OFFER DOCUMENT
PIONEER
ITI PE RATIO FUND
An
open end scheme investing in equities and debt/money market instruments
in
a proportion determined by the PE of the market
Issue
of units at Rs.10 per unit for cash at par during the initial issue
period
Subsequent
sale of units on an ongoing basis to be at Net Asset Value
Initial
issue opens on :
Initial
issue closes on :
Sale/repurchase
of units on an ongoing basis from
Asset Management Company : Pioneer ITI AMC
Ltd
Mutual Fund
: Pioneer ITI Mutual Fund
The particulars of Pioneer
ITI PE Ratio Fund have been prepared in accordance with the Securities and
Exchange Board of India (Mutual Funds) Regulations 1996 as amended till date,
and filed with SEBI and the units being offered for public subscription have not
been approved or disapproved by the Securities and Exchange Board of India nor
has the Securities and Exchange Board of India certified the accuracy or
adequacy of the Offer Document.
The Offer Document sets
forth concisely the information about the scheme that a prospective investor
ought to know before investing. Please retain this Offer Document for future
reference.
This
Offer Document shall remain effective until a ‘material change’ (other than a
change in fundamental attributes and within the purview of the Offer Document)
occurs and thereafter the changes shall be filed with SEBI and circulated to the
unitholders along with the quarterly/half-yearly reports.
Contents
Page No
I.
DEFINITIONS
3
II.
HIGHLIGHTS
& RISK FACTORS
3
III.
INTRODUCTION
5
IV.
CONSTITUTION
OF THE MUTUAL FUND
10
V.
INVESTMENT
OBJECTIVES AND POLICIES
19
VI.
MANAGEMENT
OF THE FUND
27
VII.
HOW
TO INVEST
31
VIII. HOW
TO REDEEM
34
IX.
INFORMATION
ABOUT UNITS OF THE SCHEME
35
X.
TAX
BENEFITS
40
XI.
NAV
AND VALUATION OF ASSETS OF THE SCHEME
41
XII.
EXPENSES
45
XIII. ASSOCIATE
TRANSACTIONS
48
XIV. CONDENSED
FINANCIAL INFORMATION
50
XV.
INVESTOR
RIGHTS AND SERVICES
55
XVI. DUE
DILIGENCE CERTIFICATE
61
I
DEFINITIONS
In
this Offer Document, unless the context otherwise requires
1.
‘Fund’
means Pioneer ITI Mutual Fund
2.
‘AMC’
means Pioneer ITI AMC Ltd
3.
‘Scheme’
means Pioneer ITI PE Ratio Fund offered through this Offer Document
4.
‘Trustee’
means the Trustee company which holds the property of Pioneer ITI Mutual Fund in
trust
5.
‘SEBI’
means the Securities & Exchange Board of India
6.
‘SEBI
Regulations’ means Securities & Exchange Board of India (Mutual Funds)
Regulations 1996 as applicable and amended from time to time including any
circulars, directions or clarifications issued by SEBI or any Government
authority
7.
S&P
CNX Nifty Index : An index owned and operated by India Index Services &
Products Ltd (IISL)
8.
'RBI'
means the Reserve Bank of India
9.
Working
day means any day other than : (a) Saturday and Sunday (b) a day on which
capital/debt markets, or the Banks/RBI in Chennai/Mumbai are closed (c) a day on
which sale and/or redemption of units are suspended by the Trustee and (d) a day
on which the register of unitholders is closed.
10.
“Unit
holder” or “investor” means a person holding unit in the scheme of Pioneer ITI
Mutual Fund.
II
HIGHLIGHTS & RISK FACTORS
Highlights
·
An
open end scheme with an automatic buy-sell discipline, where the extent
of investment in equities will be determined by the weighted average PE Ratio of
the stocks of NSE Nifty Index. The equity allocation will be done on a monthly
basis – the principle is higher the PE Ratio, lower the equity exposure and vice
versa.
