~ .. .., .~.. ~ .~.~ .~ .~.~... ~ .~ .~ . .., .~ .~ . .., .~ .~ i .~ I• I I I I I I - I I , 8 123 rd Meeting of the I , FINANCE INVESTMENT AND AUDIT I EMPLOYEES' PROVIDENT FUND ORGANISATION .NEW DELHI ..····-COMMITTEE· [A SUB- COMM1'l'TEF; OF TIlE CENTRAL BOARD, EMPLOYEES' PROVIDENT FUNDI On ,.I 6.,; , R 18.01.2016 at 11:00 A.M. ~,,; j -~, ~;i I 7;. VENUE: j Conference Hall, • 3*id, Floor, EPFO (Head Office), ~ Bhavishya Nidhi Bhawan, i 14, Bhikaljl Cama Place, f! NEW DELHI - 110066. I I •
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.~ EMPLOYEES' PROVIDENT FUND ORGANISATION …...EMPLOYEES'PROVIDENT FUND ORGANISATION AGENDA BOOK 123R1 Meeting of the Finance Investment and Audit Committee, Central Board, EPF. Date:
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4. Relaxation for extended CBlO borrowing up to 30 days on case 9-10
to case basiS by Chairman, FIAC/CPFC subject to ratificationby the Board.
5. Selection of Mutual Fund ETF manufacturer fot investment of 11EPFOs investment In ETF.
6. CBLO borrowing transactions by the Portfolio Managers during 12-19the period 21.11.2015 to 31.12.2015.
7. continuation of Mis Chandabhoy & Jassobhoy as External 20-23Concurrent Auditor (ECA).
8. Rate of Interest (ROI) to be aeclited to EPFMembers' To beplaced
Accounts for the year 2015-16 on the Table
9. Any other Item (s) with the pennlssion of the Chair
123rd Meeting of FIAC 18,01.2016
Item No, 1: Confirmation of the Minutes of 122nd Meeting ofthe Finance Investment and Audit Committee heldon 09.12.2015 at EPFO,Headquarter, New Delhi.
Minutes of 122ndFinance Investment and Audit Committee'
(FIAC) meeting held on 09.12.2015 was circulated vide letter No.
Invest.1/(122~ Mtg.)FIAC/2015/19670 dated 28.12.2015. Copy of the
minutes is enclosed as Annexure -'A' of this Item.
Minutes may be taken as confirmed.
"
Telephone: 26178450
R J. '/1)::'X v , C· .: t.1'1· - r ,l~~ (-!.-:..------ ",....._._._-
Fax No: 26194349
Cfi~'Cutt 31"\q fMit :8"10"Employees' Provident Fund Organisation
(~qc( ~ Ji;mpr, ~lR1IiR) ,(Ministry of Labour a EmpIovrrient, Govt. Of India)
"1i\4Ia:q I Head Offtc:e .IIbtytsbyIIIIdbl BbawaD,1HhIJqd1 Cam' "'!ICI, Newp.IbI:l100§§
2. 8 nEe
No. Invest.I/(122nd Mt9.)/FIAc/201~!10
To
Date: 28.12.2015
All Members,Flnan.ce· Investment & Audit Committee,Central Board of Trustees, Employees' Provident Fund•
•
Sub: Minutes of 122nd Meeting of the Finance Investment & Audit Committee (FIAe),CBT,EPF held on 09.!~~2Q..1~C!tEefO~Head-0fflce,..New-Delhi-Reg~·-· - ...---- ...---...
_ ...----_. __ . ---.-.--.--~.--------'--.-
Sir,
Minutes of 122nd Meeting of the Finance Investment & Audit Cor;nmittee held on .
09.12.2015 approved by the Chairperson are enclosed herewith for your kind perusal andnecessary action please.
End:· As above
Yours faithfully,
\\....J~\'I'\\<(VI~~[~~rfwlL)
R.P.F.C·U(IMC)/Unk R.p.F.c.-n (Invest.)
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CORY forwitded fOr Information and necaary action toi-
1. P.S. to Central Provident Fund eommlssloner, EPFOHead OffIce.2. PS. tqFA & CAd, E~pQ Heac.otftce.3. ~I.C.P.F.C -I (IMC~EPFOHead Office.4. Regional ProvIdent Fund Comrritsstoner~II (Conference), EPFOHead Office.
5. Regional provtdent Fund Commissioner-II (IMC),EPFOHead Omce.,
Minutes of the 122nd Meeting of the Finance Investment & Audit
Committee (FIAC) held on 09-12-2015
1. The 122nd Meeting of Finance Investment & Audit Committee was held on 09-12-
2015 from 02.30 P.M, onwards in the Conference Hall, 3rd Floor, EPFO, Head Office,
New Delhi.
2. 'The following members/representatives were present in the meeting.'
1. Sh. K.K. Jalan Chairmen, FIAC, Central Board and Central Provident Fund
Commissioner(
2. Sh. Heera Lal Samariya Additional Secretary (L&E), Ministry of Labour &, , .Employment, Govt. ofIndia,
3. Sh, Sudhir Shyam Director, Deptt. of Financial Services, Ministry of Finance, as
representative of Joint Secretary, MoF, Govt. of India;. as.
Domain Expert.
4. Sh. Balasubrahmanyam Member, Central Board. (Employers' Representative)
.Kamarsu - . - ..
5. Sh. J. P. Chowdhary Member, Central Board, (Employers' Representative)
6. Sh. Pawan Kumar As representative of Sh. Prabhakar J. Banasure, Member,
Central Board, (Employees' Representative)
The following members could not attend the meeting:
1. Dr. G. Sanjeeva Reddy Member, Central Board, (Employees' Representative)
2. Ms. Meenakshi Gupta Joint Secretary & Financial Advisor, Ministry of Labour &
EmploymentJ
In addition to the above, Shri Sanjay Kumar, FA & CAO, EPFO and Convener was
also present during the meeting.
3. The Chairman welcomed all the members and officers present in the meeting.
Thereupon the agenda were taken up.
~.. '.1.-)~-• 5••Item No.1: Confirmation of the Minutes of 12lst Meeting of the Finance Investment
& Audit Committee held on 16-10-2015.
The minutes of 121st Meeting of the Finance Investment & Audit Committee
held on 16-10-2015 were confirmed.
Item No.2: Action taken report on the recommendation of the 12111Meeting ofFinance Investment & Audit Committee (FIAC) held on 16-10-2015.
The action taken report as placed was taken note of by the Committee.
Item No.3: Amendment in terms of Agreement of Portfolio Management ServiceAgreement entered with Portfolio Managers.
FlAC deliberated upon .the issue. It was felt that the restrictions sought to be
imposed on transactions by the Fund Ma nagers with related party should not
be left totally uncontrolled. The Committee felt that changing the terms of
agreement in one go should not be the approach. As FA&CAO listed the
difficulties, it was decided that the proposed transactions (as proposed by FA)
- be allowed as were being allowed earlier.
The Committee further decided that the working of the investment with the
amended clause will be observed for some time and it shall be reviewed within
next few months in order to decide if this provision requires any further
amendment to make it practical in the present COntextof the market.
Item No.4: Accounting policy and method of Accounting for equity & relatedInvestment.
After detailed discussion, the accounting policy and method of accounting for
equity and related investment was approved.
Item No.5: CBLO borrowing traasactions by the Portlolio Managers during theperiod 19.09.2015 to 20.11.2015.
The committee took note of the agenda.
\ .
·... " ,.~'-.'•.. -.•
Item No.6: Agenda Item on one time ex-post facto sanction of FIAC for continuingCBLO borrowing- Regarding HSBC case.
The Committee took note of the facts presented in the Agenda item. FA
pointed out that the permission may be given for borrowing upto 30 days. It
was felt that a separate agenda may be brought for increasing the tenure of
borrowing from 15 days to 30 days.
Item No.7: Revised Estimates for the year 1015-16 and Budget Estimates for the year1016-17 for EPFO and the schemes administered by EPFO.
