Download - Money for Old Hope
8/8/2019 Money for Old Hope
http://slidepdf.com/reader/full/money-for-old-hope 1/50
Presented By: Group 3Mohd. Wasi (91091)
Mukesh Goel (91093)Ravi Kant Gupta (91100)
Ritu Rani (91102)Sandeep Agrawal (91104)
8/8/2019 Money for Old Hope
http://slidepdf.com/reader/full/money-for-old-hope 2/50
The article talks about the ´Fund Management Industryµ.
The article talks about different types of funds such as Hedge
Funds, Pension Funds and Mutual Funds. The author is
critical of the high fees which is charged by he Fund
Managers. The article also talks about the new trends which
are appearing in the industry.
ABOUT THE ARTICLE
8/8/2019 Money for Old Hope
http://slidepdf.com/reader/full/money-for-old-hope 3/50
Fund Management Industry in India
y Had shown a steady growth in the period before recession.
y Recession jolted the growth
y
Current scenario is promising and at least 33% growth isexpected
y AUM expected to touch a figure a figure of US $440 billion
y High growth is also expected in retail sector.
8/8/2019 Money for Old Hope
http://slidepdf.com/reader/full/money-for-old-hope 4/50
Top Asset Management Companies in India
y UTI Asset Management Company Ltd
y Reliance Capital Asset Management Ltd
y
SBI Funds Management Private Ltdy HDFC Asset Management Co. Ltd
y ICICI Prudential Asset Management Co. Ltd
y Franklin Templeton Asset Management (India) Pvt. Ltd.
y Birla Sun Life Asset Management Co. Ltd
y Sundaram BNP Paribas Asset Management Co. Ltd.
8/8/2019 Money for Old Hope
http://slidepdf.com/reader/full/money-for-old-hope 5/50
Fund Portfolio Types
8/8/2019 Money for Old Hope
http://slidepdf.com/reader/full/money-for-old-hope 6/50
1.Aggressive portfolio : Mainly would consist of Equity funds
with 75% exposure in equity and 25% in the debt and liquid funds.
This is for a ´risk takingµ investor whose objective is to obtain longterm growth of capital.
2.Moderate portfolio: Is the balanced asset allocation since the
asset composition is divided equally between fixed-income
securities and equities in order to provide a balance of growth and
income. This is for an investor with a medium level of risk
tolerance.
3. Conservative portfolio: Allocates 75% of total portfolio to
lower risk funds such as debt and liquid funds. This is for a ´risk
averseµ investor whose main goal is to protect the principal value of
the portfolio.
8/8/2019 Money for Old Hope
http://slidepdf.com/reader/full/money-for-old-hope 7/50
Types of Funds
8/8/2019 Money for Old Hope
http://slidepdf.com/reader/full/money-for-old-hope 8/50
Two types ² Open end and closed endNo entry load for most of the funds
Exit load 1-2% if redeemed within a year for open end
funds
Subjected to capital gain tax
Open ended funds can be redeemed at any time at isNAV
The net asset value (NAV) of a mutual fund is the value
of the investment company's assets minus its liabilities,
stated on a per-share basis
Total mkt value of all MF holdings - All MF Liabilities
NAV of MF = --------------------------------------------------
No. of MF units or shares
Mutual Funds
Market value of Scheme's Investments +
Receivables + Accrued+ Income + Other
Assets - Accrued Expenses - Payables -
Other Liabilities
8/8/2019 Money for Old Hope
http://slidepdf.com/reader/full/money-for-old-hope 9/50
jIn addition, there are performance incentives for the portfolio managers.
jThe expenses and fees charged by the investment companies decrease an
investor·s return .
Fees and incentives
Expense % of weekly net assets
Fund mangement fees 1.25%
Marketing/Selling Exp. 0.80%
Audit Fees 0.15%
Registrar Fees 0.12%
Trustee Fees 0.11%
Custodian Fees 0.07%
Total Recurring Exp. 2.50%
8/8/2019 Money for Old Hope
http://slidepdf.com/reader/full/money-for-old-hope 10/50
j An exchange traded fund (ETF) is a special type of fund
that invests in a portfolio of stocks or bonds and is designed
to mimic the performance of a specified index.
jThey trade like shares of a traditional (open-end) mutual
fund.
