June 20, 2019

You Can’t Always Believe What Fund Houses Tell You

“Investors should beware of lies, half-truths and dangerous nonsense.”  This was a piece of advice from someone who represents an institutional investor, that came in the course of an exchange we had, earlier this week.  As it happened, a day or so before, I had seen a cautionary tweet by a well known investor on similar lines.  However, the context of our conversation was somewhat different.  While we talked a bit about general opinions aired in the media, our exchange was largely about pronouncements made by fund houses. 

There is nothing new about fund houses making inaccurate statements.  But there are some who feel that the manner in which certain fund houses are increasingly trying to mess with our perceptions, is a cause for concern.  Sadly, there is very little that is done by way of fact-checking, and such assertions are rarely called out.  That means it’s pretty much up to each of us to be on our guard. 

Here are three instances from recent memory that came up in our conversation.  I would suggest that you look at them as illustrative of a larger problem more than an indictment of the individual fund houses.

ICICI Prudential MF

In a recent piece published in The Economic Times, its spokesperson was quoted as saying:

We had nil exposure to debt papers of IL&FS…

The specific context of the statement is not clear- it may have been about their debt funds in general or it may have been about their credit risk fund.  Also, it is not clear as to what point in time is being referred to.  Regardless, I think it needs at least one piece of additional context- that ICICI Prudential, in fact, held paper of IL&FS Financial Services in two of their FMPs that matured a couple of weeks before the downgrade happened, last year.  As per the last disclosed portfolios of these FMPs, in each of these FMPs, the exposure to IL&FS Financial Services was in excess of 13%. I’ll leave it to your imagination to think about what might have happened if the FMPs and NCDs were to have matured just two weeks later.

Mirae Asset MF

A few months ago, Mirae Asset courted controversy over the decision to reclassify its multi-cap fund as a large-cap fund.  There is nothing that can be accomplished by a large-cap fund that cannot be accomplished by a multi-cap fund, and there was no basis for such a step to be initiated in the interest of investors.  Still, the fund house persisted in defending the indefensible.  In many quarters, it was felt that this move was connected to the forthcoming launch of its focused fund, which would have a multi-cap orientation.  The fund house denied this.  In a piece that appeared in The Economic Times, its spokesperson was quoted as saying:

We are coming up with a focused fund which should not be confused with a multi cap scheme.

Barely three weeks later, in a piece that appeared in Mint, this was how he was quoted describing the focused fund:

It is a true-blue multi cap with no sector or segment bias.

For whatever it is worth, it seems that as per the last portfolio disclosure, 19 of the 28 stocks in the new fund are also part of the erstwhile multi-cap fund (now large-cap fund), with a portfolio overlap of 45%.

Kotak Mahindra MF

Kotak Mahindra was recently in the spotlight for withholding part of the maturity payments to some of its FMP investors.  This had been triggered by its questionable exposure to Essel group companies and complexities arising out of collecting on that debt (I call it a default).  As I had written in an earlier post, one of its spokespersons was quoted as making a series of bizarre statements, most notably this:

I tend to disagree that it is a call gone wrong…

But more than any single statement, the entire argument made by the fund house, of acting in the interest of investors, was dubious, and circumvented key facts.  The fact that the decision to invest into debt instruments secured by shares was something they foisted upon investors.  The fact that they went beyond accepted norms of prudence in having concentrated exposures with up to 20% of some portfolios in Essel group companies.  The fact that they increased that risk by opting for zero coupon bonds.  The fact that the mess they eventually faced, could very well have been anticipated and avoided.  I can go on.  Thankfully, someone on Twitter called them out with a blistering tweetstorm.  Here’s the link.

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