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Santosh Kamath, chief investment officer (CIO) for Franklin's debt schemes. (Mint)
Santosh Kamath, chief investment officer (CIO) for Franklin's debt schemes. (Mint)

The star fund manager with a cult following, who finally lost his mojo

  • Santosh Kamath was instrumental in setting up the strategy of investing in sub-AA papers or structured debt
  • An engineer by qualification, Kamath joined Franklin as head of fixed income business in 2006

MUMBAI : Street-smart, aggressive, bold—these are some of the adjectives peers used to describe Santosh Kamath in the past few days after the meltdown in six debt schemes he supervised at Franklin Templeton Asset Management (India) Pvt. Ltd.

Kamath, chief investment officer for Franklin’s debt schemes, was once considered someone whose calls fetched regular rewards. But the admiration evaporated as his investments in little-known but risky papers soured, leading to the fund suspending the six schemes on 23 April.

An engineer by qualification, Kamath joined Franklin as head of fixed income business in 2006, before the global financial crisis. That was the time the global fund house was reviving its debt mutual fund (MF) business in India. He had previously worked with ING Vysya AMC, Zurich Asset Management, SBI Mutual Fund, Crisil and Jardine Fleming Asset Management.

Kamath was instrumental in setting up Franklin’s research team in India for overseeing debt schemes, and setting up the strategy of investing in sub-AA papers or structured debt. These papers, though risky, generate higher yields and are typically favoured for generating superior returns.

The portfolio of these schemes with assets under management of 25,658 crore has many unknown names. In fact, Franklin is the sole MF lender to 26 of the 88 papers in its debt portfolio.

“While for many years, these managed credit funds have carefully invested in and supported growing businesses in India, unfortunately, the extreme drop in liquidity in the bond markets, coinciding with very large redemptions following the covid-19 outbreak, has compelled us to make difficult decisions in order to protect the interests of the funds’ unit holders," said Kamath in a press release issued on 23 April.

When the going was good, Franklin Templeton’s debt schemes comfortably outperformed rivals. MF distributors trying to lure India’s risk-averse middle class found these funds an easy sell compared to bank fixed deposits (FDs). From 1 November 2016 to 1 November 2019, Franklin India Short Term Income Fund, the most popular of the six schemes, delivered a compound annual growth rate of 7.81%.

This is only marginally higher than State Bank of India’s three-year FD rate of 7% prevailing in November 2016, but the scales tilt strongly towards the fund when tax benefits are considered.

Dhirendra Kumar, chief executive at Value Research Ltd, an MF advisory firm, said the fund was always transparent and Kamath’s strategy was not hidden. “This strategy made returns for investors of Franklin funds," said Kumar.

The strategy of sticking with lower-rated papers backfired in January 2020. An unfavourable Supreme Court decision in January 2020 on Vodafone Idea Ltd led Franklin Templeton to completely write off its exposure to the telco. The collapse of Yes Bank Ltd in March 2020 and the consequent write-down of its debt was another speed breaker.

In March, when the covid-19 pandemic struck, equity markets dropped by 25-30% and debt markets yields shot up, even temporarily hurting ultra-conservative liquid funds. In the “credit risk" segment, the market simply froze. There were net asset value drops because bonds weren’t simply being traded. Faced with a flood of redemptions, Franklin Templeton borrowed money to honour them, as it was unable to sell its high-risk bonds in the market meet to redemption pressures.

All this while, the fund house put up a brave face. A “Market Insights" note from Kamath earlier this month said shorter end products such as Franklin Ultra Short Bond Fund “provide a great investment opportunity". In a few weeks, the fund was wound up, along with five others.

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