money for old hope

8/8/2019 Money for Old Hope

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Presented By: Group 3Mohd. Wasi (91091)

Mukesh Goel (91093)Ravi Kant Gupta (91100)

Ritu Rani (91102)Sandeep Agrawal (91104)



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



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.



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.



Fund Portfolio Types



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.



Types of Funds



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



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%



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



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



j Value Investing

jRiskless Free Income

jResponsible Investing

Risks:

1. Shortfall Risk

2. Assumption Risk

The investment strategies of pension funds



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



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...



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...



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.



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!



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



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



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



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



Average return on Hedge Funds



Risk associated with Hedge Funds



Comparison of Returns from 1991-2006



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



Funds

PerformancesFact Sheet

Funds

PerformancesFact Sheet



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



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



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



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)



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



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



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



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



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



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



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



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



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



Active Fund Management Style

y Aim for out performance

y Higher Fees

y

Higher Costsy Stocks selection and timing



Passive Fund Management style

y Replicates a chosen Index

y Low Fees

y Low costs

y

Index linked returns



Future Trends Shaping Industry

Growth and Profitability



Move from accumulation to income andrisk management

For example, in US context:



Separation Between Alpha and Beta



Increased Role of Marketing and Client Service

Convergence and Evolution of Alternatives

Changing Sources of growth in Retail



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



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



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



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



Thank You

money for old hope

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