·
The
equity component of the portfolio will invest in stocks as represented by the
S&P CNX Nifty and seeks to provide returns that closely correspond to the
total return of the stocks in the Nifty Index; balance will be invested in
debt/money market instruments.
·
Under
each Plan, investors have a choice of Growth and Dividend options
-
The
Dividend option also offers reinvestment facility
·
Dividends
tax-free in the hands of investors (the scheme will not pay any distribution tax
upto March 31, 2002, if 50% or more of the investible funds of the scheme are
invested in equity shares of domestic companies).
·
Tax
benefits under Section 48 and Section 112 of the Income Tax Act,
1961
Risk
Factors
¨
Mutual
funds and securities investments are subject to market risks and there is no
assurance or guarantee that the objective of the mutual fund will be
achieved
¨
As
with any investment in securities, the Net Asset Value (NAV) of the units issued
under the scheme can go up or down depending on the factors and forces affecting
the securities
¨
Past
performance of the sponsors/the asset management company/mutual fund does not
indicate the future performance of the scheme of the mutual
fund
¨
Pioneer
ITI PE Ratio Fund is the name of the scheme and does not in any manner indicate
either the quality of the scheme or its future prospects and
returns
¨
Due
to tracking error, the equity component of the portfolio may not precisely track
the benchmark index – NSE Nifty.
¨
The
sponsors, The Investment Trust of India Ltd and Pioneer Investment Management
Inc., which is part of the UniCredito Italiano Group (one of Italy’s leading
banking companies) are not responsible or liable for any loss resulting from the
operation of the scheme beyond the initial contribution made by The Investment
Trust of India Ltd of an amount of Rs.50,000/- towards setting up of the mutual
fund.
Special
Considerations
·
Performance
of the S&P CNX Nifty Index will have a direct bearing on the performance of
the equity component of the scheme. In the event the S&P CNX Nifty is
dissolved or is withdrawn by IISL, the Trustee reserves a right to modify the
scheme so as to track a different and suitable index and appropriate intimation
will be sent to the unitholders of the scheme.
·
The
performance of the scheme may be affected by changes in Government policies,
general levels of interest rates and risk associated with trading volumes,
liquidity and settlement systems in equity and debt
markets
·
Investments
in debt instruments are subject to default risk and interest rate risk. Interest
rate risk results from changes in demand and supply for money and other
macroeconomic factors and creates price changes in the value of debt
instruments. Consequently, the Net Asset Value of the plans under the scheme may
be subject to fluctuation.
·
Investments
in debt instruments are subject to reinvestment risks as interest rates
prevailing on interest or maturity due dates may differ from the original coupon
of the bond, which might result in the proceeds being invested at a lower
rate
·
The
scheme may invest in non-publicly offered debt securities. This may expose the
scheme to liquidity risks
·
Frequent
rebalancing will result in higher brokerage/transaction
costs
·
Engaging
in securities lending is subject to risks related to fluctuations in collateral
value and settlement/liquidity and counterparty risks.
·
Derivatives
are high risk, high return instruments as they may be highly leveraged. A small
price movement in the underlying security could have a large impact on their
value and may also result in a loss. Also, the market for derivative instruments
is nascent in India.
·
“Standard
& Poor’s ®” and “S&P ®” are trademarks of The McGraw-Hill Companies,
Inc. and have been licensed for use by India Index Services & Products
Limited (IISL). The S&P CNX Nifty is not compiled, calculated or distributed
by Standard & Poor’s and Standard & Poor’s makes no representation
regarding the advisability of investing in products that utilize any such Index
as a component, or such similar language as may be approved in advance by
S&P, it being understood that such notice need only refer to the specific
S&P marks referred to in the Offer Document.
