Franklin’s wind-up move hits other debt schemes

Heightened investor concerns following the wind-up of debt schemes by Franklin Templeton Mutual Fund (MF) is taking a toll on other fixedincome schemes of the fund house. Both the corporate bond fund as well as the banking and PSU debt fund, have seen onefourth reduction in their asset size in four business days since the wind-up announcement.

According to data, assets under management for the corporate bond fund stood at ~1,101 crore on April 29, 2020 — 25.9 per cent lower than April 23 (~1,486 crore), the day the wind-up was announced.

At the same time, the banking & PSU debt fund has seen assets declining from ~1,542 crore to ~1,134 crore (26.46 per cent).

“Franklin had built a strong franchise over the years, especially on the fixed-income credit-play side. Today, they stand the risk of losing market share in other funds,” said Joydeep Sen, consultant at Phillipcapital.

As of April 29, the fund house had ~34,140 crore in debt assets. The six wound-up schemes accounted for 72 per cent of these, at ~24,689 crore.

However, the Franklin management has sought to allay investor concerns.

“We have generated a significant amount of liquidity in these portfolios to meet redemption requests,” Sanjay Sapre, president at Franklin Templeton MF said in a note to investors, adding that these schemes invest in highly liquid instruments such as government securities, Aaa-rated papers, or cash and cash equivalents.

“This wind-up decision was unprecedented in the Indian MF industry, and will have repercussions on the fund house in the near term,” said a senior executive of a distribution platform.

Franklin MF investors had already been turning cautious, especially those with exposure to highyield credit papers.

In the past six months, its asset base had shrunk by a third from ~1.3 trillion in October to ~87,000 crore in March.

Over 25% borrowing in two schemes

Two schemes of the fund house, Franklin India Short-term Income Plan and Income Opportunities, had reported 27.97 per cent and 26.36 per cent of scheme assets, respectively, as negative cash balances up to April 23.

In a communication to investors, the MF said borrowing in schemes will need to be paid out first, which will impact the timeline of cash flow that would come to investors, though not the value. Experts say the impact of redemption-related borrowing on value of investments on residual investors may get mitigated through accruals on debt papers.

“If accruals on debt papers continue and there is no sale of papers at stress valuations, it will be able to offset the impact of liabilities,” said Vidya Bala, co-founder of primeinvestor.in. While Sebi regulations only allow for borrowing up to 20 per cent of scheme assets, the fund house had taken approval for higher limits from Sebi, as a precautionary measure, following heavy redemption in March.

For the Credit Risk Fund, negative cash balance was 16.19 per cent, Low Duration Fund had negative cash balance of 8.69 per cent, Ultra Short Bond Fund at 6.58 per cent, and Dynamic Accrual Fund at 1.41 per cent, of scheme assets.