The scheme would actively use derivative strategies with a view to outperform the market. Use of derivatives would bring about higher risk to the portfolio and could lead to losses for the investor if the fund manager is not cautious
Pramerica Mutual Fund plans to launch a new scheme— Pramerica Alpha Equity Fund, according to an offer document filed with the Securities and Exchange Board of India (SEBI). The scheme would seek to provide “capital appreciation and income distribution to the investors by using equity investments in the spot market and equity derivatives strategies.” The scheme would invest 65%-100% of its assets in equity and equity derivative instruments. The remaining part of the portfolio would be invested in debt and money market instruments. Using derivatives brings in additional risk to ones portfolio, however, this seems to be fad now as earlier Axis MF filed an offer document for its scheme—Axis Dynamic Balanced Fund, which would use derivative instruments to hedge its portfolio (Read: Axis Dynamic Balanced Fund: Using hedging strategies could be risky).
What strategy will the fund manager use to generate ‘alpha’ returns? According to the offer document, “By taking long positions in potential gainers and short positions in stocks which have the highest probability of losing value, the strategy enhances its ability to profit from future movements. In addition, the ability to short the market using index derivatives allows the strategy to insulate a portfolio from downside risk at times of elevated market volatility.”
Fund managers seek to generate alpha (superior returns compared to the benchmark) by using their stock selection and market timing skills. Our analysis in the past has shown that most of these schemes invest in benchmark stocks. (Read: Piggybacking the Sensex and Nifty) However, despite picking the index stocks, what makes a big difference in performance is the weightage and timing and a combination of these two. And just a few fund houses have succeeded in doing this. Pramerica MF plans to use derivatives instruments to enhance its efforts to provide superior returns. But investors should beware, because use of derivatives increases the risk of the portfolio and could lead to huge losses if the fund manager makes a wrong call.
In terms of fund management, Pramerica MF has a track record of less than three years. It has just one diversified equity scheme—Pramerica Equity Fund—which was launched in December 2010. The scheme has delivered a return of 15% over the past one year (as on 11 June 2013). Its benchmark, CNX Nifty, delivered a return of 14.54% over the same period. It’s dynamic scheme—Pramerica Dynamic Fund—which was launched at the same time has delivered a return of 12.37%
Brahmaprakash Singh, will manage the equity portion of the new scheme. He has an experience of 18 years in the fund industry. Mahendra Jajoo, who has 20 years of experience will manage the debt portion.
Other details of the scheme
Benchmark: CNX Nifty Index
Initial Purchase: Minimum of Rs5,000 and in multiples of Re1 thereafter.
Additional Purchase: Minimum of Rs500 and in multiples of Re1 thereafter.
Expense Ratio: Maximum total expense ratio permissible under Regulation 52(6)(c)(i): Up to 2.50%
Additional expenses under regulation 52(6A)(c): Up to 0.20%
Additional expenses for gross new inflows from specified cities: Up to 0.30%
If units are redeemed/switched out after 30 days, but on or before 395 days from the date of allotment - 1%
“The revision of the outlook to Stable reflects the measures taken by the government to contain the budget deficit, including the commitments made in the FY’14 budget,” Fitch said in a statement
Bringing cheer to the government struggling to arrest rupee’s slide, global ratings agency Fitch on Wednesday revised India's sovereign credit outlook to stable from negative. Taking note of the government’s efforts to contain fiscal deficit, Fitch Ratings revised India’s outlook to Stable from Negative and affirmed ‘BBB-’ rating.
“The revision of the outlook to Stable reflects the measures taken by the government to contain the budget deficit, including the commitments made in the FY’14 budget, as well as some, albeit limited, progress in addressing some of the structural impediments to investment and economic growth,” the agency said in a statement. Fitch further said it expects the economy to recover after real GDP grew just 5% in 2012-13 versus 6.2% in the year-ago period.
India’s economic recovery, however, is likely to remain slow until a healthier investment climate is created, which helps lift potential growth again, it said. “As a result, Fitch is forecasting only a modest recovery with real GDP expected to expand 5.7% and 6.5% in FY14 and FY15, respectively,” Fitch said.
Fitch along with Standard and Poor’s had earlier threatened to downgrade India’s rating to junk grade in absence of steps by government to contain deficits and promote investment. The rupee on Tuesday touched historic low of 58.96 against the dollar.
However, it recovered by 19 paise to 58.20 against the dollar in early trade today after the Reserve Bank of India (RBI) announced steps to check the free-fall in rupee, raising the limit for online repatriation of export proceeds by over three-fold to $10,000. A concerned government has given indications to investors that it would take more steps to increase foreign investments in the country to stabilise rupee.
Fitch also affirmed its Long-Term Foreign-and Local-Currency Issuer Default Ratings (IDRs) at ‘BBB-’. “The agency has also affirmed the Country Ceiling at ‘BBB-’ and the Short-Term Foreign-Currency IDR at ‘F3’," it said.
It said the outlook revision and the affirmation of India’s investment-grade ratings reflect that the authorities were successful in containing the upward pressure on the central government’s budget deficit in the face of a weaker-than-expected economy. The fiscal deficit was 4.9% of GDP in 2012-13, compared with 5.7% in the previous year.
“The authorities have also begun to address structural factors that have weakened the investment climate and growth prospects, notably regulatory uncertainty, delays in government approvals of investment projects and supply bottlenecks, for example, in the power and mining sectors,” it said. The establishment of a Cabinet Committee on Investment should help to fast-track infrastructure-related projects and the government has made it easier for FDI to access a range of industries.
