Franklin Templeton isn’t the only fund house to decide what’s best for the investor.
When Franklin Templeton announced its decision of winding up six of its debt funds, did it serve any stakeholder’s interest at all? Sanjay Sapre, President, Franklin Templeton India, said that the ongoing COVID-19 pandemic had caused the liquidity in the Indian bond markets to dry up. Also, redemptions were heavy and the fund house didn’t really have any choice but to liquidate its portfolio to meet those obligations. Therefore, he claimed that the house had decided to wind up the schemes. Franklin has sought up to five years for fully liquidating the portfolios. Of course, shorter tenured schemes would get their dues sooner than that. But with some investors taking the fund house to court, the Karnataka High Court will now decide what Franklin Templeton should do.
Franklin Templeton isn’t the only fund house to decide what’s best for the investor. One fund house decided to roll over its fixed maturity plans (FMPs) in 2019, when some of their underlying Essel Group securities could not repay lenders (including mutual funds) on time. Many lenders got into a standstill agreement with the Essel Group and gave the latter some more time to repay. Fund houses could have sold the equity shares of the two companies (Zee Entertainment Enterprises and Dish TV) that the Essel Group had pledged against its borrowings. However, as the shares were pledged to many lenders, a mass sale would have sent the stock prices crashing. As a result these funds and their investors would have suffered a loss. Another fund house’s FMPs paid off investors much of their dues back then, but had to wait for a few more months to recover the remaining part.
But is that the right approach? Both the above instances go against the norms laid out by the capital market regulator, Securities and Exchange Board of India (SEBI).
Deciding the right course
FMPs must hold debt securities that mature either before or on the day that they themselves mature. But, by entering into a standstill agreement with borrowers, the tenures of the underlying instruments got extended beyond the FMP’s own maturity. Similarly, stopping redemptions in an open-ended scheme violates the basic principal that allows investors to enter and exit anytime they wish to. But all this was supposedly for the good of the investor!
In 2008, when the equity and debt markets collapsed in the wake of the global financial crisis, there was a rush for redemptions on debt funds, especially FMPs and liquid funds. There was no liquidity in bond markets. A few asset management companies even took over the securities on their books, gave cash to mutual funds to pay off their investors.
Only Mirae Asset Management did not. The AMC steadfastly refused to take losses on its own books. As a result, investors had to redeem at a loss as the fund house wasn’t able to sell its underlying assets in the market. It then sold its most liquid assets at throwaway prices and paid off a portion of its investors’ dues with whatever cash it could generate.
By passing the losses to investors, Mirae did the right thing. That’s what a mutual fund is all about. But Mirae paid a heavy price. From Rs 2,500 crore at the beginning of September 2008, its assets under management (AUM) fell to Rs 199 crore in just four months. Many distributors abandoned Mirae back then. Its first three equity schemes launched after this crisis collected just Rs 28.33 crore, Rs 23.37 crore and Rs 11.3 crore; a pittance when compared to what its peers managed. But Mirae dug deep and built its track record and credibility by sheer performance. One of the above three schemes, Mirae Asset Emerging Bluechip Fund, just turned 10 and now has assets worth Rs 9,829 crore. The number of folios in this scheme has grown from 4,094 to 9,11,629.
Sticking to principles
In 2001, Benchmark Asset Management launched India’s first exchange-traded fund (ETF). Those were the days when hardly anyone in India had ever heard of an ETF. Benchmark had steadfastly refused to pay distributors commissions, as ETFs were anyway available through stock brokers. The founders of the fund house had taken a firm decision to stick to just ETFs as they felt that passive funds were superior to their active peers. Infact, in May 2002, Benchmark AMC filed the draft offer document to launch a gold ETF that was to have been the first-ever gold ETF in the world. But regulatory delays in getting the approval meant that the world’s first gold ETF was launched in Australia in 2003. Benchmark AMC was ahead of its time. Despite modest growth, it didn’t launch a single active fund and led a humble existence. In 2012, Goldman Sachs acquired Benchmark AMC and, in 2015, Nippon India AMC acquired Goldman Sachs. Today, ETFs and gold ETFs have gained prominence.
Quantum and PPFAS have stubbornly walked the straight and right path. With minimal number of new launches, they’ve sought to manage simple products that investors could understand. There was little possibility of mis-selling.
Coming back to Franklin Templeton. By chaining investors to the schemes for months and years, the fund house itself has decided what’s best for its investors. However, a mutual fund scheme is a market-linked instrument, where profits and losses belong to investors. By telling investors that the profits are theirs but not the losses, Templeton has sent out a wrong message. Investors may never really understand the true meaning of risk and return. A massive loss today on a Rs 25,856 crore base, on the other hand, can tarnish the house’s hard-earned reputation. Something, that many firms can go to great lengths to protect.Fundsgate is a periodic column on all things mutual funds and personal finance.