Mutual Funds

Frontrunning probe: What should Axis MF investors do now

Kumar Shankar Roy |BL Research Bureau | | Updated on: May 10, 2022

Action taken by AMC against two fund managers, including chief dealer, handling certain equity schemes

Just when things were going good for Axis MF, frontrunning allegations have rocked its world. In the crosshair are two fund managers Viresh Joshi and Deepak Agarwal who were involved in managing about seven schemes. The country’s seventh-largest fund house, with over ₹2.5-lakh-crore in assets, is battling attacks from all sides including the social media. Rumour mills are running at full speed. Here is what investors should do now.

The story so far

A few days ago, media reports first indicated that Axis Mutual Fund, backed by Axis Bank and Schroders, has implemented personnel changes, including stripping two fund managers of their roles. The reason for this development was allegations of violations against certain officials of the fund house. Soon, it came to light that these managers may have engaged in frontrunning.

Front-running is a dubious market practice in which a dealer, trader or employee gets wind of a big order for buying or selling shares that will be placed by a fund or big investor and gets ‘in front’ of the trade. Large orders usually move a stock’s price. By buying shares just before the big order hits the market and selling them once the price moves up, the front-runner pockets illegal gains from his advance knowledge.

In a communication to investors on May 9, Axis MF MD & CEO Chandresh Nigam has said the fund house 'proactively' started an investigation in February 2022 and is using external advisors to carry out the probe. Pending further investigation, it has taken action against the two fund managers who were handling about 7 schemes viz. Axis Arbitrage, Axis Banking ETF, Axis Consumption ETF, Axis Nifty ETF, Axis Quant, Axis Technology ETF and Axis Value.

The combined assets under the funds is about ₹8,500 crore, with Axis Arbitrage alone accounting for ₹6,600 crore. To ensure business continuity, these funds have been reassigned to other managers and the fund house has put in place arrangements for execution of trades through another dealer.

Viresh Joshi, chief trader/dealer and fund manager, is associated with Axis since 2009 and has over 19 years of experience. Deepak Agarwal has been associated with Axis since 2015 and prior to becoming a fund manager, he was working as an analyst covering BFSI sector for Axis. He has over 17 years experience. Except for the arbitrage, quant and value funds, both the managers were involved in overseeing passive schemes.

Solid performance, flows

Axis MF has in the past few years delivered good performance across equity funds. It has been a well-run asset manager. In terms of 3-year point-to-point performance, Axis Growth Opportunities and Axis Small Cap are among the top three best performers in their respective categories. In the 5-year period, Axis Small Cap and Axis Midcap are the no. 1.

Robust performance has helped it garner assets from investors. Axis Bluechip (₹34,909 crore) is the largest in the largecap space and Axis Long Term Equity (₹31,656 crore) is the biggest in the tax-saving segment.

Axis Growth Opp. (₹7,445 crore) is the 4th largest in the large & midcap space. Axis Focused 25 (₹19,146 crore) is among the top 6 in the flexicap category, Axis Multicap (₹5180 crore) is the 4th largest in multicap bucket, Axis Midcap (₹17679 crore) and Axis Small Cap are within top-4 in their categories. For the 4th quarter of FY22, Axis MF (₹6331 crore) is second to only UTI MF (₹6668 crore) in terms of getting the highest net inflows.

Steady performance and copious flows have meant that Axis MF has over 98 lakh investor accounts (over 90 per cent from retail) for its 53 schemes including fund of funds. Equity funds alone account for one lakh crore rupees in assets. The fund-house's focus on quality and growth is said to be one of the reasons its funds have done well. Jinesh Gopani as Head - Equity is in-charge of the equity funds.

What to do now

Apart from the fund-house, market regulator is said to be looking into the developments. The thing about SEBI probes is that results do come, but they are a long-drawn out affair. In the HDFC MF frontrunning case, it was years before orders came. During the investigation period of October 2006 to June 2007, Nilesh Kapadia, who was equity dealer with HDFC AMC between June 2000 to 2010, tipped Dharmesh Shah regarding impending HDFC AMC trades. The regulator levied fines on both the front-runners and the mutual fund.

So, in all probability, in the Axis MF case too, it could probably be few years before legal action would be taken against the alleged perpetrators. You cannot wait that long to take some action. In the meanwhile, speculations will take place. So, if you can ignore the headline risk, evaluate how your funds have done vis a vis peers and benchmarks. If you are happy with the performance, stay put.

Letting a fund manage your hard-earned money is about trust. If you feel your trust has been broken with this single instance, you should assess whether the fund-house has put in systems in place so as to avoid a repeat of these instances. You can talk to your mutual fund distributor or investment advisor or write to the company to enquire about the same. Based on their response, you can take a call on whether to continue investments.

There are many speculations about the fund facing redemption requests. In equity funds, redemption pressures can usually be faced more in the midcap and smallcap fund segments usually. Axis MF has not put any restrictions on redemptions at the moment.

Worried investors should also note that Axis MF issues are not as same as the Franklin Templeton MF fiasco, where the fund-house was stuck with illiquid debt investments and decided to suspend inflows and outflows.

Published on May 10, 2022
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