MONEY MATT ER S “With euphoria around the newly-elected Modi government, even hardcore NRI investors have started looking at Indian markets.” —Gaurav Gupta, director, Omkar Realtors and Developers
Signposts Insurance sector needs over `50,000 crore capital: IRDA Indian insurance industry needs huge capital infusion of over Rs.50,000 crore ($8 billion) and foreign direct investment (FDI) can make things easy, its regulator said Friday. Insurance Regulatory Development Authority (IRDA) chairman T.S. Vijayan said the regulator welcomes any type of capital infusion. “If foreign capital is increased, it will be easier flow of capital than all put together by Indians. We are not saying FDI has to come. Capital is required and Indians may not have that much ability to put all the capital,” he told reporters.
Sensex tanks 168 points; auto stocks plunge A benchmark index of Indian equities markets Friday was trading 167.60 points or 0.63 percent down as auto stocks tanked. Selling pressure was seen in auto, consumer durables and banking sectors, while some good buying was observed in healthcare sector. The 30-scrip Sensitive Index (Sensex) of the S&P Bombay Stock Exchange (BSE), which opened at 26,429.30 points, was trading at 26,300.76 points (at 12.31 p.m.), down 167.60 points or 0.63 percent from the previous day’s close at 26,468.36 points.
Maruti Suzuki: India can become largest car manufacturer Automobile major Maruti Suzuki Thursday said the country has the potential of becoming the largest car manufacturer in the world. The company’s view coincided with Prime Minister Narendra Modi’s new campaign ‘Make in India.’ “We are fully confident that, under the Make in India programme of the Prime Minister, factors that adversely affect the competitiveness of manufacturing will now be removed quickly,” said Kenichi Ayukawa, managing director and chief executive, Maruti Suzuki.
1. Do they have durable competitive advantage? Is it the kind of company that is hard to compete with, either because it has cornered a difficult market or because competing with it would require an unreasonably high investment by others? 2. What is the purchase value of the company relative to its free cash flow? If someone were to come in and buy the entire company, would the free cash flow being generated be well in excess of simply investing in a 10-year Treasury bond? After all, the cash flow on a 10-year Treasury bond is said to be ‘risk-free’ while the free cash flow from a company is not without risk. 3. What is the return on invested capital of the company?
PUNE
“PM Modi’s ‘Make in India’ endeavour is a ‘lion step’ that has the potential to change India’s economic future. — Harsh Pati Singhania, director, JK Organisation
Scary anecdotal evidence, poor performance, opaque disclosure standards and candid responses to an online survey — all show that portfolio management schemes, aggressively pushed by brokers and banksters, are weapons of wealth destruction. Moneylife brings you a detailed analysis DEBASHIS BASU & JASON MONTEIRO Portfolio management services (PMSs) have a strange lure. Run mostly by banks, broking companies and mutual funds, PMSs promise to manage your portfolio of investments more smartly. A singledigit return from bank fi xed deposits and investment in equity mutual funds through SIPs (systematic investment plans) is for the dumb masses. The smart-affluent deserve their money to be invested by select market experts, the portfolio managers, who know what and when to buy and sell. They run your money in and out of stocks or mutual funds or commodities and, often, exotic structured products and derivatives. Of course, you need to pay fat fees for their skills. That is the sales pitch. We did two things: One, dug for performance data, fighting with the market regulator with Right to Information (RTI) Act, in the process. Two, conducted an online survey for actual customer experiences. Here is what we have found about the vaunted PMS skills of banks, brokers and mutual funds. PERFORMANCE DATA While customers walk into PMS believing in the prowess of portfolio managers, persuaded by aggressive brokers and bank relationship managers, reported data and cries of complaints from investors tell a different story. The returns are average-to-poor. How do we know? For months, we hunted for PMS data, believing that a database of returns across PMS would give us a bird’s eye view of the returns, the good and the bad—exactly the way our mutual fund industry does. Well, there is no such database. The Securities and Exchange Board of India (SEBI), regulates the PMS. Maninder Cheema, who until recently oversaw PMS at SEBI, told us that companies offering PMS are supposed to disclose their performance. They don’t. SEBI has ensured that disclosure of PMS is pathetic. Moneylife used RTI to force
and -14.62% in FY11-12 and -41.26% and -27.50% in FY10-11. This data covers only the portfolio management companies that have disclosed their data. A vast majority of asset managers have not. If portfolio managers’ performance was good, would they hesitate to provide the data in the public domain? Is poor performance the reason many asset managers do not put up their PMS document in the public domain?
SEBI to start disclosing some data about PMS. Once this data started appearing on SEBI’s excruciatingly slow website, we painstakingly started to download this data. Out of a total of 253 PMS companies, we fi ltered the data for only those which have more than an average of Rs10 crore of discretionary assets under management (AUM). There were only 46 companies which fit the bill. We decided to look up the websites of the selected 46 companies, out of which 20 companies had placed their disclosure documents on their websites. We then contacted the remaining to send us the data. Nine of them did. This means that out of the 46 companies from our sample, 29 had their risk documents uploaded or sent the documents to us on request. Among the 17 that have still not put up their disclosure document online, are: HDFC Asset Management Company, Alchemy Capital Management and Avendus PE Investment Advisors. From these documents, we pulled out the performance data of the PMSs
Is the company using its money wisely to create returns below its cost of capital? It is using its money well
to create returns, or is it taking o n bad investments that don’t pay off. 4. Can it pay off its long-term debt quickly? There are several companies that are making a lot of money, but should revenues stall or decelerate, could their long-term debt be paid off within a short period with free cash flow? Wiley claims to have spent years refining the principles behind this— back-testing data and putting his own money on it; the results have been impressive. He asserts that his clients— those willing to take a slightly different approach to investing their requirement dollars—have never been happier.
and their benchmark performance. Here again, the schemes followed different formats of the disclosure documents which, again, makes it difficult to compile and analyse the data. As per SEBI’s circular, portfolio managers are mandated to disclose the performance over the past three financial years. Since the periods of performance varied for different PMS companies and, since all of them have different strategies, we compared the performance of the schemes to their given benchmarks. We had a list of 107 schemes from the 26 PMS companies with performance data of FY11 onwards. In our analysis, we came across schemes with fancy names such as Emkays Prodigy Portfolio, HSBC Alpha Account Strategic Portfolio, Motilal Oswal Blue Chip Prodigy Investment Strategy, Reliance Royale, etc. These are just a few names, but the performance of these schemes compared to their benchmark has been really poor. Schemes such as K Energetic and K Sensible (of Karvy Stock Broking) have delivered returns as poor as -32.49%
“As per SEBI, portfolio managers are mandated to disclose the performance over the past three financial years”
An interesting formula that helps to buy stocks when they are down
There is a variety of ways to make money from shares. But, over time, it has become clear that all successful investing is based on accepting one essential feature of the markets: it is impossible to know what will happen to the price of a stock in future. From this understanding flow multiple trading and investing strategies. One of them is buy-low, sell-high. While this is one of the most popular and oft-repeated investment maxims, how does one define what is ‘low’? Luke Wiley suggests a simple formula. Look for stocks that have hit 52-week lows and judge them on four basic questions:
SEPTEMBER 27, 2014
Will your portfolio blow up?
‘The 52-week low formula’ BY DEBASHIS BASU
THE GOLDEN SPARROW ON SATURDAY
SEBI to soon notify norms for REITs MONEYLIFE DIGITAL TEAM
The 52-week low formula is based on the idea that even the best companies go through problems when their stock value heads down. This leads you to investing in a good business trading at an attractive valuation. You are buying into a company that is out of favour with the investing public and Wall Street analysts. Of course, you don’t just buy any company, trading close to its 52-week low. You have to always keep an eye on the first part of the investment approach: good quality business (that is temporarily out of favour with the market). The idea is to bet on something afflicted with a mild infection rather than a terminal disease. Buying 52-week low strategy is a clever way to take two important steps while buying stocks: narrow down a wide universe of stocks and remove behavioural bias. “It narrows down the wide world of possibility when it comes to investing by starting with an end goal—outperforming the market, with less downside risk-and working backwards. It is a logic-based, disciplined approach to narrowing down the 3,000 publicly traded companies in the market to the 25 that represent the best opportunities for creating real value in the coming months,” writes Wiley. I believe this facet of the approach (helping to deal with behavioural biases) makes it one of the best I have come across. The 52-week low approach helps you remove your biases more easily. Definitely worth applying. @moneylife
New norms will enable listing and trading of Real Estate Investment Trusts -REITs as any other security on the stock exchange Market regulator Securities and Exchange Board of India (SEBI) said it will soon notify norms for creation and listing of business trusts to help attract greater foreign and domestic investments into real estate. Addressing a conference organised by Assocham in New Delhi, SEBI’s Executive Director Ananta Barua said, “We will soon notify the new norms on Real Estate Investment Trusts or REITs.” Like mutual funds, REITs would pool in money from investors and issue units in exchange. Most of the money collected would be invested in commercial properties which are completed and generate income. The new norms will enable listing and trading of REITs as any other security on the stock exchange and also help create new platform for raising of funds by real estate companies. The guidelines, approved by SEBI board, have fi xed the minimum requirement for asset sizes permitted to be listed in India at Rs500 crore. Earlier there was a minimum requirement of Rs1,000 crore in this regard. REITs may invest directly in properties or through a special purpose vehicle (SPV). As per the norms, 80% of the value of a REIT shall be invested in completed and revenue-generating assets, and the remaining 20% may be invested in developmental properties and other assets. @moneylife
SURVEY FINDINGS Our survey on PMSs fetched over 350 responses. Onethird of the respondents have invested in PMS; one-fourth of them for five years or more. Nearly 40% have been investing for three to five years and as many as 30% have been investing for the past one to three years. A common complaint against the performance of these schemes is that they racked up losses for investors and churned portfolios aggressively; the stock selection was poor and some did not even return the entire principal. This is not a surprise for regular readers of the anguished stories on PMS and wealth-management services on www. moneylife.in. Investors are systematically lured into subscribing to schemes that yield high commissions to banks and incentives for their executives. A BLIND BET In a disclosure-based regulatory regime, why is disclosure of PMS providers
so poor? The basis of deciding to invest in any asset class is a calculation of expected risk and return, based on historical data. We know, for instance, what returns to expect while investing in a basket of stocks like the Sensex or what have been the long-term returns of gold. Can we do this for PMS? No. The problem with PMS starts with the poor disclosure norms. Data about the performance of PMSs is hard to come by. As investors pointed out in our online survey, they did not know how and where to check, to compare the performance of PMS schemes or portfolio managers. In fact, there is no
place one can check apart from going to the portfolio managers’ website and locating the disclosure document. Even this is not convenient, as not everyone uploads the risk disclosure document—which contains the threeyear performance—on their website for the public to download. We also found, at many places, the documents were outdated. That takes us to regulator’s role regarding PMSs. While SEBI is trying to promote ‘investor education and awareness’, when it comes to PMS, it has strained every nerve to ensure that investors are denied of timely, accurate and comparable data. The circular regarding the disclosure of PMS, known as disclosure document and performance record, has been kept deliberately vague. KINDS OF PMS An investor can opt for portfolio service on a discretionary, nondiscretionary or advisory basis. What do you get under each of these? Discretionary: The portfolio manager makes the investment decisions and has the power of attorney (PoA) to buy and sell shares on behalf of the investor. Non-discretionary: The portfolio manager needs the client to confirm whether to buy or sell the stock recommended. Advisory: The portfolio manager mainly gives advice on the portfolio; it’s up to the investor to execute the decisions. It’s the discretionary service, which creates the maximum trouble. These services earn the PMS companies the highest fee because of their ‘expert’ knowledge and ‘quick action’ in moving in and out of different market-linked products. As on 30 June 2013, there are around 49,000 clients registered under discretionary services, 5,000 under non-discretionary services, and 11,000 under advisory services, SEBI data shows. The assets under management (excluding debt) amount to Rs38,400 crore for discretionary services and Rs10,800 for nondiscretionary services. (To be continued) @moneylife
Insurers are shifting costs to the sick
By charging higher prices for drugs, health insurers may be violating the spirit of the Affordable Care Act BY CHARLES ORNSTEIN This story was co-published with The New York Times’ The Upshot. Health insurance companies are no longer allowed to turn away patients because of their pre-existing conditions or charge them more because of those conditions. But some health policy experts say insurers may be doing so in a more subtle way: by forcing people with a variety of illnesses — including Parkinson’s disease, diabetes and epilepsy — to pay more for their drugs. Insurers have long tried to steer their members away from more expensive brand name drugs, labeling them as “non-preferred” and charging higher co-payments. The Affordable Care Act bans insurance companies from discriminating against patients with health problems, but that hasn’t stopped them from seeking new and creative ways to shift costs to consumers. In the process, the plans effectively may be rendering a variety of ailments “nonpreferred,” according to the editorial. The authors reviewed the drug lists, called formularies, of six prescription drugs plans: Harvard Pilgrim Health Care in Massachusetts; Blue Cross Blue Shield of Michigan; Blue Cross and Blue
Shield of Illinois; Geisinger Health Plan in Pennsylvania; Aetna; and Premera Blue Cross Blue Shield of Alaska. They wanted to see how each plan handled expert-recommended generic drugs for 10 conditions. The conditions are not all high cost like H.I.V. and Parkinson’s. They also include migraine headaches, community acquired pneumonia and high blood pressure. Health plans that participate in Medicare’s prescription drug program, known as Part D, have been moving rapidly to create two tiers of generic drugs. This year, about threequarters of plans had them, according to an article co-written by Jack Hoadley, a health policy analyst at Georgetown University’s Health Policy Institute. The practical effect of such arrangements probably varies based on the difference in cost, he said. Dan Mendelson, chief executive of Avalere Health, a consulting firm, said the increasing number of drug tiers in some plans was confusing for patients. “Consumers often don’t understand which drugs are where,” he said. “They don’t understand the purpose of tiering. They just get to the pharmacy counter and it gets done to them.” Courtesy: ProPublica.org @moneylife
“Insurers have tried to steer their members away from expensive drugs.”