The Mutual Fund Show: How Franklin Templeton Unitholders Should Vote On Winding Down Debt Schemes
Unitholders of Franklin Templeton Mutual Fund’s six frozen fixed income schemes have an important decision to make next weekend. They will vote on whether to give their consent for winding up the schemes, which had assets under management worth Rs 25,861 crore as of November.
The Supreme Court, in an order at the start of December, had directed Franklin Templeton to seek unitholders’ approval for winding up six of its fixed income schemes —a process the fund house had started in April. Subsequently, the asset manager informed unitholders that a vote would take place electronically between Dec. 26 and Dec. 28.
If unitholders vote “no”, the schemes will be re-opened and they will be free to sell their units.
BloombergQuint, in its weekly special The Mutual Fund Show, spoke with Vijai Mantri, co-founder and chief investment strategist at JRL Money, and Tarun Birani, founder and director at TBNG Capital, about the likely repercussions of each of the unitholders’ choices and what the best option is from the perspective of preservation of capital.
Mantri and Birani also discussed some of the new fund offers that have been rolled out by asset management companies and the likely impact of SBI Mutual Fund’s Chief Investment Officer Navneet Munot’s move to HDFC Mutual Fund.
Watch the full interview here:
Here are the edited excerpts from the interview:
The first topic is on Franklin Templeton. What I’m trying to get into is, what should somebody who is a unitholder of any of those impacted schemes, now do, can do or can look forward to?
MANTRI: So, as you rightly mentioned the biggest concern and number one priority for investors in this given situation should be, what is the best course of action to get our money back. Not only getting our money back but how does one get our money faster and how to get money back without any serious impact on the fund with somebody who has invested. So, in this kind of a situation, I would recommend investors to vote for Yes, because if they vote Yes then there’s a definitely a very high probability that this scheme’s securities would be disposed of in the market in a very orderly fashion and the value of the money would be realised fully. One proof of that is that since the winding down of the scheme on April 23-24, 2020, when the AUM was close to Rs 28,000 crore, since then, till today, the total amount, which has been collected by Franklin Templeton from various schemes’ securities which got matured is close to Rs 40,000 crore. They gave around a 40% number—they said they’d collect around 40% till this day, but actually they have collected almost 50% of the money. So, enough proof that securities are decent because in the last eight-nine months, we have had very interesting and a very challenged environment as far as the fixed income market is concerned but most of the security is realised value and the money is lying in form of cash and there was some borrowing which has been reduced significantly and most of the scheme for schemes are running at zero debt, and two schemes today has very low borrowing. So, if the investors want their money back and the money back faster, I think, saying yes, in my opinion, would be a right thing.
Tarun, do you second this or do you have any other thoughts on this?
BIRANI: I completely agree with what Vijai said. In complete spirit, I would say whatever Vijai has said the investor or unitholder should go for that only. The Yes option is the best option available for investors because that’s to make sure all the securities are sold in a timely manner and no serious threat to the value of the securities is done because in case if there is a winding up kind of situation happens, you will see a lot of redemption pressure coming in, and there will be a serious impact on the value of the securities as it will be impacted. So, my strong suggestion is to opt for the Yes thing.
What happens if the fund house does not get the consent from the majority of the unitholders?
BIRANI: Trust me, this is a situation which we have not seen in the Indian market and this is for the first time that we are seeing a scenario like this. So, we will have to see how situation pans out... it looks like the winding up will happen and the fund house has to honor based on the redemption coming in. So, let’s see what all other legal options come in after that.
Vijai, what about the individual schemes? I have noted that the Franklin India short-term income plan and the India income opportunities plan don’t necessarily have the cash in its entirety. Will the unitholders of those two schemes have to wait for a lot longer than maybe the unitholders for some of the other schemes to get whatever money they do? And what’s the process after that? What happens once the investor says yes?
MANTRI: If the investor says yes, then there’s no problem because this scheme will get wound up very fast and if there is no fire sale then the securities will get sold in the market in a very efficient way. We have seen many of these securities which were quoting obscene yield levels in the month of March-April and now the same securities are at a much lesser valuation in the primary market. So, there’s an NAV appreciation to that effect to the market and many issuers which you see in the portfolio of Franklin Templeton are borrowing money at a much lower rate. So, if there’s no fire sale, then there’s no challenge but suppose there’s a no, then there’s redemption. If there’s redemption, then there’s a very high possibility that the Franklin Templeton will maybe resort to sell these securities in the market and perhaps given the volume of the securities they have is close to 80,000 crore there will definitely be some NAV impact if the answer is no. Now coming back to your specific question of Franklin India Short Term Income Fund and Franklin India Income Opportunities Fund, where they have as on Nov. 30, approximately 1,800 crore borrowing, which I believe has come down to 250 crore as on Dec. 15. So, these securities on the normal course of business will take three to four years to wind down but if there’s no pressure of redemption then what will happen is that these issuers who have issued these securities, perhaps get a portion of the borrower at a lower rate from other people and perhaps, prepay them. Also, there’s a huge opportunity in the market where these securities would be offloaded. In my opinion, at bare minimum are the prices at which they are getting in the portfolio and in some cases, perhaps, on the premium. So, in my opinion investors don’t need to wait for three to four years. The market condition has improved quite substantially than what was in the month of April and March. So, in my opinion in some of these schemes, in next three to six months—around 60-70% of the money will come back to you and in rest of this scheme, I do not think you have to wait for more than one year plus to get majority of your money back. So, this is my take on the current situation.
