Franklin Templeton fund of funds sees sharp value drop after scheme wind-up

Six fund-of-funds schemes take 6-25% NAV hit to their exposure to schemes wound up by the AMC

Franklin Templeton investors may have to brace for another blow, with six of the fund house's debt schemes having seen erosions of between six per cent and 25 per cent in their net asset values (NAVs). The six are so-called fund of fund (FoF) schemes, which invest in a basket of other mutual funds. The FoFs had varying degrees of exposure to the Franklin schemes that the fund house wound up, citing heavy redemption pressure amid illiquid market conditions.

Franklin Life Stage FoF 50s Plus has seen the deepest drop in NAV at 25.2 per cent, followed by Franklin Multi-Asset Solution Fund at 22 per cent and Franklin Life Stage at 17.8 per cent. The asset under management (AUM) of five of the six FOFs is less than Rs 25 crore. Franklin Dyanmic Asset Allocation FOF, which had an AUM of Rs 878 crore, has seen nearly 17 per cent drop in NAV.

“Pursuant to decision to wind up Franklin India Short Term Income Plan and Franklin India Dynamic Accrual Fund, announced on April 23, 2020, the investments by the Fund of Fund Schemes in the above-mentioned underlying schemes that are wound up were illiquid effective April 24, 2020," spokesperson for Franklin Templeton MF said.

“Hence, considering the immediate illiquidity of the investment, these funds were fair valued. We are re-working the underlying asset allocation of the fund of fund schemes and will intimate the changes to investors shortly,” he added. 

On Thursday, Franklin had plugged the plug on six of its schemes with cumulative assets of over Rs 25,000 crore.

The drastic mark downs on Friday has shocked the investors and advisors as FOF are seen as relatively safe bets.

“Investors are concerned about their investments in all of Franklin’s schemes, including equity-oriented after the surprising drop in NAVs of fund of funds,” said Srikanth Matrubai, CEO at Sri Kavi Wealth.

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The investment community said they are awaiting more clarity on next course of action.

“We will have to wait and see how they re-balancing exercise pans out. Which new schemes get added and how will that further impact the NAV,” said an advisor, requesting anonymity, as outcome is still uncertain. 

FT official said the underlying schemes of the FoF will be replaced in due course of time.

As of March 31, 2020, the Dynamic Asset Allocation FoF had exposure of 45.59 per cent to Franklin India Short Term Income Fund. Franklin Life Stage FoF 50s plus plan had 52.2 per cent exposure to Franklin India Dynamic Accrual Fund, which is another scheme that is being wound up by the fund house. According to sources, the fund house has already significantly reduced FoF exposure to wound up schemes, but the latest figures couldn’t be ascertained.

FOF typically aim to achieve diversification by investing in multiple schemes. The segment, however, has not taken off in India in a big way.

The six schemes wound up by Franklin are Low Duration Fund, Dynamic Accrual Fund, Credit Risk Fund, Short Term Income Fund, Ultra Short Bond Fund, and India Income Opportunities Fund, citing lack of liquidity in debt markets and continued redemption pressures.

The fund house has stopped fresh flows and redemptions for these schemes. Franklin plans to liquidate the holdings and return the money to unitholders once the market situation normalises.

Credit market in freeze mode: BOI AXA MF

BOI AXA Mutual Fund (MF) took an additional haircut on its exposure to its credit risk fund amid the coronavirus-induced lockdown. As a result, the scheme’s net asset value dipped by 50 per cent on Friday. The fund house increased its haircut on DHFL and Avantha Holdings to 100 per cent. It said that “redemption-related selling by mutual funds had pushed the credit market in almost a freeze mode”. The scheme also increased its haircut on Coffee Day Natural Resources from 50 per cent to 90 per cent, on Dinram Holdings to 50 per cent, and Amantha Healthcare to 75 per cent.

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“We will also have to see on how those exposed to schemes through FoF are getting impacted compared those directly exposed, whether such thing is appropriate,” said another advisor.

The covid-19 pandemic and lock downs have crippled the bond market liquidity. With reduced liquidity in debt markets, the fund houses are facing challenges in liquidating some of their debt securities. As a result, the borrowing some schemes had seen a spike last month.