When we wrote about how many funds you should have in your portfolio, we’d mentioned that it’s fine to duplicate funds in some cases in order to avoid AMC concentration risk.
In the queries you ask us, we’ve also noticed two broad trends: many of you want to hold funds from the same AMC since you transact directly through the AMC website. Second, many of you do worry if you have too many funds from the same AMC and ask us if there is concentration risk.
So we’ll explore the aspect of AMC concentration in a portfolio here – what the risk even is, when it matters, and how you can handle it.
Before that, we want to address the issue of wanting to hold funds from a single AMC because it is easier to transact. Holding funds from the same AMC simply because you don’t want to login into multiple AMC websites is not a prudent move. The solution is to have a direct platform (and there are many), where you have the option of choosing multiple fund houses if you need to. You can read our article on how to choose an online MF platform here.
Of course, there are other reasons to not stick to house-funds. We discuss them below.
What is AMC concentration?
When you have too much of your portfolio invested in fund(s) of a single AMC, you’re concentrated towards an AMC. So you might think. But it’s not that cut-and-dried. Concentration risk comes in only when the funds are of a similar type or when you have too much of your portfolio in a single fund.
To break down the concept of AMC concentration:
- Having an equity and a debt fund from the same AMC is not necessarily concentration risk. In other words, concentration risk comes into play when you have, say, 2-3 equity funds and/or equity-oriented funds from the same AMC, or 2-3 debt and/or debt oriented funds from the same AMC. An equity and debt fund from the same AMC does not constitute AMC concentration unless the absolute exposure is very high, especially in a debt fund or an active equity fund (passive fund does not matter here).
- The nature of what constitutes risk depends on the funds themselves. In equity funds, the basic style takes importance. In other words, you may hold 2 funds with very different styles from the same house. This may not amount to concentration risk. We’ll dig deeper into this in the next sections of this article. In debt, more than two funds is enough to cause concentration risks.
- There is no strict rule on what exposure is too high, as it can change based on the size of your investment and whether you hold equity or debt funds.
But why is concentration in a single AMC risky in the first place? Simply because it leaves a larger portion of your portfolio vulnerable to underperformance should something go wrong with the fund house. In both debt funds and active equity funds (and in consequence, in hybrid funds), AMCs have a basic underlying philosophy or common thread. If this basic thread were to be disturbed, it would have an impact across funds.
Concentration risk in debt funds
In their debt investments, an AMC often takes an overall call – often called the house view. This call can be on the interest rate direction and the investment-worthiness of a particular company’s debt issues. This translates into fund portfolios.
For example, if an AMC sees that there is room for a bond yield rally, it will largely position its portfolios across schemes to capture that move. The exact approach may vary depending on the fund’s mandate. For example – it could go for longer-term maturity papers in its gilt fund. It could allocate small portions of gilt in its short-duration or corporate bond funds. It could step up PSU bonds in its banking & PSU funds.
If this call plays out, it will pull up returns across the funds where the AMC took the call. On the flip side, though, should the call turn sour, it will affect performance of multiple funds. Of course, the extent of impact depends on the fund itself.
But any negative impact of wrong rate calls may pale in comparison with mis-steps in credit risk assessment. When a company (or bank) raises debt, an AMC would evaluate the merits of that company and its debt strength. The AMC here assesses the credit quality of the issuer itself, and does not limit it to a single debt issue. This raises two possibilities, then:
- Multiple funds from the same AMC could hold debt instruments from that entity. For example, a company’s bond could find place in the AMC’s corporate bond fund and medium duration fund. For example, ZCBs from Aditya Birla Fashion & Retail are present in ICICI Pru Credit Risk Fund, ICICI Pru Medium Term Bond, and ICICI Pru Short Term. CPs of Century Textiles & Industries are in 4 different Sundaram AMC’s debt funds. Here, the AMC assessed the company and took exposure to different issuances across its schemes.
- Funds could hold instruments of different maturities and different coupon from the same issuer – like a shorter-term paper in the short-duration fund and a longer-term one in the corporate bond fund. For example, CPs and bonds of different maturity dates of Bajaj Finance find place across 5 of Aditya Birla SL’s debt funds.
So what? Well, if the issuing entity suffers a downgrade or it defaults, it reverberates across the AMC’s funds. The table below shows some examples of different funds from the same AMC holding papers of issuers that got into trouble at some point over the past two years. If you notice, the funds under each AMC belong to a different category. So while you may have diversified by combining, say, a short-duration fund and a dynamic bond fund, if there are overlaps in papers, a downgrade can affect multiple funds in your portfolio. The depth of the impact will obviously depend on the share of that paper in the fund’s portfolio.
It is difficult for you to know the exposure each fund has to a particular corporate group or compare exposures across funds within an AMC to check your portfolio overlaps. Further, there are complexities in that all papers are not equally risky – so though your funds may all hold similar papers, it does not automatically create concentration risk.
