Santosh Kamath and Risk Management
When a fund manager is down, it is to easy to kick and hit. Yes it is a cruel world there and as a student of risk, human behavior is also nice to see and learn. In a completely unrelated case and somewhat similar case Naren was hounded for “bailing out” the Icici securities IPO. I did not agree with Naren on the pricing of the Icici sec IPO – I bought it much later at about sub 200, but I do think it was a good business for sure. Subsequently the share went to 510 – so the market did seem to agree with the valuation. I remember writing a piece on Naren (http://www.subramoney.com/2018/07/in-defense-of-naren).
Unfortunately, I cannot write such a personal piece about Santosh Kamath. I can’t say I know him for 20 years. I do not. I have invested with him over 10 years, and I like his attitude. He went about running a debt fund with the mind set of an equity fund manager. He never, ever solicited me to put money in his funds. Never. I chose to. I told almost everybody that he is a good fund manager. Unfortunately even the school teacher from Siliguri put her Rs. 20k in his fund and is now feeling stuck.
Mens Rea? I doubt, but Me Culpa for sure. I should have been more careful about people who needed more liquidity. For those who did not need liquidity, I feel bad because the tax is going to hit now, whereas I wanted to pay indexed cap gains in 2030. I remember Vidya Bala saying “FUSBF is a good fund for 5 years”. Yes, it was not ultra short, to that extent the stellar track record blinded us. Like it blinded Himanshu Srivastava of Morning star. I agreed with the reasoning, the star rating and the Gold rating.
When a fund manager is down people forget that SK tried to do what none of his predecessors ever did. He worked on the borrowing- lending arbitrage to small companies. He lent to companies where he bravely stood as a single lender. In a country with a non-existent this was brave strategy which worked for 14 years. His portfolio was a discovery for me. Many of today’s shares like Equitas and other small banks owe it to SK for an intro to the Mumbai market. Lending to less liquid borrowers is a risk, and hence it happens at a premium. Even today, I am convinced SK and Pallab have a plan by which all the moneys lent will be got back – subject to the economy not going down even further. That is a big caveat. Obviously this fund was not suitable for everybody. For those people who did not need the money in the near future – none of the people I knew needed the full money in a jiffy. They were fine with getting the money in small tranches, over the next few years – say even a decade.
I am sure that they would have the documents in place. I do consider it a liquidity problem and not a solvency problem. Will there be a hair cut in the total amount due? I do not think so . However, I have my friends, clients, family and friends money in this fund, so maybe I am biased.
One important learning for me was that when there is no well regulated debt market, liquidity can vanish. We needed some brave bank – to stand there – and take risk like Buffett did in 2008. We needed a Dhirubhai Ambani kind of attitude to stand there and take risk.I don’t think a politician will ever do that. It has to be a businessman willing to do that – say a Deepak Parekh. I am not sure that will happen.
Forget what has happened. FT had one of the best fixed income teams. Even in equity I like their conviction. SK’s team was the envy of many a fund house, but will of course not accept it now. Of course there was heart burn, but that is not what I am willing to write about.
I was disappointed with the role of the Risk manager, Internal controls, trustee who are all firing from Sanjay Sapre’s shoulder. Why are they in hiding?
Srinivasan
A portfolio which had consistency for the past 10 years + has brought in FM bias, seems to be the major reason.
Krish
Articles such as these seem to be hallow. Are you aware of how many investors are there in woundup schemes. Nearly 3.1 lac investors and do we know the story of everyone to declare whether they need money at once or staggered manner. Do we know the plight of some senior citizens who were dependent on SWPs for their survival. It is clear that this guy didn’t go through any crisis period as much of these funds evolved post 2008-09. I am pretty clear that he was running a ponzi MF (not debt funds) and the empire collapsed as soon as new inflows dried up. Even VR rating is a joke and gives rise to lot of suspicion. HDFC Liquid fund with 71k Crore AUM is 3 star rated and Franklin with less than 10K crore is 5 star.
SS
Investors choose funds & fund managers because they do not know to DIY. It is just like a patient trusts the surgeon’s hand. If it is a “systematic risk” that was faced by fund managers and investors (like Corona), then no one can blame it – ‘market risk disclaimer’ justifies – bad break. But fund managers can never hide behind the innovative/new/remarkable (reckless/open to black swan) “unsystematic risk” especially in a debt fund where people do not want to take undue risk. Here in this blog, we are learning only.. No kicking/blaming etc.
(1) Fund managers are good people, taking responsibility to extent as they are running on their investor’s money and expectation. How much ever, unique and innovative ways the fund managers strive to achieve their goal, if it back fires, people are losers and – one cannot say, I did not solicit your money. Then why is fund manager in market in first place and accept others money? Their reputation is also at stake.
(2) It is also a tell tale example for people who argue for “focused-portfolio” and remark for having “well-diversified” into 50-60+ shares/Mutual Funds in their portfolio. For that matter, if one were to see a Co. annual report balance sheet schedule for investments, generally it runs into “well diversified” list of 100-150+ funds & carefully tracked. Or even a fund house portfolio too.. This is India, WB rules cannot be blindly applied.
Ramesh
I hope people will now understand max 5 MF is not a good strategy afterall.
shillegara
Even today the 6 funds have exposure to Reliance – ADAG, marked as “D” – but still they have a market value. this means more downside is to come. Please check the portfolio and explain exposure to Piramal group (they are an investee in Shriram Transport finance – total 20% exposure by FT), future group – don’t tell us he was doing social service lending to Piramal, Biyani, Anil Agarwal etc.
Francis
@Krish
agree VR, morningstar rating are big joke. but the importance of AUM factor for debt fund rating is less. big AUM can spread the risk. but what if most of the debt papers are poor quality like FT funds?