What’s common between PPFAS mutual fund and an 18th century B.C. King, Hammurabi? During those times, anyone who built public infrastructure had to take a personal stake in its construction. If the building were to collapse, then severe punishment lay in store for those who built it. The builder would therefore be forced to have some skin in the game to ensure his work stands.
Inspired by the ‘Hammurabi Code,’ as it was called back, PPFAS MF’s founder Parag Parikh had made it a policy for the house to disclose the details of the investments made by fund managers, directors and even employees, in its own schemes. But what about other fund houses? Do their senior management personnel invest in their own funds?
Skin the game
In 2015, shortly after Nilesh Shah had joined Kotak Mahindra mutual fund as its chief executive officer, the fund house said that if its employees chose to invest in mutual funds, they would do it in the AMC’s schemes. “We took a voluntary pledge. And it does work, because it shows confidence that employees have in their own funds,” says Lakshmi Iyer, CIO-Debt and Head of Products, Kotak Mahindra AMC.
DSP mutual fund, too, has made it mandatory for its employees to make incremental investments in the schemes of the house, from March last year. The fund house also prohibited employees from making any direct investments in shares, bonds and debentures of a company.
Another prominent example is Quantum mutual fund. The fund managers and members of its research team, besides other staff across functions, invest in AMC’s own schemes. Quantum’s fund managers and employees contributed 6.4 percent of the assets under management of the AMC at the end of March 2020, as per its website.
Should AMC employees compulsorily invest in own schemes?
No, they don’t have to. Nor is it mandatory for them to publicly disclose their own investments. SEBI however mandates disclosure of fund managers or the AMC’s board of directors or ‘other key managerial personnel’ investing in a scheme in its offer document. But fund houses that nudge their managers to eat their own cooking say that it gives comfort to investors.
“This (disclosure) also places an implicit onus on us to make optimum use of our time and abilities in order to enhance the scheme's performance and eschew the reckless behaviour that fund managers are sometimes accused of,” says Jayant Pai, head-products, PPFAS MF.
“Globally, disclosure is a well-accepted good practice. It is a good signalling factor,” says Kaustubh Belapurkar, director, fund research, Morningstar Investment Adviser India. “Investors look at whether they (fund managers) are eating their own cooking,” he says. “It makes sense for fund managers to have skin in the game. We encourage our fund management team to invest in our schemes,” says Chandresh Nigam, MD and CEO, Axis MF.
But Jimmy Patel, MD and CEO, Quantum MF feels that disclosures at an individual fund manager level is not necessary and it creates unnecessary peer pressure,” says Jimmy Patel, MD and CEO, Quantum MF. “Giving information (on individual holdings) is an issue as people start tracking (purchases and sales). If the fund manager withdraws funds, it would become a talking point,” he says. Patel is in favour of disclosures at the AMC level rather than providing information on each and every transaction made by fund managers.
In 2014 though, the capital market regulator, Securities and Exchange Board of India (SEBI) mandated that all fund houses must invest atleast 1 percent of their new fund offer collection (in case it’s a newly-launched scheme) or 1 percent of their existing corpuses (for on-going schemes) subject to maximum of Rs 50 lakh in each and every open-ended scheme they own and manage. This, in other words, is called ‘seed capital’.
Why is this information important to you?
Many actively-managed equity funds have failed to deliver benchmark-beating returns for quite a few years along the way, especially as they gained in size. Actively-managed large-cap funds, in particular, have faced performance challenges. Given that mutual funds are not risk-free, it has been felt that fund managers should also put their own money in the schemes that they manage to put their money where their mouth is, as the phrase goes.
Can fund managers/employees be coaxed into deploying own money in their schemes?
Some industry observers say that fund managers should not be made to invest their personal money in MF schemes just because they manage them. “The objective and profile of the fund manager is quite different from an individual investor,” says a top official with a leading AMC. This official says that investors should not get carried away by how much a fund manager commits in his own scheme. The objective and profile of the fund manager are quite different from an individual investor’s,” says a top official with a leading AMC.
“Investments in own schemes should be voluntary,” Patel says. “Many factors go behind an investment decision, and not just the fact that a fund manager is managing a particular scheme. Investment decisions are at best left to individual investors,” he says.
It is true that an investment decision depends on many factors. An investor’s financial goals, investible surplus, risk profile and so on are important.
That said, it does inspire confidence if your fund manager invests in schemes he manages and also discloses this. Typically, this information can be found in an asset management company’s website. But, as it’s not mandatory for fund managers to invest in their schemes, do your own assessment on the merits of a particular scheme. If you do not have the time and/or the acumen to do so, take the help of an advisor.