·
“Standard
& Poor’s ®” and “S&P ®” are trademarks of The McGraw-Hill Companies,
Inc. and have been licensed for use by India Index Services & Products
Limited (IISL), which has sublicensed such marks to Pioneer ITI AMC Ltd
(Investment Manager). The S&P CNX Nifty is not compiled, calculated or
distributed by Standard & Poor’s and Standard & Poor’s makes no
representation regarding the advisability of investing in products that utilize
any such Index as a component.
·
The
scheme is not sponsored, endorsed, sold or promoted by India Index Services
& Products Limited (IISL) or Standard & Poor’s, a division of The
McGraw-Hill Companies Inc. Neither IISL nor S&P makes any representation or
warranty, express or implied to the unitholders of the scheme or any member of
the public regarding the advisability of investing in securities generally or in
the scheme particularly or the ability of the S&P CNX Nifty to track general
stock market performance in India. The relationship of S&P and IISL to
Pioneer ITI AMC Ltd is in respect of the licensing of certain trademarks and
tradenames of their index, which is determined, composed and calculated by IISL
without regard to Pioneer ITI AMC Ltd or the scheme. Neither IISL nor S&P
has any obligation to take into consideration the needs of Pioneer ITI AMC Ltd
or the unitholders of the scheme in determining, composing or calculating the
S&P CNX Nifty Index. Neither IISL nor S&P is responsible for or has
participated in the determination of the timing of, prices at, or quantities of
the scheme to be issued or in the determination or calculation of the equation
by which the scheme is to be converted into cash. Neither S&P nor IISL has
any obligation or liability in connection with the administration, marketing or
trading of the scheme.
·
S&P
and IISL do not guarantee the accuracy and/or the completeness of the S&P
CNX Nifty or any data included therein and they shall have no liability for any
errors, omissions, or interruptions therein. Neither IISL nor S&P makes any
warranty, express or implied, as to the results to be obtained by Pioneer ITI
AMC Ltd, unitholders of the scheme, or any other persons or entities from the
use of the S&P CNX Nifty or any data included therein. IISL and S&P make
no express or implied warranties and expressly disclaim all warranties of
merchantability or fitness for a particular purpose or use with respect to the
Index or any data included therein. Without limiting any of the foregoing, in no
event shall IISL or S&P have any liability for any special, punitive,
indirect or consequential damages (including lost profits), even if notified of
the possibility of such damages.
III
INTRODUCTION
Background
In
the face of volatile markets investors have expressed a view that fund managers
should reduce the equity component of the schemes when the markets are at a peak
so that the value of investors’ money is protected when the markets come down.
Similarly, in bearish markets, the schemes should be fully invested in equities
so that they can benefit from the appreciation in equity values which follows
such a market.
However,
the mandate for all of our other equity funds is to stay invested in equities
through all market conditions. Hence, no matter how good the stock picking
skills of the fund managers, a sharp fall in the markets can result in a severe
erosion in the value of investor’s money.
Designed
to overcome this problem is Pioneer ITI PE Ratio Fund, with a built-in mandate
to change the asset allocation in line with market
conditions.
What
is Pioneer ITI PE Ratio Fund?
Pioneer
ITI PE Ratio Fund is an open end scheme with an in-built buy-sell mechanism
which is triggered by the PE levels of the target index viz., NSE Nifty. The
scheme will automatically balance its asset allocation every month based on the
weighted average PE Ratio of the stocks of NSE Nifty
Index.
Price
to Earnings Ratio (PE Ratio) is the ratio of the stock price of a company to its
earnings per share. For e.g, a company with a stock price of Rs.60 and earnings
per share of Rs.3 has a PE Ratio of 20. The PE Ratio is an indicator of how the
market views a company. The PE Ratio of an index is the weighted average PE
Ratio of all the constituent stocks.
How does the scheme
work?
The
scheme will change its asset allocation based on the PE ratio band. At higher PE
ratios it will reduce allocation to equities in order to minimise downside risk.