The projected dates that are given, they are far out, right? You think that they are the safety standards laid out by Franklin so that people kind of give them the leeway?
MANTRI: So, the schedule that was given was actually on the basis of when these securities mature. So, it’s with the maturity date of every scheme and if there’s a low presale of securities in the market then as and when these securities mature, the money will be available to the unitholders at a regular frequency. But my sense is that these securities in the normal course of business will be sold very fast because we are living in a very different market than it was in the month of January February and March. Today the liquidity is much more comfortable. I take a couple of illustrations for instance. Vedanta and Shriram—which was part of the portfolio. They were quoting it at very high prices and at high very high yields in the month of March and April. Today these securities are at a much lower valuation. So, the fund house has given a scheme-wise maturity and when these various securities mature. Looking at the market condition, if there’s a no fire sale, then I don’t see beyond 12-18-month period that security will not get liquidated. In my opinion these securities will get liquidated and the customer would get most of the scheme; anything about 60-80% in a one-year time and most of the money perhaps in 18 months’ time.
Tarun, that was going to be my question. In each of these schemes, what’s the quantum of money that you reckon will come in? Do you reckon close to the full amount or would there be large haircuts, eventually?
BIRANI: So, I have not done individual study of each of the securities but what Vijay also mentioned there is a huge change in the market since March and as we speak today the liquidity situation is definitely way better and that gives a lot of confidence that we would be much better compared to what we envisaged in March. So, again, my guess is we should be getting maximum amount out of these securities.
Vijai, have you figured out if indeed it’s full amount or close to full amount, or would there be some haircuts that people may have to take irrespective, of course, let’s assume everybody does vote yes?
MANTRI: I don’t think there is the possibility of any haircuts because the securities which are maturing, many of these companies, the securities got matured in last eight nine months and almost everybody has paid on time and many companies had paid before date. So, there has been prepayment in the securities as well because these securities were getting a higher coupon rate as liquidity improved in the market. The same issuer has borrowed the money at a lower rate in the market and bought the securities back from Franklin Templeton. So, I do not see—until and unless we have a Covid kind of situation again where there’s a complete lockdown and there’s a squeeze of liquidity; I do not see any possibility that the customer will not get money. I think investors will get their money back, full with interest.
Is there any other point that we’re missing in this Franklin discussion?
BIRANI: I want to make one point that the whole rationale of investing into credit funds, high risk credit funds—even I continue to believe that for an investor debt as a product is meant to protect the capital and from a financial planning point of view, I strongly recommend not to venture into high credit risk funds because in order to earn that 2% extra returns, we end up getting our principal at stake. So, to play a risk, I think, equity is the best asset class one should look at but getting into such strategies and there are a lot of bonds, there are a lot of PTCs, and a lot of structures which keep coming in the market enticing investors to get that extra 2-3% but my strong suggestion to investors is that look at debt for safety and protection and there is no point in getting into a strategy like this and may be one can look at equity meaningfully to earn that kind of extra returns.
Vijai, you want to defer, or should we move on?
MANTRI: No, I think it is fine. I think everybody is wise after the event. My suggestion currently is just look at how do you realise the money and the best course of action is to just say yes and in the course of time you’re going to get the money back. Then there is around 9,000 crore cash on this scheme of Franklin Templeton. The moment you say yes, then subject to court decision, you start getting money back immediately. So, your worst days as far as with the Franklin Templeton scheme, from a realisation perspective perhaps is going to get over very soon.
What if somebody doesn’t vote? Will that be counted as a no show? I mean, does Franklin need a minimum and therefore is it imperative that people should vote?
MANTRI: It is like a normal voting anywhere when you go for any election or anywhere, it is the total number of people who are turning for the vote out of which how many say yes and how many say no. So, the decision will be taken on 50% plus. So, if an investor says yes and the majority says no, that doesn’t mean the investor can’t put forth an action or if the investor said no and the majority say yes, that doesn’t mean that the investor will not get the money back. So ultimately, whatever decision that 50% plus voters has on that day voted and took the call will be applicable to everyone. The voting is electronic so it can be done in my opinion, very easily. The votes will be given in a sealed envelope to the Supreme Court and then the court will give the verdict of what has been the final outcome.
