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Post-Lehman Bros Crash, Gains Return

Equity diversified funds have gained over the last year

Fund It has been a year since the spectacular collapse of investment bank Lehman Brothers under a huge pile of debt totalling some $600 billion. The effect on the global economy and the stock markets was one of total, and wanton, destruction.

A year down the line, surprisingly, all the pain that has been undergone by individuals in particular and corporate entities in general, has been pushed into the background by the rapidly rising economic and market graphs in most countries, especially in Asia, proving perhaps that the crash had a limited life, unlike the prolonged Great Depression seen in the 1930s.

The US officially entered recession in 2007, but by all accounts India got to feel its effects much later, mostly courtesy its lesser dependence on exports as well as its highly regulated banking and financial system not having exposed itself to the kind of high-risk instruments dreamed up by the US investment banks.

In India, the global financial crisis was striking the stock markets down from their all-time highs from early 2008. By mid-September they had fallen back to their November 2005 levels of just above 8,000 points.

Battling the Breakdown

What shortened the recession’s longevity were the lessons learnt by central bankers through history over a period of more than half-a-century. The various ameliorating steps taken by them meant that they were better able to mobilize their resources and field them in a manner to cut the deleterious effects as much as possible. In effect, what the strategy consisted of was to throw as much money as possible at the crisis and ensure that the credit markets did not freeze up. The US, European nations, India and China announced stimulus packages that tallied into trillions of dollars to virtually guarantee a return to business as usual.

With global economies awash in liquidity, it did not take too long for positive sentiment to return in the minds of everybody concerned with the financial world, especially as it became clear that all governments, including in India, would ensure that no major corporate collapses would be allowed. And as can be gauged from the performance of markets, whether it is the retail investor or the trader, everyone is back to taking risk. The effect shows on stock markets, where performances over the last 6 months or so have ensured that much lost ground has been recovered. In effect, the recession talk has given way to talk about recovery.

Faltering Funds’ Fightback

The mutual fund industry in India suffered a debilitating blow as a result of the global financial collapse too, with returns plummeting across the board. As Indian markets buckled in synch with the US markets, investors in mutual funds panicked and redemptions hit the roof -- debt funds, especially short-term funds, were the ones to suffer the worst on account of heavy redemptions (debt funds invest in fixed-income securities like corporate bonds, government bonds, debentures, commercial paper and certificates of deposits). They make up some three-fourths of the total assets of the MF industry, tallying up to Rs 5.5 trillion. Redemptions in equity were nowhere near that.

The industry found itself unable to cope with the crisis as it was not able to source enough money to pay back investors. Many funds were threatened with collapse and it was only the line of credit offered by the Government of India that saved them.

Among the various steps taken by the MF industry to escape the worst-case scenario was to hoard cash. Another one was that they shunned stocks that could prove to be a noose around their necks and these mostly fell in the small- and mid-cap range and they also moved out of sectors that were showing too big a weakness like realty. Besides there was a mass-scale migration by funds towards safety and that saw FMCG stocks come to the forefront.

The save-yourself features also included putting safety of the money at the forefront by the industry as a whole, followed by ensuring there was always copious amount of liquidity available at short notice and only thereafter were fund managers willing to look at returns.

While the strategy paid off for the industry in keeping its collective head above the rapidly rising waters, yet it caught them napping too. When markets started virtually levitating starting March 9, 2009, the industry was caught with too much money in cash and less of it invested. As a result, most of the gains that they could have booked early in the rally were lost to them. By the time they reduced their cash holdings, the initial, and the best part, of the rally was already over. Nevertheless, the strategy still paid off. Surprisingly, much of the MF industry has recovered and this is evident in the returns generated by many funds over the 1-year period (since the collapse of Lehman Bros).

And these gains are nothing to sneeze at.

Out of a universe of 185 diversified equity (open-end) funds, the best performer over the year has been ICICI Prudential Discovery, with a 40.66 per cent return, which is closely followed by Birla Sun Life Dividend Yield Plus (40.37%), and others too were not far behind (check table).

In fact, there are just 13 funds that have generated negative returns, while all the others are in positive terrain by a large margin. There are 74 funds that have generated returns in excess of 20 per cent, while some 68 funds have generated returns between 10 per cent to 20 per cent. The true perspective of the gains is evident when 14 funds from the total can be subtracted as they are not yet 1 year old (they did not exist at the time of Lehman collapse).

 

Performers and Non-Performers
Fund Name    3 Mth    6 Mth    1 Yr    3 Yr
Top Performers                
ICICI Prudential Discovery   29.74   133.60   40.66   10.55
Birla Sun Life Dividend Yield Plus   17.33   83.27   40.37   15.33
Reliance NRI Equity   10.08   97.28   38.58   13.04
UTI Opportunities   9.03   84.78   37.76   16.33
Taurus Infrastructure   8.05   154.12   33.80   -
Sundaram BNP Paribas S.M.I.L.E. Reg   18.78   134.81   33.03   18.64
Sahara Infrastructure Fixed Pricing   7.31   94.30   32.98   18.73
Religare Contra   18.91   101.67   32.70   -
Mirae Asset India Opportunities Regular   13.16   106.78   31.16   -
Canara Robeco Equity Diversified   11.43   102.19   30.73   17.07
Worst Performers                
JM Contra   4.28   74.44   -41.78   -
JM Small & Mid-Cap Reg   7.21   123.29   -39.25   -
JM HI FI   -2.72   40.11   -38.71   -17.32
JM Emerging Leaders   14.29   139.79   -30.35   -11.68
Taurus Discovery   4.86   103.78   -22.79   -1.84
JM Basic   5.31   142.11   -16.57   3.43
Fortis Opportunities   7.62   65.90   -14.96   -0.52
Fortis Future Leaders   11.92   93.60   -13.27   -7.14
DBS Chola Global Advantage   3.78   76.83   -6.88   -8.55
JP Morgan India Smaller Companies   12.60   105.15   -6.53   -
All returns as on September 14, 2009
 

Conclusion

While investors may not have totally regained the money they had lost during the great fall, yet today the sentiment is positive and, more importantly, it is backed up by better production and other economic numbers across the world and that should translate well in stock markets and other related investments.

And Lehman Brothers? Perhaps, a better regulated investment world, one that we are moving towards now, could not have been possible except through a high profile crash.