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Skin in the game, but not too much!

It is good to see mutual fund honchos investing personal money in their schemes. But why are AMCs side-stepping the 'skin in the game' rule by launching close end NFOs?


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In any industry, it heartening to see company insiders eating their own cooking. Company managers or top honchos buying their own products or services is a far better endorsements of products than the oft-used celebrity endorsements. After watching their television commercials running back-to-back during the World Cup telecast, don't we all wonder if Shah Rukh Khan really buys his outfits from Yepme.com or if Kareena Kapoor swears by i-Ball phones?

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Personal money
That is why it is nice to see many fund industry honchos parking their personal money in the AMC's schemes. In a recent interview to Value Research, Nimesh Shah, CEO of ICICI Pru Mutual Fund said that a fixed portion of his monthly salary gets invested every month (via SIPs) in ICICI Pru funds. Franklin Templeton Investments has for long had policies that require its fund management teams to invest in its own equity funds. Sukumar Rajah, Managing Director and CIO- Asian Equity for the fund house, recently told us that he has stopped making direct equity investments long ago and mainly puts money in FT's India equity funds. Anoop Bhaskar, CIO of UTI Mutual Fund had a similar preference and routes his equity exposure through UTI's large and multicap funds.

Parag Parikh Financial Advisory Services Mutual Fund, one of the more recent entrants to the mutual fund industry, has even gone one step further and made 'skin in the game' it's USP. It requires all its employees to invest in the PPFAS Long Term Value Fund and makes regular disclosures of these insider holdings too. As of February 2015, its employees held savings valued at R50.8 crore in its flagship (and only) scheme; this amounted to 8.78 per cent of the scheme's assets.

This trend of fund industry insiders parking personal money in their own funds is a welcome one, because it (at least partly) aligns the interests of the fund managers or CEOs directly with those of the investors in the fund house. Their fortunes will stand to sink or swim with those of investors in their schemes. This is contrast to most other segments of the financial services industry, where the interests of the firm and top honchos are often in direct conflict with those of investors.

Investment bankers make better fees from pitching for a high price for an IPO (because this lifts the funds raised), but this works against returns for investors. Traditional insurance products are the most profitable to market and manage for Indian insurers, but they deliver measly returns to policyholders. Remember the 2008 US housing and financial crisis, when Wall Street managers took home fat severance pay and bonuses, even as investors were forced to take huge haircuts due to blatantly wrong investment decisions?

SEBI rule
But maybe we're giving the mutual fund industry too much credit too soon. Recognising the utility of Indian AMCs having their own skin in the game, last year, SEBI made it mandatory for each AMC to invest R50 lakh or 1 per cent of assets (whichever is less) in every new fund offer made by the AMC. AMCs were supposed to hold on to this investment until redemption.

But for some inexplicable reason, this rule was applicable only to open end schemes floated by Indian funds. For close end funds, the skin in the game rule didn't apply.

Beeline for close end funds
The strange thing is, that ever since this rule came about, close end scheme launches from Indian fund houses have far outnumbered open end NFOs. Fund houses cite many reasons for why they have suddenly rediscovered the virtues of close end funds - they offer stability of corpus, they force investors not to make silly exit decisions, they allow investment in the 'hidden gems' with low liquidity in the small-cap space and so on and so forth.

But could it also be that AMCs don't really want to put too much of their own skin in the game, after all? After all, by launching close end schemes instead of open end funds, the AMC saves the R50 lakh that it is mandated to invest in the NFO.

If AMCs are really convinced that close end schemes are the best thing to happen to investors after compounded interest, it would be nice to see AMCs voluntarily investing the required R50 lakh in their close end NFOs too.

If they are reluctant, maybe it is time for SEBI to include close end funds in its 'skin in the game' rule. Else, given the rate at which close end NFOs are adding to their assets, a good portion of the industry will manage to get by without complying with this rule.



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