Rewards of investing in foreign funds are not worth the risk
HSBC Brazil Equity Fund, a fund of funds (FoF) is coming to the market. According to the prospectus filed with the Securities and Exchange Board of India (SEBI), the Fund will primarily invest in HGIF Brazil Equity Fund, managed by HSBC Global Investment Funds (HGIF), as well as in other overseas mutual fund (MF) schemes benchmarked against the MSCI Brazil 10/40 Index. It may also undertake currency hedging as a shield against volatility in the currency markets. Avoid it. Here are five reasons why it would be better to avoid it.
1. It's a fund of funds: FoF is a lousy idea. It takes your money and puts it into other funds. It adds another layer of cost without adding any benefit.
2. Monitoring: The Fund would be invested in a Brazilian fund investing in Brazilian securities. How much do you know about that fund? It would be a blind bet.
3. Track record: We have no idea about the long-term performance record of the Brazilian equity fund.
4. Diversification: Funds that put your money in other countries presumably offer another round of diversification. Well, in this case, it's not so. Brazilian and Indian markets are correlated. We don't see how you can derive additional returns without adding risk. In fact, the Brazilian market is as volatile as the Indian market. Mistakes by fund managers (that are lurking around the corner) can be very costly.
5. Benchmarks are not available: Most shockingly, you cannot even compare how these funds have performed vis-à-vis a benchmark. Of the 16 funds in which HSBC Brazil Equity Fund says it would invest, benchmarks of eight schemes are not available in the public domain to facilitate a comparison of their performance with respect to the benchmarks.
Those who read Moneylife regularly will know, as we have pointed this out long ago, that funds which take your money and invest in foreign stocks are pure fads. In the very fifth issue of the magazine, way back in 2006 (Moneylife, 7 May 2006), when fund companies launched foreign funds, we wrote: "Fund companies are offering a chance for geographical diversification. There are several reasons why this is not a great idea." In our 40th issue (Moneylife, 13 September 2007), again we wrote: "Offering you funds that invest abroad is the flavour of the season. Stay away from these for now." But, of course, bull markets can keep dubious ideas in circulation for years together. By the time it was the 43rd issue (Moneylife, 25 October 2007), we were forced to write that "International funds are a rage now, but early entrants have a patchy record." Finally, in our 73rd issue (Moneylife, 18 December 2008), we had a report card. An article titled "Global Funds, Local Results" laid bare the truth. We said, "Fund companies may not know much about the value and price of Indian stocks, but they surely don't lack confidence in exhorting you to invest in a fund that invests in foreign stocks. How have these funds done over the past one year? They have all lost tonnes of money."
The faddish nature of the funds comes through clearly. When the commodity markets are shooting up, fund companies will launch commodity-focused equity funds. When the Chinese market is hot, they will launch a China fund. No wonder that in 2007, at the height of the bull market, as many as eight funds were launched that planned to invest overseas. All of them have performed very badly since inception. On an average, they have given returns as low as 0.1%. When they were launched, we had pointed out that these funds were mere gimmicks.
President Obama’s long-term plan to cut the budget deficit pushed the US markets higher on Wednesday while markets in Asia were lower in early trade today on a strengthening yen
While the Indian bourses are closed today on account of a local holiday, here is a brief view of the global markets. Economic concerns continue to weigh on markets worldwide. The US markets closed marginally higher on Wednesday amid a volatile session following president Barack Obama’s budget speech, which called for a reduction in the budget deficit by $4 trillion over 12 years. Markets in Asia were soft in early trade on Thursday on the strengthening yen and easing of metal prices.
Yesterday the market opened soft on lacklustre global cues, following easing of oil prices and concerns about the pace of the global recovery. The Sensex fell 76 points to 19,187 and the Nifty opened lower by 38 points at 5,748. The market immediately touched the day's lows with the Sensex erasing 161 points at 19,102 and the Nifty falling 50 points to 5,736. February industrial output figures, which were released yesterday, also dampened sentiment.
However, across-the-board buying after the decline in the market over the last few days turned the tide and the indices jumped into positive territory in the first half hour itself, pushing all sectoral gauges into the green. The gains continued through the session with the market scaling the day's high in the late session. At their intra-day highs, the benchmarks touched at 19,737 and 5,924.
The market closed slightly below these levels, as the Sensex surged 434 points to close at 19,697 and the Nifty gained 126 points to settle at 5,911, erasing the losses of the last five sessions.
Wall Street closed with marginal gains on Wednesday in a choppy session following president Barack Obama’s budget speech, which called for a reduction in the budget deficit by $4 trillion over 12 years. While JP Morgan Chase reported a 67% jump in quarterly profit, financial stocks were a let-down as sanction regulators ordered 14 largest US mortgage servicers to pay back homeowners for losses from foreclosures or loans that were mishandled in the wake of the housing collapse. JP Morgan fell 0.8% and Bank of America tumbled 1.5%, to 13.27.
