Thursday, January 5, 2012

MFs move to partial portfolio disclosures

Some fund houses now disclose 60-80% of the monthly portfolios of equity schemes instead of full disclosure earlier
Does too much transparency hurt anyone? Apparently, the Rs. 7.12 trillion Indian mutual fund (MF) industry thinks that disclosures should be made within limits. Some fund houses now disclose only 60-80% of their monthly portfolios of their equity schemes instead of the earlier full portfolio disclosures. While fund houses such as Fidelity Fund Management Ltd and JPMorgan Asset Management (India) Ltd have been cautious about disclosing their portfolios ever since they launched in India (2005 and 2007, respectively), others such as HDFC Asset Management Co. Ltd and AIG Global Asset Management Co. (India) Ltd started the practice of partial disclosures in 2011.

According to the capital markets regulator, Securities and Exchange Board of India (Sebi), all MFs are mandated to disclose complete portfolios of all their schemes twice a year, as part of their half-yearly mandatory disclosures, in the months of March and September. Till about 2004, most fund houses used to stick to Sebi’s rules but over time private sector fund houses started disclosing portfolios every month on their websites. Eventually, all fund houses moved to full portfolio disclosures every month.

Tracking portfolios

Though most MFs disclose portfolios every month on their websites and through fact sheets so that investors know where their money gets invested, some MFs feel that it’s not just investors who track its moves. AIG AMC’s July-end fact sheet says: “As part of portfolio management, we regularly keep buying/selling stocks and sometimes we were unable to complete our transactions within a month and such names are visible in the portfolio as marginal names. We feel that disclosure of such names inhibits our ability to efficiently operate in markets and ultimately hurts your interest as investors in our fund.” Fund managers who share AIG’s observation say that this is a problem especially in cases where the fund buys scrips in phases. A large-sized fund, typically, takes over a month to buy scrips especially when it wants to build a strong position in it, such as making it one of the top 10 scrips of the portfolio. They claim that some market operators have sophisticated computer software built in their systems to track such movements for ulterior motives. AIG Global AMC stopped disclosing scrips that take up less than 2% of the corpus effective July 2011. HDFC AMC stopped disclosing about 20% of portfolios across its equity funds effective July 2011. The MF, however, discloses full portfolios after a time lag of two months.

Nandkumar Surti, managing director and chief executive officer of JPMorgan AMC, says that it is not very difficult for people in the market to track what fund houses are buying. “When you compare two months’ fact sheets in successive months, there will be few names whose presence in the portfolio means that the fund house is in the process of acquiring or selling them. We don’t want these market operators to do front-running in those scrips,” he says. Front-running is an activity by which a person who is privy to the trading information of a large institution places its trades minutes before the large entity. For instance, a stock market dealer (who is closely tracking an MF) could enter with his own personal order for the shares of a company if he suspects the fund house is buying a scrip in phases, and gets a lower price. When the fund continues to buy the same scrips over a period of time and build positions, the price will usually rise since it is a large order; the dealer would have already built his position by then.

In 2005 when Fidelity Fund launched in India, it broke away from the trend and started to disclose its portfolios only twice a year. Its chief executive officer, Ashu Suyash, had told us at that time, “very frequent disclosures do not help the investor. If an investor can track what stocks we’re buying and then invest in the fund, perhaps he is so evolved that he is better off managing his own portfolio.” Instead, Fidelity used to disclose the top 10 portfolios of all its schemes along with the fund manager’s commentary. Around three years back, Fidelity started to publish full portfolios every month, but with a time lag of one month. So, say by 10 January 2012, while most fund houses would have published their December 2011 portfolios, Fidelity will publish its November 2011 portfolio.

Does it really matter?
Not all are convinced. Bhanu Katoch, chief executive officer of JM Financial Asset Management Ltd, says that such protective disclosures help only large-sized fund houses. “If small-sized fund houses have negligible assets under management, I doubt if there are market operators who track them so closely. However, if a large-sized MF limits its disclosures, it’s understandable,” he says. Though JM Financial discloses about 90% of its portfolios, Katoch claims partial disclosure is because of the non-disclosed portion consisting of scrips that take up less than 2% of the total corpus or “negligible holdings”.


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