The agenda was approved by the committee with the following remarks anddirections:
i) On the receipt side, the Committee observed that the forecast/estimatesfor contribution received in 2016-17 are on the lower side and it shouldbe raised to minimum 10% of the RE of 20 15-16.
ii) The entire contribution to the Gratuity and the Pension fund of the staffand officers ofEPFO should be charged as a one time in expenditure in
The Agenda on the investment in ETFwas discusse.d and it was furtherdecided that the investment in ETF was further to be reviewed. For this'purpose, eRlSIL, NSE & BSE will be requested to make a .separate expertpresentation in the next meeting of FlAC. The experts in this meeting shall berequested to focus their presentation on the following broad points:
i) Relevance of investment in equity by Pension Fund.ii) Security of the investment money in the Pension Fund.iii) The periodicity of review of the decisions of investment in equity.iv) The ideal size of fresh accretions that should be invested in equity
considering the AUM to EPFO and the equity market of India.v) The right mix of the products among the equity and related investment
for investment by EPFO at present and in future.
The meeting ended with a vote of thanks to the chair
\ ; ..i..J- ••
::r123rd Meeting of FIAC 18.01.2016.
Item No 2: Action Taken Statement on the minutes of 122ndmeeting of theFinance Investment and Audit Committee (FIAC) held on09.12.2015.
SrNo.
(Action Complete)
Decisions/Directions of FIe , Action Taken
1.
Amendment In terms of Agreement of PortfolioManagement Service Agreement entered withPortfolio Managers.
,FIAC deliberated upon the Issue, It was felt that therestrictIOnssought to be imposed on transaction by theFund Manager with related party should not be left: totallyuncontrolled. The Committee felt that changing the terms.of agreement In one go should not be approach. AsFA&.CAOlisted the difficulties, It was decided that theproposed transactions (as proposed by FA) be allowed aswere being allowed·earller.
The Committee further decided that the working of theInvestment with the amended clause will be observed forsome time and it shall be reviewed within next few monthsin order to decide if this provision requires any furtheramendment to make It practical In the present context ofthe market.
Decisionhas been Communicated toall Portfolio Managers.
(Item no. 3 of 1.22'" RAc.)
Accounting policy and method of Accounting forequity. related Investment. . Approved Accounting policy has
been :E:irculatedto all- exempted-establishments.2. After detailed diSCUssion,the accounting policy and
method of accounting for equity and relatedinvestment was approved.
(Item no. 4 of 1.zrt RAc.)Process of operatlonalization ofsaid accounting policy has beeninitiated
3.CBLO borrowing transactions by the PortfolioManagers during 19.09.2015 to 20.11.2015. The Item was for Information of the
Committee. Accordingly, no furtheraction was required.The Committee took note of the agenda.
(Item no. 5 of 122nd FIAC)
Agenda item on one time ex-post facto sanction ofFIAC for continuing CBLO borrowing- Regarding An agenda'on the matter is beingHSBC case. placed in this Meeting.The Committee took· note of the facts presented in the
4. Agenda Item. FA pointed out that the permission may begiven for borrowing upto 30 days. It was felt that aseparate agenda Item be brought for Increasing the tenureof borrowing from 15·days to 30 days.
(Item no. 6 of 122nd FIAC)
••The Agenda on the investment in mwas discussed and itwas further decided that the investment in ETF was furtherto be reviewed. For this purpose, CRISIl, NSE &. SSE will berequested to make a separate expert presentation In thenext meeting of F1AC.The experts in this meeting shall berequested to focus their presentation on the following broadpoints:
6. (I) Relevance of investment In equity by Pension Fund.(II) Security of the Investment money In the Pension Fund.(iii) The periodicity of review of the decisions of investment
in eqUity.(iv) The ideal size of fresh accretions that should be
Invested in equity considering the AUM to EPFO andthe equity market of India.
(v) The right mix of the products among. the equity andrelated investment for investment by EPFO at presentand in future.
(Item no. 8 of 122nc1 FIAC)
Revised- -Estimates for the year 2015·16 and The same has been noted forBudget Estimates for the year 2016·17 for EPFO compliance.and the schemes administered by EPFO.
(Item no. 7 of 122nd FIAC)
Update of Investment In Exchange Traded Fund(ETF). As decided, .presentations are
being made in this Meeting.
9
•ITEM No.4: Relaxation for extended CBlO borrowing up to 30 days on case to
case basis by' Chairman, FIACICPFCsubject to ratification by theBoard.
Pursuant to the recommendation of CBT in Its 204th Meeting held on26.08.2014, the Ministry of Labour & Employment vide its letter no. G-20025/1/2014-55-11 dated 12thMay, 2015 approved borrowing of funds from CBLOfor participation in Primary Auctions of Government Securities and CorporateBonds. Accordingly, the direction of Govt. on borrowing of funds from CBLO wascommunicated to all Portfolio Manaf}ers, that Inter-alia mentioned followingconditions:
a) No borrowing will be done for more than 15days.b) Prior to entering into such transaction, the Portfolio Managers shall intimate
through emeit to Investment Monitoring Cell (IMC), at EPFOHead Office thedetails of proposed borrowing to be made and the matching purchase ofsecurity. The proposal should also contain the expected profit/gains from thetransaction.
c) The Portfolio Managers shall report full outcome of the transaction to the IMCafter the borrowing is dosed.
d) The IMC shall compile all such transactions and p/~~~ tb~__s;Jmebefore EIAC---,n 7fSnexflmmedTatelY fOiiowing-meeiing~----- .e) The outcome shall also be placed before the Board for Information in next
following meeting.
2. With reference to the above, the minutes of 122fK1Meeting of RnanceInvestment & Audit Committee (FIAC) held on 9-12-2015 (placed as Annexure'A') on agenda of "One time -ex-post facto sanction of FlAC for continuing CBLOborrowing -regarding HSBC case" may be referred wherein the decision on thesame has been recorded as under:
"The Committee took note of the facts presented in the Agenda item. FA pOintedout that the permIssion maybe given for borrowing upto 30 days. It was felt that aseparate agenda may be brought for Increasing the tenure of borrowing from 15days to 30 days".
3. When the agenda for 15days was put up, at that.tlme itself It was suggested.that borrowing should be allowed for 30 days. However, It was Initially agreed thatwe should allow borrowing for 15days. It needs to be noted that EPFOgets fundsonly during aperiod of approximately 5 days and rest of the 25 days, EPFOremains
'1:\I !./, •short of money. Borrowing was allowed to take care of a good opportunity comingfor investment during these 25 days. Therefore, it is necessary that borrowing forinvestment be open for 30 days instead of 15 days. As we have seen in somecircumstances, the borrowing Is required for more than 15days.
4. One such case which came on 31st December'was that of Yes Bank whereborrowing became necessary for more than 15 days to catch opportunity ofInvestment for YesBank Basel 111Tier 11bonds issue having maturity of 10 years @8.90% p.a. As it was felt that proposal may not be ~vai/able later on, accordingly,Investment was made for 1500 crores where the borrowing was required for 18days instead of 15days.
5. Accordingly, RAC is required to take a dedsion to increase borrowing periodfrom 15 days to 30 days and make ex-post facto approval for borrowing forapproximately 18days instead of 15days.
Proposal: The proposals' at Para '5' Is placed for approval and recommending theproposal of extending the duration to CBT.
II•Item No.5: Selection of Mutual Fund ElF manufacturer for investment of EPFO!i
investment in ElF. '
1. The Rnance Investment &. Audit Committee (RAe) in its 120th Meeting held on 23rdJune, 2015 recommended' investments of EPFO corpus in 581 manufactured ETF forthis current year!.e. 2015-2016.
2. The Hon'ble Chairman, CBT EPT had approved the recommendations of RAC on29.07.2015.
3. Subsequently, the Board in its 208th Meeting held on 16th September, 2015 approvedby FlAC proposal also ratified the fees charged by SBI Mutual Fund for its ETF asnegotiated by the Sub-Committee constituted by RAC which is @0.07% per annum onnet asset.
4. Investment in ETF manufactured by 5BI Mutual Fund was started w.eJ 06th Aug~st,2015.
5. The tenure of appointment of S8I Mutual Fund as manufacture of ETF for investmentsby EPFO is ending on 31st March, 2016. Mutual Funds as ETF manufacture have to beappointed a fresh.
