Moneylife » Investing » Mutual Funds » Can SEBI do much about poor mutual fund performance?
Can SEBI do much about poor mutual fund performance?
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| 22/06/2012 06:59 PM |
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SEBI chief UK Sinha is concerned about mutual fund underperformance but what action can the regulator really take, given its hand-off regulatory policy
Underperformance of mutual funds seems to be a cause of concern for the Securities and Exchange Board of India (SEBI). At the CII Mutual Fund Summit yesterday, SEBI chairman UK Sinha said, "There are nine fund houses where over a period of three years, 50%-100% of their schemes have performed less than the scheme benchmarks. So, imagine if more than half of their schemes over a period of time on a continuous basis have been performing less than their benchmarks."
"If it is happening on a continuous long-term basis for a significant percentage of the schemes then it becomes a SEBI issue," he said.
The regulator has also said it will engage with fund managers and CEOs of these asset management companies (AMCs) to understand why their funds are trending below their benchmarks on a continuous basis. The SEBI chairman further states, "The credibility of the industry and the credibility of the individual fund houses, their trustees shareholders directors, it is important that these matters are discussed and remedial measures are taken."
Mr Sinha may be right in saying that underperformance is a concern but what action can SEBI take? SEBI keeps on saying that investor protection and transparency is its top priority, but what action has SEBI taken in the past? SEBI in the past has come out with regulations where fund companies have to disclose their fund manager performance and a fund manger should not be allowed manage two or more similar schemes, these and many more. This would help the investor to a certain extent but what more?
Moneylife is only publication that has consistently highlighted underperforming fund houses. (Recent Articles: Equity Mutual Funds to avoid at all costs , Fund Performance: Worst Equity Funds ). What we have noticed most of the schemes which are consistently underperforming come from the same set of fund houses. Such gross underperformance over different periods can't go unnoticed by the AMC and the trustees. But SEBI has not done the only thing it could have done-question the trustees.
We did analysis of the top 20 fund houses as per AUM over a five-year monthly rolling periods from April 2006 to March 2012. We only considered consistent underperformers, that is, those that have underperformed the benchmark in the last 12 rolling periods. As you can see, LIC Nomura MF and JM Financial MF top the list of underperformers. Even in the last three-yr period ended 15 June 2012, all the schemes of these two fund houses have failed to perform.
Underperformance: 5-year monthly rolling period ending March 2012
Underperformance: 3-year as on 15th June
These are just equity schemes of select fund houses. They charge the highest from the investor for managing the fund and such is the performance. The least the investor would expect is returns on par with the benchmark. Even the index fund of LIC has given below par returns. Unless SEBI takes active interest and introduces stricter norms, AMCs would continue their business as usual.
Given that India has adopted a hands-off disclosure-based regime (meaning, a man charged with murder can make a public issue as long as he discloses it in the prospectus), it would be interesting to see how SEBI can change anything by calling mutual fund CEOs, trustees and fund managers for a chat. Any other action would have to be justified by activist regulatory stance, which SEBI is neither mandated nor equipped to carry out.
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Comment
Ravindra 11 months ago
It was a mistake, though well intentioned, to bring the entry load from 2.5% to zero in one shot. For Indian mindset it should have been reduced to 1% which would have still encouraged the agents (maybe 90% of them) to sell MFs.
Prakash 11 months ago
Main Important matter is to fraud and wrong practices adopted by Mututal fund Manager
As I said SEBI must look JM agri and infra fund and purchase made by that particular fund manager who is already facing criminal charges for his earlier manipulation
Same way front buying by some related people is also serious issue
Similarly inferior quality midcaps bought by fund managers in some cases they take bribe and buy junks all should be investigated
Jayant 11 months ago
Being a mutual fund distributor myself I have been consistently writing in various fora that SEBI has shifted the entire blame of investors losses during the financial meltdown on to Distributors. No action or comment has been made till now about the culpability of Fund Managers. I have mantained that the blame for this, if not mainly by fund managers, should be shared at least equally by both, fund managers and distributors. Finally at least SEBI has broken its silence, though I doubt very much if any action can or will be taken. A larger issue would be to investigate what kind of performance bonuses have been paid out to these errant fund managers for their underperformance. I will not be surprised if it has been incremental.
Sandeep 11 months ago in reply to Jayant
It's high time that SEBI/AMFI/Mutual Fund CEOs/Fund Managers start realizing that "When an investor puts money in any financial instrument he expects some kind of positive return-that is the tangible. You can't satisfy him by saying that oh! you lost money in last 5 years but we beat the benchmark so we get our fat bonus"
Of all the open ended MF schemes (equity/debt/liquid/hybrid) available for last 5 years, only 5% have been able to beat the inflation. So much for the fund management expertise. The whole mutual fund industry is held hostage to few dozen fund managers who want to keep their job secure by cloning the benchmark (or being close to it) not worrying about millions of investors who need actual/positive/inflation beating returns.
Jayant 11 months ago in reply to Sandeep
Sandeep,
You must realise that a mutual fund in itself is not an asset class. An investment in a mutual fund is an investment in the underlying asset class which is mandated by the objectives of the fund. Therefore, for instance, if you invest in a fund whose underlying asset class, or what it invests in, is gold; then you cannot complain that the fund has underperformed aginst another fund which invests in silver. Thus a fund's performance has to be compared with its benchmark index, in the above instance it would be the Gold index. If your Gold Fund is tracking the Silver prices then your fund manager has done something drastically wrong, irrespective of the fact that the fund may have given better returns than tha Gold Index.
Next time when you invest in a mutual fund please read the offer document carefully as is stated in every advert and literature published by the Asset Management Company. If you invest in a large cap fund, then do not expect it to track the returns of the Mid Cap index or vice versa. Or if you invest in a debt fund then do not compare it to the returns offered by the Sensex or an equity fund.
Sandeep 11 months ago in reply to Jayant
Jayant, what u mentioned is absolutely clear. Point is that, sticking too close to the benchmark (in the portfolio) affects the funds performance and doesn't use the full potential of fund manager's expertise. For ex if a large cap fund is giving returns simillar to its benchmark i.e. Sensex or BSE 100 (whatever is mentioned in the offer doc.) what's the point of Active Fund management. Might as well invest in a passive index fund with low mgmt fee and low tracking error. Fund managers of an active fund r supposed to use their stock selection/market timing skills to generate Alpha/get superior returns. Benchmark is for reference only.
Anyways its good that SEBI/AMFI have now taken note of the performance aspect of MF's. With investor activism, even fund managers will wake up to the fact that they need to deliver for the industry to survive.
Deepak R Khemani 11 months ago in reply to Sandeep
Expecting fund Managers to deliver consistently year on year is impossible, see for yourself the schemes that were 5 star rated 5 years ago are now recommended as a sell or a switch to the now 5 star rated funds, fund performance is based on movements of the stocks selected by the fund manager on expectations of future performance and not on the previous history of the fund.
The key here is asset allocation for a customer, if he has all his investments in equity and expects positive returns every year then he needs to change his adviser. What is important is that an investor invest wisely across asset classes to generate inflation beating returns over a period of time!
But if a fund has been consistently under performing then it is for the AMC and its trustees to step in and ask serious questions to its fund managers who are being paid fat salaries for under performance!
pravsemilo 11 months ago
Sometime back it was written in Moneylife that fund management charges should be based on the performance. I guess that move would really help.
We can't have a fund manager invest his own money. What if the fund manager's only asset is real estate or gold - something which can't be liquified.
Another welcome move could be making the salary of fund manager public - in the scheme document itself and perhaps a rough break up of fund management expenses.
Nilesh KAMERKAR 11 months ago
SEBI may have to go into the details & identify the reasons for long term under performance of a mutual fund scheme.
If negligence, incompetence, non-adherence to investment objective or fraudulent intent is the cause for such under performance than the amc cannot be allowed to charge recurring expenses till under performance is corrected & more importantly
Some mechanism needs to be put in place for recovering the asset management fees charged by the amc on annual basis during the 5 year period of under performance.
Also, It would work as a booster dose for reviving the fortunes of MF industry if an AMC is not allowed to charge fund management fees to those schemes where the unit holder is losing / or has losses for a certain stipulated period (as may be specified by SEBI.. )