Tag: Franklin Templeton

Franklin Templeton fund closure: Check portfolio of six schemes that are shut now

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Franklin Templeton Mutual Fund has closed down six of its debt schemes in India citing severe redemption pressure and illiquidity in the bond markets amid the ongoing coronavirus crisis. The funds which have been shut are Franklin India Low Duration Fund, Ultra Short Bond Fund, Short Term Income Plan, Credit Risk Fund, Dynamic Accrual Fund and Income Opportunities Fund, the company said in a statement.

The fund house maintains that in this scenario, this is the best possible way to safeguard the interest of exiting investors and is the only viable means to secure an orderly realization of portfolio assets.

“There has been a dramatic and sustained fall in liquidity in certain segments of the corporate bonds market on account of the Covid-19 crisis and the resultant lock-down of the Indian economy which was necessary to address the same. At the same time, mutual funds, especially in the fixed income segment, are facing continuous and heightened redemptions,” the company said.

In view of this, let’s check the top 10 holdings of these 6 funds that have been shut by FT:

Franklin India Low Duration Fund

Check the full list at Morningstar India

Franklin India Ultra Short Bond Fund

Check the full list at Morningstar India

Franklin India Short Term Income Plan

Check the full list at Morningstar India

Franklin India Credit Risk Fund

Check the full list at Morningstar India

Franklin India Dynamic Accrual Fund

Check the full list at Morningstar India

Franklin India Income Opportunities Fund

Check the full list at Morningstar India

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KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

Franklin Templeton fund closure: How did Santosh Kamath, the master of managing credit risk funds, lose the plot?

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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With Franklin Templeton Mutual Fund deciding to wind up its six credit funds, Santosh Kamath, who had managed to make a name for himself as a suave fund manager, is in the spotlight.

An engineer from REC Bhopal,  Kamath had joined Franklin Templeton Mutual Fund 14 years back in March 2006 as Chief Investment Officer.

Prior to joining Franklin Templeton Investments, he had worked with ING Vysya AMC, Zurich Asset Management, SBI Mutual, CRISIL and Jardine Fleming Asset Management.

Sadly, the performance of the six funds don’t draw a pretty picture. In fact, most of them were at the bottom in their respective segments.

According to Value Research, Franklin India Low Duration Fund (FILDF) has given 7.7 percent returns  since its inception in 2010. In the past one year until April 23, the scheme has delivered a negative return of 7.11 percent. In the Debt: Low Duration category, there are total 26 schemes and this fund is in the 25th spot.

Franklin India Dynamic Accrual Fund Returns is the last in its category as returns fell 3.24 percent.

The Franklin India Credit Risk Fund Return scheme has delivered negative average return of 6.20 percent. In the debt: credit risk category, it was in 17th position out of 20 schemes.

Franklin India Short Term Income Plan has posted negative average returns of 5.39 percent and is last in its category.

The Franklin India Ultra Short Bond Fund-Returns scheme is also last in the ultra-short category.

Franklin India Income Opportunities Fund (FIIOF)-Returns has given negative average return of 3.30 percent and is in 17th position out of 18 in the medium duration category.

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Franklin Templeton says it discussed decision to shut 6 mutual fund schemes with Sebi

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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A day after its shocking decision to close six debt schemes, Franklin Templeton Mutual Fund on Friday said it had engaged with Sebi on the decision and the capital markets regulator saw “reason” in its move aimed at protecting value for investors.

The fund manager said that investors will have to wait for a few months to get their money while pointing out that instances like targeted long-term repo operations’ inability to find takers despite the low-interest rate illustrate heightened risk aversion in the system and a “dislocation” in the markets.

The asset manager, which h operating in India for 25 years, shut down Franklin India Low Duration Fund, Franklin India Dynamic Accrual Fund, Franklin India Credit Risk Fund, Franklin India Short Term Income Plan, Franklin India Ultra Short Bond Fund and Franklin India Income Opportunities Fund on Thursday. The six debt schemes had assets under management of over Rs 25,000 crore.

This is the first instance when a fund house is shutting its schemes because of coronavirus related pandemic.

