Side Pocketing Episode of ABSL Dynamic Bond Fund
(This is for information and educational purposes only. This should not be
construed as a recommendation or investment advice even though the author is a CFA
Charterholder. Please consult your financial adviser before taking any
investment decision. Safe to assume the author has a vested interest in stocks
/ investments discussed if any.)
Mutual funds or asset management companies (AMCs) in India have been disappointing their investors for a long time. There are several episodes of mutual funds being unable to achieve the objectives of their schemes (see Annexure A at the end of the blog for a list of such episodes -- recounting several instances of failure of AMCs in their fiduciary duty).
The blog is an attempt to recount the backstory of side pocketing by Aditya Birla Sun Life Dynamic Bond fund (ABSL DB Fund for short).
When certain securities in a mutual fund scheme default on their principal and / or interest, the portion of such securities in default needs to be side pocketed or segregated from the main portfolio to prevent a run on the scheme.
The side pocketing helps in protecting the interests of remaining investors / unitholders in mutual funds. Side pocketing is also known as segregation of portfolios.
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Related blogs on Debt Mutual Funds:
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Side Pocketing Episode of ABSL Dynamic Bond Fund
Backstory:
While checking the AUM movement (Axis Direct) of certain dynamic bond funds in recent years -- the author happened to notice that there was a precipitous fall in the asset size of ABSL DB fund (AUM is assets under management) in 2019 / 2020.
Further digging into the fund revealed the fund lost more than 7 per cent of NAV (net asset value) in a quarter as per data from Value Research (best and worst period returns).
Between Aug2019 and May2020, the AUM (assets under management) fell by 42 per cent from Rs 3,160 crore to Rs 1,820 crore. Such a big fall in AUM that too in a short period of time is bizarre (as of 30Jun2024, the fund's AUM is Rs 1,709 crore).
Screenshots of AUM movement, best and worst period returns and point-to-point returns of all debt funds from 19Sep2019 to 19Dec2019 >
ABSL DB Fund suffered heavy losses due to some unrated debt instruments it was holding as of 31Aug2019. One such major unrated debt holding was Adilink Infra & Multitrading Pvt Ltd (an entity belonging to controversial Essel Group / Zee Group of Subhash Chandra).
See screenshot of Aug2019 portfolio >
Adilink Infra & Multitrading Pvt Ltd defaulted on its securities on 25Nov2019, which forced Aditya Birla Sun Life to segregate its portfolio in the interest of unitholders of its Dynamic Bond Fund -- side pocketing the defaulted bond and creating a segregated portfolio.
Screenshot of side pocketing / segregation >
Recovery of segregated portfolios:
As per the factsheets of ABSL DB Fund, it appears that the fund was able to fully recover the proceeds from Adilink Infra & Multitrading Pvt Ltd in several stages by Oct2022.
So, the unitholders had to suffer for almost three years due to the episode of side pocketing by ABSL Dynamic Bond fund -- they were deprived of the liquidity during this three-year period.
Other funds where ABSL MF, in Nov2019, created segregated portfolios due to default by Adilink Infra & Multitrading Pvt Ltd were: Aditya Birla Sun Life Credit Risk Fund Aditya Birla Sun Life and Medium Term Plan.
Key Takeaway
Investors have to do their own due diligence thoroughly before investing in mutual funds. They have to be satisfied themselves with the quality of the securities in a fund's portfolio.
A template for analysing debt mutual funds is available here which may help novice investors on how to assess a scheme before investing. Indian AMCs are asset gathering machines ripping off investors in several ways.
Investors should not get carried away by past returns or by the promise of juicy future returns. If they are too greedy, they will have to suffer the consequences as described above. Annexure A given below delineates past episodes of investors suffering due to credit risk (also known as default risk).
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Annexure A:
Debt Mutual Funds issues in India:
Franklin Templeton India - Debt Fund closure - six debt funds winding up - Franklin Fiasco - Tweets from 10Aug2020 to 21Jan2021 - Value Research timeline -
Prof Jayant Varma argues for some sort of a sovereign backstop for debt mutual funds in India - Tweet 29Apr2020
Occasionally, liquid funds deliver negative returns for very brief periods, e.g., between 2009 and 2021 - Tweet 01Apr2021 -
Why Corporate bond funds generate lower returns compared to Gilt funds? - Tweet 19Mar2021
Impact of write down of Vodafone India debt papers on debt mutual funds - AGR dues - Supreme Court - Tweet 18Jan2020 - Tweet 15Nov2019 -
Impact of downgrade of Simplex Infrastructure on HDFC credit risk fund - Tweet 31Dec2019
Franklin India Debt funds holdings debt of Essel Infraprojects - Tweet 12Dec2019
Shenanigans of debt mutual funds - Tweet 27Nov2019
SEBI mandate of 20% minimum G-Secs / Treasury Bills investment for liquid and overnight funds - Tweet 20Sep2019
Debt
funds impacted by Dewan Housing Finance Ltd (DHFL) credit rating
downgrade - side pocketing - segregated portfolios - FMPs - Tweet 05Jun2019 - Tweet 05Jun2019 - Tweet 05Jun2019 - debt funds concentration risk Tweet 13Feb2019 -
Lending to promoters (via share pledging) by debt funds via opaque structures - Tweet 19Feb2019 - Tweet 19Feb2019 - exposure to DHFL, Essel group / Zee group Tweet 30Jan2019 -
SEBI circular on creation of segregated portfolios - side pocketing - Tweet 28Dec2018
RBI FSR - Money Market Mutual Funds & their Inter-connectedness with Banks - Tweet 16Oct2018 - network effect of interaction among banks, NBFCs, AMCs (mutual funds) and insurance cos Tweet 24Oct2018
Debt
/ liquid / short term mutual fund schemes for Franklin Templeton India
MF suffered heavily in February 2016 due to credit rating downgrade of
securities of Jindal Steel and Power (JSPL) Tweet 02Jul2018
16Feb2016 Franklin Templeton - credit rating downgrade by CRISIL of Jindal Steel and Power (JSPL) debt securities: Tweet 11Mar2018
28Aug2015: JP Morgan AMC's redemption crisis in liquid / short term funds - credit rating downgrade of Amtek Auto by Crisil, Care Tweet 11Mar2018
Ballarpur Industries default and debt funds exposure - Tweet 17May2017 - Taurus MF debt funds lost heavily Tweet 11Mar2018
Lessons for mutual funds from Amtek Auto default - Tweet 07Oct2015
JP Morgan AMC's redemption crisis in debt funds (credit rating downgrade of Amtek Auto by Crisil and Care - Amtek Auto default) - Tweet 28Aug2015 - Tweet 04Sep2015 - JP Morgan's 1% cap on redemption Tweet 02Sep2015 -
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The Reference Shelf:
VR ABSL DB fund - segregated portfolio 1
ABSL MF - side pocketing 25Nov22019
Weblinks referenced throughout the blog
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Disclosure: I've got a vested interest
in Indian stocks and other investments. It's safe to assume I've interest in the financial instruments / products discussed, if
any.
Disclaimer: The analysis and
opinion provided here are only for information purposes and should not be construed
as investment advice. Investors should consult their own financial advisers
before making any investments. The author is a CFA Charterholder with a vested
interest in financial markets.
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