Responding to an e-mail query on the borrowing’s impact on residual investors, Franklin MF said: “This AUM is the sum of the total investment value and net current assets and liabilities. Borrowings of the schemes are considered liabilities and have been adjusted while determining the AUM. Effectively, the portfolio value is higher than the AUM reported; any repayment of borrowing will not reduce the AUM,” it added.
Franklin MF was already seeing investors turn cautious towards its schemes, especially those with exposure to high-yield credit papers.
In the past six months, its AUM had shrunk by a third, from Rs 1.3 trillion in October to Rs 87,000 crore in March. The latest move will erode the AUM by another 30 per cent to Rs 62,200 crore.
Investment advisors have been receiving several queries on other schemes of Franklin, fearing the possibility of similar issues cropping up.
According to industry participants, Franklin MF had made significant inroads into the retail investor franchise, despite lacking a captive banking channel. “Several of the MF’s debt-oriented schemes were popular among retirees, given their high-yield generation potential through credit calls,” said another distributor.
Though the fund house’s credit strategy worked well in a stable environment, the liquidity crunch in the market led to a build-up of pain points.
Recently, the fund house ran into trouble because of its exposure to Vodafone Idea, Essel, and Reliance Group. “With the benefit of hindsight, concentration risks in portfolios could have been handled better,” said Amol Joshi, founder of Plan Rupee Investment Services.
Near-term pressure and investors’ reluctance could take the fund house out of the top players’ league.
“If the fund house deals with the issue well and ensures investors are repaid in full, it will be able to rebuild its image. This will not be easy as corporate bonds will be hit if the lockdown continues,” said Dhirendra Kumar, CEO of Value Research.
It would need to ensure that borrowing liabilities do not impact recovery for residual investors in schemes. “If accruals on debt papers continue and there is no sale of papers at stress valuations, the fund house will be able to offset the impact of borrowed liabilities,” Bala added.