The one-manager-one-fund rule

Every mutual fund should appoint a separate fund manager for each ‘separate' fund managed by it.

Is the Securities and Exchange Board of India (SEBI) trying to make life easier for mutual funds or tightening the screws on them? With its tersely-worded circulars being issued at the rate of one per week, this is becoming quite difficult to decipher.

The latest cause of confusion is SEBI's recent circular. It says that every mutual fund shall appoint a ‘separate fund manager' for each ‘separate' fund managed by it. If a single manager does manage many funds, the portfolio must be ‘replicated' across them. But it is enough if 70 per cent of the portfolio is so replicated.

Given that many fund houses today have their star managers managing as many as six or seven schemes at a time, this has raised many questions.

First, why does SEBI want fund houses to stick to this ‘one-manager-one-fund' rule? Investors may prefer a good fund manager to apply his skills to many products. With every scheme a fund manager takes on, his mandate is to select 10 or more stocks that beat the markets. If a fund manager oversees six different funds, that makes it 6 portfolios, with a minimum of 60 stocks. This may be difficult, but isn't an impossible task. After all, firms which offer customised portfolio management services manage hundreds of portfolios.

Second, SEBI has been frowning upon the practice of fund houses offering products which are clones of each other. As a result, they have been reducing duplication by merging similar products. Thus, where is the question of two schemes having identical portfolios, even to the extent of 70 per cent?

DIFFERENT ACTIVITIES

These questions have sent fund houses into a tizzy. But the context in which this new circular has been put out suggests that a ‘one-manager-one-fund' rule for domestic schemes may not be SEBI's intent at all.

This is because this new circular is described as a ‘clarification' to Regulation 24 of the 1996 mutual fund regulations. The original Regulation 24 states that an asset management company (AMC) which manages a domestic mutual fund can only undertake a few other activities along with this. It can offer portfolio management services, manage and advise offshore funds, pension funds and venture capital funds. But firms that have a finger in all these pies are basically required to run them as separate businesses. This means that the AMC needs to maintain separate fund managers, infrastructure and books for each activity, and cannot share facilities with the mutual fund.

The purpose of this regulation was to make sure that fund houses don't get into conflict of interest situations, where better managers are allocated to offshore or affluent clients, giving retail investors a step-motherly treatment. If a single manager runs a portfolio management service and a retail mutual fund too, he could be tempted to allocate his best stock choices or his best trades to the former, which earns him a higher fee. SEBI's recent clarification, however, seems to relax these norms.

CLARIFICATION

It states a fund house may now have a common fund manager across the different activities undertaken by it, if there is considerable overlap (of 70 per cent or more) between portfolios. That is, an offshore fund and a portfolio management service may share personnel with a mutual fund.

To prevent a conflict of interest between such activities, the circular puts in place new rules. Thus, schemes which use a particular fund manager across activities should now: have a written policy on allocation of trades; make sure the manager doesn't take directionally opposing positions in different schemes — that is, buy up a stock in one, while furiously selling it in another; disclose returns manager-wise, and explain differences of 10 per cent or more in yearly returns to the trustee. The problem is, one has to infer all this merely from the reference to Regulation 24 in SEBI's latest circular.

So can fund houses have a single manager for different schemes within a domestic mutual fund? That requires one more circular!

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