Equity mutual fund schemes report a net outflow of Rs1,935 crore in March 2014, after four months of consecutive net inflows, despite a near 50% growth in sales compared to that reported in March 2013
Over the past three months, from December 2013 to January 2014, equity mutual funds reported a total net inflow of Rs1,866 crore. However, a net outflow of Rs1,935 crore in March 2014 wiped out the positive inflows of the past three months. Even though sales reported in March 2014 of Rs6,675 crore is the highest since January 2011, redemptions were even higher at Rs8,610 crore, the highest since September 2010. Investors who may have invested at the market peaks in the past would have seen this as an opportune time to exit. Unfortunately for them, at the current level, the market may not be as overvalued at the earlier peaks. However, those who are jumping in now are new investors who may neither have the patience nor the knowledge to hold for the long term if the market goes sideways now.
On analysing the quarterly fund flows, equity mutual fund schemes have reported a 10% growth in sales of Rs15,163 crore for the quarter ended March 2014 as compared to Rs13,780 crore for the quarter ended March 2013. Redemption pressure continued with a 1% growth, leading to a net outflow of Rs309 crore for the March quarter.
With the market trending higher, fund houses have jumped at the opportunity and have launched new schemes. In March 2014, as many as six new fund offers were launched. Over the past three years ended October 2013, when the market was volatile and flat, just 30 NFOs were launched. Astonishingly, over the five month period, from November 2013 to March 2014, already 24 schemes have been launched; many of these are close-ended schemes.
However, despite the uptick in sales and new fund offerings, the number of equity mutual fund folios continues to decline. As on 31 March 2014, the total number of equity folios amounted to 29.18 million, down by 12% from 33.17 million as on 31 March 2013. Month on month the number of equity folios have been on a decline. While the regulator looks for ways to develop the mutual fund industry, introducing various policy changes, it fails to instil confidence in investors, the majority of whom are shunning mutual funds as an investment option.
Central banks remained focussed on consolidation, but encouraging smaller banks may be the way to push economic growth
The International Monetary Fund (IMF) gave out some good news this week. They told us that the crisis was over. Well sort of. The Fund predicted that the strong economic growth in the US and the UK would prevent a global recession. But there the good news stopped. It warned that the world faced “years of slow and subpar growth”. In a world with ultra-low interest rates, why is growth so slow? Where is all that money going?
The answer is rather simple. It is going to speculators. While down playing the risks, the IMF did point out a few danger points. These issues all have a common denominator. They exist because the massive amount of money printed by central banks is going into risky assets. The central banks have been successful in creating “liquidity driven” markets, but failed in creating “growth-driven” markets.
The low interest rates have created an enormous demand for unsafe assets. The indicators are everywhere. Junk bond yields are close to record lows. Equity markets are at all-time highs. Price/ earnings ratios in the US are among the highest decile of reported values since 1881. Nobel Laureate Robert Shiller’s Cyclically Adjusted Price Earnings ratio (CAPE) is at 26. The historic norm is 16.5. Another indicator created by a Nobel Laureate, Tobin’s q, indicates that the US market is 70% over valued. Margin debt in New York is at a historic record of $466 billion.
Meanwhile, the search for yield has created a field day for borrowers. Lending standards are deteriorating. Debtors can now demand money with few strings. New deals have few covenants to protect lenders (cov-lite loans). Repayments can be made in kind (payment in–kind- PIK loans), that is in new debt or preferred shares rather than cash.
The demand for the riskiest assets by speculators reveals the main flaw in the central bank thesis that more stimulus equals more growth and jobs. The reason for the flaw is the central banks are relying on the wrong intermediaries. They provide large bank with huge amounts of cash, which usually goes to speculators or the largest corporations. Lending to individuals and smaller businesses often requires smaller banks and more flexibility, but that is the problem.
In the US, deregulation in the 80’s and 90’s allowed mergers across state lines. This led to a wave of consolidation. In the past 30 years, the number of banks in the US has halved to about 6,000. So now there are fewer small banks. Worse, according to the IMF, large banks have a major competitive advantage. They are too big to fail. Since they have the implicit backing of taxpayers, investors see them as having less risk. So they lend them money at a lower rate. This rate subsidy is estimated globally at $590 billion.
Large banks and small banks have distinctly different business plans. Small banks internalise their risks. They make smaller loans at higher rates for shorter periods. But because they have better knowledge of their customers, they experience only 70% of the defaults that hit larger banks. They also keep their deposits and so are less reliant on interbank loans or even worse, foreign loans.
Even though well-run smaller banks can be safer than large urban ones, they are often punished by banking regulations. In the US, the Dodd Frank bill was supposed to reform abuses perpetrated by large money center banks. Its unintended consequence has been an adverse effect on smaller banks.
The problems of government regulation are not limited to the US. Different countries have different problems. As I wrote last week, the Chinese rural banks issues are not government regulations but their relations with local governments.
In India, the regional rural banks (RRBs) were set up to help channel funds and provide banking services to poor agricultural workers and farmers in the country. But since they are a creature of government regulation, they are subject to restrictions that often make them uncompetitive. They have to follow procedures of scheduled commercial banks when making loans and taking deposits. Their village customers find these complicated, confusing and unnecessary especially considering the amounts involved. The RRBs charge the statutory 14% interest. But borrowers will always prefer the commercial banks if they are available, because they charge only 4%.
Both India and Indonesia have similar problems of regulating smaller rural banks. In India, the National Bank for Agriculture and Rural Development (NABARD) has complained about the Rs100 crore increase in the amount of fraud at the state cooperative banks, district central cooperative banks and RRBs.
In Indonesia, there are 1,641 rural banks, locally known as Bank Perkreditan Rakyat (BPR), operating throughout the archipelago. During its existence, the eight year old Indonesian watchdog, the Insurance Deposit Corporation (LPS) has closed a total of 53 banks, 52 of them have been in rural areas. Rural banks also have non-performing loan ratios of 5.2% well above the national average of 1.9%.
The difficulty of rural access to banks exists in the Philippines. One third of the Philippines 9,000 bank branches are located in the greater Manila area. To address this issue, the government has created rural banks designed to serve the needs of farmers and fishermen far from the cities. Since 2012, 80 of these 560 rural banks could not meet capital requirements and 24 were closed. The Philippines’ solution to this problem was to invite in foreign investors to help increase the banks efficiency and capital.
Small banks in both rural and urban areas can provide enormous social and economic benefits to both their communities and their countries. To function properly, the regulatory environment must encourage and enhance their strengths rather than restrict them. It also must end subsidies to the largest banks. Most of all governments should attempt to restrict their activities to limiting risk rather than using their powers to encourage it.
(William Gamble is president of Emerging Market Strategies. An international lawyer and economist, he developed his theories beginning with his first-hand experience and business dealings in the Russia starting in 1993. Mr Gamble holds two graduate law degrees. He was educated at Institute D'Etudes Politique, Trinity College, University of Miami School of Law, and University of Virginia Darden Graduate School of Business Administration. He was a member of the bar in three states, over four different federal courts and speaks four languages.)
The nation’s largest forensic expert college will sell its forensic accounting division, following a series of investigations by ProPublica and Frontline
This story was co-published with Frontline
There's been a major shake-up in one of the largest organizations that certifies forensic experts.
The group, the American College of Forensic Examiners Institute (ACFEI), quietly put up for sale its forensic accounting division — one of its most prominent programs — prompting the unanimous resignation of that division's entire advisory board. The volunteer accounting board oversaw ACFEI's certification program for experts in financial investigations.
The upheaval at ACFEI comes in the wake of a series of reports that have raised questions about the credibility of the organization's certification programs, notably the FRONTLINE/ ProPublica joint investigation, The Real CSI, which examined the organization's rigor in certifying forensic experts.
Three of the board members who resigned say their efforts to bolster their division's credibility were being stymied.
"I don't think we were getting the support that we needed to carry out our duties. And from an ethical standpoint, the right thing to do is leave your position when you can't do what you're basically hired to do," said Michael Kessler, a past chair of the accounting board and member of ACFEI since 1994. Kessler and two other board members said they were never consulted about the sale and were left with no other choice but to resign in protest.
In a statement, ACFEI said it planned to spin off the forensic accounting program for reasons "related to organizational efficiency" and pledged to only sell it to a buyer that would maintain rigorous credentialing standards.
"The company can only develop excellence in so many directions at the same time and is transferring ownership of the credential to accounting professionals to further strengthen it," the statement said.
ACFEI offers certification courses in various other aspects of forensics, including nursing, social work and criminal investigation, and the group has also established related associations offering coursework in other disciplines, including psychotherapy and integrative medicine. One of the associations, the American Board for Certification in Homeland Security, has garnered support from the U.S. Navy in recent years, which has paid more than $12 million for more than 10,000 sailors to obtain certifications from the ACFEI-affiliate since 2008.
It appears that troubles between ACFEI and the accounting division had been building for some time.
Last year, board members say they were surprised to learn that ACFEI had lost the rights to use a longstanding aspect of its brand, the acronym "Cr.FA" — which signifies Certified Forensic Accountant — as the result of a trademark lawsuit.
According to documents filed with the U.S. Patent and Trademark Office, ACFEI had failed to actively defend its ownership of the title, and essentially let it slip away.
After discovering the loss of the trademark six months after the fact, board members rushed to advise hundreds of forensic accountants around the country to remove the acronym from resumes and business cards. ACFEI did not respond to FRONTLINE's repeated requests for comment on the trademark litigation.
As FRONTLINE and ProPublica reported in The Real CSI, there are no national standards for forensic experts. Credentials such as the ones offered by ACFEI are voluntary, but they are often relied upon as a shortcut to assess the credibility of an expert witness at trial.
"It's up to the judge whether a witness is qualified as an expert — which is true —but when you take a look at the dockets, they're jammed," said Suzanne Hillman, a CPA who often testifies in financial fraud cases in the Washington, D.C. area. "You see certification, it gives you a little bit of a feeling of comfort."
Hillman said she sought ACFEI's Certified Forensic Accountant credential because, "I knew I had a wealth of experience and was seeking to add the credential that would, in essence, summarize that quickly." Hillman also joined ACFEI's forensic accounting board, but resigned at the end of 2013, similarly disillusioned with the organization.
Hillman has since removed Certified Forensic Accountant from her title.
She believes the lack of regulation on certifying experts damages the entire justice system. "To the judges, jurors and lawyers, I don't think the message has totally gotten out to them that there's problems with some of these credentials," Hillman said.
Jeannette Koger, vice president of member specialization and credentialing for the American Institute of CPAs said the lax standards also make it harder for people to know the quality of the experts they are hiring, often at a high price.
"This causes confusion in the marketplace and can potentially cause consumers great harm," Koger said in an email. "If they receive unqualified or poorly qualified representation their expert can be challenged in the courtroom, resulting in an adverse judgment."