BackDo Indian fund managers eat their own cooking?
It's comforting to know if your fund manager is putting his money where his mouth is.
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Ask any fund manager whether you should invest in his fund house and you’re likely to be flooded with reasons and statistics nudging you to do so. To be fair, some of the sales pitches are correct: Indian funds have done very well over the past 15 years. But the question I ask is different: do Indian fund managers invest their personal money in their own schemes; do they eat their own cooking?
There is no rule that makes it mandatory for fund managers or the senior management at any fund house to invest in their own fund houses, unlike, say, in the private equity (PE) space where the general partners—or those who start a PE fund and raise money from investors or limited partners—have to contribute at least 5% of the corpus they raise. And this column is not about taking a moralistic ground that they should. But wouldn’t you, for instance, want to know where accomplished fund managers such as Prashant Jain (HDFC Asset Management Co. Ltd), Madhusudan Kela (Reliance Capital Ltd) or, say, S. Naren (ICICI Prudential Asset Management Co. Ltd) invest their personal money?
To begin with, most of them do not invest in equity shares directly because it is cumbersome for them, thanks to the capital markets regulator, Securities and Exchange Board of India (Sebi). Through the Securities and Exchange Board of India (Prohibition of) Insider Trading Regulations, 1992, and later a circular that it issued in 2001 to all fund houses, Sebi has laid down guidelines as to how fund houses should allow their internal employees to trade on the stock market. For instance, fund managers cannot invest in stocks that any of their fund houses’ schemes hold. If, however, they do wish to buy such scrips, they can do so only after 15 calendar days. For this, they need to take the permission of their compliance officer. Once granted, this permission is valid only for seven days; if the fund manager fails to execute his decision within this period, he needs to apply for the permission once again. Also, fund managers are mandated to hold on to their investments for at least 30 days. Stocks must also be bought or sold through the brokers that the fund house specifies, in many cases. These restrictions cover not just fund managers but also their spouses and dependant parents.
All these complications mean that fund managers find it easier to invest in MFs, where there are no such restrictions. Many fund managers of large and well-performing fund houses say that they prefer to invest in their own fund houses. A fund manager tells me that when large sovereign wealth funds (state-owned investment funds such as the Government Pension Fund–Global of Norway, Qatar Investment Authority and so on) or private banking firms abroad that channelize their investors’ money into mutual funds abroad, do a stringent due diligence before investing their money. One of the questions that they ask their potential fund managers is this: “Do you invest your own money in your own mutual fund?"
Investing in the fund you manage, at the very least, shows conviction. If a fund manager invests a sizeable chunk in its own fund house, it shows his conviction in the fund house. That doesn’t mean you should follow suit, but it still means something. Many fund managers I spoke to, especially from the large fund houses, claim that they invest almost all their equity funds’ allocation in their own fund houses. But surprisingly, some equity fund managers refrain from investing in equities either out of laziness (they prefer that their money stays in bank deposits) or because they want to stay away from equities (they prefer real estate and fixed-income securities). Since a fund manager’s bonus (in some cases, bonus doubles a fund manager’s salary) is driven by equity markets, the latter prefers to keep their personal savings away from equities. But typically, if fund managers invest in mutual funds, they do invest 50-100% in their own fund houses. The ones who don’t invest in equity mutual funds take the real estate and fixed income route.
The most unique way to demonstrate this conviction comes from ICICI Prudential AMC. Every year, when employees get a retention bonus as part of their annual salary appraisals, the fund house gives them a choice to invest their dues in its own schemes. It works like this: if an employee gets 100 as bonus this year (May 2013)—to be paid over the course of the next three years—he gets paid, say, 50 this year. In May 2014, he gets paid 15, in May 2015 he will get paid 15 and the balance (30) will get paid in May 2016. Till the time the dues get paid, they get invested in the basket of MFs, he chooses. Three baskets (each consisting of three MF schemes) are offered, across equity and debt categories, depending on the employee’s view on the markets. All the gains as well as the losses go to these employees. The employee also has a fourth option: to not invest anywhere.
Coming back, it’s unfair to mandate fund managers to invest their hard-earned money in their own fund houses. Though it’s comforting to know if your fund manager is putting his money where his mouth is.
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