6. Accordingly, it is proposed to constitute a sub-Committee for Selection of Mutual Fund- EfF manufacturer for investment of-EPFOsinvestment in moThe Terms of reference---·.of the proposed Committee may be as follows:
a) To prepare and approve Request for Proposal (RFP) document for Selection ofMutUal Fund ETF manufacturer for investment of EPFOsInvestment in ETF.
b) To undertake the entire process of evaluation of RFP, technical bids, finandal bidsetc. and select a Mutual Fund ETF manufacturer for investment of EPFOsinvestment In ETF.
c) To recommend the selected entity to the RAqCBT.
7. Since the entire process of selection of Mutual Fund ETF manufacturer for investmentof EPFOs investment in ETF may take some time beyond 31st March, 2016, it Isproposed to extend the tenure of SBl Mutual fund for another three month~ l.e. upto3d" June, 2016 on the same fees i.e. @ 0.070/0 per annum.
The proposal contained In Palil 6and Para 7al'tJplaced before the Committee forapprovaL
12
Item No.6: CBlO borrowing transactions by the PortfolioManagers during the period 21.11.2015 to.31.12.2015.
Pursuant to the recommendation of CBT in its 204th Meeting held on26.08.2014, the Ministry of Labour & Employment vide its letter no. G-20025/1/2014-55-11 dated 1~ May, 2015 approved borrowing of funds from CBLOfor participation in Primary Auctions of Government. Securities and CorporateBonds. Accordingly, the direction of Govt. on borrowing of" funds from CBLO wascommunicated to all P~rtfolio Managers, that inter-alia mentioned followingconditions:
a) No borrowing will be done for more than 15days.b) Prior to entering Into such transaction, the Portfolio Managers shall Intimate
through email to Investment Monitoring Cell (IMC), at EPFO Hea,d Office thedetails of proposed borrowing to be made and the matching purchase ofsecurity. The proposal should also contain the expected profit/gains from thetransaction.
c) The Portfolio Managers shall report full outcome of the transaction to the IMCafter the borrowing is closed.
d) The IMC shall compile all such transactions and place the same before FIACin its next immediately following meeting.
e) The- outcome shall also be placed- before the Board for information In next - -fbllowing meeting.
2. The information of the CBLO borrowing transactions till 20.11.2015 done bythe Portfolio Managers had already been placed in 12~ Meeting of the FIAC heldon 09.1.2.201.5.
3. The CBLO borrowing transaction for the period 21.11.2015 to 31.12.2015 madein respect of following investments: .
11. Various Banks (HDFC Bank, Bank of India, Canara Bank,. lOBI Bank, StateBank of Mysore, Yes Bank,. State Bank of Hydeiabad, Allahabad Bank, SBIBasel 111Tier II Bonds)
4. The following ~re the details (Jf profit made in the period of investment onborrowed fund:
•(A) rcrcr Securities Primary Dealership Ltd
SI.No. .Entities/lssue Transaction Range of CBlO No. YTM Range Net Gains ofrs Date borrowing of (Ann) of Rate EPFOin Rs.
Net Gains of EPFO during the above said period.(A+B+C+D+E)= Rs. 1,01,03,146.61/-
The item is placed befol'e the FIAC for information. The same shallalso be placed in the next CSTmeeting for information.
Item No.7: Continuation of MIs Chanda bhoy & Jassoobhoy as External Concurrent Auditor CECA}
1. As per the decision taken in 196th meeting of Central Board, EPF held on 20.07.2011,MIs Chandabhoy & Jassoobhoy was appointed as External Concurrent Auditor (ECA)for conducting Audit of the Fund of EPFO managed by the Portfolio Manager.
2. Central Board, EPF in its 205th meeting held on 19.12.2014 has approved theextension of the period of appointment of MIs Chandabhoy & Jassoobhoy as ECA onnomination basis till October 2016 on the earlier terms and conditions.
3. As per the decision taken in 207th meeting of Central Board, EPF held on 31.03.2015,UTI Asset Management Company Ltd. was appointed as 5th Portfolio Manager witheffect from 01.07.2015.
4. As per the terms and conditions of appointment of ECA, following clause I sub-Clause of Chapter 2 of RFP i.e. Duties and Responsibilities of ExternalConcurrent Auditor (ECA)' are as below -
2.1 The ECA while conducting Audit of the Fund of EPFO managed by the Fund Managers,must:
2.1. J Ensure that the audit is to be conducted by a team consisting of one leader and atleast two staff personnel. The leader of the team should be a qualified charteredaccountant with a least three years' experience in the field of Portfolio Audit. The auditshould be carried out under direct supervision of a Partner of the. chartered accountantfirm if the leader of the Team is not a partner of the Chartered Accountam firm.
2.1.2 Ensure that they are not engaged/or audit ojthe samejund manager(s) ofEPFOfor any purpose other than the terms of reference contained In the RFP.
2.1.3 Ensure to the best possible extent, that the team leader appointed to conduct theaudit should continue In his role till the completion of the assignment. For any reason, ifthere is a change in the team leader appainted 10 conduct the audit, the same should beintimated to the EPFO immediately. (Annexure A)
S. However,MIs Chandabhoy & Jassoobhoy has informed that they are the auditors of the UTI PortfolioManagement Service for.past several years i.e. befate their appointment as Concurrent Auditors of.EPFO. (Annexure B)
6. If the sub-clauses 2.1.1,2.1.2 & 2.1.3 are read in coherence with the main clause 2.1 then it appearsthat 'they' in the sub-clause 2.1.2 refers to the team/individual employees/Chartered Accountantsmentioned in 2.1.1.
7. MIs Chandabhoy& Jassoobhoy, ECA has submitted thrOughemail the list of persons involved in theaudit of EPFO and UTI AMC res~ively, (Anllexure C).
8. In consideration of the above, FIAC may recommend to the Central Boiardthat .MlsChandabhoy&Jassoobhoy, ECA may continue the audit of EPFO accounts on the earlier tenns and conditions tillOctober2016 as the persons involved in the audit of EPFO accounts and UTI accounts are different.
The proposal at para 8 is before the Committee for consideration and approval
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2.Dutlesand Responsibilities of the ExternalConcurrent Auditor (ECA)~----------------------------
2.1. The EeA, while conducting audit of the fund of EPFO managed by thefund managers, must:2.1.1. Ensure that the audit is to be conducted by a team consisting of one
leader and at least two staff personnel. The leader of the leamshould be a qualified chartered accountant with atleast three yearsexperience in the field of Portfolio Audit. The audit should becarried out under direct supervision of a Partner of the charteredaccountant firm if the leader of the Team is not (\ Partner of theChartered Accountant firm.
2.1.2. Ensure that they are not engaged for audit of the same fundmanager(s) of EPFO for any purpose other than the terms ofreference contained in this RFP.
2.1.3 Ensure, to the best possible extent, that the team leader appointedto conduct the audit should continue in his role tiB the completionof the assignment. For any reason, if there is a change in the teamleader __,,-pp<)_int~~__t9 _conduct. the audit, the same- shoul+vbeintimated to EPFO immediately.
Mr. Abhay RanjanRegional PF Commissioner - I (IMC)Employees' Provident Fund OrganisationBhavishya Nidhi Bhavan,14 - Bhikaji Cama Place,New Delhi - 110066.
Dear Sir,
We refer to your letter No. Invest.l/ 1 (35)1 02/ ECA/ 2011/ 5691\ dated ·)'uIY 2, 2015,wherein you have informed us that Central Ooard of Trustees, Employees Provident FundOrganisation has apPointed a new (fifth) PortFolio Manager, UTl Assets ManagementCompany Limited aln9with previous other four 'Portfolio Managers to manage theinvestment corpus of CST, EPF.
tn this regard, we would like to state that we are the auditors of the .UTIPortf.OJio.--M~Jl~ge_menLServices for past several years re: before our appointment as concurrentauditors of EPFO. However Clause 2.1.2 of RFP (Duties and Responsibilities of ExternalConcurrent Auditor (teA), states to 'Ensure that they (ECA) are not engaged for audit ofthe same fund manager (s) of EPFQ for any purpose other than the terms of referencecontained in this RFP'.
This intimation is to comply with terms and conditions of our appointment as ECA..Further we wish to inform you that audit team and partner involved for both theassignments are different. We assure you that in future also we shall assign differentpartners for finalising UTI PMS certification work and EPFO audit to ensure that there isno conflict of interest.