Similarly at lower PE ratios, it will increase allocation to equities to
capitalise on the upside potential of equities. Historically, such a strategy of
varying the allocation of equity and debt/money market instruments based on the
PE Ratio level has delivered superior risk-adjusted returns over the long term
as explained below, although there is no guarantee that this past performance
will be repeated in the future.
The
equity component of the scheme will be passively managed and will replicate the
NSE Nifty Index and the debt/money market component will be invested in quality
debt and money market instruments.
What
are the benefits of such a strategy?
·
Since
the fund will sell out when the markets are high and buy when the markets are
low, investors will see less volatility in their asset
values.
·
There
is an inherent buy - sell discipline which ensures there is no room for
subjectivity or error of judgement.
How has such a strategy
worked in different market conditions?
When
stock markets are at a low
The following table gives
the annualised compounded returns by adopting two different strategies – one
with an equity portfolio rebalancing at monthly intervals based on changes in PE
ratio as detailed in the section ‘Asset Allocation’ under the chapter
‘Investment Objectives and Policies’ above and the other without rebalancing
|
|
10
years |
5
years |
3
years |
1
year |
|
Portfolio
based on PE Ratio |
9.8% |
12.0% |
18.6% |
-1.3% |
|
Fully
invested portfolio |
5.6% |
2.8% |
5.3% |
-18.7% |
As
on December 3, 2001
Data
source for BSE Sensex and PE Ratio values - The Stock Exchange Ltd., Mumbai
(website: http://www.bseindia.com/). BSE
Sensex has been used instead of NSE Nifty as the latter’s historical PE Ratio
data is not available.
Past
performance is not an indicator of future performance.
As
can be seen from the above table, the strategy of rebalancing the portfolio
based on PEs has outperformed a fully invested portfolio across all time
periods.
When
stock markets are on a bull run
At
the peak of a bull market, however, a portfolio rebalanced on PE ratios, may not
outperform a fully invested portfolio as can be seen from the following table
:
|
|
9
years |
5
years |
3
years |
1
year |
|
Portfolio
based on PE Ratio |
14.4% |
13.8% |
12.9% |
42.6% |
|
Fully
invested portfolio |
18.5% |
10.3% |
13.5% |
59.9% |
As
on March 1, 2000
Data
source for BSE Sensex and PE Ratio values - The Stock Exchange Ltd., Mumbai
(website: http://www.bseindia.com/).
Past
performance is not an indicator of future performance.
Across
market cycles
The
following graph illustrates the effectiveness of these two strategies across
market cycles. As can be
seen in rising markets, a fully invested portfolio has delivered better returns,
while a portfolio rebalanced on PE ratios has preserved value better in falling
markets.
The calendar
year returns of a fully invested portfolio and a portfolio based on PE Ratio are
given in the boxes above the graph which depicts the movement of the BSE Sensex
from January 1991 upto December 2001.
In
conclusion, the strategy of monthly rebalancing can deliver steady and
risk-adjusted returns over the long term and provide a smoother journey towards
one’s financial goals.
Investors
may note that the above examples are only for illustrative purposes and not the
actual returns delivered by Pioneer ITI PE Ratio Fund in the past, nor do they
indicate the future return potential of the scheme. These examples have been
given to enable a prospective investor understand how a rebalancing strategy can
work and take an informed decision.
Rationale for choosing PE
Ratio to represent market levels
PE
ratios reflect the price one pays for a unit of earnings and has historically
provided an indication of how overvalued or undervalued the stock market is.
This is especially true for a major index like Nifty, whose highly liquid stocks
are constantly monitored and whose weighted average PE ratio reflects how much
value market players put on their earnings power. If we look at the graph below
it will be evident that bull phases in the markets are marked by high PE levels
and bear phases by lower PE ratios.
Source
: ABN Securities
As can be seen from the
graph, the historical PE ratio for the last five years has been in the range of
28 and 12.
Nifty
: