Franklin Templeton Shutting Six Schemes

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Franklin Templeton has shut six of it’s scheme namely -

1. Franklin Templeton Credit Risk Fund
2. Franklin Templeton India Low Duration Fund
3. Franklin Templeton India Dynamic Accrual Fund
4. Franklin India Short Term Income Fund
5. Franklin India Ultra Short Term Fund
6. Franklin India Income Opportunities Fund

Total invested amount in these funds according to different sources is around 26k - 30k cr.

Shutting down fund means there will be no investment or redemption in the funds. The AMC and/with trustees will try to sell the assets of the funds and return the money to investors.

Now I have three questions in my mind, one I have a part answer to, remaining two remains unanswered.

Question 1 - What is the effect of this default on money supply in market?

Answer 1 - Assuming fund size to be 30k cr and money multiplier at 6. Amount of money out of system can be 1.8L cr.

Question 2 - What assets these funds hold?

Answer 2 -

  Credit Risk Fund - Full Portfolio.
  India Low Duration - Full Portfolio
  India Dynamic Accrual Fund - Full Portfolio
  India Short Term Income Plan - Full Portfolio
  India Ultra Short Term Fund - Full Portfolio
  India income opportunities fund - Full Portfolio

Question 3 - Who are the owners of these funds? Which companies will be loosing money in this? (Un-answered)


Let’s look at Credit Risk Fund in detail, it is segregated into three parts
 Main Portfolio
 8.25% Vodafone Idea - 10Jul20
 10.9% Vodafone Idea - 02Sep23 partially convertible 03Sep21

Leaving Vodafone aside let’s analyse Main Portfolio -
Total fund size as of 31-Mar-20 is 4,900 cr

Screenshot from 2020-04-25 19-35-03
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Out of the listed companies unknown/doubtful companies are -

Rishanth Wholesale Trading (RWTPL) - 2,300cr
  owns VMMPL. VMMPL grants franchise rights for Vishal Mega Mart.
Coastal Gujarat Power - 1,8k
  wholly owned subsidiary of Tata Power.
SD Corporation - 1,800
  is Shapoorji Pallonji group company
Five-Star Business - 1,500
  Finance start-up backed by TPG Capital, Matrix partners, Morgan Stanley, Sequoia Capital etc.
Aadarshini Real Estate Developers - 1,500
  Wholly owned subsidiary of DLF Home Developers
Vistaar Financials Services - 1,300
  Incorporated in 1991, MD - Ramakrishna Nishtala, Bangalore (Explore)
Aptus Value housing - 1,200
  Raised 800cr from WestBridge, Steadview & Sequoia
Nufuture Digital - 850
  No website, Incorporated-2007, Mumbai (Explore)
India Shelter Finance - 680
 erthwhile Satyaprakash Housing Finance (Explore)
Molagavalli Renewable - 530
  Incorporated-2017 (Explore)
OPJ Trading - 520
 Jindal Steel promoter OPJ Trading raises fund from Centrum Credit
Incred Financial - 440
 Invested by Rajan Pai (Manipal) etc.
Vivriti Capital - 390
  Had series A & B round of funding.
Ess Kay Fincorp - 240
  TPG growth, Norwest Venture & Evolvence India are investor
Furture Ideas - 190
 (Explore)
Rivaaz Trade Ventures - 280
 Invest in leasing retail space and renting to retail business.
Narmada Wind Energy - 120
  Something to do we renew power (Explore)
Reliance Big - 748cr
  ADAG group
Reliance Infra consulting - 50.6
  Rating document

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That money multiplier is for the money released by the central bank into the economy.

While you may consider this as a default in terms of liquidity for the investors in the fund,please keep in mind that the bonds have no takers does not mean that they would not be honored by the companies on maturity.

Alternately the fund could sell these to some other investor but why would anyone offer liquidity at par to anyone now,the buyers would want the assets to be marked down to a higher yield.

Bonds generally are not very liquid and the Corona crisis has only exacerbated this illiquidity.

Generally the fund managers keep some amounts as cash for redemptions but if many people rush to redeem at the same time,there is not much they can do.

This will lead to freezing up of credit in the markets because there is no trust in the system.

So it will be prudent for the Reserve bank to step in now and offer a liquidity window to mutual funds like they had offered in 2008.

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Some of the papers held by those schemes were not listed. SEBI had come out with a rule some time ago that unlisted paper can’t be bought by mutual fund, but ongoing buyers can keep the paper.

