Restricting inflows is not a new strategy for the fund house—its IDFC Premier Equity Fund, a Rs5,500 crore fund, accepts fresh inflows only through SIPs and periodically opens for larger lump sum investments.
IFEF, on the other hand, is a much smaller fund, with assets under management of around Rs900 crore.
The fund has recently refreshed its portfolio construct and investment strategy. Since the change both performance and subsequently asset under management (AUM) have improved.
Why restrict inflows?
The main difference in IFEF as compared to its earlier avatar, IDFC Imperial Equity Fund, is that it seeks to keep the portfolio relatively compact at a maximum limit of 30 stocks. The stock selection remains sector agnostic and across market capitalisation.
The change in strategy seems to be working well for the scheme with performance moving sharply higher and inflows coming in quick; then why restrict inflows?
According to a senior wealth manager, “The initial communication from the fund house indicated their intention to restrict inflows once AUM reached between ₹ 750-1000 crore."
The fund presentation talks about a focused strategy with a maximum exposure to 30 stocks. The current portfolio is structured such that stocks at the tail end also have at least 2% exposure in the fund.
According to Vishal Kapoor, chief executive officer, IDFC Asset Management Co. Ltd, “Focused fund is a strategy implemented in April this year when the Imperial Equity Fund was re-positioned. The strong fund performance was rewarded with quick inflows in a relatively short span. The fund size now is above Rs900 crore and we felt that sharp, large incremental inflows could now impact the original style and investment strategy of the fund. Hence, the decision to moderate flows." This move is also expected to broaden the investor base for the scheme and include more retail investors, Kapoor added.
In a fund which allocates a relatively higher proportion to individual stocks in the small and mid-cap segment, the probability of straying away from the original investment style if there are sudden large inflows is potentially higher. This happens because, many of these small and mid-cap stocks are illiquid and incrementally it becomes harder to allocate similar amount of funds as earlier without and impact on performance and price. Ultimately, it can impact performance.
Does it work?
Does a focused strategy work better with controlled inflows? IFEF has delivered 54% annualised return in the last one year, which places it at the top of its multi-cap diversified category in terms of one-year performance. However, it’s hard to compare with others given that the fund has just undergone a significant change in strategy. There are focused funds, those which invest in 25-35 stocks at the most which have delivered annualised returns of around 15-20% over a three-year period, with no restriction on inflows.
It’s common to see inflows following performance. A fund house showcases its good performing schemes to distributors, who then recommend it forward. As the popularity increased so does the pace of inflows.
Recently, inflows were restricted in Mirae Asset Emerging Bluechip Fund. Before that DSP BlackRock Micro Cap Fund too restricted inflows as did SBI Small and Mid-Cap Fund. However, these are slightly different from the IFEF as they invest majorly in mid and small cap segments of the market where stock specific liquidity is limited and transacting in large sums can impact price especially when valuations are already high.
According to a senior wealth manager, who preferred not to be named, “Now that the fund is performing and popular, there is a danger that further inflows can hurt performance. This won’t look good. The fund house always wants to retain its top performer as the flag, it makes it easier to sell its other products under the same fund management."
Nisreen Mamaji, founder MoneyWorks Financial Advisors, feels it’s fair to do if the fund manager is confident of delivering better returns as a result of controlled inflows. “Inflows are being restricted with the right intent which is a step in the right direction."
What is surprising is the choice of the asset manager to limit inflows when the AUM is at ₹ 900 crore. Mid-cap funds with many times the AUM have delivered returns in excess of 35-40% in the last one year. IDFC AMC’s own mid-cap fund, IDFC Sterling Equity Fund with an AUM of close to ₹ 1900 crore has delivered around 54% returns in the last one year—this fund remains open for subscription with no restrictions.
Kapoor says, “Moderating flows helps in getting reasonable time to keep investment ideas aligned to the original style. This particular strategy is not a deep value, buy and hold portfolio, it is about capturing current opportunities and as such the fund manager needs to be nimble. Moreover, it is important not to exceed the stated objective of keeping the maximum number of stocks at 30. It is also about staying pure and true to strategy."
More inflows might mean adding fresh stocks if the ones already held are too highly priced (valuation). The choice then is to either leave the new funds in cash and wait for an investment opportunity or buy additional stocks, neither of which is an attractive option for the fund managers as returns are likely to falter.
Not all agree with this kind of a change, especially given the level of AUM the fund has reached. In an industry where mid cap fund with Rs4,000-5,000 crore and higher assets under management have maintained a track record of top performance, the move can appear to be premature.
According to a senior executive with another large wealth advisor, “It is unusual to see inflows getting restricted at this level. One can hope to preserve performance and not dilute portfolio, but ₹ 1,000 crore does not seem like an unmanageable corpus given that other much larger sized funds are delivering performance too."
What about existing investors?
The retail investor is not impacted as the upper limit of accepting inflows is expected to be ₹ 2 lakh. For big ticket investors, high net worth investors, it’s a missed opportunity for the time being.
We will have to wait and watch to see if this strategy is a success. In the meantime, the AMC sales focus is likely to shift to other diversified equity funds in its basket to keep growing its assets under management.