July 09, 2018

Baffling Trades In ICICI Securities

Why would a fund manager buy shares of ICICI Securities in the IPO and then sell them off at a loss, two months later? 

As many of us would know, since its IPO in March, the stock price of ICICI securities has seen a sustained fall.  At no point, thus far, has the price come back to its IPO price of 520.  If I take the month of May in particular, the price ranged between a high of 421 and a low of 352.  Yet in that same month, fund managers across 10 9 schemes that acquired the stock in the IPO, brought down those holdings or exited them completely.  All put together, these fund managers sold off shares worth 96 91 crore at the time of the IPO, at a loss of somewhere between 19% to 32%.

The table below lists the schemes that took this hit.

Schemes that sold shares of ICICI Securities in May 2018

No of shares
bought in IPO

Price: 520
No of shares
sold in May
Price: 352-421
HDFC TaxSaver981,120508,500
Axis Long Term Equity Fund480,788480,788
Reliance Growth Fund288,456288,456
Reliance Banking Fund192,304192,304
Edelweiss Maiden Opportunities Fund-196,18096,180
UTI Multi Cap Fund96,15296,152
Edelweiss Long Term Equity Fund96,15286,183
Kotak Bluechip Fund63,44863,448
Kotak Equity Savings Fund30,74430,744
UTI Banking and Financial Services Fund288,4843,957

Data Sources: BSE, NSE, RupeeVest.

The way I see it, a couple of months is just too short a period for a long term investor to have drastically changed one’s view on this stock.  So what else could explain the actions of these fund managers? 

One view is that the fund managers may have been forced to do this on account of scheme reclassification.  That doesn’t make sense to me because the stock fitted comfortably into the portfolios of all of the schemes on the list above.  Another view is that this might have been done to meet redemptions.  But the extent to which most of these fund managers reduced their positions makes me doubt that.  As it happens, one of the schemes on the list is a closed-end scheme while three others are ELSS.  A third view is that the fund managers may have decided to cut their losses.  While that’s not implausible, it strikes me as an approach that a trader would take and not something that a fund manager would do. 

As I took a closer look at the numbers, something else emerged.  This pertains to three two fund houses whose schemes are listed above: Kotak Mahindra MF, Reliance MF and  UTI MF.  It turns out that in the same month, while their schemes listed above reduced or exited their holdings, there were other schemes managed by these fund houses where the exposure to ICICI Securities was increased.  In the case of the latter two fund houses, the shares sold in one scheme were identical to the shares bought in another scheme, suggesting the possibility that these might be inter-scheme transfers.

Fund houses that took contradictory action on ICICI Securities in May 2018

Action taken
No of shares
Kotak Mahindra MF
Kotak Bluechip FundSale63,448
Kotak Equity Savings FundSale30,744
Kotak Emerging Equity SchemePurchase154,828
Reliance MF
Reliance Growth FundSale288,456
Reliance Banking FundSale192,304
Reliance Focused Equity FundPurchase192,304
UTI Banking and Financial Services FundSale3,957
UTI Multi Cap FundSale96,152
UTI Value Opportunities FundPurchase96,152

Data Source: RupeeVest.

Frankly, I can’t think of any good reason why a fund house would have sold its loss-making investments in one scheme only to buy those shares in another scheme. 

In fact, looking at all of this, makes me question the credentials of the concerned fund houses and fund managers to manage long-term investments.  I came upon all of this information, quite by accident.  But now I wonder that beyond ICICI Securities, where else may something like this have happened, and how often it might have happened.  I guess that unless these fund houses/ fund managers decide to open up about this, we may not know.  Personally, I think that investors in these schemes should press hard for answers.

Correction: The original version of the post incorrectly identified UTI Multi Cap as a fund that had sold shares of ICICI Securities.  That scheme was merged into UTI Value Opportunities Fund.  I apologize for the inaccuracy.

July 02, 2018

Meandering Thoughts On Manpasand Beverages

Now that the results of Manpasand Beverages are finally out, does it mean that the decisions of the fund managers who invested in the stock have been vindicated?

