 Fund (G) vs. S&P BSE 200
Table 4.8: Kotak 50 Regular Plan (G) vs. NIFTY 50
Table 4.9: IDBI India Top 100 Fund (G) vs. NIFTY 100
Table 4.10: ICICI Prudential Top 100 Fund (G) vs. CNX NIFTY
4Benchmarking
101
Table 4.1 UTI Equity Fund-comparison with benchmark fund as on January 26,
2016
3
1
month months
(%)
(%)
6.2
10.6
5.5
8.7
0.7
1.9
Fund returns
Category avg
Difference of fund
returns and
category returns
Best of category
1.9
Worst of category
8.4
Benchmark returnsa 5.3
0.9
Difference of fund
returns and
benchmark returns
4.9
14.5
10.7
0.1
6
months
(%)
11.7
11.7
0.0
1 year
(%)
11.0
10.8
0.2
2
years
(%)
17.2
13.3
3.9
3
years
(%)
13.7
10.0
3.7
5
years
(%)
10.9
6.6
4.3
2.1
19.5
14.0
2.3
15.5
26.0
14.9
3.9
34.0
2.5
9.0
8.2
21.4
1.3
7.2
6.5
14.5
1.0
5.3
5.6
Fund returns
Category avg
Difference of fund
returns and
category returns
Best of category
Worst of category
Benchmark returnsa
Difference of fund
returns and
benchmark returns
3
1
month months
(%)
(%)
6
months
(%)
1 year
(%)
2
years
(%)
3
years
(%)
5
years
(%)
5.1
5.5
0.4
6.4
8.7
2.3
8.6
11.7
3.1
2.9
10.8
7.9
22.5
13.3
9.2
17.1
10.0
7.1
6.6
1.9
8.4
5.3
0.2
4.9
14.5
10.7
4.3
2.1
19.5
14.0
5.4
15.5
26.0
14.9
12.0
34.0
2.5
9.0
13.5
21.4
1.3
7.2
9.9
14.5
1.0
5.3
102
Table 4.3 Birla Sun Life Frontline Equity Fund (G)( Rank 2) as on January 26, 2016
3
1
month months
(%)
(%)
Fund returns
Category avg
Difference of fund
returns and
category returns
Best of category
Worst of category
Benchmark returnsa
Difference of fund
returns and
benchmark returns
a
6
months
(%)
1 year
(%)
2
years
(%)
3
years
(%)
5
years
(%)
5.9
5.9
0.0
8.8
8.1
0.7
9.6
9.5
0.1
11.7
11.4
0.3
19.4
15.2
4.2
13.5
10.0
3.5
11.3
7.0
4.3
1.9
9.1
6.6
0.7
4.9
13.8
9.6
0.8
2.1
16.8
10.7
1.1
15.5
26.6
14.5
2.8
36.9
4.5
13.5
5.9
22.4
1.2
8.3
5.2
15.5
1.5
5.9
5.4
Table 4.4 SBI Magnum Equity Fund (G) (Rank-3)comparison with benchmark
fund as on January 26, 2016
3
1
month months
(%)
(%)
Fund returns
Category avg
Difference of fund
returns and
category returns
Best of category
Worst of category
Benchmark returnsa
Difference of fund
returns and
benchmark returns
a
6
months
(%)
1 year
(%)
2
years
(%)
3
years
(%)
5
years
(%)
5.8
5.9
0.1
8.0
8.1
0.1
7.3
9.5
2.2
10.0
11.4
1.4
18.6
15.2
3.4
11.8
10.0
1.8
10.3
7.0
3.3
1.9
9.1
6.2
0.4
4.9
13.8
10.0
2.0
2.1
16.8
11.1
3.8
15.5
26.6
16.5
6.5
36.9
4.5
10.1
8.5
22.4
1.2
7.0
4.8
15.5
1.5
5.5
4.8
4Benchmarking
103
Table 4.5 HSBC Equity Fund (G)comparison with benchmark fund as on January
26, 2016
Fund returns
Category avg
Difference of fund
returns and
category returns
Best of category
Worst of category
Benchmark returnsa
Difference of fund
returns and
benchmark returns
3
1
month months
(%)
(%)
6
months
(%)
1 year
(%)
2
years
(%)
3
years
(%)
5
years
(%)
6.5
5.9
0.6
8.9
8.1
0.8
10.9
9.5
1.4
15.5
11.4
4.1
12.2
15.2
3.0
7.2
10.0
2.8
5.3
7.0
1.7
1.9
9.1
6.6
0.1
4.9
13.8
9.6
0.7
2.1
16.8
10.7
15.5
26.6
14.5
36.9
4.5
13.5
22.4
1.2
8.3
15.5
1.5
5.9
Fund returns
Category avg
Difference of fund
returns and
category returns
Best of category
Worst of category
Benchmark returnsa
Difference of fund
returns and
benchmark returns
3
1
month months
(%)
(%)
6
months
(%)
1 year
(%)
2
years
(%)
3
years
(%)
5
years
(%)
5.7
5.5
0.2
10.8
8.7
2.1
14.5
11.7
2.8
16.0
10.8
5.2
10.0
13.3
3.3
8.1
10.0
1.9
6.6
1.9
8.4
4.5
1.2
4.9
14.5
11.0
0.2
2.1
19.5
14.3
0.2
15.5
26.0
15.8
0.2
34.0
2.5
7.0
3.0
21.4
1.3
6.9
1.2
14.5
1.0
5.0
104
Fund returns
Category avg
Difference of fund
returns and
category returns
Best of category
Worst of category
Benchmark returnsa
Difference of fund
returns and
benchmark returns
a
3
1
month months
(%)
(%)
6
months
(%)
1 year
(%)
2
years
(%)
3
years
(%)
5
years
(%)
8.4
5.5
2.9
12.8
8.7
4.1
15.8
11.7
4.1
18.6
10.8
7.8
12.4
13.3
0.9
8.4
10.0
1.6
6.8
6.6
0.2
1.9
8.4
5.4
3.0
4.9
14.5
10.2
2.6
2.1
19.5
13.4
2.4
15.5
26.0
13.3
5.3
34.0
2.5
11.4
1.0
21.4
1.3
8.2
0.2
14.5
1.0
5.7
1.1
3
1
month months
(%)
(%)
6
months
(%)
1 year
(%)
2
years
(%)
3
years
(%)
5
years
(%)
3.7
3.5
0.2
6.4
5.2
1.2
10.6
10.2
0.4
8.9
9.5
0.6
20.9
16.8
4.1
12.5
11.0
1.5
10.4
7.8
2.6
1.9
6.7
5.1
1.4
4.9
10.0
6.1
0.3
2.1
17.2
11.6
1.0
15.5
24.1
14.1
5.2
38.6
6.2
12.2
8.7
23.3
2.5
8.0
4.5
16.9
2.6
6.9
3.5
Fund returns
Category avg
Difference of fund
returns and
category returns
Best of category
Worst of category
Benchmark returnsa
Difference of fund
returns and
benchmark returns
a
4Benchmarking
105
Fund returns
Category avg
Difference of fund
returns and
category returns
Best of category
Worst of category
Benchmark returnsa
Difference of fund
returns and
benchmark returns
1 year
(%)
2
years
(%)
3
years
(%)
5
years
(%)
12.6
10.2
2.4
9.7
9.5
0.2
20.0
16.8
3.2
14.4
11.0
3.4
7.8
2.1
17.2
11.6
1.0
15.5
24.1
13.0
3.3
38.6
6.2
14.0
6.0
23.3
2.5
8.9
5.5
16.9
2.6
7.5
3
1
month months
(%)
(%)
6
months
(%)
4.6
3.5
1.1
6.6
5.2
1.4
1.9
6.7
5.7
1.1
4.9
10.0
6.2
0.4
Fund returns
Category avg
Difference of fund
returns and
category returns
Best of category
Worst of category
Benchmark returnsa
Difference of fund
returns and
benchmark returns
3
1
month months
(%)
(%)
6
months
(%)
1 year
(%)
2
years
(%)
3
years
(%)
5
years
(%)
3.8
3.5
0.3
2.7
5.2
2.5
5.6
10.2
4.6
10.0
9.5
0.5
17.2
16.8
0.4
12.6
11.0
1.6
11.4
7.8
3.6
1.9
6.7
5.1
1.3
4.9
10.0
6.1
3.4
2.1
17.2
11.6
6.0
15.5
24.1
14.1
4.1
38.6
6.2
12.2
5.0
23.3
2.5
8.0
4.6
16.9
2.6
6.9
4.5
106
This study shows that the benchmark varies according to scheme and
the fund selection behavior of fund managers. The details of the List of
Indices used for benchmark is given in the appendix.
