October 09, 2016

The Performance Reporting Mess- Part 2

This is a long post. 

As a follow up to my last post, in this I give specific examples on how some fund houses, in the wake of SEBI’s 2012 ‘single plan’ directive, ended up presenting a distorted and incomplete picture of the returns of some schemes.  The purpose behind this post is to encourage investors to look closely at the examples given here and to think about digging deeper into facts and figures, than they might be accustomed to doing.  These examples should also serve as food for thought for fund houses, and for the people at AMFI and SEBI.

For this post, I have chosen four schemes:

  • HSBC Cash Fund
  • BNP Paribas Bond Fund
  • ICICI Prudential Long Term Plan
  • UTI Short Term Income Fund

There is no particular reason for selecting these schemes other than that I felt that together these made a short list that would provide a fair sense of the range of questionable choices made across the industry.  For each scheme, I have given the details of the plans retained and discontinued for fresh subscriptions, followed by my observations on how its returns were calculated and presented before, and after, 30 September 2012.  Some fund houses changed the names of the plans after September 2012.  To keep things simple, I have stuck to the plan names as they existed before the ‘single plan’ policy came into effect.

HSBC Cash Fund

Plans in existence on 30 Sep 2012

Inception date

Uninterrupted NAV History

% of Scheme AUM

Retained/ Discontinued

Regular

Dec 2002

Yes

29%

Discontinued

Institutional

Nov 2003

Yes

6%

Discontinued

Institutional Plus

Jun 2004

No

65%

Retained

Let me talk a bit about the interruption in the NAV history of the Institutional Plus plan.  Sometime in May 2011, there was a period of two weeks or so during which no NAV was declared under the growth option (presumably because it had no AUM at that time).  When the NAV was again declared on 19 May 2011, it was reset to 10 (par value).  Typically,  fund houses use the NAV data of the growth option of any plan to calculate its returns.  This meant that by choosing to retain the Institutional Plus plan, HSBC MF (HSBC) would not be able to show a long-term performance track record under the plan that all investors would henceforth be subscribing to.  That would not have been the case had the fund house retained the Regular plan or the Institutional plan, both of which had an uninterrupted NAV history (in their respective growth options).  Generally speaking, a good, long-term track record is a prized asset for any fund house.  Yet, for reasons best known to it, HSBC preferred to retain the Institutional Plus plan and discontinue the other two plans for fresh subscriptions.  I would recommend considering these facts as you see below, how HSBC calculated and presented the returns under this scheme.

Calculation and Presentation of Returns:

Before Sep 2012 NAV data of the Regular plan was used to calculate returns in the fact sheet.
Sep 2012 to Feb 2013 NAV data of the Regular plan continued to be used to calculate returns in the fact sheet despite the fact that this plan had been discontinued for fresh subscriptions. 
March 2013 onwards HSBC made a change and has been using the the NAV data of Institutional Plus plan to calculate returns in the fact sheet. The launch date of the scheme is prominently stated at the top of the returns table, and elsewhere, as Dec 2002.  However, for calculating the returns since inception, it takes the inception date as 19 May 2011, which is the date from which the Institutional Plus plan has an uninterrupted NAV history.  This fact is put as a cleverly worded footnote, that is easy to miss.  This manner of reporting is also followed in the KIM and the SID.  As far as I can make out, the fund house does not report the performance of the discontinued plans in any of these documents.

 

BNP Paribas Bond Fund

Plans in existence on 30 Sep 2012

Inception date

Uninterrupted NAV History

% of Scheme AUM

Retained/ Discontinued

Regular

Nov 2008

Yes

81%

Discontinued

Institutional

Nov 2008

No

19%

Retained

Like HSBC, BNP Paribas MF (BNP) chose to discontinue the plan which had an uninterrupted NAV history, and retain the plan where there were breaks in the NAV history.  In fact, if my information is correct, between Feb 2009 and May 2010, the growth option of the Institutional Plan had 4 breaks in the NAV, the longest of which lasted for seven months.  Each time, when the NAV history resumed, it was set back to 10.  Despite this, BNP chose to retain this plan.

