It has been quite a rollercoaster ride for equity investors in the past few months. US investors have seen gains of more than 9% in SP500 turn into year-to-date losses of more than 3%. Indian investors have seen losses of more than 9% in CNX Nifty turn into year-to-date gains of more than 2%.The question is what’s next. Some weeks back it appeared that the US markets were in the process of forming an intermediate-term bottom. On June 8th, the SP500 tested the low it had made on May 25th. That test came on lower volume and fewer 52 week lows, a positive divergence that in many instances has resulted in tradable bottoms. It also marked an “initial rally attempt”. An initial rally attempt begins when a major market average closes higher after a decline that happened either earlier in the day or during the previous session. What we need after an initial rally attempt is a follow through day (FTD) to ascertain that the market has indeed put in a bottom. The concept of follow through day was introduced by William O’Neil in his book, “How to Make Money in Stocks”. In the book, O’ Neil defines a follow through day as one where one of the major market indices registers a booming gain on heavier volume than the day before. All major market bottoms flash FTD’s though not all FTD’s result in market bottoms. Most successful FTD’s that mark durable bottoms occur four to seven days after the “initial rally attempt”. The US markets flashed a follow through day (FTD) on June 15th. However, this recent follow through day was not confirmed in terms of new breakouts in institutional quality stocks. Some stocks that did break out following the intermediate term low quickly reversed course. This is never an encouraging sign for a fledgling rally. And then last week we saw a series of distribution days in the major indices. Some weeks back in an article titled, “The Anatomy of a Market Top”, I had explained the concept of distribution days. In that piece I had written how 3-5 distribution days over some days can sound the death knell for a market rally. By Friday, the major US indices had already registered two distribution days. What however makes me extremely bearish is the notable increase in short side setups/candidates. A lot of institutional quality stocks like Microsoft (MSFT), Adobe (ADBE), Cisco (CSCO) and Blackberry maker Research in Motion (RIMM) etc have seen heavy selling in recent weeks and are now breaking down on long term charts. This selling reeks of extreme risk aversion. That along with the rally in safe haven assets like gold and treasuries is conveying some significant downside in the US markets in the coming weeks. The picture for Indian stocks on the other hand appears quite positive. Indian stocks have been outperforming their global peers for some weeks now. The chart below depicts how Indian stocks have been doing compared to the SP500 since May. A rising line on the chart indicates outperformance by Indian stocks as measured by the S&P CNX Nifty Index. I expect this outperformance to continue on the back of expanding new highs, breakouts in frontline stocks, positive breath and broad sector participation we have seen recently. Color me bullish on Indian stocks.

The Morningstar Investment Conference is one of the best events of the year for fund investors. But few individual investors actually go; the audience is mostly financial advisers and money management pros, experts who in many cases are worried more about the latest trend than about the basics that make for investment success.

An average investor who came here for the recent Morningstar event and listened carefully would have come away with five big lessons that seemed to come up in session after session:

1. Beware the attraction of short-term bets when looking for long-term outcomes

There have been countless studies of fund investor behavior showing that typical consumers don't do as well as the funds they buy. The discrepancy is caused mostly by losing confidence in a fund and jumping around, constantly trying to make headway with whatever is hot today.

Michael Mauboussin, chief investment strategist for Legg Mason, compared it to grocery checkout lines or changing lanes in the highway, always searching for what appears to be the fastest route to your destination.

"Very rarely does changing lanes get you there significantly faster," Mauboussin said during his keynote address, "but there are risks involved in making the change and you can wind up further behind -- or worse -- if you make the change at the wrong times."

2. When it comes to information, 'availability bias' is a problem

Morningstar is in the investment-research business and has made its name helping investors see through the skin of securities, first mutual funds and then stocks and exchange-traded funds. Where old-time investors had to rely a lot more on blind faith, today's investors have tools -- like Morningstar ratings, regular performance updates and much more -- that they depend on.

But several speakers noted that investors tend to have a problem with "availability bias," where they confuse access to information with relevance. Think of it like the Queen of Hearts in "Alice in Wonderland," where every bit discussed in court is decreed "very important!" although most of it is meaningless.

Investors frequently ascribe significance to short-term performance numbers, or watch the flow of money into various asset classes, thinking they say something important about long-term trends; frequently, this is how people wind up missing out on gains and buying into declines.

3. About half of all funds available today deserve to die

No one actually says this on the podiums at the Morningstar event, but they whisper it in the exhibit hall and in conference rooms.

The exhibit hall featured a number of companies whose best products could charitably be called mediocre, but realistically should be described as awful. Many firms created funds simply more for their ability to sell them rather than their capability for managing them well.

Thousands of laggards would be out of business if fund investing was a meritocracy. Since fund companies won't close these funds, it is up to investors to hold funds to a simple standard, namely that results are not disappointing over a long stretch of time.

