Read this story about the erstwhile UTI Ventures (now called Ascent Capital)'writing off' and investment in KOUTONS RETAIL.
http://www.livemint.com/2011/01/20215647/Ascent-Capital-exits-from-Kout.html?atype=tp
In informal circles, Koutons was considered to be one of the better retail plays, much like Vishal Retail was talked of as a focused and aware player. Both have fallen. This is the third large failure. The first to fall was SUBHIKSHA which had some high profile investors.Of course, the TVS Group had given up this sector after a very early try in 1990 or so.
Organised retail chains find it difficult to battle the local stores, which have upgraded themselves, have low costs, low rents and labour costs that are half or less.
Of course, there are scalable models like Star Bazar (do not know about their profitability). Real estate is one business. Retailing is another. Understanding both is key.
Clearly, the dice is loaded against the retail sector from an investment perspective. The rents kill. On top of that, Vishal and Koutons also had to face the problem of having their own brand in ready to wear garments. This is a foolish business to get in to, since the inventory risks are very high, given that both the retail cos did not have any brand worth a recall.
I am also amazed at the venture capitalists who put in money.
Or, maybe, the promoters are laughing their way to the banks (swiss or not, it does not matter).
A clear message that retail focused on the Bottom of the Pyramid (India's pyramid bottom is ninety percent of the population) is a dicey call.
Friday, January 21, 2011
Tuesday, January 18, 2011
THE YEAR THAT IS WILL BE THE YEAR THAT WAS....
(This appeared in the recent issue of MoneyLife)
The sun shone, having no alternative, on the nothing new. —Samuel Beckett, Murphy (1938)
By the time you read this, you may have read umpteen articles on ‘where to invest in 2011”. Of course, each one is a forward looking piece and the equity markets could promise anything from a modest fifteen percent return (for the year) to usual homilies like “equities are best for the long term “. None of us bother to read what we read last year this time and how much of the oracles’ prophecies came true. I am also guilty of indulging in star gazing and it is fun to carve out a slice in time and predict what the markets will do. There is a fifty percent probability that we are right. Of course, where we can all go horribly wrong is in our picking of stocks, sectors etc.,
The best way is not to look at the change in the calendar as anything spectacular. In the life of a company, dates come and go. If a company is doing well, its earnings grow and shareholders remain happy.
As we step in to 2011, we are more informed. We now know that our country is amongst the most corrupt nations in the world. No party is free of guilt, with each one having abused power for personal gains. The most dirt can be found where there is a ‘discretion’ given (often, taken) by an individual for dispensing favours. Corporate India is perhaps the source of all guilt. From the days of licensing to using corporate riches for personal gains, Corporate India has been treated like a punching bag by the captains of industry. I think in case of corporate and political India, it is safe to assume “Guilty until proven innocent”.
Domestic economy is on a tear so far as prices and demand goes. The key question is whether the rising prices will impact demand? Supply bottlenecks will take time to get resolved. Investments in infrastructure are happening, but at a pace that is snail like. The government is using capital receipts (sale of shares, sale of licenses etc) to fill revenue deficits, which is a disastrous thing. The current account deficit (imports minus exports) is running at nearly six billion dollars every month! This gap is getting narrowed by capital market inflows. Again, a structurally weak filler.
Domestic inflation, driven by high demand, slow catch up of supply is also driving the rupee down. 2011 is ominous. If the global economy recovers, India will face a problem of high prices in crude and commodities. This will weaken our rupee further. Global protectionism will also contract the margins of export oriented service industries.
So, the investment theme does not change at all, as far as I am concerned. Let us continue to do what we do, with more focus. Look out for value to preserve our wealth and look for growth to place our bets on higher return opportunities.
If the global economy is going to recover, I will perhaps make one big change in my investment strategy. I will look for some India based multi nationals that have made a base in India for some global products. And another thing to evaluate is whether one should invest in equities overseas. Of course, most of the global markets are at two year highs, but then the pump priming which the world has done, has resulted in almost all the money coming to the equity markets. Entities like Citibank have used the hiatus to revamp business, write down old sins and planning a return to old times. So, global stocks may actually head much higher if the world recovers. Maybe some of it is in the price already. Global interest rates are still soft and till consumer confidence (which is abysmally low worldwide and pump primed by monopoly money) is back, we cannot call it a recovery.
Yes, we will be closer to another election. Politics is getting murky day by day and with all parties being of the same shade, there is unlikely to be any difference irrespective of which one is in power. What is sad is that each political party is busy throwing apparent ‘freebies’ at the populace and in the process destroying the fiscal discipline for good. The combined fiscal deficit of the states and the centre is in double digits. And it is very likely that we may see one more state added to the Indian map by creating more division. All this will shift focus from growth and development. 2010 was the year of scandals and 2011 will be spent in cursing politicians and fixers. In all this hue and cry, companies will continue to make money. Inflation will be a constant worry. Hopefully, business will not be throttled by regulatory seizure.