Calculation and Presentation of Returns:

Before Sep 2012 NAV data of the Regular plan was used to calculate returns in the fact sheet.
Sep 2012 to Feb 2013 BNP made a change and used the NAV data of the Institutional plan to calculate returns in the fact sheet.  The returns since inception that were shown were incorrect because whoever did the calculations, apparently forgot about the breaks in the NAV history of  the Institutional plan. 
March 2013 to May 2013 BNP made another change and reverted back to using the NAV data of the Regular plan to calculate returns in the fact sheet despite the fact that this plan had been discontinued for fresh subscriptions.  For the Annual Report of 2012-13, too, the returns were calculated on the same basis.
June 2013 onwards BNP made yet another change and once again started using the NAV data of the Institutional plan to calculate returns in the fact sheet.  For calculating the returns since inception, BNP has been taking the inception date as 10 May 2010, which is the date from which the Institutional plan has an uninterrupted NAV history.  This fact is put as a footnote to the calculations that is worded in exactly the same way as the HSBC MF footnote, and which is easy to miss.  The launch date of the scheme continues to be prominently stated as Nov 2008.  This manner of reporting continues across the KIM and SID as well.  As far as I can make out, BNP does not report the performance of the discontinued plans in any of these documents. 

 

ICICI Prudential Long Term Plan

Plans in existence on 30 Sep 2012

Inception date

Uninterrupted NAV History

% of Scheme AUM

Retained/ Discontinued

Regular

Mar 2002

Yes

6%

Partially Retained

Premium

Jan 2010

Yes

3%

Discontinued

Premium Plus

Jan 2010

Yes

91%

Partially Retained

For this scheme, ICICI Prudential MF (I-Pru) did a complicated kind of mix-and-match to create a new plan out of two existing plans.  The new plan that they carved out had four options: Growth, Weekly dividend, Quarterly dividend, and Annual dividend.  The Weekly dividend option came from the Regular plan while the other options came from the Premium Plus plan.  I am not even sure if what they did was permissible, and/ or if there were other implications for investors, such as tax.  As far as I could scan through the addendums, I couldn’t see any formal notification to this effect either.  But there is enough of an evidence trail for me to believe that it happened.

Calculation and Presentation of Returns:

Before Aug 2012 NAV data of the Regular plan was used to calculate returns in the fact sheet.
Aug 2012 An incomprehensible change was made and the NAV data of the Premium Plus plan was used to calculate returns in the fact sheet.  I could see no meaningful reason for this change, nor was any reason given.  The returns definitely looked better, so I suspect that that may have had something to do with this change. In the footnotes to the calculations, an obscure line was added which said “Returns shown for ICICI Prudential Long Term Plan Premium Plus Option”.  The footnotes mentioned the date of inception as March 2002 but there was no mention of the inception date of this plan.  Effectively, readers were misled into thinking that the returns since inception related to the period from 2002 to 2012.
Sep 2012 NAV data of the Premium Plus plan continued to be used to calculate returns in the fact sheet.  In contradiction to this, the NAV data of the Regular plan was used to calculate returns in the half-yearly financials. 
Oct 2012 onwards NAV data of the Premium Plus plan continues to be used to calculate returns in the fact sheet. The launch date of the scheme (March 2002) continues to be emphasised whereas the inception date of the plan (Jan 2010) is mentioned only as a footnote.  This manner of reporting continues across the KIM and SID as well.  As far as I can make out, the returns of the discontinued plans are not mentioned in any of these documents.  In promotional material on an external website, it was recently seen that I-Pru made a claim related to this scheme’s returns since 2002, while the actual data used in the claim was only from 2010 onwards. 

