The Mutual Fund Show: What Investors Of Franklin Templeton’s Frozen Schemes Need To Watch Out For
Both Mantri and Shah advised unitholders to track disclosures, borrowing numbers and defaults on a monthly basis.
Franklin Templeton Mutual Fund has given investors of the schemes it froze two options as it looks to monetise assets to repay them. While the Gujarat High Court has stayed the plan as of now, financial advisers suggest that unitholders should track disclosures by the asset manager closely.
Vijai Mantri, co-founder of JRL Money, flagged falling borrowings in the last 40 days of two of the largest schemes among the six that were wound up by the asset manager. This is important because investors were scared about money being stuck and not coming back, he said. The fact that the asset manager is clearing its borrowing, said Mantri, is a sign that repayments may happen soon.
Jay Shah, founder of One Tree Hill Wealth Partners, however, considers borrowings falling a routine development. If this would’ve happened in a fund that was open for business, then this wouldn’t have made news, he said.
Both Mantri and Shah advised unitholders to track the disclosures, borrowing numbers and defaults on monthly basis to assess the situation. Unitholders should watch securities maturing each month as well the periodic interest payments, they said.
As Franklin Templeton has wound up the schemes, they have become illiquid as investors can’t redeem when they want. Mantri and Shah, however, are willing to give the fund house benefit of doubt as long as it repays.
For mutual fund investors in general, Mantri advised staying put for the long term. He cited the example of an investor who started a systematic plan for Rs 10,000 a month a year ago. For 12 months, the SIP would have lost 39.32% going by average large-cap returns, he said. But if held for 13 months, the loss shrunk to 7% in April and further narrowed in June.
What to choose: a large-cap fund or an exchange-traded fund? Shah said the benefit that a large cap fund might offer is expensive compared to an ETF, which is low cost but guarantees index return; or a multi-cap fund is which will give a potentially higher return for the same cost.
He suggested an ETF instead of a large-cap fund, and mid- or small-cap fund if an investor is looking to beat the index.
Watch the full show here:
Here are the edited excerpts from the interview:
Vijai, what do you make of what Franklin Templeton has offered its unitholders?
Mantri: I think, first of all, now it is under the judicial review so to be honest, I can’t comment much on it, but had there not been a stay from the Gujarat court then the option was that they need to say a yes or no, and if they say no, then challenge is that the asset management company would have to come up with a new plan for investors and that would delay the ultimate money available to investors... We have two options available but today we are not in a position to comment. But what is more important and I think is critical is just to see what is happening in the underlying portfolio of Franklin Templeton. Sine April 23-24, 2020 till May 31, 2020, almost 40 days, we have some data available. Also see what can happen going forward and how and when investors can get their money back.
Jai, subject to ofcourse how this shapes up at the courts, what is your sense of the proposals and what would you have recommended?
Shah: I think we see this as two options either a yes or no, more than anything else. Now, whether we go with the Franklin Trustee, or whether we go with Deloitte- I think more or less Franklin Templeton AMC is going to be involved. Kotak at some level is going to be involved. Honestly, there is no way to assess whether Franklin Templeton is better as a trustee or Deloitte is better. Sure, you can argue that Deloitte maybe does not have this experience. But we’re living in a time which is quite unprecedented of sorts. It has not happened before. And hence, we say that definitively yes, it is something that you should want to do quickly rather than delay it. The only point out here is, if they could sell the underlying bonds much faster, then they wouldn’t be here. We would have already gone through the process, met a good amount of redemption, borrowed and then have taken the decision to wind up the fund in a manner that we are seeing. So honestly seeing that whether Franklin Templeton trustee, or Deloitte is in a better position than anybody else, is honestly not a very important question here because everyone will not be able to sell this because we live in a supply-demand sort of environment. No one is going to raise their hand and say that look; I’m going to buy all these bonds at a very fair price.
Vijai, you obviously believe that there is credit in choosing one or the other. Why would you say that? What is your rationale?
