Observations On Recent Fund Returns

The last ten months or so have been an extraordinary period for those whose fortunes are linked to the stock markets.  It isn’t often that frontline indices fall by close to 40% and then completely recover from there, all within such a short span of time.  If I am not mistaken, it was way back in 1990-91 that we last saw something quite like this. 

But leave aside the rarity of that: there is a fair bit to take away from fund returns over these past ten months.  In this post I’d like to offer a few assorted observations that stood out for me.  Some are high-level observations while some are scheme-specific.

All calculations are for the period 14 January (Nifty 50 TRI: 17,349) to 6 November (Nifty 50 TRI: 17,392).  Unless mentioned otherwise, the calculations pertain to direct plans.  Data sources: Value Research and FundzBazar.

The inconsistencies of Index Funds
As one might expect from the dates that I mentioned, point-to-point, index funds and ETFs tracking the major domestic indices- Nifty 50, Sensex and Nifty 500-  gave little to no returns.  If you look beyond those indices, the returns across other non-sectoral index funds and ETFs are both much better, and much worse.  On the positive extreme, the lone ETF tracking the Nifty 50 Shariah index gained ~19%.  On the negative extreme, the CPSE ETF fell by ~28%, and Bharat 22 ETF fell by ~25%.  Dubious diversification, perhaps?

Luck, skill, or something else?
Over this period, actively managed Large-cap funds gave returns ranging from +8.3% to –10.9%.  However, Value Research and other websites, list one other open-end large-cap scheme that gave a return of –11.4%.  Strictly speaking, this is a Focused fund with a mandate to invest in stocks regardless of their market cap.  Be that as it may, going by this scheme’s month-end portfolios, through these ten months, on an average, 97% of its equity holdings were large-cap stocks.  If you think it is worth including in the list of large-cap funds, then consider this: it is managed by the fund house that also managed the large-cap scheme that gave the highest return.

Differences across Dynamic Asset Allocation Funds (DAAFs)
More than any other category, DAAFs have the freedom to adjust their allocation in a way that preserves value when markets crash, and cashes in on market recoveries and rises.  Leading from that, these funds have been frequently positioned as a sort of panacea.  Thus, these past ten months represent an excellent period to look at what DAAFs can accomplish.  It turns out that, over this period, the returns of these funds ranged from +17.8%  to –12.6%.  So, what explains this vast difference? To some extent it was on account of stock selection which, contrary to the spiel on the importance of asset allocation, isn’t an insignificant variable.  In addition, and quite obviously, it had to do with the differences in when and how much the funds shifted from equity to debt and vice versa.  To be fair, no one can perfectly time the market, so I personally didn’t expect any fund to shift its allocations perfectly.  However, the evidence suggests that some of the funds got that right a lot better than others.  

ICICI Prudential Equity & Debt Fund
Over this period, this scheme gave a return of -8.4% which made it one of the worst performing Aggressive Hybrid funds.  What’s more, its return was worse than that of any of the open-end, actively-managed, diversified pure equity funds from ICICI Prudential.  Its return looks even more disturbing when you dissect its asset allocation.

Going by this scheme’s month-end portfolios, over these ten months, its average allocation to cash and debt instruments was around 30%.  If we assume a return of 10% (that’s what the fund house’s short duration fund has delivered), that would imply that the equity holdings gave a return of –16.3%.  In contrast, the worst performing, open-end, actively managed, diversified pure equity scheme from the fund house, gave a return of -7.8%.  That raises the question: was this hybrid scheme pursuing a divergent and riskier equity strategy than all other pure equity schemes from this fund house?  If so, why?

SBI Dynamic Asset Allocation Fund
This is one of the most unique and well-meaning funds across the industry, and it breaks my heart to say that over these ten months, it utterly failed to live up to its promise.  For those who don’t know, its equity allocation seeks to mirror the Nifty 50/ Sensex while the debt allocation is exclusively held in the 10 year g-sec. As I stated earlier, point-to-point, over these ten months, the Nifty 50 and the Sensex delivered little or no return.  Thus, the contributors to this scheme’s return had to be the return from the cash and debt component (SBI MF’s 10 year g-sec ETF gained 8.8%), and whatever gains it could make by switching from equity to debt when the market peaked (and as it rose again), and from switching from debt to equity around the bottom of the market.  Unfortunately, all of this came to nought.  For reasons that only the fund house can really explain, this scheme’s return was –0.2%, which is just a tiny bit better than that of the Nifty 50 index fund managed by the fund house: –0.6%.  The only explanation that I can think of is that the algorithm used by the fund house, did a terrible job of deciding the switches between equity and debt.  Talk of good intentions going bad.