“Nonetheless, the investment climate could benefit from further reforms, such as the new land acquisition bill, some liberalisation of insurance and pension provision and public procurement, which are pending parliamentary approval,” Fitch said. It said addressing the structural issues in the power and mining sectors would further boost investor confidence.
Referring to inflation, Fitch said the pressures have begun to show more pronounced signs of easing in response to weaker economic conditions and the tightening of monetary conditions by the RBI. “The recent weakness of the exchange rate may, however, complicate policy management and limit the scope for further cuts in RBI policy rates,” it added.
A close above 5,845 on the Nifty may be the first indicator of a change in the trend
The market closed in the red on concerns about the economy as industrial growth declined to 2% in April and retail inflation eased less-than-expected. A close above 5,845 on the Nifty may be the first indicator of a change in the trend. The National Stock Exchange (NSE) reported a lower turnover of 59.60 crore shares and advance-decline ratio of 549:847.
The market opened in the negative ahead of the release of the industrial output and retail inflation numbers. In the global arena, the decline in the Asian markets continued today taking cues from the US and European markets which closed lower on Tuesday.
The Nifty opened 17 points down at 5,772 and the Sensex resumed trade at 19,104, a decline of 39 points from its previous close. The indices, which were in the negative terrain, witnessed choppy trade in the morning session.
Reports of industrial growth slowing to 2% in April and retail inflation easing marginally to 9.31% in May led the market to its lows in noon trade. The Nifty fell to 5,939 and the Sensex dropped to 18,969.
However, select buying in oil & gas, realty, banking, healthcare, capital goods and power saw the benchmarks bouncing back from the lows and making a struggled effort to emerge into the positive. The upmove helped the indices hit their intraday highs around 1.00pm. At the highs the Nifty rose to 5,793 and the Sensex inched up to 19,143.
Concerns about the slowdown in economic growth as highlighted by the economic indicators saw the benchmarks paring their gains and edging lower and settling in the red for the second day in a row.
The Nifty closed 29 points (0.49%) lower at 5,760 and the Sensex declined 102 points (0.53%) to 19,041.
The broader indices underperformed the Sensex today, as the BSE Mid-cap index declined 0.60% and the BSE Small-cap index fell 0.56%.
BSE Healthcare (up 0.46%), BSE Oil & Gas (up 0.45%) and BSE 0.01%) were the sectoral gainers today. The main losers were BSE Consumer Durables (down 7.37%); BSE Metal (down 1.75%); BSE IT (down 1.45%); BSE TECk (down 1.17%) and BSE Fast Moving Consumer Goods (down 0.97%).
Out of the 30 stocks on the Sensex, 10 settled higher. The top gainers were Jindal Steel & Power (up 3.80%); Cipla (up 1%); Mahindra & Mahindra (up 0.78%); Reliance Industries (up 0.65%) and State Bank of India (up 0.62%). The major losers were Tata Power (down 3.03%); Coal India (down 2.69%); Tata Steel (down 2.61%); Hero MotoCorp (down 2.37%) and Hindalco Industries (down 2.27%).
The top two A Group gainers on the BSE were—United Breweries (up 5%) and IPCA Laboratories (up 4.94%).
The top two A Group losers on the BSE were—Titan Industries (down 13.32%) and Adani Enterprises (down 7.31%).
The top two B Group gainers on the BSE were—Venus Universal (up 20%) and Filatex Fashions (up 20%).
The top two B Group losers on the BSE were—Liberty Phosphates (down 20%) and Tata Coffee (down 20%).
Of the 50 stocks on the Nifty, 21 ended in the in the green. The main gainers were JSPL (up 3.47%); IndusInd Bank (up 2.96%); Jaiprakash Associates (up 2.53%); IDFC (up 2.04%) and Lupin (up 1.97%). The major losers were Reliance Infrastructure (down 3.95%); Axis Bank (down 3.28%); Coal India (down 3%); Tata Power (down 2.85%) and Tata Steel (down 2.76%).
Markets across Asia continued to settle lower on the Bank of Japan’s reluctance to make any fresh commitments on easing the volatility in the market and concerns of the US Federal Reserve tapering its bond buying programme.
The KLSE Composite declined 0.25%; the Nikkei 225 fell 0.21%; the Straits Times dropped 0.53%; the Seoul Composite lost 0.56% and the Taiwan Weighted settled 0.54% lower. Bucking the trend, the Jakarta Composite jumped 1.91%. Markets in China and Hong Kong were closed Dragon Boat holidays.
At the time of writing, the key European indices were trading higher on merger and acquisition news. At the same time, the US stock futures were trading with gains, indicating a higher opening for US stocks later in the day.
Back home, foreign institutional investors were net sellers of shares totalling Rs885.85 crore on Tuesday while domestic institutional investors were net buyers of equities worth Rs313.42 crore.
Bangalore-based IT services company Wipro on Wednesday announced the expansion of its operations in Germany. As part of strengthening its business the company plans to triple its employee strength in Germany over the next three years, by hiring over 1,000 professionals. The stock shed 0.01% to Rs345 on the NSE.
Apollo Tyres on Wednesday said it has acquired US-based Cooper Tire & Rubber Company, in an all cash transaction of Rs14,500 crore. The deal has been approved by the boards of directors of both companies in which Cooper stockholders will receive $35 per share in cash. Apollo Tyres gained .74% to close at Rs92 on the NSE.
Construction major Larsen & Toubro (L&T) has bagged a Rs 900-crore contract from Wave Group’s realty arm Wave Infratech to build residential towers in Noida. L&T will construct the residential towers of the first phase of the project and ensure delivery by 2016. L&T fell 0.41% to close at Rs1,397.30 on the NSE.