HDFC Asset Management Company (AMC) is in the news, and sadly, not for the right reasons. If media reports are to be believed, the AMC has been served a show cause notice by market regulator SEBI. The front-running scandal which first surfaced in June 2010 has returned to haunt the AMC, with apparently more instances of questionable trades being uncovered. The popular belief that the matter had been laid to rest when the AMC and its managing director settled charges by paying fines was obviously incorrect.
There is a legal aspect to the episode which the fund house's legal team will undoubtedly deal with. However, to my mind, there's another side—pertaining to the AMC's stewardship—which is even more significant. In the mutual fund business, the importance safeguarding and acting in investors' interests cannot be overstated; likewise, it would be imprudent to undermine the significance of investor confidence and trust. On those counts, now is the time for HDFC AMC to step up to the plate.
The need to act is only accentuated by HDFC AMC's standing in the industry (remember the Spider-Man credo: with great power comes great responsibility). Not only is it among the largest fund houses, in my opinion HDFC AMC easily ranks among the best players in the Indian mutual fund industry. A disciplined investment process and a consistent long-term focus have contributed to the fund house's sterling reputation in no small measure. In an industry where high manager turnover is the norm rather than the exception, the AMC has been successful in both attracting and retaining talent over the long-haul. Performance-linked compensation structures ensure that the investment team's interests are aligned to those of long-term investors. It can be safely stated that the fund house fosters an investment culture rather than a marketing culture.
All the positives notwithstanding, it is disconcerting to hear that there is a likelihood that more questionable trades may have taken place, and that the AMC finds itself on the wrong side of the law yet again. HDFC AMC must assuage concerns of its stakeholders (read investors and distributors). And here's how they should go about doing so.
To begin with, the AMC must start communicating. Instead of learning about the developments from the media, it would help if HDFC AMC were to communicate with its stakeholders and offer its side of the story. Don't get me wrong: I'm not suggesting that nitty-gritties of the legal proceedings or confidential matters be placed in public domain. But the AMC can and must offer its stance to let its stakeholders know that all is in order. If is as being alleged, questionable trades did indeed take place, then an apology is in order. All it takes is an unambiguous and forthright note from someone in the top brass, which can be put up on the AMC's website.
Then there's compliance; presumably, the AMC has already taken steps to ensure that irregularities such as front-running do not recur. It would help if the same are communicated to investors as a part of the confidence-building measure.
Finally, the AMC must also chart out a plan to compensate investors for losses suffered as a result of the alleged irregularities. The obvious solution would be to credit a sum equal to the loss suffered into the respective funds' assets. It may not be a bad idea for the AMC to go the extra mile, and consider issuing bonus units to all investors in affected funds.
At times in the world of investments, perception is as important as reality itself. No responsible AMC can afford to be perceived as having a cavalier attitude when it comes to investors' monies or dealing with irregularities. Hence, now is the time for HDFC AMC to stand up and be counted!
There is a legal aspect to the episode which the fund house's legal team will undoubtedly deal with. However, to my mind, there's another side—pertaining to the AMC's stewardship—which is even more significant. In the mutual fund business, the importance safeguarding and acting in investors' interests cannot be overstated; likewise, it would be imprudent to undermine the significance of investor confidence and trust. On those counts, now is the time for HDFC AMC to step up to the plate.
The need to act is only accentuated by HDFC AMC's standing in the industry (remember the Spider-Man credo: with great power comes great responsibility). Not only is it among the largest fund houses, in my opinion HDFC AMC easily ranks among the best players in the Indian mutual fund industry. A disciplined investment process and a consistent long-term focus have contributed to the fund house's sterling reputation in no small measure. In an industry where high manager turnover is the norm rather than the exception, the AMC has been successful in both attracting and retaining talent over the long-haul. Performance-linked compensation structures ensure that the investment team's interests are aligned to those of long-term investors. It can be safely stated that the fund house fosters an investment culture rather than a marketing culture.
All the positives notwithstanding, it is disconcerting to hear that there is a likelihood that more questionable trades may have taken place, and that the AMC finds itself on the wrong side of the law yet again. HDFC AMC must assuage concerns of its stakeholders (read investors and distributors). And here's how they should go about doing so.
To begin with, the AMC must start communicating. Instead of learning about the developments from the media, it would help if HDFC AMC were to communicate with its stakeholders and offer its side of the story. Don't get me wrong: I'm not suggesting that nitty-gritties of the legal proceedings or confidential matters be placed in public domain. But the AMC can and must offer its stance to let its stakeholders know that all is in order. If is as being alleged, questionable trades did indeed take place, then an apology is in order. All it takes is an unambiguous and forthright note from someone in the top brass, which can be put up on the AMC's website.
Then there's compliance; presumably, the AMC has already taken steps to ensure that irregularities such as front-running do not recur. It would help if the same are communicated to investors as a part of the confidence-building measure.
Finally, the AMC must also chart out a plan to compensate investors for losses suffered as a result of the alleged irregularities. The obvious solution would be to credit a sum equal to the loss suffered into the respective funds' assets. It may not be a bad idea for the AMC to go the extra mile, and consider issuing bonus units to all investors in affected funds.
At times in the world of investments, perception is as important as reality itself. No responsible AMC can afford to be perceived as having a cavalier attitude when it comes to investors' monies or dealing with irregularities. Hence, now is the time for HDFC AMC to stand up and be counted!
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