Presenting his long-term plan for closing the federal budget shortfall, president Obama set a target of reducing the annual US deficit to 2.5% of gross domestic product by 2015, compared with 10.9% of GDP projected for this year.
The Dow rose 7.41 points (0.06%) to 12,270.99, the S&P 500 added 0.25 of a point (0.02%) to 1,314.41 and the Nasdaq gained 16.73 points (0.61%) to 2,761.52.
Markets in Asia were lower in early trade on Thursday as a stronger yen pushed export-related companies lower. Besides, lower metal prices dragged commodity stocks lower. The London Metal Exchange Index of prices for six industrial metals including copper and aluminium fell 1.2% on Wednesday.
Meanwhile, Singapore’s first quarter GDP rose 8.5% from the year-ago figure, exceeding analysts’ estimates for a 6% rise. The central bank also said inflation in the city-state this year will likely come in at the upper half of its 3%-4% forecast range.
The Shanghai Composite fell 0.08%, the Hang Seng declined 0.83%, the Jakarta Composite was down 0.53%, the KLSE Composite shed 0.23%, the Nikkei 225 declined 0.59%, the Straits Times contracted 0.35% and the Seoul Composite was down 0.21%. On the other hand, the Taiwan Weighted gained 0.09%.
Back home, the Telecom Regulatory Authority of India (TRAI) has recommended that telecom infrastructure be considered as general infrastructure and make tax benefits available to the sector. The regulator has recommended bringing telecom infra companies (Infrastructure Provider-1) under Unified Licences, a suggestion which was opposed by participants at roundtable conference held by the telecom ministry in early March.
For private equity firms trying to make a quick buck from their investments in stock broking firms, the horror show seems endless. The first of a three-part series
On Wednesday, Geojit BNP Paribas Financial Services reported an 8% decline in revenue and 65% crash in net profit, for the quarter ended March 2011, over the corresponding previous quarter. Other broking companies haven't reported results so far, but nobody is expecting them to do wonders. What does this mean for a set of private equity firms, which lemming-like, had been clamouring for a piece of the business of stock broking firm in 2007? Very simply, the horror show continues.
Look at the stock performance of these companies from their lifetime highs of 2008. Emkay Global Financial has crashed by 84%, Edelweiss Capital has collapsed by 78%, India Infoline has fallen by 80%, Indiabulls Securities is down by 87%, JM Financial by 84%, Motilal Oswal Securities by 70% and Networth Stock Broking has slumped by 77%. Over this period, the Sensex is down by only about 5%.
This is not what the smart private equity investors who had jumped into the broking companies were hoping for. It was the pre-crisis period of 2007-08, when PE firms were investing in well-established broking companies which were on the path of huge expansion. The idea of course was to offload them within a couple of years to an eager public. What could be easier? After all, they have played the game many times before. Citigroup Venture Capital bought an 85% stake in Sharekhan, India Capital Growth Fund and Caledonia Investments took a stake in Rajkot-based Marwadi Shares, Barings bought a 45% stake in JRG Securities, Gaja Capital a stake in Bonanza and IFC Washington a stake in Angel, among others.
But their timing couldn't have been worse. Within a few months of their investment, financial turmoil rocked the world, deep crises hitting Western economies particularly hard. Brokerage income collapsed. And even though the overall market revived and real businesses are doing well, private equity firms find that they are still badly stuck with their investments in Indian broking firms. So, what went wrong?
In 2007, when the private equity players rushed into unlisted broking companies, they expected a continuation of the long bull market that started in 2003. This would mean robust market volumes and increasing brokerage income. It turned out to be quite different. When the Sensex was at 20,000, in December 2007, there was some optimism among a section of retail investors. Mutual funds were drawing net positive inflows from individual investors.
The mood this time is one of caution, with individual investors busy reducing their stock portfolios and redeeming their fund investments. There are specific reasons why broking income has collapsed now, some of which would have been clear even in 2007, but nobody wanted to see. And so, in 2007, at the height of the euphoria, the assumptions used to project income and profits were deeply flawed.
In the situation they find themselves in, how would private equity players recover their investment or even make an exit from their investments? The investment attractiveness of stockbroking firms has turned out to be a trap. The PE firms have no easy exits. Public issues of broking firms are unthinkable and there are no buyers of their stakes. Scope for 'consolidation' is low for fundamental reasons.
The point is, is this likely to change? When will things change for broking firms and how? Can things really improve for the big brokers, who have expanded with PE money, and are saddled with an inherently-flawed business model? That is what we will highlight in the second part of this series when we discuss the model of broking firms.
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