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Sebi has scheduled meetings, starting this week, with senior officials of some asset management companies whose schemes have been laggards over a sustained period. Senior officials said if a good number of schemes of some of the fund houses were underperforming over three to five years, there was no justification for them to launch new offers after delivering poor returns to investors who end up paying for the mediocre performance of the fund managers of the schemes. "We will not approve new schemes of fund houses if their performance has been below par for long," a senior official said.
In the past, Sebi had denied approval to mutual funds who had come up with new offers similar to existing schemes or which mirrored some of their schemes. "Performance is performance, whether it is equity or debt schemes. Our focus is on equity because there are more retail investors in such schemes compared to debt, which largely has institutional money," the official said.
The regulator will interact with asset management companies to assess why their fund performance has consistently been below par and to review the corrective measures these fund houses propose to take. At a recent industry event, Sebi Chairman UK Sinha had said schemes managed by at least 18 fund houses were consistently underperforming over the last three years. 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. This should be a cause of concern for those AMCs. And I do hope that the trustees of those AMCs have taken note of it.
He had also said there were nine other asset management companies where up to 50% of their schemes were trending below their benchmarks. "It is right that investors are free to move out and get into other schemes but if it is happening on a continuous long-term basis for a significant percentage of the schemes then it becomes a Sebi issue as well," Sinha had said.
An analysis by the Economic Times Intelligence Group shows a chunk of the schemes managed by fund houses such as Baroda Pioneer Mutual Fund, Deutsche Asset Management, JM Financial Mutual Fund and LIC Nomura Mutual Fund are underperforming their own benchmark indices for the last three years. (See chart: 10 worst-performing equity schemes).
But analysts and industry representatives differ with the regulator on the approach to be adopted for punishing these fund houses. There is no need for a regulatory intervention because market forces are at work. Also the schemes that are underperforming constitute only 10-15% of the total assets under management of the MF industry. Investors should focus on fund houses with strong processes and orientation towards superior risk-adjusted performance on a consistent and long-term basis.
Another fund manager who did not want to be identified said there were several instances of a fund doing well in a bull market because of its exposure to risky small and mid-cap stocks but faring miserably in a bear market.
MS Apte, former president of Investors Guidance Forum and a member of Sebi's MF advisory committee, too, is not in favour of a ban on new schemes from such fund houses. If a student does not perform well in his studies, do you terminate his education?.
If you are running a rotten fund, people won't invest in it for a long time.
Some fund managers say investors should be educated about equity investments and fund houses that are doing well and those that are laggards.
The regulator is also working on measures to revitalise the mutual fund industry based on suggestions received from various stakeholders on allowing fungibility in expense ratio, crediting back the exit load to a fund's net asset value instead of giving it to the asset management company, single cheque payment for both investments as well as advisory services, utilisation of stock exchange mechanism and the brokers' network for sales and distribution of mutual fund products and multiple share classes. We have also received suggestions with regard to the cost structure in the industry. There have been suggestions of re-introduction of entry load or variable entry load. But let me clarify that re-introduction of entry load is not being recommended by a majority of players. This is the broad spectrum of suggestions that we have received.
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