How allocation to bad assets increases with declining AUM

Basically, AMC has to sell good assets to meet redemption payouts and allocation to bad assets keep on increasing.

A small thread taking UTI Credit Risk Fund and underlying holding Vodafone/Idea as example
#mutualfunds
In Feb’2017, the scheme bought 650 debentures of “8.04% UNSECURED REDEEMABLE NON-CONVERTIBLE DEBENTURES. DATE OF MATURITY 27/01/2022” from secondary market.
AA+
Allocation in scheme = 2.6445%; AUM ~ 2433 cr
#vodafoneidea Image
Scheme increased allocation in Idea in April’2017
AA+
Allocation in scheme = 3.7297%
AUM ~ 2791 Cr (increasing) Image
Scheme increased allocation in Idea in May’2017
AA+
Allocation in scheme = 3.8261%
AUM ~ 3109 Cr (increasing) Image
Next one year, scheme neither bought/sold these holdings only the allocation in the scheme due to the change in AUM.
In May’2018, the scheme additionally allocated ~ 3% of its assets to the group.
Allocation in scheme = 5.2776%
AUM ~ 4938 Cr Image
In July’2018, scheme allocated more and for the last time, this point onwards, all the changes in % allocation in scheme is on account of change in AUM due to redemption or markdown (other securities).
Allocation in scheme = 5.8249%
AUM ~ 5292 Cr Image
After the IL&FS event, active money started to flee the credit risk category. At the end of september’2018 AUM of credit risk as category was ~88.7K crore & at the end of January’2020 AUM shrink to ~61.5K Crore Image
Post July’2018, UTI Credit Risk Fund has not bought or sold Idea/Vodafone papers & % allocation to scheme for this group kept on rising due to shrinking of AUM.
The exposure went to 17.549% at the end of December’2019 Image
In Jan’2020, after the supreme court event, @FTIIndia marked it down to 0 @utimutualfund marked it down partially. Now UTI has segregated the portfolio.

Always keep an eye on AUM in debt funds & single issuer risk (red flag if AUM is declining & single issuer is increasing).
@FTIIndia @utimutualfund data from Ace MF

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Second Order effect on Fund of Funds of @FTIIndia due to Wind Up of 6 debt schemes

An accident or an opportunity

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Investors have seen what illiquidity in underlying instruments can do in debt schemes

Please note same applies to small/mid cap equity schemes

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Fund managers have already over diversified in those schemes, look number of securities in those schemes

Look average daily volumes of top 10 holdings and see how many days will it take to liquidate
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