FUND FULCRUM (contd.)

August 2020

Despite lockdown and market volatility, the average number of folios of investors in the mutual fund industry has risen consistently since March 2020. The average number of folios of investors across the industry has increased by 18.5% since March 2020 to Rs 2.94 lakh in July 2020. The number stood at Rs 2.48 lakh in March 2020, 2.65 lakh in April 2020, Rs.2.70 lakh in May 2020 and Rs.2.78 lakh in June 2020. Further, the average number of folios of retail investors rose to Rs 1.54 lakh from Rs 1.33 lakh. As of July 2020, the average folio assets of retail investors in B30 cities was at Rs.90,000 as compared to Rs.77,000 in March 2020. This shows an increase of nearly 17% since March 2020. In T30 cities, the average folio assets of retail investors rose by 16% since March 2020 to Rs.2 lakh in July 2020 as against Rs.1.73 lakh in March 2020. Over the last one year, average folio AUM of retail investors has declined substantially. The latest AMFI data shows that average folio AUM of retail investors fell by 15% to Rs.54,130 in June 2020 compared to Rs.63,701 in June 2019. Similarly, average folio AUM of HNIs has come down 18% from Rs.9.47 lakh in June 2019 to Rs.7.81 lakh in June 2020. The fall in average folio AUM is largely because of mark-to-market loss and heightened volatility since March 2020. In terms of average account size, all scheme categories except solution oriented and debt oriented schemes witnessed a fall in its average folio AUM. Liquid/money market scheme, equity oriented scheme, hybrid schemes, ETFs, FoFs and index funds in June quarter 2020 fell 8%, 11%, 11%, 44% and 11% respectively from June quarter 2019. Meanwhile, the average folio size of solution oriented schemes and debt schemes increased by 6% and 4%, respectively. This can be attributed to investors’ increasing interest in debt funds. Many investors have put their additional savings during lockdown months in debt funds that have performed well recently. Another reason could be mark-to-market gains in equity funds.

Piquant Parade

 

AMFI has completed its 25 years, a silver jubilee milestone. AMFI was incorporated in August 1995 when there were around 15 member AMCs. The industry body now has 44 members. Over the last 25 years AMFI has been spreading investor education, creating financial inclusion, bringing global best practices to the industry, improving corporate governance and lowering cost of transactions through economies of scale. In fact, ‘Mutual Funds Sahi Hai’ media campaigns have helped reach out to larger retail audience and create awareness. From largely an urban and institution focused industry, mutual funds now have over 15% of the assets coming from beyond the top 30 cities and 52% of assets coming from individual investors.

 

PAG, an Asia-focused investment group has acquired majority stake in Edelweiss Wealth Management. The company has invested USD 300 million or Rs.2200 crore for a 51% stake in Edelweiss Wealth Management. The wealth management business, including capital markets, provides wealth management services to over 2,400 of India’s wealthiest families as well as 6.10 lakh HNIs and other affluent clients. The company manages assets under advice of Rs.1.27 trillion as on June 2020. This investment endorses the core strategy of incubating businesses, building value and growing them into market leaders as they gradually move from inter-dependence to independence. The investment in Edelweiss Wealth marks a milestone in PAG’s investments in the Indian market.

Regulatory Rigmarole

Markets regulator SEBI imposed a penalty of Rs 10 lakh each on three public sector financial institutions - SBI, LIC and Bank of Baroda -- for not complying with the mutual fund norms. SEBI observed that State Bank of India (SBI), Life Insurance Corporation of India (LIC) and Bank of Baroda (BoB) are the sponsors of SBI Mutual Fund, LIC Mutual Fund and Baroda Mutual Fund, respectively, and they also hold more than 10 percent stake each in these mutual funds. In addition, UTI AMC is promoted by four public sector financial institutions as sponsors -- SBI, LIC, BoB and Punjab National Bank (PNB) -- with each of them currently holding 18.24 percent stake in the fund house, while private equity firm T Rowe Price International holds 26 percent stake in UTI AMC. This is not in conformity with the requirement of mutual fund regulations. The regulator amended the mutual fund regulations in March 2018, wherein a shareholder or a sponsor owning at least 10 percent stake in an AMC is not allowed to have 10 percent or more stake in another mutual fund house operating in the country. Entities not in compliance with the requirement were given time up to March 2019 to comply with the requirement. SEBI noted that the three entities have not denied the fact that they have not complied with the provisions of mutual fund regulations although they stated that the IPO (initial public offering) process for divestment of their shareholding in UTI AMC has been initiated and sale of its stake in UTI Trustee company is in the process of finalisation. They further said the IPO of UTI AMC will be completed by the end of September 2020.

Capital markets regulator SEBI has said that the issuer of structured products or market-linked debentures (MLDs) will have to hire a third party valuation agency for the valuation of such products. The regulator has made these changes because of amendment done in rating agencies' norms. Pursuant to amendment to SEBI's rating agencies regulation on May 30, 2018, a CRA cannot carry out any activity other than rating of securities post May 30, 2020. Accordingly, the regulator has decided that valuation of MLDs will be carried out by an agency appointed by AMFI for the purpose of carrying out valuation.