6.1
Performance Analysis
Table 4.1 indicates the performance of UTI Equity Fund vs. S&P BSE
100. It shows that the fund returns are better than that of benchmarks
for the holding periods of two years, three years and five years. In the
long term the fund yield is better than the short term. Investors can get
17.2 % for the two year holding period, which is 8.2 % more than that
of benchmark return.
Table 4.2 indicates the performance of SBI Blue Chip Fund-Direct
Plan (Growth option). The data reveals that there is consistent improvement in the returns after a two-year period; that is, 22.5 %. However, this
fund yields a negative return up to the one year holding period. It also
shows that the category average also performed negative returns during
this period.
Table 4.3 shows the performance of Birla Sunlife Frontline Equity
Fund (G) vs. S&P BSE 200. It reveals that this funds returns are better
than that of the category average and benchmark fund, but it is not showing better performance than best of category.
Table 4.4 indicates the performance of SBI Magnum Equity Fund (G)
vs. NIFTY 50. It was observed that the funds returns are negative up to
a one year holding period and high positive returns are expected after
two years. It was also found that the funds performance is better than
category average and benchmark.
Table 4.5 depicts HSBC Equity Fund (G). It was found that this
funds performance is lower than that of the benchmark fund. Its average
returns are also less than the category average. Thus, it may be stated this
fund manager has to improve his performance. The benchmark is NIFTY
50.
Table 4.6 shows HDFC Index Fund Sensex Plus PlanDirect Plan
Option. This fund is showing negative performance against category
average and benchmark fund. At the same time this funds return has
4Benchmarking
107
Summary
5
Asset Management
Introduction
Massimo Massa and Lee Xhang (2008), The Effects of Organizational Structure on Asset
Management, http://ssrn.com/abstract=1328189.
109
110
managers.2 The study found that performance in the first half of the year
had, in general, a positive impact on the choice of risk level in the second
half of the year. David M. Smith (2009) discussed the size and market
concentration of the mutual fund industry, the market entry and exit of
mutual funds, the benefits and costs of mutual fund size changes, principal
benefits and costs of ownership from fund shareholders perspective and so
on.3 Lalit (1997) carried out a study of mutual funds and their regulatory
framework.4 He also critically reviewed the performance and working of
the Securities and Exchange Board of India (SEBI) as related to schemes,
discussing the portfolio management of some Indian fund managers.
This chapter is based on managing risk by AMCs in general, with a particular focus on HDFC Asset Management Company Limited (HDFC AMC
Ltd). It provides a comparative analysis of fund management in HDFC
AMC Ltd and Standard Chartered AMC Pvt. Ltd. This chapter also analyses the performance of HDFC Equity Fund and Standard Chartered Classic
Equity Fund (SCCEF) as regards the returns the fund has generated.
In the lastfive to eight years the mutual fund industry has dramatically changed in terms of its structure, players in the market, acceptance
by investors and so on. This has led to a sharp rise in the number of
schemes offered by different mutual funds, and the amount raised by
these offers is unimaginable.
The USA
On January 17, 2013, the US Department of the Treasury and the Internal
Revenue Service (IRS) issued their Foreign Account Tax Compliance Act
(FATCA) regulations. These were enacted to prevent and detect offshore tax
2
Manuel Ammann and Michael Verhofen (2008), The Impact of Prior Performance on the RiskTaking of Mutual Fund Manager, Annals of Finance, Issue 5, 6990.
3
David M Smith (2009), The Economics of Mutual Funds, Chapter-3 of forthcoming in John A
Haslem (ed.) A Companion to Mutual Funds, John Wiley Sons, USA.
4
Lalik K Bansal (1997), Mutual Fund- Management and Working, Deep & Deep Publishers,
New Delhi.
5
CII report onMutual fund Summit, 2014, Indian Mutual fund industry-challenging thestatus
quo, setting thegrowth path.
Asset Management
111
112
China
In July 2013, Shanghai put forward the Qualified Domestic Limited
Partners (QDLP) Program, which permitted qualified household private Renminbi (RMB) assets to be built up in Shanghai in order to put
resources into seaward securities markets. Every benefit administrator
who partakes will have an individual share of US $50 million to trade
the RMB stores raised from Chinese financial specialists for outside coin,
which will put resources into the overseas securities market. The QDLP
program provides another channel to overseas resource supervisors to
access Chinese household capital, especially from institutional speculators and people with high total assets. It is foreseen that the aggregate
volume of these QDLP assets will build in the future.
Hong Kong and China
On August 29, 2013, China and Hong Kong consented to an arrangement that allows both nations budgetary controllers to perceive each
others common assets. This common asset acknowledgment plan will
open up Chinese retail and institutional speculators gigantic reserve
funds pool to Hong Kong and to other worldwide resource administrators. In the future Hong Kong will be the portal through which global
resource administrators will be able to take advantage of the market in
this area. This will allow Hong Kong to remain as a global asset focus and
also give it an unmistakable seaward RMB focus. Such a move will urge
worldwide resource administrators to reconsider their proximity to Hong
Kong and the ways in which they can interact with the area.
Japan
Among all the measures taken by the Japanese authorities to incentivize
households to invest their assets in the financial market, the Japanese
Individual Savings Account (NISA) scheme is expected to provide the
greatest opportunities for the asset management industry. In the retail
market segment, NISAs could be the long-awaited catalyst that will
turn investment trusts into long-term asset-building products for Japans
retail public (the rules essentially prohibit short-term trading). NISAs
are designed to encourage demographic groups that have historically not
been part of the investor class to become long-term investors.
Asset Management
113
NISAs will provide tax exempt treatment of capital gains and dividend
income from listed equities and equity investment trusts. Individuals will
be permitted to invest up to 1 million annually in NISAs for ten years
through to 2023. Once an eligible asset is purchased in a NISA, capital
gains and dividends from the asset will be exempt from tax for a maximum of five years.
Europe
The Alternative Investment Fund Managers Directive (AIFMD) is a
European Directive that aims to provide a harmonized regulatory and
supervisory framework for the managers of alternative investment funds
within the EU.The deadline for EU member states to adopt the AIFMD
in their national laws was July 2013.
United Kingdom
The European Commission (EC) published a proposed regulation on
money market funds (MMF) on September 4, 2013, forming part of
the ECs response to the on-going global debate around shadow banking. This new regulation will introduce many additional requirements,
ranging from risk management to data collection and capital buffers.
The UK government announced in its 2013 budget that it wanted to
increase the attractiveness of the UK as an asset management hub. In
view of this, the UK government has published new regulations, effective from December 19, 2013, under which UK-authorized funds are
allowed to pay gross interest distributions on units held by non-UK
resident investors. However, units held by UK residents are still subject
to income tax.
The Netherlands
On December 17, 2013, the Ministry of Finance of the Netherlands published the final text of the commission ban for investment firms. Until
that time, investors in the Netherlands could pay commission (often indirectly) to investment advisors, banks or investment managers. However,
from January 1, 2014, investors would have to directly pay investment
service fees. This applied to every type of investment service provided to
non-professional investors. Therefore, investment firms should no longer
114
2000
2004
2010a
2020a
Change in amount
11,871.1
7,424.1
3,296
1,134
13.5
0.3
432
110.6
0.01
16.9
16,152.4
8,792.4
5,628.2
1,677.9
32.8
1.8
399.5
177.4
1
54
25,000
5,000
8,000
5,000
35
4.5
300
325
3.5
90
35,000
4,500
7,750
5,500
42
3
350
285
2.3
78
5,000
500
250
500
7
1.5
50
40
1.2
12
receive commissions from a third party directly or procure them via third
parties through investment services to the customer.