The asset manager blamed redemption pressures and lack of liquidity in the bond markets for the “voluntary” action. The decision has led to concerns about the fate of investments and industry body AMFI rushed in on Friday to assuage the same.

“We did have extended engagement with the regulator on this and the regulator is also very cooperative. Sebi has been wonderful; they also saw reason…that the best option would be to wind-up the fund. its a very thoughtful decision not taken in haste,” Franklin Templeton Group’s managing director Vivek Kudva said on an investor call.

Earlier, the entire top management affirmed of the ninth biggest asset manager in India affirmed its commitment to India, underlining that all the other schemes continue normally.

Its managing director for India operations Sanjay Sapre said due to the COVID-19 pandemic, there has been an unprecedented redemption pressure from investors and the only options left with the MF was to sell its holdings at a significantly lower cost which would impact investors choosing to remain invested, or borrow more to fund the investments.

When both looked difficult, and with a view of protecting the investment value, it decided to pause, by shutting the schemes, he said, adding that no new transactions can be initiated by the investors now.

However, the funds will be functional from a management perspective, wherein maturity amounts and coupons on investments will get accrued and the sale of papers will take price at the best price, he explained.

“We realised that it is going to harm investors because we do not see much clarity on both the market and the economy moving ahead. We took a call that it is pertinent to put a pause to these (six) funds, wind them over a period of time in an orderly and non-disruptive manner,” its chief investment officer for fixed income Santosh Kamath said.

Kudva said investors will keep getting paid periodically as the money gets generated, while Sapre pointed to the possibility of an “equitable” distribution of the proceeds if a scheme is shut.

“We hope that we will be able to preserve value and hopefully over the next few months we will be able to return maximum value to the investors,” Kudva said.

Kamath said the markets are dislocated and not functioning optimally because of lack of clarity on lockdowns, while Kudva said lakhs of crore in excess liquidity being parked with RBI daily points out to severe stress in risk appetite.

“There has been a dramatic and sustained fall in liquidity in certain segments of the corporate bonds market on account of the COVID-19 crisis and the resultant lockdown of the Indian economy which was necessary to address the same. At the same time, mutual funds, especially in the fixed income segment, are facing continuous and heightened redemptions,” Franklin Templeton MF said in a late evening statement on Thursday.

Industry body Amfi has assured investors that majority of the fixed-income mutual fund assets are invested in superior credit quality securities and such schemes have appropriate liquidity to ensure normal operations.

The industry body, in a statement, has strongly recommended that investors should continue to focus on their investment goals, consult their financial advisor and not get side-tracked by an isolated event in a few schemes of one fund company.

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Franklin Templeton closure: What went wrong, how it will impact investors and other questions answered

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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In an unprecedented move, Franklin Templeton Mutual Fund has closed down six of its debt schemes in India citing severe redemption pressure and illiquidity in the bond markets amid the ongoing coronavirus crisis.

The funds which have been shut are Franklin India Low Duration Fund, Ultra Short Bond Fund, Short Term Income Plan, Credit Risk Fund, Dynamic Accrual Fund and Income Opportunities Fund, the company said in a statement.

The fund house believes that the market will not return to normalcy soon because of coronavirus disruption and this decision may protect value for investors via a managed sale of the portfolio.

Let’s understand what went wrong with Franklin Templeton Mutual Fund  and how it will impact debt investors:

How did Franklin end up here?

The extreme drop in liquidity in the bond markets, coinciding with very large redemptions following the COVID-19 outbreak compelled the fund house to make this decision, the company said.

“This decision may protect value for investors. It is the only viable means to secure an orderly realisation of portfolio assets,” it added.

What are mutual fund experts saying?

Debt mutual funds, even some liquid funds which are considered the safest, have in the recent past experienced tremendous volatility.

These six schemes of Franklin Templeton Mutual Fund had taken aggressive credit calls in their portfolios, according to Ankur Choudhary, Co-Founder and CIO, Goalwise, a mutual fund investment online platform.

“They can’t sell these to meet redemption requests, so they decided to close the fund itself,” he said.

According to Sanjiv Singhal, Founder, Scripbox – a financial company that provides mutual funds investments, Franklin Templeton AMC has had a history of high returns, by taking on higher risk in their debt portfolio.