Exchange traded fund
8/8/2019 Money for Old Hope
http://slidepdf.com/reader/full/money-for-old-hope 11/50
j A pension fund is any plan, fund, or program which providesretirement income to employees or results in a deferral of
income by employees.
jClassification: 1. Open and Closed Pension Funds
2.Public and Private Pension Funds
Pension Funds
8/8/2019 Money for Old Hope
http://slidepdf.com/reader/full/money-for-old-hope 12/50
j Value Investing
jRiskless Free Income
jResponsible Investing
Risks:
1. Shortfall Risk
2. Assumption Risk
The investment strategies of pension funds
8/8/2019 Money for Old Hope
http://slidepdf.com/reader/full/money-for-old-hope 13/50
jHedge funds strive for absolute returns.
jThey do not perform relative to some specific benchmark
or index and seek to maximize returns in all market scenarios.
jMost hedge funds are in the form of either a limited
partnership, a limited liability corporation, or an offshore
corporation.
j The manager of the fund receives compensation that is
comprised of two components.
Hedge Funds
8/8/2019 Money for Old Hope
http://slidepdf.com/reader/full/money-for-old-hope 14/50
jThe base fee is typically around 2% of assets, and the manager receives
this fee regardless of performance of the hedge fund.
jThe second component, the incentive fee, is paid based on the actual
returns of the fund.
jSometimes an additional provision allows incentive fees to be paid only
after the fund has produced returns in excess of any negative returns fromthe previous year.
j A ´high watermark provisionµ is sometimes included, which stipulates
that incentive fees are only based on returns above the highest value
achieved over the life of the fund
jSome managers specify a hurdle rate, signifying that they will not charge a
performance fee until the fund's annualized performance exceeds a
benchmark rate, such as T-bill yield, LIBOR or a fixed percentage.
Continued...
8/8/2019 Money for Old Hope
http://slidepdf.com/reader/full/money-for-old-hope 15/50
Suppose 100 mn is Invested
Let us assume Year 1 is a good year, with a 50 percent gain.
The manager receives an incentive allocation of $10 million ( i.e. 20
percent of the $50 million gain for the year), which it leaves
invested in the fund.
The investor holds the remaining $140 million interest in the fund.
Year 2 is an equally good year with another 50 percent gain, and the
fund grows to $225 million ($150 million plus $75 million gain).
An Example...
8/8/2019 Money for Old Hope
http://slidepdf.com/reader/full/money-for-old-hope 16/50
The manager receives an incentive allocation of $14 million ( i.e. 20percent of the investor·s $70 million gain for the year). The
manager also received a $5 million gain on the $10 million
incentive fee allocation that was banked in Year 1. The net result is
that out of $125 million of cumulative profit, the manager received
$29 million, or 23.2 percent of the cumulative gain, while theinvestor received $96 million, or only 76.8 percent of the
cumulative gain. If a down year follows an up year, the annual
banking misfire can be worse.
8/8/2019 Money for Old Hope
http://slidepdf.com/reader/full/money-for-old-hope 17/50
Case 2: Year 2 is a bad year, with a 33 1/3 percent loss. The fund
has returned to its $100 million original value. The
investor·s $140 million interest in the fund decreases in
value to $93.33 million³a $6.67 million loss over the two years. Although the manager·s $10 million interest from
Year 1 decreases in value to $6.67 million, the manager still
has realized positive incentive compensation over the two
years for delivering to the investor a net loss!
8/8/2019 Money for Old Hope
http://slidepdf.com/reader/full/money-for-old-hope 18/50
jIlliquidity: Investing in markets with little liquidity, such as derivatives,
decreases a hedge fund·s trading flexibility.
j Potential for mispricing: Investments in esoteric securities that
infrequently may lead to difficulty in determining true current market
value.
j Counterparty credit risk: A broker-dealer is involved in most
transactions, thereby creating significant counterparty risk to the hedge
fund.
jShort covering: Short selling is a component of many common hedge
fund strategies. Hedge fund managers run the risk that they will have tocover their shorts and repurchase securities at a price higher than where
they originally sold.
Risks associated with hedge funds
8/8/2019 Money for Old Hope
http://slidepdf.com/reader/full/money-for-old-hope 19/50
jMargin calls: Margin calls on an already highly leveraged position canresult in forced selling of assets, possibly at a loss.
j Asymmetrical returns: Some investment strategies used by hedge funds
may have a limited upside potential but unlimited downside potential.