Hope this meets with your requirements and in case you require clarification, please feelfree to contact us.
With reference to your trail mail, we are forwarding herewith details of the audit tcarw ,>,rtnPfS deployed forrespective assignments ofEPFO and MIs UTIAMC Pvt. ltd. (Portfolio Manager for Err''''
for EmUi'l' I Pro •.•. .•. Fund Ore:anisation IEPF01:-~ .. c·
S. No. Name 8&Designation1. Mr. Ambesh A..Dave (Partner) --2. Ms. Dhwani Gala (CA), now Partner
Indices as anInformation Tool forPortfolio Diversification andAsset Allocation
Mahavir KaswaJanuary 2016
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.~ ASIA INDEX Pvt. Ltd. For Financial Professionals. Not for Public Distribution. PROPRIETARY.~ •. es!! and S6P 0.11Vent"". Permission to reprint or distribute any content from this presentation requires the written approval of S&P Dow Jones Indices. 4
•.•.......... ---------------~-----~.,.ASSET CLASS
Potential Asset Classes:• Equities (stocks): Buy shares of a company/business. An equity investment can be
spread across - region, size, sector, strategy, theme for example ...• Fixed Income (debt): Lending money to a company or government for interest.• Cash and cash equivalents: The money in a savings account or hidden under a
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resource commodities and precious metals like gold .
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Debt: In a debt investment, typically an investor lends money to an individual, a company or a government atpredetermined interest rate/coupon. The interest rate/coupon may be fixed or floating. The investor tymcally -
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Equity: In an equity investment, the investor typically purchase shares of company in anticipation of capitalgains and/or dividend income. Equity investments are often characterized as high risk-high return and mayalso act as a hedge against inflation due to the potential for relatively higher returns over longerterm.The investor typically -
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• Diversification is a widely known investment strategy that is intended to helpmitigate the risk associated with unpredictability of markets. It tends to beespecially important during times of increased uncertainty.
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" ~;X;M+"""i"'~ ~ "IF" " " " " " " fP 1P 1Ft! Tlfi'f-~ - - - ••- - - - ~• • '.. n • - - • II II . IT n n n rr n nTn~:1rJL
•.•............... ---.-------~---~-..,••~ ...............•"'-----BACK·TESTED INDEX PERFORMANCE: DEBT AND,EQUITY
-s&P BSEIndia 10 Year Sovereign Bond Index -S&P BSESENSEX(TR)
• We will discuss various asset mix strategies that uses equity and debt in different proportion.
• We use the S&P SSE SENSEXIndex (TR) to represent the 'equity' piece and the S&P BSE India
10 year Sovereign Bond Index to represent the 'debt' piece.
Source: Asia Index Pvt. Ltd.; Data since December 31, 2001 up to December 31, 2015; Past performance is no guarantee of future results. Charts are provided for Illustrative purposes. Pastperformance is no guarantee of future results. These charts may reflect hypothetical historical performance. Please see the Performance Disclosure at the end of this document for more Information
IJut ind8~retums..jtJCludina hvDOtheticalperformance. F F- . I P f - IN' P b' . PROP IEA:5IA INUtJCJ-1Vt~ L"tU.r - or manoa ro essona s. ot ,or u hc Distribution. R TARY.ASSE oanllS&P DJ. Velltw. Permission to reprint or distribute any content from this presentation requires the written approval of S&P Dow Jones Indices. 9
.s&P"~..'..........•...••-----iifdiE~ALLOCATION STRATEGIES: DEBT AND EQUITY
1,200
1,000
Performance of various strategies during last 14 years:Back-tested Data from December 31, 2001 through December 31, 2015
Source: Asia Index Pvt. Ltd.-;.8ack test data since December 31,2001 up to December 31,2015; Past perfonnance is no guarantee offuture results. Charts are provided for illustrative purposes. Pastperfonnance is no guarantee of future results. These charts may reflect hypothetical historical perfonnance. Please see the F'erfonnance Disclosure at the end of this document for more infonnath>n.ut~fi~i~i'i..rtWPDthetical perfonnance. For Financial Professionals. Not for Public Distribution. PROPRIETARY.fill Po8$£ Uld s.\P ·0.11V...t_ Permission to reprint or distribute any content from this presentation requires the written approval of sap Dow Jones Indices. 10
-l-fttrn"n " 1111ft" ~nlt ltJfJ Ian 1J"JfJ!J[J[JJT1fJf-l
Source: Asia Index Pvt. Ltd.; Back test data since December 31, 2001 up to December 31, 2015; Past performance is no guarantee offuture results. Charts are provided for Illustrative purposes. Pastperformance is no guarantee of future results. These charts may reflect hypothetical historical performance. Please see the Performance Disclosure at the end of this document for more information
O'utindex cetums..iflCludil1a hvoothetical performance. '" . ,A:51A INUf:: ~ 'P\1L. L"tO'. r- - For FinanCIal Professionals. Not for Public Distribution. PROPRIETARY.A SSE ~ 56P o.n 'l9l1tur. Permission to reprint or distribute any content from this presentation requires the written approval of S&P Dew Jones Indices. 11
Source: Asia Index Pvt. Ltd.; Back test data since December 31, 2001 up to December 31, 2015; Past performance is no guarantee of future results. Charts are provided fOr illustrative purposes. Pastperformance is no guarantee of future results. These charts may reflect hypothetical historical performance. Please see the Performance Disclosure at the end of this document for more information
sut~rA ~i~i'l.'t~thetica' performance. For Financial Professionals. Not for Public Distribution. PROPRIETARY.fIi1 A eSf. ,,"d saP 0.11v.ntur. Permission to reprint or distribute any content from this presentation requires the written approval of S&P Dow Jones Indices. 12
• ..!1i*"~.rt~"r.". 1M?." " " " " ft.ft " " & .n w 11->: -rl"IL_ - ~:,,--. C!'" -...•..1IL__fl u. .1£ . . .. . . [t.. IT IT Jl n~TLn IT n nn
..••••............. __ ._-----------••,~.ALLOCATION STRATEGIES: DEBT AND EQUITY
Performance of vartous strategies during last 14 years:Back-tested Data since December 31,2001 up to December 31,2015
Source: Asia Index Pvt. Ltd.; Back test data since December 31, 2001 up to December 31, 2015; Past perfonnance is no guarantee of future results. Charts are"provided for illustrative purposes. Pastperformance is no guarantee of future results. These charts may reflect hypothetical historical perfonnance. Please see the Performance Disclosure at the end of this document for more information
SA~ ~i~it~~thetical performance. For Financial ProfeSSionals. Not for Public Distribution. PROPRIETARY.fII A SSE _ SltP OJ. Vent"" Permission to reprint or distribute any content from this presentation requires the written approval of S&P Dow Jones Indices. 13
Source: Asia Index Pvt. Ltd.; Back test data since December 31, 2001 up to December 31, 2015; Past performance is no guarantee of future results. Charts are provided for illustrative purposes. Pastperformance is no guarantee of future results. These charts may reflect hypothetical historical performanca. Please see the Performance Disclosure at the end of this document for more information
5.utj(}1f1.~i~i~QYPothetical performance. For Financial Professionals. Not fO; Public Distribution. PROPRIETARY.f1I A SSE IOndSIt' OJI VI8tltUt'. Permission to reprint or distribute any content from this presentation requires the written approval of sap Dow Jones Indices. 14
Source: Asia Index Pvt. Ltd.; Back test data since December 31, 2001 up to December 31, 2015; Past performance is no guarantee of future results. Charts are'provided for illustrative purposes. Pastperformance is no guarantee of future results. These charts may reflect hypothetical historical performance. Please see the Performance Disclosure at the end of this document for more information
.,ut jnde~ retums...it:ICludioQ hvootheticai performance. F F' . IP f . IN' .... 0 ARA:5IA lNUcA -fo'Vt~ L."tO',r· - or msnoa ro essona s. ot ior Public Dlstnbutlon. PR PRIET Y.
A IISf aM saP OJI Vtntur. Permission to reprint or distribute any content from this presentation requires the wriHen approval of S&P Dow Jones Indices. 15
• Indices are designed tocaptore different segments of the market - by size, sector,factorand/or asset class.