“This strategy started to show cracks over the past 18 months, since ILFS, Vodafone, etc. FT created side pockets in these funds to hold defaulting/suspect debt. Our understanding is that recent issues like COVID-19 lockdown, illiquid bond markets, SEBI opening the window for AMCs to borrow to meet redemptions, etc. led to further problems. Worried investors withdrew money which further made the problem worse,” he says.

As the portfolio shrinks, Singhal adds, the fund is left with a higher and higher proportion of less liquid and probably riskier investments. The mutual fund borrowed money to pay off redemptions but appears to have hit the regulatory limit for borrowing.

What this means for investors of these six Franklin Templeton funds

As per the announcement, no investments or withdrawal will be allowed in these six schemes from Friday.

“Investors will not be able to withdraw or transfer their existing investments or start any SIP in those schemes, or make fresh investments in them,” explains Adhil Shetty, CEO, BankBazaar.

So, when will the investors get their money?

It is expected that once the macroeconomic situation improves, the cash-flow pains will be relieved, and they be able to make good on their debts, allowing investors to withdraw their investments, according to Shetty.

FT will do an orderly sale of their investments and return the money to investors. They may publish a Net Asset Value (NAV) for the schemes on a daily basis and eventually communicate more details on an exit strategy

“This step is in a way similar to temporarily blocking withdrawals from a bank. However, time duration can’t be predicted,” explains Singhal.

Should investors also worry about other funds from Franklin Templeton?

This appears to be a situation unique to these specific debt funds from Franklin Templeton. Experts feel that credit risk funds are going to face redemptions by people worried about the safety of their money.

Credit risk funds take additional risk to generate additional return and the current economic environment has led to defaults.

“While there are some well-managed credit risk funds out there, these will get impacted as much as others. Smaller funds/ fund houses could also face issues. Smaller fund size means more liquidity stress in case of redemptions,” say experts.

They are hoping that there will be some regulatory/government intervention on this soon.

“But, sometimes issues are compounded by public reaction (panic!) as much as underlying facts and whether this could become a widespread issue is unclear. Our advice to investors is please don’t take any decisions without consulting with a professional advisor,” advises Singhal.

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Franklin Templeton issue an ‘isolated event’, investors money safe in debt MFs: AMFI

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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The Association of Mutual Funds in India (AMFI) on Friday assured investors that the majority of fixed income mutual funds AUM is invested in superior credit quality securities and schemes have appropriate liquidity to ensure normal operations.

The mutual fund industry body’s statement came even as Franklin Templeton Mutual Fund announced the winding up of six credit risk fixed income schemes.

The asset management company said it was forced to take the extreme step of closing down six of its debt schemes due to a combination of high redemptions, weak inflows and “dislocation in corporate bond markets”.

The AMFI urged “investors continue to focus on their investment goals, consult their financial advisor and not get side-tracked by an isolated event in a few schemes of one fund company.”

It furthermore sought to assure investors that, “The action taken by the particular AMC is limited to the six specific credit risk fixed income schemes managed by the said AMC due to the illiquidity of their portfolios. The assets under management (AUM) of these six schemes constitute less than 1.4 investors of the Indian Mutual Fund Industry’s aggregate AUM as on March 31, 2020.”

We expect fixed income funds across the entire mutual fund industry to continue their normal operation without any material impact, the statement added.

“Banking liquidity in excess of Rs 700,000 crore, Long Term Repo Operations ( LTRO ) conducted by the RBI, expectations of further rate cuts and Operation Twist by the RBI is likely to keep bond market liquid and normally functioning in current challenging times,” Nilesh Shah, Chairman, AMFI, said in the statement.

“The mutual fund industry remains fully committed to investor interests and there is no need for them to panic and redeem their investments. The industry continues to remain robust like in the 2008 sub-prime crisis or 2013 taper tantrum crisis,” Shah added.

