May 23, 2018

More Questions For Kotak AMC

These are questions that have been triggered by readers of this blog in the wake of my last post.  To make the questions more understandable, I have added context and comments.

Q1: Why should investors in Kotak Opportunities Fund, still stay invested?

As per the latest fact sheet, there are ~138,000 folios under Kotak Opportunities Fund.  I am not an investor, but if I was, I’d need a lot of convincing to believe that the fund house has been acting in my best interests.  Why?  Consider the facts that I presented in my last post:

  • Since 2012 (if not earlier), Kotak Opportunities and Kotak Select Focus have had largely identical portfolios
  • Since 2012, Kotak Opportunities and Kotak Select Focus have had the same fund manager

Despite that (based on daily data from Sep 2009 to Apr 2018),

  • Over 1 year periods, 83% of the time, Kotak Opportunities gave less returns than Kotak Select Focus. 
  • Over 3 year periods, 98% of the time, Kotak Opportunities gave less returns than Kotak Select Focus. 
  • Over 4 and 5 year periods, 100% of the time, Kotak Opportunities gave less returns than Kotak Select Focus. 

As I asked in my post, how is this possible?  Is it purely by chance?  Is the better performance of Kotak Select Focus merely a fluke?  Or is there something else to all of this?

I would like to believe that it is chance.  Unfortunately, for reasons best known to them, the fund house has chosen not to confirm this.  And now, the reader who raised this question, brought some information to my notice which makes me doubtful that this is pure chance.  Consider these facts (based on the last available SID) about how the fund manager has divided his own investments across these schemes:

  • Investment by fund manager in Kotak Select Focus: 3.32 crore
  • Investment by fund manager in Kotak Opportunities: 6.31 lakhs

So what should one read into this?  Does the fund manager lack confidence in Kotak Opportunities?  If so, why not ask the investors in Kotak Opportunities to switch to Kotak Select Focus?

Q2: Leave aside Kotak Select Focus.  Why should investors have any confidence in ANY of their other equity schemes?

Now, why would somebody think that?

I was presented two reasons.

One reason has to do with Kotak Mahindra Pension Fund, which is a JV between Kotak Mahindra AMC and Kotak Mahindra Bank.  As a couple of readers pointed out, it seems that for some time now, the equity schemes managed by Kotak Mahindra Pension Fund have been investing their corpus in equity schemes of other fund houses rather than directly into stocks.  To the best of my knowledge, they are legally allowed to do so.  Nonetheless, it begs the question: why? One reader wondered why couldn’t they replicate the “success” of Kotak Select Focus in that scheme.

The bigger point, though, is that investing into schemes managed by other fund houses doesn’t speak well for an entity that claims the expertise that they do.  It simply doesn’t inspire confidence in their fund management capabilities.

For those who are interested, the table below gives the equity holdings of the Tier I equity scheme managed by Kotak Mahindra Pension Fund.

NPS Trust A/c Kotak Pension Fund Scheme E Tier I

Equity Holdings: 31 March 2018
ABSL Top 100 Fund9.64%
ABSL India GenNext Fund9.10%
ABSL Frontline Equity Fund9.64%
DSP BlackRock Opportunities Fund9.02%
Franklin India Bluechip Fund 9.56%
Franklin India Prima Plus 8.04%
ICICI Prudential Focused Bluechip Fund9.31%
Mirae Asset India Opportunities  Fund8.56%
SBI Bluechip Fund9.45%
SBI Magnum Equity Fund7.22%
SBI Magnum Multiplier Fund9.03%

Scheme names have been reproduced as mentioned in the portfolio disclosure, correcting only for typo errors.  Following the SEBI directed categorization and rationalization, the names of some of these schemes have been changed. 

The second reason is similar to what brought about the first question.  It isn’t just Kotak Opportunities: in all of the open-end diversified, domestic funds managed by the fund house (other than Kotak Select Focus), the respective fund managers have negligible investments, or no investments at all.  The table below gives some details.

Investments by equity fund managers in schemes managed by them
Amounts in Rs. Lakhs

Kotak 506.6111.26
Kotak Classic EquityNilNil
Kotak Midcap0.75Nil
Kotak Emerging Equities1.85Nil

Compiled from SIDs dated 26.06.2016 and 26.06.2017

I want to make something clear.  In isolation, I wouldn’t read much into the extent of investment made by a fund manager.  Yes, I applaud fund managers who make significant investments in schemes managed by them, but I don’t hold it against a fund manager for making a negligible investment, or no investment.  There can be valid reasons for that.  In this case, however, there is at least one thing that is different.

In July 2015, the fund house made a public announcement that “its employees will invest only in its own mutual fund schemes” (emphasis mine).  According to the press release, this was based on a belief that like restaurants which display the sign “the owner eats here”, this would show the faith of the employees in their product offerings. 

Well, to extend the same analogy, the owners/ employees may be eating what Kotak Mahindra MF offers, but if the data above is anything to go by, their cooks (the fund managers) seem to largely have an aversion towards their own cooking.  Thus, investors are right to be curious, if not suspicious, about what makes the cooks so averse.

PS: One of my collaborators is willing to wager that in the next updation of the SIDs (due for release shortly), the disclosures will show much more investments by the fund managers in the schemes that they manage.  While I don’t want to bet one way or another, if it does happen, I hope it is because of genuine conviction on the part of the fund managers, rather than because of this blog.

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