March 22, 2018

Last-Minute Expense Ratio Chicanery

In an earlier post, where I praised SEBI’s recent directives related to scheme expense ratios, I had suggested that these could result in expense ratios being reduced.  I had consciously used the word ‘could’ because I was not sure if all fund houses would whole-heartedly adopt SEBI’s directives in their intended spirit.  I haven’t actively tracked what fund houses have done since then, but based on information that came my way, at least one fund house has given enough reason to doubt its sincerity.

Last week, an investor reached out to me with something that was bothering him.  Towards the end of February, he had invested in ABSL Cash Manager.  At the time of investing, thanks to Value Research, he got the impression that the expense ratio of the direct plan was 0.09%.  A couple of weeks later, someone told him “on good authority” that the expense ratio of the plan had been sharply increased.  However, on the Value Research website, the expense ratio was being shown as 0.08%.  He then double-checked on the Morningstar website which also reflected the same number.  In that backdrop, he had these questions for me:

  • Had the expense ratio actually gone up or had that person misinformed him?
  • If it had gone up, then why hadn’t the fund house intimated him, as it was supposed to, in line with the new SEBI directives?
  • If it had gone up, why was it not being correctly reported on the Value Research and Morningstar websites?

Here, then, is what I could gather.

From 30 Dec 2017 till 27 Feb 2018, the expense ratio of the direct plan of ABSL Cash Manager remained almost unchanged at ~0.09%.  W.e.f. 28 Feb, the fund house did, in fact, jack up its expense ratio to 0.29%.  In absolute terms, that may appear to be a small increase but in relative terms, it was roughly a three-fold increase.  More than that, though, there were some other aspects about this increase that made it appear very fishy. 

The first was related to the timing of the change.  The change happened just one day before some of SEBI’s new directives were to come into force.  Any change on or after 1 March would require a fund house to intimate investors via email or SMS, at least three working days prior to effecting the change.  Thus, by making the change on 28 Feb, ABSL MF managed to sidestep that requirement.  Also, since the change happened on the last day of the month, it would have a negligible impact on the average expense ratio for the month, which is the number that the fund house reports in the monthly fact sheet.  So, if someone tracked expense ratio changes via the fact sheet, the change would not be detected/ suspected until the first week of April, when the next month’s fact sheet would be released.

The second dubious aspect of this change was that it was not made in isolation.  By my count, on 28 Feb, at one go, ABSL MF increased the expense ratios across as many as 38 schemes, some of which had not seen any change in their expense ratios in over a year.  Furthermore, of these, 21 were closed-end schemes.  Why is that relevant?  Those who are familiar with SEBI’s new directives will know that one of the circulars issued by it stipulated that schemes where exit load was not levied, or was not applicable, and where an additional 0.20% was being charged, would not be allowed to do so any longer.  This was especially directed at closed-end schemes, where such expenses were widely being charged.  In other words, it would seem that the increases by ABSL MF in the base expense ratios of these 21 schemes were made to negate the cuts imposed by SEBI. 

There was one last thing that I found particularly disturbing, and that was that some of the open-end schemes in which expense ratios were increased, are among the largest in their respective categories, by AUM.  Take ABSL Cash Plus, for example.  As on 28 Feb, this scheme had AUM of 43,997 crore which makes it, by far, the largest liquid scheme in the industry, by AUM.  A scheme of that size would be expected to have significant economies of scale and would be expected to have among the lowest expense ratio in its category.  Going by the average expense ratio for Feb 2018, which was 0.03% for the direct plan, and 0.12% for the regular plan, that would appear to be true.   But in the case of this scheme, too, the expense ratios of both plans saw a steep increase on 28 Feb, to ~0.19% for the direct plan, and ~0.28% for the regular plan.  Could there be a reasonable justification for such a hike?  I can’t think of any, other than to make money for the AMC.  If my maths is correct, going by the Feb-end AUM, the increase in the expense ratios of this scheme alone, would have resulted in additional income to the AMC of ~19 lakhs per day.

And what about the information given on the Value Research and Morningstar websites? 

It would appear that both these entities have been content to take data on expense ratios from the fund house monthly fact sheets, and not bother with any intra-month changes.  Well, the times are changing, and given the present requirement of daily reporting of expense ratios by fund houses, they’ll have to consider updating data more frequently.  For now, I’d be careful about relying on what they report.  If you want authentic information related to expense ratios, the only place I would recommend is each fund house’s website.

Update (27 March 2018): Some evidence has come to light that suggests that the file with the expense ratio changes on 28 Feb 2018 was actually uploaded on the ABSL MF website only on the evening of 1 March 2018.  If correct, it makes the actions of ABSL MF even more troubling.

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