Thursday, July 26, 2012

"Not my fault, everyone else and his uncle's...!"

Here's what Sandesh Kirkire, CEO, Kotak Mutual Fund says defending underperformance of Mutual Funds as an asset class -

"Mutual funds are ultimately alpha players. My estimate is that almost two-thirds of the schemes (by way of assets) would have outperformed their respective benchmarks over the medium to long term. This is not bad when you compare it with the developed economies."

This is more or less the refrain of most Mutual Fund managers.  They blame everything but the quality of their own stock selection or fund management skills.  Even now they are not conceding their investment skills are as bad as any direct equity investor or worse, and blame it on everything else. The investors in their funds remember very well the loud declarations made by them regarding their investment prowess.  But when their Systematic Investment Plans (SIP) succeed only in systematic destruction of investor wealth, they shamelessly resort to semantics as the first line of their defense instead of candidly admitting their incompetence as the reason behind their inability to ringfence their fund portfolios from the vagaries of the market by "highly skilled strategic intervention" they advertised in their promos and commercials, not so long ago - which the lay investor believed and invested.

To me, the real road test for veracity of any fund manager's claim will come when they loudly advertise across media, with the same intensity as on the launch of new fund offerings, asking investors to *exit from their investments* [also cut down on SIP subscription] when markets enter a bubble zone and to *restart SIPs* after the bubble collapse.  But they invariably do the opposite so that they can sell their funds at the highest NAVs to pocket higher commissions based on larger corpus size.

If serious fund management has to happen, AMCs should benchmark fund managers compensation 100% to Alpha returns.  Then it'll be fun to invest because the casualness or the indifference with which they play with OPM (other people's money ) will end and they will be more sensitive to the investor pain before they bullshit over the media...!!!

Wednesday, June 06, 2012

L&T Finance Directors fleece the company

L&T Financial Holdings Ltd., just a three year old company (that had to wind up in its earlier avatar L&T Finance Ltd. because of mismanagement and reckless lending) with an annual turnover of Rs.112 crore seeks shareholders approval to pay its Directors a compensation which is unheard of amongst its peers in the Financial Services Industry.

All this, even as the company has a captive and ready customer base by way of customers of L&T Ltd., the holding company that is into EPC and Capital Goods business.  All that it has to do is to finance the equipment / services purchase by its vendors and sit tight.  No sweat.

For such a cakewalk, the company wants to pay its Chairman Y.M.Deosthalee, a Director on the board of L&T Ltd. a remuneration of close to Rs.7.33 crore and its non-executive Directors 1% of net profits.

IIAS, the proxy advisory company has quite rightly debunked this move, outraged by this incongruous payout, especially at a time when the investors in equity markets have been mauled badly by weak investor sentiment and gross under-performance by companies with sequential dwindling earnings.

This resolution deserves to be torpedoed.  Shareholders, do convey your dissent either through postal ballot or by personal presence at the meeting.  Mr.Deosthalee is nearing his retirement and is in a hurry to boost his kitty on his way out... But should you, the institutional and minority shareholders ensure that...?

Tuesday, May 22, 2012

Heads I win, Tails you lose theory of Mutual Funds

"..India's top asset management companies (AMCs) have continued to remain profitable, nomatter whether mutual fund investors made money or not in the tough market conditions. Rather, top players have posted growth in their profitability during financial year 2011-12..." 
I was suspecting this all along and exactly the reason why I hardly ever invest in mutual funds.  To those who solicited my custom (especially the executives at ICICI and HDFC Mutual Funds whom I had to sadly turn down each time they cold call me) I pop the question "will you charge me even if  my portfolio created by you wilts under water...?"  Their reply has always been in the affirmative and that was something that I could never digest. This spurred me on to quit my job and start my own investment management business  with a spunky slogan "...We wouldn't charge you unless we help make enough for yourself..."   I can proudly claim that I'd been keeping up that promise.
All my clients will swear by that, something that helps me effortlessly wean away clients that got creamed by portfolio managers and mutual funds and sincerely hope they keep going down that one way street so that my business is in tact, ethically miles ahead of them...!!!

Why Rupee weakening isn't helping our IT vendors...

That was the question I got from a client yesterday.

Her question wasn't out of place.  A weak Rupee should help Indian exporters as much as it dents our importers.  But she has been constantly hearing a weak Rupee will worsen India's fiscal deficit since it will go to fatten our oil import bill. And she is worried why this double whammy.