Mantri: A known devil is better than an unknown devil. Franklin Templeton- an asset management company has 50 other schemes to run, and they have more than 20 years’ track record in India. If you look at other schemes, other schemes would have more than 1,50,000 crore or 1 lakh crore of investing surplus. And why would they run risk at that? Not only Franklin Templeton is also a global asset management company what happens in India, potentially has a question on various businesses which they run. Since I work in a global company so I know how seriously the global guys look at any country because potentially a pursuant can decide - suppose Franklin Templeton was working in another country and in then they come to India, the regulated investor would also look at what they have done in that country. So, it has wider ramifications. I would go for a non-devil.
Shah: The petition which is there in the Gujarat High Court right now is actually on the legality of this winding down process. So, there’s actually some chance, and I’m not saying I’m a lawyer and know the merits and demerits and have understood and read all the things, but the proposal or what the idea is that you have to ask the unitholders before winding it down. Here we seem to be going the opposite way, that we have taken a call to wind it down and these are the two options available, but not a question on the winding down.
What’s happening within these schemes and what should the unitholders expect now because the monies are gone?
Mantri: So, the most important thing to see is what has happened from April 23-24 till the May 31. and first I’ll tell you a couple of news which are not negative but they’re not positive. There’s been rating downgrade on two paper. The Future Group has asked for three more month moratorium on all the securities which are maturing in various schemes of Franklin Templeton. These are not so positive but also not so negative. However, what is positive and could be heartening for investors to note is that since April 23-24, 2020 till May 31, there has not been a single default or delay anywhere else. They are receiving interest properly, and the borrowing amount across all the six schemes are coming down to the extent that in two schemes the borrowing has become zero. So for instance, one of the biggest is the ultra-short term bond fund where the borrowing of Rs 800 crore has become zero. That means that they have received Rs 860 crore of inflows from the investing companies. What is also interesting to know that this money has come from various companies. It has come from Piramal Enterprises. Money has come from Jindal Group companies, it has come from Hero Group of companies, from ICICI, PNB Housing Finance, etc. So, the money has come from various entities. What investors should look out going forward is this monthly disclosure which Franklin Templeton Asset Management Company is communicating so effectively and look out for the borrowing numbers, look out for any default or anything happening, and month-on-month, I think we should communicate with the investors.
Jai, you have some thoughts here?
Shah: I completely agree with what Vijai is saying, to the extent that this has to be now looked at a monthly level, the portfolio is sort out there and Franklin itself is sharing it. So it’s not difficult to figure out when something is due, when an interest rate payment is due. It’s clear that while the ultra-short term, and I believe, dynamic approval funds that have sort of become cash positive now because some of the funds have matured interest payments come in, if you see other funds, especially I think the income opportunities or short-term income fund, you know these are maturities which are post 2021, right? I think, at least from what I’ve seen, while a lot of investors bought in with the intention of taking the benefit of peers, longer term debt, safety etc., I think what I would actually look for, is that how aggressively are we trying to get out of something... The process of winding down is to put money in the hands of an investor. Now whether there is pre-payment, whether there is maturity, whether someone out there sells the particular liquid fund, I think that is what is more important and that is what at least a few of our clients are looking for that is how are we going to get money in our hands?
We should move on to other things as well, but just one final thing. Any last word on the FT saga as it stands right now?
Shah: The entire focus of a mutual fund is to provide liquidity. At least that is one of the bigger objectives. And sure monthly paying back the investors will keep the calm sort of in place, but I think it misses the bigger picture that how should we ensure that something like this does not happen? Everyone’s talking about it that it has happened, it’s an unprecedented event, but what is going to stop somebody else from being the same way? It’s a very open ended question I agree, maybe not right forum as well. But I think that’s, that’s a more important question, but I think we will get it sorted in some time.
Vijai any last word on the FT issue?
Mantri: I think I would watch out for the maturities, I would watch out for the various interest payments and I have seen the worst of debt market. I look at the handout portfolio of a Franklin Templeton. In three to six months of time in the market, they will formalise, you will see a lot of money coming back to the investor. The investors will get their money back over a time period, so I would look out for what are the various payments and if the payments have been happening on time or not. It is very important for investors to learn the lesson that when we say diversify, it is not only diversification of the scheme but also fund houses. I recommend eight to 10 funds to the customers and never a single scheme gets repeated. It is very important that when you are investing in a mutual fund, don’t put all eggs in one basket.