We spoke to a number of fund managers to see what impact the financial crisis had had on their investment strategies, what they had learnt from the event, and whether 2008 had really changed the way they looked at the market or analysed stocks. We were not surprised to find that it did.
Counter-cyclical policies are necessary
Governments the world over are resorting to counter-cyclical fiscal policies to deal with the downturn. Some economies are in a better position to use fiscal policies but India has limited fiscal manoeuvrability since its fiscal policy was pro-cyclical and not counter- cyclical during the boom period. At the peak of the cycle, the fiscal policy should have been contractionary and government expenditure and deficits should have been reduced. But we had a spate of high-expenditure welfare programmes and the fiscal deficit shot up alarmingly.
While India has historically run high deficits, the capital flows have minimized the impact on the real economy in the past.
Adapt a global perspective
The financial crisis threw up many lessons on adapting a global perspective to one’s investment strategy.
Investors across the board were flummoxed at the way India was hit by the global crisis.
On a structural basis, India is in far better health than many other economies. But we cannot expect to see a significant upturn till the global factors are negative.
Once the recessionary outlook in the US starts receding, global sentiment will improve, risk appetite will be restored, global portfolio flows will improve and some of the flows will find their way to India.
Never ignore the red flags
Market capitalization was one red flag. Unreasonable PEs (price-earnings ratios) were another. But these signals were ignored.
It is natural that in a strong phase of economic growth, the profit projections of companies may have a large variation from what had been stated earlier, forcing one to revisit the earnings projections. So when P-E ratios were moving up, red flags did appear. But one had to be confident about whether they were really red flags or the earnings growth projections signifying that earnings would grow significantly for FY 08 also.
If one did a fundamental analysis in 2007, a SOTP (sum of the parts) valuation was also expected. But that is no longer the case. It’s back to basics in terms of evaluating companies.
Money will come and go at the wrong time
People often get carried away by euphoria or panic. Hence, when one should ideally be investing during a bear phase, investments are terminated. And during a bull run, when one should exit smartly, fresh funds flow in. This is an anomaly in the markets that fund managers have to live with.
It was not just a crisis of liquidity but also a crisis of confidence that hit the market, and caught fund houses unprepared. Soon after the crisis, fund managers swore never to mollycoddle their institutional investors again; new risk-control measures were put in place and some even took a second look at their business models.
It’s not all about alpha
The euphoric days of 2007 all boil down to risk and return. It was all very well to pursue the higher return but foolish to ignore the risks that went with it.
If 2007 was about generating great returns, 2008 was all about minimizing the downside. And each fund house dealt with the issue according to their convictions. Many fund houses resorted to debt and even cash. So, from chasing alpha, the focus quickly turned to building a defensive portfolio.
Wounded but wiser
This crisis has reinforced the need to stay humble. We all know now that the market can turn on us in a matter of a few days, if not a few hours.
You never know what hand the market will deal. You can never take your eye off the ball. You can never be emotional about your investments. Neither can you bask in past glories and successes. The moment you do that, you are more likely to commit mistakes.
What the fund managers said
CIO, SBI Fund Management
In hindsight, we can say that investors were overpaying for growth expectations in 2007. But now they look far more intensely at the quality of the balance sheet, the quality of cash flows and visibility of cash flows than they were (doing) earlier. The market may move from euphoria to absolute panic, but the mark of a good fund manager is one who keeps the balance across cycles.
CIO, equity, ICICI Prudential AMC
In retrospect, 2007 was the defining year. In the second half of 2007, there were portfolios run with a very bullish market call. But those who stayed rational then managed to stay rational through the downturn. It’s not easy for mutual funds to suddenly change strategy. As the money one manages increases significantly, the ability to suddenly change strategy diminishes. Looking at our very own funds, the ones that did not perform well in the second half of 2007 were the ones that did very well in 2008.
Head, equity, Reliance Capital Asset Management
The most defining moment for me was the collapse of Lehman Brothers. A 150-year-old institution collapsing created panic across the globe. Prior to that, we got more than $100 billion of foreign money, which led to extreme overvaluation of various asset classes. The collapse of Lehman Brothers and other major institutions changed the entire situation.
Funds can invest
A slew of funds is looking to invest in gold and related securities. While based on gold, these new funds—called gold funds— are not gold ETFs (exchange traded funds). The primary difference: Investing in gold funds involves less paperwork. The second difference: Gold ETFs invest only in physical gold; gold funds can also invest in gold mining companies. Asset management companies (AMCs) launching with new gold funds include Reliance, Kotak, UTI, Sundaram BNP Paribas and IDFC. Kotak, Reliance and UTI also have gold ETFs. There are three more gold funds that invest in gold mining companies: AIG World Gold, DSPBR World Gold (invests through international funds) and UTI Wealth Builder Fund-Series II (invests in gold ETFs).
Funds gain in May
May was a good month for mutual funds, even better than April. Banking funds were the top gainers, with 38.66% returns. Equity funds posted an average of 30.65%, their best gain in 17 years. Debt funds, though, found themselves at the losing end last month. Their performance in April was excellent, but in May, the 10-year government of India (GoI) yields went up (from 6.23% to 6.70%) on increased government borrowings, translating into losses for income and gilt funds. Liquid funds gained 0.37%; monthly income funds gained 3.61%; short-term gilt funds lost 0.10%; short-term debt funds gained 0.15%; gold ETFs saw gains of 2.16% after two months of losses.
Small-cap funds gain 39.71%, Mid-cap funds rise 30.7% in May
The last month has been quite encouraging for small- and mid-cap funds. Among small-caps, which gained 39.71% on average, three funds beat the stock market indices: JM Emerging Leaders (45.98% returns), Taurus Ethical (45.28%) and Escorts Growth (44.92%). Mid-cap funds rose 30.7%, with 14 funds outpacing the BSE Mid Cap index: Taurus Infrastructure (53.47%), JM Basic (51.18%), Sundaram BNP Paribas Capex Opportunities-D (44.71%), Sundaram BNP Paribas Capex Opportunities-G (43.95%), Sundaram BNP Paribas Select Midcap (43.68%), Magnum Emerging Businesses (42.84%), Taurus Starshare (41.62%), Magnum Global (39.50%), Principal Junior Cap (39.40%), Tata Service Industries (38.97%), Sahara Mid-Cap (38.45%), Taurus Discovery (38.38%), Escorts Leading Sectors (37.73%) and Birla Sun Life Mid Cap (36.93%).
MFs assets rise 15.9% in May
May brought good news for investors, who saw their money grow by surprising amounts. Following the extraordinary gains on equity markets, the total assets of the mutual fund industry rose by 15.9% to reach their highest ever: Rs6.39 trillion. In May, fund houses cumulatively added Rs87,600 crore to their average assets under management (AUM). Reliance Mutual Fund crossed the Rs1 trillion AUM mark, a first for any fund house in India: Its average AUM for May stood at Rs1.02 trillion. The rise in assets was driven specifically by diversified equity funds (see ‘KNOW’). The gains for the Sensex and Nifty were their best in the same period: 28.25% and 28.06%. The top 10 fund houses held on to their ranks, except Kotak MF and LIC MF.
Photoimaging: Monica Gupta / Mint
Content by Value Research
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