Also most of the papers would be paid in full (atleast that’s the hope) and unit holders will get their money back in due course (2028 for the long term scheme). They may get early also cause a lot of liquidity in the money markets are due to corona virus. If the liquidity is lifted then the AMC can sell the paper in their possession.

What I thought would happen is that NIFTY would tank on the news, but it seems people are really REALLY bored sitting at home and bidding up shares for god-knows-why.

Assume more such fund closures in future, it would be a domino affect. As more and more people come to realise that they hold debt fund in their portfolio, they will try to sell and due to lack of cash in the system won’t be able to. RBI at best can release cash to banks for them to specifically loan money to mutual funds based on the paper they possess - then again, many of the paper possessed by mutual funds are risky.

If they had gotten good ratings at good times, that may not be the case now, but then again, SEBI will probably ask rating agencies to stop the work-from-home thing.

PS: Whatever it takes.

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As we see in FT Low Duration fund (see first file attached),

  • 11% exposure is to a company called Greenko, Renew Power (7.93%), Renew Solar Power Ltd (5.59%) - These are all related parties. Renew Power and Renew Solar Power are both related to Mr Sumant Sinha (son of former FM Yashwant Sinha and former MoS for finance Jayant Sinha).

  • The above makes it a total of almost 25% exposure to a set of related companies. It almost seems like such a massive investment in related companies is not possible without the fund manager being in close sync with promoters. This is 25% exposure to renewable energy segment and from a related set of promoters. It is shocking how the processes of Franklin Templeton allowed fund manager to park 11% of funds in a company like Greenko without seeing linkage to their XL Telecom & Energy past which not only became a bad loan with SBI but trades at 25 paise

  • More shocking in the investments of Mr Santosh Kamat is that Sterlite Power Grid and Talwandi Sabo both are from same group… (Anil Agarwal Group) !! - This is 8.98% exposure. Sterlite Power Grid and Talwandi Sabo both are from same group… (Anil Agrwal Group) !! - This is 8.98% exposure

  • Other top investments like in Ess Kay group, Hero Wind Energy, Pune Solapur expresways, sadbhav infrastructure etc. at https://www.franklintempletonindia.com/downloadsServlet/pdf/franklin-india-low-duration-fund-number-of-segregated-portfolios-2-fact-sheet-islnfdph is shocking

There is definitely something amiss that SEBI has to investigate. Investing so much (25%) in green power/renewable energy into related parties and rest in firms that are unlisted, illiquid is shocking. I am worried that there might be a fund manager-promoter nexus

Santosh Kamat, fund manager of this and the others at FT India should be investigated

ft_low_duration
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XLEnergy_greenko_group_SBI-converted.pdf (126.1 KB)

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If one thinks Franklin is a fiasco,what will you call this fund?

Their portfolio holdings put credit risk to shame,they also have an exit load 4% up to 1 year,3% up to 2 years and 2% for 3 years.

Incidentally after falling almost 50% in the last one year,it’s NAV was marked down by another 50% yesterday.

Screenshot_2020-04-25 Factsheet March 2020 cdr - factsheet-march-2020 pdf
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I think the high allocation for some of these bad papers is not by design. Due to the redemption pressure, they were forced to sell good papers. ( The ones that have takers). So the % allocation for the bad ones went up. Btw these companies shouldn’t have made it to the portfolio in first place. So there is no excuse. Also, it has become a common practice to blame covid19 these days. (For example look at the BOI fund’s notice)

Btw can anyone let me know how to check latest AUM size for a scheme?. All the websites report the last month AUM size from the fact sheet.

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I think it may be useful to point out that this is a debt fund and not equity. What matters when you buy a debt paper is quite different from when you buy equity. As long as the Fund has acted as per the scheme objective as outlined in the KIM and followed general and followed SEBI guidelines, the Fund cannot be faulted.

Specifically,

Greenko does not seem to be related to ReNew Power and ReNew Solar.

Greenko’s website says, “The privately owned group takes a long-term view of business, guided by strong corporate values, high ethical standards, and an able shareholder base which includes sovereign wealth funds GIC and ADIA. Greenko’s ultimate holding company is Greenko Energy Holdings, which is incorporated in Mauritius.”

ReNew’s website says, “Established in the year 2011 by Sumant Sinha, ReNew Power is backed by marquee investors from across the globe such as Goldman Sachs, Abu Dhabi Investment Authority, Canada Pension Plan Investment Board, JERA (a joint venture between two of Japan’s largest utilities companies, Tokyo Electric Power Co., Inc. and Chubu Electric Power Co.) and Global Environment Fund.”