The sun shone, having no alternative, on the nothing new. —Samuel Beckett, Murphy (1938)
By the time you read this, you may have read umpteen articles on ‘where to invest in 2011”. Of course, each one is a forward looking piece and the equity markets could promise anything from a modest fifteen percent return (for the year) to usual homilies like “equities are best for the long term “. None of us bother to read what we read last year this time and how much of the oracles’ prophecies came true. I am also guilty of indulging in star gazing and it is fun to carve out a slice in time and predict what the markets will do. There is a fifty percent probability that we are right. Of course, where we can all go horribly wrong is in our picking of stocks, sectors etc.,
The best way is not to look at the change in the calendar as anything spectacular. In the life of a company, dates come and go. If a company is doing well, its earnings grow and shareholders remain happy.
As we step in to 2011, we are more informed. We now know that our country is amongst the most corrupt nations in the world. No party is free of guilt, with each one having abused power for personal gains. The most dirt can be found where there is a ‘discretion’ given (often, taken) by an individual for dispensing favours. Corporate India is perhaps the source of all guilt. From the days of licensing to using corporate riches for personal gains, Corporate India has been treated like a punching bag by the captains of industry. I think in case of corporate and political India, it is safe to assume “Guilty until proven innocent”.
Domestic economy is on a tear so far as prices and demand goes. The key question is whether the rising prices will impact demand? Supply bottlenecks will take time to get resolved. Investments in infrastructure are happening, but at a pace that is snail like. The government is using capital receipts (sale of shares, sale of licenses etc) to fill revenue deficits, which is a disastrous thing. The current account deficit (imports minus exports) is running at nearly six billion dollars every month! This gap is getting narrowed by capital market inflows. Again, a structurally weak filler.
Domestic inflation, driven by high demand, slow catch up of supply is also driving the rupee down. 2011 is ominous. If the global economy recovers, India will face a problem of high prices in crude and commodities. This will weaken our rupee further. Global protectionism will also contract the margins of export oriented service industries.
So, the investment theme does not change at all, as far as I am concerned. Let us continue to do what we do, with more focus. Look out for value to preserve our wealth and look for growth to place our bets on higher return opportunities.
If the global economy is going to recover, I will perhaps make one big change in my investment strategy. I will look for some India based multi nationals that have made a base in India for some global products. And another thing to evaluate is whether one should invest in equities overseas. Of course, most of the global markets are at two year highs, but then the pump priming which the world has done, has resulted in almost all the money coming to the equity markets. Entities like Citibank have used the hiatus to revamp business, write down old sins and planning a return to old times. So, global stocks may actually head much higher if the world recovers. Maybe some of it is in the price already. Global interest rates are still soft and till consumer confidence (which is abysmally low worldwide and pump primed by monopoly money) is back, we cannot call it a recovery.
Yes, we will be closer to another election. Politics is getting murky day by day and with all parties being of the same shade, there is unlikely to be any difference irrespective of which one is in power. What is sad is that each political party is busy throwing apparent ‘freebies’ at the populace and in the process destroying the fiscal discipline for good. The combined fiscal deficit of the states and the centre is in double digits. And it is very likely that we may see one more state added to the Indian map by creating more division. All this will shift focus from growth and development. 2010 was the year of scandals and 2011 will be spent in cursing politicians and fixers. In all this hue and cry, companies will continue to make money. Inflation will be a constant worry. Hopefully, business will not be throttled by regulatory seizure.
SELLERS KEEPERS, BUYERS WEEPERS
(This appeared in the recent issue of MoneyLife)
My mutual fund distributor friend is very disturbed. He has carefully nurtured clients who are regular investors in to mutual funds. My friend has an insurance distribution business, but does not sell insurance investment products. Of late, he is extremely upset.
What is happening is that his customers are being poached by the insurance agents. The clients used to regularly invest moneys in Fixed Maturity Plans of mutual funds. Now, a few of them have used the money meant for that, to invest into ‘Single Premium” insurance (investment) product, which has a ‘guaranteed’ return. The effective returns work out to around four or five percent per annum! My friend tries to explain this to the clients, but in vain. The client has been bamboozled in to a five year insurance cover. The client has also not been told that there is a very high probability that any returns he gets from a single premium product would be subjected to income tax.
My friend explained the dynamics to me. Apparently, these single premium products are being sold by the come lately Certified Financial Planners masquerading as “Independent Financial Advisors”. The old insurance agents do not push this product since traditional ULIP’s give them a fatter income.
The insurance companies have been pushing their case with the IFA’s in the following manner:
“If you put the money in to mutual fund FMP’s your earnings are going to be not more than 0.40 percent per annum on the amount invested. And each year, you will have to live with the vagaries of the market, the customers’ preferences at varying point etc. Assuming you are able to convince the customer each year, you will make a total of two percent over five years. In other words, from a fifty lakh customer, you will make a lakh of rupees over five years. You have to live with the fund house performance, follow up each year and the other routine headaches.