• Diversification is typically considered an important investment strategy for long terminvestments
• Diversification tends to be incorporated according to asset class, size, sector andfactor.
• Diversification is intended to provide hedging of idiosyncratic, single stock risks andthe benefits of exposure to different segments.
• In the following slides, we intend to demonstrate the difference in index performance.during different market cycles using various 'equity' S&P BSE indices .
•• ASIA INDEX Pvt, Ltd,~ A 8SI.' ••"et S6P DJI v"ntur.
For Financial Professionals, Not for Public Distribution. PROPRIETARY.Permission to reprint or distribute any content from this presentation requires the written approval of S&P Dow Jones Indices, 16
Source: Asia Index Pvt. Ltd.; Data since September 3D, 2005 up to September 3D, 2015; Pa$f performance is no guarantee offuture results. Charts are provided for illustrative purposes. Pastperformance is no guarantee of future results. These charts may reflect hypothetical historical performance. Please see the Performance Disclosure at the end of this document for more information
S'f~ ~~~i'l..ftW'pothetical performance. For Financial Professionals. Not for Public Distribution. PROPRIETARY.fIi' Ii. SSE Me! saP DJIVemu,. Permission to reprint or distribute any content from this presentation requires the written approval of S&P Dow Jones Indices. 17
BACK·TESTED PERFORMANCE DURING MARKET'CYCLES~--•.
• Before Financial Crisis
sap BSE SENSEX (TR) sap BSE AIICap TR sap BSE I.IrgeMIdCap TR saP BSE DMderid StabIIty saP BSE MIdCIIp SelectIndex 11t Index 11t
• During Financial Crisis
sap BSE SENSEX (TR) sap BSE AllCap TR saP BSE LargeMIdCIIp TR saP BSE DMderid StabIlity saP BSE IoIfcItap SelectIndex 11t Index TR
• Recovery fromFinancial Crisis
saP BSE SENSE)( (TR) saP BSE AIICap TR saP BSE LargeMldCap TR saP BSE DIYIdend Stabl\ty saP BSE MIdCap SelectIndex 11t Index TR
Source: Asia Index Pvt. Ltd.~Data since September 30, 2005 up to September 30, 2015; Past perfonnance is no guarantee of future results. Charts are provided for illustrstlve purposes. Pastperformance is no guarantee of future results. These charts may reflect hypothetical historical performance. Please see the PerformanceDisclosure at the end of this document for more informationsut A~ ~i'f9JYei'Lft~pothetical performance. For Financial Professionals. Not for Public Distribution. PROPRIETARY.
'" A 8SE ••• d saP DJI V.ntUl1l Permission to reprint or distribute any content from this presentation requires the written approval of S&P Dow Jones Indices.
r ftrt',fl:tt:rr! rerz-' ".11 " ~ ft ft " " " " " " a a " " n " n n n=rJ:l1"l.................................. ~~ ..~---...
__________________ m _
.,~•.ALL FACTOR INDICES - BACK·TESTED PERFORMANCE
- - - S&P BSE SENSEX (TR) - S&P BSE Enhanced Value Index TR - S&P BSE Low Volatility Index TR
- S&P BSE Momentum Index TR - S&P BSEQuality Index TR
Source: Asia Index Pvt. Ltd.; Data since September 30, 2005 up to September 30, 2015; Past performance is no guarantee of future results. Charts are provided for illustrative purposes. Pastperformance is no guarantee of future results. These charts may reflect hypothetical historical performance. Please see the Performance Disclosure at the end of this document for more information
~t§. ~i~i1(.rHr.pothetical performance. For Financial Professionals. Not for Public Distribution. PROPRIETARY.fiIi' It. SSE aM stoP OJ. V.MUI'. Permission to reprint or distribute any content from this presentation requires the written approval of S&P Dow Jones Indices. 19
~~.BACK·TESTED PERFORMANCE DURING MARKET'CYCLES
• Before Financial Crisis
S&P SSESENSEX(TR) S&P SSEEnhanced S&P SSELow Volatility S&PSSEMomentum S&P SSEQuality IndexValue Index TR Index TR Index TR • TR
• During Financial Crisis
S&P SSESENSEX(TR) Sap SSEEnhanced S&P SSELow Volatility S&PSSEMomentum S&P SSEQuality IndexValue Index TR Index TR Index TR TR
• Recovery fromFinancial Crisis
Sap BSESENSEX(TR) S&P SSEEnhanced S&P SSELow Volatility sap SSEMomentum S&P SSEQuality IndexValue Index TR Index TR Index TR TR
Source: Asia Index Pvt. Ltd.-;·Data since September 30, 2005 up to September 30, 2015; Past performance is no guarantee of future results. Charts are provided for illustrative purposes. Pastperformance is no guarantee of future results. These charts may reflect hypothetical historical performance. Please see the Performance Disclosure at the end of this document for more Information*.ut jJgfJ. ~i~ii~{rP<>thetical performance. For Financial Professionals. Not for Public Distribution. PROPRIETARY.fill' A SSE Mtd S&P OJI Vttntur. Permission to reprint or distribute any content from this presentation requires the written approval of S&P Dow Jones Indices. 20
l crCtc"'!rc~t=:f1 fl aa-:a L1~ rtr~a U ft a·!lft ..Jf zz tr·a· D ,a .a· ·a ..a 11 ..~ %11111
.......................... _----------.p~.TABLE OF CONTENTS
o1 INVESTMENT AND AVAILABLE ASSET CLASS
02 PORTFOLIO DIVERSIFICATION
03 ASSET ALLOCATION
04 sap BSE SENSEX AND EPFO
.ilIA ASIA INDEX Pvt. Ltd.~ "SSE..,d s&P DJI v."tVl'.
For Financial Professionals. Not for Public Distribution. PROPRIETARY.Permission to reprint or distribute any content from this presentation requires the written approval of S&P Dow Jones Indices. 21
• Asset allocation is the process of developing a customized, diversified investmentportfolio by strategically mixing different asset classes in varying proportions. -
• It aims to reduce the "ups and downs" associated with investing and make it easier tostick with investors' long term investment objectives and avoid market timing.
• Asset allocation includes combining asset classes such as equities, bonds and cashin varying proportions within one customized, diversified investment portfolio that issuitable to the risk-return profile of a given investor. '
.•• ASIA INDEX Pvt. Ltd.~. A 8Se Md S&P DJI VeAtur.
For Financial Professionals. Not for Public Distribution. PROPRIETARY.Permission to reprint or distribute any content from this presentation requires the written approval of S&P Dow Jones Indices. 22
••.............. -.~--.-----.------;pp~.
ALLOCATION STRATEGIES: DEBT AND EQUITY ... CONTINUED
• The debt only (100% debt) strategy noted the least portfolio volatility and also notedthe lowest annualized performance over the last 14 years.
• Among the various strategies discussed, as allocation to equity increases (S&P BSESENSEX), annualized performance and risk adjusted returns improved over last 14years up to the strategy '25% equity and 75% debt', after that risk adjusted returnsnoted decline.
• This is possible because as one asset may perform strongly while the other does not.• S&P BSE SENSEX Index (Equity) and S&P BSE India 10 year Sovereign Bond Index
(Debt) noted correlation of daily total returns, as low as 0.068797 from Dec 31,2001 to Dec 31,2015 .
..• ASIA INDEX Pvt. ltd.~ PoSSE ••ne! SloP OJt V.m",.
For Financial Professionals. Not for Public Distribution. PROPRIETARY.Permission to reprint or distribute any content from this presentation requires the wriHen approval of S&P Dow Jones Indices. 23
ASSET ALLOCATION
Asset allocation strategies are considered key driver ofinvestment results
Security SAlar.tinn4.69(,
MarketTming1.89(,
Other Factors2.19(,
S&P••. ·•.·.·•·•~:~-·--~-f ' .
• Generally significant percentage of thevolatility of investment performance is drivenby asset allocation decisions
• Factors such as when investors commitassets and which securities they buy areconsidered to have a relatively small impacton long-term investment results.
"
Source: Brinson, Hood, Beebower. "Determinants of Portfolio Performance". Financial Analysts Journal. July-August 1986; Brinson, Singer,Beetbower. "Determinants of Portfolio Performance II: An Update". Financial Analysts Journal. May-June 1991. Excerpt from the paper on 'Thepotential benefits of diversification' by Goldman Sachs
.•• ASIA INDEX Pvt. Ltd,• A 8SE ••.•d s&P OJI '4ntllf.