Table 5.1 focuses on projections of assets under management of mutual
funds by 2020in selected countries. It is expected that India, Japan and
the Asia Pacific region will have positive trends in assets managed by
mutual funds. At the same time a negative trend is expected for select
remaining countries.
Ingo Walter and Elif Sisli, The Asset Management Industry in Asia: Dynamics of Growth,
Structure and Performance, (September 7, 2006). Available at SSRN: http://ssrn.com/
abstract=929162.
Asset Management
115
traded both within and outside China. Besides forming joint ventures,
foreign fund management companies have begun to enter the Chinese
market by buying shares inlocal fund managers. Foreign companies are
allowed to take stakes of up to 49 % inlocal fund managers, a ceiling
that is scheduled to rise to 51 % by 2007. The foreign fund management
partner in any Sinoforeign joint venture must have a paid-up capital of
at least Rmb 300 million. Investment in foreign assets remains restricted
in China. In 2003, the State Administration of Foreign Exchange (SAFE)
established new rules for overseas investments by local fund management
companies, requiring them to seek permission before setting up special
foreign exchange capital accounts through which overseas investment
funds must be channeled.
In order to attract foreign capital, Korea abolished all restrictions on
foreign investment in stocks and bonds in 1998. Foreign fund management companies can enter the local fund management industry by establishing a branch, subsidiary or joint venture, or by taking over existing
holdings in an asset management firm. In order to set up a local branch,
the foreign firm must have sufficient experience in the fund management industry and meet international criteria for asset allocation and
operations.
For a foreign asset management firm to be active in the Korean mutual
fund industry, the four key criteria are that: (a) It must already have been
in the asset management business abroad; (b) Its assets under management must exceed W 5 trillion; (c) Its credit rating must be investment
grade; and (d) It must not have been subject to criminal or administrative
sanction in its home country.
In Malaysia, the Securities Commission planned to open the sector to
foreign companies from July 2003, but postponed the liberalization to
give domestic companies more time to strengthen their operations before
facing foreign competitors. From April 2005 Bank Negara Malaysia
allowed mutual funds to raise foreign investments to up to 30 % of funds
under management. Mutual fund managers investing abroad are required
to seek the Securities Commissions prior approval regarding the foreign
exchanges in which they intend to invest.
In Indonesia, Bapepam issued a ruling in August 2002 that allowed
mutual funds to buy offshore securities (public offerings abroad and secu-
116
Asset Management
117
HDFC AMC Ltd was incorporated under the Companies Act 1956, on
December 10, 1999, and was approved to act as an AMC for the HDFC
Mutual Fund by SEBI in its letter dated July 3, 2000. The registered office
of the AMC is situated at HUL House, 2nd Floor, H.T. Parekh Marg,
165166, Backbay Reclamation, Churchgate, Mumbai, 400 020. The
Company Identification Number(CIN) is U65991MH1999PLC123027.
In terms of the Investment Management Agreement, the trustee has
appointed the HDFC Asset Management Company Limited to manage
the mutual fund. The paid up capital of the AMC is Rs. 25.241 crore as
at March 31, 2015.
HDFC AMC and HDFC Trustee Company Limited (HDFC Trustee),
the asset management company and trustee company of HDFC Mutual
Fund (HDFC MF) respectively, entered into an agreement with Morgan
Stanley Investment Management Private Limited (MS AMC) and the
Board of Trustees of Morgan Stanley Mutual Fund (the MS Trustees),
the asset management company and trustees of Morgan Stanley Mutual
Fund (MSMF), pursuant to which the schemes of MSMF (MSMF
Schemes) were transferred to and formed part of HDFC MF, HDFC
Trustee took over the trusteeship of the MSMF Schemes from the MS
Trustees and HDFC AMC took over the rights to manage the MSMF
Schemes from MS AMC, and became the investment manager of the
MSMF Schemes (the Transaction).
4.1
118
Type of change
Change in Name
and Fundamental
Attributes
Change in Name
and
Fundamental
Attributes
Change in Name
and
Fundamental
Attributes
Merger
Merger
Merger
Merger
Change in Name
and
Fundamental
Attributes
Merger
a
HDFC Short Term Plan underwent a change in fundamental attributes after the
close of business hours on June 20, 2014
b
As part of the change in the fundamental attributes of Morgan Stanley Multi
Asset Fund (Plan A and Plan B)
4.2
HDFC AMC Ltd has a very strong focus on risk control for the investments made in different asset classes, either equity or debt. A full-time
dedicated risk manager is in place to monitor the templates set up for risk
Asset Management
119
4.3
There are different templates for each fund, and each template spells out
the following unambiguously.
The funds positioning, based on investing, growth vs. value, cap-based
investment. All these are taken in to consideration.
The investment objectives.
asset allocations.
investment limits.
120
The Standard Life Assurance Company was established in 1825 and has
considerable experience in global financial markets. In 1998, Standard
Life Investments Limited became the dedicated investment management company of Standard Life Group, owned 100 % by the Standard
Life Assurance Company. With global assets under management of
approximately US $186.45 billion as of March 31, 2005, Standard Life
Investments Limited is one of the worlds major investment companies
Table 5.3 PEG ModelDerived by Peter Lynch
Company
PE
Growth
PEG Ratio
Decision
A
B
C
20
20
20
40
20
10
0.5
1
2
Under ValuedBuy
Fairly ValuedHold
Over ValuedSell
Asset Management
121
HDFC Cash
ManagementFund
Call Plan
HDFC Cash
ManagementFund
Regular Plan
HDFC Liquid Fund
HDFC STP
HDFC High Interest STP
HDFC Income Fund
HDFC High Interest
Fund
HDFC Cash
ManagementFund
Call Plan
HDFC Cash
ManagementFund
Regular Plan
HDFC Liquid Fund
Portfolio
maturity
Features
Inv. Period
15 days
T+0 redemption/Daily
Dividend
17 days
120180
days
T+1 redemption/Daily
Dividend
715 days
60120 days
T+1 redemption/
Weekly Dividend
115 days
Credit risk
Load
Low
Moderate
Low
Moderate
Low
Low to Moderate
Medium
Medium
15 days
30 days
90 days
No Load
Portfolio
maturity
Features
Inv. Period
15 days
T+0 redemption/Daily
Dividend
17 days
120180
days
T+1 redemption/Daily
Dividend
715 days
60120 days
T+1 redemption/Weekly
Dividend
115 days
122
5.1
PE vs. growth
Sector/market PE
Discounted Cash Flow (DCF) vs. Enterprise value
Economic value addition (EVA)
Asset Management
123
the issue of market interest, equity circle aspects are looked into as they
drive this.
Free float
Institutional interest
Research coverage
These concepts help the company to arrive at its price performance,
which is nothing but the concept of a company growing with the earnings growth rate. The so-called 3D process is used for managing debt
assets at Standard Chartered Mutual Fund. It looks at the factors that
influence investment in debt assets in three broad categories, each of
those factors being influenced by sub-factors.
Economic fundamentals
Market psychology
Market valuations.
These three aspects look at each of the macro aspects that influence the
interest rate movement and the liquidity position in the market. Based
on analyzing all these factors, a fund is managed by moving the maturity
of the portfolio, and the credit risk is thereby managed.
Fixed Income Investments HDFC MF also has a different process for
investments in Fixed Income Securities. The following are the broader
processes used for debt fund management.
Emphasis on risk adjusted return (RAR) for all the fixed income
portfolios.
Consistent investments in the highest credit quality securities for all
portfolios.
Portfolio risk contained through a mix of low credit/liquidity risk and
active management of interest rate risk.
Positioning in instrument/maturity buckets that provide highest relative value.
Clear product differentiation for various products spread across the
yield curve.
