January 03, 2016

Fudging In Plain Sight

A few months ago, I came across an odd discrepancy in the return of a certain equity scheme.  Its official factsheet stated that the CAGR since its launch was 9.5% pa.  Yet, when I looked at the growth shown in rupees (on a standard investment of Rs.10,000, as required by SEBI) it looked remarkably less than what the CAGR suggested.  I crunched the numbers and these translated into a return of 4.4% pa.  For a scheme that had been around for over 15 years, this was a huge difference.  I suspected there may have been a misprint and instinctively decided to cross-check on Value Research.  According to Value Research, the CAGR since inception was 3.3% pa.  Clearly, something was not right.  I decided to dig a bit deeper.  I waded through the official factsheets of earlier months, and the last few annual reports of the fund house and this is what I found out:

  • The difference between the stated CAGR on the factsheet and what Value Research threw up was because they were using different launch dates.  According to Value Research, the scheme was launched 5 years earlier than what was mentioned in the fund factsheet. 
  • The fund house’s last annual report confirmed that the scheme in question was indeed launched 5 years earlier than what was mentioned in the factsheet before me. Initially, it was intended to be a 5 year closed-end scheme, but was converted into an open-end scheme at the end of that period.  It was this date that the fund house had taken as the start date for the purpose of calculating the scheme’s return since inception.  The annual report alluded to it as its “re-launch” date, without elaborating what that meant.  As far as I could make out, the scheme wasn’t re-launched, in any sense of that term, nor was its NAV reset to par.  The scheme continued as it was but with a different structure.
  • Apparently, the above approach towards reporting scheme performance started from March 2013.  Prior to this date, the return since inception used to be calculated considering the launch date, and not the so-called re-launch date.  I could find no clear explanation for this dramatic change in approach.
  • The fund house has four other schemes that were also initially closed-end and which were subsequently made open-end.  For three of these schemes, the fund house’s approach mirrored the approach taken for the abovementioned scheme.  In the case of the fourth scheme, though, the fund house seems to have been consistently using the launch date (instead of the so-called re-launch date).
  • In the case of all the schemes where the so-called re-launch date has been used to calculate the return, the growth in rupees since inception has been consistently misreported in the monthly factsheets from March 2013 onwards and cannot be relied upon.

I find it surprising that something like this has gone unnoticed for so long.  At least, I have not seen anything about this previously in the financial media or on the internet.  And considering that this is still going on, I find it safe to assume that this has not caught the attention of AMFI or SEBI, either. 

I have deliberately avoided naming the fund house in question.  At this point, I feel no need to publicly shame it.  If, anytime in the future, I find it necessary, I will.  For now, I just hope this post encourages a wider, constructive scrutiny of what fund houses report and disclose.

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