Instead, you sell our single premium product. Firstly, there is a ‘guaranteed’ return. Your first effort is in convincing the client. Once you do that, look at what you make. You get a first year commission of around two to three percent and an annual commission of two percent. So, you make a total of at least twelve percent! In other words, you will make six lakh rupees! And once you have taken the cheque out of the customer, you can forget him. No servicing, no worrying about NAV, no after sales service. In fact, once he has given you the cheque, you do not even have to take his calls, unless he has more money to invest.
So now, you decide which you want to push.”
This argument is solid. The agent sees the light of the day. Where is a lakh of rupees as compared to ten or twelve lakh rupees?
Single premium products are absolutely useless. In the past, I remember having put money in to products like Bima Nivesh of LIC simply because it was a nine to ten percent post tax return. Now, unless the premium is not over twenty percent of amount insured, the tax man is going to chase you. And no one gives this out as a risk. All the agent says is ‘tax benefits” as per law. This is highly ambiguous and will easily fool someone. And insurance agents, being what they are, will shove in their body if you give them an inch.
If an IFA has to be a genuine one, there cannot be any product in insurance other than a Term Policy that will be sold. All the other products are investment products, which pick the pockets of an investor. And for Term policies, you get a fantastic price if you go online and take it directly, without an agent. Of course, the agent will scare you. He will say that in case of a claim, there will be no one to help you. Think. It is very likely that you may live longer than the agent. And in any case, after a few years, the agent vanishes. You have to, in any case, run to make the payment yourself. I had a running exchange of mails with Metlife telling them to send an agent to give service. I told them that I am unhappy with the agent and to stop paying his commission. No use. For them, the agent is God. The agent stopped servicing me inspite of reminders and requests. In spite of this, Metlife continues to pay commission (I presume) to the agent. In no other profession (maybe some government jobs are like this) can you earn without doing anything for it. What a shame!
My mutual fund distributor friend is very disturbed. He has carefully nurtured clients who are regular investors in to mutual funds. My friend has an insurance distribution business, but does not sell insurance investment products. Of late, he is extremely upset.
What is happening is that his customers are being poached by the insurance agents. The clients used to regularly invest moneys in Fixed Maturity Plans of mutual funds. Now, a few of them have used the money meant for that, to invest into ‘Single Premium” insurance (investment) product, which has a ‘guaranteed’ return. The effective returns work out to around four or five percent per annum! My friend tries to explain this to the clients, but in vain. The client has been bamboozled in to a five year insurance cover. The client has also not been told that there is a very high probability that any returns he gets from a single premium product would be subjected to income tax.
My friend explained the dynamics to me. Apparently, these single premium products are being sold by the come lately Certified Financial Planners masquerading as “Independent Financial Advisors”. The old insurance agents do not push this product since traditional ULIP’s give them a fatter income.
The insurance companies have been pushing their case with the IFA’s in the following manner:
“If you put the money in to mutual fund FMP’s your earnings are going to be not more than 0.40 percent per annum on the amount invested. And each year, you will have to live with the vagaries of the market, the customers’ preferences at varying point etc. Assuming you are able to convince the customer each year, you will make a total of two percent over five years. In other words, from a fifty lakh customer, you will make a lakh of rupees over five years. You have to live with the fund house performance, follow up each year and the other routine headaches.
Instead, you sell our single premium product. Firstly, there is a ‘guaranteed’ return. Your first effort is in convincing the client. Once you do that, look at what you make. You get a first year commission of around two to three percent and an annual commission of two percent. So, you make a total of at least twelve percent! In other words, you will make six lakh rupees! And once you have taken the cheque out of the customer, you can forget him. No servicing, no worrying about NAV, no after sales service. In fact, once he has given you the cheque, you do not even have to take his calls, unless he has more money to invest.
So now, you decide which you want to push.”
This argument is solid. The agent sees the light of the day. Where is a lakh of rupees as compared to ten or twelve lakh rupees?
Single premium products are absolutely useless. In the past, I remember having put money in to products like Bima Nivesh of LIC simply because it was a nine to ten percent post tax return. Now, unless the premium is not over twenty percent of amount insured, the tax man is going to chase you. And no one gives this out as a risk. All the agent says is ‘tax benefits” as per law. This is highly ambiguous and will easily fool someone. And insurance agents, being what they are, will shove in their body if you give them an inch.
If an IFA has to be a genuine one, there cannot be any product in insurance other than a Term Policy that will be sold. All the other products are investment products, which pick the pockets of an investor. And for Term policies, you get a fantastic price if you go online and take it directly, without an agent. Of course, the agent will scare you. He will say that in case of a claim, there will be no one to help you. Think. It is very likely that you may live longer than the agent. And in any case, after a few years, the agent vanishes. You have to, in any case, run to make the payment yourself. I had a running exchange of mails with Metlife telling them to send an agent to give service. I told them that I am unhappy with the agent and to stop paying his commission. No use. For them, the agent is God. The agent stopped servicing me inspite of reminders and requests. In spite of this, Metlife continues to pay commission (I presume) to the agent. In no other profession (maybe some government jobs are like this) can you earn without doing anything for it. What a shame!