A bunch of small cap schemes have done well. Tarun, I want to get your thoughts here. UTI small cap—should somebody apply or are there other better options available?
BIRANI: My quick take on any NFO would be that take an NFO if it is unique and if it is coming from a parentage which has a long-term track record. So, there are a lot of good small-cap funds which already are available. I don’t think there is a strong rationale to pick up something which is new in the market, but just to give you a quick background of this category. Small cap, I feel if the Sensex is trading at a 45,000 level, there are a lot of small-cap stocks that are available at a 28,000 level. Let me tell you why is it so because 2018 and 2019 had been very bad for this category as an asset because post that SEBI-dictate in 2018, a lot of small cap and a lot of mutual fund schemes had to rebalance their portfolio and sell small and mid-cap and by large cap. Due to that we have seen a lot of pressure in this category but post-Covid. Due to revival in the economy, whatever we can talk about the vaccine thing there is a lot of positivity around this sector. I feel small cap needs to be part of the portfolio at least for the risk-oriented investor at 10-15% of their portfolio in this category. If you can hold it for five to seven years, then this is a great category and I see a strong performance for this category. UTI, one point I want to make there. The mid-cap category has actually done very well in the last 1-1.5 years. Their sector selections have been very good. So, again UTI could be considered but maybe I would like to take it after six or nine months or one year once I see some performance coming in.
Any thoughts about the Aditya Birla Sunlife ESG fund?
BIRANI: ESG again is like a fancy word across the globe. Everybody’s getting into this space and there is a lot of rush in the market. So again, I would go for somebody who is already there, but I want to point out one important thing on ESG. That is, a lot of ESG funds globally are taking most of the technology stocks which are very easy to comply in the environmental norms and everything. So, this is again one of the concentrated risks which we are building in this category. So, one needs to be aware of this part. Now, because of the ESG thing there is a lot of mis-selling which may also happen in the market. So, I think a normal large-cap or a diversified fund is also doing that job. Don’t take an ESG fund just for the sake of taking it.
From the Kotak house, there is an offering. What are your thoughts on the Kotak REITs?
MANTRI: A very interesting proposition in my opinion and I’ll give you two to three reasons why it is very interesting. First of all, this Kotak International REITs Fund is not a new fund. It is feeding into existing funds with a close to 10-year track record. The underlying assets are around 48% in Singapore, 33% in Australia and New Zealand and Hong Kong. The mix of asset is also very good, you have a data center, you have residential complexes, you have logistic and your commercials. It is a combination of all four. In rupee terms, in last 8 to 9-10 years, the fund has delivered close to 16% CAGR over a decade. If you look at the fund in the current environment, it has a 4.5% yield in dollar terms. Then, one could look at potential currency depreciation which may or may not happen which could be around 2-3%. Then one could look at 2-3% capital gains. So, if you are looking at the fixed income returns in the current market, then this counts as one of the very good alternatives compared to what we have in the fixed income market in India, where Reliance has borrowed CPs like 3%, liquid funds are delivering 3%, ultra-short term is 4- 4.5%. In my opinion at this point with the instant liquidity, it can offer you anything between 6% and 8% on the fungibility basis to the investors and give a very good exposure to the real estate sector without compromising on the liquidity part of it. So, Kotak International REITs Fund is a very interesting concept, though they are existing REITs available in Indian form of embassy and Mindspace. The challenge with these REITs are that when they declare dividend—which is what they have to declare the earning where they have to give 90% of that rent to the investor. That money becomes taxable in the hands of investor at the marginal rate of tax but if the same REIT is coming through the mutual fund route where the mutual fund investing in these underlying REITs, then the rental which gets distributed by these REITs to the funds doesn’t get taxed at the fund level. So, NAV to that extent goes up and only gets taxed when they invest or take money out from the fund. So, from a tax efficiency perspective also, it is a very good option. So, it is an interesting option that investors should examine. In my opinion, given the current market condition, a decent part of the customer’s money can be invested in Kotak International REITs Fund.
Tarun, let me ask you on the actual Axis Special Situation Fund. What is your verdict here should people go out and subscribe, yes or no?