Correction: An earlier version incorrectly stated that the 10 year g-sec gained 10.8%. Actually, it was SBI MF’s 10 year Constant Maturity g-sec fund that gained 10.8%.  SBI MF’s 10 year g-sec ETF gained 8.8% over the period.

How Fund Houses Are Trying To Sabotage SEBI’s Expense Ratio Reforms

Seeing the things that some fund houses do, frequently gives me the feeling of watching cheap crooks in action.  The type that get a thrill from travelling without a ticket.  The type that like to steal from the weak and elderly.  The type that give a stupid grin when caught with their hands in the cookie jar.  Except that there’s nothing cheap about the scale on which fund houses operate.

It’s been a month since SEBI’s disclosure norms for expense ratios came into effect.  They were among the most significant set of reforms undertaken by SEBI in recent times.  They were intended to boost transparency, and bring down costs.  Yet the fact is that some fund houses have lacked the ability to appreciate the spirit of those moves, while others have plain ignored it. Worse still, some fund houses have shown no respect for investors or for SEBI and have, in effect, mocked the process of reforms (see here, for example).  In this post, I want to give a sense of how widespread this is.  I will talk specifically on one key issue i.e. the expense ratio files that fund houses have put up on their websites.  I hope to spotlight the questionable approach of multiple fund houses, and the message that they appear to be giving to their investors. It is based on what I have seen across the websites of select fund houses: it is not an exhaustive analysis. 

“Don’t visit our website!”
On many fund house websites, locating the expense ratio file can be a tall order.  It might be under disclosures, or under downloads, or somewhere else.  Probably no fund house has made it tougher to locate the file than Kotak Mahindra MF.  Leave aside the fact that its website is a sprawling mess, or that it does not seem to have even the option for a search.  When I tried looking for the file, I just couldn’t find the link.  It wasn’t even on the sitemap.  Finally, I had to do a search on Google to get to the file.  Just so that you know, when it comes to other fund houses, doing a search on Google isn’t going to necessarily help.

“We’re going to make it really difficult for you!”
What if you want to compare expense ratios across all schemes of a fund house?  Many fund houses have presented their data in such a manner that it is not easy to do so.  Some, such as IDFC MF and Kotak Mahindra MF have given the data for each scheme in a separate sheet, making it a gruelling task to do such comparisons.  Others like  ICICI Prudential MF and SBI MF have made the task even more laborious because they have opted to have separate files for each scheme.  Thus, instead of a single download, they expect you to make multiple downloads, each time you want to see the data.  And given the number of schemes that they have, that, by itself, could take a really long time. 

“We’re going to make it really, really difficult for you, and we don’t care what SEBI thinks!”
Getting expense ratio information from the HDFC MF website poses a different level of difficulty.   The fund house first wants you to decide whether you want current data or historical data.  If it is historical data, then you are expected to put in a date range.  Thereafter, just like ICICI Prudential MF and SBI MF, you have to download the data for each scheme separately.  Last, but not the least, the information in the files is presented in a format that is different from what SEBI has stipulated.  As a result, if you simply want to compare expenses across direct and regular plans of a single scheme, doing so is an uphill task.

“We’re going to drive you nuts, and SEBI can’t do a thing about it!”
In what I would describe as a drastic departure from SEBI’s format, DSP BlackRock MF and IDBI MF (and possibly others) have opted to give the expense ratios for each date in a separate file.  Consequently, if you want to examine the date-wise expense ratios in any single scheme, be prepared for a nightmarish experience.  In the case of IDBI MF, if you want to compare expense ratios across schemes on any single date, that task will also prove to be arduous because the information for each scheme is in a separate sheet.  In my opinion, of all the fund houses, the approach taken by IDBI MF is either the most harebrained or the most sadistic.

“We’re the most investor-friendly!”
I have to admit that, going into this exercise, I did not expect UTI MF to emerge as the best example of a fund house conforming to SEBI’s disclosure.  Fact is, it was a delight to see what the fund house has done: I just hope that they keep it up.  All you need to do is to select a date range.  You can then download the daily expense ratios across all schemes, exactly the way SEBI has specified, and all in a single sheet.  What’s more, the scheme names are entered in such a way that using the feature of filters in Excel, you can easily make comparisons across schemes.  I am not sure if what they have done can be improved but as things stand, every fund house should at least follow their lead.

10 Years After The 2008 Peak

On Jan 8 2008, the BSE Sensex closed at a then all-time high level of 20,873.  This week, as it hit new all-time highs, I have been poring through performance numbers of equity funds over these last 10 years.  In this post, I’d like to share some of my observations and thoughts.