Tuesday, January 4, 2011
Fixing share prices- Mumbai Ishtyle
(This appeared in the recent issue of Moneylife)
In the recent fall in prices of small and mid cap stocks, we all have a big lesson to learn. A friend of mine sent me a list that had the names, prices etc of around 350 stocks that had touched their 52 week lows. I glanced through the list to see if there is anything interesting in them.
My first reaction was that this list had a major proportion of stocks that were ‘operated’. What are the typical characteristics? For one, they have limited retail interest. Less than fifty thousand shareholders are typical of most Indian companies. And average retail holding tends to be a hundred to five hundred shares. There is no reason for the stock to churn up large volumes on the bourses, unless there is a clear manipulative activity which gives an illusion of liquidity and also is part of a larger exercise by the promoters to rig the price. Why do the promoters rig prices? One reason is to keep trading and making money on the ‘unofficial’ promoter holdings. The other reason is to create an illusion of liquidity as well as pushing the prices higher, with a view to enable a ‘Qualified Institutional Placement’ with Institutional investors.
For most Indian companies with low market cap (say less than Rs.500 crore) there is hardly any institutional demand. And surely, the retail shareholders hardly trade their holding every day. Most retail investors tend to either hold on for long or sell on listing.
To create an illusion, the promoter approaches a few ‘operators’. Many times, some broking houses approach companies saying that they will ensure ‘interest’ in the company stock by writing research reports, road shows etc. Once all arrangements are in place, there are a few entities which will keep buying and selling the shares on a daily basis. Most of them will have a ‘Loan Against Shares’ facility from a NBFC. There can be up to twenty or more corporate entities involved in this activity. Essentially, circular trading happens in a way that it creates an impression of volumes as well as help to move the price up. A few stray retail investors participate. In a vicious market, they are like the victims of stray bullets!
The one classic symptom which most of these stocks displayed was their getting locked on the lower circuit for several days in a row. This can happen when the operator ceases his activity. The recent cessation was perhaps due to some of them getting scared of regulatory action or the NBFC’s pulling the plug. Regulators can easily catch these operators if they want to. The trail is open enough. The other sign is the percentage of ‘deliveries’ to the total traded volume. In these kinds of counters, it is rare that anyone other than an operator would indulge in ‘intra day’ activity. The first smell of suspicion is the breakdown of the volumes traded. The lower the delivery volumes in these small stocks, the greater are the probability of manipulative trading.
The other is to look at the pattern of ‘block’ trades. Most times, you will see names of a few investment companies repeating. If you track the data on a yearly basis, some names seem to be present in a group of stocks. Whilst it may not be conclusive evidence, it surely smells.
Look at the number of shareholders. Look at the institutional investors’ breadth. Domestic institutional investor presence is easily ‘bought’ by many promoters through brokers who ‘fix’ the fund managers. If you look at the list of investments of most domestic institutions, it would have such obscure companies, that you cannot but doubt the integrity of the institution.
So, what did the list tell me? Yes. If one wants to be focused on integrity and transparency, the universe of listed stock shrinks by as much as ninety to ninety five percent. The second thing is one has to keep track of operators if you want to get in to the second rung companies. In the small companies, the main issue is also that without an ‘operator’ it would be almost impossible to buy and sell shares.
I have gradually seen promoters using the operator route to make money on the side and when they are able to ramp up the prices to very high levels, even by their own yardsticks, they sell part of their holdings. Then over time, they bring the prices down and then use the QIP route to allot themselves warrants to shore up the holding.
So, if I have to take a chance, I will perhaps make a list of five or ten of these companies and place a few bets. These bets would hinge on whether and how soon the concerned promoters get back to action. Of course, you can exercise some extra checks by looking at numbers (often pointless because when the promoter can rig share prices, he can rig anything) and taking a view on whether the stock is such that sooner or later one can find an institutional buyer.
This is the cycle that most Indian stocks go through. Understand it and gain from it.
In the recent fall in prices of small and mid cap stocks, we all have a big lesson to learn. A friend of mine sent me a list that had the names, prices etc of around 350 stocks that had touched their 52 week lows. I glanced through the list to see if there is anything interesting in them.
My first reaction was that this list had a major proportion of stocks that were ‘operated’. What are the typical characteristics? For one, they have limited retail interest. Less than fifty thousand shareholders are typical of most Indian companies. And average retail holding tends to be a hundred to five hundred shares. There is no reason for the stock to churn up large volumes on the bourses, unless there is a clear manipulative activity which gives an illusion of liquidity and also is part of a larger exercise by the promoters to rig the price. Why do the promoters rig prices? One reason is to keep trading and making money on the ‘unofficial’ promoter holdings. The other reason is to create an illusion of liquidity as well as pushing the prices higher, with a view to enable a ‘Qualified Institutional Placement’ with Institutional investors.
