November 15, 2012

benchmark nifty etf investors suffer post-acquisition by goldman sachs

In the Indian mutual fund industry, till last year, there was one asset management company whom one could count on to come up with useful passively-managed products and serve their existing one well. This was the Benchmark Mutual Fund managed by Benchmark Asset Management Company (BAMC) which kicked off operations in 2002 with India's first ETF on the 50-stock Nifty index.BAMC was committed to offer only passively-managed products such as ETFs and index funds, and nothing else.

Therefore, it came as a shock last year (2011) when it became known the top management and shareholders of BAMC were selling out the fund and schemes to Goldman Sachs.  It became clear to ETF investors that Goldman Sachs will not be interested in doing much justice to the running of ETF schemes and will expend their time and energies in coming out with, and managing, actively-managed schemes. 

This is already seen to be happening. After acquiring Benchmark Mutual Fund in July 2011, Goldman Sachs India Mutual Fund, the new name of the fund, began filing offer documents with the regulator for the launch of actively-managed equity schemes. The first one was launched last month (October 2012).

But what is the most dismaying is that investors in the erstwhile Benchmark Nifty ETF, now known as GS Nifty ETF, are being hit due to the deliberate negligence of Goldman Sachs.  Sadly, the shareholders and management of BAMC betrayed the trust put in it by the investors by selling out to Goldman Sachs and got big cash as a result.

Below is a news analysis I did recently for the newspaper I work on how the performance of GS Nifty ETF has lagged peers since the July 2011 acquisition.

Here is what I wrote:

Goldman Nifty ETF lags peers post-Benchmark acquisition

The re-christened Benchmark Nifty ETF gave 1.2 per cent return against 2.9 per cent of peers

Mutual fund investors run the risk of the performance of their schemes getting adversely affected when the asset management company (AMC) managing their schemes gets taken over by another AMC or see significant stake changes. At times, in real life, this risk does unveil itself, as investors in the first-ever exchange traded fund launched a decade ago have been discovering lately.

When Benchmark Mutual Fund launched its Nifty Exchange Traded Scheme (Nifty ETF) in 2002 it was the first ETF in the country. The mutual fund's investment manager, Benchmark Asset Management Company (BAMC) was taken over by the Goldman Sachs group with effect from July 14, 2011 and was effectively run by Goldman Sachs since then.

For one month BAMC stayed as a distinct company but as a part of the Goldman Sachs group. From August 22, 2011, Goldman Sachs Asset Management (India) formally took over the management of all the schemes managed by BAMC. But post-mid-July, the performance of its most popular scheme, Nifty ETF, has, for the most time in its decade-old history, under-performed the underlying benchmark index as well as its peer schemes.

This was revealed in a FC Research Bureau analysis comparing the performance of GS Nifty ETF before and after the July 2011 acquisition with that of Nifty Total Returns Index (Nifty TRI) and two of its Nifty ETF peer funds--Quantum Index Fund-Nifty ETF and Kotak Nifty ETF.

From the average of its net asset values of July 4 to July 13 last year to the average of its NAVs in the current month of November till the 9th, GS Nifty ETF has given an absolute return of 1.20 per cent, below that of corresponding Nifty TRI's return of 3.14 per cent, Quantum Nifty ETF's 2.95 per cent and Kotak Nifty ETF's 2.85 per cent.

The was not the case in the earlier comparable periods. In the 1-year period upto mid-July last year, GS Nifty ETF's return of 5.91 per cent was in sync with Nifty TRI's 6.16 per cent and a little ahead of Quantum Nifty ETF's 5.63 per cent and Kotak Nifty ETF's 5.82 per cent. The previous 1-year period from July 2009 to July 2010 also saw the same pattern (see table).

    GS Nifty ETF        Quantum                Nifty ETF       Kotak  Nifty ETF   TRI Nifty
Jul '11* to Nov '12** 1.202.95  2.85 3.14
Jul '10 to Jul '11* 5.91 5.63 5.82 6.16
Jul '09 to Jul '10 23.90 23.68           NA 24.77
Figures represent returns based on monthly average NAVs/index values
Nifty TRI: Nifty Total Returns Index
* till 13th
** till 9th
Source: Respective MF websites, NSE. Analysed by FC Research Bureau

Post-expenses, index-linked ETFs are supposed to mirror the returns of the underlying index's total returns values which includes the impact of dividends received from the member-companies of the index. The expense ratios range from 0.2 per cent to 0.5 per cent in the case of Indian mutual fund industry's ETFs.

A month before the Goldman Sachs acquisition of Benchmark MF, Benchmark Nifty ETF had a corpus of Rs 533 crore in June 2011. In September this year, the average corpus of (rechristened) GS Nifty ETF was Rs 563 crore.

Interestingly, in other comparable performance records of Goldman Sachs India MF's ETFs, no under-performance was seen. As per NAV data from Capitaline NAV, GS Bank ETF and Reliance Banking ETF, both linked to CNX Bank index, the absolute return from July 13 last year to November 9 this year was the same -- 4.36 per cent. Another ETF, linked to CNX PSU Banks index, the GS PSU Bank ETF has given a negative return of 15.2 per cent which is better than peer Kotak PSU Bank ETF's negative return of 16.10 per cent.

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