Is this what we expected?
“How much return would you expect the Sensex to give over a 10 year period?”  Back in the day, I would pose this question to advisors and investors, as part of a long-running series of exercises that I conducted.  Throughout 2007-08, the most common answer I got was “at least 15% p.a.”.  It was an understandable response.  The growth in the Sensex from its base date in 1979 to its value at the end of December 2007, stood at just over 20% p.a. (without reinvesting dividends).  Some would consider the estimate of 15% p.a. to be too high.  The most conservative estimates that I heard were of a growth of no less than 10% p.a.  Yet, the fact is that over the last 10 years, the BSE Sensex TRI grew by just 6.6% p.a.  The BSE MidCap TRI did a bit better, growing by 7.9% p.a.  And for whatever you may find it worth, the BSE SmallCap TRI grew by just 5.3% p.a.  All these numbers pale in comparison to the fact that a 10 year deposit with SBI over the same period would have given an assured compounded annualized rate of 8.78%.

So, going forward, could such long-term underperformance by equity indices be a more frequent occurrence, or is this just a blip?  When I discussed these numbers with a prominent industry observer, he responded with a quote that is frequently attributed to Keynes: “Markets can remain irrational far longer than we can remain solvent.”

How much value did actively managed funds really add?
Of the 140 actively managed, domestic, diversified equity funds that survived these 10 years, only 2 schemes gave an annualized return in excess of 15% p.a.  While the median return of this group was 9.2% p.a., 61 schemes (i.e. 44% of all schemes) gave less returns than the SBI deposit would have.  Of these, 28 schemes (20%) gave less returns than the BSE Sensex.  All these numbers exclude entry loads, which were prevalent at the time.

How did the largest schemes perform?
The table below gives the list of the largest equity funds (by AUM) at the end of December 2007 along with their returns over these 10 years.  Some of the names on this list may surprise those who weren’t investors at the time.  I can’t say how many investors were committed to being invested in these schemes for 10 years or more.  For those who were, it is a moot question as to whether their faith in these schemes was justified.  For better context, I have also given the ranking of these schemes based on their return.

	AUM Rank Dec 2007	Return p.a. 2008-2018	Return Rank 2008-2018
Reliance Growth Fund	1	9.9%	72
Reliance Diversified Power Sector Fund	2	4.1%	181
HDFC Equity Fund	3	11.4%	37
ICICI Prudential Infrastructure Fund	4	4.8%	173
DSP BlackRock India T.I.G.E.R. Fund	5	5.6%	155
Reliance Vision Fund	6	7.8%	116
Fidelity Equity Fund*	7	10.2%	65
Franklin India Flexi Cap Fund	8	10.2%	66
SBI Magnum Taxgain Scheme	9	8.2%	105
Reliance Focused Large Cap Fund	10	5.6%	156

Returns are for the period 8 Jan 2008 to 8 Jan 2018 and exclude loads.  AUM and Return ranking is among all open-end equity funds that survived these 10 years.  Total no of funds: 202.
* This scheme has seen a change in fund house management from 2008 to 2018.
Data/ Information sources: AMFI, NJ India Invest, Value Research

How many of us could predict the top performers?
The table below gives the list of domestic, diversified equity funds which gave the highest return over these 10 years.  Alongside I have given their ranking among equity schemes based on their current AUM, as well as their AUM ten years ago.  Going by their AUM ranking ten years ago, it would seem that most investors weren’t betting big on most of these schemes.

	Return p.a. 2008-2018	AUM Rank Dec 2007	AUM Rank Current
HDFC Mid-Cap Opportunities Fund	16.5%	36	4
DSP BlackRock Micro Cap Fund	16.0%	108	26
ICICI Prudential Value Discovery Fund	14.7%	97	5
Canara Robeco Emerging Equities Fund	14.5%	257	59
Franklin India Smaller Companies Fund	14.2%	49	23
Sundaram Select Midcap Fund	14.0%	19	29
DSP BlackRock Small and Mid Cap Fund	13.8%	44	35
IDFC Premier Equity Fund*	13.6%	77	30
UTI Mid Cap Fund	13.5%	114	44
L&T Midcap Fund*	13.4%	239	86

Returns are for the period 8 Jan 2008 to 8 Jan 2018 and exclude loads.  AUM ranking is among all open-end equity funds.  Current AUM ranking is based on AUM  at end of Nov 2017 which is the latest date for which data was available across all fund houses.  Total no of funds- Dec 2007: 287; Current: 385. 
* These schemes have seen a change in fund house management from 2008 to 2018.
Data/ Information sources: AMFI, NJ India Invest, Value Research