For most Indian companies with low market cap (say less than Rs.500 crore) there is hardly any institutional demand. And surely, the retail shareholders hardly trade their holding every day. Most retail investors tend to either hold on for long or sell on listing.
To create an illusion, the promoter approaches a few ‘operators’. Many times, some broking houses approach companies saying that they will ensure ‘interest’ in the company stock by writing research reports, road shows etc. Once all arrangements are in place, there are a few entities which will keep buying and selling the shares on a daily basis. Most of them will have a ‘Loan Against Shares’ facility from a NBFC. There can be up to twenty or more corporate entities involved in this activity. Essentially, circular trading happens in a way that it creates an impression of volumes as well as help to move the price up. A few stray retail investors participate. In a vicious market, they are like the victims of stray bullets!
The one classic symptom which most of these stocks displayed was their getting locked on the lower circuit for several days in a row. This can happen when the operator ceases his activity. The recent cessation was perhaps due to some of them getting scared of regulatory action or the NBFC’s pulling the plug. Regulators can easily catch these operators if they want to. The trail is open enough. The other sign is the percentage of ‘deliveries’ to the total traded volume. In these kinds of counters, it is rare that anyone other than an operator would indulge in ‘intra day’ activity. The first smell of suspicion is the breakdown of the volumes traded. The lower the delivery volumes in these small stocks, the greater are the probability of manipulative trading.
The other is to look at the pattern of ‘block’ trades. Most times, you will see names of a few investment companies repeating. If you track the data on a yearly basis, some names seem to be present in a group of stocks. Whilst it may not be conclusive evidence, it surely smells.
Look at the number of shareholders. Look at the institutional investors’ breadth. Domestic institutional investor presence is easily ‘bought’ by many promoters through brokers who ‘fix’ the fund managers. If you look at the list of investments of most domestic institutions, it would have such obscure companies, that you cannot but doubt the integrity of the institution.
So, what did the list tell me? Yes. If one wants to be focused on integrity and transparency, the universe of listed stock shrinks by as much as ninety to ninety five percent. The second thing is one has to keep track of operators if you want to get in to the second rung companies. In the small companies, the main issue is also that without an ‘operator’ it would be almost impossible to buy and sell shares.
I have gradually seen promoters using the operator route to make money on the side and when they are able to ramp up the prices to very high levels, even by their own yardsticks, they sell part of their holdings. Then over time, they bring the prices down and then use the QIP route to allot themselves warrants to shore up the holding.
So, if I have to take a chance, I will perhaps make a list of five or ten of these companies and place a few bets. These bets would hinge on whether and how soon the concerned promoters get back to action. Of course, you can exercise some extra checks by looking at numbers (often pointless because when the promoter can rig share prices, he can rig anything) and taking a view on whether the stock is such that sooner or later one can find an institutional buyer.
This is the cycle that most Indian stocks go through. Understand it and gain from it.
Thursday, December 30, 2010
Portfolio Damagement Schemes and distributors
(This appeared in www.moneylife.in)
A big fund house recently announced the redemption of a three year real estate PMS scheme. The investors were happy as they got back a total of one hundred and three percent of the money they invested. Yes, a pathetic return, but the investors were happy to see their principal back. Of course, it is more psychological than logical. In real terms, probably each investor lost around thirty percent of his principal, if inflation or purchasing power is factored in! Not a very prudential investment.
Several interesting takeaways from this:
i) Though the scheme collected money in 2007 (property prices even today are around fifty percent higher than that period), the investment must have been so bad that the net return to the investor is so pathetic. Or it is likely that the fund manager/s has done sweetheart deals with investee companies and made good money on the side;
ii) There would have been some investment costs (brokerage, due diligence etc);
iii) The distributor made a total of around five percent upfront, when he sold the scheme to the investor; and
iv) The AMC or the investment manager charged a three percent entry load and an annual management fee of two percent. Totally, the AMC made around nine percent of which five percent was given to the distributor. In effect, the AMC made four, the distributor five and the investor three! All the investment was of the investor. So, for the distributor and the investment manager, the return is infinite and for the investor, it is less than one percent per annum!
Alas, even today PMS schemes continue to lure investors.
The latest among the PMS schemes are the ‘debt’ PMS schemes, with return promises of around twenty percent per annum for three to five years. The collected money is lent to investment companies belonging to industrialists who in turn pledge their holdings in listed companies. The money is used by the investment companies to either buy more shares or to manipulate the share prices. Not all the investment companies are actually disclosed to be promoter entities as per the official records. And since there are no investment limits etc on PMS schemes, often, the entire pool of money is lent to one entity! This is nothing but backdoor money lending!
For selling these funds, the distributor can get two to five percent commission, upfront.