Also, risks in papers are often clear only in hindsight after credit events actually unfold. The events in the past two years show just how out of the blue a credit event can be.
Therefore, when you have too many debt and debt-oriented funds from the same AMC, there is a heightened risk for your portfolio as a whole even though the funds per se may not be high risk or belong to different categories.
So AMC concentration risk in debt funds is very real. Therefore, you necessarily need to spread your debt holdings across AMCs. This helps ensure that a credit event does not disproportionately affect you.
You may worry that diversifying would lead to duplication in debt. Not really.
- For one thing, your aim in holding debt in a portfolio is to mitigate risk and to this end, duplication is perfectly acceptable.
- For another, duplication in debt is not similar to that in equity. All you’re likely to be doing is to hold several funds that follow an accrual strategy of buying and holding debt to earn interest income. Or in the case of dynamic bond funds, as explained in both our article on fund categories and in the ideal number of funds to hold, they shouldn’t form the only debt portion of your portfolio which makes duplication lesser of an issue.
The following pointers can help in addressing AMC concentration risk here:
- You can ignore liquid funds for the purposes of concentration. This is because these funds have very specific rules and maturities that make them much less riskier than other debt categories. Having said that, make sure you hold a liquid fund with large AUM, else add more fund houses.
- If you hold a quality gilt fund (in your long-term portfolio), you can ignore this too in terms of concentration risk. This is because these funds do not have credit risk. You are already aware of the duration risk and the only way to counter this is to add accrual based funds.
- In all other categories, avoid holding more than two funds from the same AMC.
When you have too many debt and debt-oriented funds from the same AMC, there is a heightened risk for your portfolio as a whole even though the funds per se may not be high risk or belong to different categories.
Concentration risk in equity funds
In equity and aggressive hybrid funds, it gets a little trickier. In an equity fund, what differentiates one from the other is the strategy or style it follows. As we have been saying, combining styles in your portfolio is important. Why? Because in different markets, different strategies will work well. If you focused only on a particular style, the bulk of your portfolio could spend a long time underperforming. Blending styles allows you to make the most of different opportunities across market cycles.
Now, in most AMCs, there will be a core investment philosophy. An AMC can tailor each fund’s strategy in a different way while staying true to the core philosophy. As long as the style and strategy of the fund differs, it is fine to hold several funds from the same AMC.
Consider UTI Equity and UTI Value Opportunities. The former is a growth-style fund while the latter is a value-based fund. So though both funds come from the same AMC, there’s enough difference in the way they are managed. The same goes for Invesco India’s funds which draw from the same researched basket of stocks but combine them in different ways in their funds such as Invesco India Growth Opportunities and Invesco India Contra.
As long as the style and strategy of the fund differs, it is fine to hold several funds from the same AMC. Blending styles allows you to make the most of different opportunities across market cycles.
If growth were to falter as a strategy, for example, the value-based fund could do well. If you combine, say, a focused fund and a more diversified large-and-midcap fund from the same AMC, the difference in stock allocations can help one do better than the other. In these cases, AMC concentration is not a risk.
But when there’s a lot of similarity between funds within an AMC, an underperformance in the core investment thread can impact all funds. Consider Axis AMC’s equity funds. They all take cash calls when the going is tough. They all more or less follow a growth-based strategy. The top ten stocks in Axis Bluechip’s current portfolio – which accounts for over half its portfolio – share a 44% overlap with Axis Focused 25. If any of these stocks were to slip, it could pull both funds down.
Similarly, an underlying value strategy across ICICI funds has hurt returns of its equity funds as well as its hybrid aggressive fund. Similarly, Franklin Bluechip, Franklin Equity, and Franklin Prima though belonging to different categories have all slipped due to similar reasons. Canara Robeco Equity Diversified and Canara Robeco Emerging Equity, though both doing extremely well, share similarities in both portfolio and strategy.
The following pointers can help address AMC concentration risk in equity and hybrid aggressive funds.
- It is the basic investment style that takes precedence. It is perfectly fine to hold multiple funds from the same AMC as long as those funds are managing their portfolios differently.
- Equity fund categories can be very similar in terms of risk and return profile. In such cases, AMC concentration risk becomes higher – for example, mid-caps and small-caps are both high risk, and if you hold funds from the same AMC here, it could add much more to your overall risk than holding, say, a large-cap and a small-cap fund from the same AMC.
- Go by allocation to style/strategy to decide which funds from other AMCs you need to include. For example, if you want to reduce AMC concentration because you have two growth-style funds, pick a value-based fund or even a growth-at-reasonable price from a different AMC.
Overall, concentration risk is not simply about the risk of losing money if an event like the Franklin debt debacle. It is about risk of ‘all falling down’ when a common investment threat in an AMC breaks.