BIRANI: So, I think yes and no is a very relative thing. Trust me I don’t want to get in that. I want investors to see whether this as a category is available in their portfolio or not but as a product. It’s a unique product that I felt 30% of the portfolio is going outside India. So, this gives you a global diversification. Again, with Axis’ tie-up with the Global Fund Management—Schroders, it again gives you a very good global exposure. They have a good expertise in managing this special situation. So, one can consider that but my only disconnect with all these different contrasts, special situation and all these things is that they always position it like buying something; a very cheap kind of a thing which I think at the end of the day, all the funds are trying to do. So why do we keep testing all these new things? So, maybe one can see the performance for some point of time and then look at them. Whether they’re buying or not, I will avoid it.
A quick follow up, Vijai. A bunch of these options are available which either do a fund of funds strategy on a global fund or have the option of investing into global stocks. Now out of the plethora of options available, which to your mind or to your houses’ mind is among the better ones to invest in? I think that in Invesco a product is on right now which gives you that option. There is the Axis option too. Which one to your mind is among the better ones? It doesn’t mean that you are saying that the others are bad, you’re just choosing one which you like.
MANTRI: So, the investors have a choice of investing directly in international markets to liberalise remittances scheme and investors also have a choice to participate, through a domestic mutual fund which feeds into the international fund. The difference is identical to buying domestic mutual funds versus buying domestic equities. So, there are certain people who feel very comfortable buying direct stocks. They have a sense of ownership when the stocks come into their portfolio, they get regular dividends, they get the company’s annual report. So, a true sense of engagement and ownership. People get different feels when they invest in direct stocks. When investors of mutual fund compares to direct stocks, it looks a little passive but if you are venturing into international investing, then you do not know what the underlying companies could be. I’ll give a simple illustration. In March, when the lockdown started, Zoom went up 50% in no time, but people figured out that later on, Zoom technology was not the same company which spun the business of videoconferencing. Later on, they figured out that the company was different because the code was very different and that company which went up 50% was not in operation for five-six years. So, this is the kind of risk we look at while investing but they have a very interesting concept coming up in the Indian market. Why it is becoming very interesting to look at these options? It is because with what we have seen that the consumers are in Indian markets but the companies profiting out of these consumers are not in the Indian market. They operate out of some other market. So, you are spending money but the profit is going somewhere else. So, through these international opportunities, you can participate in that kind of an opportunity as well.
So, let’s establish it that it is there, it is interesting to do and let’s assume that the person doesn’t want to invest the money himself or herself. Which fund option is a good option?
MANTRI: So currently, around two years ago we recommended the U.S. funds. Today, we are not recommending the U.S. funds one because the U.S. market has run too much and it has shown 20% CAGR over a 10-year period, which in our opinion is one of the best returns that the U.S. has delivered. So, we are looking at something outside the U.S., and this Invesco Global Consumer Fund is one option which has a very low correlation with Nasdaq or S&P 500 or whatever existing options available in the Indian market through the mutual fund route. So, this Invesco Consumer Global Consumer Fund looks at where investors and consumers are spending their time and consequently where they’re spending their money and they’re tracking these trends and the companies which are going to benefit out of that. This fund has a 26-year track record, and this is a real outstanding track record. So, I would look at Invesco Global Consumer Trend Fund as one option that investors can look at investing.
Tarun, Navneet Munot is moving on from SBI. Could that have an impact on SBI schemes? Should an investor in any of the SBI schemes be worried that the CIO of the fund house is moving to another house?
BIRANI: Not really because I feel that SBI has a strong investment team. Their equity team as well as their debt team is a pretty stable one with a long-term track record and what I understand is, they now have co-CIOs that have been taken onboard the existing equity plus the debt CIO will be co-managing as a CIO. So, this again gives a lot of confidence. It’s an old team. So, I really don’t see any concern from that point of view. Yes, key personnel leaving definitely puts a question but what I have seen is over a period of time they have put in a lot of strong processes in place and they have a very strong team which is handling the same. So, I will not look into that much.
Vijai, do your thoughts differ?
MANTRI: Yes, it is very difficult to replace a person like Navneet with the skills and capabilities but one needs to keep in mind that the way SBI mutual fund has been running in the past decade or so, they’re running very professionally. The compensations and the work environment is identical to what is available in the private sector. In addition to their fantastic brand, they have a huge network of SBI and they have a corporate relationship and a relationship with almost every Indian investor. They are managing more than four lakh crores of AUM in the mutual fund set alone. Then their ETFs and all kind of things. So, their ability to attract good talent—A, is without question. Second, the existing team. Navneet was not managing any fund per se directly, the existing head of fixed income, a head of equity, have been managing the fixed income and equity portfolio respectively. So as on date, as far as SBI’s mutual fund schemes are concerned, there are no red flags. Let’s see how the situation emerges over a period of time but as of then, one could take a call—so if the performance deteriorates, whether it is deteriorating because of a leadership change or because of the market cycle. So, as of date, there would be no red flag on SBIs schemes.