For Financial Professionals. Not for Public Distribution. PROPRIETARY.Permission to reprint or distribute any content from this presentation requires the written approval of S&P Dow Jones Indices. 24ctrm"~ rr rr ~..!a a ann !n n !1J-t+-+fJP ft.. E - W if D nPrJJT"""'-rlu " ~. II_Il_Il __ll. R_JL __
Apart from a few other factors, asset allocation often results from overall balancingamong the following considerations:1. Goals -Includes long term objectives e.g. - meet liabilities.2. Time horizon - The investor often seeks to balance longer term objectives with
shorter term considerations. Generally, time horizons include a minimum of one ormore than one market cycle i.e. 3 to 5 years, to allow sufficient time for a givenasset allocation strategy to work through a market cycle. -,
3. Risk tolerance level -An investor defines the level of risk s/he is willing to take inan effort to generate returns .
•• ASIA INDEX Pvt. Ltd.¥'" ASSE -' saP OJ,Yent_
For Financial Professionals. Not for Public Distribution. PROPRIETARY.Permission to reprint or distribute any content from this presentation requires the written approval of S&P Dow Jones Indices. 25
.••~ .....•...... '----TABLE OF CONTENTS
o1 INVESTMENT AND AVAILABLE ASSET CLASS
02 PORTFOLIO DIVERSIFICATION
03 ASSET ALLOCATION
04 S&P BSE SENSE)( AND EMPLOYEES PROVIDENT FUND ORGANIZATION
For Financial Professionals. Not for Public Distribution. PROPRIETARY.Permission to reprint or distribute any content from this presentation requires the written approval of S&P Dow Jones Indices. 26
l {t''''rtlr1l tr tr rra rra rrrr n Irl nn 1i 8 ~~~, D D D D J R ~ J J. II•• ASIA INOEXPvt. Ltd¥'" •.•.8S~ ••.•d SloP DJlY.mur.
••••••••••••••••••••••BACK·TESTED ANNUALIZED RETURNS:EMPLOYEES PROVIDENT FUND ORGANIZATION AND:S&P BSE SENSEX PRICE RETURN OVER LAST 36FINANCIAL YEARS(31 MARCH 1979 TO 31 MARCH 2014)
Source: Asia Index Pvt. Ltd. And www.epfindia.com; Data since April 3, 1979 up to March 31, 2015; Past performance is no guarantee offuture results. Charts are provided for illustrative purposes.Past performance is no guarantee of future results. These charts may reflect hypothetical historical performance. Please see th8 Performance Disclosure at the end of this document for more
~
11 about.iDdex l'Btums. including hypothetical performance. '.. . . .A fNUtX .t'Vt. Lto. For Financial Professonals.Not for PublIC Dlstnbution, PROPRIETARY.IISE -' s&P OJI V.mu,. Permission to reprint or distribute any content from this presentation requires the written approval of S&P Dow Jones Indices. 27
Charts and graphs are provided for illustrative purposes. Past performance is no guarantee of future results. These charts and graphs may reflect hypothetical historicalperformance. All information presented prior to the launch date is back-tested. Back-tested performance is not actual performance, but is hypothetical. The back-test calculationsare based on the same methodology that was in effect when the index was officially launched. However, it should be noted that the historic calculations of an Economic Index maychange from month to month based on revisions to the underlying economic data used In the calculation of the index.
AIPL defines various dates to assist our clients in providing transparency on their products. The First Value Date is the first day for which there Is a calculated value (either live orback-tested) for a given index. The Base Date is the date at which the Index is set at a fixed value for calculation purposes. The Launch Date deSignates the date upon which thevalues of an index are first considered live: index values provided for any date or time period prior to the index's Launch Date are considered back-tested. AlPL defines the LaunchDate as the date by which the values of an index are known to have been released to the public, for example via the company's public website or its data feed to external parties.
Past performance of the Index is not an indication of future results. Prospective application of the methodology used to construct the Index may not result In performancecommensurate with the back-test returns shown. The back-test period does not necessarily correspond to the entire available history of the Index. Please refer to the methodologypaper for the Index, available at www.spdji.com and www.asiaindex.co.in for more details about the index, including the manner in which it is rebalanced, the timing of suchrebalancing, criteria for additions and deletions, as well as all index calculations. '
Another limitation of using back-tested information is that the back-tested calculation is generally prepared with the benefit of hindsight. Back-tested Information reflects theapplication of the index methodology and selection of index constituents in hindsight. No hypothetical record can completely account for the impact of financial risk in aCtual trading.For example, there are numerous factors related to the equities, fixed income, or commodities markets in general which cannot be, and have not been accounted for in thepreparation of the index information set forth, all of which can affect actual performance.
r
Index returns shown do not represent the results of actual trading of investable assets/securities. It is not possible to invest direcUy in an index. AIPL or its agent maintajac:UBSE Indices and calculates the Index levels and performance shown or discussed, but does not manage actual assets. Index returns do not reflect payment of any salesfees an investor may pay to purchase the securities underlying the Index or investment funds that are intended to track the performance of the Index. Theand charges would cause actual and back-tested performance of the securities/fund to be lower than the Index performance shown. As a simpleon a US $100,000 investment for a 12-month period (or US $10,000) and an actual asset-based fee of 1.5% was imposed at the end of the period oninterest (or US $1,650), the net return would be 8.35% (or US $8,350) for the year. Over a three year period, an annual 1.5% fee taken at yearendyear would result in a cumulative gross return of 33.10%, a total fee of US $5,375, and a cumulative net retu"!. Qf~7.2% (or US $27,200).
~ lIS Ll\ii'JO X Pvt,~.', A 8$[ ;I'''' SI!.POJI V"ntu'.,
Redistribution, reproduction and/or photocopying in whole or in part are prohibited without written permission. This document does not constitute an offer of services injurisdictions where AIPL, SSE, S&P Dow Jones Indices LLC or their respective affiliates (collectively "AlPL Companies-) do not have the necessary licenses. All informationprovided by AIPL Companies is impersonal and not tailored to the needs of any person, entity or group of persons. AIPL COmpanies receive compensation in connection withlicensing its indices to third parties. Past performance of an index is not a guarantee of future results.
It is not possible to invest directly in an index. Exposure to an asset class represented by an index is available through investable instruments based on that Index. AIPLCompanies do not sponsor, endorse, sell, promote or manage any investment fund or other investment vehicle that is offered by third parties and that seeks to provide aninvestment return based on the performance of any index. AIPL Companies make no assurance that investment products based on the index win accurately track indexperformance or provide positive investment returns. AIPL and sap Dow Jones Indices LLC are not investment advisors, and the AIPL Companies make no representationregarding the advisability of investing in any such investment fund or other investment vehicle. A decision to invest in any such investment fund or other Investment vehicleshould not be made in reliance on any of the statements set forth in this document. Prospective investors are advised to make an investment In any such fund or other vehicleonly after carefully considering the risks associated with investing in such funds, as detailed in an offering memorandum or similar document that is prepared by or on beh~1fofthe issuer of the investment fund or other vehicle. Inclusion of a security within an index Is not a recommendation by the AIPL Companies to buy, sell, or hold such security, noris it considered to be investment advice. ClOSingprices for sap BSE Indices are calculated by AIPL or its agent based on the closing price of the individual constituents of theindex as set by their primary exchange. Closing prices are received by AIPL or its agent from one of its third party vendors and verified by comparing them with prices from analternative vendor. The vendors receive the closing price from the primary exchanges. Real-time intraday prices are calculated similarly without a second verification.