How important is the long-term performance of a scheme to investors?
This is the question that bothers me the most.  It is widely recognized that a scheme’s long-term, multi-cycle performance is a good indicator of a fund management team’s competence.  However, if the current AUM of equity schemes is anything to go by, it would seem that long-term performance of a scheme doesn’t really matter to many investors.  As evidence, consider this: three of the ten largest actively managed, diversified equity funds today, did not exist 10 years ago.  These three schemes currently have a combined AUM of ~47,000 crore.  In other words, investors have poured significant money into schemes that were not tested in the brutal bear phase of 2008-09.  I find it all the more astonishing given that two of the fund houses behind those schemes had a patchy record with their other schemes during 2008-09 while the third fund house itself did not exist at the time (nor did its sponsor have any known track record of fund management). 

That’s not all.  There is one more statistic that quantifies the lack of consideration for long-term performance.  It is that the actively managed, domestic diversified schemes that actually underperformed the BSE Sensex over the past 10 years currently have a combined AUM of ~19,000 crore.  If you include thematic/ sector funds, that number goes up to ~32,000 crore.

Warren Buffett famously stated that risk comes from not knowing what you are doing.  While past underperformance (or absence of performance) is no guarantee of future underperformance, I hope investors in all these schemes know what they are doing.

Total Return Index Benchmarking

Around six weeks ago, DSP BlackRock MF stated its intention to “compare its funds’ performance” to the total return of their respective benchmark indices.  A few days later, Edelweiss MF made a similar announcement.  While these were noteworthy decisions, I couldn’t quite understand the need for these fund houses to formally proclaim their intentions to the world at large.  To be honest, a part of me felt that these announcements had a holier-than-thou ring about them.  More than that, though, it was the wide media coverage of these announcements that stood out for me.  Sure, it was helpful in spreading awareness about the difference between a Total Return Index (TRI) and a Price Return Index (PRI).  But beyond that, it seemed to me that most of the coverage was hype and lacked clear perspective.  In this post, I’d like to chip in with some scattered thoughts.

TRI benchmarking has little to do with appropriateness
By any reasonable standard, the appropriateness of a scheme’s benchmark index is determined by the similarity of the constituents of the benchmark with the universe of securities that the scheme will invest into.  So, for a scheme that invests in large cap stocks, the Nifty 50 or the BSE Sensex could both be appropriate benchmarks.  It is a fund house’s individual decision as to which index to choose as the formal benchmark.  As for choosing a TRI over a PRI, that has little to do with appropriateness in that sense: it is more like raising the height of a hurdle to jump over. If a fund house chooses a TRI over a PRI, then at best it can be assumed to be signalling its intent to raise the bar for its performance.  Bear in mind, though, that a fund house can raise the bar for its performance in any number of ways, and without making such announcements. 

Where will performance be reported?
Even if a fund house chooses TRI benchmarking, its performance reporting will be restricted to documents that are released by it (e.g. fact sheets, SID, KIM etc.).  So, to investors who prefer to compare scheme performances across multiple fund houses, such reporting will be of little use. 

Investors can choose their own benchmark
No matter what benchmark index a fund house chooses, in analyzing the performance of a scheme, an investor is always free to use whatever benchmark index he or she thinks appropriate.  For example, in all instances of index data used by me on both my blogs, I have used total return numbers only.  It is not as if that is necessarily better than using price return numbers: it is merely an expression of my personal belief.  And I have done so, regardless of what practice the industry or individual fund houses have followed.

The notion of “alpha” varies
There are some who argue that a TRI is a better choice for accurately determining “alpha”.  In my opinion, a lot depends upon how one defines “alpha”.  For those who regard “alpha” as a mathematical formula, it is understandable for them to prefer a TRI over a PRI.  But in my experience, for most people who look for “alpha”, it is just a broad appraisement of the value added by a fund manager.  Sure enough, some of these people assess “alpha” against a TRI but there are many to whom the TRI/ PRI choice may be inconsequential.  There are also those who believe in assessing “alpha” against an appropriate index fund (rather than an index) while there are yet others who, in their own wisdom, assess “alpha” against the returns from a bank deposit.

