Hopefully, investors in the six closed funds of Franklin Templeton will not do anything that would damage their own interests. I'm referring to an unusual event that is coming up soon — a Supreme Court mandated vote of investors about the administration of six funds of Franklin Templeton. The issue in the vote is whether the funds that the fund company had closed down because of the pandemic's immediate impact should be forced to become open-ended again or should the fund company be allowed to wind them up in an orderly way. There is a legal point here which the courts and eventually the regulator will deal with eventually. According to the court, the investors should have a say in the matter and the vote shall decide that.
However, what us investors should do — and I say 'us' because I am an investor in these funds through Value Research — is an open and shut case: the funds should not be made open-ended. Investors should instead vote for an orderly winding up because that will be a far better outcome. If the funds are made open-end then there will be a run on the funds as the logical conclusion of us investors will be that the sooner one gets out the better. Everyone will file for a full redemption and the AMC will be forced to conduct a distress sale of all assets at whatever price they can get for the holdings.
It is so obvious that an orderly winding up is in every investor's interest that it's strange to see an online campaign on Twitter, Facebook and WhatsApp to try and get investors to do the opposite. There seem to be two or three different tacks that these messages are taking. One, those people who clearly have no understanding of what will happen but need to appear 'gyani', which is a peculiarly social media problem.
For example, there is a clutch of tweets and messages which claim that investors should vote 'no' because the funds are 'cash-positive'. What do they mean by 'cash-positive'? They mean that the fund has enough assets to honour the NAV. Initially, when the pandemic hit and the markets seized up, the funds had borrowed money to meet redemptions. If they have repaid those borrowings, then they are being deemed 'cash-positive'. As things stand now, four of the six funds have done this and are thus 'cash-positive'. This merely means that they have no borrowings any more. However, in the context of what will happen when the funds have to be wound up and all assets sold hurriedly, this fact is meaningless. If the funds become open-end, there will be a run on them and investors will get far less than they would otherwise do. Whether a given fund is cash-positive today or not will not matter. Anyone who is advising investors on how to vote based on whether a fund is cash-positive today is just displaying his/her own ignorance about the very basics of what is happening. You can read details of each funds progress and their cash levels here.
Two, there are those who believe that voting 'no' will be some kind of a punishment for the AMC, as well as a loss of face for SEBI and myriad other imaginary enemies they have identified. The less one says about the foolishness of these revolutionaries, the better.
There's a third constituency here, which is hidden among these two. I've come across some personal examples of this third constituency. These are advisors and distributors who have sold these funds to investors and are now trying to save face by saying that there was some malafide somewhere. Instead of admitting that they had mis-advised their clients about the nature of the risks that these funds carried, they are trying to say that their advice was good, but there was something wrong going on somewhere.
All of us who are invested in these funds need to dispassionately understand the issues at hand and, in our own self-interest, allow the funds to stay closed and go through an orderly winding up. That's the way to get the maximum remaining value from our investments.
If you'd like detailed answers to questions that you might have, read our FAQ at Your 10 questions answered on Franklin vote. A complete, factual history of the entire Franklin saga is available here. Our team updates this at every step.
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