In­dian MFs be­ing pun­ished for reck­less­ness

Fund man­agers, hop­ing for pri­vate-eq­uity type re­turns, were es­sen­tially soup­ing up per­for­mance by for­go­ing liq­uid­ity

The Hindu Business Line - - THINK - ANDY MUKHER­JEE IS­TOCK BLOOMBERG

In­dian re­tail in­vestors won’t eas­ily for­give their fund man­agers, nor will they quickly for­get this wealth de­struc­tion. Out of 416 open-ended, on­shore eq­uity funds, 401 have lost money this year. Tech funds, the only ones to have per­formed de­cently, have been helped by Asia’s worst-per­form­ing cur­rency of 2018. And that’s only be­cause In­dian soft­ware ex­porters earn rev­enues in a strong dollar and pay wages in ru­pees.

Most other mu­tual funds are down, many of them 20-40 per cent in a flat mar­ket.

In­di­vid­ual in­vestors started re­turn­ing to col­lec­tive in­vest­ment ve­hi­cles af­ter the 2014 gen­eral elec­tions, hop­ing for a re­set to an econ­omy held back by cor­rup­tion scan­dals and pol­icy paral­y­sis.

They dou­bled down af­ter Prime Min­is­ter Naren­dra Modi’s shock Novem­ber 2016 cur­rency ban pulled 86 per cent of peo­ple’s cash into bank accounts. But now dis­ap­point­ment is writ large.

Fund man­agers who had hoped for pri­vate-eq­uity type re­turns by dis­cov­er­ing jew­els buried in the haystacks of pub­lic mar­kets were es­sen­tially soup­ing up per­for­mance by for­go­ing liq­uid­ity.

Now that the mar­kets are pun­ish­ing them for that reck­less­ness, the search for the elu­sive al­pha is over in in­fras­truc­ture; power; bank­ing and fi­nance; small-, mid- and mi­cro­cap shares; trans­port and lo­gis­tics; value stocks; state-owned firms; busi­ness cy­cles; and ev­ery other fad.

With fund as­set val­ues col­laps­ing, what hap­pens if in­vestors get up and leave?

Since May 2014, in­vestors have put more money into In­dian eq­uity funds than they have pulled out in ev­ery month ex­cept one. Even dur­ing last month’s bru­tal sell-off, they poured ₹11,100 crore ($1.5 bil­lion) into stock funds, the most since May.

How­ever, buy-on-dips greed can’t in quick time

last if as­set prices don’t re­cover. A rush for the ex­its may cause its own prob­lems, es­pe­cially when it comes to han­dling re­demp­tion pres­sures. On con­ser­va­tive es­ti­mates, it would take more than 30 days to off­load a quar­ter of the net as­sets of one small In­dian in­fras­truc­ture fund, Bloomberg’s liq­uid­ity tools show.

A fifth of a large tax-saver fund would need more than 180 days to dis­man­tle, so thin is the liq­uid­ity of the stocks it holds. (By con­trast, a typical in­dex fund track­ing the Nifty 50 can be en­tirely liq­ui­dated in less than three days.)

Con­cerns around liq­uid­ity have been el­e­vated ever since IL&FS Group, a highly rated Mum­baibased in­fras­truc­ture fi­nancier, started miss­ing debt pay­ments. The panic from this mini-Lehman mo­ment spread last month to mon­ey­mar­ket mu­tual funds, which have been pro­vid­ing most of the credit to hous­ing-fi­nance com­pa­nies and other non-bank lenders. Then it was the stock mar­ket’s turn to fo­cus on as­set-li­a­bil­ity mis­matches by pum­melling the likes of De­wan Hous­ing Fi­nance Corp.

SBI’s com­mit­ment

Au­thor­i­ties have re­sponded by tak­ing over the man­age­ment of IL&FS to shore up con­fi­dence. State Bank of In­dia, the coun­try’s big­gest lender, this week tripled its an­nual tar­get for buy­ing shadow banks’ as­sets, in­clud­ing some of De­wan’s home loans, ac­cord­ing to a news re­port.

Con­sid­er­ing less than $12 bil­lion of In­dian re­tail as­sets were se­cu­ri­tised and sold last year, State Bank’s $6 bil­lion com­mit­ment could be a wel­come source of liq­uid­ity to parched shadow lenders.

Will it be enough? State Bank might end up pick­ing a de­cent pool of mort­gage as­sets in the bar­gain, and so could some oth­ers like Bank of Baroda. Still, a liq­uid­ity crunch eases only when some­body makes a bold com­mit­ment to sup­ply it in un­lim­ited quan­ti­ties.

That role can only be played by the cen­tral bank. Wor­ry­ingly, how­ever, the cash that the Re­serve Bank of In­dia is plough­ing into the sys­tem is com­ing back as a tem­po­rary sur­plus banks are scared to take credit risks. While the sys­tem-wide liq­uid­ity short­age of $20 bil­lion or so as of Septem­ber 24 has eased, at the last count there’s still a deficit of more than $5 bil­lion.

No­body knows just where the limit for in­vestors pa­tience lies, but it can’t be very far.

Los­ing money

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