NS Venkatesh, Chief Executive, AMFI  assured investors and said “The Mutual Fund industry has seen many cycles and its professional fixed income fund managers have managed crises efficiently over the years. Investors continue to repose trust in the industry and over the last 5 years the Indian MF Industry AAUMs have doubled from Rs. 11.88 lakh crores as on March 31, 2015 to Rs. 24.70 lakh crores of AAUM as on March 31, 2020.”

Most credit risk funds have pretty good credit quality and sufficient liquidity in today’s challenging times and continue to remain an attractive investment option for investors,  Venkatesh added.

As per AMFI data released on April 9, the equity inflows stood at Rs 11,485 crore in March. In February, the number was around Rs 10,730 crore and in January, it was Rs 7,548 crore.

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Franklin Templeton India winds up six credit funds amid COVID-19 crisis

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Franklin Templeton Mutual Fund on Thursday announced the closure of its six credit funds due to liquidity issues amid the coronavirus crisis.

The funds that will be shut are Franklin India Low Duration Fund, Ultra Short Bond Fund, Short Term Income Plan, Credit Risk Fund, Dynamic Accrual Fund, Income Opportunities Fund, the company said in a statement.

As of April 22, total asset under management by these funds was Rs 25,856 crore.

“There has been a dramatic and sustained fall in liquidity in certain segments of the corporate bonds market on account of the COVID-19 crisis and the resultant lock-down of the Indian economy which was necessary to address the same,” it said.

The fund house further said that mutual funds, especially in the fixed income segment, are facing continuous and heightened redemptions.

The trustee or the people authorized will continue to realize or dispose-off the assets of the schemes. The sale proceeds after the discharge of all liabilities and expenses will be paid to the unitholders in proportion to their respective interests in the assets of schemes.

The statement noted that the Trustees of Franklin Templeton Mutual Fund in India, after careful analysis are of “the considered opinion that an event has occurred, which requires these schemes to be wound up and that this is the only viable option to preserve value for unitholders and to enable an orderly and equitable exit for all investors in these unprecedented circumstances”.

It said that individual emails are being dispatched to the unitholders regarding the closure of the schemes.

(With inputs from IANS)

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Sebi seeks reply from Franklin Templeton after markdown of investment in Vodafone Idea

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Markets regulator Sebi has sought a reply from Franklin Templeton after the fund house’s markdown of its investment in second-largest telecom firm Vodafone Idea Ltd (VIL) that led to an erosion of investor wealth.

However, Sebi Chairman Ajay Tyagi parried questions on whether such a move is illegal or if it hurts the broader cause of protection of investors’ interests.

Following the Supreme Court ruling on the adjusted gross revenue (AGR) matter, which resulted in a due of Rs 53,000 crore on the telco, the fund house had marked down its investment value to zero, resulting in a correction of up to 7 percent in net asset value for six of its schemes.

Franklin Templeton has the highest exposure to the telco at Rs 2,074 crore out of the total Rs 4,500 crore, which VIL owes to the MF industry as a whole.

Tyagi said it is a fund house’s own call to take a view on the asset value of an investment and added that industry body Association of Mutual Funds of India (Amfi) has suggested a formula only in case of downgraded debt, which does not apply to VIL.

“Why they did it, we had asked them. I don’t remember what has happened to that,” Tyagi told reporters on the sidelines of an NSE event here.

When asked if it is the right thing to do from an investor interest protection perspective, he said, “I don’t remember what is their (Franklin Templeton’s) comment. We had asked for the comment.”

Similarly, to a question of whether such a move was illegal, he expressed an inability to comment immediately as the reply received from Franklin Templeton will have to be studied.

In his speech, Tyagi gave out a list of work that is yet to be done with regard to the agenda on corporate bond development in the immediate term.

This includes setting up of the credit enhancement fund announced last year and operationalising credit default swaps.

From the medium-term perspective, Tyagi said the idea of unification of markets need to be implemented that was first announced in the Budget 2015.

He said that while a lot of work needs to be done to make the corporate bond market popular in India, it is not so that we are bad as compared to peers, and pointed out to data on market liquidity.

He also said that till now, more than 78 commercial paper issuances amounting to over Rs 3,58,000 crore have been listed on stock exchanges, following the framework for listing of commercial paper again to bring in transparency.

