August 28, 2016

Misrepresentation or Deception?

If you are an old subscriber to this blog, you will know that I don’t put out posts very frequently.  Yet here is a post just two days after the last one.  And like that post, this relates to ICICI Prudential, though on a totally different issue.  So, in case you are wondering if this is more than a coincidence, let me assure you that it is not.  Fact is, my posts are based on issues that come my way- through conversations, emails, or things that I see or read.  I never really know what might catch my attention next or when.  I wasn’t expecting this post to happen so soon after the last one, and I wasn’t expecting it to be about ICICI Prudential.

A few days ago, I was approached by an institutional investor to help check out a few debt schemes, one of which was ICICI Prudential Long Term Plan.  In the process of researching, yesterday I came across a promotional write-up on the scheme, on a website that is frequented by mutual fund distributors.  It was structured as an interview with one of the key people in the fund house and was embellished with a few infographics, a couple of which were misleading and likely in violation of SEBI guidelines.

But what particularly triggered this post was a claim made in the chart below (the original infographic had some dubious tables as well which I removed to put a sharper focus on the point that I want to make). 

image

The title of the chart reads “Three-Year Rolling Returns Since Inception (Mar 28, 2002)”.  Below that title, it is claimed that “59% of the time, the fund’s three-year returns have been more than 10%”.  Right away, this struck me as an impossible claim, and I thought it fit to investigate.  What emerged from that investigation was a long and twisted tale of extreme confusion and questionable actions.  It took some effort to uncover and it may take some effort for a reader to follow.  On my part, I’ve tried to keep things as simple as possible.  If you feel up to the challenge, read on.

ICICI Prudential Long Term Plan was indeed launched in 2002.  As far as I can make out, it started by offering two plans- Growth and Dividend.  Subsequently, between March 2009 and September 2012, at least 10 more plans were added.  One of those plans was called “Premium Plus Growth” and was launched on 20 January 2010 (you’ll shortly see why I singled out this plan). 

In September 2012, SEBI made its “single plan” announcement and directed fund houses to reduce the number of plans under each scheme.  Following that, most of the plans under this scheme were closed for fresh subscriptions.  But while doing so, the fund house, for reasons best known to them, opted to keep the original Dividend plan open for fresh subscriptions but close the original Growth plan.  In its place, the fund house brought in the “Premium Plus Growth” plan. 

Alongside these changes, there was a round of name changes.  The original Growth plan stood renamed as “Retail Cumulative” and the “Premium Plus Growth” plan was renamed as “Growth”.  One could say that this was now the new Growth plan.

But as a result of these changes, there was one other extraordinary change.  It was in how the returns of the scheme since inception were going to be calculated.

Prior to 30 September 2012, the returns since inception for this scheme were calculated using the NAV of the original Growth plan, and based on the inception date of 28 March 2002.  But from 1 October 2012, that plan, now renamed as “Retail Cumulative”, was no longer open for fresh subscriptions.  Thus, the only legitimate way to calculate the returns since 2002 was by using the NAV data of the original Dividend Plan.  But that also meant doing a series of cumbersome calculations, assuming the reinvestment of each dividend, at the respective ex-dividend NAV.  This would be all the more challenging given that under the original Dividend plan, since 2010 (I think),  dividends were being paid weekly.  Of course, thanks to technology, no calculation should be cumbersome.  Yet, the fund house took the easy but dubious way out by using the new Growth plan for the purpose regardless of the fact that this plan did not exist when the scheme had been launched. 

Since the new Growth plan had come into existence on 20 January 2010, the fund house made this the inception date for the purpose of all future calculations.  As if this was not questionable enough, the scheme page on the fact sheet continued to prominently mention the inception date of the scheme as 28 March 2002.  In contrast,  the fact that the returns since inception were based on an inception date of 20 January 2010 was tucked away as a footnote to the calculations.  

Misrepresentation?  Deception?  I’ll let you think about this for a bit. 

Once you’re done, take another look at the chart above.  It will be a lot more easier to understand how deceitful that chart is.

As in the fact sheets, the chart title prominently refers to the date of inception as 28 March 2002.  But the actual chart and the claim of “59%…” is based on investments made between January 2010 and July 2013 using NAV data of the new Growth plan.  In other words, the chart title is factually incorrect and misleading.  The chart should actually have been titled “Three-Year Rolling Returns Since Jan 20, 2010.”   The claim of “59%…” is also misleading because it represents too brief a period to justify any inferences from three-year rolling returns.

But that’s not all.  The claim of “59%…” is, in fact, such a colossal distortion that it makes one wonder about the audacity of those who make the claim.  Let me explain.

While investigating this issue, I realized that if the fund house truly wanted to convey a fair picture of its historical rolling returns from 2002 onwards, it would be easy to do so.  One of the ways (it is not the best way but it is pretty accurate and easy to explain), is made possible by investors in this scheme’s original Growth plan (now renamed as “Retail Cumulative” plan), who continue to hold investments.  As long as they continue to hold their investments, the fund house is required to declare a daily NAV for this plan.  As a result, for this plan, one can get the daily NAVs all the way back to 2002.

So I pulled out historical NAVs of this plan and analyzed the three-year rolling NAV growth based on this data.  Contrary to the fund house’s claims of “59%… ” my calculations suggest that only 24% of the time have the fund’s three-year returns been more than 10% pa.  In fact, for investments made in the nearly 8 years before January 2010, it appears that only 6% of the time were the fund’s three-year returns more than 10% pa.  Without mincing words, that is one hell of a difference. 

And it gives one a lot more to think about.

Firstly, think about how perverted and misleading the fund house’s claim actually is, and what if somebody believed that claim in good faith. 

Secondly, think about the possibility that there may be other claims which one may have accepted in good faith and which are equally or more misleading.

Last but not the least, think about how it might be that a claim that is so obviously implausible, missed being spotted by the brainy people in the fund house.

As I see it, on the part of ICICI Prudential, this is either an incredibly careless misrepresentation or a daring, skillful deception. 

Update (29 August 2016): Once again, a reader of this blog wrote in to say that he had shared this post with some of the senior management of ICICI Prudential (this is the same reader who I mentioned in the update to the previous post).  A short while ago, when I checked on the aforementioned website, I saw that the above infographic had been replaced with a new one.  In the new infographic, the title of the chart is now “Three-Year Post Tax Rolling Returns”.  There is also an additional footnote in tiny print that reads “Investments Period: January 2010 to July 2013.  Information only for Distributors.”  The misleading claim of “59%…” remains.

Whether ICICI Prudential acknowledges this or not, it is now pretty clear that this blog and likely the actions of the abovementioned reader have spurred them into action.  However, in the present instance, the fund house’s action of changing the infographic is akin to sweeping things under the carpet, and does not inspire even an iota of confidence.  The core issue regarding the inception date, as far as I can see, remains unaddressed.  The only way that the core issue can be addressed is by first coming clean.  Thus, the questions about the fund house’s intentions remain.  That they chose to retain the perverted claim of “59%…” despite the evidence in this post, raises further doubts about those intentions.

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