It’s not that Reliance Capital Mutual Fund always does exactly the opposite of what Indiabulls recommends !

United Breweries (UB) was recommended to sell at Rs 90 by Indiabulls with a target price of Rs 70,citing high Leverage and margin pressures

Reliance Capital Mutual Fund and another Fund,Indea Absolute Return Fund ,actually went ahead and purchased 1.5 million shares and 1.3 million shares respectively of UB on February 27,2009,last week for Rs 75 in Bulk Deals of Rs 11.25 crs and Rs 9.75 crs respectively 

It’s just that the Beauty of Equity and Diverse Views in it come into Focus…with such mixed view,who do you follow !?…..Follow what you have conviction in and what appeals to you rationally and logically…Some basic sense of Earnings and Assets Valuation is warranted as Share Price is often skewed around this….. this will also help you to do some of your own basic homework and basic research to build up a well informed view with better conviction.

At 1 am Mumbai Time,just a half hour ago,I got to see on CNBC TV 18,two of my favourites,John Bogle,founder of Vangaurd Group of Mutual Funds and a staunch advocate of Index Investing over specific Stock Selection and Jeremy Seigel.Professor at the University of Pennsylvania and a strong advocate of Stocks

Both made some very interesting arguments

Bogle said that Fund Managers had not been doing a good job at all…sometimes one strategy or sector works well and at other times they are failures…there is no way to know in advance what will work….He hates strategies in Equities and Index Investing is the way to go…15 Years and 20 years CAGR returns are postive at over 5% and over 7% respectively…Asset Allocation is important and as a thumb rule,which he has followed with great success, is that the % of Bonds Allocation in your Portfolio should be around your Age

Seigel made a strong point on Dividend Yield of S & P 500 being at 3.7%,over 1 % of Bond Yields and at it’s highest in 50 Years…so any one in Stocks,need not need any capital appreciation in them to beat the Bond Yields…Higher Dividend Yield takes care of this…when the Anchor inquired that Bear Markets in the past has seen Dividend Yields of 5% to 6% in the S & P and should not one await such levels before entering Stocks again,Seigel highlighted the fact that when these high Dividend Yields of 5% or 6% had come about the Interest Yields were higher at 8 % and 10 %…Today the Dividend Yield is higher than Interest Yield,making Equities look very attractive indeed

Countering this,Bogle states that the volatility even in Dividend Yield Stocks was very high…forget capital appreciation,there was a 20% drop in days in prices of such stocks…that’s a capital loss higher than the Dividend Yields on the Stocks !….so specific strategies and stock selections on whatever criteria don’t really work….what works is Index Investing over a long Time Frame

I’m well acquainted with both,Bogle and Seigel and regularly argue them at my workshops…but it was Great hearing these guys Live on TV now 

Equity markets Collapsing has taken it’s toll on Mutual Funds too in many ways

• Redemption Pressures are High forcing Equity Sales and Increased Borrowing at higher rates
• No Takers and Markets for New Schemes
• NAVs under relentless pressure on relentless selling
• Access to Financing restricted as risks of counterparty exposure limits being breached and overleverage play up
• Distinct possibility of rating downgrades on FMPs on growing concern of deterioration of credit quality of portfolios
• Structual Flaws revealed in Liquid Funds and Fixed Maturity plans in that they are largely invested in longer term corporate paper while they have to provide for same day liquidity in case of redemptions  

Data released by the Association of Mutual Fund Industry (AMFI) shows that Assets Under Management (AUM) for all debt and equity funds had dropped by 3% to Rs 529122 crs as on September 30,2008….AUM as on October 31,2008 should be even lower

RBI has announced a liquidity window of Rs 20000 crs as risk aversion and counter party exposure had reduced the access to finance

Some Mutual Funds are limiting withdrawal amounts daily under the Fixed Maturity Plans,infuriating Clients in no small measure…there is talk of them even putting pressure on the government to allow a temporary freeze on withdrawals.

The CEO of a Leading MF,winner of several performance awards too, is said to be so upset at the massive loss that has come on the books because of forced selling of equities to fund redemptions that he wanted a way out of not showing such a loss so as the NAV is not impacted….This is not posssible unless the loss is transferred to the AMC…and this is not posssible as auditors who certify the NAV daily will not allow this 

The Mutual Funds Industry is bound to see a big Churn in Funds and Fund Managers…most of them have simply not performed