I happened to see a PMS account statement of a gentleman who had invested money in to a scheme focused on ‘consumption’ theme. In one year since investment, the person was down eleven percent, in spite of keeping cash balance of close to 45%! In the same period, the sensex has given a positive return of twenty percent! I found the arithmetic difficult to digest. My guess is that what I saw was just the snapshot of the statement date. Perhaps there has been active churning and trading which would have eaten away most of the money. Investors never seem to learn!
It is rare that PMS schemes give returns higher than the mutual funds. In spite of that, people with too much money, seem to get easily conned by the sales folk who push the PMS schemes at them because the selling commission is much higher than a mutual fund. It is time SEBI raised the minimum ticket size for PMS to at least a few crores of rupees. Then, it is a case of the rich putting their money knowingly. Today, people with less than even a crore of investment portfolio, are being lured in to PMS. Of course, they too do not deserve any sympathy, but greed is a normal human tendency and if the regulator can curb it somewhat, the investor who keeps away from such rotten schemes, would be protected.
A big fund house recently announced the redemption of a three year real estate PMS scheme. The investors were happy as they got back a total of one hundred and three percent of the money they invested. Yes, a pathetic return, but the investors were happy to see their principal back. Of course, it is more psychological than logical. In real terms, probably each investor lost around thirty percent of his principal, if inflation or purchasing power is factored in! Not a very prudential investment.
Several interesting takeaways from this:
i) Though the scheme collected money in 2007 (property prices even today are around fifty percent higher than that period), the investment must have been so bad that the net return to the investor is so pathetic. Or it is likely that the fund manager/s has done sweetheart deals with investee companies and made good money on the side;
ii) There would have been some investment costs (brokerage, due diligence etc);
iii) The distributor made a total of around five percent upfront, when he sold the scheme to the investor; and
iv) The AMC or the investment manager charged a three percent entry load and an annual management fee of two percent. Totally, the AMC made around nine percent of which five percent was given to the distributor. In effect, the AMC made four, the distributor five and the investor three! All the investment was of the investor. So, for the distributor and the investment manager, the return is infinite and for the investor, it is less than one percent per annum!
Alas, even today PMS schemes continue to lure investors.
The latest among the PMS schemes are the ‘debt’ PMS schemes, with return promises of around twenty percent per annum for three to five years. The collected money is lent to investment companies belonging to industrialists who in turn pledge their holdings in listed companies. The money is used by the investment companies to either buy more shares or to manipulate the share prices. Not all the investment companies are actually disclosed to be promoter entities as per the official records. And since there are no investment limits etc on PMS schemes, often, the entire pool of money is lent to one entity! This is nothing but backdoor money lending!
For selling these funds, the distributor can get two to five percent commission, upfront.
I happened to see a PMS account statement of a gentleman who had invested money in to a scheme focused on ‘consumption’ theme. In one year since investment, the person was down eleven percent, in spite of keeping cash balance of close to 45%! In the same period, the sensex has given a positive return of twenty percent! I found the arithmetic difficult to digest. My guess is that what I saw was just the snapshot of the statement date. Perhaps there has been active churning and trading which would have eaten away most of the money. Investors never seem to learn!
It is rare that PMS schemes give returns higher than the mutual funds. In spite of that, people with too much money, seem to get easily conned by the sales folk who push the PMS schemes at them because the selling commission is much higher than a mutual fund. It is time SEBI raised the minimum ticket size for PMS to at least a few crores of rupees. Then, it is a case of the rich putting their money knowingly. Today, people with less than even a crore of investment portfolio, are being lured in to PMS. Of course, they too do not deserve any sympathy, but greed is a normal human tendency and if the regulator can curb it somewhat, the investor who keeps away from such rotten schemes, would be protected.
2011- change is nothing. stock markets rule ok
2011 - Crystal Ball
(This was written for the Dalal Street Journal)
Returns
P/E Open Close
25.53 Jan-08 20,325.27
12.16 Dec-08 9,647.31 -52.54%
12.21 Jan-09 9,720.55
21.82 Dec-09 17,464.81 79.67%
21.99 Jan-10 17,473.45
22.85 dec 6 2010 19,981.31 14.35%
(Above numbers are based on the BSE Sensex)
The above table is self explanatory. Indian markets have given fantastic returns, unless you were caught with your money in the markets through 2008. If you have done that, hopefully you have bounced back. It is likely that if you were caught in fancy ‘growth’ stocks and still deep in the red.
From my experience of equities, I can clearly see that ‘value’ stocks have delivered superior returns as opposed to ‘growth’ chases. You have only to look at multinational stocks like HUL, Colgate, Castrol, Cummins etc to realise this. Many Indian ‘growth’ stocks have given nothing but heartaches. Perhaps you were lucky to catch an Infosys early, but it is more likely that you may have the ilk of Ispat in your portfolio.
The charm that the MNC companies offer us is that they seem to be in dull businesses. But in a country where domestic demand is going up in leaps and bounds, their businesses benefit enormously. Most of the companies I named enjoy incredible return on shareholder funds. They enjoy their share of India’s economic growth as well as stay focused on what they do.