Traditional risk measures, such as standard deviation or value at risk,
do not fully account for this asymmetric return profile.
j Fee structure and incentives: A typical hedge fund fee structure pays
the manager a small fixed fee and then a substantial percentage of gains.
This structure may cause fund managers to take big risks, especially if
past performance is bad and they have ´nothing to lose.µ
8/8/2019 Money for Old Hope
http://slidepdf.com/reader/full/money-for-old-hope 20/50
2010 Top 10 Highest Earning Hedge Fund Managers
Rank Name Firm Name 2009 Earnings
1 David Tepper Appaloosa Management $4 billion
2 George Soros Soros Fund Management $3.3 billion
3 James Simons Renaissance Technologies $2.5 billion
4 John Paulson Paulson & Co. $2.3 billion
5 Steve Cohen SAC Capital Advisors $1.4 billion
6 Carl Icahn Icahn Capital $1.3 billion
7 Edward Lampert ESL Investments $1.3 billion8 Kenneth Griffin Citadel Investment Group $900 million
9 John Arnold Centaurus Advisors $900 million
10 Philip Falcone Harbinger Capital Partners $825 million
8/8/2019 Money for Old Hope
http://slidepdf.com/reader/full/money-for-old-hope 21/50
jThe Sharpe ratio is calculated by subtracting the risk-free rate - such
as that of the 10-year U.S. Treasury bond - from the rate of return for a
portfolio and dividing the result by the standard deviation of the
portfolio returns. The Sharpe ratio formula is:
Sharpe Ratio
8/8/2019 Money for Old Hope
http://slidepdf.com/reader/full/money-for-old-hope 22/50
Average return on Hedge Funds
8/8/2019 Money for Old Hope
http://slidepdf.com/reader/full/money-for-old-hope 23/50
Risk associated with Hedge Funds
8/8/2019 Money for Old Hope
http://slidepdf.com/reader/full/money-for-old-hope 24/50
Comparison of Returns from 1991-2006
8/8/2019 Money for Old Hope
http://slidepdf.com/reader/full/money-for-old-hope 25/50
Comparison of 5 Yrs Return of Various Mutual Fund
5 Years Cat. Avg. Best Fund Worst Fund
Ending 7th September '10 Return Return Return(%pa) (%pa) (%pa)
Equity: Banking 25.18 27.26 23.09
Equity: FMCG 19.21 19.9 18.32
Sensex 18.6 - -S&P CNX Nifty 18.2 - -
Equity: Diversified 18.12 26.68 -1.99Equity: Pharma 16.91 26.76 7.3
Hybrid: Equity-oriented 15.51 23.22 7.71
Equity: Technology 13.72 20.54 10.68
BSE Small Cap 10.94 - -Hybrid: Debt-oriented
10.5517.25 6.38
Debt: Short-term Institution 7.9 8.75 6.36
Debt: Floating Rate Long-ter 7.2 7.41 7.04
Debt: Floating Rate Long-ter 6.79 7.56 5.37
Gilt: Medium & Long-term 6.21 11.87 1.73
8/8/2019 Money for Old Hope
http://slidepdf.com/reader/full/money-for-old-hope 26/50
Funds
PerformancesFact Sheet
Funds
PerformancesFact Sheet
8/8/2019 Money for Old Hope
http://slidepdf.com/reader/full/money-for-old-hope 27/50
SBI Contra FundOption NAV(Rs) AUM
Growth 53.17 3254.30 cr
Dividend 24.39
1 year 3 years 5 years Since
InceptionFund 96.20% 12.36% 32.74% 27.31%
Benchmark 93.08% 8.74% 21.68% 15.30%
Standard
Deviation
Beta R-
Squared
Sharpe
Ratio
Portfolio
Turnover
Total
Expense
Ratio
Ratio 36.54% 0.89 0.97 0.38 1.2 1.86
Date of Inception: 14/07/1999 Fund Manager: Mr. Pankaj Gupta
Total Experience: 6 years,5 Months
8/8/2019 Money for Old Hope
http://slidepdf.com/reader/full/money-for-old-hope 28/50