These materials have been prepared solely for informational purposes based upon information generally available to the public from sources believed to be reliable. Nocontained in these materials (including index data, ratings, credit-related analyses and data, model, software or other application or output therefrom) or(Content) may be modified, reverse-engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system,permission of AIPL. The Content shall not be used for any unlawful or unauthorized purposes. AIPL and its third-party data providers and licensorsCompanies (collectively" AIPL Parties") do not guarantee the accuracy, completeness, timeliness or availability .9f the Content. The AIPL Partieserrors or omissions, regardless of the cause, for the results obtained from the use of the Content. THE CONTENT IS PROVIDED ON AN "ASDISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, SUT NOT LIMITED TO, ANY WARRANTIES OFPARTICULAR PURPOSE OR USE. In no event shall the AIPL Parties be liable to any party for any direct, indirect, incidental, exemplary,consequential damages; costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs) inContent even if advised of the possibility of such damages.
iliA ASIA INDEX Pvt. Ltd~ A SSE and S&P OJI V.MUTe
Koel GhoshHead - Business Development, South Asia+91 [email protected]
,--.
A ASIA INDEX Pvt. Ltd. For Financial Professionals. Not for Public Distribution. PROPRIETARY.•. A BS£ ..,.. SltP OJ! V.MUIe Permission to reprint or distribute any content from this presentation requires the wrillen approval of SSP Dow Jones Indices. 30
Asset Allocation Profile of Global Pension Funds (7 largest market, Share in %)
IEqtily .Bonds .other ICash
Australia
Canada
Japan
Nethertands .
SwitzerlandUK
us
P7
• Average asset allocation:42% equities31% bonds2.3% cash24.8% other assets (includes property &other alternatives)
• Australia, UK and US have higher allocation to equities
Equity investment is used as a tool to enhance returns bypension funds globally
Source: Report by Tower Watson - Global Pension Funds Survey 2015 ."!!'~'1.D,!S8Z FUNDS MANAGEMENT PRIYATE LIMIl"EO (A joint venture between set &. AMUNDI)
Factors that favor a structural Bull Market in India
.•"!!'.f!'!t.D.!58! FUNDS MANAGEME:NT PRIYATE UNITED (A joint venture between S8t a. AMUNOI) .&.
en -"CD••••
•
'"e eni(It
Dr:r
0-)Iz
-)I
CD
'"m 3::rm~
D)
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a D)
c::::s
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~,e "....••0
:;,.•.., -0
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••-.<
edo
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en;cridodo;::,III011•••lit
Ic:z0....-
Real GDP growth (%) I 6.9
Nominal GDP growth (%) I 13.6
CPllnflation (%) t 10.0
Fiscal deficit (% GDP) I 4.4
CAD (% GDP) I -1.7
BoP (US$ bn) I 15.5
Repo Rate (%)* I 8.00
INR/US$ I 60.7
Brent (US$/bbl) . I 96.2
Bank Credit growth (% ) I 14.9
.!!]~D,!581 FUNDS f'1ANAGEf'1ENT PRIYATf! Uf'1ITf!D (A joint venture between SBX 81 AMUNDI)
Source: SBIMF Research; NB: Green indicates improvement, Pink indicates deterioration; * data is end period
581 FUNDS MANAGEMENT PRIVATE LINITED (A Joint venture between S8! I: Af!iIUNDI)
Source:MOSL, SBIMF Research
• Last cycle savings attracted by physical assets
• Financial Assets as % of savings are just 45% - only 4%of these are in equities
• Equity flows would track the equity returns and theexcess returns of Equity over Gold have turned positive
• Improved attractiveness, government measures toaugment financial savings and Interest of domesticinvestor in Equities provides for a long term bull case inIndian Equities.
Source: Sebi, BSE, NSE, Morgan Stanley, Bloomberg
13% -Share of Equity Investments in Total Financial Asset at Cost11%
• By the very nature of it, equity investments, tend to be volatile in short term• The volatility of equity investment is inversely proportional to its holding period• Longer the holding period, lesser the chances of negative returns• As shown above, investors who have had a holding period of 10 years, have never made negative
returns, and have the highest probability of making returns over 10% CAGR
£ £ ~ ~ ~ ~ ~ ~ ij ij ij ij ~ ~ ij ~ ~E E ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ t ~~ ~ ~ M ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~ ~ ~ M _ N N N N N
Hotding Period
std Deviation of Sensex returns by HoldingPeriod (Jan 1980-Jan 2016)
40%35%30%25%20%15%
10%
~:lI I I. I I ••• _ ••• I =..I ••••• I I i-' i. i'£. ..cu "'"'E E 15 IrJ L L L L L L L L L L
CJ 10 10 10 co •• I\J I\J CJ IIIQ.1 tJ tJ CJ Q.1 CJ «J • CD QI QI tJ>. >. >- >. >- >- >- >. >- >. >. >.I"- 01 ...-t Pl U) ••••• 0\ ~ P'I If') ••••• 01...-t ...-t ...-t ...• ...• N N N N N
Ia II Ia" G.I ">. >- >.
••• Ii) •.•• 1"1 It}
Holling Period
• Risk and return are directly related to the holding period of investment• In the long term, the chances of making negative return diminishes• Risk, defined by standard deviation, shows a decreasing trend as the holding period increases
.!!.f!!.~o.!S8X FUNDS MANAGEMENT PRIVATE LIMITED (A joint venture between S8t • AfI1UNDI)
Staggered investment relieves invesitors from the pressure of. guessing themarket direction
20%
15%
10%
5%
0%
16.82%
12.39%
Fixed Investmentevery year at lowest
Sensex value
Fixed Investmentevery year at highest
Sensexvalue
Fixed SystematicInvestment
• The differential between the best timed investment & systematic investment is only 4.43% in10 years.
• However, if the investor gets the timing wrong, and invests at" market highs", he wouldunder perform systematic investment by the best timed investment by 3.49%
#SBIFUNDS.JJ,.0...,..-_Pft .•!iBI FUNDS MANAGEMENT PRIVATE UNITED (A joint Yenture between Set 8IAMUNDI)
Small money grows big overtime if the investment is systematically staggeredover a period of time, vis-It-vis one time investment
buys 11.62 unitsA~r - 09 J~I_~se8c!~~Jan- 07 Apr - 07 Jul- 07 Oct - 07 Jan- 08 Apr - 08 Jul - 08 Oct . 08 Jan - 09
S8I FUNDS MANAGEMENT PRIVATE UHITEO (A joint venture between S6t a AMUNOI).)!!'!!'!1o.!
Performance of EPFO Investment as on NAV dated December 31,2015
Scheme name I ETF Cost (Rs. in era) NAV based Valuation I Profit! Loss (%)(Rs••n era)
Nifty 959.2 - 955.06 -0.43%CBT-EPF-11-V-DM L Sensex 312.49 310.02 -0.79%
Total ~271.69 1265.08 -0.520/.
Nifty 2025.97 2019.26 -0.33%CBT-EPF-05-V-DM l Sensex 660.47 656.09 -0.66%
Total ~686.44 2675.35 -0.41%
Total Portfolio I I 3,958.13 I 3,940.43 I -0.45%
Point to Point returns from Aug 05, 2015 to Dee 31, 2015
S81- ETF Nifty 50 -6.9487%Nifty 50 TRI -7.0289%Difference 0.0802%
S81- ETF SENSEX -7.1978%S&P 8SE SENSEX TRI -7.1783% ..'
Difference -0.0195%
Tracking error* from Aug 05,2015 to Dee 31,2015
ETF Annualized
SBI - ETF Nifty 50 0.0422%
SB. - ElF SENSEX 0.0975%------
Investing in a staggered manner; has resulted in a reasonable rupee cost averaging, hence, remaining fairlyresilient against the market volatility
Source: Intemal Calculations* tracking error for SBI- ETF Nifty 50 & SBI- ETF SENSEX is calculated since inception of EPFOs investment and for is for period ending 31" Dee 2015
0--SBI FUNDS_ ~OIllllU •• _ft' Pft_S8r FUNDS HANAGEHENT PRIYATE UNITED (A joint venture between S81 a AMUNDI) ~
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Passive Allocation
• 581- ETFNifty: current investment• 581- ETFSENSEX: current investment• 581- Nifty Next 50
Smart Beta
• 581Enhanced Index fund - Maximum sharpe• 581Enhanced Index fund - Minimum variance
Actively managed
• 581Magnum Equity fund• 581Blue Chip Fund
S8! FUNDS MANAGEMENT PRIYATE LIMITED (A joint venture between S8t •. AMUNOI).~D,!
