October 20, 2016

The Moderately Conservative Aggressiveness of Sundaram MF

If you think that the title of this post makes no sense, wait until you see how Sundaram MF has chosen to interpret the words ‘Conservative’, ‘Moderate’ and ‘Aggressive’.

Until last month, Sundaram MF offered three MIP schemes: MIP Aggressive, MIP Moderate, and MIP Conservative.  As per the Scheme Information Documents (SID), as far as I could make out, the difference between these three schemes was only in the asset allocation.  MIP Aggressive could invest up to 30% in equities, MIP Moderate could invest up to 20% in equities, and MIP Conservative could invest up to 10% in equities. 

When I spoke to some people about how they saw the differences between these three schemes, nearly all of them said that they didn’t need to know the asset allocation of these schemes to understand the differences.  According to them, the names of the schemes (Aggressive/ Moderate/ Conservative) by themselves were a clear indicator of the relative risks across these schemes.  All of them believed that MIP Aggressive would have been more volatile than MIP Moderate which, in turn, would have been more volatile than MIP Conservative.  In fact, I think it fair to presume that the fund house chose these names to convey this impression.  Yet when I looked at the actual volatility of these schemes, a different picture came forth.

For the purpose of my calculations, I looked at the monthly returns of these three schemes from April 2010 through August 2016 (i.e. the period over which all three schemes existed).  I used this data to derive the Standard Deviation over each of 42 rolling 36-month periods.  The result:

  1. MIP Aggressive was consistently more volatile than both MIP Moderate and MIP Conservative.
  2. In 30 of the 42 periods, MIP Conservative was more volatile than MIP Moderate.  One could say that MIP Conservative was more volatile than MIP Moderate about 71% of the time.

Curious, I decided to check the maximum drawdown on each of these schemes.  For those who are unfamiliar with this, the maximum drawdown tells us what is the worst dip in investment value that any investor could have seen across this entire period.  As per my numbers, while the MIP Aggressive had a maximum drawdown of 10.5%, for MIP Moderate it was 6.1%, and for MIP Conservative it was 9.1%.  In other words, some investors in MIP Conservative, at some point during this period, would have seen their investment value dip by 9.1%.  The question: is this what they had expected from this scheme?

But how exactly could this have happened?

I did a random check across the monthly fact sheets of the past few years, and this is what I noted:

  • In each of the fact sheets that I saw, the equity portfolio of MIP Moderate was consistently within the 20% cap, and was mostly/ fully composed of large cap stocks.  The average maturity of the debt portfolio was across all observations, shorter than the average maturity of MIP Aggressive as well as MIP Conservative (often, much shorter)
  • Across most of my observations, the equity portfolio of MIP Aggressive was within the 30% cap, but there were times when this exceeded that cap.  The equity portfolio was mostly/ fully composed of mid cap stocks.
  • Across most of my observations, the equity portfolio of MIP Conservative was within the 10% cap, but there were times when this exceeded that cap (in one month, it was as high as 17%).  The equity portfolio was mostly/ fully composed of mid cap stocks.

I have never been comfortable with labels such as ‘conservative’ or ‘moderate’ or ‘aggressive’.  But if I had to stick my neck out here then I would say that MIP Moderate was clearly more ‘conservatively managed’ than MIP Conservative.  Or to put it differently, investors seem to have been misled into believing that MIP Conservative would be more conservatively managed.

But last month, something changed.

Last month, Sundaram MF merged MIP Moderate with MIP Aggressive.  Thus, MIP Moderate ceases to exist.  So going forward, there should, hopefully, be no more conflict between ‘moderate’ and ‘conservative’.  But that doesn’t take away one fact i.e. there is a lot that is questionable about this merger.  Let me explain.

To start with, the rationale given for the merger is perplexing, to say the least.  To quote from the letter to investors: “The Monthly Income Plan - Moderate has under performed the Monthly Income Plan – Aggressive…”   My question: how on earth can underperformance of one scheme relative to another be a reason for a merger? 

The letter goes on to say “Given the more or less similar asset allocation, similar debt portfolios (which is the major part of the portfolios), similar YTM these two schemes can be merged.”  This is equally bizarre.  Earlier in the same letter, the latest equity allocation of MIP Aggressive and MIP Conservative is mentioned as 20% and 12% respectively.  This is hardly similar.  And even if it were to have been similar, what the fund house chose to do is less relevant than what the SIDs provide for.  The SIDs clearly provide for both schemes to have a different asset allocation.  As for similarity in debt portfolios, the Average Maturity of the debt portion of MIP Aggressive (as on 29 July 2016) was 2.86 years while for MIP Moderate it was 1.63 years. This, too, is hardly similar.  In fact, across all the fact sheets that I randomly scanned, I couldn’t find a single month when the Average Maturity of these two schemes was similar.  Most of the time, the difference in their Average Maturity was much more greater.  Lastly, the rationale for the YTM being similar, insults the intelligence of the reader.  Two very different schemes can have similar YTM. 

But beyond all of this, there are some other serious questions. 

Firstly, given the difference in the risks associated with these schemes, should these have been merged?  On an average, the volatility in MIP Aggressive (as measured by the annualized Standard Deviation) was twice the volatility in MIP Moderate.  Then there are the Drawdown numbers.  Last, and by no means the least, even by SEBI’s Riskometer, these schemes were classified at different risk levels. 

Secondly, if there were still grounds for a merger, shouldn’t have MIP Aggressive been merged with MIP Moderate (rather than vice versa)?  Think about this: the investors in the less riskier scheme, so to speak, were asked to shift into the more riskier scheme. 

Thirdly, shouldn’t this have been clearly communicated to the investors?  At the very least, investors should have been cautioned about the fact that MIP Aggressive was a more riskier scheme.  Nowhere in the letter could I see any reference to this fact, let alone any guidance given to the investors. 

About a month ago, I got an email from a reader in which he alluded to Sundaram MF as a “conservative” fund house.  While I stated my inability to relate to that label, I am certain of one thing: this fund house’s interpretation of ‘conservative’ challenges the way in which any dictionary defines this word.

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