TRI benchmarking is not new in India
In conversations with investors and advisors, I gathered that quite a few of them were under the impression that these announcements were pioneering/ ground-breaking in the context of the Indian fund industry.  In fact, there was at least one report, in The Economic Times, which credited DSPBR MF as “the first fund house to start with this practice”.  The truth is that Quantum MF has been following TRI benchmarking for years, for both its equity schemes, as well for its Nifty ETF.  Other fund houses following this practice selectively include IDBI MF and Kotak MF (thanks to one scheme taken over from the erstwhile Pinebridge MF).  And then there are some fund houses that have taken a somewhat convoluted approach, if I may call it that.  To take an example, SBI MF compares the returns of its Nifty Index Fund with the Nifty 50 PRI, but measures its tracking error against the Nifty 50 TRI.  As far as I am aware, none of these fund houses trumpeted their decisions and perhaps, for that reason, these haven’t attracted the media coverage that the more recent announcements have.

Excessively Expensive Income Funds

For some time now, I have been trying to maintain a watch list of the most expensive plans among income funds.  While expenses matter regardless of fund category, in the case of income funds they have a more consistent and harder impact (than, say, in the case of equity or balanced funds). Much more often than not, higher expenses lead to low returns or higher risk or both. 

While pursuing this objective, one of my most striking observations has been that the plans that I consider to be excessively expensive, account for a large chunk of the AUM in the category.  If I go by last quarter’s AAUM data, then 69% of the money invested in regular plans (i.e. other than direct) of income funds (other than liquid funds and pure debt fixed maturity plans) was allocated to plans that I consider to be excessively expensive.  This could mean one of two things: either my threshold for expensiveness is too low or most investors in regular plans have been sold plans that are way too expensive.  For those who want to explore the truth of the matter, in this post I present a small selection of the income funds on my list.  But before we get into the specifics, there are a few things to bear in mind. 

Firstly, evaluating and explaining a plan’s expensiveness can be a far more complex exercise than most people realize.  In presenting the data in this post, I have opted to keep things simple (some may regard it as an oversimplification).  I have limited the scope of my presentation to non-direct plans, and have primarily focussed on each plan’s expense ratio relative to that of peer group schemes. For the purpose, I have grouped schemes into five categories.  While I have tried to keep things as objective as possible, in any discussion on expensiveness, some degree of subjectivity/ personal bias is unavoidable.

Secondly, against each scheme that I have listed, I have given the current AUM of its non-direct plans.  This is intended to serve two purposes.  For one, it tells you how much money stands invested in these expensive plans.  Additionally, it can help you better understand a plan’s expensiveness.  As a rule of thumb, schemes with larger AUM are expected to have lower expense ratios than schemes with lesser AUM.  Similarly, schemes with larger AUM than most of their peer group should ideally have expense ratios that are below the category average. 

Thirdly, bear in mind that this is a small selection of schemes from my list.  My complete list of excessively expensive plans is too long and complex to be meaningfully presented here.  The plans presented below are not necessarily the most expensive ones: they are some of the most expensive ones.  They have been handpicked to show how widespread the problem of high expenses is.

Lastly, what you see below is not the ideal way that I would like to present this information.  I am compelled to do so because of the constraining ways in which fund houses report expense ratios and AUM data, and because many fund houses frequently change their expense ratios.

Ultra Short Term Schemes
Average Current Expense Ratio: ~0.75%

	Expense Ratio Regular Plan FY 17	Current AUM Non-Direct
IDBI Ultra Short Term Fund	1.40%	410 cr
ICICI Prudential Savings Fund	1.38%	7,057 cr
SBI Savings Fund	1.36%	3,546 cr
DHFL Pramerica Low Duration Fund *	1.24%	686 cr
HDFC Cash Management Fund - Treasury Advantage Plan	1.13%	10,768 cr

With one exception, this category covers all schemes currently classified by Value Research as ‘Ultra Short Term’.  Data for expense ratios has been sourced from scheme annual reports, monthly factsheets and third party sources.  Data for AUM has been sourced from latest available AAUM disclosures and includes AUM for plans that have been suspended for fresh investments. Schemes whose expense ratios are shaded in yellow have above-average AUM in the category.

* One plan in which fresh sales have been suspended since 2012 but in which there continues to be AUM had an expense ratio of 2.51% in FY 17.

Short Term Schemes
Average Current Expense Ratio: ~0.94%

	Expense Ratio Regular Plan FY 17	Current AUM Non-Direct
HDFC Regular Saving Fund *	1.79%	4,517 cr
Franklin India Short Term Income Plan	1.57%	7,000 cr
Sundaram Select Debt Short Term Asset Plan	1.48%	307 cr
Aditya Birla Sun Life Short Term Opportunities Fund	1.40%	4,605 cr
IDFC Super Saver Income Fund - Medium Term Plan	1.31%	2,057 cr
ICICI Prudential Short Term Fund	1.24%	6,329 cr

This category covers all schemes currently classified by Value Research as ‘Short Term’.  Data for expense ratios has been sourced from scheme annual reports, monthly factsheets and third party sources.  Data for AUM has been sourced from latest available AAUM disclosures and includes AUM for plans that have been suspended for fresh investments.  Schemes whose expense ratios are shaded in yellow have above-average AUM in the category.

