Fund prospectuses: Too much legalese, too little substance

Stripped off their legalese, prospectuses of mutual funds are prone to misrepresentations and inadequate disclosures. As a result, the investing community continues to be short-changed. A two-part analysis

Mutual fund prospectuses are fat documents that can turn off even the most intrepid investor. There are pages and pages of legally mandated disclosures but they have absolutely no truck with what the investors really need to make an informed decision. Stripped off their legal content, these documents are essentially a few pages of paper filled with bland information of little substance.

Whether a fund wants to invest in mid-cap stocks or Brazilian stocks or infrastructure stocks, the quality of disclosure is the same. Disclosures on what has gone into the portfolio design are non-existent. Explanations as to what distinguishes the stock-selection process of the fund managers are non-existent. Even the disclosures that appear don’t reveal the full facts.

Recently, HSBC Mutual Fund has filed a prospectus to launch a fund of funds that would invest in Brazilian stocks. This is an exotic fund. Who has ever heard of a name like Companhia Vale do Rio Doce (CVRD), one of the world’s largest producers of iron ore? If HSBC wants to pick your money to invest in CVRD, the least it should do is have a long section devoted to explaining the structure of the Brazilian economy, its corporate sector, how these companies and their stocks have performed in different market cycles, what are their current prospects, the level of governance, the likely political change after the coming elections and so on. And finally, investors need to know whether HSBC has any experience in navigating this market with multiple products over different cycles. Even then, one would like to know who is managing the money for HSBC, whether he is a local or not and how long this fund manager has been around doing this same job. Or, will HSBC’s giant asset-gathering machine merely suck the money from somewhere and funnel it somewhere else, collecting money for its various services along the way?

We don’t recall for how long the current format of fund prospectuses has been around. It was designed badly ab initio and it continues. If the market regulator has satisfied itself that fund prospectuses are fine documents, it should think again. Today, there is nothing to distinguish one scheme from another on the most vital aspects such as process of stock selection, track record of the fund manager and most importantly, back-tested results of a new fund idea.

Of all these factors, it is the third aspect that is most worrying. Fund companies are happily launching funds with different flavours but they have absolutely no obligation to show how these ideas would have performed under different market cycles in the past. But we have just discovered to our horror that there is a regulatory issue here as well. Nitin Rakesh, chief executive of Motilal Oswal Asset Management Company tells us that even if fund companies wanted to show back-tested results, they would not be able to do it. The Securities and Exchange Board of India (SEBI) does not allow it. A few days ago, we wrote about Motilal Oswal’s new fund idea ‘MOSt50’, which will be an exchange-traded fund and invest in 50 stocks according to their weights in a proprietary index called MOSt50, derived from the Nifty. This is called enhanced indexing.

The prospectus gives you no clue on how MOSt50 will be calculated. It wants you trust the fund blindly that it will give returns superior to Nifty’s returns. Maybe it will. But you have no way of knowing. A new simple idea like this can be easily back-tested. But no. “SEBI does not allow us to show back-tested results,” avers Mr Rakesh.

While an obviously valuable piece of information is kept out, funds are allowed to spike their offerings with any kind of flavour they like, no matter how ridiculous they sound.

Tomorrow: Bizarre fund ideas and what SEBI should do to control them

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    K B Patil

    1 decade ago

    I agree wholeheartedly. The same can be said of even companies coming to the market and even most companies annual reports. For instance, Asian Hotels is being demerged and the shareholders end up with shares of three companies. Except some bland figures, we do not have any clue about the companies. Most Indian promoters do not give a damn about individual investors. For instance, any individual who invested his entire savings in Essar Steel's issue more than a decade ago would have seen his net worth shrink to almost nothing. If you expect the promoters would have been hit too, you are sadly mistaken. They are in the top 50 of the world's richest, as per the ranking done by Forbes magazine. How do these guys sleep at night?

    Mercator to expand in dredging, bulk and tanker segments

    Mercator Lines is planning to increase its presence across various verticals depending on the opportunities available. It plans to improve capacity in its bulk, tanker and dredging segments

    Seaborne transportation service provider Mercator Lines Ltd, which has diversified into various segments apart from being a core shipping company, plans to expand in the dredging, bulk and tanker segments in the next twelve to eighteen months. Expansion in its coalmining capacity is also on the cards.