The bid was done together so that they can, in combination, offer 1200 MW which was on auction - 900MW by Greenko and 300 MW by ReNew. “While Hyderabad headquartered Greenko has been awarded 900 MW after quoting a peak power tariff rate of Rs 6.12 (~$0.086)/ kWh, ReNew Power will supply the residual 300 MW. Its bid for peak tariff came at Rs 6.85 (~$0.096)/ kWh.” This is quite in the normal course of business. Just a a large loan syndication by a few banks joining hands to fund a large project.

Group CFO was a DIrector in a failed firm that issued loans that became an NPA - maybe that can shine light on competence, but why should it be related to wrong doing? SBI would have been a lender to almost all large projects in India and many would be NPAs. That does not indicate with any probablity that something is amiss. Mere association like Company went bust → Director is a crook; SBI lent to this failed firm so if ex SBI Chairman now sits as Chairman in a along with this ex-Director → they are in cahoots. This association has zero validity as far as investing is concerned.

Like I mentioned Greenko and ReNew companies are not related, so 25% number is incorrect.

I have about four companies and LLPs, the banker for all of them is a large private bank with one relationship manager for all entities including my personal banking. Does it mean that he is in cahoots with me? The statement is mere speculation to a level by to match the senstionalism that FT had now shut down its 6 funds. There is no basis rooted in fact to say that the fund manager was in cahoots.

Please note the fund is a debt fund, not an equity fund. The instruments have been rated by CARE as A1+ and as of 22 April 2020, been repaid in full (CARE Press Realese on Greenko). Subsequent to the repayment FT will have nothing to do with Greenko.

Why should a fund manager of a debt fund care beyond his invested instrument?

Again, this is a debt fund, as long as the financial instruments have been properly evaluated for repayment as per the agreed terms, there is not problem whether they are related or not. In equity investing related party transactions are important to evaluate because profits due to equity holders may get moved indirectly to the owners via a ‘related party’. But for debt, investors are first in queue and protected via say an escrow account, control over cash flows and such. Their relationship ends when the obligations are met. Equity holders, if they are investors, even if they intend to sell next year, need to be bothered about the business until the end, because that’s the value they should expect to get.

SEBI’s Review of Risk Management Framework issued around Sept 2019, says that the prudential limits can be as high as 25% in a single sector and 25% to a single group as long as Trustees are OK (Page 3 of https://www.sebi.gov.in/sebi_data/meetingfiles/sep-2019/1568030594032_1.pdf). Since this fund was well within these figures, there is no violation of prudential limits.

As such I don’t think there is anything amiss in FT’s shutting down these funds for an orderly payout. In fact they said they have been working with SEBI on this. The key trade off the fund had to make was between liquidity and valuation, and it chose the latter because the credit markets are shut.

Disc: no investments and I don’t know the Fund Manager or any of the firms invested in, or the CFO of Greenko from Adam

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some history of greenko
https://www.iqe.im/case-studies/greenko-group-plc

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6 FOFs from Franklin Templeton see NAVs dip as debt funds are wound up

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This would be a way for them to prevent redemptions in these FoF schemes. Those that exit do not have to be paid in full.

Many decisions of FT are shocking:

The FM needs to be investigated

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@rkirana Debt funds invest as per their fund objective & categorization. Here is how ValueResearch defines Credit Risk funds:

Credit risk funds invest mainly in corporate bonds which are below the highest rating (i.e. AA rated or below) assigned by credit rating agencies. The lower rating indicates a higher possibility of these bonds defaulting on repayment of investors’ money. Therefore, these funds are the riskiest of all types of debt funds.

For example, here is a screen grab of the Scheme Information Document (SID) JM Financial Credit Risk Fund, from SEBI’s website:

Screenshot 2020-04-26 at 1.16.54 PM
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So what you have stated is by design. Many of FT’s debt funds had a mandate to invest in risky bonds. If you read through the SIDs of FT’s funds, you will realize that their investments were according to the SID.

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I was invested in Franklin India Ultra Short Term Fund. This fund ranks 1 in his category with an average return of 9.5% for several years. I invested in this fund and pull out the money 3 months back because I needed it(not because I saw it coming). It is pretty obvious why they put their money in low rated bonds because it fetches them higher returns. You have to keep in mind that they are invested in bonds, not in equities. So unless the companies go bankrupt, their money is safe. In a normal economic scenario, it is highly unlikely that so many companies will go bankrupt in a short period of time. But the Corona pandemic has created an adverse situation and complicates the things for small companies. The sensible investor did not have the nerve as their hard-earned money is parked in junk bonds. In a normal situation, they wanted to take the risk(if really there is any) but in the current situation, they dont.

