Linking fund-managers’ pay to schemes’ performance is good, but the current formula may be too complicated to implement
A glance at the returns from mutual fund (MF) equity schemes over the years makes it clear it would have made sense for investors to simply park their money in index funds or, in some cases, even a bank account. Barely a handful of fund managers have beaten the indices, with the majority turning out returns that are sub-standard. And for this grand underperformance, year after year, they preen on television screens and earn fat salaries. When their bets go wrong—debt investments in Essel Group, IL&FS and others—they plead with the regulator to allow them to side-step the rules.
The Franklin Templeton (FT) episode told us exactly how carefully fund managers are making investments and how closely they scrutinise the companies they buy into. Allegedly, some employees of FT encashed their personal holdings in six of the schemes just before they were shut down.
It is obvious that the MF industry needs some cleaning up; fund managers, as also other key executives of AMCs, should have been made accountable long ago. Now, SEBI has decided they must have some skin in the game. The regulator rightly believes that a fund manager’s compensation should be in some way linked to the performance of the scheme he or she is managing.
However, the method suggested might be somewhat hard to implement and monitor. SEBI has decided that at least 20% of their compensation—excluding tax and mandatory PF contributions—should be earned in the form of units managed by them. These units would be locked in for three years. Of the 20%, fund managers can invest up to 50% in their own schemes and the rest in a scheme with a similar or higher risk profile. For members of the senior management—CEO or CIO—the investment needs to be made across schemes managed by the AMC and in proportion to the assets under management.
To be sure, this will neither be easy to implement nor monitor; even random checks based on self-declarations by the fund managers could be onerous. There are hundreds of schemes—even within a fund house, the number is not small. There isn’t too much job-hopping, but enough to make the paperwork onerous for the regulator. Perhaps the fund manager should buy units of just one or two schemes—that he manages—else, it could get unnecessarily complicated.
There should be a better way to name and shame fund managers who do not perform but who take home hefty pay packages; every newsletter or factsheet that a fund house puts out should detail the performances of its managers. The data should be presented in a transparent manner; funds would try and slice the returns data in a manner that does not show them in poor light.
AMFI should take the lead in highlighting poor performances, and could, from time to time, put out reports on the worst-performing schemes. It is primarily because many savers simply do have the time to look closely at the performances, and assess them the right way, that fund-houses have got away even after having done so badly.
Ajay Tyagi has been an excellent SEBI chairman; he has been strict with fund-houses and brought them to book when needed. His latest rule linking compensation to performance is a good one, he just needs to tweak it a little.