4. Expect large-cap stocks to hit their stride in the next 12 months

You can't go to an investment conference without getting some prognostications for where the market is headed, and the consensus among experts at the Morningstar event was that the big names are due for a pick-up.

Large-cap stocks -- particularly for value-oriented investors -- are about as cheap as they have been in a long time, having lagged small-cap stocks for six to eight years (depending on which benchmarks you prefer). Stellar fund managers such as Bill Nygren of the Oakmark fund or Bill Miller of Legg Mason Value Trust have been migrating towards large-cap names.

For buy-and-hold investors -- as well as people who fled the bear market for the comfort of recognizable names -- a boost in the large-cap arena would be good news indeed.

5. There's a balance between running with the herd and being so contrarian you're wrong

Many of the top managers at the event discussed how they like to go against popular thinking, with the basic idea being that when everyone on the deck of the ship tilts to one side, the safest place may be the other side.

But the only difference between a contrarian and a fool is that the contrarian tends to be proven right (eventually), while the fool who kept trying to beat the herd failed to even keep up with it.

In plain speak, that means that when all of the experts start loving, say, large-cap stocks, that doesn't mean it's time to bail out of everything else. Diversification allows you to participate in the best of the market, no matter which way certain asset classes are running.

Is a Rs. 10 mutual fund better than a Rs. 100 fund?

A number of people think that the unit price of a mutual fund matters when they purchase; i.e. that a cheaper unit price is better. Why? They say that they will get more units for the same money, and isn't that better?

"Number of units"
The "Number of units" does not matter at all. It is all about gain percentages. The best funds have gained some 750% in five years. What does that mean? That means if you bought that fund at Rs. 10 in 2001 its NAV will now be Rs.75 .

If you bought it at Rs. 20, NAV will be Rs. 150.

There are lots of such funds whose NAV is greater than 100 or 150 because they have performed very well.

What's the NAV?
The total NAV, or "Net Asset Value" is a simple concept - First you get the "Net Assets", which is the sum total of all the assets minus any liabilities of the fund. Meaning, add the current market value of all the shares, minus any open redemption requests and any applicable charges (like Daily fund management fee etc.) and you get the Net Assets. Divide the Net Assets figure by the total number of outstanding units and you get the unit price (called the "NAV Unit Price" or simply, the NAV).

Most web sites and newspapers call the unit price "NAV". It's actually the NAV unit price, so the phrase is confusing. Let me not confuse you any further: I will call the total assets as the "Net Assets" and unit price as the "NAV".

Now you might think, if you have a 10,000 rupees, is it better to buy 1,000 units of one fund quoting at Rs. 10 NAV, or 100 or those quoting at hundred? Frankly it's dependent on how the fund performs. If the second fund grows at 20%, your units are worth Rs. 12,000 at an NAV of Rs. 120. If the first one grows at 10%, your units are worth Rs. 11,000 at Rs. 11 NAV. What is better? Obviously the second one, but over here the NAVs are still Rs 11 vs. Rs. 120!

Lesser number of units is like small change
But what if you have a 1000 Rs. NAV? That's a problem, you think; if you want 2,500 rupees, you have to sell three units! That means you take out more than you want, right? Also what if you have 1200 rupees to invest? You can only buy one unit, right?

Wrong.

In Mutual funds you also get "fractional" units. So if you invest Rs. 1000 in HDFC Taxsaver, whose nav is Rs. 149.44, you will get 6.692 units. (Some funds even go to fourth decimal)

You can then sell fractional units also, like 1.212 units etc!

Growth is important, not unit price
What you care about is how much your money grows, not the number of units you have. It is just as difficult for a Rs. 10 fund to move to Rs. 12, as it is for a Rs. 50 fund to move to Rs. 60.

The fund chasers

Ratan Tata

Till a month ago, no punter or investor worth his salt would have dreamed of buying shares of the second largest real estate player in the market, Unitech, which also has the dubious distinction of being one of the most leveraged companies in the sector.

Even as analysts were busy writing the company’s obituary, five large foreign institutions picked up nearly 15 per cent in Unitech for $325 million through a Qualified Institutional Placement (QIP) in mid-April.

QIP is a process by which a company sells securities other than warrants to large institutions. These securities are issued to qualified institutional buyers on a discretionary basis.

Kumar Mangalam Birla

The Unitech QIP has become a landmark of sorts as it clearly indicates that there is still global demand for Indian paper—be it debt or equity—despite risk aversion.

Taking a cue from Unitech and Tata Capital, which raised Rs 1,500 crore through a non-convertible debenture issue in February, corporate India has lined up plans to raise about $6 billion over the next two months.

Says Sunil Ladha, senior vice-president, capital markets, at ICICI Securities: “While this is a positive trend, a lot depends on its sustainability. If it continues for two quarters then it means there is buoyancy in the market and that eventually initial public offers (IPOs) too will come back.”

