The repayment crisis in Fixed Maturity Plans (FMPs) has yet again put the focus on credit risk investing. All-too-familiar arguments suggesting that fund managers have erred by taking credit risk (or high-yield investing) have cropped up yet again.
Does this investment strategy entail risk – yes, it does. But that doesn’t make the approach flawed. To my mind, for investors who understand the risks involved, and have the ability to take on risk, credit risk investing continues to be an apt strategy.
Expectedly, fund companies and fund managers are busily defending their investment decisions. Some of the defences are admittedly ludicrous, but that’s a discussion for another day.
I thought it will be interesting to find out if fund managers are willing to put their money, where their mouth is. In other words, are managers running funds from the Credit Risk category, investing alongside investors? As of March 2019, the SEBI defined Credit Risk Funds category had assets of over Rs 81,000 crores (Rs 810 billion).
Some disclosures are in order: In the hunt for relevant information, I have perused various documents — Scheme Information Document, Key Information Memorandum, Statement of Additional Information, and fact sheets from websites of fund companies. While some fund companies continue to disclose information as of 2018, others have released updated information.
To efficiently analyse the data, I broke down manager investments into the following ranges: None (No Investment by Fund Manager), Re 1—Rs 10 Lakhs, Rs 10 Lakhs—Rs 50 Lakhs, Rs 50 Lakhs—Rs 1 Crore, Rs 1 Crore—Rs 5 Crores, Rs 5 Crores—Rs 10 Crores, Over Rs 10 Crores. The results are interesting:
- A massive 63% of assets in the Credit Risk category have not attracted any investments from managers running the funds. In other words, 11 (i.e. over half) out of 20 funds in the category are run by managers who are unwilling to invest in their funds.
- Roughly 8% of assets have investments in the range of Re 1 – Rs 10 lakhs.
- The only saving grace is that one fund accounting for 9% of category assets, has manager investments in the Rs 5 crores – Rs 10 crores range.
Clearly, fund managers running Credit Risk funds do not invest alongside investors.
Defending the Indefensible
Disclosures related to manager remuneration reveal that an annual compensation of Rs 50 lakhs (Rs 5 million) is commonplace even in mid-sized fund companies. Hence, the defence that managers do not have monies to invest, doesn't hold water.
Also, most managers have been at the fund's helm for a reasonably long period of time now. Hence, they cannot take refuge under the pretext of 'early days on the fund' either.
Finally, if managers have no reservations in asking investors to invest in funds they run, then no excuse is good enough for managers to not invest in the same fund alongside investors. Let's not forget: What's good for the goose, is good for the gander.
The Counterview
Sceptics will claim that a manager investing in his fund doesn’t guarantee performance. True, but, it is an undeniably important evaluation tool, which demonstrates the manager’s conviction in his investment approach and acumen. More importantly, it speaks volumes about his commitment to the fund.
I fail to see why investors should invest in a fund that the manager isn’t entirely committed to. I am certain that like me, most are wary of the chef who doesn’t eat his own cooking.
