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Lull after self-created storm

Sunil (Mr. Bond) Jhaveri, MSJ Capital, Gurgaon

12th April 2016

Mr. Bond says we created a storm when Amtek happened. We saw that the end game finally did not justify the storm. Then we did it again with JSPL. The end game here too did not justify the storm.

In the calm after these self-created storms, a look at investor outcomes is a sober reminder of whether proactive panic or wise restraint served our investors better.

Mr. Bond summarizes lessons from the two self-created storms, which we will all do very well to imbibe and remember.


This article is not to defend any AMCs decision to include Amtek Auto/JSPL or any such papers in their debt schemes. Neither is to justify their actions or inactions in either retaining the same or selling them. This article is also not to comment on creditworthiness of these papers or otherwise. Also, I am not writing this on behalf of any AMCs to defend or justify their actions or inactions in these situations.

Once I have made these points clear, now let me tell you why I have penned this article.

As you can see from the Title of this article, this is a Calm/Lull after self-created storm. Why do I call this self-created? Without understanding the implications of one off paper defaulting/getting downgraded & its miniscule impact on the performance on overall portfolio of a scheme, the Industry went to town in a) tom-tomming about it, b) creating negative perception in investors' minds c) making them panic & making them take irrational decisions & d) putting huge redemption pressures on the schemes & AMCs.

Even after the experience of Amtek Auto default, & thereafter the AMC creating Gating of units of the schemes, AMC then finally recovering 85% of the value of the security & then opening the gating for full redemption; investors not only got their principal back but some returns as well.

Understand why Gating was required & was for the benefit of the investors

Let me illustrate this with an example where we assume that no Gating was done for redemption:

Scheme Corpus                                                   100 crs     100%

Good Assets                                                           85 crs     85%

Bad Assets (say Amtek Auto)                              15 crs      15%

Redemption pressure                                           50 crs      50% of the scheme

Post Redemption:                                                  50 crs       100%

Good Assets (85 crs - 50 crs redemption)          35 crs     70%

Bad Assets                                                               15 crs      30%

As you can see from the above example, if the concerned AMC had not done Gating for Redemptions & due to redemption pressures, they would have had to sell good assets (as bad assets had become illiquid) to meet the redemption pressure. This would have increased the proportion of the bad assets for remaining investors who would have then taken the brunt of impact of the bad assets on themselves.

Look at the redemption pressure created by the Industry & how the Industry did not give time to the concerned AMC to get into the process of recovery of bad assets; thereby creating panic amongst investors, eroding investor values, jeopardizing a very important Asset Class called Accrual schemes (which is the only real competition to FDs) & creating a Liquidity Crisis rather than Credit Crisis:

AUM of J P Morgan Short Term Plan during Amtek Auto Fiasco

July 2015                         430 crs

August 2015                   459 crs

September 2015            152 crs

October 2015                 127 crs

January 2016                    57 crs

If the industry would not have panicked; after recovery of 85% of Amtek Auto value, all investors would have weathered the storm very smoothly & without too much of damage.

Now let us look at JSPL issue

AUM of Franklin India Short Term Income Plan: (which had exposure to JSPL)

January 2016            10,900 crs

February 2016            8,907 crs

March 2016                8,430 crs

As shown above, inspite of a recent experience of Amtek Auto & the Industry's amateurish behavior we repeated the same mistake when JSPL downgrade happened in the month of March 2016. Same rumor mongering, spreading of negative news (without understanding its implications), other AMCs making Capital out of it by resorting to CHINESE WHISPERS, pushing the concerned AMC in a corner due to redemption pressures & making them offload the entire portfolio of JSPL (which according me was done to protect the investors from further redemption pressures) & not giving time to take necessary action for recovering the dues (by the way JSPL honored all its maturities to MFs which fell due in the month of April 2016).

If the industry would have been patient in the JSPL issue, given some breathing time to the AMC (by not putting redemption pressure) & waited for JSPL to repay on their maturities (as & when they fell due), or allowed the AMC to come up with some solutions (like J P Morgan managed to sell 85% of their holdings) situation for both the AMCs as well as the Investors would have been dramatically different (on the positive side).

Returns after hair-cuts

Inspite of all these & taking a haircut in NAVs due to downgrade & taking a hit on valuation at the time of actual sell off of the entire JSPL holdings form their portfolios; 3 year returns in Franklin India Short Term Income Plan & some other schemes which had JPL exposure is as follows v/s 3 year returns in SBI FD for the same period:



Lessons to be learnt after reviewing the returns tables as shown above

  1. First & foremost - stop panicking

  2. Understand the benefits of diversification through the MF route, which can mitigate losses arising out of such default/downgrade stories

  3. Start ignoring media noise around these events & stay the course

  4. Stop creating negative noise around these events as these too will pass away

  5. Give time to the Fund House to manage these crisis & come up with some solutions

  6. Be patient. Time is the best healer both for debt as well as for equity holdings

  7. Do not kill an asset class which is the only true alternative to Fixed Deposits

  8. Even after these haircuts in NAVs, booking of losses, etc. 3 year returns in these schemes, both on pretax & post tax basis is far superior to FD returns of similar tenors

  9. Learn from your past mistakes & ensure that we do not repeat the same

Foot note

Thank God we are not in the US Mutual Fund industry where sometimes investors get paid in kind (in shares of some other companies) for unusually high redemptions instead of cash. Click this link to read the shocking news:

Our Industry is more mature & has handled liquidity crisis (including at the time of Lehman Brother crisis) & honored all redemptions in cash.

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