 

UTI Short Term Income Fund

Plans in existence on 30 Sep 2012

Inception date

Uninterrupted NAV History

% of Scheme AUM

Retained/ Discontinued

Regular

Jun 2003

Yes

62%

Discontinued

Institutional

Aug 2007

No

38%

Retained

Like BNP and HSBC, UTI MF also chose to retain a plan where there were breaks in the NAV history.  For over a year, between March 2008 and May 2009, there were no NAVs declared under the growth option of the Institutional Plan.  When the NAV was again declared on 22 May 2009 (as per my information), it was reset to 10.  Despite this, UTI MF chose to retain this plan.

Calculation and Presentation of Returns:

Before Jan 2012 NAV data of the Regular plan was used to calculate returns in the fact sheet.  For reasons that are not known, in the fact sheet, UTI has historically followed a practice of mentioning the NAVs of one plan only.  In the case of this scheme, until Dec 2011, the NAVs of only the Regular Plan were shown. 
Jan 2012 to Aug 2012 NAV data of the Regular plan continued to be used to calculate returns in the fact sheet.  But instead of the NAVs of the Regular plan, the scheme page in the fact sheet now showed only the NAVs of the Institutional Plan.  No reason was given for this change.
Sep 2012 UTI made a change and used the NAV data of the Institutional plan to calculate returns in the fact sheet.  In contradiction to this, the NAV data of Regular plan was used to calculate returns in the half-yearly financials. 
Oct 2012 onwards NAV data of the Institutional plan continues to be used to calculate returns in the fact sheet.  For calculating the returns since inception, UTI uses the NAV for 22 May 2009, which is the date from which the Institutional plan has an uninterrupted NAV history.  But this is not mentioned anywhere, not even as a footnote.  The actual inception date of the Institutional plan is also not mentioned anywhere.  In contrast, the inception date of the scheme (June 2003) is prominently mentioned.  In effect, readers are being misled into thinking that the returns since inception relate to the period from 2003 till date.  This manner of reporting continues across the KIM and SID as well.  As far as I can make out, the NAVs and returns of the discontinued plans are not mentioned in any of these documents.  

SEBI’s ‘single plan’ policy in 2012 was intended as a move to benefit investors  But as would be evident from the above, there have been unforeseen consequences.  Thanks to what these, and other fund houses have done, the whole purpose of performance reporting has been defeated.  One industry insider, whom I spoke with, put it rather bluntly when he said: “Performance reports have been reduced to something that is fit for the garbage bin.” 

To some extent, the problem started with the choices that fund houses made, in light of SEBI’s directive.  As I hinted in my last post, I believe every effort should have been made to retain the plans with the longest track record.  The benefits of having a good, long-term performance track record for a scheme can hardly be overstated. But if, for any reason, there were other compulsions, there could still have been a very simple way around that.  All that any fund house should have done was to have shown the returns for each plan separately.  Such an approach would have been logical and practical.  Most importantly, such an approach would have served the purpose of all investors, prospective and existing, even those who continued to stay invested in discontinued plans.

As it happens, I am not alone in this thinking.  Franklin Templeton (FT) and Birla Sun Life (BSL), to name a couple of fund houses, seem to think on similar lines.  I must point out that BSL has followed this approach in the SID and the KIM, but inexplicably, not in the fact sheet.  FT has followed this approach in the SID, the KIM, the fact sheet, and even in the half-yearly financials.  It mentions the inception date of each plan separately, and prominently, and has been doing so, well before September 2012. 

But, then, why aren’t all other fund houses doing something similar?

When I spoke to some industry insiders about this, there were two key reasons that were offered.  The first was that most fund houses were not bothered about these things.  The second was that most fund houses hate transparency.  One individual whom I spoke with, had this to say about a certain large fund house “It is not in their DNA to be ethical and transparent.”  Given what I have seen of fund houses, that’s not hard for me to believe.

I have, in the past, maintained the importance of transparency, ethics, and investor-friendliness in selecting a fund house.  I think all investors need to give this some serious thought as well.

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