December 02, 2012

quid-pro-quo between mutual funds & banks

Quid pro quo between mutual funds and banks is not a new phenomenon and I have written about it a few times in the last 6-7 years. But it is still relevant to take note of it. 

Here is a story (article) I did a month ago which touched upon this in detail along with another issue.

Liquid & debt funds susceptible to large investor holdings?

Liquid funds carry the highest investor concentration risk and cross-holding incidences. Is it a cause for worry yet?

The latest half-yearly period of April to September did not see any departure from the normal concentration levels of investors in the mutual fund industry, as per Association of Mutual Funds in India's latest quarterly update on scheme category-wise assets under management and investor folio numbers.

But a Financial Chronicle Research Bureau analysis of latest half-yearly financial statements of the five largest mutual funds revealed there still existed a few cases of eye-popping concentration levels among a handful of individual schemes among these five fund houses.

The September-end AMFI data showed the regular trend of diversified investor presence in equity schemes and concentrated investor unit-holding in fixed-income schemes. Of total industry AUM of 7,22,500 crore as on September 30, equity-oriented schemes, excluding exchange traded funds, balanced funds and overseas fund of funds, accounted for 26 per cent, or Rs 1,87,300 crore. Seventy per cent of this was from 3.5 crore retail investors' folios which made up for 98.4 per cent of all investor folios invested in these equity-oriented schemes.

Another 19 per cent of total equity-oriented schemes' total AUM came from high-networth individuals' folios, which comprised 1 per cent of equity-investing folios, while investments by companies, banks and institutions, whose investor folios number was only 0.6 per cent of total, accounted for 10.5 per cent. The dominance of individual investors in equity schemes was, therefore, seen once again with 90 per cent of equity AUM coming from them.

Similarly, the dominance of corporate investors and banks in fixed income funds was also evident in the September-end quarter, seen from AMFI's figures. Investments in liquid funds, debt-oriented funds (except balanced funds and ETFs) and gilt funds were from just 57.56 lakh investor folios (12.8 per cent of all investor folios investing in the mutual fund industry) and the aggregate AUM was a huge Rs 5,02,584 crore (70 per cent of total industry AUM). Just two per cent of the 57.56 lakh folios were corporate investor folios but they accounted for 62 per cent of the Rs 5,02,584 crore debt AUM. Another 0.03 per cent of folios, of banks, took up 5 per cent of AUM while HNI and retail investor folios were 8 per cent and 90 per cent of total and accounted for 27 per cent and 5.3 per cent of AUM respectively.

Concentrated unit-holding

These are the latest half-yearly period cases among 5 largest MFs

Single       investor holding (%) Sep 30 '12 corpus (Rs crore) Mar 31 '12 corpus (Rs crore)
UTI-Treasury Advantage Fund               25.3 10220 3938
HDFC Liquid Fund 38.8 8500 3629
UTI - Short Term Income Fund 27.4 1830 418
ICICI Prudential Floating Rate Plan 30.0 1363 755
UTI Dynamic Bond Fund 31.0 599 832
Reliance Liquid Fund Cash Plan 31.2 534 422
UTI - Gilt Advantage Fund Ltp 26.7 215 126
ICICI Prudential Gold ETF 49.6 195 165
Birla Sun Life Gilt Plus - Regular Plan 42.9 119 96

The data covers largest 5 MFs only & represents their Sebi-mandated

disclosures of >25% holdings by a single investorin any scheme

All cases involved one investor only who held more than 25%

Two cases where Sep 30 corpus is less than Rs 100 crore have been excluded.
Source: Respective MFs' half-yearly financial statements.  Analysed by FC Research Bureau

But what is revealing are the findings of the analysis of various disclosures in the latest April-September half-yearly financial statements of the five largest mutual funds by size -- HDFC MF which had an average AUM of Rs 97,773 crore in the July-September quarter, Reliance MF (Rs 86,327 crore), ICICI Prudential MF (Rs 76,388 crore), Birla Sun Life MF (Rs 72,905 crore) and UTI MF (Rs 70,783 crore).

The analysis reveals a few instances of concentrated unitholding in a scheme, several instances of cross holdings between banks and debt schemes, and a couple of instances of high commissions paid out to group company distributor.

Among other data elements, Sebi's mutual fund regulations require all mutual funds to disclose in their half-yearly financial statements a note giving percentage details of large single-investor holdings of over 25 per cent of the net assets of a scheme. There were 11 schemes across the five analysed fund houses where this limit was breached during the latest April-September half-yearly period (see chart), most of them being liquid funds or ultra-short-term debt funds.

Basing their greater-than-25-per-cent percentage holdings on their September 30 AUMs, the single-investor holdings, for all the 11 schemes, added up to Rs 7,360 crore. This was not an insignificant figure if one looked at it against the five MFs' collective average AUM of Rs 4,04,175 crore in the July-September quarter;  it made up for a good 1.82 per cent. Individually, the proportions were highest for UTI MF and HDFC MF. The single-investor holdings of over 25 per cent in each of 4 UTI MF schemes, added up to 4.7 per cent of the fund house's total average AUM of Rs 70,783 crore and that in 1 HDFC MF scheme added up to 3.4 per cent of its total average AUM of Rs 97,773 crore.

But industry analysts believe this level of concentration of a few investors in debt funds does not pose the danger of sudden redemptions causing a problem for the remaining investors. Says Dhirendra Kumar, founder and CEO of Value Research, a mutual fund research firm, "The valuation norms for liquid funds and ultra-short-term debt funds are so strict that the underlying investments' liquidity is very high and there is no risk of investors being left with residual garbage (which is possible if it happens in an equity fund) if they face sudden redemptions from large investors."

Moreover, Sebi regulations require a mutual fund to make an investor, whose average quarterly holding in a scheme exceeds 25 per cent, a one-month balancing period after that quarter is given to the fund house and if the breach is still present then the investor has to redeem its exposure beyond 25 per cent within the next 15 days.

But worries about high investor concentrations prevail among industry observers. Sebi mandates disclosure of corporate investor names investing more than 5 per cent of a scheme's AUM and the corresponding investments by any of the same mutual fund's schemes in the shares, certificate of deposits, bonds and other securities issued by that corporate investor.

In the analysis, cross-holdings were commonly seen in the Sebi-mandated disclosures. For instance, Canara Bank had invested a minimum 5 per cent each in Reliance Liquid Fund Treasury Plan (RLFTP) and Reliance Liquidity Fund (RLF). These two schemes had respective AUMs of Rs 10,174 crore and Rs 7,676 crore on September 30 and Canara Bank would have invested at least Rs 509 crore and Rs 384 crore respectively in these two schemes. In return, RLFTP had outstanding investments in Canara Bank's CDs to the tune of Rs 641 crore as on September. Other debt schemes (including other liquid funds) of Reliance MF had outstanding investments of close to Rs 1,000 crore in Canara Bank's CDs.

According to Kumar such cross-holdings between banks and debt schemes, while being legitimate, occurs due to tax arbitrage as banks pay only 24 per cent dividend distribution tax on income from liquid fund investment which if deployed in other money-market or debt instruments would require them to pay 30 per cent tax on the returns earned.

Sebi has been monitoring the concentration levels and cross holdings in the mutual fund industry and that should provide some solace to worried investors.

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