IT vendors like Infosys and TCS have negotiated price increases at a time when Rupee was appreciating. Now the trend has reversed, now it's their clients turn to ask for a wind down. Under normal circumstances, it should cancel each other out but it doesn't since 70% of their revenues come from US and Europe where there is a major social, economic and fiscal crisis.  Also the general weakening of demand is felt more in their major bread-winning vertical i.e. Financial Services.

Another reason is, during low demand situations, companies will hedge their revenues to protect their margins by booking forward covers for their forex exposure.  As a result, our IT vendors would have booked these covers (sold Dollars forward) when the Rupee was Rs.44-46 against the Dollar.  Not many would have expected Rupee to weaken so dramatically (20% in 3 months) and throw a spanner in their works.  Now Rupee is weakened to a low of Rs.55 against the Dollar, they are left to lick their wounds.

Nobody said Life is easy, after all.

Wednesday, May 09, 2012

Escorts merger - sleight of hand...?

Kudos to investor activism in Escorts merger...

Let me elucidate it with an easier example.  Let's say I, you and 48 others own a company -XY Farms Ltd.  Imagine I and you hold 5% shares each and 48 others own the remaining 90%.  Some time later,  to help sell the products of the company, we set up a retail store - XY  Retail Pvt. Ltd -  in a nearby city, using the company funds.  In this case, XY Retail is a subsidiary of XY Farms ( Parent Co. or Holding Co.).  As such, I, you and 48 other shareholders have identical interests in both the companies.

A few years later, I and you feel that our shareholding in XY Farms Ltd. is only 10% put together and worry that if a few shareholders from the minority get together, they can throw us out of the management control using their collective voting power far in excess of 10% that I and you hold.. So the option before us is to buy out some of those shareholders and boost our stake in the company.  But what if nobody wants to sell..?

So we storm our brains and come up with an idea. Since XY Retail is a subsidiary of XY Farms, why keep both companies as distinct entities...?  Let's merge the two and run the business of XY Retail as a division of XY Farms instead of as a separate company, with a separate management.  It helps reduce  many functional overlaps in accounting, inventory, sales etc., that consume capital. 

All corporate actions should be seen in the light of how it helps increase the shareholder value.  Here since XY Retail is 100% owned by XY Farms, the parent company need not `pay' any consideration to merge it back with it. Only regulatory approvals need be obtained and accounting entries passed to validate the transaction.

Here is where Escorts Ltd., tried to play foul.  While it seeks to merge its 100% subsidiary with itself, it wants to allot shares as "consideration" to its subsidiary that will eventually merge with itself and cease to exist. And then it wants to transfer those shares (treasury stock) into some company owned Trust, controlled by Trustees that include CFO of the parent company.  This arrangement is a foul since it leaves out the minority shareholders (who are also part owners of the subsidiary and therefore entitled to the proportionate treasury stock) without any say on how to administer the treasury stock. 

Proxy advisory firm IIAS has called the bluff... Let's hope the institutions vote against this proposal in the interest of upholding shareholder democracy.

Monday, April 16, 2012

...Shibulal, do your own thing...

No sooner Infosys announced its Q4 2011-12 results with a lower guidance, than the market pundits started pummeling it for hoarding up all its cash and not going in for acquiring businesses. I am tempted to ask - What else will they do...?

The problem with stock market / industry analysts is that the so-called free strategic advisory they proffer is nothing but a leaf out of the consultants' manual that is the thinnest ever tome with a two-size-fit-all strategy. First, if they are hired by a diversified firm, the consultants would advise them to merge/consolidate/ integrate. And if the hirer is a single vertical behemoth, they'll say Break-it-down. With just this two options, they get a life, ruining the clients' own. If you guys know a third strategy a consultant has, feel free to write in.

Now they see Infy sitting with a cash pile of Rs.20,500 crore (Roughly $ 4 billion) and they are urging it to acquire businesses. Why wouldn't they ever concede that if a company management was smart enough to pile all that cash up, wouldn't it know when and where to deploy it...? We all know the major acquisitive frenzy unleashed by Wipro with its string-of-pearls strategy got it - to the 4th or 5th place in the pecking order from its 3rd place after TCS and Infy. Like a good hunter, Infosys should wait for a right synergistic acquisition that falls in line with its future growth projections. Sitting on a cash pile is any day better than soaking it up into a bad big-bang deal and going down with it. Infosys CEO S.D.Shibulal is a veteran and I think the decision is better left to him. I am sure Infosys will get its act together, in time...