124
High
Low
Banking/Finance
Automotive
Technology
Oil & Gas
Pharmaceuticals
Cement
21.20
14.17
10.91
7.34
7.23
6.89
23.85
15.86
12.64
8.14
9.49
7.57
20.83
14.63
11.06
7.37
7.46
6.59
High
Low
Banking/Finance
Pharmaceuticals
Automotive
Engineering
Technology
Oil & Gas
19.74
11.85
10.05
8.32
7.50
6.00
25.60
11.93
11.95
9.56
14.51
7.06
20.69
9.30
10.07
6.89
6.57
1.95
Asset Management
High
Low
Banking/Finance
Technology
Automotive
Oil & Gas
Tobacco
Pharmaceuticals
26.84
14.61
10.60
9.01
7.22
6.38
30.33
14.72
10.60
11.79
7.22
7.50
26.84
12.86
9.24
9.01
6.06
5.46
High
Low
Banking/Finance
Technology
Engineering
Automotive
Oil & Gas
Utilities
35.12
12.13
10.26
9.35
8.58
4.23
35.73
13.75
11.13
9.60
10.59
4.23
33.01
10.41
9.17
8.03
8.55
2.66
High
Low
Banking/Finance
Technology
Automotive
Engineering
Oil & Gas
Pharmaceuticals
29.89
12.12
8.79
8.03
7.69
6.68
34.01
12.32
11.05
8.45
7.69
7.98
29.89
10.50
8.79
6.84
5.59
5.51
125
126
High
Low
Banking/Finance
Technology
Automotive
Engineering
Pharmaceuticals
Cement
26.67
11.52
11.09
11.04
7.41
7.28
35.14
11.52
13.68
14.40
7.61
7.28
26.67
7.56
11.09
10.67
4.83
4.84
High
Low
Banking/Finance
Technology
Automotive
Engineering
Cement
Oil & Gas
26.81
15.26
12.37
7.60
7.06
6.80
32.00
16.78
13.07
8.44
7.91
6.80
23.85
13.19
10.57
6.37
6.40
4.44
High
Low
Banking/Finance
Automotive
Engineering
Pharmaceuticals
Technology
Cons NonDurable
24.59
19.97
7.41
6.51
5.28
4.97
27.20
20.62
10.04
12.13
8.20
5.40
20.21
15.57
7.41
6.51
5.28
3.54
Asset Management
127
Table 5.5 depicts asset management and sectoral allocation of UTI Equity
Fund on October 30, 2015. It may be observed that the banking sector
has been given top priority with 21.20 % and least priority is given to the
cement industry, with 6.89 % of allocation of assets.
Table 5.6 depicts SBI Blue Chip FundDirect Plan (Growth Option).
This fund allocates 19.74 % to the banking and finance sector followed
by the pharmaceutical industry with 11.85 %.
Table 5.7 gives a clear picture of the allocation of funds by HDFC
Index FundSensex PlanDirect Plan. In this scheme the banking and
finance sector got top priority with 26.84 % allocation of funds, followed
by the technology sector with 14.61 %.
Table 5.8 indicates asset allocation by HDFC Top 200 Fund
(Growth). This scheme also allocates highest funds to the banking and
finance sector (35.12 %) and least priority is given to the utilities sector
(4.23 %).
Table 5.9 is allotted for Birla Sunlife Frontline Equity Fund (G). In
this scheme top priority is given to the banking and finance sector with
29.89 %. The same pattern is followed by J.P.Morgan India Equity Fund
(G) (see Table 5.10). The allocation to the banking and finance sector is
26.67 % and least priority is given to the cement industry with 7.28 %
allocation by the fund manager.
Table 5.11 indicates the fund allocation for Kotak 50Regular Plan
(G). This scheme invests 26.81 % funds in the banking and finance sector followed by the technology sector with 15.26 %.
Table 5.12 focuses on the sectoral allocation of the IDBI India Top
100 Equity Fund (G) scheme. This scheme also allots a major share to the
banking and finance sector with 24.59 %, followed by the automotive
sector with 19.97 %.
128
Summary
Sector
Metals, Media and Hotels
FMCG, Retail
Sugar
Banking
Oil, Gas, Chemicals and Fertilizers
Cements, Textiles and Ceramics
Capital Goods, Auto and Ancilliaries
IT and Telecom
Asset Management
Step 2:
Macro Themes
Stock Filters
BVM Model
Business
Great Business
Valuations
Market Interest
Undervalued
Price Performance
Stock
Step 3:
129
2012
58.8
47.1
0.8
0.4
0.7
52.3
50.3
5.7
2.2
1.6
2012
301.8
264.7
28.7
4.5
4
1,016.90
562.4
343.9
52.2
58.4
2011
15.9
13.6
2.6
1
0.8
46.2
4.6
23.7
7
10.9
2011
183.3
157.3
20
3
2.9
774.1
416.4
262.6
40.1
55
Bonds
Global
Asia
Europe/Middle East/Africa
Latin America
Equities
Global
Asia
Europe/Middle East/Africa
Latin America
Bonds
Global
Asia
Europe/Middle East/Africa
Latin America
Equities
Global
Asia
Europe/Middle East/Africa
Latin America
Net asset values
Net ows
(Billions of US dollars)
2013
326.2
265.5
30.3
6
24.5
1,071.20
580.1
385.1
55.3
50.7
2013
25.2
19.5
2.5
0.5
3.7
26.7
10.1
17.2
7.7
11.9
2014
362.7
258.4
80.6
5
18.7
1,130.80
569.7
481
43.1
37
2014
11.7
6.3
0.2
1.1
4.5
28.5
8.9
6.1
5.7
7.9
2014
Q1
18.4
14.8
2.7
0.2
0.6
42.9
21.9
15.3
1.9
3.7
2014
Q1
319.6
260.3
28.7
6.1
24.4
1,027.40
559.3
369.9
52.1
46.1
2014
Q2
12.4
15.9
0.8
0.1
2.5
13.4
16.1
1.4
0.6
0.7
2014
Q2
348.5
288.5
30.5
6.3
23.2
1,117.80
618.6
394.9
55.2
49.1
2014
Q3
1.5
2.5
0.3
0.4
1
26.3
13.4
14.9
1.2
0.9
2014
Q3
364
278.8
59
5.5
20.8
1,159.50
607.8
456.5
49.8
45.4
2014
Q4
7.2
9.9
3.4
0.3
0.4
25.3
16.4
4.3
1.9
2.6
2014
Q4
362.7
258.4
80.6
5
18.7
1,130.80
569.7
481
43.1
37
130
The Management of Mutual Funds
Asset Management
Nature of
ownership
Private foreign
Private Indian
Banks
Banks
Banks
Private foreign
Private foreign
Private foreign
Private Indian
Private Indian
Institutions
Institutions
Banks
Private foreign
Private Indian
Private foreign
Private Indian
Private Indian
Institutions
Private foreign
Banks
Private Indian
Banks
Private Indian
Private foreign
Private foreign
Private Indian
Private Indian
Private foreign
Institutions
Private foreign
131
6
Portfolio Management
Introduction
133
134
6 Portfolio Management
135
1.1
136
Sp =
E ( Rp ) Rf
( Rp )
E ( Rp ) Rf
Treynor, Jack L (1965), How to rate management of investment funds, Harvard Business
Review, Vol.43, pp6375.
8
Treynor, Jack L and Mazuy, Kay K (1966), Can Mutual Funds Outguess the Markets, Harvard
Business Review, 44: 13136.
7
6 Portfolio Management
(R
R ft ) = + p ( Rmt R ft ) + yp ( Rmt R ft ) e pt
137
2+
pt
E ( R j ) = RF + J E ( Rm ) RF
138
rate plus a risk premium given by the product of the systematic risk
of the asset and the risk premium on the market portfolio.
