August 21, 2017

Watch Out For Clandestine Portfolio Changes

In May this year, Birla MF (now, Aditya Birla MF) announced changes in the names of three of its ‘MIP schemes’: BSL Monthly Income, BSL MIP, and BSL MIP II- Savings 5 Plan.  What is noteworthy about these changes is that these were intended to mask some of the most brazen portfolio changes that I can remember seeing in any scheme in recent times.  Thankfully, two months later, SEBI shot down the name change decisions, forcing the fund house to “reinstate” the original names.  Unfortunately, despite SEBI’s intervention, the portfolio changes continue to remain, largely unnoticed.

In this post, I’d like to spotlight some of those changes and make the case for stricter regulation of scheme portfolio changes.  Equally importantly, what I share here, should serve as a cautionary tale for investors on the need to closely monitor the portfolios of the schemes that they invest into.  Note: This post has been pieced together from publicly available information and conversations with people supposedly in the know.  I reached out to the spokesperson of the fund house for its side of the story but for reasons best known to him, there was no response from his side.

The roots of the name changes of the abovementioned schemes can be traced back to January this year, when someone on the investments team at Birla MF initiated the idea to launch three debt schemes that would have significant exposure to instruments rated lower than AA.  As the idea was bounced around, it was felt that launching new schemes would be time consuming and expensive and, as an alternative, it was proposed that three of the existing MIP schemes be converted into pure debt schemes.  The fund house had four MIP schemes that had been around for several years but only one of those schemes had seen its AUM grow somewhat consistently.  The other three schemes, despite being in existence for an average of 16 years, had a combined AUM of just under 650 crore (as on December 31 2016).  More to the point, in their existing form, these three schemes did not seem to have much of a future.  Thus, it made sense for the fund house to explore the possibility of converting these schemes.  On the flip side, though, there was at least one key obstacle that would have to be overcome.  Converting a MIP scheme into a pure debt scheme would mean, as some would say, a change in the asset class of the scheme, and ran the risk of being rejected by SEBI.  Apparently, a few months earlier, SEBI had turned down a similar proposal by another fund house.

In order to manoeuvre this idea past SEBI, the fund house hit upon a plan to present it, not as a series of scheme conversions, but as a set of scheme name changes.  But to make a credible case, some groundwork needed to be done.  This was to be in the shape of two sets of changes that would be made to the portfolios of these schemes.  The first involved removing the equity exposure of these schemes.   The second involved reworking the portfolios so that there was a greater allocation to debt instruments that were rated lower than AA.  Thus, in March 2017, the work on restructuring the portfolios of these schemes began.  By the end of the month, the portfolios looked very different from those at the end of the previous month (or any earlier month).  The changed portfolios continued through April 2017, and the groundwork for the name changes was in place.

It is in the magnitude of changes made to the scheme portfolios that one can truly understand the lengths to which the fund house was prepared to go to accomplish its questionable objective.  To help you get a sense of that, I have given below a table which shows the extent to which each scheme’s portfolio was invested in equities, and in debt instruments rated lower than AA, before and after the change.  To present a fair picture, for the investments before the change, I have taken the average portfolio holdings for the 12 months from March 2016 to February 2017 while for the investments after the change, I have taken the average portfolio holdings for the months of March 2017 and April 2017.

BSL Monthly
Savings 5
Average % of Portfolio in Equities
      March 2016 – February 2017 16% 17% 11%
      March 2017 – April 2017 0% 0% 0%
Average % of Portfolio in Securities Rated A+/ A/A-
      March 2016 – February 2017 9% 9% 9%
      March 2017 – April 2017 41% 43% 43%

Based on month-end portfolio disclosures.  All percentages are calculated on invested portfolios to avoid impact of cash holdings.  Data source: Prudent Corporate Advisory Services Ltd.

By any measure, this would seem to be a radical transformation in the portfolios of these schemes.  If I were an investor in these schemes, seeing such a sudden and drastic shift would make me seriously consider exiting these schemes.  At the very least, I would expect an explanation from the fund house.  Yet, as far as I can make out, no communication was sent to investors intimating them about these changes.  It makes me wonder about the adequacy of the regulations that govern mutual funds that a fund house can get away with making such sweeping changes to the portfolio.  I would argue that making changes of such a magnitude should be subject to the same requirement as is changing the fundamental attributes of a scheme i.e. investors must be given the option to exit without any penalties. 

As for the fund house, I am sure that it would contend that it was acting within the law, and it would be right about that.  I question its sincerity to the spirit of the law, and its morality.  I look at its actions as trampling upon the trust of its investors.

Next ➡ ⬅ Previous