Our economy has kind of moved on to a seven to nine percent growth despite the government’s utter paralyses in terms of doing anything proactive (other than individuals taking a toll for putting a rubber stamp). And for the righteous ones, who think that corruption and scams will matter, do not worry. Dishonesty is a way of life in India and merely because it is out in the print does not amount to a new discovery. Ignore it.
Industrial growth can be as high as fifteen percent, if supply catches up. In many areas, including service sectors, there is a clear shortage of skilled manpower. Rising wages are eating in to profitability as well as adding to inflationary pressures. I think that profit growth is going to be a party pooper. Inflation should continue at nine to ten percent in official terms, whilst on the ground inflation will be closer to twenty. This alone should keep some profit on the table for companies.
One worry is whether the last quarter will see some dip in rural spending as farm output is getting impacted by capricious weather in most parts of India. This is something that can upset the consumption story.
In this backdrop, I would like to look at keeping my money in to sectors like banking (private banks), pharmaceuticals, engineering and FMCG. Oil and petroleum can be looked at, but the sector has limited investment possibilities. Regulated sectors (fertilizers /sugar etc ) continue to remain politically threatened sectors and usual speculation around pre budget time could provide some quick bucks. With all the controversies surrounding telecom, it would be good to pick up market leaders at declines. The trouble is that one does not know which of these companies would be the next ‘discovery’ in a scam.
The government’s selling off of capital assets (shares in PSU) and treating the proceeds as revenue, will help to dress up the shoddy fiscal position. Analysts will shift focus from Trade deficit (increasing at nearly six billion dollars a month) to Current Account deficit (buffeted by capital market inflows) and say that ‘All Is Well’. The main plank for the bullishness is continuing foreign inflows in to this market. At some point, if they wake up and think that India is not all that hot or that some other global economies offer better opportunity, the flows will thin.
2011 is going to be a year of uncertain returns in this market. Whilst I do not see a market collapse (primarily due to corporate earnings rather than macro economics), earnings growth beyond fifteen percent or so is clearly not on. So, valuations are rich and stock picking is going to be key.
Gold and silver seem to be on a tear and so long as Europe and America continue to wallow in printed money, the gold run would continue. Perhaps gold and silver would give higher returns. If you ask me about whether they are at fair value, the answer is a resounding “NO”. Clearly, our stocks represent better value than the precious metals. The metal prices merely reflect the fear on global currencies.
One possibility is of regulatory whiplash which can bog down investments. These could be accompanied by exposure of accounting frauds also. 2011 is going to be a bumpy ride in the face of rich valuations, decent economy and strong funds flows.
R. Balakrishnan
December 7th, 2010.
(This was written for the Dalal Street Journal)
Returns
P/E Open Close
25.53 Jan-08 20,325.27
12.16 Dec-08 9,647.31 -52.54%
12.21 Jan-09 9,720.55
21.82 Dec-09 17,464.81 79.67%
21.99 Jan-10 17,473.45
22.85 dec 6 2010 19,981.31 14.35%
(Above numbers are based on the BSE Sensex)
The above table is self explanatory. Indian markets have given fantastic returns, unless you were caught with your money in the markets through 2008. If you have done that, hopefully you have bounced back. It is likely that if you were caught in fancy ‘growth’ stocks and still deep in the red.
From my experience of equities, I can clearly see that ‘value’ stocks have delivered superior returns as opposed to ‘growth’ chases. You have only to look at multinational stocks like HUL, Colgate, Castrol, Cummins etc to realise this. Many Indian ‘growth’ stocks have given nothing but heartaches. Perhaps you were lucky to catch an Infosys early, but it is more likely that you may have the ilk of Ispat in your portfolio.
The charm that the MNC companies offer us is that they seem to be in dull businesses. But in a country where domestic demand is going up in leaps and bounds, their businesses benefit enormously. Most of the companies I named enjoy incredible return on shareholder funds. They enjoy their share of India’s economic growth as well as stay focused on what they do.
Our economy has kind of moved on to a seven to nine percent growth despite the government’s utter paralyses in terms of doing anything proactive (other than individuals taking a toll for putting a rubber stamp). And for the righteous ones, who think that corruption and scams will matter, do not worry. Dishonesty is a way of life in India and merely because it is out in the print does not amount to a new discovery. Ignore it.
Industrial growth can be as high as fifteen percent, if supply catches up. In many areas, including service sectors, there is a clear shortage of skilled manpower. Rising wages are eating in to profitability as well as adding to inflationary pressures. I think that profit growth is going to be a party pooper. Inflation should continue at nine to ten percent in official terms, whilst on the ground inflation will be closer to twenty. This alone should keep some profit on the table for companies.
One worry is whether the last quarter will see some dip in rural spending as farm output is getting impacted by capricious weather in most parts of India. This is something that can upset the consumption story.
