The hype over executive pay in mutual funds is overdone

Much noise is being made on SEBI’s recent fiat on disclosing executive remuneration by mutual funds.

Eyebrows have been raised at pay-packets of top executives of mutual funds, which ranged from ₹3.73 crore to ₹6.25 crore in FY 2015-16. But though the absolute numbers seem exorbitant, they are justified on many counts.

An analysis of top six mutual fund houses — HDFC, ICICI Prudential, Reliance, Birla Sun Life, SBI, and UTI — whose assets under management exceed ₹1 lakh crore as of March 2016 — reveals that the payouts are minuscule relative to total average assets managed (AAUM).

The ratio of executive compensation to AAUM ranges between 0.00021 and 0.00039 times for these fund houses.

“Investors should not be overly bothered by the fund manager remuneration numbers,” says Kaustubh Belapurkar, Director, Fund Research, Morningstar Investment Adviser.

“The manager remuneration comes from the management fee that is charged to the fund, which is a component of the total expense atio (TER) of the fund.

“SEBI has strict limits in terms of what is the maximum expense ratio that can be charged on the basis of the type of fund and the fund size. Thus investors should instead be paying closer attention to the expense ratio of the funds they are investing into.”

The pay-packets of many fund managers are also commensurate with their track record in delivering returns to investors.

For instance, assets of HDFC Equity and HDFC Top 200 as of July 29 were ₹15,858 crore and ₹13,039 crore, respectively. In a 10-year period these funds have returned around 15 per cent annually (CAGR), while the S&P BSE Sensex has appreciated by a lower 9.6 per cent.

Prasanth Jain, ED and CIO of HDFC Mutual Fund, has been managing these funds since June 2003. No wonder his remuneration was ₹6.16 crore for the last fiscal.

Similarly, Sankaren Naren, the current ED and CIO at ICICI Prudential, who has risen through the ranks and has managed the popular Value Discovery Fund from October 2005 to January 2011, was paid ₹4.75 crore last fiscal.

The fund returned 27 per cent growth annually since inception, while the Sensex rose about 22 per cent in the same period.

Reliance Mutual Fund too is not far behind in rewarding performance. Sunil Singhania, CIO-Equity Investments, had an annual salary of ₹3.36 crore last fiscal.

According to AMFI data, assets managed by the Indian mutual fund industry grew 18 per cent year-on-year to ₹14.89-lakh crore as of June 2016.

The share of debt and liquid funds dominate with a two-thirds share, and equity funds account for around a third.

Mirroring this trend, Maneesh Dangi, Co-CIO Fixed Income of Birla Sun Life MF, got the highest annual remuneration in the fund-house at ₹3.87 crore, outstripping CEO A Balasubramanian’s ₹3.73 crore. The fund house has over three-fourths of its AAUM in debt assets.

The list is not dominated by fund managers alone and includes those heading functional areas such as dealers, marketing, sales, operations, information technology, compliance, legal, risk officers, HR and zonal heads as well.

According to SEBI, disclosure has to be made on remuneration paid to anyone earning equal to or above ₹60 lakh in a year or when remuneration is not less than ₹5 lakh per month when employed for part of the financial year.

So what are the global practices in disclosure of fund manager remuneration? “Globally, US is the only country where fund manager remuneration is disclosed, but not the exact dollar amount”, says Kaustubh Belapurkar. “Currently no other European or Asian countries have a mandate for disclosure of manager compensation.”