* (1) The expense ratio of the regular plan of HDFC Regular Savings Fund saw one of the steepest jumps in the category from 1.07% in FY 16 to 1.79% in FY 17.  (2) The expense ratio of the direct plan in FY 17 was 1.19% which was higher than the expense ratios of the regular plans of most schemes in the category.

Medium Term/ Long Term/ Dynamic Schemes
Average Current Expense Ratio: ~1.43%

In my opinion, this category as a whole, is somewhat more expensively priced than it should be.  By my reckoning, if it were to have been fairly priced, then at this point in time, the average current expense ratio for this category should have been ~1.07% (disclaimer: based on complex calculations, subjective assumptions, and personal bias).

	Expense Ratio Regular Plan FY 17	Current AUM Non-Direct
Sundaram Bond Saver	2.61%	120 cr
Sundaram Income Plus *	2.23%	117 cr
Franklin India Income Builder Fund	2.08%	872 cr
Reliance  Income Fund	2.00%	499 cr
Aditya Birla Sun Life Corporate Bond Fund	1.97%	2,947 cr
HDFC Income Fund	1.96%	1,086 cr
HDFC Corporate Debt Opportunities Fund	1.84%	10,724 cr
Franklin India Corporate Bond Opportunities Fund	1.83%	6,237 cr

With one inclusion, this category covers all schemes currently classified by Value Research as ‘Credit Opportunities’, ‘Income’ and ‘Dynamic Bond’.  The inclusion is Sundaram Income Plus which is currently classified by Value Research and Morningstar as ‘Ultra Short Term’.  Since its stated benchmark is CRISIL Composite Bond Fund Index, I feel it appropriate to include it in the present category.  Data for expense ratios has been sourced from scheme annual reports, monthly factsheets and third party sources.  Data for AUM has been sourced from latest available AAUM disclosures and includes AUM for plans that have been suspended for fresh investments. Schemes whose expense ratios are shaded in yellow have above-average AUM in the category. 

* (1) Over the last 3 financial years, the expense ratio of the regular plan of Sundaram Income Plus has seen a remarkable level of fluctuation, changing from 2.17% in FY 15 to 0.38% in FY 16 to 2.23% in FY 17.  (2) The expense ratio of the direct plan of Sundaram Income Plus in FY 17 was 0.22%.  As far as I can make out, the difference between the expense ratios of the regular plan and the direct plan of the scheme was the highest for any pure-debt scheme.

MIP Schemes
Average Current Expense Ratio: ~2.15%

In my opinion, this category as a whole, is way too expensive.  Consider this: in the case of many fund houses, if you were to create an MIP-type allocation on your own by investing in their most expensive equity scheme, and their most expensive debt scheme, that would be cheaper than investing in their MIP schemes.  By my reckoning, if it were to have been fairly priced, then at this point in time, the average current expense ratio for this category should have been ~1.26% (previous disclaimer applies).

	Expense Ratio Regular Plan FY 17	Current AUM Non-Direct
DSP BlackRock Monthly Income Plan	2.60%	447 cr
HDFC Monthly Income Plan - Short Term Plan	2.60%	322 cr
BNP Paribas Monthly Income Plan	2.59%	327 cr

This category covers open end income schemes that allow for marginal equity allocation, and which are targeted at investors seeking regular income.  Data for expense ratios has been sourced from scheme annual reports, monthly factsheets and third party sources.  Data for AUM has been sourced from latest available AAUM disclosures and includes AUM for plans that have been suspended for fresh investments.

Closed End Income Schemes With Marginal Equity 
Average Current Expense Ratio: ~2.31%

In my opinion, this is, by far, the most expensive category of income funds.  In terms of asset allocation and return potential, it is similar to the category of MIP schemes.  However, the essential running costs of these schemes are less (lesser servicing costs, lower portfolio turnover etc.).  As a result, there is a case to say that the average expense ratio in this category should be less than that of MIP schemes.  There is also a case to say that the expense ratios of many plans in this category reflect fund house-distributor collusion with the intent of milking investors, at its ugliest.  By my reckoning, if this category were to have been fairly priced, then at this point in time, the average current expense ratio should have been no more than 1.26% (previous disclaimer applies).

	Average Expense Ratio Regular Plans FY 17	Current AUM Non-Direct
HDFC Capital Protection Oriented Fund - Series III	2.69%	322 cr
DHFL Pramerica Hybrid Fixed Term Fund (Multiple Series)	2.65%	634 cr
Sundaram Hybrid Fund (Multiple Series)	2.65%	520 cr
Axis Hybrid Fund (Multiple Series) *	2.53%	6,474 cr
ICICI Prudential Multiple Yield Fund (Multiple Series)	2.51%	1,364 cr
Kotak Capital Protection Oriented Scheme (Multiple Series) ^^	2.44%	426 cr
ICICI Prudential Capital Protection Oriented Fund (Multiple Series)	2.34%	3,277 cr

Data for expense ratios has been sourced from scheme annual reports and third party sources.  Data for AUM has been sourced from latest available AAUM disclosures.  While compiling the data, only plans that were in existence on the date of compilation i.e. 21 Sep 2017 have been considered.

* 93% of  the current AUM of Axis Hybrid Fund has come via associate distributors such as Axis Bank.

^^ As far as I can make out, Kotak Mahindra MF does not follow SEBI directions/ industry practices in reporting plan-wise expense ratios in its annual reports. The expense ratio number given here includes both direct and regular plans.  The actual expense ratio for regular plans alone can be assumed to be higher than what is mentioned.

NAV Observations

If you wanted to download the NAV history of a scheme, which website would you go to?  Would you go to the website of the fund house managing that scheme?  Or would you go to one of those websites where you can get the NAV history of schemes across fund houses?

As we know, there are a few different websites where one can get the NAV history of almost any scheme.  Each of us may have our own favorites: I certainly have mine.  Yet just over a week ago, when faced with a need to pull out the historical NAVs of half a dozen schemes, I went looking for this information on the respective fund house websites instead.  Maybe it was because it involved just three fund houses, or maybe I wasn’t thinking clearly: I don’t remember.  Fact is, on the very first fund house website that I checked, I couldn’t find the information that I wanted.  So without wasting any further time, I retraced my steps to one of my favorite websites and got all the information that I needed. 

Later on, I thought about my experience on the fund house website, and decided to take another look.  Maybe I had missed something.  But once again, I couldn’t find the information that I wanted.  Curious, I decided to check out a few other fund house websites.  On each website, I tried to obtain the complete NAV history for a few, somewhat randomly selected, schemes.  In all, I visited eight websites.  As it turned out, from only three of the eight websites was I able to get NAV data that was comprehensive and easy to use.  In this post, I give some details of what I observed.

The fund houses whose websites I visited were:

• Birla Sun Life (BSL)
• Franklin Templeton (FT)
• HDFC
• ICICI Prudential (I-Pru)
• IDFC
• Reliance
• SBI
• UTI

There was no strong reasoning that led me to these websites.  I was guided by a vague impression that given the assets and the number of schemes that these fund houses manage, these might be reasonably representative of the industry as a whole.

BSL, FT and IDFC were the three fund houses on whose websites I could get the complete information that I wanted, and in the way that I wanted it.  On their websites, I could download the entire NAV history of each of the schemes that I selected, in an easy-to-use Excel file.  Not only that, each of these fund houses, in different ways, made it easy to do so.  Consider this, for instance: on all of the other fund house websites, to get a scheme’s NAV history since inception, I was required to enter a “start date” and an “end date”.  That meant having to know the inception date in advance.  On the BSL website, once I selected my scheme, the “start date” and the “end date” were filled in by default with the launch date of the scheme, and the latest NAV date respectively.  On the FT website, there was an option to get the NAVs since inception, which I needed to select.  On the IDFC website, I didn’t even have to do that.  By design, selecting a scheme (whose NAV history I wanted to see) triggered the download of an Excel file which had the NAVs since the scheme’s inception.    

HDFC was the only other fund house that offered the complete NAV history of any scheme in an Excel-readable format.  But apart from having to know the inception date in advance, there were two obstacles.  Firstly, depending on the extent of history that I sought, it took a considerable amount of time for the data to be downloaded.  Secondly, the data in the Excel file was laid out in a manner that required a lot of work to make it usable. 

Reliance and UTI also offered me the option to download the NAVs into Excel but in the case of each scheme that I selected, only a limited history was available for download.  In contrast, SBI displayed the entire NAV history of the schemes that I selected, but it didn’t offer an option to download or export to Excel.  As far as I could make out, in the Beta version of its new website, one can download a limited NAV history into Excel.

I-Pru presented the NAV history of each scheme that I selected only as a chart, that too of dubious merit.  There was a link to export the data (or perhaps only the chart) to Excel but every time I clicked that link, I was led to an error page. 

But to be doubly sure that I had not missed something, I thought of rechecking with those fund houses where incomplete or no information was available.  So I reached out to them via email, mentioned what I had experienced, and requested them to email me the NAV history of a certain scheme or set of schemes. 

Reliance was quick to respond and they directed me to the AMFI website to get the NAV history.

I-Pru took 5 days to respond and gave me the same link that I had visited on their website.  When I pointed out that the Excel export option was a dead link, they promptly replied saying (somewhat cryptically) that the “Historical NAVs for the above mentioned scheme will be available as graphs.”

UTI has, thus far, neither acknowledged nor responded to my email.

It is not unreasonable to expect to get the complete NAV history of a scheme in a usable format.  And there is a good reason to visit a fund house’s website rather than anywhere else: the assurance that the data is authentic.  It is to the advantage of a fund house as well.  It is one more reason for someone to visit its website.  It is also in the fund house’s best interests that people draw inferences based on data that is authentic.  But it seems that some fund houses haven’t been able to figure out how best to facilitate such requests on their websites.  And if those email responses (or lack thereof) are anything to go by, some fund houses appear to be fine with driving visitors away from their websites.

A Mockery of Disclosure

Maybe it had something to do with being ‘Friday the 13th’.  Last Friday, for reasons that I cannot figure out, I was drawn into three separate, but equally vigorous conversations about how fund houses have chosen to interpret and act upon SEBI’s recent directive to disclose executive remuneration.  Of the three people who reached out to me, one is a respected investment advisor, another is a former client who occasionally consults with me, and the third is a friend who happens to be a DIY investor. 

All three of them were of the view that if a fund house had any reservations about making the said disclosure, it should have challenged SEBI.  Since no fund house had done so, there was no reason for any fund house to not disclose the information as directed.  Further, each of them felt that by adopting devious ways to mask the disclosure, most fund houses were making a mockery of it.  To paraphrase my former client: “A law is followed either in letter, or in spirit, ideally in both.  But in this instance, nearly the entire fund industry has chosen to ignore the spirit and to come up with their own perverse, pathetic and distorted interpretations of the letter.” 

Leave aside some of the more diabolical measures (asking for an OTP, saying that the HR department will revert etc.)  The unanimous view was that asking for any proof of being an existing investor was in itself an extremely questionable approach.  After all, wasn’t a prospective investor equally entitled to the same information?  My friend went on to say that, if necessary, he would become an investor in every such fund house by investing the minimum amount in each of their liquid funds.  The purpose, he said, was not because he craved this information, but “to teach those arrogant, overpaid f**kers a lesson” by rightfully making that information public.  If you can take my word for it, my friend is generally a mild-mannered individual who, only when provoked, uses such colourful language.  I say this to suggest the possibility of other investors reacting similarly to this issue.

The advisor whom I spoke with, pointed out one other thing.  According to him, some fund houses seemed to have gone to great lengths to figure out the most obscure places on their websites to disclose this information.  A quick look at some fund house websites confirmed the truth in what he was saying.  In fact, a search for ‘remuneration’ using the site search option on the websites of 4 of the top 5 fund houses (by AUM) did not yield the desired result.

This is not the first time that fund houses have made a mockery of disclosures.  If one looks back, one may remember television commercials where the risk factors were read out at breakneck speed.  If one goes further back, one would find instances of font sizes on statutory documents being so small that those documents were virtually unreadable.  I could go on and on.  Not all instances have been related to statutory disclosures.  About a year or so ago, I alluded to the bizarre manner in which ICICI Prudential discloses fund expense ratios in its monthly fact sheets, a practice that continues till date.  Take a look at this screenshot from their latest fact sheet (click on it to see it in its original size).

 

In my early days in this industry, I would have probably wondered how was it that no one in the fund house noticed this.  But experience has taught me that there is a more straightforward explanation: most fund houses do not care enough about their investors, and some do not care at all about their investors.  Well, history offers enough examples of firms that paid a stiff price for disrespecting their customers.  Only time will tell who will be next.  My mild-mannered friend, of course, has his own take on it: “They’re gonna burn in hell!”

Full disclosure: I was employed by the fund industry for over twenty years.  For a certain part of that tenure, I believe I would have qualified as an “arrogant, overpaid f**ker” though I was never overpaid enough to merit a mention in any such disclosure, had it been in force at that time.