July 08, 2020

Perfect Timing

A short post on something that caught my eye. 

On 6 July, there was a unusually sharp jump in the NAVs of a few debt funds.  Topping the list was JM Low Duration Fund whose NAV rose by an astounding 19.9%.  Next was a cluster of three funds from Principal MF and two funds from HSBC MF whose NAVs went up in the range of 5.6% to 8.6%.

As far as I can make out, the jump in the NAVs can largely be attributed to the sale of defaulted DHFL NCDs that had matured last year.  Until recently, defaulted debt securities couldn’t be traded after their maturity.  However, last month, in a landmark move, SEBI came out with an operational framework for enabling transactions in such securities.  This decision paved the way for these NCDs to be traded (assuming one could find a buyer). 

From what I’ve been able to gather, following that, on 6 July, these funds were able to sell their NCDs at around 22% of their face value.  Since these securities carried a ‘nil’ value in the books (on account of being completely marked down), the entire sale value qualified as gains for the fund.  Hence, the huge jumps in NAVs.  In fact, in the case of some funds, thanks to the fall in their AUMs, this rise has taken their NAVs above where they were at the time that DHFL defaulted last year.

As interesting as I found this, there was something else that held my attention that bit more, and which will explain the title of this post.

I mentioned earlier that there were two funds from HSBC MF that saw their NAVs shoot up on 6 July.  These were  HSBC Short Duration Fund (up by 8.3%) and HSBC Low Duration Fund (up by 7.7%). 

On 23 June, which was the date that SEBI announced the operational framework, HSBC Low Duration Fund had an AUM of 76.5 cr.  Its AUM had consistently remained in the range of 75-78 cr since the start of the month and continued to remain so till 25 June.  Then, on 26 June, there was a huge inflow (estimated at ~16 cr) as a result of which the AUM spiked up to 92.5 cr.  From then onwards (up to the 6 July NAV jump), the AUM remained in the range of 93-95 cr.  That leads me to believe that the increase in AUM on 26 June was driven by a single large investor (or a group of investors acting collectively) who was/ were betting big on this scheme.  Sure enough, they’ve made a killing.

This throws up a few questions.

What made the investor(s) choose this particular scheme?  Was the timing just a coincidence?  Or was it shrewd thinking on the part of the investor(s)?

As it happens, just about two months ago, I had seen a somewhat similar example of impeccable timing.

Two months ago, on 8 May to be specific, HSBC MF had completely marked down its aforesaid DHFL holdings.  That day, the NAV of HSBC Low Duration Fund fell by 9.7% while that of HSBC Short Duration Fund fell by 9.0%.  In the case of the latter scheme, this was preceded by a very notable change in the AUM.

Over the two business days before the day of the fall, there was a ~19% drop in the AUM of HSBC Short Duration Fund.  On 4 May, the AUM was 271.3 cr.  On 5 May, it fell to 245.2 cr.  On 6 May, it was down to 219.9 cr.  7 May was a non-business day.

Once again, were those large redemptions merely a coincidence? 

I wouldn’t want to insinuate anything but I must confess that in both instances, the timing looks unbelievably perfect to me. 

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