Franklin, Archegos and the power of Narrative

Franklin Templeton has made more news in the last one year or so than the rest of the Mutual Fund industry combined. Then again, I cannot remember the last time such a high profile asset management company decided to shut down and lock out investors in one of the premier funds.

Even before they shut down the funds, I felt they broke the trust of the investors in the way they handled their exposure to Vodafone. (Breaking Trust – The Franklin Experience). In a way, I recognized the problem but decided not to act as I stuck with my investments in Franklin both on the debt side and equity. (our family’s first and a major investment for those days was with Kothari Pioneer Prima Plus Fund). 

While the locking out decision was painful, it did not impact me for I have always believed in diversification when it comes to debt and the percentage of funds stuck with Franklin was something I could live with. For now, the decision hasn’t been proven to be wrong though we shall have a real answer once the fund has been closed.

The selection criteria for investing in mutual funds for me basically falls into two buckets. Invest based on past performance or invest based on philosophy. Regardless of the narratives that are sold around by advisors, most just depend on the past returns marrying then with the philosophy when it suits and divorcing them when it doesn’t.

For most fund houses, Philosophies don’t change based on market trends. This maybe a weakness when it comes to the fund house for very few investors want to stick when the returns are sub-par even if the reason for being sub-par is because of the divergence we see in terms of the market vs the philosophy, but as investors I think one should see that the fund house has a strong conviction from which it will not budge much.

The following statement is of Quantum Mutual Fund with respect to their philosophy

That is by following the tenets of Value Investing as a concept for the Quantum Long Term Equity Value Fund since its inception in 2006. Value Investing is defined as “An investment strategy where stocks are selected that trade for less than their intrinsic values. Value investors actively seek stocks they believe the market has undervalued

This from Mirae

The investment process at Mirae has strict investment guidelines ensuring that we contain portfolio risk within the specified levels. We are of belief that the company fundamentals are the primary factors of stock performance. 

The difference is stark. Miare is more of a growth oriented fund house while Quantum seems to believe in Value. Both are worthwhile philosophies but when comparing funds, there is no point in comparing the returns of Mirae with that of Quantum. But who has the time for all that research and hence Value funds generally tend to lose out to growth oriented funds.

Interestingly I couldn’t find any such statement by Franklin. But when you have funds that try to cater to everyone, it’s not possible to have such a mission statement in the first place. On their US site, they showcase the breadth of their investment capabilities (Value, Deep Value, Core Value, Blend, GARP, Growth, Convertibles, Sector, Shariah, Smart Beta, Thematic) just on the equity front not to mention Debt and Alternatives to boot. 

Franklin talks about Risk Management being one of its most important pillars when it comes to investing client funds but today we know that it ain’t true. But then should one even be surprised. It’s only when shit hits the fan does one realize that something wasn’t right all along. 

Nifty Alpha 50 is a Momentum Index that tries to replicate the academic version of Momentum Investing. It’s top two weighted stocks are Tanla Platforms and Adani Green Energy which combined have a weight of nearly 13% in the Index. I have ignored both stocks when it comes to my Momentum Portfolio because of the intrinsic risk I feel exists in both these stocks. If I were to under-perform because of the omission, the question is – am I a good fund or a bad fund.

Most investors tend to barely look at the portfolios of the funds they hold and this means that funds can claim one thing while doing exactly the opposite. A value fund holding growth stocks for example would be an example of such inconsistency and one that makes it tough to analyze the fund in relation to its competition.

It’s for this reason and the fact that finally its returns that the investor is focussed on that we see advisors choosing the best fund of the season. Currently if your advisor is advising fund houses like Axis and PPFAS, you know which data point is driving his decision making.

A couple of days back after Bill Hwang basically blew through his fortune, the Chief Risk and Compliance Officer of Credit Suisse was forced out after the bank took an enormous loss. Here is an interesting thing – Morgan Stanley took an even bigger risk with but I am pretty sure their  Chief Risk and Compliance Officer will get a hefty bonus this year. 

The risk for all the major players were the same and yet when the final numbers were counted, Goldman and Morgan came out smelling good while Nomura and Credit Suisse sucked. But what if they too had been able to get out (dumping the stocks to their clients before shit hit the fan as Morgan did), would there be any controversy or even news? I doubt so.

What is interesting for me about the entire Franklin episode is the way narratives have been built as if they were the only bad guys around. That kind of statement can be only made if every asset manager is subject to a forensic audit and the results published. But as the case of Archegos shows, it’s not the risk that you take that can bring you down as much as not getting out in time. 

This is not to say there is nothing wrong with the way Franklin has gone about its business, it has a lot of wrongs that need to be answered, but if you are getting swayed by the public frenzy of opinion makers, it’s important to step back and reanalyze.