Churning of funds’ kitty – stirred, not shaken

Equity fund managers have reduced the frequency of buying and selling in mutual fund portfolios for nine straight months, on account of fewer trading opportunities and a persistently dim view of market-people on India. The percentage of securities bought or sold by mutual funds as a proportion of their assets they manage, has been on a steady decline since February.

The average portfolio turnover rate is down from 105.31% in February to 81.62% in November, according to a DNA Money analysis. The sample for the analysis comprises 81 equity schemes for which uninterrupted data is available for the last one year.

K. Ramanathan, chief investment officer at ING Investment Management India, says that a sustained negative view on markets has slowed the churn. “Unless the view changes, there isn’t an intense need for churning. Also, this is not a trading market. It has largely been negative except for brief spurts. This does not leave much room for heightened churning anyway.”

The ‘slowdown’ can be attributed to cautious investors and current portfolio compositions favouring cash, says Vikaas Sachdeva, chief executive officer at Edelweiss Asset Management. “Investors are reluctant to book losses. Also, fund managers are sitting on larger amounts of cash due to market volatility. All this has obviated the need for fund managers to sell and meet redemptions.”

Among the larger equity funds, HDFC Top 200 saw a decline in churn from 23.18% in April to 17.11% in November; the DSP BlackRock Top 100 churn declined from 275% to 219%; and the UTI Dividend Yield Fund from 66.12% to 48.39%.

There has been a decline in the average churn in mutual fund portfolios in ten out of the last 12 months. The only exceptions were the months of December 2010 and February 2011. Both months saw less than a percentage point increase in churn.

On average, the largest monthly decline in churning occurred in October, down 6.73% to 84.57% in absolute terms from 91.3% in September. The second highest monthly decline was in April 2011, down 5.12% to 99.85% from 104.97%.

Inflows into equity schemes have been positive with funds having received net inflows of Rs6,488 crore since the beginning of the calendar year.

The total assets managed by the mutual fund industry rose from Rs6.26 lakh crore at the end of December 2010 to Rs6.81 lakh crore at the end of November 2011, according to data of the Association of Mutual Funds in India.

Meanwhile, trading activity picked up amongst other market participants, according to a Morgan Stanley India research report dated December 21, 2011. The report notes that “after a tough 2010, domestic fund managers received inflows in their equity as well as fixed income funds”.

The year was marked by a spurt in derivative volumes even as cash market turnover declined, note Sheela Rathi, Ridham Desai, Utkarsh Khandelwal and Amruta Pabalkar, the authors of the report. “Trading activity was marked by strong volumes in derivates markets (at record levels), even though the cash turnover fell to a seven-year low, and, compared with percentage of market cap, it was at its lowest level in history…. Market breadth and depth were weak during the year, while hedging activity ascended to a decade high.”

The share of options trading to total derivatives trading climbed to 75% from 68% in 2010 and 52% in 2009.

Traditionally, a slowing frequency in trades is associated with lower costs, and hence considered beneficial for investors. But this may not be true for India this year. “Brokerage costs are quite low in India and have come down in recent times, so the benefit to investors through lowers costs will be minimal,” says Raunak Roongta, an independent finance planner.

Mutual funds have been net buyers by Rs4,047.90 crore for nine months (March-November 2011) and Rs5,979.80 crore in 2011 so far.