Late evening on April 23, 2020, Sanjay Sapre, president of Franklin Templeton Asset Management (India) Ltd, made probably, one of the most awkward public announcements in his life—that of winding up six of the fund house’s marquee debt funds. These were all open-ended debt funds and weren’t meant to be shut down. Franklin Templeton believed that by winding up the schemes, it would buy the fund house time to sell its illiquid securities once market conditions improved. At the time, the COVID-19 global pandemic was declared, equity markets had fallen sharply and the debt market had frozen.
Debt fund investors rushed to take their money out and fund houses everywhere saw redemptions. Franklin Templeton India was the worst affected because it had been running a high-yield strategy across six of its debt schemes, totaling assets worth Rs 25,215 crore as of April 23, 2020.
Its strategy involved investing in securities that came with low credit ratings but companies where the fund management saw potential of paying its interests, albeit higher than others, on time and timely principal repayment. But when the debt market froze due to COVID-19, buyers shunned bad quality securities of the sort Franklin Templeton held. And so, Sapre and his team started their defence that the funds had to be wound up due to COVID-19-led illiquidity, and not due to the fund house’s own strategy. The verdict is still out.
But there has been some light at the end of the tunnel. Over the past two years, Franklin Templeton has sold most of its illiquid securities as markets and the Indian economy opened up. It has paid most of the investors’ money. SBI Funds Management Ltd, India’s largest mutual fund house and the Supreme Court-appointed liquidator, managed to sell off most of six schemes’ illiquid securities in the last nine-odd months. Franklin Templeton is now getting ready to move on. It wants to go back to distributors and investors and wants to start accepting money again. Moneycontrol’s Jash Kriplani and Kayezad E. Adajania caught up with Sapre at his office for a chat on how Franklin Templeton aims to win back investors’ confidence, whether Franklin Templeton looking to sell out and leave India or if it want to stay on and get back on track.
A side note: Some of the questions we asked Sapre are sub judice as the matter is still being heard in court (the Securities Appellate Tribunal) and quite likely the Supreme Court, thereafter. To these questions, Sapre had no comments to offer. Edited excerpts:
If you had one chance to turn the clock back, what would you have done differently two years ago? We’ve done a lot of introspection. We ask ourselves: if the debt market had not frozen because of COVID-19, would we have had to close these funds? No, we would not.
The funds were fairly liquid even when large redemptions had started across the mutual funds industry in October 2019. And other similar stress periods many years before that. But we hadn’t stressed-tested the portfolio to withstand the kind of illiquidity we eventually saw when COVID-19 set in. That was unprecedented.
Also read: Two years of Franklin Templeton debt fund crisis: Will it win investors back?
One learning is that we need to be even more conservative when it comes to putting our portfolios through stress tests to react to extreme events.
Do you think in retrospect you could have explained credit risks better? Some of your debt funds had a lot of structured exposures, unlisted securities, even exposures in companies where you were the only lender. Perhaps investors understood just ‘credit risk’, whereas layers of credit risks might have been better communicated. If you had read the disclosures, all of the risks were disclosed. So were all the portfolios, every month. The offer documents had all the risks listed in them.
The reality was that the funds gave very good yield. They had a long-term track record and had provided liquidity in tough situations up until then, in 2008 post the Lehman crisis and also in 2013, which was tough for debt funds.
We had seen credit events up until then; Amtek Auto, Ballarpur Industries, JSPL and then IL&FS. The funds had recovered and had continued to provide liquidity.
It’s good that new regulations have been put in place in light of the black swan event (COVID-19) that has happened. But that doesn’t mean what was done was wrong.
I think investors recognise that what we said we would do, we have done it. But no doubt, the trust was broken. We have to now rebuild and regain that trust. A lot of distributors also suffered because they had sold Franklin Templeton schemes. We have to build our trust with the distributors as well.
You may have returned most of the money now. But when investors needed the money back then for their medical emergencies or, say, they had lost their jobs and needed their investments to sustain themselves, they found their money locked up in these debt funds. The pandemic had already set in. How would you go about rebuilding that trust with investors and distributors? We understand that just because we have returned much of investors’ money in the six wound-up schemes, things are not going to turn around for us at the press of a switch. It’s very critical that we return back whatever money still remains to be returned.
In numbers: How has Franklin Templeton Mutual Fund repaid its investors?
Different investors will have their own concerns, which we would need to address. Some investors might tell us that until they get back 100 percent of their stuck money, they cannot trust Franklin Templeton. We can only engage with them, communicate with them regularly and give them updates. We are not going to win that trust (till they get all their money back), because they have drawn a line.
