Fidelity Investments is the latest mutual fund sponsor rumoured to be looking to exit India. Amid reports that the company has already sought proposals from interested buyers, Fidelity has issued a somewhat terse statement.

What it says is. “Fidelity Worldwide Investment is conducting a strategic review of its onshore asset management business in India. As with strategic reviews, all options are being covered. We remain fully engaged in, and committed to, the process of successfully managing money for clients using all the resources of the company….The outcome of this review will take full account of our fiduciary duty to, and the interests of, our clients.” Now for the more-than-9-lakh investors who are invested in Fidelity funds in India, this doesn't do much to clarify matters.

CRITICAL TO INVESTORS

What they would like to know is: Is Fidelity looking to exit its India operations as a result of its ‘strategic review'? While finalisation of the deal may be subject to the right price, is it true that the fund is scouting for buyers?

A ‘yes' or ‘no' answer to these questions is critical, as investors have plenty of reasons to worry if a fund's ownership is set to change. For one, a mutual fund's performance depends to a much larger extent on its management team, than that of a company. A company's stock price returns may be only marginally impacted by the exit of top management personnel. But for a mutual fund, it is the investment management team, which literally makes or breaks returns.

When a fund is set to undergo ownership changes, this often means a change in its management team. Even if the new sponsor has every intention of retaining the team, talented fund managers can begin to desert it as soon as takeover rumours begin to circulate. An existing team can become uninterested in actively managing the schemes too, leading to a drag on performance.

Two, even if the fund management team remains intact, there is a risk of smart money deserting the fund, given the open-end structure. This can severely impact the remaining investors.

If big pullouts happen, stocks or bonds may have to be prematurely liquidated, cash positions hiked, and portfolio structures altered significantly. The Temasek-owned Lotus Mutual Fund lost nearly a third of its assets in a span of two months, when it decided to sell out during the credit and liquidity crisis of late 2008.

RUMOUR AND REALITY

So what has hurt investors the most in these situations is the prolonged waiting period between rumour and reality.

The Indian operations of AIG mutual fund are a case in point. Investors in AIG's Indian mutual funds were dogged by uncertainty ever since the global parent underwent restructuring in late-2008. Media reports of the fund being in ‘talks' with various buyers were circulating since late 2010. The actual change in the fund's ownership came through in October 2011, a full 3 years after the first murmurs of stake sale.

Current Securities and Exchange Board of India regulations require fund houses to give all their investors an exit option prior to an ownership change. But this option is only given after the official announcement, by which time speculation may have already taken its toll on the fund's operations or performance.

It may be a far better idea for the Securities and Exchange Board of India to impose on mutual fund sponsors the rules that it enforces on listed companies. Now, companies are required to inform their investors, via stock exchange announcements, of all material developments that could have a bearing on their stock price or operations. This is why reports of a company in takeover ‘talks' are often followed by a clarification through stock exchanges from the company itself.

Investors in mutual funds, too, will benefit from early-stage updates on material developments in the fund house. What is more, funds in takeover talks should also be barred from launching new funds or even soliciting fresh money from investors without making disclosure of their intention to sell.

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