(e) Overall performance can be attributed to selectivity and risk:
Fama (1972) devised a mechanism for segregating part of an observed
investment return depending on managers ability to pick up the best
securities at a given level of risk, in part thanks to the prediction of
general market price movements.10 In Famas decomposition performance evaluation measure of portfolio, overall performance can be
attributed to selectivity and risk. The performance based on selectivity is decomposed into net selectivity and diversification. The difference between actual return and risk-free return indicates overall
performance:
Rp Rf
Rp Rf = Rp Rp ( p ) + Rp ( p ) Rf )
6 Portfolio Management
139
This adjustment is necessary in order to level out the playing field for
portfolio risk return and vis--vis market return. The effect of this
adjustment is reported below:
M 2 = *Rp Rm
140
Open ended
Equity
July 9, 1998
10
332.88 crore
Rs. 5,000
Daily
Daily
Devensangoi
2.25 %
Nil
Equity and equity-related instruments up to 95 % and
debt, money market and cash up to 5 %
Growth and dividend
Dividend re-investment
Monthly : Minimum Rs. 1,000+5 post-dated
checks for a minimum of Rs. 1,000 each.
Available
Minimum of Rs. 500 and multiples of Rs. 1
SPECIAL FEATURES:
CHOICE: Growth plan and dividend plan (re-investment &
Payout option)
Dividends are tax-free for the investor.
EASY LIQUIDITY: Transactions are processed within four
working days.
UTI MASTERSHARE FUND:
This is an open-ended equity fund aiming to provide benefit of capital
appreciation and income distribution through investment in equity shares.
SPECIAL FEATURES:
CHOICE: Growth plan and dividend plan (re-investment and
payout option)
Dividends are tax-free for the investor.
EASY LIQUIDITY: Transactions are processed within four
working days.
6 Portfolio Management
141
Open ended
Equity
December 1, 1993
10
2023.88 crore
Rs. 5,000
Daily
Daily
K.N.SIVASUBRAMANIAN
2.25 %
Nil
Open ended
Equity
September 19, 1986
10
1,596.40 crore
Rs. 5,000
Daily
Daily
Mr. Chandraprakashpadiyar
2.25 %
Nil
Equity minimum 70 %
Debt maximum 30 %
Growth and dividend
Dividend re-investment
Monthly: Minimum Rs. 1,000+5 post-dated checks for
a minimum of Rs. 1,000 each
Available
Available
142
Open ended
Equity
February 24, 1995
10
422.89 crore
Rs. 5,000
Daily
Daily
Mahesh Patil
2.25 %
Nil
S.D
BETA
SHARPE
TREYNOR
JENSEN
8.2199
7.90873
0.9369
1.02055
0.1861
0.1613
1.6332
1.2501
0.2072
0.6178
7.2350
7.9636
0.9145
0.9138
0.0439
0.0555
0.3471
0.4832
2.0138
1.2536
143
6 Portfolio Management
Table 6.6 Ranking of select funds
PRU ICICI
FRANKLIN TEMPLETON
UTI
BIRLA
S.D
BETA
SHARPE
TREYNOR
JENSEN
V
III
I
IV
IV
V
II
I
II
III
V
IV
II
III
V
IV
II
III
V
IV
This section deals with portfolio management and analysis of the following select schemes in India: UTI Equity Fund (Table 6.7), SBI Blue Chip
FundDirect Plan (G)(Table 6.8), Birla Sunlife Front Line Equity Funds
(G) (Table 6.9), SBI Magnum Equity Fund (G) (Table 6.10), HDFC
Index Fund Sensex Plus PlanDirect Plan (Table 6.11), HDFC Top fund
(G) (Table 6.12), J.P.Morgan India Equity Fund (G) (Table 6.13) Kotak
50 Regular Plan (G) (Table 6.14), IDBI India Top 100 Equity Fund (G)
(Table 6.15), ICICI Prudential Top Fund (G) (Table 6.16).
Table 6.7 depicts the portfolio management of UTI Equity Fund. It is
observed that 6.1 % of the total fund value of Rs.281.9 crore, invested in
HDFC Bank, can be considered as top holding of the portfolio, followed
by investment in Infosys with 5.02 %, and its value is Rs.232.15 crore of
UTI Equity Fund.
144
Sector
Value
Asset %
(Rscr)
HDFC Bank
Infosys
TCS
Reliance
Shree Cements
ICICI Bank
Sun Pharma
Maruti Suzuki
Axis Bank
Bharti Airtel
Banking/Finance
Technology
Technology
Oil/Gas
Cement
Banking/Finance
Pharmaceuticals
Automotive
Banking/Finance
Telecom
281.9
232.15
167.18
165.41
152.73
151.24
122.55
94.04
90.54
88.83
6.1
5.02
3.62
3.58
3.31
3.27
2.65
2.04
1.96
1.92
Sector
Value (Rscr)
Asset %
HDFC Bank
Sun Pharma
Reliance
Infosys
Maruti Suzuki
TCS
Larsen
Ramco Cements
M&M
Titan Company
Banking/Finance
Pharmaceuticals
Oil/Gas
Technology
Automotive
Technology
Engineering
Cement
Automotive
Miscellaneous
29.04
23.97
22.83
19.16
15.61
12.49
11.52
11.35
10.89
9.96
6.88
5.68
5.41
4.54
3.7
2.96
2.73
2.69
2.58
2.36
Sector
Value (Rscr)
Asset %
HDFC Bank
Infosys
ICICI Bank
Reliance
ITC
Axis Bank
Larsen
IndusInd Bank
Tech Mahindra
Banking/Finance
Technology
Banking/Finance
Oil/Gas
Tobacco
Banking/Finance
Engineering
Banking/Finance
Technology
637.53
528.79
446.38
431.84
377
350.14
321.4
304.92
265.84
6.2
5.14
4.34
4.2
3.66
3.4
3.12
2.96
2.58
145
6 Portfolio Management
Table 6.10 SBI Magnum Equity Fund (G)
Sector allocation (Dec 31, 2015)
Equity
Sector
1-Year
HDFC
Infosys
Tata Motors
HPCL
DIVIS Labs
coal India
Banking/Finance
Technology
Automotive
Oil/Gas
Pharmaceuticals
Metals/Mining
High
low
32.94
19.01
9.29
8.56
6.21
5.15
37.23
19.1
15.62
7.39
13.62
5.9
32.22
12.42
10.32
4.73
7.34
3.2
Table 6.11 HDFC Index Fund Sensex Plus Plan Direct Plan
Top holdings (Dec 31, 2015)
Equity
Sector
Value (Rscr)
Asset %
Infosys
HDFC Bank
ITC
HDFC
Reliance
Technology
Banking/Finance
Tobacco
Banking/Finance
Oil/Gas
9.7
9.37
8.76
8.53
7.8
7.99
7.73
7.22
7.04
6.43
Sector
Value (Rscr)
Asset %
SBI
Infosys
ICICI Bank
HDFC Bank
Larsen
Maruti Suzuki
Reliance
Tata Motors (D)
ITC
Banking/Finance
Technology
Banking/Finance
Banking/Finance
Engineering
Automotive
Oil/Gas
Automotive
Tobacco
958.38
943.22
900.53
650.09
610.12
535.68
534.18
455.76
424.46
7.49
7.37
7.03
5.08
4.77
4.18
4.17
3.56
3.32
146
Sector
Value (Rscr)
Asset %
HDFC Bank
Infosys
HDFC
TCS
Reliance
Kotak Mahindra
Maruti Suzuki
ITC
IndusInd Bank
Tata Motors
Banking/Finance
Technology
Banking/Finance
Technology
Oil/Gas
Banking/Finance
Automotive
Tobacco
Banking/Finance
Automotive
41.5
28.71
24.28
18.07
14.47
13.86
13.26
13.26
12.98
12.93
8.89
6.15
5.2
3.87
3.1
2.97
2.84
2.84
2.78
2.77
Sector
Value (Rscr)
Asset %
Infosys
HDFC Bank
ICICI Bank
Larsen
Reliance
Axis Bank
Maruti Suzuki
TCS
IndusInd Bank
Sun Pharma
Technology
Banking/Finance
Banking/Finance
Engineering
Oil/Gas
Banking/Finance
Automotive
Technology
Banking/Finance
Pharmaceuticals
84.44
77.19
57.24
43.43
40.91
39.3
35.07
32.04
31.44
28.21
8.38
7.66
5.68
4.31
4.06
3.9
3.48
3.18
3.12
2.8
Sector
Value (Rscr)
Asset %
Maruti Suzuki
HDFC Bank
IndusInd Bank
Bosch
HDFC
Kotak Mahindra
Bajaj Auto
Siemens
United Spirits
UltraTech Cement
Automotive
Banking/Finance
Banking/Finance
Automotive
Banking/Finance
Banking/Finance
Automotive
Engineering
Food/Beverage
Cement
10.38
8.74
8.69
8.37
7.95
7.74
7.72
7.53
7.51
7.48
3.94
3.32
3.3
3.18
3.02
2.94
2.93
2.86
2.85
2.8
147
6 Portfolio Management
Table 6.16 ICICI Prudential Top 100 Fund (G)
Top holdings (Dec 31, 2015)
Equity
Sector
Value (Rscr)
Asset %
Utilities
Banking/Finance
Oil/Gas
Banking/Finance
Services
Technology
Banking/Finance
Technology
Automotive
Oil/Gas
129.04
86.69
80.71
54.81
54.31
54.18
46.71
44.97
43.97
41.85
10.36
6.96
6.48
4.4
4.36
4.35
3.75
3.61
3.53
3.36
Table 6.8 indicates the portfolio management of SBI Blue Chip Fund
Direct Plan (G). It is observed that 6.88 % of total fund value of Rs.29.04
crore, invested in HDFC Bank, can be considered as the top holding of
the portfolio, followed by investment in Sun Pharma with 5.68 %, and
its value is Rs.23.97 crore of UTI equity fund. It is found that this fund
invests the least in Titan Company for a value of Rs.9.96 crore, which is
2.26 % of total investments.
