How one mutual fund joined forces with KKR with disastrous consequences

BOI Axa Mutual Fund is a join venture between Bank of India and the investment arm of Axa, a French insurer. This fund, called BOI Axa Credit Risk Fund was launched on a particular USP, a tie-up with global private equity player KKR who would advise it on its investments in return for a fee. The AMC continues to be advised by KKR to this day.

The inflection point in the fund’s history came in September 2018 before which it had in fact delivered a heady CAGR of around 9.49% (as of 30th August 2018). The fund held some IL&FS paper which shook, but did not break the fund. However the credit crisis in India was just getting started. In June 2019, Dewan Housing Finance Ltd (DHFL) was downgraded to default causing pain across the mutual fund industry.

This combined with a downgrade in Sintex BAPL, caused BOI Axa Credit Risk Fund to see a vertical drop in its NAV and its CAGR since inception declined from 6.7% to -7.78% by July. The final coup de grace came on April 23rd when the AMC decided to ‘revalue’ debt securities held by it such as Avantha Holdings and RKV Enterprise which had previously only been partially written off. The fund has been closed for fresh subscriptions since June 2019.

The KKR partnership was a major selling point for the fund, a mutual fund distributor told Mint. “They kept commissions low at 0.10-0.15% attracting more investment from the HNI segment or those coming through direct plans," he said. “KKR were advisors to the fund house and we co-invested with them in many papers, but we did not follow them as such.

There was no downselling of investments by KKR to the mutual fund. Yes, we pay them advisory fees," said Alok Singh, Chief Investment Officer (CIO) at BOI Axa Investment Managers. “Distributor fees were low to prevent a wide distribution of the scheme and any mis-selling. Only a small fraction of our investor base which currently stands at around 1,000 folios, is retail investors," he added.

Singh however took great pains to stress that the mutual fund was not held by a few wealthy investors. “Before the IL&FS crisis hit, at its peak, the fund was around ₹1,700 crores The largest investor was ₹25 crore. Several banks such as Kotak, Deutche and Credit Suisse were distributing the fund," he said. Another key issue is why the fund did not create segregated portfolios (side pocketing) for its securities. “We had virtually no defaults since March 2019", said Singh in response to this. BOI Axa Mutual Fund amended its

Scheme Information Documents to enable side pocketing in April 2020 around 13 months after SEBI first introduced the procedure into the mutual fund world in December 2018. Side pocketing allows a mutual fund to segregate a portion of its portfolio in lieu of bad debt. This allows mutual fund investors to exit the rest of the scheme without giving up a chance to gain from recovery in the bad debt. However why BOI Axa Mutual Fund chose to implement the procedure more than a year after it was introduced, remains a mystery.

Investors, in what is left of the scheme (currently at ₹167 crore AUM) can take what little they have and go. The scheme remains open for redemptions. However exit could mean giving up on the chance for recovery. They should evaluate the rest of their portfolio and risk appetite before taking a decision. Much of this remaining portfolio consists of Certificates of Deposit (CDs) by banks such as Bank of Baroda and Axis Bank and Commercial Paper by issuers like HDFC (based on data as of 31st March) posing somewhat muted risk to investors.