Sucheta Dalal :Different Strokes: Janus Face
Sucheta Dalal

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Different Strokes: Janus Face  

May 2, 2004

Investors continue to alert about new tricks to part them from their money. After all even the most famous mutual funds in the world are not always above board.

Janus Face

By Sucheta Dalal

Janus mutual fund, once famous for its aggressive pick of growth-oriented stocks is struggling to rebuild its reputation. In India, Janus is known as the first major foreign fund to make substantial investment in Reliance Industries since its six per cent investment was expected to trigger a rush of foreign investment to India’s largest private sector company. But FII investment in Reliance remains at 22 pc with Janus being the biggest foreign investor.

In fact, Reliance was the second largest investment in the portfolio of Janus Worldwide Fund (at 2.91 pc) at the end of March 2004. It also holds a four per cent stake in Reliance Energy. Janus settled claims of improper trading practices with US regulators last week by agreeing to pay up a hefty price of $255 million.

This is among the highest settlements by any of the mutual funds under investigation for trading misconduct in the US. Investors will get $100 million out of this penalty; half will be in the form of restitution and the rest as civil penalties. It will also reduce the fees charged to investors by $125 million over five years, and pay the Colorado Attorney General’s office another $1.2 million for enforcement costs, fees and investor education programmes. The Indian securities market regulator should also be allowed to retain monetary penalties slapped on market participants to finance its protection activities.

Generating trades

How can investors protect themselves from self-styled analysts making wild stock projections? By avoiding such tip-sheets and websites altogether. Stock market sources say that several shady analysts put out tip sheets masquerading as technical analysis based newsletters that predict stock price movements on a daily basis.

Every recommendation usually comes with a narrow stop-loss advice that usually protects the analyst when the projections go awry. Often enough, the stock simply collapses soon after generating initial interest from day traders, instead of shooting up as predicted.

The stop-loss is triggered and investors square up in a hurry, generating further trades. Each trade results in brokerage income. Effectively, the newsletter’s main aim is to encourage frequent trades and churning of stocks to the benefit brokerage houses. What keeps investors hooked is the simple law of averages ever so often, the stocks behave as predicted and allow investors to make money. Many brokers actively recommend such analysts to their clients or even hire in-house analysts whose tips are broadcast through e-mail or SMS messages. Investors must remember that brokers and the website hosting such tip sheets protect themselves by carefully distancing themselves from the analysis through clever disclaimers.

Value proposition

How are traders lured into following tip sheets? They are usually directed by brokers to select websites hosting colourful tip-sheets. Investors should study the tip-sheets carefully. The web-based ones carry clear disclaimers avoiding all responsibility. These come in the form of tiny print at the bottom of each webpage.

The message usually says that the newsletters are not recommendations to buy or sell securities, although they are exactly that. They further claim that although their information sources are deemed reliable, the website is not liable for mistakes. Owners of the website often declare that they don’t own the stocks that are recommended, but what about the tipster, masquerading as analysts? Some analysts also proclaim that they don’t trade in stocks at all; which only means that their money is not even behind their trading tips. Now consider this. If the tip sheet is distributed free of cost and the analyst doesn’t trade in stocks, are the recommendations a form of public service? The only conclusion is a happy nexus with brokerage firms.

Sexy Sensex

The National Stock Exchange (NSE) arguably set a global precedent when its professionally managed, technology based system displaced the entrenched, 125-year old Bombay Stock Exchange (BSE) in record time. That was almost a decade ago. Since then the NSE has launched derivatives trading and index based futures products, and enjoys a near monopoly over these markets.

Yet, the NSE’s Nifty hasn’t made the slightest dent in the popularity of the BSE’s 30 share sensitive index popularly known as the Sensex. Although derivatives traders have to follow the movement of the 50-share Nifty, the Sensex remains, by far the more popular benchmark for stock price movements.

The popularity of the BSE’s online trading system, called the BOLT is more peculiar. The BSE went nation-wide long after the NSE had expanded to cities across the country. Yet, even NSE member brokers refer to trading terminals as BOLT as if it is a generic term and not NEAT, the NSE’s system. It must be the rare example where the market leader doesn’t also capture popular mind share. Brokers believe that it is because the BSE is still considered their exchange while the NSE may be efficient, but remains remote, inaccessible and unfriendly.

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-- Sucheta Dalal