 

Debt funds have been in the spotlight for various reasons. As a result, concerns over fund houses investing in risky assets have increased more than ever. Keeping this in mind, AMFI has asked fund houses to include some additional disclosures in their monthly factsheet. The objective is to bring transparency and uniformity in these disclosures so that it becomes easier to evaluate the quality of debt funds. Among the key disclosures will be macaulay duration, modified duration, average maturity and yield to maturity. Currently, fund houses do not publish all these measures separately in their factsheets. Macaulay duration of a fund measures how long it takes for the price of a bond to be repaid by the cash flows from it. Simply put, it indicates the time an investor would take to get back all his invested money in the bond by way of periodic interest as well as principal repayments. In mutual fund parlance, Macaulay duration of a debt fund is the weighted average Macaulay duration of the debt securities in the portfolio. Similarly, modified duration measures the sensitivity of a bond’s price to the change in interest rates. The higher the duration, the more volatility the bond exhibits with change in interest rates. For instance, if the modified duration of the fund is four, it indicates that the price of the bond will decrease by 4% with 1% or 100 bps increase in interest rates. Yield to maturity of a debt fund is the rate of return an investor could expect if all the securities in the portfolio are held until maturity. For instance, if a debt fund has an YTM of 7%; it means that if the portfolio remains constant until all the holdings mature then the return to the investor would be 7%. However, the YTM does not remain constant as some of the debt instruments are actively traded by the fund manager. Average maturity is the average time it takes for securities in the portfolio to mature, weighted in proportion to the amount invested. It indicates the sensitivity of the portfolio to interest rate changes. The higher the average maturity, the greater is the volatility of returns in the fund. It helps investors check if debt funds are suitable for the time horizon of their investment.

SEBI has allowed stock exchanges to propose a subsidiary that would regulate registered investment advisors (RIAs). In a recent circular, the market regulator said, “Considering the growing number of RIAs, it is decided to recognize a wholly-owned subsidiary of the stock exchange (stock exchange subsidiary) to administer and supervise investment advisors registered with SEBI.” Further, SEBI has put in place the criteria for a stock exchange subsidiary to become the regulator of RIAs. SEBI said that the recognition of the stock exchange subsidiary will be based on the eligibility of its parent entity i.e. the stock exchange. Following are the eligibility criteria laid down for the stock exchange:

·         Number of years of existence: Minimum 15 years

·         Stock exchanges having a minimum net worth of Rs.200 crore

·         Stock exchanges having nation-wide terminals

·         Investor grievance redressal mechanism including arbitration

·      Capacity for investor service management to be gauged through reach of investor service centers (ISCs). The stock exchange has to have ISCs in at least 20 cities

Moreover, SEBI said that the stock exchanges will either form a subsidiary or designate an existing subsidiary for the purpose of regulating RIAs. The stock exchange subsidiary will have to put in place systems for grievance redressal, administrative action against IAs, maintain data and share information with SEBI. The subsidiary needs to have the necessary infrastructure like adequate office space, equipment and manpower to effectively discharge its responsibilities. SEBI also laid the responsibilities of the stock exchange's subsidiary. SEBI said they are required to supervise RIAs, including both onsite and offsite, redress grievance of clients and IAs, take administrative action including issuing warning and referring to SEBI for enforcement action. In addition, the subsidiary will have to monitor activities of RIAs by obtaining periodical reports, submit such reports to SEBI and maintain the database of RIAs. The stock exchanges fulfilling these criteria may submit a detailed proposal to SEBI within 30 days from August 6, 2020.

 

SEBI will no longer entertain email complaints. In fact, the market regulator will only process complaints that are registered on SCORES. SEBI has urged investors to lodge complaints related to securities market entities like mutual funds, PMS, AIFs and RIAs only through its web-based centralised grievance redressal system SEBI Complaints Redress System (SCORES). The market regulator receives a large number of complaints on its generic e-mail ID sebi@sebi.gov.in and official IDs of SEBI officers. All complaints sent on sebi@sebi.gov.in and official IDs of SEBI officers were then uploaded on SCORES. However, SEBI has now decided that complaints against registered intermediaries sent on sebi@sebi.gov.in or on any official ID of SEBI officers will not be processed. Earlier in March 2020, SEBI launched the SCORES mobile app for the convenience of investors in lodging grievances. The app has all the features of SCORES, which are presently available on SCORES portal. SCORES mobile app is available on both Apple App Store and Google Play Store.

 

Over the past decade, investors across the world have increasingly started taking into consideration the non-financial impact of companies that they invest in. According to a 2006 study, millennials are more likely to trust a company or purchase a company's products when the company has a reputation of being socially or environmentally responsible. Half of those surveyed are more likely to turn down a product or service from a company perceived to be socially or environmentally irresponsible. Overall, this emphasis on the societal impact of a company has led to the popularisation of a new way of investing called ESG investing. ESG stands for Environmental, Social, and Governance. ESG investing refers to a class of investing also known as sustainable investing. The goal for an ESG investor is to seek financial returns along with a positive long-term impact on society and the environment. ESG are three central factors in measuring the sustainability and ethical impact of a company. Environmental factors determine a company's impact on the environment and focus on waste and pollution, resource depletion, greenhouse gas (GHG) emissions, deforestation, and climate change. Social factors look at how a company treats people and focuses on employee relations and diversity, working conditions, local communities, health and safety, and conflict. Governance factors take a look at corporate policies and how a company is governed. Today ESG investing is estimated at over $20 trillion in AUM or a quarter of all professionally managed assets around the world. Over time ESG investing has evolved from funds that simply screened out undesirable companies like polluters or sellers of tobacco to strategies that apply a matrix of sophisticated screens to assess the best and worst players in every industry and actively seek to have a positive impact in many ways. India is still in the early days of ESG investing. But interest in the space has been increasing. There are a couple of mutual funds that have launched ESG funds in recent times such as the Axis ESG fund and the SBI Magnum Equity ESG Fund. One of the challenges with ESG investing in India is that finding companies that score well on the environment and governance standards can be difficult. As we have seen with the banking sector fiascos, even large listed companies face governance issues. Further, environmental impact is often overlooked when making key business decisions. COVID was the first big test for ESG supporters across the world and data seems to indicate that it passed the test with flying colours.