Mutual funds are supposed to be long-term investors. Why did IDFC Premier buy Tecpro Systems in August and sell it completely in September and sell Fag Bearings in August and buy it in September?
Most fund managers show you, by way of illustration, how a stock held over years can fetch you high returns, underlining the importance of ‘buy’ and ‘hold’. Do funds follow this approach in practice? Some even buy and sell the same stocks erratically for no apparent reason.
While looking at some fund data we came across some strange transactions in IDFC Premier Equity Fund. As per our data, the fund bought 9,67,545 shares of Tecpro Systems Ltd in August 2011 and then completely sold them in September 2011. Tecpro (listed in October 2010) has halved in value from the listing price. We also noticed that IDFC Premier had 200,000 shares of Fag Bearings at the end of July 2011, sold them completely in the immediate following month, that is, August 2011—and bought 247,602 shares in September 2011. What could be the reason for such frequent buying and selling? We asked the fund house but did not get a relevant answer. Indeed, a spokesperson replied that “we are long-term equity investors and don’t look at short-term opportunistic liquidity events.Given this, your query is factually incorrect” but was unwilling to show what was “factually incorrect” about the data. The data for this is sourced from the Mutual Funds of India (MFI) database; MFI insisted that this information of buying and selling is absolutely correct because it is culled from the data submitted by the fund house itself.
Mutual funds are supposed to be the best bets for those who have no idea about markets and individual stocks. Picking stocks is a job that needs long years of knowledge and expertise and mutual fund managers are supposed to be experts in that game. Unlike millions of uninformed and emotional individual investors who, reacting to greed, buy high and then, reacting to fear, sell low, fund managers are supposed to know what to buy and when.
However, as we have been pointing out time after time in many of our articles on mutual funds, including some unusual fund managers are, after all, human and they too act like individual investors from time to time. They buy the wrong stocks; they buy at the wrong time; and they sell at the wrong time. They cruise along in a bull market confusing luck with performance and are shocked to find the market collapsing around them. They talk of value investing but hold on to expensive stocks hoping for one more rally. They chase momentum. Not all fund managers sport these patterns of behaviour always, but almost all of them do at some time or the other. As we said, they are human.
We have nothing against IDFC Premier. It is a well-performing fund. We wished to understand the factors behind its performance. The bizarre buying and selling from month to month is not confined to IDFC Premier. We will bring more stories of buying and selling by fund houses in the near future.
The future of its Indian arm, MF Global Sify Securities, is also at stake. MF Global had overextended itself beyond futures trade—its credit rating has now been downgraded to junk by major ratings agencies, its stock is plummeting
MF Global Holdings’ credit rating has been cut to junk status. It has resulted in its equity value plunging 60% since Monday. What will its impact be on MF
Global Sify Securities, which is a subsidiary of MF Global Holdings?
MF Global Holdings, a leading global broker of exchange-listed futures & options, suffered a series of blows this week. The firm, headed by former CEO of Goldman Sachs, Jon Corzine, underwent a downgrade on Monday by Moody’s to a grade just above ‘junk’ status. After reporting a loss on Tuesday, Standard and Poor’s suggested a possible downgrade for the firm the following day. On Thursday, Fitch Ratings downgraded the brokerage firm’s credit rating to junk status.
There have been further reports that the firm is planning to sell a part of its operations. However, a few reports have indicated that the probability of MF Global striking a deal with a buyer was low. A number of firms have indicated interest in a possible deal, but there is absolutely no concrete buyout plan so far.
This has resulted in the stock of the firm plummeting nearly 60% since Monday which included a 16% decline on Thursday before finally closing at $1.43.
A major reason for the downgrade is that the firm has taken on substantial risk in the form of its exposure to European sovereign debt amounting to about $6.30 billion as a part of an effort to transform itself into an investment bank that did more than just place trades for clients on futures exchanges.
MF Global Sify Securities is a joint venture between MF Global and Sify, which offers online and offline equity and derivatives trading for retail customers as well as execution and clearing services for financial institutions. Chances are that the Indian subsidiary would be affected by the global crisis as well. The big question is what will be the impact on its clients?
The brokerage firm has been through such situations before. In 2005, the parent company Refco LLC, collapsed under allegations of securities fraud and was then taken over by Man Financial, which later changed its name to MF Global. In 2008, rogue trading cost MF Global $141 million resulting in its shares plunging 90%.
In both the cases the firm was able to pull itself out of the crisis. But this time it will have a tough task ahead. A few global reports have indicated that regulatory permission for any possible buyout deal might be difficult to come about, given the current mood in Wall Street.
