Long-term investors have a bull ride

Indian equity markets are dancing to subprime tunes, giving investors sleepless nights. But if you are a mutual fund investor, you might as well take a vacation. In the past five years, 81% of diversified equity funds managed to outperform (give higher) Sensex returns. This is an encouraging statistic, underscoring the need for investors to look at a long-term investment horizon. For short-term investors though, there are lots of grey areas. In fact, there is only bad news, since the extent of outperformance has been widely fluctuating. In 2007, 68% of equity funds have managed to outperform the Sensex. This is an improvement from the 21% level in 2006 and 40% in 2005. A historical study reveals that fund managers have traditionally relied on mid-caps to beat the Sensex. So equity funds gave higher returns than the Sensex whenever mid-cap indices outperformed large-cap indices. Mid-caps, as measured by the S&P CNX Midcap, gave higher returns than the Sensex in the calendar year 2002, 2003 and 2004. And in all these years, the extent of outperformance was high, with upwards of 90%. But subsequently, in 2005 and 2006, the Sensex ended up giving higher returns than mid caps. This led to many equity fund managers, especially those heavy on midcaps, underperforming the Sensex. Only 40% of equity funds managed to beat the Sensex returns in 2005 and 21% in 2006. During 2007, midcaps have managed to give slightly higher returns than the Sensex so far and the extent of outperformance has improved tremendously. Is the fact that equity fund performance is linked to mid-cap performance a cause for concern? Not really for long-term investors. While over the single year periods, there has been greater vacillation in performance, the statistics are encouraging over the long-term periods. For instance, in the past five years, 81% managed to beat the Sensex returns. It is 59% and 58%, respectively, for one and three year periods. Another interesting trend has been that of fund managers finding it relatively easy to beat the Sensex in a bull run than in a bear run. In the past 15 years, there has been four years of 10% plus correction in Sensex values in 1995, 1998, 2000 and 2001. And except during 1998 — when the outperformance was 90% — in all the other years, the outperformance figures were 50% or lesser. With bearish phases existing in the current market, this is a cause of concern for the short-term investor. With the launch of many variants of equity funds, outperformance might become a tad tougher. This is because a mid-cap fund would be benchmarked with a mid-cap index and not Sensex or BSE 200. Similarly, a broad-market fund would benchmark with a broad-market index like BSE 200 and not a large-cap index like Sensex. While there used to be only one equity fund in the past, which invested across market caps, now there would be a greater focus. Expect lot of action ahead for active fund managers in the equity market.

Link Times of india

Asian stocks continue to slip
Asian stocks tumbled to their biggest two-day drop in a year after Australia’s Rams Home Loans Group said it was unable to refinance $5 billion of debt amid a widening credit crunch. South Korea’s Kospi index plunged 6.9%, its largest loss since June 2002. Macquarie Bank, Australia’s biggest securities company that’s lost almost a third of its value in the past four weeks, led a slide in financial stocks. Toyota and Samsung fell after reports showed US home sales dropped to a four-year low and prices declined in a third of the nation’s cities. BHP Billiton, the world’s biggest mining company, slumped as concerns about slower global growth dragged commodities prices lower. "Blood is hitting the streets, everyone seems to be panicking, and there’s reason to panic," said Patrick Chang, who helps manage $4.5 billion at CIMB-Principal Asset Management Bhd in Kuala Lumpur. "There’s been so much blow-up, we don’t know when it’s going to end. Liquidity is drying up.”" The Morgan Stanley Capital International Asia-Pacific Index lost 2.5% to 141.89, the lowest since March and its biggest two-day decline since June 2006. About 10 stocks retreated for each that gained on Thursday as benchmarks slid across the region. Japan’s Nikkei 225 Stock Average dropped 2% to 16,148.49, its lowest close since November. Sony Corp led Japanese exporters lower after the yen strengthened to the highest against the dollar since March. South Korea’s Kospi plunged the most in five years following a one-day holiday on Wednesday when the MSCI Asia index lost 2.5%. The Standard & Poor’s 500 futures were 0.9% lower on Thursday. US stocks fell on Wednesday on speculation that Countrywide Financial, the nation’s biggest mortgage lender, may be forced into bankruptcy. The S&P 500 erased its gains for the year, dropping 1.4%. US treasury secretary Henry Paulson said financial turmoil will "extract a penalty" US growth rates, yet the economy is strong enough to weather problems without falling into recession, the Wall Street Journal reported on Thursday. Rams Home Loans Group said it was unable to refinance $5 billion of short-term US loans because of a "lack of market liquidity" caused by a global credit rout. It plunged 36% to 86.5 Australian cents, 65% lower than the price at its initial offering last month. "It’s a selling panic," said Mark Mobius, who oversees $30 billion at Templeton Asset Management. "We’re seeing a lot of negative news with very few positives." Countrywide may go bankrupt if creditors force the company to sell assets at depressed prices or investors lose confidence in its ability to raise cash, Merrill Lynch said. KKR Financial Holdingssaid it may lose up to $290 million from a drop in the value of mortgage-backed bonds it owns.
link timesofindia