A mobile application for retail investors to invest in government securities has seen 15,000 bids leading to the raising of Rs 280 crore since launch, Tyagi said.

The budgetary announcement on creating new smart cities, along with the virtual rewriting of the rules for raising money will also help in the development of the municipal bond market, Tyagi said.

He also said Sebi has had a meeting with the National Housing Bank, the Secretary of the Urban development ministry and a few municipal corporations in this regard.

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Side pocketing mutual fund losses: Removing bad apples from the good ones

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Franklin Templeton has become the latest fund house to offer a ‘side pocket’ to investors in its fixed-income schemes hit by ratings downgrade of debt securities issued by crisis-hit Vodafone Idea. The board of trustees of Franklin Templeton Mutual Fund (MF) has approved the creation of ‘segregated portfolio’ or a side pocket in six of its fixed income schemes— Franklin India Credit Risk Fund, Franklin India Short Term Income Plan, Franklin India Ultra Short Bond Fund and Franklin India Income Opportunities Fund.

With effect from 24 January, various securities issued by Vodafone Idea, in the abovementioned schemes, will be segregated from the total portfolio. “This decision has been taken in order to protect value for existing unitholders in these schemes. These securities have already been marked down by us to a value of zero, on January 16,” Franklin Templeton MF said.

While side pocketing is in vogue in several developed economies, markets regulator Sebi allowed it in debt schemes of MFs only in January last year. Tata MF was the first fund house offer a ‘side pocket’ to investors in the country by segregating the portfolio of securities of crisis-hit mortgage lender DHFL held by its debt schemes last June.

So how does a side pocket work? The side pocket is generally formed by the creation of a separate portfolio of distressed, illiquid and hard-to-value assets. Each investor is allocated his/her pro-rata interest in the side pocketed portfolio. To put it simply, side pocketing removes the bad apples from the good ones.

In case of credit events, existing investors potentially lose all value if there is no side pocket. With side pockets, investors, who take the hit when the credit event happens, get the full upside of a future recovery. When recovery is made in the side pocketed portfolio, the same is distributed among investors on a pro-rata basis.

What impact does it have on investors? You cannot subscribe or redeem (exit) your units in a side pocket portfolio. The fund house would transfer the money to the investor in the segregated portfolio of the troubled investment (for example DHFL, Vodafone Idea) when the debt security matures.

You can also get money if the fund house is able to sell the troubled securities after an upgrade from credit rating agencies. Typically, an upgrade would result in an improvement in liquidity for the troubled investment offering a window of opportunity to exit.

Personal finance experts say that ‘side pocket’ is a useful tool for investors. In the absence of a side pocket, there would be huge redemption pressure. The fund house would have to sell good quality securities to meet redemption requirements.

How would the portfolio look like after a side pocket is created? The number of MF units in both the side pocketed and the regular portfolios would be shown as the same. However, the net asset value (NAV) of the portfolios would be different. In the case of the fixed income schemes of Franklin Templeton MF that have taken a hit—the exposure to the downgraded securities of Vodafone India was 4.1-6.5 percent of their respective total AUM.

A statement of account indicating units held by the investors in the main and segregated portfolio along with the respective NAVs as on the day of the credit event will be communicated to the investors within five working days of the creation of the segregated portfolio.

Though units of the segregated portfolio will not be available for subscription or redemption, the AMC (asset management company) will enable listing of units of the segregated portfolio on the recognised stock exchange within 10 working days of the creation of the segregated portfolio and enable the transfer of such units on receipt of transfer requests.

Upon recovery of money from the issuer in the segregated portfolio, whether partial or full, it will be distributed to the investors in proportion to their holding in the segregated portfolio. No investment and advisory fees can be charged by the AMC on the side pocketed portfolio.

However, TER or total expenses ratio (excluding the investment and advisory fees) can be charged on the side pocketed portfolio but only upon recovery, on a pro-rata basis i.e. on the recovered amount. Franklin Templeton MF has restricted fresh inflows in these schemes to Rs 2 lakh per day per fund per investor, till further notice. This limit is imposed only on the new applications received after the cut-off time on January 16.

Allirajan M is a journalist based in Coimbatore.

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KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow