Stocks
PMS in troubled waters
Frequent churning of portfolio, high management fees followed by dismal returns and dwindling profitability is leading to several Asset Management Companies (AMCs) exiting the portfolio management service (PMS) business. Such exits would have not been normally noticed because PMS is a privately sold service. But one of them, from Franklin Templeton, has turned controversial after the fund house abruptly exited from the PMS business, leaving the investors and distributors high and dry. According to distributors, Franklin Templeton has failed to offer enough reasons to them and investors for impetuously pulling out two equity products—FT Select and FT Opportunities.

The distributors are now angry with the fund house for putting them in an awkward situation in front of the clients, to whom they were once encouraged to sell PMS. “During the bull run, AMCs tried to convert PMS from a large value item into a retail item. But as the market crashed, they realised that it was not the right place for them to be,” said T Srikanth Bhagavat, managing director, Hexagon Capital Advisors Pvt. Ltd. Zankhana Shah, co-founder, Moneycare Financial Planning Ltd, said, “I was surprised with Templeton’s move. I had to incur 50% loss because of this.”

In an attempt to underplay the crisis, Harshendu Bindal, president, Franklin Templeton Investments India said, “We haven't closed down our PMS business but pulled out only two equity products—FT Select and FT Opportunities.”

Before 2005, if an investor wanted to enter the PMS business, the entry level charge used to be anywhere between Rs50 lakh and Rs1 crore. During 2005- 2006 when the stock market was bullish, AMCs had slashed the PMS entry level charge between Rs5 to Rs10 lakh in a bid to attract more retail customers.

Besides Templeton, DSP BlackRock Investment Managers has also shut down its PMS business.

The profit-sharing fee charged by most PMS houses is also on the higher side. Most PMS houses charge 20% more than the hurdle rate profit-sharing ratio. Even if the scheme shows poor performance, the PMS house charges a fixed fee which is very high. Again there is no control on the cost in terms of churning and the brokerages paid to distributors. There is no transparency in the process.

Some distributors don’t even like PMS. “I do not like PMS schemes and I do not sell these schemes. It’s my personal choice as I am not convinced with what fund houses like Templeton have done,” said Kolkata-based Brijesh Dalmia, founder, Dalmia Advisory Services.
 
When asked whether PMS is a dubious product because of high costs and poor returns, Dalmia said,”PMS is a good product but the paradox is that customers do not understand it. PMS is sold as a customised product, but in reality, it is not. This is because the cost is very high compared to other investment options available in the market. The taxation is not suitable for customers. Besides, there is no control on the churning part by the fund house or the fund manager.”
 
“I find there is no logic to differentiate PMS from a mutual fund. The PMS schemes are operated in a manner where there is no fixed fee structure and capping on expenses on churning. This is obviously not in the interest of the client. In the last couple of years, I have not seen any PMS which has beaten the benchmark index of any diversified equity fund. Of course, PMS will be promoted by the distributors and financial advisors because of high commission offered by the fund houses which range anywhere between 2%-4%,” said Dalmia.
 

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Competition taking its toll—Bharti Airtel slashes prepaid tariffs
 
Bharti Airtel Ltd, India's largest telecom operator, has announced a new tariff plan, Advantage Airtel, to its prepaid subscribers that offers local and national long distance calls at 50 paise per minute. However, there is a catch; you will have to pay an additional Rs50 per month to avail these rates.
 
Time and again all mobile services providers come out with various tariff plans, the latest from Airtel has its own reasons. "The surge in Tata Teleservices Ltd's (TTSL) August net-adds, clearly suggested that incumbents were losing traffic and minutes of use, with rapid proliferation of multiple SIM ownership. Post the latest cut, Bharti’s tariffs compare well with TTSL's ‘normalised’ GSM tariffs, though still higher than the ‘promotional’ or limited period, rates offered by TTSL," said Anand Rathi Financial Services Ltd, in a report.
 
During August, TTSL added 3.4 million subscribers while the same for Airtel was 2.8 million. Idea Cellular added 1.5 million new subscribers, while ADA group company, Reliance Communications Ltd (RCom) could garner only 1.7 million subscribers, in both GSM and CDMA segments.
 
TTSL had showed a healthy growth in new additions in July as well with 2.2 million new subscribers. “While TTSL has shown a growth of 50% or more in new subscriber additions in July and August 2009, other telecom operators have shown flat or negative growth in new additions in the same period,” TTSL said in a release.
 
The wireless industry is set to witness a flurry of new entrants or network expansion by existing smaller players, resulting in 12-14 players in each circle from 5-6 at present. With the backing of experienced global and regional players and about $6 billion of initial funding committed by them, the new entrants appear well-poised for their initial rollout plans. Also, these players will have a shorter time to market and lower capacity expansion needs due to a predominantly shared infrastructure model.
 
However, average revenue per user (ARPU) of incremental subscribers—given that growth would now come from the ‘lower rungs of the economic pyramid’—is likely to be at a steep discount to the industry average, said IDFC-SSKI Securities Ltd, in a report.
 
As past experience suggests, the lowest ARPU is often reported by the latest entrant in any circle—for example, Aircel’s ARPU in Kolkata, launched in May 2008, Bihar and Himachal Pradesh, both launched in January 2007, is at a discount of 73%, 56% and 64% respectively to the average ARPU in these circles, the report added.
-Yogesh Sapkale [email protected]
 
 

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Retail loan customers will receive balance statement once in a year
 
If the Reserve Bank of India (RBI) has its way, then retail loan customers of banks will soon be quoted a single, all-inclusive interest rate with no hidden charges or fees. This will allow them to work out their exact cost of borrowing and also allows for easy comparison across offerings by other banks and institutions. This is part of RBI Deputy Governor Dr K C Chakrabarty’s effort to bring transparency to the working of commercial banks. 
 
“Customers should get statements once in a year with all inclusive cost or annual effective rate (AER) which will cover interest rate comprising various elements of costing such as cost of funds, legal fees, inspection charges, switch-over fee, etc,” said Dr Chakrabarty, speaking to bankers recently. He wants to make the rules stringent and transparent for most of the services delivered by banks.
 
RBI has been receiving complaints about the unfairness of home loan rates, wherein most banks are reluctant to reduce interest rates for existing borrowers while new customers are offered lower rates. Dr Chakrabarty wants all existing customers to enjoy the current rate of interest and has asked RBI nodal officers to take up the issue with the head offices of various financial institutions. At the same Bhopal conference, he said, “When the cost of fund at a point of time reflects the floating rate offered at that time, how can it be different for different for two sets of borrowers?”
 
Speaking to Moneylife, Dr Chakrabarty said that many issues relating to retail lending happen because bankers are confused about who is the retail borrower. He says, “Ask 10 bank chairmen and each will define the retail borrower differently.” His own definition is very precise; he says, “banking for the individual, that is, for non-entrepreneurial activity is retail lending,” it has nothing to do with size. For instance a farmer is a small borrower, but he should not be confused with a retail borrower, because he is an entrepreneur. On the other hand credit cards, mortgage, auto loans are all retail loans and in all these cases, the recovery will not be from the asset that is created but from some other source of income. Once the definition is clear the next step is to ensure that pricing is transparent and non-discriminatory. Unfortunately this has not happened as yet.
 
Another area of concern for Dr Chakrabarty is to take banking to the masses. He points out that even today, 60% of the population does not have access to a bank account and he is more concerned about extending the reach of banking to these segments.
 
Speaking on the issue, a financial sector source told Moneylife, “We mostly receive complaints from existing customers since they cannot enjoy the benefit of the current reduced interest rate. But we also cannot pass on the benefit to the customers free of cost. That is because the interest on floating rates depends on the rate at which the institution is borrowing from the market. If the institution is borrowing at a lower rate, it will pass the benefit to the customers, if not, customers get angry. RBI is looking into the issue and trying to find a solution.”
 
Banks have also been asked to hasten the process of re-crediting customer accounts in case of a wrong debit. There are times when faulty ATMs do not allow customers to withdraw cash although it is debited from their accounts. Banks take as much as 12 days to re-credit the money when it ought to take only three working days now that most banks now have adopted core banking solutions (CBS) that allow money to be transferred within minutes from one account to another. 
 
 

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