S81- Enhanced Index -Maximum Sharpe ratio
Benchmark: NIFTY 50Inception date: Awaiting approval fromregulatorFund Positioning: Weights stocks withinNifty 50 to achieve the maximum possiblerisk-adjusted portfolio performance
6.25
S81 - Enhanced Index - MinimumVarianceBenchmark: NIFTY 50Inception date: Awaiting approval fromregulatorFund Positioning: Minimises the portfoliovolatility based on correlation & volatilities in theIndex constituents
21.55 14.53
6.69
Source: Internal Calculations, One year returns are absolute, returns for period above one year are CAGRBack tested data .)!!J~...D,!
S8l FUNDS MANAGEMENT PRIYATE UNITED (A joint venture between S8t 81 AMUNOI)
SBI Magnum Equity Fund SBI Magnum Blue chip FundBenchmark: CNX NIFTYInception date: Jan 91Fund Positioning:- Pure large cap fund - invests 90-100% ofits assets in large cap stocks.
Key Parameters (as on 31st Dec 2015):- Assets under management: 1281.27Crores
Benchmark: S&P BSE 100Inception date: Feb 2006Fund Positioning:- Pre-dominantly large cap fund withup to 20% in mid cap stocks '
Key Parameters (as on 31st Dee 2015):-Assets under management: 3634.32 Crores
Equities integral to global retirement industry _CRISII...RESEARCH
• A preferred investment class around the world ...
Equity exposure of pension funds (in %)70605040
30
20
10
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• ... equities help spruce up returns significantlyAverage real return of select DECO countries was 3.9% in the five years to 2014,compared with 0.11% for Indian PFs
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Average median age: 32.8 yearsSelect OECD countries
Average median age: 38.8 yearsMedian age of theworld: 35 years
*Source: aECD Global Pension Statistics, CIA 2013; A Category includes loans, land and buildings, unallocated insurance contracts, hedgefunds, private equity funds, structured products, other mutual funds (i.e. not invested in cash, bills, bonds, or shares) and other investments,world average indicates average equity exposure among countries depicted in the above graphs
Case study - California Public Employees' Retirement _CRISII...System (CaIPERS) RESEARCH
• USA's largest public pension fundEstablished as "State Employees' Retirement System" in 1932
- Pension fund serves more than 17.2 lakh members
- Total fund market value as of November 2, 2015 is $295.6 billion (Rs 19.32 lakh cr*)
• 620/0 of assets in equities, 200/0 in fixed income and 11% in real assets
• A time-weighted return of 18.4% in FY14- Strong returns in global equity and real assets bolster performance of fund
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* Rs/USD rate of 65.4793 ** Trust level includes absolute return strategy; multi-asset class; overlay, transition and plan level
Case study - The Ontario Teachers' Pension PlanBoard (OTPP)
_(8IStl...RESEARCH
• Defined-benefit pensions for school teachers of the Canadian province ofOntario- On January 1, 1990, Ontario government created OTPP as an independent organisation'
- Pension fund serves more than 3.11 lakh members
$154.5 billion in net assets as on December 31,2014 (Rs 9.78 lakh cr*)
10.2% average rate of return since 1990
• .45% of assets in equities, 43% in fixed income and 23% in real assets
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**money market asset class provides funding for investments in other asset classes* RslUSD rate of 63.3315
Allocation between Sensex and Nifty ETFs _CRISII...RESEARCH
• . Equity allocation by EPFO is being managed passively
i • EPFO currently invests 5% of incremental flow into equity through ETFs- S81 ETF Nifty 50 :'75%
- S81 ETF SENSEX : 25%
• Sensex and Nifty have varying performance across timeframes- Difference in performance is as high as 6.78% in FY-2010.
(through selection of • Company and sector• Cost of fund management could be research, and risk
portfolio concentrationlower than expense charged by equity management teams
manager/managers) • Liquidity riskmutual funds
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• Returns close to underlying c0
• Equity expertise of not required as index with no potential to • Assets under aExchange traded
;:)
fund is managed passively generate alpha managementiiE
funds I Index funds• Tracks the performance of market • Compulsory exposure to • Tracking error ~..
(SensexlNifty) 0
index sectors or stocks with negativeu,
outlook
• Professional active management can generate alphaCRISIL- AMFI Equity Fund Performance Index outperformed Sensex INifty by 9.75-10.18% annually since April 1, 2001 ••
CRISIL- AMFI Equity Fund Performance Index has never given negative return for any5 year period since April t, 1997
-CRISIL.RESEARCH
Need for higher allocation in equity (1/2) _CRISILRESEARCH
• Investment between 50/0 and 15% allowed in equity
• Minimal impact of equity on overall potential return with 5~15%exposure
• Globally, average 30% is the allocation to equity by pension funds ~- With 15% incremental allocation to equityoverall allocation to equity will reach 30% by
2060 (in line with global average) .
• Other models for allocating funds to equity .- Life cycle option - based on age of investor
- Choice of allocation to equity left to investor. \
in equity
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r and previous yearc x in 75:25 ratio j0~~i!f c~ ~! !~If
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•••
PRESENTATIONslTO EPFO ON··INVESTMENT IN SHARES
Rama Koteswara Rao18th January 2016
I
New Delhi.
-.---~------ - ------_.Cell : 93939 21515
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"'-A. RAMAKOTE~~!~~~. r.
· AGENDA
• Characteristics of Shares
• Role of Shares in Long Term Investments.• Implementation of Share Investment in EPFO
• Recommendations
CHARACTERISTICS OF SHARES• Shares represent OWNERSHIP of the Company
- Shares are not money lent to the Comp-any• Shares are LONG TERM investments
- Accounting Basics:Companies are a "Going Concern"- No Terminal (Maturity Date) for Shares
• No Guarantee of Fixed Return (e.g. Interest on Bonds orDividend on Preference Shares)- Dividend Payments depend on company performance
• As SharehoJde s, we are LASTin the line for Cash Flow of thecompany after: Employees (Salaries), Banks (Interest) andGovernment ( axes)
• 501 what Shar holders are entitled to?CAPITAL GAINS B MEANS OF SHARE PRICEAPPRECIATION IFTHE COMPANY P RFORMS WELL AND GROWS WITH TIME
SHARES AS LONG TERM· INVESTMENTSENSEXRETURNS,Starting, 31st December YEAR,Ending 31st December 2015--. • Dividends add about 1..2% to the return
• Years.of Negative Returns2015: -5.1% China Crisis2011: -24.6% Emerging Market crisls2008: -52.4% Global Financial crisis2001: -17.9% USRecession2000: -20.7% .COM Bubble Burst1998: -16.5% Asian Financial Crisis1996: -0.9% Political uncertalntv1995: -20.8% Stock Market scam1987: -15.7% Drought1986: -0.5% Weak Economy
HOLDINGPERIOD
Peri '""
As can be seen, with long holdingperiod, Share Market.has givensignificantly more return than FixedIncome investment such asGovernment Securities or Debentures
Implementation of Share Investmentin EPFO
• Share Investments should initially form a,smallportion of the overalJinvestment
• It should be gradually increa·sedwith time• 'It should be increased in weak market periods
This helps to acquire shares at low price
• EPFO must adopt a LONG TERM Jnvestrnentapproach to Share Investments
I'
INVESTMENTS IN• Negative sectors & High -Debt companiesshould be avoided .
. • Selective stocks with focusonsustainabJegrowth should be considered.
• Support and resistance levels of each tradesession should be considered beforeinvestment
• Hedging mechanism for the existing stock'should be followed to reduce Jossthrough calloption mechanism.
I
• Dependence on single source for investmentsis undesirable.Differentsources for bear/bullmarket operations of investment should befollowed.
• The "KEY ROLE " played by fund managershould be evaluated.
•
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"
MODEL INVESTMEN,T SUCCEfi~STORY. ,~,
~ In August 2015, LIC of India, subscribed for Indian Oil Corporation FPO and got allotment atRs. 387 per share. ,', "
~ The present market price is Rs. 435 despite the down fall of the market.,.
~ LIC has got 12.5% appreciation in five months i.e. annualized ~O%.
~ Both LIC and EPF are similar long term investors wi~ sirrjil,.arresources.
> Investment thro ETF/SIP are detrimental to such subscnPtF:...
~ Disinvestment of coal India is on the anvil and good investrient opportunity.:. :
~ LIC may be looked at as a suitable mentor for EPF equity .participation.