July 28, 2017

Another Baffling Scheme Merger

Mutual fund scheme mergers should be straightforward stuff, or so I thought. 

In a post, last year, I noted my surprise at the demise of Sundaram Growth Fund on account of its merger with Sundaram Select Focus.  For quite some time, Sundaram Growth Fund had been the flagship equity scheme of Sundaram MF and at the time of the merger, it had a 19 year track record with a CAGR of over 15%.  Shortly before that, Sundaram MF had effected another merger: that of two of its MIP schemes.  In another post, last year, I had questioned the merits of this merger on multiple counts, not the least of which was that investors in the less riskier MIP scheme, so to speak, were asked to shift into the more riskier MIP scheme, and without being adequately briefed on the risks in doing so.  To be clear: in both instances, my puzzlement wasn’t with the mergers per se but with the choices made by the fund house related to the mergers.  And now, a few months ago, Sundaram MF, yet again, merged two of its schemes in a manner that has left me perplexed. 

The merger I refer to is that of Sundaram Banking and PSU Debt Fund (S-BPSU) with Sundaram Flexible Fund Short-Term Plan (S-Flex).  In my limited understanding, there was no real reason for these schemes to co-exist in the first place.  Despite claims in the SID that the differentiating aspect of S-BPSU was that it was “the only Scheme in Sundaram Mutual Fund having the mandate to invest predominantly in Debt and Money Market instruments issued by Banks, PSUs and PFIs”, as far as I can make out, for the two years that they co-existed, both S-BPSU and S-Flex had similar portfolios in that respect.  Hence, I’m inclined to believe that the launch of S-BPSU in 2015 was an exercise in duplication, and that the recent merger brought an end to that.  While I will let better minds than mine elaborate on the reasons for their co-existence, I would like to move straight into what I think is the most curious aspect of their merger. 

Right after S-BPSU was merged into S-Flex, S-BPSU should have ceased to exist.  But that’s not quite what happened.  Instead, on the very same date, S-Flex was renamed as – hold your breath - Sundaram Banking and PSU Debt Fund. Lo and behold- S-BPSU was born again!

Right off the bat, this throws up the question: why didn’t they simply merge S-Flex into S-BPSU (rather than vice versa)? 

One answer to this appears to be that the AUM and investors under S-Flex were far more than S-BPSU.  But that still doesn’t explain the need for the change in the name.  Also, consider this: the trailing 1 year return (at the time of announcing the merger) of S-Flex (regular plan) was 7.81% while for S-BPSU (regular plan) it was 9.87%.  This was despite the fact that the expense ratio of S-Flex was less than S-BPSU by 0.33%.  Given that both schemes had supposedly similar portfolios, if that is any indication of their relative performances, it would appear that the better performing scheme was merged into one that hadn’t performed as well.

There is another answer that has been offered by a couple of industry insiders, though without specific evidence.  Hence, you are free to regard this as speculation.  According to them, schemes that are branded as “Banking and PSU Debt” funds, constitute an important sub-category among debt schemes, and have come into being primarily in response to the needs of some big-ticket investors.  Furthermore, they have suggested that many of these investors prefer schemes with a significant track record and AUM.  The erstwhile S-BPSU had neither, while the new S-BPSU has both.  Based on that, it is their view that the merger may have been effected in this manner to acquire these characteristics at one go.

Frankly, I don’t know what to make of all of this: to me it is simply baffling.  Perhaps, Sundaram MF might want to clear the air on this.

Next ➡ ⬅ Previous