In this backdrop, I would like to look at keeping my money in to sectors like banking (private banks), pharmaceuticals, engineering and FMCG. Oil and petroleum can be looked at, but the sector has limited investment possibilities. Regulated sectors (fertilizers /sugar etc ) continue to remain politically threatened sectors and usual speculation around pre budget time could provide some quick bucks. With all the controversies surrounding telecom, it would be good to pick up market leaders at declines. The trouble is that one does not know which of these companies would be the next ‘discovery’ in a scam.
The government’s selling off of capital assets (shares in PSU) and treating the proceeds as revenue, will help to dress up the shoddy fiscal position. Analysts will shift focus from Trade deficit (increasing at nearly six billion dollars a month) to Current Account deficit (buffeted by capital market inflows) and say that ‘All Is Well’. The main plank for the bullishness is continuing foreign inflows in to this market. At some point, if they wake up and think that India is not all that hot or that some other global economies offer better opportunity, the flows will thin.
2011 is going to be a year of uncertain returns in this market. Whilst I do not see a market collapse (primarily due to corporate earnings rather than macro economics), earnings growth beyond fifteen percent or so is clearly not on. So, valuations are rich and stock picking is going to be key.
Gold and silver seem to be on a tear and so long as Europe and America continue to wallow in printed money, the gold run would continue. Perhaps gold and silver would give higher returns. If you ask me about whether they are at fair value, the answer is a resounding “NO”. Clearly, our stocks represent better value than the precious metals. The metal prices merely reflect the fear on global currencies.
One possibility is of regulatory whiplash which can bog down investments. These could be accompanied by exposure of accounting frauds also. 2011 is going to be a bumpy ride in the face of rich valuations, decent economy and strong funds flows.
R. Balakrishnan
December 7th, 2010.
Wednesday, December 15, 2010
Trust betrayed-
Today, the television channel, Headlines Today (belonging to the India Today group) had an expose on the Tata Group. In brief, land that belonged to Voltas, with a market value of Rs.250 crores was sold / transferred at Rs.25 cr to nominees of the Karunanidhi family (the family that rules the state of Tamil Nadu and is an important ally of the Congress ). According to the channel, this was the consideration paid to ensure that the Telecom portfolio was NOT given to Dayanidhi Maran.
In the same news capsule, there is mention of a shell co which links the Anil Ambani group, Swan Telecom, ETISALAT, ETASTAR and the DMK ruling family!
To all of those who have been saying that I am very negative and pessimistic, what more do you expect?
If Voltas has done it, Ratan Tata stands totally stripped of his high moral stance. That was supposed to be the last bastion of trust.
Now, let us turn to the important question. If the land deal is true, Voltas shareholders have been screwed. Voltas shares are held by institutional investors also. This is a fit case to sue the Board and recover the difference. The Board has gifted away the property of the shareholders.
This is also a lesson to those who invest based on ‘asset’ values in Indian companies. The benefits rarely come to the shareholders.
Even if the Tatas restore the property to Voltas (a high probability due to the political stench that is happening), the Board of Voltas has to go. They have no bloody business being there or on any other Board of any Company. In fact there is a fit argument for suing them for breach of trust. This shows that the Boards are dummies and the promoters can do what they want. Look at the names on the Board:
Name Designation
Ishaat Hussain
Chairman / Chair Person
Nasser Munjee
Director
N N Tata
Director
N D Khurody
Director
Nani Javeri
Director
Sanjay Johri
Managing Director
S N Menon
Director
Ravi Kant
Director
Jimmy S Bilimoria
Director
How independent are any of the names above? Is any one of them fit to be trusted, if the land deal has been struck?
This is a fit case for SEBI, Co Law Board and shareholders to act upon.
In the same news capsule, there is mention of a shell co which links the Anil Ambani group, Swan Telecom, ETISALAT, ETASTAR and the DMK ruling family!
To all of those who have been saying that I am very negative and pessimistic, what more do you expect?
If Voltas has done it, Ratan Tata stands totally stripped of his high moral stance. That was supposed to be the last bastion of trust.
Now, let us turn to the important question. If the land deal is true, Voltas shareholders have been screwed. Voltas shares are held by institutional investors also. This is a fit case to sue the Board and recover the difference. The Board has gifted away the property of the shareholders.
This is also a lesson to those who invest based on ‘asset’ values in Indian companies. The benefits rarely come to the shareholders.
Even if the Tatas restore the property to Voltas (a high probability due to the political stench that is happening), the Board of Voltas has to go. They have no bloody business being there or on any other Board of any Company. In fact there is a fit argument for suing them for breach of trust. This shows that the Boards are dummies and the promoters can do what they want. Look at the names on the Board:
Name Designation
Ishaat Hussain
Chairman / Chair Person
Nasser Munjee
Director
N N Tata
Director
N D Khurody
Director
Nani Javeri
Director
Sanjay Johri
Managing Director
S N Menon
Director
Ravi Kant
Director
Jimmy S Bilimoria
Director
How independent are any of the names above? Is any one of them fit to be trusted, if the land deal has been struck?
This is a fit case for SEBI, Co Law Board and shareholders to act upon.
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