What is the Role of a Trustee in a Mutual fund?

Here is what the text book says:

The primary objective of the trustees of the mutual fund is to hold its property for the benefit of the unit-holders. The board acts as a protector of unit-holders’ interests: it appoints a custodian for safe-keeping of assets and closely monitors the AMC.

The trustees also have to spell out the responsibilities of the AMC, monitor any new scheme introduced and ensure full compliance with regulatory guidelines.

Now, a trustee could stick to the letter of the law and prove that he did this, or WE could take a view that they did not do any of this. We will never ever know.

If I were a trustee in a Credit Risk fund, what all would have I done?

done a stress test on the portfolio, and have that number ALWAYS available to the trustees, directors of the Amc, and the debt team.

picked up one or 2 big holdings and visited them on my own (surprise visit spending my own money, and not letting the debt team know)

FORCED THE FM to sell some instrument in real time basis and find out whether the liquidity promised is really happening

Got independent research reports on the clients (spending my own money)

Put a cap (Jan) on the amount that each client could withdraw

OK kidding. No trustee takes such an active interest in the portfolio of the client. There are trustees who open their mouth only for eating the cashew and sandwiches at the BoT meeting. It is seen as a sinecure and not as a JOB requiring too much attention. As I am not a director in any company (conflict of interest being a blogger – albeit free) I seem to be in an utopian world. Also hindsight is 20×20.

However, I have done the audit of many organisations where the Trustees have gone far beyond their call of duty.

What is the Role of the Board of Directors of the mutual fund?

Is it to be a cheer leader of your star fund manager or is it something more involved? I hope it was more involved.

If a scheme winding up is handled by the fund management team itself, sadly there is nobody else’s version of this event available to us. So even if we participate in a con call (or hear the recorded version) we are not getting the view of the

a. Independent director

b. The Chief Risk Officer (debt)

c. The Strategy Manager (debt)

d. the trustee

e. the Internal auditor

f. the statutory auditor.

As an investor / adviser we too have made a lot of mistakes (me culpa). We were like the frogs in the water which was getting boiled. We did not realize this till we were cooked.

Journalists (including bloggers) though independent do not ask the client the tougher questions. So let us look at some of the tough questions…

1. This share that you have bought HARDLY trades, how will you exit 500,000 shares in 4 days time when the WHOLE market knows you are a seller?
2. WE do not have a secondary market for debt products, so will you be able to sell while showing off your identity?
3. I am happy that you be a 20% lender to a bigger borrower than be 100% to a small borrower.
4. Why did you buy this share at X Rs.? or sell at Y Rs. (in many cases it is a stupid question)

When I withdraw money from an ATM, I never, ever count. I never ever check for fake notes.

What is this? this is trust in the software, system and processes. It was in 1999 that I first met the top team at FT. I still meet some of them and have always been impressed by them.

What is this called? Confidence in the system? or Over Confidence?

Trusted them because I knew them for a long time (they are one of us – as Sir Humphrey would say in Yes Minister).

I heard the rumblings, but since it came from a competitor I did not pay much attention.

I have been an investor since the year 2000 – and still hold many of their under-performing equity funds. I actually like their process.

Now let me ask MYSELF: Did I suffer from

Over-confidence bias, Familiarity bias, Not listening to the fresh facts (and changing my mind), Confirmation bias (when you hear only what you want to).

Me Culpa. One more Me culpa piece is called for. This was the first one.

I do think the trustees, independent directors, Internal auditor – all of their voices should be heard. After all we want the policeman’s version of an accident. It can’t just be the driver who keeps saying how great they are. That we know. We just saw evidence, did we not?

We will all know EXACTLY what we should have done. Truth is we were just as smart 2 weeks ago – then why did we not see it?

Simply because what is INEVITABLE is not ALWAYS OBVIOUS. Many journalists, bloggers, etc. PRETEND as if they would have known.

What can I tell you? you think I am smart? well, I have no proof of being smart. Neither do i hav proof that I am clairvoyant.

by the way I am an investor in one of the funds which has been closed down. As are my family members. So much for skin in the game.