Can SEBI do much about poor mutual fund performance?
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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