It was just over a month ago that the previous auditors of the company quit, a few days before the results were to be announced.  That triggered speculation that the company may have cooked its books, and sent its stock price tumbling by 50% in the space of just a week.  It also brought media focus on the fund houses that held its stock.  It isn’t often that something like this happens to a stock reportedly held in the portfolio of 21 actively managed mutual fund schemes, overseen by 13 different fund managers across 7 fund houses. 

Many people wondered how was it that so many fund managers held that stock in their scheme portfolios.  A number of them went further and concluded that the fund managers had screwed up.  There were also some who thought it might be better to wait until the financial results, as vetted by the replacement auditors, actually came out.  Well, last week that happened.  And contrary to what many feared/ anticipated, there was no hard evidence of anything being wrong with the company. 

So what should one make of all of this?  Were the fund managers justified in their faith in this stock?  Was this just a storm in a teacup? 

Before I say anything else, let me make this clear: I am not a stock analyst or a business analyst.  Truth be told, I couldn’t analyze a company even if my life depended on it.  Yet I believe that as a mutual fund investor, it is an ironical necessity to have an opinion of one’s fund managers, even if one is not an expert.  As countless experts say, investors should entrust their money for management only to someone whose integrity and competence they feel confident about, or at the very least, they see no reason to question.  The approach that I take to form an opinion, is on the lines of what I proposed here.  And in this instance, I find myself questioning the judgment of the fund managers.

From what I can make out, almost every analyst and portfolio manager who has praised Manpasand Beverages, has relied upon the company’s audited financials.  While that is understandable, history offers plenty of examples of companies whose numbers didn’t add up, and of fund managers who got taken in by those numbers.  Even so, I would have taken the fund managers at their word were it not for questions put forth by those on the other side of the argument: questions which, as far as I can discern, have not met with substantive answers. 

Many of us would be aware of pieces put out by 2Point2 Capital Advisors and MoneyLife Advisory Services which raised several of those questions.  More recently, I came across a thought-provoking comment on an online investment forum that, I feel, deserves close consideration.  Since it is an off-the-cuff comment, I think it would be best to take the numbers in it as approximative.  Also, bear in mind, this was posted much before the company’s results were declared last week.

I have worked in the FMCG biz for 10+ years. Manpasand never passed the sniff test.

The revenue numbers seemed unbelievable. I travel to wholesalers a lot for work and never came across the brand – in sharp contrast to Pulse candy (DS group) where wholesalers were singing paeans to the brand and it was extremely visible in market as well as consumer studies around the time the company claimed a 100 crore revenue. In contrast – this 700 crore brand was barely visible.

The fact that the Nielsen numbers never reflected the distribution is a huge red flag. I have handled a ~500 crore brand and at scale the Nielsen numbers are pretty accurate. They have a very robust sampling size. We used to see barely +/- 10% to our internal numbers annually. If the brand was so big – there is no way Nielsen would not have captured it.

The basics never stacked up. The throughput per store was way too high. For example, Maggi is ~1200 crore at 8 lac retailers. Manpasand at 700 crore for 4 lac retailers means that it would have a throughput per store higher than Maggi. Does that seem credible? To clarify – it is possible for brands to have a higher throughput per store than Maggi. But those are typically brands in high price points and more urban-focused (think Cadbury Silk) – the opposite of what Manpasand claimed.

The advertising seemed way too low. There are great regional brands (Wagh Bakri) – but all of these spend substantially on regional advertising. It is extremely possible for a DS group/Pulse candy to get to 100 crore because the candy category is extremely margin driven – almost 80% through wholesale. But beverages is much more consumer driven – only about 55% through wholesale – and is very hard to drive scale without advertising. Look at Paperboat – it hit a ceiling at ~80 crore and HAD to advertise to grow.

My point is – I can completely empathize with retail investors who were taken in. But I cannot excuse experts such as an ICICI FMCG fund having a 3.73% stake in Manpasand. Did they not validate their stock picks with even a halfway decent FMCG expert?

I wonder if any of the fund houses holding the stock might like to respond to this.