Table 6.9 illustrates the Birla Sunlife Frontline Equity Fund (G). The
fund manager prefers to invest in HDFC Bank for a value of Rs.637.53
crore, which is equivalent to 6.2 % of total investments, followed by
Rs.528.79 crore (i.e. 5.14 %) in Infosys.
Table 6.10 shows details for SBI Magnum Equity Fund (G). The top
holdings in the portfolio are allocated across banking, technology, automotive, oil and gas, pharmaceuticals and metals and mining. Hence, we
can say that the fund manager has produced a balanced portfolio.
Table 6.11 indicates the portfolio allocation for HDFC _Index Fund
Sensex Plan Direct Plan. It is observed that there is a widespread allocation of investments in almost all sectors of industry, ranging from 3.14 %
in the automotive to 7.99 % in technology.
Table 6.12 shows the holdings for HDFC Top 200 Fund (G). The
fund manager invests Rs. 958.38 crore (7.49 %) in SBI as a top priority
and Rs. 371.71 crore (2.90 %) in Bank of Baroda as the lowest priority.
148
Summary
7
Role oftheFund Manager
Introduction
149
150
investments, with the basic objective of allowing small investors to partake in the capital market by investing in a wide portfolio of stocks so as
to reduce risk.
Lixin Huang and Jayant R.Kale state that a simple theoretical model
to demonstrate that better mutual fund managers make larger investments in the important supplier/customer industries related to the main
industry. Consistent with their theory, empirical tests on a large sample
of mutual funds show that investment in related industries is positively
associated with fund performance and plays a more significant role in
explaining fund performance than investment in the main industry.1
As Russ Wermers study reveals,2 the mutual fund returns strongly
persist over multi-year periods. Further, consumer and fund manager
behavior both play a large role in explaining these long-term continuation patternsconsumers invest heavily in last-year's winning funds,
and managers of these winners invest these inflows in momentum stocks
to continue to outperform other funds for at least two years following
the ranking year. However, managers of losing funds appear reluctant
to sell their losing stocks to finance the purchase of new momentum
stocks. Hence, momentum continues to separate winnings and losses for
a much longer period than indicated by prior studies. Even more surprising is that persistence in winning fund returns is not entirely explained
by momentum. The study finds strong evidence that flow-related buying, especially among growth-oriented funds, pushes up stock prices.
Specifically, stocks that winning funds purchase in response to persistent
flows have returns that beat their size, book-to-market, and momentum
benchmarks by two to three percent per year over a four-year period.
1
Huang, Lixin and Kale, Jayant R., Product Market Linkages, Manager Quality, and Mutual Fund
Performance (September 10, 2012). forthcoming in the Review of Finance. Available at SSRN:
http://ssrn.com/abstract=1429431 or http://dx.doi.org/10.2139/ssrn.1429431.
2
Wermers, Russ, Is Money Really Smart? New Evidence on the Relation Between Mutual Fund
Flows, Manager Behavior, and Performance Persistence (May 2003). Available at SSRN: http://
ssrn.com/abstract=414420 or http://dx.doi.org/10.2139/ssrn.414420.
151
Cuthbertson, Keith and Nitzsche, Dirk and OSullivan, Niall, A Review of Behavioural and
Management Effects in Mutual Fund Performance (January 28, 2016), International Review of
Financial Analysis. Available at SSRN: http://ssrn.com/abstract=2723890.
4
Amisano, Gianni and Savona, Roberto, Imperfect Predictability and Mutual Fund Dynamics:
How Managers Use Predictors in Changing Systematic Risk (March 2008). ECB Working Paper
No. 881. Available at SSRN: http://ssrn.com/abstract=1103484.
152
ments over time. The main findings of their empirical work are that beta
dynamics are significantly affected by economic variables, even though
managers do not care about benchmark sensitivities towards the predictors in choosing their instrument exposure, and that persistence and
leverage effects also play a key role. Conditional market timing is virtually absent, if not negative, over the period 19902005. However, such
anomalous negative timing ability is offset by the leverage effect, which
in turn leads to enhanced mutual fund performance.
The idea of pooling money dates back to 1822, when groups of people in
Belgium established a company to finance investments in national industries under the name of Societe Generale de Belgique, incorporating the
concept of risk-sharing. The institution acquired securities from a wide
range of companies and practiced the concept of mutual funds for risk
diversification.
In 1822, King William I of the Netherlands established a close-end
fund. In 1860, this phenomenon had spread to England. In 1868, the
Foreign and Colonial Government Trust of London was formed, which
pioneered the industry, encouraging entrepreneurship over a large number of securities; this was considered the Mecca of modern mutual funds.
In 1873, Robert Fleming established the Scottish American Trust.
A mutual fund in America is essentially equivalent to a unit trust in
Britain. In the USA mutual funds have come a long way since March 21,
1924, when the first fund, the Massachusetts Investment Trust, was introduced by the professors of Harvard University; it began to offer shares to
the public in 1926. But it was Sherman L.Adams, the father of modern
mutual funds, along with Charles Learoyd and Ashton Carr, who established a modest portfolio of 45 common stocks worth US $50,000. The
crash of the stock markets in 1929 led to the demise of many close-end
funds. By the 1930s, 920 mutual funds had been formed in the USA and
most of them were close-ended. In Canada, the Canadian Investment
Fund was the first to be set up, in 1932, followed by the Commonwealth
International Corporation Limited and Corporate Investors Limited.
153
154
The fund managers role is changing and widening particularly considering the growth of mutual funds since the eighteenth century. The following paragraphs offer a brief insight into the growth of mutual fund
industry.
155
The history of mutual funds dates back to the nineteenth century when
the concept was introduced into Great Britain. In 1868 Robert Fleming
set up the first investment trust called Foreign and Colonial Investment
Trust, which promised to manage the finances of the moneyed classes of
Scotland by scattering the investment over a number of different stocks.
This investment trust and other investment trusts which were afterward
set up in Britain and the USA resembled todays close-ended mutual
funds. The stock market crash in 1929, the Great Depression and the
outbreak of World War II slackened the pace of growth of the mutual
fund industry. Innovations in products and services increased the popularity of mutual funds in the 1950s and 1960s. The first international
stock mutual fund was introduced in the USA in 1940. In 1976, the
first tax-exempt municipal bond funds emerged and in 1979, the first
money market mutual funds were created. The latest additions are the
international bond fund in 1986 and arm funds in 1990. This industry
witnessed substantial growth in the 1980s and 1990s when there was
a significant increase in the number of mutual funds, schemes, assets
and shareholders. In the USA the mutual fund industry registered a tenfold growth in the 1980s. From 1996 onwards mutual fund assets have
exceeded bank deposits.
