December 24, 2014

Expense Ratio or Expendable Ratio?

This is a long post.

Much as I love the concept of mutual funds, I have a problem with some of the business practices of individual fund houses.  One area where I find nearly the entire industry deficient is the disclosure of expense ratios. 

It starts with SEBI and AMFI which, as far as I am aware, have never conveyed or stressed the importance of the expense ratio as a simplified representation of the annual expenses charged to a scheme.  They have never highlighted the relative significance of (and need for) calculating and disclosing current expense ratios and historical expense ratios.  Not surprisingly, therefore, the guidelines as to the disclosure of the ratio are inadequate, and fund houses find themselves mostly free to choose their own way of disclosing expense ratios.  Going by the manner in which they do so, I get the impression that most fund houses do not appreciate the importance or the benefits of this disclosure. Worse, I also get the feeling that there are some that treat this disclosure with disdain.  

As I see it, any fund house desiring to position itself as being fair and transparent should base its disclosure on at least four rules (there are others that are desirable but I will leave those out, for now).  These are:
  1. The current expense ratio of any scheme should be easy to locate, and easy to understand.
  2. It should be easy to compare current expense ratios across schemes.
  3. The expense ratio of any scheme should not be changed very frequently and significantly.
  4. If the ratio for a scheme is changed, it should be possible to understand from when this change comes into effect and compare the new ratio with earlier ratios.
Reasonable and logical as these rules are, I find that very few fund houses follow a policy that scores on all four counts.  As an illustration of that, and of the differences in the policies of individual fund houses, I have given below some details of how the top 10 fund houses (by AUM) fare on these four areas.  Based on my assessment, I have also assigned a score that attempts to encapsulate the depth and quality of each fund house’s disclosure policy.  While doing so, I am assuming that any reference to the expense ratio outside of a financial statement is a reference to the current expense ratio, unless otherwise mentioned.

HDFC: 1.5/4
Expense ratios are disclosed on the website, on each individual scheme page.  If you don’t know where to look, these may be difficult to find because the website search doesn’t help.  It is difficult to compare expense ratios across schemes.  Once the ratio is changed, there seems to be no way of knowing what the earlier ratio was.

ICICI: 2.5/4
Expense ratios across the schemes are disclosed on the website in a downloadable file.  If you don’t know where to look, it may be difficult to find because the website search doesn’t help.  For some schemes, it is easy to understand and compare the ratios while for others, it is difficult to do so.  The file appears to be uploaded daily.  Historical files do not appear to be available on the website, hence, a scheme’s current ratio cannot be compared with its earlier ratio.  Expense ratios for ETFs are also mentioned in the monthly fact sheet.  As for other schemes, the fact sheet mentions the “year to date expense ratio.”  However, the manner in which this is presented makes it near-impossible for anyone to decipher this information.

Reliance: 2.5/4
Expense ratios across the schemes are disclosed on the website in a downloadable file.  The link, while not easily visible, can be located through the website search.  For some schemes, it is easy to understand and compare the ratios while for others, it is difficult to do so.  The file appears to be uploaded once or twice a month, and shows the date from which each expense ratio is effective.  Historical files do not appear to be available on the website, hence, a scheme’s current ratio cannot be compared with its earlier ratio. 

Birla Sun Life: 1.5/4
Expense ratios across the schemes are disclosed on the website in a downloadable file.  If you don’t know where to look, it may be difficult to find because the website search doesn’t help.  For some schemes, it is easy to understand and compare the ratios while for others, it is difficult to do so.  The file appears to be uploaded very frequently, and shows the date from which each expense ratio is effective.  Historical files do not appear to be available on the website, hence, a scheme’s current ratio cannot be compared with its earlier ratio.  Instances have come to light that suggest frequent and significant changes in the expense ratios of some schemes.

UTI: 1.5/4
Expense ratios across the schemes are disclosed on the website in a downloadable file.  If you don’t know where to look, it may be difficult to find because the website search doesn’t help.  For some schemes, it is easy to compare the ratios while for others, it is difficult to do so.  The frequency at which the file is uploaded is not clear nor is the date from which each expense ratio is effective.  Historical files do not appear to be available on the website, hence, a scheme’s current ratio cannot be compared with its earlier ratio. 

SBI: 3/4
Expense ratios across the schemes are disclosed on the website and in the monthly fact sheet.  If you don’t know where to look, these may be difficult to find because the website search doesn’t help.  It is possible, though not easy to compare expense ratios across schemes.  To the extent that the historical fact sheets are available on the website, it is possible for one to check the ratio of a scheme at some point in the past.

Franklin Templeton: 4/4
Expense ratios are disclosed on the website on individual scheme pages, as well as in a downloadable file.  If you don’t know where to look, the website search can lead you to the individual scheme pages.  Expense ratios are also disclosed in the monthly fact sheet.  The downloadable file makes it very easy to compare expense ratios across schemes.  The file appears to be uploaded once or twice a month.  The file gives the date from which ratios are effective.  Historical files as well as fact sheets are available on the website making it possible for one to check the ratio of any scheme at some point in the past.

IDFC: 1.5/4
Expense ratios across the schemes are disclosed on the website in a downloadable file.  If you don’t know where to look, the website search can lead you to it.  For reasons not clear, the file is marked “For internal use only,” and does not mention the expense ratios of Direct Plans.  For some schemes, it is easy to compare the ratios while for others, it is difficult to do so.  The frequency at which the file is uploaded is not clear nor is the date from which each expense ratio is effective.  Historical files do not appear to be available on the website, hence, a scheme’s current ratio cannot be compared with its earlier ratio. 

DSP BlackRock: 2.5/4
Expense ratios across the schemes are disclosed on the website on individual scheme pages, as well as in a downloadable file.  If you don’t know where to look, these may be difficult to find because the website search doesn’t help.  For some schemes, it is easy to compare the ratios while for others, it is difficult to do so.  The date from which any expense ratio is effective, does not come across clearly.  There appears to be no way to compare a scheme’s current ratio with its earlier ratio. The monthly fact sheet also gives the expense ratios for each scheme but with the qualification that these are “F.Y. beginning to date.”

Kotak Mahindra: 0.5/4
Expense ratios across the schemes are disclosed on the website on individual scheme pages. If you don’t know where to look, it may be difficult to find because, as far as I can make out, the website does not offer the option to search for anything.  Even knowing that this information is on the individual scheme page is not good enough- there is a non-descript link that needs to be clicked, upon which the expense ratios appear in a popup box.  The date from which any expense ratio is effective, does not come across clearly.  It is difficult to compare expense ratios across schemes.  Once the ratio is changed, there seems to be no way of knowing what the earlier ratio was.

Clearly, there is a need for most fund houses to have better disclosures, and for the industry to have uniformity in their disclosures.

I am often told that with the existence of information portals such as Value Research and Morningstar, an investor is able to get this information unambiguously across fund houses, and hence it doesn’t really matter if fund houses adhere to the disclosure norms that I regard as essential.  I think such a viewpoint is flawed and misses some key issues.  If a fund house chooses to report its expense ratios clearly to these portals and not do so on its website and in its product information literature, then I would hold it guilty of double standards.  I would also regard such a fund house as being blind to opportunities to engage with its customers- every visit to one’s website represents a chance to directly interact with investors- current and prospective.  Then, there is the risk of misreporting.  I have seen instances of differences in the numbers disclosed by fund houses with those shown by the information portals.  Finally, I think it might help to recognize the fact that these portals have their own limitations.  For instance, these only provide the current expense ratio. But, then, I guess that may work well for fund houses that want to bury the past.
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