Nifty may find support at 5,265
The Indian market settled nearly 3% up on news of a settlement reached by European leaders to defuse the debt crisis plaguing the region. In our Tuesday closing report, we had mentioned that the Nifty would reach the level of 5,220 and then to 5,320. Today the index opened above the second level and traded higher throughout the session. Although the gain was on a large volume of 72.83 crore shares, we may now see the market pausing for breath with the support being at 5,265.
The market started the day on a firm footing, extending the gains accrued in the last three trading sessions of the holiday-shortened week. Positive cues from the global markets on reports that European policymakers had reached an agreement to help contain the continent’s two-year debt crisis also supported the gains. The Nifty opened at 5,342, a surge of 140 points and the Sensex jumped 383 points to resume trade at 17,672.
The indices hit their intraday highs in the initial minutes of trade with the Nifty rising to 5,400 and the Sensex scaling 17,908. The market was range-bound in subsequent trade in the absence of any domestic trigger.
The Nifty fell to its intraday low in the noon session with the index at 5,323 while the intraday low for the Sensex was its opening figure. Trading sideways during the entire day, the market settled in the green for the fourth day in a row. At close, the Nifty was 159 points higher at 5,361 and the Sensex climbed 516 points to settle at 17,805.
The advance-decline ratio on the National Stock Exchange (NSE) was a positive 962:483.
Among the broader indices, the BSE Mid-cap index advanced 1.51% and the BSE Small-cap index rose 0.88%.
All sectoral indices settled in the green. The top gainers were BSE Metal (up 6.34%), BSE Realty (up 5.34%), BSE Bankex (up 3.73%), BSE Capital Goods (up 3.56%) and BSE Auto (up 2.87%).
Hindalco Industries (up 10.88%), Sterlite Industries (up 8.80%), DLF (up 7.95%), Jaiprakash Associates (up 7.90%) and Jindal Steel (up 7.53%) were the top performers on the Sensex. Maruti Suzuki (down 1.99%), Bharti Airtel (down 0.25%) and Bajaj Auto (down 0.11%) were the losers on the index.
Among Nifty stocks, Hindalco Ind (up 10.72%), DLF (up 8.23%), JP Associates (up 8.04%), Reliance Infrastructure (8.03%) and Sterlite Ind (up 8.02%) were the top gainers while BPCL (down 3.15%), Maruti Suzuki (down 1.63%), GAIL (down 0.65%), Bharti Airtel (down 0.52%) and Sesa Goa (down 0.49%) were the major losers.
Markets in Asia settled higher as hope of a settlement to rein in the European debt crisis boosted investor interest in riskier assets like stocks. The gains were also supported by a 2.5% annual rise in US gross domestic product (GDP) growth in the third quarter, which was announced on Thursday.
The Shanghai Composite gained 1.55%; the Hang Seng advanced 1.68%; the Jakarta Composite rose 0.44%; the KLSE Composite climbed 0.74%; the Nikkei 225 surged 1.39%; the Straits Times jumped 2.04%; the Seoul Composite rose 0.39% and the Taiwan Weighted settled 0.67% higher.
Back home, foreign institutional investors (FIIs) were net sellers of stocks worth Rs68.95 crore during the short muhurat session on Wednesday. On the other hand, domestic institutional investors (DIIs) were net buyers of equities worth Rs36.25 crore. On Tuesday, FIIs were net buyers of stocks worth Rs444.76 crore, while DIIs were net sellers of shares worth Rs879.46 crore.
State-owned explorer Oil and Natural Gas Corporation (ONGC) plans to take up to 49% stake in one of the five proposed nuclear power plants of Nuclear Power Corporation of India (NPCIL). The joint venture would build, own and operate nuclear power plants for energy generation at mutually agreed locations. It would be managed by a board of directors made up of nominees from both the companies. ONGC gained 2.69% to close at Rs284 on the NSE today.
Shree Ganesh Jewellery House has entered into a joint venture with Italy-based SALP SPA. The 50:50 joint venture company will set up a gold jewellery manufacturing unit and sell light weight gold jewellery under the brand Oroitalia Sales, according to a top company official. The stock declined 1.06% at Rs154.25 on the NSE.
Pharma major Lupin’s US subsidiary, Lupin Pharmaceuticals Inc, has received final approval from the US health regulator to sell its generic version of ‘LoSeasonique’ tablets, an oral contraceptive drug, in the American market with 180 days of marketing exclusivity.
The USFDA nod is for Levonorgestrel and Ethinyl Estradiol tablets in strengths of 0.1 mg and 0.02 mg and for Ethinyl Estradiol tablets of 0.01 mg. Lupin fell 1.52% to settle at Rs475 on the NSE.