Actual Returns and Risk
Average Monthly Returns
2005-2006 2006-2007 2007-2008 2008-2009 2009-2010
6.192453 1.040378 2.499483 -2.97263 5.81619
2005-2006 2006-2007 2007-2008 2008-2009 2009-2010
0.7583215 1.0141916 1.0403405 0.9660062 1.0100754
8/8/2019 Money for Old Hope
http://slidepdf.com/reader/full/money-for-old-hope 29/50
Jenson Alpha Modely Risk adjusted performance measure
y Measure involves evaluation of the returns that the fund has
generated vs. the returns actually expected out of the fund given
the level of its systematic risk
y Surplus between the two returns is called Alpha, which measures
the performance of a fund compared with the actual returns over
the period
y Required return of a fund at a given level of risk (Bi) can be
calculated as:Ri = Rf + Bi (Rm - Rf)
y Higher alpha represents superior performance of the fund and vice
versa
8/8/2019 Money for Old Hope
http://slidepdf.com/reader/full/money-for-old-hope 30/50
Fama Modely This model compares the performance, measured in terms of
returns, of a fund with the required return commensurate withthe total risk associated with it
y Measure of the performance of the fund and is called netselectivity
y Net selectivity represents the stock selection skill of the fundmanager, as it is the excess return over and above the returnrequired to compensate for the total risk taken by the fundmanager
y Higher value of which indicates that fund manager has earned
returns well above the return commensurate with the level of risktaken by him
Required return can be calculated as: Ri = Rf + Si/Sm*(Rm - Rf)
8/8/2019 Money for Old Hope
http://slidepdf.com/reader/full/money-for-old-hope 31/50
Fund Managers Stock Selection Abilities
Net Portfolio Return due to selectivity( Fama Index)
2005-2006 2006-2007 2007-2008 2008-2009 2009-2010
1.34 -0.47 0.56 0.24 0.22
Jensen·s Alpha
2005-2006 2006-2007 2007-2008 2008-2009 2009-2010
2.37 -0.41 0.62 0.21 0.31
8/8/2019 Money for Old Hope
http://slidepdf.com/reader/full/money-for-old-hope 32/50
SBI Balanced Fund
Option NAV(Rs) AUM
Growth 46.11 499.17 cr
Dividend 24.74
1 year 3 year 5 years Since
Inception
Fund 70.09% 9.03% 22.61% 18.12%
Benchmark 44.04% 8.24% 11.72% N.A.
Standard
Deviation
Beta R-
squared
Sharpe
Ratio
Portfolio
Turnover
Total
ExpenseRatio
Ratio 29.53% 1.18 0.97 0.29 1.3 2.29
Date of Inception:31/12/1995 Fund Managers:Mr Ritesh-Equity
Mr Sankar chebiyyam-Debt
Total Experience: 7 Years and 10 years
8/8/2019 Money for Old Hope
http://slidepdf.com/reader/full/money-for-old-hope 33/50
Actual Returns and Risk
Average Monthly Returns
2005-2006 2006-2007 2007-2008 2008-2009 2009-2010
4.517 0.749 1.815 -2.545 4.711
2005-2006 2006-2007 2007-2008 2008-2009 2009-2010
0.510 0.770 0.881 0.727 0.784
8/8/2019 Money for Old Hope
http://slidepdf.com/reader/full/money-for-old-hope 34/50
Fund Managers Stock Selection abilities
Net Portfolio Return due to selectivity( Fama Index)
2005-2006 2006-2007 2007-2008 2008-2009 2009-2010
1.098 -0.542 0.096 -0.253 0.301
Jensen·s Alpha
2005-2006 2006-2007 2007-2008 2008-2009 2009-2010
1.788 -0.487 0.131 -0.295 0.363
8/8/2019 Money for Old Hope
http://slidepdf.com/reader/full/money-for-old-hope 35/50
How Fund Managers make money ??
