“Un-fixed rate loans”: The new kid on the block

By Jayant Pai | jayant@ppfas.com

Recently, I read a few media articles railing against the launch of “Semi-Fixed Rate Loans” by a couple of banks. Here the borrower is charged fixed rates for a certain period – say two or three years – and then has to pay Equated Monthly Instalments (EMI) based on a floating rate (usually linked to the bank’s Base Rate). Continue reading

Expense ratio for ETFs is lower than MF

Exchange-traded funds (ETFs) are, in the opinion of many market experts, an idea whose time has come. Global investors are affirming this belief by pouring huge sums into these products. As of December 31, 2010, the global assets of ETFs of all hues amounted to a staggering $1.48 trillion, an impressive jump of 28% year-on-year.

Today, the ETF industry encompasses products across the entire spectrum, be it equities, fixed income, commodities, currencies, etc. They are also the preferred vehicle of many institutional investors as they provide an easy way to take (onshore or offshore) exposure to certain geographies or products, which otherwise may have been inaccessible. Continue reading

“Show Me The Money….”

Jayant Pai | jayant@ppfas.com

I read a quote by a famous US based Futures trader named Ed Seykota, around twelve years ago. He said “Everybody gets what they want, from the markets”. It is only recently, that the true import of this statement dawned upon me.

When you ask market participants what they want from the market, they will all say that they want to make money. However, things are not always what they seem. There may be different reasons for being in the market and making money through price differentials may not be prime amongst them. Here are a few examples :

The day trader: He is in it for the action. If you ask him a hypothetical question whether he would like to earn Rs. 10 per day through day trading or Rs. 100 per week by trading once a week, most probably he will choose the former. For such people, it is the thrill of being involved with the rough and tumble of markets that is exciting. Many even use the colloquial term “Time-Pass” when asked as to why they are glued to the screen 5×5 (Five hours a day for five days in a week). Money is the ostensible motivator but the real reason is “the kick” which they get from being a part of the action.

The stockmarket analyst: The markets have given birth to this animal called an analyst. However many a time, making money from his/her recommendations is the last thing on the analyst’s mind. They are in the market only because it offers them a well-paying job. Analysts who work in large brokerage houses usually do not buy the stocks they recommend. They justify this strange behaviour by citing “compliance-related” reasons. It is rather surprising that the compliance department does not permit an analyst to put her money where her mouth is. Not that many analysts mind it. They relish the accoutrements that accompany their job. Analyst meets in five-star hotels, plant visits in scenic locations, the networking with other analysts (which may help in securing a lucrative new assignment), etc. Why bother to stake your capital in the market when your job gives you everything without any risk…

Some company promoters: For many promoters, stockmarkets are a necessary evil. They are required for periodic fund raising and nothing more. For them, despite being market participants, money is made through their business and not from price gyrations. Of course, for investors it may make sense to tag along with managements who are involved with developing their business as compared to those who have an eye on the quotation screen.

Brokerage houses: They aim to make money by making others transact as much as possible. They are not so much concerned with price movements, as to find reasons for stimulating action among traders. In a sense, the day trader and brokerage houses share a symbiotic relationship. If the day trader is seeking action, the broker does his utmost to provide it.

The financial media: Though not strictly “market” participants, they certainly mould the opinions of several people in the market. By virtue of their daily appearances many media personnel are elevated to the status of “stars” and exult in the adulation and feeling of power that accompanies it. They love the market as that is their vehicle to stardom.

The investor: He is the most invisible market participant (save and except for a few whom the media anoints as a “Wizard” or “Oracle”). He is the one who is really in it for the money and he tries to attain his objective in as unobtrusive a way as possible. Large investors come into the limelight when they make an open offer etc. but there are many other individuals or outfits who disregard the glitz and glamour of the stockmarket as it is irrelevant to their main objective, which is wealth creation.

Seykota himself was a semi-recluse who operated far away from Wall Street as he wanted to remain unaffected. He was clear about what he wanted from the market.

Are you frustrated about not making money in the market? It may be worthwhile pondering as to whether that is what you really want or are the markets already giving you what you want and you are not aware of it…..

Walking The Talk…..Easier said than done

Jayant Pai | jayant@ppfas.com

I was startled to hear two comments last week. These were made by the Chief Executive Officers (CEOs) of a mutual fund and a life insurance company, on two different business channels on the same day.