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But for investors who say that we have returned much or all of their money back and that we’ve stuck to our word and therefore are willing to look at us again, they may have other questions to ask us. Others might ask us to explain if we learnt any lessons at all. We’ll have to address those questions also. So, our communication has to be multifaceted.
But, having returned most of investors’ money, we are now at a point to go out and start meeting our distributors and investors—both existing and new—and start talking to them.
Is Franklin Templeton India mutual fund here to stay? Yes, unequivocally. Our parent, Franklin Templeton International, has invested its money here. We are hiring people, we are planning to launch new funds.
Even a period of a few years is nothing in a journey of a few decades. We are not here for days or weeks. We’ve been here for almost three decades. We intend to be here in the long term.
Some distributors are upset with Franklin Templeton, because distributor commissions accrued to them are in limbo and might be returned back to investors. Although this would be a regulatory decision, will distributors forgive Franklin Templeton? The matter is in the court, so I cannot comment. But we have always recognised our distributors, which is why their commission was accrued in the first place. Of course, the entire set of regulations around winding up got tested in this episode. The court will give us clarity, which will set a precedence.
We respect what our distributors have done. We understand their angst and the pain. Distributors have supported our investors through this difficult period.
Among the multiple charges that Franklin Templeton faced, one episode sticks out like a sore thumb. The allegation of Vivek Kudva. How do you plan to tackle that when you start reaching out to your distributors? This is also sub judice and the matter is at the SAT. We, therefore, cannot comment on it.
There were also rumours that some large investors were informed about the impending winding up of the six schemes and they withdrew their money in the nick of time.
Absolutely not. Not a single investor was told in advance. The SEBI’s forensic audit also did not find any incident, it was not there in SEBI's order.
What role will Santosh Kamath, the head of your fixed income funds, play in future at Franklin Templeton India? He headed your fixed income management in the years leading up to the 2020 winding-up crisis. Even today, he is the highest paid official at Franklin Templeton India and is said to be among the highest paid fund managers in India. Given how much time it could take for you to gain confidence among investors and relaunch the debt funds with strategies that require Kamath’s skills, what will be his future at Franklin Templeton India?
Santosh is the head of our fixed income funds. Although he is known for credit strategy, as the fixed income CIO (chief investment officer), he oversees credit and non-credit strategies that have been managed at Franklin Templeton India.
Santosh continues to be our CIO, we continue to run the six or seven funds. Yes, our debt fund basket is much smaller today. That doesn’t mean we are going anywhere. We still have to run debt funds. And we still have a responsibility to our investors for the five or six securities until the time they are fully liquidated.
But would distributors and investors accept Santosh Kamath as a fixed income fund manager again? I think the answer to that is a mixed bag, just as it is for Franklin Templeton Asset Management India.
We’re finding that some investors and distributors are already accepting of Franklin Templeton. We are still doing business and inflows are still coming in. So some investors and partners were supportive throughout from day one, they recognise that this was a one-off event. Some distributors who went away have come back. Some may take longer to come back. Even our equity funds took a bit of a beating because of the debt funds episode.
It’s a challenge and we recognise that.
Word on the street is that Franklin Templeton might launch alternate investment funds (AIF) and run credit strategies and that is where Santosh Kamath is headed to. And your mutual funds’ debt funds will run high-credit strategies, headed by a new fixed income chief. We are not executing any such plan at the moment.
(But) we are absolutely looking at AIF and portfolio management services (PMS), actually. For three reasons. One, a lot of wealth and money from family offices and high net-worth individuals has been investing in AIFs and PMSs. The allocations to traditional fixed income investments has been coming down.
Two, there is demand for credit strategies in the fixed income space through the AIF structure. We will certainly consider entering this space some time, because obviously we have credit expertise in-house. Does that mean Santosh will go there? That is a very future structural discussion.
And three, the emergence of AIFs and PMS is not just happening in India, it’s a global phenomenon.
Therefore, we absolutely want to look at the AIF and PMS space as a future growth opportunity.
We know that you’ve defended your actions in court and still continue to do so. But are you sorry or do you feel Templeton hasn’t done anything wrong? Is there self-introspection? Six months ago, 95 percent of the conversation was around the winding up of the six debt funds. Today, just about 10 percent of the people talk about the winding up.
Many people have heard and understood this. We will continue to present our point of view to investors.
But yes, we deeply regret the liquidity issues that have cost investors and the challenges brought upon our distributors. But was the winding-up decision the right decision to take in the circumstances?
Yes, it was.
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