June 12, 2018

Scheme Mergers Can Be Costlier Than You Think

As part of the scheme rationalization exercise directed by SEBI, HDFC MF merged its Balanced Fund with its Premier Multi-Cap Fund w.e.f. close of business hours on 1 June.  To put it more accurately, Premier Multi-Cap Fund, an equity fund, was first transformed into a hybrid fund and was renamed as HDFC Hybrid Equity Fund.  Then, on the same date, Balanced Fund was merged into that fund.  It was a complex manoeuvre that confounded many industry insiders and observers, including me.  

For one, at its heart, this was a merger of a hybrid fund with a pure equity fund.  Mergers between dissimilar funds are fraught with a variety of issues and are hard to justify.  Secondly, if, for some reason, such a merger was warranted, then the most practical and straightforward approach would have been to merge Premier Multi-Cap Fund into Balanced Fund (and not the other way round).  After all, the new scheme was more similar to Balanced Fund than to Premier Multi-Cap Fund.  Also, at the time of the announcement, Premier Multi-Cap Fund had AUM of ~300 crore while Balanced Fund had AUM of ~22,000 crore.  It would have made more sense for the smaller scheme to be merged with the bigger scheme than vice versa. 

Like many others, I decided to write it off as a mystery.  Then, last Friday, an investor in the direct plan of Hybrid Equity Fund reached out to me on this.  He had been an investor in Balanced Fund before the merger, and there was something that bothered him.  From what he could make out, after the merger, the expense ratio of his investments had significantly gone up.  He sought my view on whether this was actually the case.

It turned out that his observation was spot on.  Here are the facts:

  • On 1 June, the date of the merger, the total expense ratio (TER) of Balanced Fund (direct plan) was 0.56% while the TER of Premier Multi-Cap (direct plan) was 2.16%.   Post-merger, the TER of the direct plan of the merged fund (HDFC Hybrid Equity Fund) was 2.16%.
  • On 4 June, the TER of the direct plan of Hybrid Equity Fund was reduced  to 1.43%.  This continued till 7 June. 
  • From 8 June, the TER was reduced to 0.66%.

As would be evident from the above, even after the “reductions”, post-merger, investors in the direct plan of Balanced Fund (who opted for the merger) have been paying more than what they were paying earlier.

There is one other thing worth pointing out over here regarding the reductions.  It would seem that 0.15% of the reduction was on account of a change directed by SEBI to all fund houses.  In other words, if the merger had not happened, it was likely that, thanks to SEBI, the expense ratio of Balanced Fund would have been brought down to 0.41%.  If so, that makes the difference with the post-merger TERs even more glaring.

If my numbers are correct, in the 11 days since the merger, the investors in the direct plan of Balanced Fund (who opted for the merger) have been collectively charged (excluding GST) an additional ~67 lakhs (i.e. over and above what they would have been charged, had the merger not happened).  At present, by my estimate, they are being collectively charged (excluding GST) an additional ~2.3 lakhs per day (unless, of course, the fund house reduces the expense ratio further).

Something similar to this (though not to the same extent) happened to investors in the direct plan of HDFC Prudence Fund .  Like Balanced Fund, this, too, was questionably merged into an equity fund (HDFC Growth Fund) whose attributes were changed to make it a hybrid fund – HDFC Balanced Advantage Fund. 

All of this raises the question: did HDFC AMC act in an unfair manner with the investors in Balanced Fund and Prudence Fund, particularly those in the direct plans? 

Certainly, there are grounds to believe so.  Consider this: pre-merger, the AUM of Balanced Fund (direct plan) was ~3,500 crore while the AUM of Premier Multi-Cap (direct plan) was merely ~18 crore.  If their pre-merger expense ratios were to have been applied proportionate to their AUM, then the post-merger expense ratio should have right away been fixed at 0.57% (instead of 2.16%).

Of course, it can be argued that the merger letter to investors mentioned the then expense ratios of both schemes, so any investor who felt that he/ she was being treated unfairly, could have exited.  On the other hand, it can also be argued there was no mention of the possible increase in expense ratios in the key paragraph on “Consequences of Merger of Schemes” in the merger letter. 

It might be a good idea for SEBI to examine if something can be done to ensure that investors are treated fairly in mergers.

For now, this should serve as a cautionary tale for investors.

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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