Over the past two years, the markets have been hugely volatile— which is ideal for arbitrage funds. But over this period, of the 12 arbitrage funds, only three funds outperformed and nine underperformed their benchmarks
Fund companies push arbitrage funds as one of the best options in a volatile market environment for those investors who wish to invest in a low-risk portfolio and yet gain decent returns. Theoretically, these funds benefit from the arbitrage opportunities arising out of price differences between the equity and derivatives segment of the stock market. So, these funds should do well when the market is volatile. But as is usual with mutual funds, the reality is different. Or rather, as with any other mutual fund product, the reality is simple: like all other funds, arbitrage funds also make money mainly when the market is rallying for a while. Volatility kills them!
What else explains the following facts? In the past two years, the Indian markets have remained highly volatile as it saw a bull run as well as a bear run. Arbitrage funds should have done extremely well in this period. If we look at the past two years’ performance of 12 arbitrage funds, it was terrible—only three funds outperformed and nine underperformed. Over three years, out of a total of nine funds, five funds outperformed while the others underperformed—an outcome akin to the toss of a coin. The performance of the 15 funds that were available over the past one year is hardly surprising, either; seven funds outperformed and eight underperformed. Again, the outcome of a coin toss.
So, what is so great about arbitrage funds? They are just another marketing gimmick of a complicated product. Over the past one year, most of these funds have given a return of 4%. A bank fixed deposit for a period of one year gives a return of 6%. The performance of these funds over the period of six months and three months were pathetic. Their returns were just 1%-2%.
The latest positive data on the infrastructure sector failed to spark a market rally
Indian markets finally ended the day on a flat note after the finance ministry’s Economic Survey for 2009-10 predicted that India would bounce back to a high 9% growth in 2011-12 and is on its way to becoming the world’s fastest-growing economy in four years. The latest data on the infrastructure sector for January 2010 also helped the market to bounce back. At the end of the day, the Sensex declined 2 points from the previous day’s close to 16,254 while the Nifty gained 1 point to close at 4,860. Yesterday, we had said that the market would move sideways until the Union Budget, and it did so today. However, tomorrow, the Budget will be tabled and the market is getting ready for a major move, probably downward.
At 12:00 hrs IST, the Sensex was trading down 58 points from the previous day’s close at 16,198. At 14:00 hrs, the index was trading at 16,220, down 36 points.
At the end of the day, Banco Products gained 2%, after the company clarified that it does not supply the specific gasket fitted in the recalled A-star model of Maruti Suzuki.
Aurobindo Pharma ended flat after the company received tentative approval from the US Food & Drug Administration for Nevirapine tablets in oral suspension form.
PAE Ltd has entered into a distribution agreement with Schneider Electric India for the Xantrex range of products, which consists of solar invertors, solar chargers and charge controllers. The stock gained 1%.
Kerala Ayurveda has signed an expression of interest with Arya Vaidya Pharmacy (Coimbatore) to evaluate the integration of both businesses. The stock declined 1%.
During trading hours, the government announced that the infrastructure sector output grew 9.4% in January 2010 from a year earlier, higher than an upwardly revised annual growth of 6.4% in December 2009. During April-January, the first 10 months of the 2009-10 fiscal year, output rose 5.4% from 3% a year ago. The infrastructure sector accounts for 26.7% of India's industrial output.
The Economic Survey said capital inflows from advanced economies could be a challenge for India as they might lead to overheating of the economy. With interest rates at historic lows in most advanced economies, capital flows from these countries are finding their way into the fast-growing Asian economies, including India. It added that if inflows exceed the domestic absorptive capacity, it could lead to overheating of the economy. The Survey showed that this can also be looked at as the “impossible trinity” dilemma of policy choice between price stability, exchange-rate stability and capital mobility.
The economic survey for the 2009-10 financial year urged a calibrated exit from fiscal stimulus, which cushioned India’s economy from the worst of the global downturn. The report, presented in Parliament ahead of tomorrow’s general Budget, forecast economic growth at 8.25%-8.75% in 2010-11, accelerating to over 9% the year after, compared with projected growth of 7.2%-7.5% in the current year.
The economic survey said the risk of a double-dip recession in advanced economies has a direct implication for India. The survey said production of farm and allied sectors fell 0.2% in 2009-10, adding that there is a need for serious policy initiatives to achieve 4% annual agriculture growth. The survey suggested direct food subsidy via food coupons to households and favours making available food in the open market. The survey also favours issuing monthly ration coupons for the poor.
During the day, Asia’s key benchmark indices in Indonesia, Japan, South Korea, Hong Kong, Singapore and Taiwan fell between 0.49%-1.57%, but China’s rose 1.27%.
On Wednesday 24 February 2010, in the US markets, the Dow Jones Industrial Average was up 92 points while the S&P 500 and the Nasdaq Composite gained 11 points and 22 points, respectively.
Faced with a credibility crisis, mutual fund industry body AMFI has appointed HN Sinor as its chief executive. Industry sources have welcomed the move.
The Association of Mutual Funds in India (AMFI) has decided to appoint Hoshang Noshirwan Sinor, better known as HN Sinor, as its chief executive (CEO). Mr Sinor, a former CEO of Indian Banks Association (IBA), is expected to replace AP Kurian, current chairman of the industry body, who will be stepping down in the month of September.
Mr Sinor’s appointment comes at a time when AMFI appears to have lost face within industry circles because of its fumbling and lack of preparedness over many issues. “Over time, it has been reduced to a department of the Securities and Exchange Board of India (SEBI), rather than acting as a strong voice for the industry. It has failed to become the voice of industry participants like small distributors and asset management companies (AMCs), as well as independent financial advisors (IFAs), who have been struggling in the wake of various game-changing regulations introduced by SEBI last year,” says a chief executive (CEO) of an asset management company (AMC).
AMFI, as an industry body, is expected to argue intelligently for the industry. It has failed miserably in this regard. It has conducted no research and has hardly any points to make on any of the key issues affecting the industry, such as abolition of entry loads. For what an industry association can do, witness the effectiveness of Confederation of Indian Industries (CII) which commands the respect of businesses and regulators alike, because it puts enormous efforts into networking and also co-opting industry leaders in the association’s activities.
Sources within the industry have welcomed this new appointment. Fed up with AMFI’s parochial and indecisive approach, several experts are hopeful that Mr Sinor will make certain positive moves. An IFA source said, “Mr Sinor is an honest person with a clean record. I expect that he will do some good. AMFI has lost credibility. It is plagued by many problems, most of which have been brought forth by its lackadaisical approach. It doesn’t allow small distributors and small AMCs to have a say in policy matters.”
Another IFA said it is nice to have someone with a fresh perspective and approach. “Although he comes from a different industry, he brings with him vast experience that will count. A lot depends on what he can bring out of the relationships with regulators and how the industry as a whole tackles various matters. Ultimately, he is representing an industry, to work as the voice of the industry. But the industry chooses to be docile in front of regulators. It has to have the conviction to take up various matters with the regulator. For this, he will have to mobilise support from within the industry.”
A graduate in commerce and law, Mr Sinor’s career has spanned 43 years in the banking sector. He has previously worked with Central Bank of India, Union Bank of India and ICICI Bank, and was the chief executive of the IBA until July 2008. He has worked on various committees of the Indian government, Reserve Bank of India (RBI) and Confederation of Indian Industry (CII) and has hence contributed to policy and decision-making processes.