Sebi may ask fund managers to reveal their track records

Sebi may ask fund managers to reveal their track records

Mumbai: India’s capital market regulator may make it mandatory for asset management companies (AMCs) to disclose the track record of their fund managers while promoting or selling equity-oriented schemes.

To enhance transparency in mutual fund (MF) sales and help investors take informed decisions, the Securities and Exchange Board of India (Sebi) is considering a plan to make it mandatory for AMCs to disclose the track record of their fund managers, said four people familiar with the matter, including officials from the regulator and AMCs.

Sebi has met all fund managers handling equity schemes and questioned their ability to manage investors’ money in equities when even fixed-income funds and exchange-traded funds (ETFs) are generating better returns, one of them said.

All the four people declined to be identified as Sebi is yet to finalize the rules. A Sebi official declined to comment.

The regulator is worried that poor fund management may have resulted in the underperformance of two-thirds of the equity-oriented MF schemes in the industry, vis-a-vis the benchmark indices Sensex and Nifty over three- and five-year periods.

Sebi has been meeting fund managers since November on the underperformance vis-à-vis the benchmark indices, said a second official familiar with the matter.

“Since a number of schemes have underperformed, Sebi wanted the AMCs to also disclose the track record of the fund managers while selling or promoting an equity scheme," he said. “This may be made compulsory shortly as Sebi is serious about the matter."

India has 41 fund houses managing assets worth nearly 7 trillion. Of this, close to 2 trillion is invested in equity-oriented schemes.

Data from Value Research, a New Delhi-based MF tracker, show that 130 of 214 equity schemes underperformed their own benchmark indices in the past five years till 31 May. Over a three-year period, 127 of 293 equity schemes underperformed their key indices.

“Half of the equity schemes were outperformed by their own benchmark indices in the last three-year and five-year periods. Two-thirds of the schemes were outperformed by the Sensex and Nifty during the same period," said a third person familiar with the discussions at Sebi and its MF advisory committee. “This means two-third of the times an investor is likely to take a wrong decision while investing in an equity scheme if he does not know the track record of the fund manager who would manage his money."

Fund managers defend themselves saying equity investments are for the long term. Investors often decide on what fund to put their money in depending on the popularity of AMCs and the schemes promoted.

After Sebi raised its concern over the poor performance of equity schemes, a number of non-performing schemes have been merged with ones that have fared well.

There are about 149 equity fund managers in the country. If Sebi goes ahead with its plan for the disclosures, AMCs may be required to disclose the track record of their fund managers in all their scheme-related documents, advertisements, promotions, as well as on the websites of Sebi and the Association of Mutual Funds in India, in addition to their own websites.

At present, often only one warning statement accompanies all MF advertisements and documents, stating that MF investments are subject to market risks and that investors should read all scheme-related documents before investing.

“I do not know of any country where AMCs are required to disclose the track record of their fund managers," said Dhirendra Kumar, chief executive of Value Research. “But it is useful for the investors."

The head of equities at an MF house cautioned that such disclosures could still mislead. “A fund manager who has done well in a particular type of market or a time period or a sector may not do as well in a completely different scenario," this person said, asking not to be identified. “Fund houses will be keen to encash on some big names that have done well in the past, but there is no guarantee the performance will continue."

If implemented, this will be the first tough move by Sebi under its new chairman U.K. Sinha, who was earlier with UTI Mutual Fund. During the tenure of former Sebi head C.B. Bhave, the regulator came out with a number of stringent MF norms. Important among these were the scrapping of entry loads (an upfront commission paid by investors to agents for investing in MFs), valuing all long-dated securities as marked-to-market, listing of close-ended debt-oriented schemes, and making it mandatory to refrain from indicating returns in debt-oriented schemes.

Bhave had been continuously criticizing the MF industry for its poor performance and low penetration despite the introduction of hundreds of schemes.

The industry has opposed Sebi’s moves, saying its new rules are hurting the industry’s growth. An analysis by Sebi shows that because of the non-payment of entry loads at an average of 2%, investors have saved at least 2,800 crore since the ban was implemented in August 2009.

Sinha has formed a committee to examine the grievances of AMCs and has recommended some changes in rules. The recommendations are yet to be formalized.

“The matter has been discussed several times and the Sebi board should not have any problem to implement this new rule to benefit the investors," said one of the officials mentioned earlier in the story.

To implement the new rules, regulations governing MFs have to be amended.

“This move will benefit small retail investors who may be say 30-20% of investors in a fund," said Gopal Agrawal, head of equity investments at Mirae Asset Management Co. Ltd. “It has been mandatory to name the fund manager in the offer document and most investors, especially HNIs (high networth individuals), banks and the average retail investors, who together form about 70-80% of investors in a fund, are normally aware of the fund manager’s track record."

Vyas Mohan and Ashwin Ramarathinam contributed to this story.