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India’s newest MF house wants to rewrite rules of active funds

India’s newest MF house wants to rewrite rules of active funds

14 Sep 2021

NEW DELHI: Samco Mutual Fund, the newest entrant in the crowded mutual fund industry, has a big complaint against its competitors. It believes the active funds run by them are not truly active. And, now it has taken upon itself to remedy this.

The company promised to “disrupt” the active fund management by launching funds that invest in companies beyond index stocks. It said it will transparently disclose daily ‘Active Share’ to investors, so they know that when they are paying an active fee, it’s certainly for buying something widely different from the index.

‘Active Share’, developed by Martijn Cremers and Antti Petajisto, both Yale professors, measures the fraction of a portfolio (based on position weights) that differs from the benchmark index.

“The world of asset management is going through various disruptions and Samco aims to be at the forefront of leading disruptions on the active segment. We will build funds with high ‘active share’ so that cost conscious investors get a truly active fund and not a closet index fund when they pay for an active TER,” said Jimeet Modi, founder and director of Samco Asset Management.

Active funds refer to any fund which is actively managed by a fund manager. The fund manager actively takes decisions on how to invest a fund’s capital and does the trading of stocks. However, most active funds fail to beat their benchmark indices.

Samco claimed one of the primary reasons that active funds underperform is that the average equity fund manager owns far too many stocks and in effect tracks the index. So, the result that investors are getting is, in fact, an index fund less the manager’s fees.

“This structure makes underperformance against the index inevitable. This phenomenon is referred to as Closet Indexing or Index Hugging. A scheme that has an active share less than 60 per cent is in effect an index hugger. Most active funds in the world have ended up being closet indexers,” said the fund house.

Samco said it will use its ‘Stress Test’ framework to select stocks. This framework is basically a strategy to put to work money with businesses that can endure and survive in a variety of stressful situations and generate long-term risk adjusted returns.

The fund house said 70 per cent of the index components fail its test. In other words, it believes 35 out of 50 stocks in Nifty are not worth investing in. “So, we will embrace divergence from the index and disclose Active Share. In fact, Samco’s endeavor will be to launch only truly active funds with high ‘active share’,” it added.

At the launch ceremony, Samco said its first scheme would be a flexicap fund. The company is filing papers for it on Tuesday. It may take 100-150 days to get approval of Sebi.

“Samco shall refrain from launching schemes in every SEBI category and will refrain from launching schemes like Infra Funds, PSU funds, Power and Energy funds, Dividend Yield funds, etc because these categories typically do not make the cut as far as passing the stress tested framework is concerned. We will truly be an asset manager and not an asset gatherer,” declared Umeshkumar Mehta, CEO of Samco Asset Management.