Do mutual fund managers practise what they preach?
The aim here is to remind fund management teams in the industry that they have a fiduciary responsibility towards investors and their conviction is best judged when they invest in their own funds.
The mid and small cap indices have been on a roll on Dalal Street. Investors wanted to know if we are still positive on one of our recommended mid cap funds, Mirae Asset Emerging Bluechip Fund. My answer to this question was that I personally have a running SIP for my child in this fund. I later got a feedback for this answer that, if I am parking my own surplus into the said fund, then this means that my money is where the mouth is.
If this kind of an answer from a Research Team can convince our investors, then imagine the comfort they will get when they see their fund managers parking their own surplus into the funds that they manage. It is in this context that I decided to do a quick analysis to see how many of our fund managers were parking their surplus into funds that they propagate to investors. I have restricted the universe to the 55 funds recommended by us for 2016 and this includes:
• 35 equity funds
• 15 debt funds
• 5 hybrid funds.
The data on this is easily available, as SEBI, in a circular on Mutual Funds in March 2016 has mandated that the additional disclosures in Scheme Information Document (SID) of a Mutual Fund should include the following:
The aggregate investment in the scheme made by AMCs Board of Directors, concerned scheme’s fund Manager(s) and other key managerial personnel.
We got hold of the latest SIDs of these funds uploaded on the respective websites and our conclusion was on these lines.
• Out of the 35 equity funds, there were 13 funds, in which the fund manager’s exposure into their respective funds was nil.
• Only 3 out of 15 debt funds had fund managers parking their own surplus into their funds.
• Except for 1, all the other Funds in the hybrid category had fund manager’s money invested into their respective funds. Although here, we are not able to decipher if the surplus parked belongs to the equity/debt fund manager.
• In short, fund managers are on the “walk the talk” mode in the case of 53% of our Recommended Funds.
• The investments in the respective funds ranged from ~INR 4000 to INR 2.5 crore.
• There were 5 fund houses, wherein all the funds included in our list had fund manager surplus flowing in them. They were Axis Mutual Fund (2 equity funds and 1 debt fund), Reliance Mutual Fund (4 equity funds), Mirae Asset Mutual Fund (1 equity fund), L&T Mutual Fund (1 equity fund) and HDFC Mutual Fund (1 balanced fund). It needs to be noted here that the last 3 fund houses only had 1 fund included in our list.
• The top 5 funds wherein the fund manager surplus flowed in belonged to Kotak Select Focus Fund, Mirae Asset Emerging Bluechip Fund, Birla Sun Life Dynamic Bond Fund, HDFC Balanced Fund and SBI Blue Chip Fund. The surplus ranged from INR 2.5 crore to INR 60 lakh.
In the case of equity, more than 60% of the funds have fund managers investing into their funds. However, the point that comes to mind is that parking a few thousands/nil exposure into funds is sending a strong message –while the fund houses have tried their level best in making their funds reach the milestone in terms of AUM, they are not able to convince the captain of the ship to park his/her surplus into the funds that they manage.
As far as debt funds are concerned, it is alarming to see that 80% of the funds do not have any fund manager exposure. This includes funds both in the credit and duration spaces which are volatile categories as far as fixed income is concerned. The question is “Do our debt fund managers think that the grass is greener on the other side that their surplus is parked in equities or in bank FDs?” We advise our investors to move their surplus from bank savings account/ FDs which are considered by them to be one of the safest instruments, into credit or duration funds. In this case, such a data point is not giving a convincing picture on why investors should take risk in fixed income funds when the fund managers themselves are not parking a single rupee in these funds which are considered to be risky vis-à-vis surplus parked in banks.
My intention in this column is not to get into the asset allocation strategy that our fund managers adhere to when it comes to their own surplus; the aim here is to remind fund management teams in the industry that they have a fiduciary responsibility towards investors and their conviction is best judged when they invest in their own funds. After all, our fund managers on an average are managing not more than 5 funds, unlike research teams that advise on funds wherein the recommended funds can be more than 50. It is interesting to see the mutual fund industry move into a phase where we have a set of fund houses who are openly displaying data on their website, showing entire employee contribution to the fund. They have been telling investors that they have skin in the game even before the Regulator came out with this diktat.
As far as our investors are concerned, this startling revelation should not increase their stress levels as they need to continue following their asset allocation and take exposure into funds depending on their risk profile, goals and time horizon. The recommended funds have been selected on the basis of stringent quantitative and qualitative parameters. These also include hours of discussion with the Fund Management teams to understand the strategies being followed in these funds. This data on the fund manager’s exposure into his/her own fund should only give comfort to our investors that along with them, their fund managers will also go through the same ups and downs that the fund subjects them to. This data point strictly should not be the criterion for including funds in their portfolios. However, we would like to see fund houses acting on this data point and making sure that their fund managers invest a little bit of their surplus into their own funds which will be music to the ears of our investors.
iFAST and/or its content and research team’s licensed representatives may own or have positions in the mutual funds of any of the Asset Management Company mentioned or referred to in the article, and may from time to time add or dispose of, or be materially interested in any such. This article is not to be construed as an offer or solicitation for the subscription, purchase or sale of any mutual fund. No investment decision should be taken without first viewing a mutual fund's offer document/scheme additional information/scheme information document. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Investors should seek for professional investment, tax, and legal advice before making an investment or any other decision. Past performance and any forecast is not necessarily indicative of the future or likely performance of the mutual fund. The value of mutual funds and the income from them may fall as well as rise. Opinions expressed herein are subject to change without notice.