yMutual funds charge fees range from under one percent to well overtwo percent
y Some mutual funds charge investors Entry Load also called a
marketing fee
y Depending on how large these fees are, they do diminish Investor
return
y Some Mutual funds charge exit loads when there is redemption before
maturity or specific time period
8/8/2019 Money for Old Hope
http://slidepdf.com/reader/full/money-for-old-hope 36/50
Continued«..y Sell their funds to third parties such as brokers, advisers,
private banks and saving a lot of marketing expenditure
y Hedge funds charge both a management fee and aperformance incentive fee
y Typically annual fee is typically set at 20 percent of
profits which weed out investors profits
8/8/2019 Money for Old Hope
http://slidepdf.com/reader/full/money-for-old-hope 37/50
Cost to Investors
y
Investors are unwittingly paying billions of pounds a year in fund chargesy Companies need to levy charges to cover their costs, such as wages and
research
y Sometimes, Total Expense Ratio is not mentioned in the fact sheet of AMC
to mislead the investors
y The TER takes into account dealing costs, stamp duty and auditors' fees, as well as the annual management charge
y Trading costs ² the costs of buying and selling shares within the fund. The
more active a manager is in trading the underlying portfolio, the higher these
costs
y Fund managers that levy high TERs argue that it is results that count. However,
the vast majority of funds fail investors with their performance year in year out
8/8/2019 Money for Old Hope
http://slidepdf.com/reader/full/money-for-old-hope 38/50
What is AUM???
y Market value of assets that an investment company manages onbehalf of investors
y Measure of success against the competition and consists of growth/decline due to both capital appreciation/losses and new money inflow/outflow
y Funds under discretionary management, where the client
delegates responsibility to the company
8/8/2019 Money for Old Hope
http://slidepdf.com/reader/full/money-for-old-hope 39/50
Concern for Huge AUM??
y High amounts of money being invested into particular kind of
fund
y Fund starts to resemble the overall market
y Detrimental to the interest of investors, if markets experience a
sudden decline
y Difficult to manage for fund managers
y Investors should monitor the performance of their funds
periodically and may decide to exit a fund if it under-performs for
a considerable length of time and drops down the ratings ladder
8/8/2019 Money for Old Hope
http://slidepdf.com/reader/full/money-for-old-hope 40/50
Active Fund Management Style
y Aim for out performance
y Higher Fees
y
Higher Costsy Stocks selection and timing
8/8/2019 Money for Old Hope
http://slidepdf.com/reader/full/money-for-old-hope 41/50
Passive Fund Management style
y Replicates a chosen Index
y Low Fees
y Low costs
y
Index linked returns
8/8/2019 Money for Old Hope
http://slidepdf.com/reader/full/money-for-old-hope 42/50
Future Trends Shaping Industry
Growth and Profitability
8/8/2019 Money for Old Hope
http://slidepdf.com/reader/full/money-for-old-hope 43/50
Move from accumulation to income andrisk management
For example, in US context:
8/8/2019 Money for Old Hope
http://slidepdf.com/reader/full/money-for-old-hope 44/50
Separation Between Alpha and Beta
8/8/2019 Money for Old Hope
http://slidepdf.com/reader/full/money-for-old-hope 45/50
Increased Role of Marketing and Client Service
Convergence and Evolution of Alternatives
Changing Sources of growth in Retail
8/8/2019 Money for Old Hope
http://slidepdf.com/reader/full/money-for-old-hope 46/50
Long Term Opportunities for Fund ManagementBusiness
y In the developed world, populations are ageing and the
burden of retirement provision is increasingly falling on
the individual
y In the developing world, meanwhile, rapid economicgrowth is creating an immense amount of new wealth
y People will need fund management industry for guiding
their investment decisions
8/8/2019 Money for Old Hope
http://slidepdf.com/reader/full/money-for-old-hope 47/50
Key Management issues for Fund Managers
y Seizing the new opportunities.
y Retooling the investment management process,
reinventing retail distribution and product management capabilities
y Reorienting new business development towardsfuture growth opportunities
y Driving scale to generate operating leverage
8/8/2019 Money for Old Hope
http://slidepdf.com/reader/full/money-for-old-hope 48/50
How Investors Should Select funds??
y Find out whether their objective matches with thescheme
y Select funds As per their Risk capacity and capability
y Fund house they choose Should have an excellent
track recordy It also should be professional and maintain high
transparency in operations
y They should look at the expense ratio of the fund
before investing y Investment should be done by looking at fund
managers stock selection abilities measured by Alpha
8/8/2019 Money for Old Hope
http://slidepdf.com/reader/full/money-for-old-hope 49/50
Benefits of Going With Fund Managers
y Professional Management
y Diversification
y Low Risk
y Return Potential
y Liquidity
y Choice of Schemes
y
Well Regulated
8/8/2019 Money for Old Hope
http://slidepdf.com/reader/full/money-for-old-hope 50/50
Thank You