Saturday, 25 February 2012

News Hour- Domestic managers may get to run offshore funds

MUMBAI: Indian fund managers will soon be able to manage domestic and offshore funds. Market regulator SEBI is planning to relax rules that require funds to appoint separate managers for each activity -mutual funds, portfolio management services and offshore advisory services, according to people with knowledge of the matter.

The regulator will put in place rules mandating disclosures of possible conflict of interest arising from the same person managing different funds, they said. Industry officials say the move will result in lower cost for fund houses while investors will be able to enjoy the benefits of the cumulative experience of the investment team.
Also, international investors have more faith in local fund managers as they have a better understanding of the market. "There is a distinct segregation of activity in terms of personnel, research and dealing. Anything that can facilitate pooling in of resources which would not result in conflict of interest would be a welcome move," said N Sethuram Iyer, chief investment officer, Daiwa Mutual Fund.

Last year, the regulator had allowed investment management firms to share back-end resources like IT systems but said they had to have a separate manager for each fund by it unless the investment objective and asset allocation are identical.

Chinese walls that require separate investment teams add to the cost of the asset management company which translates into higher costs to the ultimate investor, industry officials said. Such segregation is not found in developed markets with fund managers managing different funds, provided disclosure about potential conflicts of interest is made to the investor.
The conflicts of interest that the current SEBI regulations seek to avoid are insider trading, front running or the practise of the fund manager buying stocks ahead of the fund and preferential treatment to investors in the larger fund at the expense of funds that have a lower quantum of assets under management.

Abroad, asset management firms have to ensure that they have put in place effective policy to mitigate such concerns.

For instance in the UK, there are provisions for disclosure of conflict of interest to clients and potential clients.

"Achieving the economies of scale is the key value delivery by investment management industry. Being conscious of an ensuring effective resolution of any conflict of interest of varied set of investors is crucial," said Dhirendra Kumar, CEO of Delhi-based mutual fund tracker Value Research.

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