Mutual funds fare poorly on skin-in-the-game metric

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In India’s biggest actively-managed equity mutual funds, asset management company (AMC) boards of 63 per cent of the funds, and managers of nearly three-fourths of the funds have parked personal money voluntarily in their own schemes, a BusinessLine analysis shows. Market regulator SEBI recently announced norms that require key AMC employees to compulsorily invest a part of their compensation in funds they manage.

In value terms, the AMC board, executives and fund managers hold ₹1,050 crore of their own money in the 42 biggest actively-managed equity mutual funds and a tad over ₹13 crore in eight large passively-managed funds. However, the combined skin-in-the-game at ₹1,063 crore in these 50 schemes is just 0.13 per cent of the ₹7.93-lakh crore combined assets of these schemes.

In the 42 equity funds with average AUM of ₹13,942 crore, the holdings are distributed across three buckets — AMC board, fund managers and other key managerial personnel (KMP). Of them, AMC boards hold the biggest stake at ₹665 crore, followed by ₹215 crore by fund managers and ₹170 crore by other KMP. The numbers are as per the latest available SIDs (scheme information documents) of individual funds.

 

AMC boards, fund managers

An AMC’s board of directors investing in their own schemes is a big vote of confidence. However, out of the 42 biggest actively-managed equity funds, boards of only 27 schemes, or 64 per cent, have their skin in the game. In value terms, the five schemes with highest AMC board holding are Motilal Oswal Flexi Cap (₹545 crore), Kotak Emerging Equity (₹21.19 crore), Axis Bluechip (₹19.58 crore), Axis Focused 25 (₹16.85 crore) and Aditya Birla Sun Life Frontline Equity (₹13.34 crore). In percentage terms too, these funds have highest AMC board holdings. Big funds with no AMC board investments are Axis Long Term Equity, HDFC Top 100, UTI Flexi Cap and Nippon India Tax Saver.

Fund managers’ own investments in schemes they manage inspire conviction. Note that in many AMCs, the bonuses of fund managers are invested in the AMC’s MF schemes. Out of the 42 biggest actively-managed equity funds, 31 schemes or 74 per cent have seen their fund managers ‘eat their cooking’. In terms of absolute investment, fund managers of HDFC Flexi Cap (₹106.29 crore), HDFC Top 100 (₹24.72 crore), HDFC Small Cap (₹14.27 crore), Mirae Asset Tax Saver (₹13.67 crore) and Parag Parikh Flexi Cap (₹11.55 crore) top the charts. In percentage terms too, these funds have the highest fund manager holdings. Large funds with no fund manager skin-in-the-game are Kotak Flexicap, HDFC Mid-Cap Opportunities, ICICI Prudential Bluechip and Aditya Birla Sun Life Tax Relief 96.

Other personnel, ETFs

Apart from AMC board and fund managers, regulations require funds to disclose other KMP holdings as well. The record is better here. Out of the 42 biggest equity funds, 40 schemes or 95 per cent of them have holdings of other KMPs. In value terms, the five schemes with highest other KMP holding are Motilal Oswal Flexi Cap (₹51.76 crore), HDFC Flexi Cap (₹48.22 crore), SBI Small Cap (₹10.33 crore), HDFC Small Cap (₹7.06 crore) and Nippon India Small Cap (₹4.65 crore).

Passively-managed funds such as exchange traded funds (ETFs), many of which are among the biggest equity funds (due to EPFO investments), still don’t figure heavily in the skin-in-the-game focus. Of the 50 biggest funds studied, eight are ETFs with average assets of ₹26,000 crore. Put together, there is only ₹13 crore worth skin-in-the-game holdings in 8 ETFs, translating to mere 0.06 per cent.

While new SEBI norms exempt AMC employees handling ETFs and index funds, it is noteworthy that on a voluntary basis, not even one fund manager has invested his personal money in an ETF he manages. Only one (Bharat 22 ETF) out of eight has holdings of the AMC board while other KMP have some skin-in-the-game in four out of eight ETFs.

With actively-managed funds facing a cap on launches due to SEBI’s strict categorisation rules, AMCs increasingly sing paeans about passive investing to investors; but they seem to have not walked the talk so far.

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