Perhaps more outstandingly, the British fund model established a
direct link with the US Securities markets, contributing finance to the
development of the post-Civil War US economy. The Scottish American
Investment Trust, formed on February 1, 1873 by fund pioneer Robert
Fleming, invested in the economic potential of the USA, chiefly through
American railroad bonds. Many other trusts followed that not only targeted investment in America, but led to the introduction of the fund
investing concept on US shores in the late nineteenth century and early
twentieth.
By 1929, there were 19 open-ended mutual funds in the USA with
total assets of US $140 million. But the 1929 stock market crash followed by the Great Depression of 1930 ravaged the US financial market
as well as the mutual fund industry. This necessitated stricter regulation
for mutual funds and for financial sectors. Hence, to protect the interests of common investors, the US government passed various Acts, such
as the Securities Act 1933, the Securities Exchange Act 1934 and the
Investment Companies Act 1940.
156
AUM is a financial term that denotes the market value of all the funds
being managed by a financial institution (a mutual fund, hedge fund,
private equity firm, venture capital firm or brokerage house) on behalf
of its clients, investors, partners and depositors. The average AUM of all
mutual funds in India for the quarter July 2015 to September 2015 (in
INR billion) is given below (Table 7.1):
In the literature it has been found that various mutual fund characteristics influence their performance. These characteristics have been called
the attributes of mutual funds. Finance professionals and journalists frequently claim that various fund attributes are useful devices to either
select the top-performing funds or eliminate the worst performers. These
attributes are of paramount importance and are discussed in this section.
(a) Past performance: Past performance refers to the performance of the
mutual fund in previous time periods. It is measured by the return
through net asset value (NAV) of the mutual fund. The NAV and its
calculation are described in detail in later sections.
(b) Asset size: Asset size of a mutual fund is the total market value of all
the securities held in its portfolio. The AMFI has described it as the
assets under management of mutual funds.
(c) Expense ratio: Total expenses of the mutual funds are divided into
three components: management fees; marketing and distribution
fees; and other expenses, including securities custodian fees, transfer
agent fees, shareholder accounting expenses, auditor fees, legal fees
and independent direct fees. The total expenses divided by the funds
average net assets is its expense ratio. As described by the Centre for
Research and Security Prices (CRSP), it is the ratio of the funds
operating expenses paid by shareholders to the total investment.
157
Table 7.1 Average assets under management in India, July to September 2015
Sr No
Average AUM
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
1,034.42
952.28
853.03
773.44
700.57
595.58
448.12
396.65
352.99
304.86
179.66
170.59
150.79
139.47
132.57
125.12
123.18
79.76
76.16
67.18
62.44
52.63
47.71
43.00
41.49
35.38
32.90
28.35
27.32
21.66
19.80
16.06
11.05
11.03
10.82
5.08
4.37
3.15
2.67
2.52
2.33
2.07
12.70
11.69
10.48
9.50
8.60
7.31
5.50
4.87
4.34
3.74
2.21
2.10
1.85
1.71
1.63
1.54
1.51
0.98
0.94
0.83
0.77
0.65
0.59
0.53
0.51
0.43
0.40
0.35
0.34
0.27
0.24
0.20
0.14
0.14
0.13
0.06
0.05
0.04
0.03
0.03
0.03
0.03
(continued)
158
Average AUM
43
44
45
46
47
1.94
0.51
8,142.68
0.02
0.01
0.00
0.00
0.00
100.0
(d) Load status: Investment in mutual funds costs the investors a load
fee. AMFI has described two types of load fee: entry load and exit
load. Entry load is the charge collected by a scheme when it sells the
units. It is also called sales load or front-end load. Exit load is the
charge collected by a scheme when it buys back its units from the
unit holders. It is also called the repurchase or back-end load. The
Securities Exchange Board of India (SEBI) has abolished entry load
from all mutual fund schemes in India with effect from August 1,
2009.
(e) Investment style: Mutual fund schemes possess specific investment
styles informed by their investment objectives, for example equity
funds for growth of capital, income funds for regular income, balanced funds for a balanced combination of regular income and
growth, and liquid funds for liquidity. They have also been classified
according to their functions as open ended, close ended, and so on.
(f ) Risk: Investment is always associated with some risk. Risk involved
in the investment of a mutual fund scheme is measured as the deviation in actual return from the expected one. A mutual funds risk is
calculated in two ways. One is the total risk measured by the standard deviation () and the other is the systematic risk measured by
the beta ().
(g) Age of the mutual fund scheme: Past literature has considered the
age of the mutual fund as an attribute that affects its return performance because of the economies of experience. The age of the mutual
fund schemes at any particular time is determined by the time period
since their inception date. A wide variety of mutual fund schemes
exists to cater to needs such as financial position, risk tolerance and
159
Typical investment
Equity or
growth fund
Fixed income
fund
Money market
fund
Balanced fund
Sector-specic
fund
Index fund
Fund of funds
160
7.1
A firm will be classed as having a sound track record when the corporate body has been in the financial services business for at least five years
and has a positive net worth in the five years immediately preceding the
application of registration.
7.2
The following steps indicate the procedure for measuring the sound
track record of a mutual fund organization.
(a) Net worth in the immediately preceding year is more than its contribution to the capital of the AMC.
(b) Earning a profit in three out of the five preceding years, including the
fifth year.
(c) The sponsor should hold at least 40 % of the net worth of the AMC.
(d) A party which is not eligible to be a sponsor shall not hold 40 % or
more of the net worth of the AMC.
(e) The sponsor has to appoint the trustees, the AMC and the
custodian.
(f ) The trust deed and the appointment of the trustees have to be
approved by SEBI.
(g) An AMC or its officers or employees cannot be appointed as trustees
of the mutual fund.
(h) At least two-thirds of the business should be independent of the
sponsor.
(i) Only an independent trustee can be appointed as a trustee of more
than one mutual fund; such appointment can be made only with the
prior approval of the fund of which the person is already acting as a
trustee.
7.3
161
Launching aScheme
Before its launch, a scheme has to be approved by the trustees and a copy
of its offer documents filed with the SEBI.
(a) Every application form for units of a scheme is to be accompanied by
a memorandum containing key information about the scheme.
(b) The offer document needs to contain adequate information to enable
the investors to make informed investment decisions.
(c) All advertisements for a scheme have to be submitted to SEBI within
seven days of the issue date.
(d) The advertisements for a scheme have to disclose its investment
objective.
(e) The offer documents and advertisements should not contain any
misleading information nor any incorrect statement or opinion.
(f ) The initial offering period for any mutual fund schemes should not
exceed 45 days, the only exception being equity linked saving
schemes.
(g) No advertisements can contain information whose accuracy is dependent on assumption.
(h) An advertisement cannot carry a comparison between two schemes
unless the schemes are comparable and all the relevant information
about the schemes is given.
(i) All advertisements need to carry the name of the sponsor, the trustees
and the AMC of the fund.
(j) All advertisements need to disclose the risk factors.
(k) All advertisements shall clarify that investment in mutual funds is
subject to market risk and the achievement of the funds objectives
cannot be assured.
(l) When a scheme is open for subscription, no advertisement can be
issued stating that the scheme has been subscribed or over
subscription.
162
Academic Monthly Bulletin on Money, Banking and Finance, Ed. Sona Kapila, Academic
Foundation, Vol 81, September 2006, 158162.
6
Academic Monthly Bulletin on Money, Banking and Finance, Ed. Sona Kapila, Academic
Foundation, Vol 81, September 2006, 158162.
7
Academic Monthly Bulletin on Money, Banking and Finance, Ed. Sona Kapila, Academic
Foundation, Vol 81, September 2006, 158162.
163
164
the offer document does not allow for overseas investments (via ETFs,
ADRs, GDRs, Securities, etc.), a scheme may embark on such investments, provided that it follows SEBI guidelines and appraises its unit
holders through written communication of its investment intentions
and the associated risks. Additionally, the scheme is required to place
two advertisementsone in an English-language daily newspaper,
with national circulation, and one in the local language newspaper
where the schemes headquarters are basedto provide proper notification of its intention to invest in foreign securities (Kapila, 2006).