    “We are trying to increase our presence in the other industries, the idea is in the next three to four years, our income from the other segments should be more than the shipping segment. But the shipping segment is also increasing. It will also depend on the kind of contracts that we sign. If contracts increase, our investments will also increase,” said HK Mittal, executive chairman, Mercator Lines.

    However, at the moment, the company does not plan to infuse any fresh equity or explore other fund-raising options, he added.

    The shipping company has taken delivery of two tankers on Wednesday and another bulk carrier is likely to join the fleet soon. Going ahead, it plans to add four to five ships each in both the bulk and tanker segments.

    “We have 14 bulk carriers and eight tankers at the moment. I think we will increase the number of tankers to 12–13. Overall, we will add up to five to six vessels in both these segments in the next 12 to 18 months,” a company official said, preferring anonymity.

    “The year 2009-2010 is definitely low for all shipping companies; 2010-2011 would be slightly better. The dry cargo (bulk) business has increased a little, but the tanker segment seems to be depressed at least for the next year. The rates in the bulk segment have returned to normal. The shipping segment will take time to recover,” Mr Mittal said.

    Commenting on the fall in asset prices of vessels, he said, “I think the prices have bottomed out, and in my opinion, prices should not fall further. Assets are being sold below manufacturing cost. Chinese, European and Korean companies get subsidies from their respective governments, which are passed on to buyers. If at all, these governments withdraw subsidies, prices may go up.”

    Mercator is in the process of phasing out four single-hull vessels ahead of the implementation of the International Maritime Organisation (IMO) guidelines on phasing out of such vessels and is confident that it will complete the process before April 2010. “We will be the one of the few shipping companies with a complete double-hull fleet in India by 1 April 2010,” the company official said.

    On the issue of capital gains from the scrapping of single-hull vessels, Mr Mittal said, “Scrap prices are good at present, as steel prices are high. Anyway, for our company, the acquisition cost for these ships was quite low.”

    In the dredging segment, the company is looking at expanding to eight dredgers in the next 12 to 18 months. “We do not basically work upon a concrete plan, we are always , but ideally we should have seven or eight dredgers in the next 12 to 18 months, but they (the numbers) could vary,” the company official said.

    “We are planning to expand in the dredging segment. The potential in the dredging segment is quite large. With port capacity expanding, the dredging market available in India also expands automatically. At present, a major amount of dredging work is done by foreign companies. Indian companies have a negligible presence in this segment. Thus, the potential is absolutely big in this segment,” added Mr Mittal.

    Apart from the expansion planned in its core shipping segment, the company is also focused on opportunities in coal mining. The company at present undertakes mining activities in Indonesia and exports around 3.5 million tonnes (MT) of coal to India. It is also aggressively looking for another mine in Indonesia.

    “We wish to increase our current coal capacity of 3.5MT to a minimum of 10MT in the next two years,” said Mr Mittal.

    “The demand for coal from India and China is huge and the sale of coal is not a problem. The sale price of the coal depends on the price of the power that is generated. The scope of selling power is not an issue, the issue is the availability,” he added.

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    9 years ago

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    Audi eyes numero uno position in Indian luxury car market by 2015

    Audi stood at the third position in India in the luxury car segment in 2009, with BMW and Mercedes occupying the first and second ranks respectively

    German luxury automaker Audi is planning to beat rivals BMW AG and Mercedes to acquire the numero uno position in the Indian premium car market in the next five years, tripling its sales in the country by then, reports PTI.

    "By 2015, we aim to become number one in India. We have told our team in India to work towards that aim. Our efforts, for brand-building and developing dealerships for deeper market penetration, are geared towards that," Audi AG board member Peter Schwarzenbauer said.

    Audi stood at the third position in India in 2009 with BMW and Mercedes occupying the first and second ranks respectively in the luxury car segment in the country.

    The automaker is also targeting sale of about 5,000 units in India by 2015, up from 1,658 units in 2009.

    It also plans to significantly increase the number of its dealerships from 12 currently to 18 by next year. The new dealerships are lined up at Jaipur, Ludhiana, Kolkata, Nagpur, Lucknow and Coimbatore.

    The company will also start assembling its compact SUV ‘Q5’ in India by the middle of this year at the Aurangabad plant of Volkswagen Group firm Skoda. At present, it assembles its sedans ‘A4’ and ‘A6’ in the country.

    BMW sold 3,619 cars in 2009 while Mercedes had sales of 3,247 units last year.


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