Motilal Oswal’s fund offer asks investors to take a blind bet  

March 9, 2010

Motilal Oswal Asset Management Company (MOAMC) has decided to take the road less travelled and launch an exchange-traded fund (ETF) as its first fund offering. Being an ETF, it has a lot going for it. We consider indexing as the preferred route to investing in mutual funds, since it eliminates a fund manager’s failed effort at stock picking—and finally underperforming the underlying index. Also, it is the first equity ETF offer after a long time.

However, poor quality of disclosures in the draft offer document of Motilal Oswal AMC will surely put off investors.

There is a lot of ambiguity regarding the index underlying the Fund i.e., its benchmark index. The draft offer document filed with the Securities and Exchange Board of India (SEBI) is almost secretive about this aspect.

Motilal Oswal AMC has tweaked the S&P CNX Nifty to arrive at a ‘fundamentally enhanced’ index called MOSt 50 index. Its constituents will be the same as that of the constituents of the S&P CNX Nifty. However, the draft offer document has failed to provide any information regarding the weightages assigned to each constituent of the index since it will be different from the Nifty. It also has no word on how the index would have done in the past.

The only fact the draft mentions is that the scheme would invest in the securities comprising the underlying index in the same proportion as the securities have in the index. As such, the benchmark itself is the criteria for selection of stocks. The fund, being a passively managed one, would not select securities in which it wants to invest, but would be guided by the underlying index.

Investors have been kept in the dark about the actual methodology to be followed by this adapted index. The document states, “The MOSt 50 Index i.e. the Underlying Index is designed by AMC which owns the intellectual property of the methodology of the Index. The weightages assigned to the constituents of the Underlying Index are as per the methodology formulated by the AMC which may consequently affect the returns of the Scheme.”

Moneylife’s email to the company seeking clarification on this matter went unanswered till the time of writing this story. The fund company should explain how the MOSt index has been computed and also how this index would have performed on a volatility-adjusted basis vis-à-vis the Nifty over different market cycles.

If there is no clarity about the index and its historical performance, how would investors know how the Fund is going to go about investing its money? In essence, the document is asking investors to blindly place their faith in the process of the Fund. This document is readily available for public viewing at the SEBI site. If SEBI clears the draft offer as it is, it would mean that the final offer document will carry with it all the ambiguities mentioned above.

Normally, the fund offer prospectus is expected to clearly define the characteristics of the fund. The AMC’s unwillingness to share the workings of the underlying index with the public should raise some eyebrows.

SEBI, as the market regulator, should insist that the AMC disclose the relevant information in full; otherwise, it should not clear the draft offer document. However, considering its past indifference to shady prospectuses, it is unlikely that SEBI will crack its whip. — Debashis Basu and Sanket Dhanorkar