In the first instance, the CEO was being quizzed about an ongoing Public Sector Undertaking (PSU) Fund New Fund Offering (NFO) from his stable. On being asked about why an investor should choose his fund over other PSU Funds already available, he said that while fundamentally his fund was no different from the other PSU funds which had a longer track record, his was the only PSU fund which was currently available at Rs. 10 per unit and hence investors could get attracted to it. This contention is not only logically absurd but also akin to taking two steps backward. First of all, the nominal Net Asset Value (NAV) of a fund is immaterial. The NAV is only a figure which summarises the market value per unit after deduction of certain expenses. Hence an investor purchasing a mutual fund unit at Rs. 10 is no better a position than an investor purchasing another mutual fund unit at Rs. 20 on the same day. Both will rise and fall in tune with the market. The degree of this will, of course, depend on the stock selection ability and the cash calls taken by the individual fund managers. Hence it is wrong to sell a fund using this tack. Besides, for the past few years, various CEOs have taken pains to educate investors regarding the fallacy of the “Rs.10 NAV”. It is all the more distressing that the said CEO was resorting to actually propagating this fallacy while marketing his fund. Such acts could undo all the efforts made over the years.

The second comment was in respect of Unit Linked Pension Plans (ULPPs). Since September 1, 2010, certain IRDA regulations have made the product more investor friendly. However, paradoxically most insurance companies have ceased to offer this product since that date. On being quizzed as to the reason behind this, the CEO of one of the upcoming insurance companies (A tie-up between a Japanese company and two domestic PSU banks) openly said that this product was a “Money Spinner” earlier but had now ceased to be so. That is why they had discontinued it. While some may admire this CEO for being candid, I think that citing this reason is akin to committing “hara-kiri”. Also, while I believe that every company is free to decide on its product portfolio, pulling out products merely because they have become less profitable (not unprofitable, mind you) smacks of opportunism. Did investor/policy holder interest feature nowhere on the radar of this company (and others of its ilk)? These CEOs spout various platitudes at public fora. However, when it is time to walk the talk, they often fall short.

Let us hope that both these instances remain aberrations. Otherwise, the financial services industry will have a tough time bridging the “credibility deficit”.

Star Struck….

Jayant Pai | jayant@ppfas.com

I met a prospective client earlier this week. He wanted our advice on choosing a few good mutual funds. However, he had one pre-condition. He wanted us to limit our choice only to those rated “five star” by his favourite personal finance magazine. It seems that two other advisors had previously suggested only such funds and he therefore believed that they were the best ones.

While it is true that “five-star” rated funds are good performers, it may not be appropriate to get fixated on them for the following reasons:

1. Variety: Every rater (be it a magazine, a website or an agency) uses different standards, while arriving at ratings. Hence the toppers list may vary. A fund which is “five star” as per one list may be four star under another one. Hence, a good fund may not make the cut, if a client only goes by the gold standard for funds.

2. Consistency: Rarely is a fund able to hold on to the five-star rating for a very long period. Its position in the league tables will fluctuate from time to time. Any rating usually holds only for a certain point in time and that too only in relation to its peer universe. It is not a cast-iron guarantee that the fund will remain a stellar outperformer in future too. It only helps to make an educated guess regarding future performance.

3. Suitability: The amount of allocation to equity mutual funds and the choice of funds therein, is dictated by your personal goals, willingness and ability to take risk. It may so happen that a lower rated fund may be more suitable to your individual case as compared to a higher rated fund.

4. “Crowding in” effect: It is very easy for advisors to sell “five star” rated funds as clients are already pre-sold to the idea of buying these highly rated funds. However, in case the fund attracts too much money, it may suffer from the “Winner’s Curse” syndrome by losing its nimbleness and underperforming, thereby causing disappointment all around. This is a perceptible hazard in the case of mid-cap funds.

Judging a fund on certain quantitative and qualitative parameters is a preferred option. For instance, its ability to contain downside risk, the inherent volatility of the fund, its adherence to its stated mandate, its performance under different fund managers, etc. should be given more importance as compared to the number of stars following the scheme’s name. I believe that when it comes to choosing a fund, a five-star rating is neither a necessary nor sufficient condition. What matters is whether it is a good fit in your portfolio or not.