Gold fund to prove if Indians love their bling
DSP Merrill Lynch is the first to launch a feeder fund investing in overseas gold mining companies.
DSP Merrill Lynch is launching a new feeder fund that will allow Indian investors to invest overseas in gold for the very first time. The company hopes to raise as much as $200 million for the fund, which through the parent companyÆs Merrill Lynch World Gold Fund, will invest in equities of international gold mining companies.
The move follows the Securities Exchange Board of IndiaÆs recent revision of capital outflow regulations, which now allows fund houses in India to invest overseas an aggregate $2 billion. Each fund house has a maximum $200 million limit to purchase securities or funds outside of India. Sebi must approve any new funds, and its overseas quota is rising to meet the broader regulation set in May by the Reserve Bank of India - the final arbiter on capital outflows - which lets the investment community put up to $4 billion abroad.
Although most quotas have yet to be fully taken up by local fund managers, Anup Maheshwari, head of equities at DSP Merrill Lynch, says the latest fund launch will fully use up the companyÆs allocated limit. He expects the current appreciation of the Indian rupee against US dollars will bolster Indian investorsÆ asset purchasing power overseas. In particular, the capital raised from the new gold fund will be invested in mining companies that benefits from tight supply in the gold market worldwide and the weak US dollar û which in turn stimulates gold prices.
ôWe are very bullish on gold prices for the coming two-to-three years,ö Maheshwari says. Compared to the previous gold cycle that lasted from 1969 to 1981, MerrillÆs research team in London believes the market is now in a phase of high accelerating growth, with a possibility for valuations to double in seven years. Maheshwari cites David Rosenberg, Merrill LynchÆs chief economist who claims this doubling can happen within four years.
Similar views have been voiced by American hedge-fund star Jim Rogers û he predicts gold prices to rise further to $1,000 an ounce from the current $664 level.
Maheshwari explains local investorsÆ preference is key. Investors expect returns comparable to the strong local equity market, where the Sensex has risen by 44.74% since July 31, 2006, while having a chance to diversify away from emerging market trends. Hence developed market equities, emerging market equities, bond, and money market funds were all ruled out when DSP Merrill Lynch considered its first overseas offering for local investors.
ôIndians know their gold very well,ö he says. ôIt is not limited to upper- or middle-class families. It reaches to the masses.ö In this country where 10% of the worldÆs gold is kept, consumption is strong thanks to jewelry production and purchases for gold as a saving tool, making India the largest market for gold internationally. A gold fund is easily marketable not only because of price trends, but also local traditions and popularity.
DSP Merrill Lynch would not be the first manager to launch a gold fund in India. Earlier this year, Benchmark Asset Management and UTI Asset Management, two of the top 10 fund houses in the country by asset size, released exchange-traded funds that track index performances on world gold prices. Unlike DSP MerrillÆs gold fund, however, they are not actively managed and they could be more volatile because they track commodity indices movements, instead of equities.
Subscription for the fund began on July 25 and will close in early August or once DSP Merrill Lynch has hit the $200 million mark. Minimum subscription starts at Rs5,000 ($124). Maheshwari says demand is ôvery positiveö among locals, and for many will represent their inaugural offshore investment.
The move follows the Securities Exchange Board of IndiaÆs recent revision of capital outflow regulations, which now allows fund houses in India to invest overseas an aggregate $2 billion. Each fund house has a maximum $200 million limit to purchase securities or funds outside of India. Sebi must approve any new funds, and its overseas quota is rising to meet the broader regulation set in May by the Reserve Bank of India - the final arbiter on capital outflows - which lets the investment community put up to $4 billion abroad.
Although most quotas have yet to be fully taken up by local fund managers, Anup Maheshwari, head of equities at DSP Merrill Lynch, says the latest fund launch will fully use up the companyÆs allocated limit. He expects the current appreciation of the Indian rupee against US dollars will bolster Indian investorsÆ asset purchasing power overseas. In particular, the capital raised from the new gold fund will be invested in mining companies that benefits from tight supply in the gold market worldwide and the weak US dollar û which in turn stimulates gold prices.
ôWe are very bullish on gold prices for the coming two-to-three years,ö Maheshwari says. Compared to the previous gold cycle that lasted from 1969 to 1981, MerrillÆs research team in London believes the market is now in a phase of high accelerating growth, with a possibility for valuations to double in seven years. Maheshwari cites David Rosenberg, Merrill LynchÆs chief economist who claims this doubling can happen within four years.
Similar views have been voiced by American hedge-fund star Jim Rogers û he predicts gold prices to rise further to $1,000 an ounce from the current $664 level.
Maheshwari explains local investorsÆ preference is key. Investors expect returns comparable to the strong local equity market, where the Sensex has risen by 44.74% since July 31, 2006, while having a chance to diversify away from emerging market trends. Hence developed market equities, emerging market equities, bond, and money market funds were all ruled out when DSP Merrill Lynch considered its first overseas offering for local investors.
ôIndians know their gold very well,ö he says. ôIt is not limited to upper- or middle-class families. It reaches to the masses.ö In this country where 10% of the worldÆs gold is kept, consumption is strong thanks to jewelry production and purchases for gold as a saving tool, making India the largest market for gold internationally. A gold fund is easily marketable not only because of price trends, but also local traditions and popularity.
DSP Merrill Lynch would not be the first manager to launch a gold fund in India. Earlier this year, Benchmark Asset Management and UTI Asset Management, two of the top 10 fund houses in the country by asset size, released exchange-traded funds that track index performances on world gold prices. Unlike DSP MerrillÆs gold fund, however, they are not actively managed and they could be more volatile because they track commodity indices movements, instead of equities.
Subscription for the fund began on July 25 and will close in early August or once DSP Merrill Lynch has hit the $200 million mark. Minimum subscription starts at Rs5,000 ($124). Maheshwari says demand is ôvery positiveö among locals, and for many will represent their inaugural offshore investment.
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