Franklin Templeton’s $4.1 billion fund freeze shows lingering credit pain

The closure of funds fueled worries of a renewed wave of withdrawals from similar products.

Franklin Templeton winds up six funds, what it means for investors
By Anurag Joshi, Nupur Acharya and Ravil Shirodkar

Franklin Templeton will wind up $4.1 billion of Indian debt funds after a liquidity crisis compelled the firm to freeze investor withdrawals, underscoring persistent stress in credit markets as the coronavirus pandemic wreaks havoc on the global economy.

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The firm’s surprise announcement late Thursday marked the biggest-ever forced closure of Indian funds and fueled worries of a renewed wave of withdrawals from similar products. Indian corporate bonds slumped on the news, while banks and fund managers paced declines in the country’s stock market.


“There is fear in the minds of investors that other mutual funds may not be immune to the problems faced by Templeton,” said Deven Choksey, who oversees investment and research as managing director at KR Choksey Securities Pvt in Mumbai. He called on the Reserve Bank of India and other regulators to roll out further measures to support funds and financial markets.

The episode is another black eye for Franklin Templeton, whose flagship global bond fund has also suffered a wave of client withdrawals this year. But it also suggests that pockets of stress in global credit markets are persisting despite unprecedented central bank efforts to ease liquidity strains and prop up companies hit by virus-induced economic shutdowns.

In India, home to the world’s most expansive lockdown, debt markets had been under pressure even before the outbreak, due to a shadow-banking crisis and a prolonged slump in economic growth. Franklin Templeton, one of the first global financial firms to launch asset management operations in India more than two decades ago, was heavily invested in lower-rated corporate bonds that were among the most affected by the downturn.
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Winding up the funds is the “only viable option to preserve value for investors and to enable an orderly and equitable exit” for all unit holders, the asset manager said in a statement posted on its website. “There has been a dramatic and sustained fall in liquidity in certain segments of the corporate bonds market on account of the Covid-19 crisis and the resultant lock-down of the Indian economy.”

The firm said it’s shutting down the Franklin India Low Duration Fund, Franklin India Dynamic Accrual Fund, Franklin India Credit Risk Fund, Franklin India Short Term Income Plan, Franklin India Ultra Short Bond Fund and Franklin India Income Opportunities Fund.

“The winding up of as many as six funds is unprecedented,” said Vidya Bala, head of research and co-founder at Chennai-based Primeinvestor.in. “Having already used up the liquidity to meet large redemptions, they had no choice but to wind up to prevent a run on the funds that would have induced them to sell good-quality paper and hold on to the bad ones.”

While shares of Nippon Life India Asset Managers Ltd. slumped as much as 14% on Friday and HDFC Asset Management Co. tumbled 9%, the Association of Mutual Funds in India downplayed the risk of wider contagion. It said in a statement that a majority of fixed income mutual funds’ assets under management are invested in “superior credit quality securities and schemes have appropriate liquidity to ensure normal operations.”
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The six funds constitute less than 1.4% of the Indian mutual fund industry’s total assets under management as of March 31, AMFI said.


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Still, Franklin Templeton is far from the only investment firm hit by outflows. Ultra short-duration funds -- those that invest in notes maturing between three and six months -- saw a net outflow of about 290 billion rupees ($3.8 billion) in March versus an inflow of 81.5 billion rupees in January, AMFI data show. Low duration funds saw an outflow of about 200 billion rupees last month.

Franklin Templeton’s woes threaten to accelerate those outflows and push Indian credit markets back into turmoil just as they were starting to show some signs of improvement. Unprecedented stimulus by central banks has sparked a rebound in debt globally in recent weeks after the worst rout in at a least a decade last month, and India was no exception.

The RBI last month announced it would fund banks’ purchases of 1 trillion rupees in company bonds through its targeted long-term repo operations of up to three years. That helped lift issuance of shorter-dated local corporate bonds to a record this month. The RBI has since taken more steps to boost liquidity, helping dollar bonds from the nation’s issuers return the most in Asia in April.

On Friday, average yields on top-rated rupee corporate bonds maturing in three years jumped as much as 35 basis points, among the biggest increases in about seven years.

“The closure of Franklin Templeton debt funds will be a jolt to the corporate debt market in India,” said Abhimanyu Sofat, head of research at IIFL Securities Ltd. in Mumbai. “These funds were one of the top performing for last couple of years due to higher risk being taken by them by lending to lower-rated corporates. We believe it’s time for RBI to be even more strong in its intervention in the credit market.”


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