Ratan Tata, Tata Motors Purpose: To part-finance the Jaguar Land Rover acquisition Mode: Through non-convertible debentures with a full bank guarantee from SBI Rs 3,800 crore Anand Mahindra, Tech Mahindra Purpose: To expand the Satyam acquisition Mode: Allotment of nonconvertible debentures Rs 600 crore Kumar Mangalam Birla, Aditya Birla Nuvo Purpose: To finance financial services business and improve the debt-equity ratio Mode: Issuance of equity in domestic or international markets Rs 1,000 -1,500 crore Sanjay Chandra, Unitech Purpose: To retire a part of its Rs 8,900-crore debt Mode: Qualified institutional placement of shares, which was oversubscribed Rs 1,625 crore G. Mallikarjun Rao, GMR Purpose: For capital expenditure Mode: Private placement or QIP route in domestic or international markets Rs 5,000 crore Kishore Biyani, Future Group Purpose: To improve cash flows and capital expenditure Mode: Raised Rs 336 crore by allotting equity and warrants. Rest to be raised via stake sales. Rs 1,500 crore Shishir Kumar Bajaj, Bajaj Hindusthan Purpose: To reduce debt on its balance sheet Mode: To issue securities in one or more international markets over multiple tranches Rs 1,500 crore

The India fundamentals story, which got derailed last year due to a liquidity crisis, may get revived if the fund-raising plans of companies materialise. According to a Credit Suisse report, if Indian companies succeed in raising $10-15 billion over the next few months, corporate fundamentals could push the market substantially higher by 2010.

In the last one year, Indian companies have found it rather difficult to raise foreign capital due to the global financial crisis. In the last one month, though, the tide has turned slightly with positive economic data flowing from developed economies. Within weeks of five FIIs picking up a stake in Unitech, even the secondary market has rebounded with foreign inflows touching $2.3 billion in fiscal 2009. The first 10 days of May alone have seen inflows of $1 billion.

Despite the surge in the secondary market, few companies across sectors are looking to tap capital markets. Given that most valuations are still much lower than peak levels, promoters are preferring to raise debt rather than dilute their stakes at these levels.

Companies that are heavily leveraged, however, are left with no option but to dilute equity at these levels. Those who are choosing to do this are mostly from sectors that are finding it hard to raise debt.

Explains Anshul Krishnan, head of India Financing Group, leading the capital markets business at Goldman Sachs India: “Most companies in India are still family-owned and equity dilution remains a key consideration for promoters.

Equity dilution is, therefore, happening sooner in those sectors where liquidity is tighter or near-term needs are substantial, like real estate and infrastructure.” So raising equity capital in this environment would be seeking desperate capital.

The India story got a leg-up between 2005 and 2008 due to the huge capital expenditure plans that companies lined up for capacity expansion.

But this time around, Indian companies are seeking capital primarily to clean up their balance sheets.

Last year, when the markets tanked in February, several companies who had raised debt and were ready to tap the capital market, were caught by surprise.

Anand Mahindra

Such companies have been stuck with high levels of debt as they have not been able to raise equity capital. Says Sivasubramanian K.N., senior portfolio manager (Equity) at Franklin Templeton: “A significant portion of re-crore on March 31, 2008, to Rs 10,907 crore by December 2008. With the QIP dilution, its debt-equity ratio will fall to 1.4 from a high of 2.4 in December.

Krishnan, however, has a warning for those looking to raise equity capital: “Given that markets remain volatile, windows of opportunity are coming and going quickly, so companies will have to be prepared with relevant permissions or the conditioning to act whenever opportunities arise. While India is no doubt benefiting on a relative basis now, there is still mixed evidence on the underlying global economic fundamentals and to, therefore, suggest that this is a secular recovery trend might be premature.”

G. Mallikarjun Rao

There are some exceptions to this rule as well. Aditya Birla Nuvo, a company that has under its umbrella the carbon black business, viscose and sunrise business segments like apparel and financial services, raised a debt of Rs 1,500 crore earlier this year and is now preparing to raise equity capital for its expansion plans.

While the financial services sector may not have shown much promise, mutual fund and insurance businesses of the Aditya Birla Group have beaten the industry’s growth rates. Says Sushil Kumar, chief financial officer of Aditya Birla Nuvo: “Even in the tough environment of last financial year our life insurance and asset management businesses delivered substantially higher growth compared to the industry and gained a handsome market share.”

So what does this mean for the economy and capital markets? While there’s no doubt that capital flows into viable projects are positive for the economy, this trend will also help in arresting the current moderation being witnessed in investment growth.

This, along with steady growth in consumption, places the Indian economy in an enviable position. Given that this is just the beginning of a turnaround in the credit crisis, not much should be read into this trend unless it continues for at least two to three quarters, maintain the pundits.