FIIF - Put out of misery

Recently, Franklin Templeton Mutual Fund came out with the proposal to shut down one of its funds - Franklin India International Fund (FIIF) - a fund that invested in foreign debt.

Launched at the start of 2003, FIIF was essentially a feeder fund, the parent fund being Franklin US Government Fund. The mandate of Franklin US Government Fund is to invest solely in government-backed Government National Mortgage Association (GNMA) pass-through securities popularly known as Ginnie Mae with provisions for also going into cash.

Unlike the mortgage backed securities of Fannie Mae and Freddie Mac, the security issued by Ginnie Mae was not severely hit by the downturn in the U.S. housing crisis of 2008. So the question that begs to be answered is: Why is the fund house shutting down the fund?

The reason cited is “the strengthening rupee against US dollar which has resulted in a sharp reduction for demand for the fund.” Fair enough. But after the rupee appreciated by 11.93 per cent against the dollar in 2007, why did the fund house not pull the plug then?

In the past six years of its existence, FIIF has given a negative return in as many as three years. Being a debt fund, investors have not taken to this kindly. In fact, it added to the risk in their debt portfolio. It started with Rs 8.25 crore in assets but by 2006, its size was in the range of Rs 1-2 crore. It posted -4.70 per cent in 2007, while its assets touched a new low of Rs 54 lakh (December 2007). Though it delivered a scorching return of 23.73 per cent (2008), investors had lost confidence in the fund. With a negative return in 2009 and historic low size of Rs 47 lakh in March 2010, the fund house decided to call it quits. Franklin US Government Fund, with assets over $9 billion, delivered a 5-year annualised return of 5.30 per cent (in dollars), while FIIF delivered 3.90 per cent (as on April 21, 2010).