(e) Reporting to Trustees
As outlined in Academic Monthly Bulletin on Money, Banking and
Finance: The AMCs should send detailed periodical reports to the trustees which should include the following aspects:
I. Performance of investments made in foreign securities and overseas
ETFs in various countries.
II. Amount invested in various schemes and any breach of the exposure
limit laid down in the scheme offer documents (Kapila, 2006).
(f ) Review of Performance
Boards of AMCs and trustees are expected to discuss and analyze
the performance of their schemes foreign investments and ETFs and
compare them with the returns of analogous investments in the domestic
market. In this review, the board must assess what the balance and selection of their international and domestic investment portfolio should be.
As Kapila (2006) states, In case of schemes investing exclusively in foreign securities/overseas ETFs, performance may also be compared with
appropriate benchmark(s).
(g) Reporting to SEBI
According to the SEBI guidelines, the AMCs and trustees should
offer their comments on the compliance of these guidelines in the quarterly and half-yearly reports filed with SEBI (Kapila, 2006).
165
Summary
This chapter deals with the role of the fund manager and their styles of
investment management. It also focuses on some important studies that
discuss how fund manager attributes can enhance the value of mutual
funds. In addition to this, the chapter clarifies the duties and responsibilities of fund managers as suggested by SEBI in India. Thus, the success
of an investment activity completed by a fund manager depends on his
knowledge and ability to invest the right amount, in the right type of
investment, at the right time. In the present dynamic global environment, exploring investment avenues is of great relevance.
Year
Challenge
Details
Country
1987
Fall in DJIA
USA
1988
Deregulated
markets
1990
Trouble in
Japanese
market
1992
UK exits ERM
USA
Japan
UK
(continued)
167
168
(continued)
Year
Challenge
Details
Country
1995
Cause of
problem of
Barings
Bank
Singapore
1997
Asian
nancial
crisis
1998
Russian
nancial
crisis
1999
Recession in
Argentina
2001
Financial crisis
in Turkey
Thailand
Russia
Argentina
Turkey
169
(continued)
Year
Challenge
Details
Country
2002
Uruguay
banking
crisis
Uruguay
2007
US sub-prime
mortgage
crisis
USA
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Index
A
agent, 5, 52, 75, 86, 97, 156
asset management, 1, 15, 19, 345,
42n19, 434, 54n59, 59, 74,
96n1, 10931, 109n1, 154
asset management company (AMC),
2, 46, 12, 22, 24, 2830, 34,
43, 74, 77, 79, 81, 8392, 95,
107, 10910, 11719, 1224,
128, 131, 15962, 164
assets under management (AUM),
11, 1720, 45, 84, 11415,
120, 154, 1567
Association of Mutual Funds in India
(AMFI), 19, 81, 8493, 156,
158
B
balanced funds, 17, 24, 1589
benchmarking, 1, 6, 345, 37, 403,
59, 95107
C
capital asset pricing model (CAPM),
47, 51n49, 54, 97n7, 136
capital market, 12, 7, 12, 25, 38,
49, 723, 75, 84, 86, 100,
137, 150, 154
certificate of deposits (CDs), 24
Chang hung and Lee model, 97
Choi model, 53, 133
close ended schemes, 67, 21
commercial paper (CPs), 24
compound annual growth rate, 9
corporate governance, 1, 56, 335,
3740, 59, 6193
custodian, 46, 9, 13, 223, 28, 79,
86, 156, 15960
177
178
Index
D
data envelopment analysis (DEA), 52
debentures, 3, 24
debt fund, 3, 17, 118, 123
distributor, 5, 81, 84
domestic funds, 25, 42, 114, 1345
E
Elango model, 56
equity linked savings scheme (ELSS),
26, 47, 83
equity oriented fund, 19, 13943
equity schemes, 84
exchange trade fund (ETFs), 278,
99100, 1624
F
Fama model, 50, 138, 138n10
fast moving consumer goods
(FMCG), 128
Fidelity investments, 30
financial institutions, 5, 8n2, 13, 15,
302, 61, 77, 93, 111
floating rate income schemes, 17
foreign direct investment (FDI), 70
foreign partner, 15
fund manager, 14, 22, 25, 27, 29,
34, 37, 39, 42, 44, 44n23, 45,
54, 569, 62, 65, 778, 96,
989, 1067, 10910, 110n2,
11516, 119, 1278, 133,
1402, 14765, n60
fund of funds, 11718, 159
fund sponsor, 4, 6
G
General Insurance Corporation of
India (GIC), 12, 131
gilt funds, 26, 118
gilt short term, 17
global deposit receipt (GDR), 1624
global mutual funds trends, 89,
301, 1345
gold exchange trade fund, 17
growth fund, 7, 17, 24, 26, 118,
159
H
Hongkong Shangahi Banking
Corporation (HSBC), 103,
106, 157
Housing Development Finance
Corporation (HDFC), 7, 100,
1034, 1067, 110, 11721,
1235, 1278, 1437, 157
I
income fund, 24, 121, 1589
index funds, 9, 267, 43, 43n20, 96,
96n2, 98, 103, 106, 1245,
127, 143, 145, 147, 159
Indian mutual fund industry, 8n1,
10n5, 11, 19, 81n6, 110n5,
111
Industrial Credit Investment
Corporation of India (ICICI),
1516, 78, 100, 105, 107,
13940, 1428, 157
Industrial Development Bank of
India (IBDI), 11
Index
J
Jensen analysis, 45, 51
Jensen model, 49
L
leaders and laggards, 46
Life Insurance Corporation of India
(LIC), 12, 18, 157
liquid fund, 118, 121, 158
M
Massachusetts Investor Trust, 910,
152
money market mutual funds, 24,
155
monitoring funds, 3
179
N
National Stock Exchange (NSE), 86,
100
National Stock Exchange 50 Index
(NIFTY), 268, 100, 1027,
159, 168
net asset value (NAV), 7, 10, 16, 21,
289, 47, 51, 56, 70, 80, 99,
130, 1402, 151, 156
O
offshore funds, 23, 25
open ended schemes, 67, 10, 212,
29, 83
P
pension funds, 23, 27, 44, 44n26, 46
portfolio management, 1, 6, 23, 35,
37, 42, 447, 45n27,
51n4151n42, 52n50, 52n53,
56n69, 59, 65, 78, 110,
13348
portfolio manager, 2, 6, 38, 456,
53, 134
private sector, 1, 1519, 21, 39, 56,
63, 93
provident funds, 23, 27, 73
public sector, 3, 1216, 19, 556,
61, 77, 83, 93
Punjab National Bank Mutual Fund
(PNBMF), 12
180
Index
R
regression model, 49
Reserve Bank of India (RBI ), 11,
1415, 26, 79, 93
resource mobilization, 1314
retail investors, 3, 17, 78, 153
risk return analysis, 154
S
scheduled commercial banks (SCBs),
80
schemes wise resources, 13
sector funds, 1215, 1718, 56, 124
Securities and Exchange Board of India
(SEBI), 1 6, 36, 13, 1819,
213, 2830, 62, 7787, 903,
989, 110, 117, 15865
Sharpe analysis, 51
Sharpe model, 51, 133
short-term income schemes, 17
special sales price, 7
stand deviation analysis, 55, 97
State Bank of India (SBI), 12, 18,
1002, 106, 124, 127, 1435,
147, 157
Statman model, 55
stock market, 910, 46n29, 48, 52,
96, 99, 1345, 152, 1545
U
underwriter, 23
United States of America (U.S.A.),
810, 15, 22, 27, 30, 33, 42,
44n24, 51n43, 54n63, 62,
11011, 121, 1523, 155,
167, 169
unit holding pattern, 87, 91
unit investment trusts, 9
Unit Scheme 1964 of UTI (US 64),
11, 17, 62
Unit Trust of India (UTI), 1120,
256, 612, 8691, 101, 106,
124, 127, 131, 1404, 147,
157
Unit Trust of India Mutual Funds
(UTIMF), 867
US financial markets, 155
US scheme, 17
T
Tax scheme, 25
V
venture capital funds, 23, 26