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What disgusts most of the people is that FT did a webinar with distributors/advisors a week back to this lockdown incident and claimed all is well. This particular fund manager also made an appearance. They were trying to show confidence so that people don’t redeem while they would have been planning for this lockdown. As usual investors are left to fend for themselves.

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In India nothing is a given. Companies are going to court to stop the interest payouts, stop rating agency reviews, stop NBFCs from selling their pledged shares on account of share price fall etc. Courts have obliged on all these prayers. A day is not far when skipping paying principal is also granted on some legality.

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Some observations after reading the above posts

Franklin Templeton did the right thing closing the funds
Imagine you invested in two bond funds and did not redeem during this crisis.
On FT fund closure news you found that due to high redemption requests they have closed the fund and you will get your money after they collect on maturity or prepayment. Your money is stuck according to maturity of the bonds.
The other fund kept redeeming other investors and sold off all the liquid good quality papers. The nav of the fund has fallen proportionately. You are stuck with low quality illiquid bonds effectively making your investment devoid of any value.
FT acted in your best interest by shutting the fund.

Manager words can’t be trusted
The bond fund manager did not say the truth about redemption pressure. It would have increased the redemption rate. They could have shut the fund then only instead of misleading the public.

Safety should be given preference in fixed income
These schemes invested in risky high yield bonds and gave best returns in their categories for a long time. Investors bought them seeing their high returns and low volatility increasing the aum massively.
Since return is only 1 to 2% higher than fixed deposit and risk is much more these schemes should be avoided.
Bond manager should strive for safety of capital instead of higher returns.

Bond and equity are correlated
Bond market should have provided the necessary cushion during crash in the asset allocation plan. When the market falls and you have to rebalance by selling your bond fund. If they become illiquid at the wrong time your asset allocation plan goes for a toss.
Fixed deposits and government schemes (g-sec, nsc, ppf) should be preferred to bond fund considering redemption by other investors in bond fund.

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That’s thanks to the judicial activism of our unelected lords who interfere in everything, from what water to use for IPL pitches to how to handle corona epidemic.

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I wonder why you’re throwing around all sorts of claims and accusations but refuse to reply to folks who actually pointed to SID and other documents to rebut your claims.

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Issue is fund manager pointing to the very closed scheme (ultra short term fund) saying it’s all good and is a good opportunity to invest in it.

And as for fund manager striving for safety of capital, that’s a non-starter. How can debt markets be deepened (as govts try to) if fund manager can’t choose beyond AA bonds? If we do that, debt markets can never be source of funds for 90% of companies.

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Time to state some facts (these are not opinions) -

The strategy that got the FT funds into trouble is the same strategy they have been running with for a long time. Buying papers of the lesser known entities of well known promoters is how they have been able to squeeze out high returns, logic being a well known corporate which is worth 10X won’t risk losing their reputation for X amount of debt one of their smaller entities has

Credit funds will invest in lower rates papers, that is the investment philosophy. This was known and declared in every single document the fund house had put out

There are others risks inherent in fixed income markets, for e.g. you have interest rate risk. When the RBI hiked MSF in Aug 2013 after the Fed taper tantrum, longer tenor funds that had 80% in G-Sec lost 7-8% in absolute terms in one single day. One can lose part of principal by getting the duration call wrong too, credit risk is just one of the risks in fixed income

Fixed income just means that the income is fixed, it does not mean that income is assured. This is Investing 101. Even bank FD’s are guaranteed only up to a particular threshold, beyond that amount if the banks shuts down there is no assurance of the depositor getting his money back. It is just that the central bank then steps in to keep confidence in banking system intact, they aren’t legally mandated to do it

In abnormal times, the usual concepts and correlations all break down. Those who understand macros well know that equity markets and credit spreads move in the opposite direction. When spreads move up, equity markets more often than not fall. If one does not understand the concept of credit spreads, got no business parking money in credit funds

When liquidity dries up, prices can fall drastically. In 2018 and 2019 we saw steep corrections in small cap equity counters when liquidity fell off, the same thing can happen in fixed income markets too. What is playing out in the FT episode is triggered by a drying up of liquidity, credit events have not happened yet

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