A total of 57 of the 100 largest equity schemes have Reliance Industries as a top 10 holding. Not because RIL has been a great stock, but because it is a Sensex and Nifty heavyweight. Funds don’t want to stray too far away from the benchmarks!
In 2007, when I was interviewing a low-profile but reasonably good fund manager, he gave me a rare peek into the core investing process followed by fund houses. “When the money comes into the fund, we quickly allocate the bulk of it according to the stocks in the benchmark we have chosen.” He added with a smile, ”We don’t want our performance to lag the benchmark.” What this means is that if the scheme has the Sensex as the benchmark, the fund would allocate most of the money according to Sensex heavyweights— usually in the same weights as the stocks have in the index. Therefore, investing a substantial amount of money in index heavyweights is part of a “strategy”—even if this means that these index heavyweights may not be the best of picks at that particular time.
This is exactly why Reliance, which has been grossly underperforming for over two years since June 2009, is a top 10 holding of more than 100 fund schemes among a total of 230-odd equity schemes and 57 of the 100 largest schemes. The stock was at Rs1,140 at the end of May 2009, after rising from a low of Rs560 in March to over Rs1,200 in mid-May following the big upmove after the general elections. From that point onwards, RIL has wilted, belying its size, profile and new initiatives, to fall to Rs713 in August 2011. In the process it grossly underperformed the Sensex as its retail initiatives hit several roadblocks and the gas reserves turned out to be hard to exploit. Just how badly the stock has fallen can be judged from the fact that the Sensex was at just 9,700 when Reliance was Rs760 sometime in March-end 2009. When the Sensex was 15,700 at its low in August 2011, Reliance had hit Rs714. For the first time ever, Reliance had contributed nothing to a 60% Sensex growth over two years.
However, this continuous weakness in price, followed by weakness in fundamentals, has not been able to shake off the fund managers’ confidence in the stock.
This is simply because mutual funds are primarily managed with an objective to “stay as close as possible to the benchmark.” As a mutual fund salesperson told me once: losing money is not a big issue in the mutual fund industry—after all it is a function of market prices. But what is really a big issue is grossly underperforming the benchmark.” One way not to underperform the benchmark is to be substantially invested in benchmark heavyweights. This “strategy” has cost fund investors dearly.
In November 2010, when the market was at its peak and Reliance was at around Rs1,150, as many as 25 funds of the largest 50 had more than 5% of their portfolio in RIL, controlled by Mukesh Ambani. By this time, all of RIL’s fundamental troubles and gross underperformance of the stock were clear. All major funds houses like Birla, Fidelity, Franklin, ICICI, HDFC, SBI, UTI and even Reliance Mutual Fund (controlled by Mukesh Ambani’s estranged brother Anil Ambani) were heavily invested in Reliance Industries in most of their schemes. The lone exception was DSP BlackRock. The number of large funds which had Reliance as a top 5% holding swelled to 33 by September, when the stock had fallen off the cliff.
Indeed, when checked at three different dates (November 2010, April 2011 and September 2011), the schemes which had more than 5% in Reliance Industries had not changed much. They simply preferred to inflict massive losses on their investors and stay with this heavyweight. If dozens of top funds all keep holding a stock that has fallen by 40% or more from the peak and has continuously underperformed the index massively, it can only mean deep collective wisdom across all fund houses about the future returns from the stock. Or, it could mean active investing of the worst kind, because it is really amounts to closet passive investing.
The next support for the Nifty is at 4,970. Volumes were sharply lower in today’s fall
Asian markets opened weak today, followed a sharp fall in the US markets on Monday, leading to a weak opening in domestic bourses. The Sensex opened 208 points below the previous close at 16,817, while the Nifty opened 69 points below at 5,049. Yesterday, we had indicated that the Nifty may move between 5,070 and 5,160. However, we had said that in case the index closes below 5,070, we may see a substantial correction. Today the Nifty made a lower high and lower low at 5,058 and 5,011 respectively and closed below 5,070 (the support level given yesterday) at 5,038 (it fell 81 points). From here, we may see the Nifty moving sideways to the level of 4,970. Over the last 62-day period, (including today), Tuesday witnessed the lowest volume of 44.93 crore shares on the NSE (National Stock Exchange).
The Sensex moved in the range of 16,825 and 16,669 to close 277 points down at 16,748. Today’s fall of 1.63% on the Sensex and 1.58% on the Nifty is the maximum loss after 4 October 2011. The advance-decline ratio on the NSE was 81:402.
All BSE sectoral indices ended in the red today— the maximum loss being seen in BSE IT (down 3.67%) and BSE TECk (3.11%). Out of the pack of 30 Sensex stocks, four ended in the positive—NTPC ended flat, while 25 stocks ended in the red, maximum loss being seen in TCS, which fell 7.71% on the back of its lesser-than-estimated results, followed by Tata Motors (down 3.64%); Hindalco Industries (3.57%); Sterlite Industries (3.48%) and Wipro (down 2.94%). The Nifty’s 50 stocks saw 10 gainers and 39 losers while Sesa Goa ended flat.
Global news continued to be negative. China's annual economic growth eased to 9.1% in the third quarter, the slowest pace since 2009, from 9.5% in the previous quarter, the National Bureau of Statistics said on Tuesday, as tight domestic monetary policy and easing foreign demand crimped activity. There were also concerns about mounting bad-debt risks faced by local banks; high debt levels being carried by provinces and a severe cash crunch which is impacting rail & road construction in the world’s second-largest economy.
European indices were also trading in the red. Domestic indices hit their intraday low after the European market opened. Germany's finance minister cautioned against hopes for a ‘quick-fix’ to solve Europe's debt problem, reminding investors not to become “too optimistic” about a rapid development to the two-year-old crisis. On the other hand, Moody's decision to review France’s triple-A credit rating cast new doubt on Tuesday on Europe's hopes of drawing a line under its sovereign debt crisis, five days before a crucial EU (European Union) summit. The US ratings agency said late on Monday that it may slap a negative outlook on France's ‘AAA’ rating in the next three months, if the costs for helping to bailout banks and other euro-zone members like Greece stretch the country’s budget too much.
Finance minister Pranab Mukherjee said yesterday that India remains “firmly on track” to achieve annual economic growth of 8%-9% in the medium-term. But the country needs to stay alert and respond to emerging global challenges, the FM said at a conference.
India's headline inflation will remain under pressure until December and maintaining growth momentum along with price stability remains the biggest policy challenge, according to a finance ministry statement released on Tuesday.
The company was demerged 10 months back though it is yet to be listed; SEBI approved the listing after eight months but now BSE is yet to give its nod
The dwindling population of retail investors in India is time and again made to suffer due to wrongdoing by companies. Often, buybacks, delisting & demergers are announced, resulting in a sudden spurt in the share price and then the company defers from actually going through with the announcement, leaving small-time investors mired in losses.
Take the case of Five X Finance and Investment Limited, a demerged arm of Octant Industries, (formerly listed as ‘Octant Interactive’ on the BSE, or Bombay Stock Exchange), which has not yet been listed for more than 10 months now.
Octant Interactive Technologies Ltd demerged its financial division business and vested in Five X Finance and Investment Ltd, with a whopping 80% of its capital as per the demerger agreement, on 7 December 2010. However, the company has still not received approval from the BSE. This has left retail investors in the lurch with a majority of their capital stuck in the unlisted firm.
Moneylife had earlier reported on how the delay in listing of Five X, due to delay in approval by the Securities and Exchange Board of India (SEBI), had left investors trapped in the unlisted company. (See: Post de-merger, Octant Interactive shareholders still await listing of spun-off business ).
Now after eight months, the market regulator has given listing approval to the company. But this time it is the BSE which is yet to give its nod.
In a filing with the BSE, dated 2 September 2011, Octant Industries said,
“The demerged Undertaking/Resulting Company ‘Five X Finance and Investment Ltd’ has revived the approval under 19(2) (b) SC (R) Rules, 1957 from SEBI for listing the company with stock exchanges.”
It added, “Post the approval from SEBI, the company is under the process of obtaining listing approvals with the concerned exchange (BSE).”
Here again, retail investors are at the receiving end of the deal. “Now they are waiting for permission from BSE, but in the past 45 days there is no update or sign from the company regarding permission from the BSE. And we (investors) don’t have any other way as the company is not responding to email from investors as usual, and there is no other way we can contact them and get an update about the listing procedure. It is really a horrible experience as our entire money is stuck in Five X as the ratio was 80% to 20%,” complained an investor who had invested in Five X, who spoke to Moneylife preferring anonymity.
As per the Scheme of Agreement, post the demerger, Octant Interactive Technologies Ltd’s shareholders got 4 shares in Five X Finance and Investment for every 5 shares in Octant Interactive which they held. For every 5 shares of Octant Interactive, the equity holder was to receive 1 share of Octant Industries, each share with face value of Rs10. In other words, the shareholders of Octant Interactive were given 80% of their current holding in Five X Finance and 20% in Octant Industries. This effectively reduced shareholder stake in Octant Industries.
Industry experts say that investors are suffering with the majority of their capital stuck in unlisted firms solely due to delay in SEBI and stock exchange approval.
Interestingly, Octant Industries, which got only 20% capital, was successfully listed on 7 February 2011.
Five X says that it is awaiting BSE’s approval. When asked about the investors’ money, a company official told Moneylife, “We can’t do anything unless we get listing approval from the BSE.”
An email query to BSE did not solicit any reply till the time of publishing this story.