The AMTEK- JP MORGAN INDIA MUTUAL FUND SAGA- Some thoughts

The curious case of JP Morgan and two funds it manages should be an eye opener to people who invest in debt funds.

Check the default magnitude and the fall out (http://profit.ndtv.com/news/corporates/article-amtek-exposure-jpmorgan-mf-restricts-redemption-in-schemes-1212842 )

JP Morgan was once a hallowed name. It seems to have survived so many crises, including the 2008-09 Lehman fall out. However, its conservative approach does not seem to be present here.

A quick check at the Amtek Auto numbers tells me that the ROCE has been a challenge for this company for a long long time. Plus it had changed its year end and neither the old nor new year ends coincides with the taxation year. And the penchant for acquisitions, corporate acrobat etc does show the characteristics of a company that should be borrowing at all. The industry is a cyclical one and leverage in such an industry is a sin.

The flip side is that as a fund manager, I would never put unit holder money at risk in such a company, in the form of debt. It definitely is not high quality. And the fact that the credit rating is NOT from CRISIL or ICRA should itself raise a flag. Every participant in the bond market knows that all the ‘recognised’ credit rating agencies are not the same.

What is more shocking is that this paper has been put in to a scheme that is pompously titled “India TREASURY fund”!! Wonder if AMFI or SEBI will hall it up for ‘truth in labelling’.

I recall that when Templeton India started operations, it had a lousy paper that went bad. The sponsor bought it at book value and did not let the unitholder suffer, since it was early days yet for the industry. I only wonder if the Fund Manager and the CIO still kept their jobs. Similarly, we saw a lot of hits to the NAVs of many liquid funds in the Lehman aftermath. The Mutual funds had invested in CP of the most illiquid industry in the world- Real Estate. It was a ponzi – Maturing debt had to be replaced with new debt. However, as the redemptions exceeded the inflows, the cookie crumbled. Many MFs had the sponsor companies buy the junk paper, but some had let the investors stew by knocking off the NAV. It also showed the regulators in poor light. In the name of preventing panic, they let the guilty get away scot free. Ideally, SEBI should have forbidden those AMCs from having liquid funds in their overall portfolio, examined the investment committee minutes and made heads roll. But since every fund house was in trouble, SEBI perhaps did not do anything.

So, as an Investor, you can put your principal at risk in ANY SCHEME. Even Liquid Funds can have negative returns.

The sad part is that I do not recall any portal or advisors or mutual fund analyst point out the risk in the JP Morgan schemes. Even now, there may be a few funds out there with dubious credit quality paper. And when a single exposure becomes 15% or so of the scheme, it is worrying.

THE ACTION OF JP MORGAN IS surprising. It has knocked off the NAV and limited redemptions to 1% of AUM!! Corporate investors, if anyone foolishly has invested, are stuck. And the Sponsor is obviously not willing to buy this paper and restore the NAV of the investors. And I have not heard of any heads at JP Morgan India rolling. Interestingly the distinguished Board of Directors of the AMC includes Mr AP Kurien, the past head honcho of AMFI!!.

So, investors beware- NO FUND OFFERS CAPITAL PROTECTION. RISK IS OMNIPRESENT. And a foreign name does not guarantee integrity of process or investment.

And if AMFI is listening, clearly a case to haul up the fund house for the labelling.