The Great Franklin Templeton Mutual Fund Saga

The Great Franklin Templeton Mutual Fund Saga - In Search of Alpha

It's only when the tide goes out that you learn who's been swimming naked.

In an unprecedented move, due to dramatic illiquidity in certain segments of the corporate bonds, on 23rd April 2020, Franklin Templeton Mutual Fund announced winding up of six debt fund schemes as follows:

Scheme	Assets as on 31 Mar 2020 (in Crore)
Franklin India Low Duration Fund	2,737
Franklin India Ultra Short Duration Fund	13,158
Franklin India Short Term Fund	7,093
Franklin India Credit Risk Fund	4,434
Franklin India Dynamic Accrual Fund	3,119
Franklin India Income Opportunities Fund	2,506
Total	33,048

Above debt mutual fund schemes are short and medium-term schemes. These schemes are a good substitute for funds lying idle in current and savings bank account of corporates and individuals.

Sub-categories of debt schemes:

Overnight Fund
Liquid Fund
Money Market Fund
Ultra Short Term Fund
Banking and PSU Debt Fund, etc.

Features of short and medium-term debt schemes:

The money is invested in short term instruments such as a certificate of deposit, treasury bills, commercial papers, etc.
Enter and exit at any point in time (like savings and current bank account)
Better post-tax returns than current, savings bank accounts and short tenure fixed deposits
Indexation available on long term capital gains

However, when investors become greedy and chase high return schemes which provided more than 10% return for some time period in the past, it creates problems. There remains no margin of safety.

Even if one or two underlying securities defaults, the entire excess return (i.e. alpha) wipes out in a moment. Is that excess risk worthwhile disturbing the good night's sleep? I don't think so.

Today morning, I attended the conference call set up by the Franklin India Mutual Fund to explain this situation. Sanjay Sapre (President) and Santosh Kamath (Chief Investment Officer) were available on the call along with the team.

Highlights from the conference call:

Due to the inability to sell underlying securities in these schemes at a fair price, along with the redemption pressure from investors, Franklin Templeton Mutual Fund decided to wind up these schemes.
Winding up the scheme was the only option (in order to avoid distress selling) to protect the investors.
There is no certainty regarding the short and medium-term impact of COVID 19 on businesses and the economy as a whole.
These debt mutual fund schemes will not allow any purchase, redemption, transfer.
On a monthly basis, on the basis of net fund inflows in schemes, proportionate payouts will be made to investors. The answer to the question, "How much amount will investors be repaid?", is of anybody's guess. Nobody knows.
NAV of the schemes will be declared every day.

Learnings from this event and similar events in the past:

There's never just one cockroach in the kitchen. List of similar big-ticket events in the past (in India):

Restriction on withdrawal from PMC Bank, Mumbai
Restriction on withdrawal from Yes Bank
Default in loan repayment by Jet Airways
Default in loan repayment by IL & FS
Default in loan repayment by DHFL
Fraud by Nirav Modi (Firestar Diamond)
Fraud by Vijay Mallya (Kingfisher Airlines)
Default by Sahara India

Capitalism without bankruptcy is like religion without hell. Major credit default events, frauds occur across the asset class (equities and debt/ fixed income), across industries, across businesses, across geographies.

There are no free lunches in life. No free lunches in equities, debt, or any other asset class. It is unreasonable to expect that there is a magic system that will make you rich.

Warren Buffett famously quotes two rules to always keep in mind while investing:

Rule 1: Never lose money.
Rule 2: Never forget rule no. 1.

It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you'll do things differently. This helps me reinforce Warren Buffett's and Charlie Munger's investing principles time and time again.

Trust plays an extremely important role in banking, finance, and investment businesses. Time will tell regarding the future of Franklin Templeton as a fund house.

There is a huge scope for good advisory. Tremendous demand!

You may contact me in case you need to ask or tell me something. I am waiting to hear from you.

---

Stay home! Stay safe!

Thank you very much for your time!

With respect,
Aaditya Chhajed
CA, CFA(US) All Levels Cleared, MCom

E: chhajedaaditya@gmail.com
M: +91-9404055222.

Instagram: https://www.instagram.com/chhajedaaditya/

Aaditya is the founder of Aaditya Chhajed Financial Advisory Services, a financial planning and wealth management firm in Pune. He loves helping family, friends, and, clients make better financial decisions. He believes learning is perpetual. He loves reading books, traveling around the world.
He is a commerce postgraduate and Chartered Accountant. He has also cleared all levels of CFA(US) in the first attempt.

Disclaimer:
Investors should seek the advice of their financial advisor prior to making any investment decision based on this report or for any necessary explanation of its contents. Future estimates mentioned herein are personal opinions and views of the author. This post is not a recommendation to buy or hold or sell securities. Investments are subject to market risks. Please read all scheme related documents carefully.

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Aaditya Chhajed, CA, CFA

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