Crossinvest Wealth Management Strategies

When a domestic fund manager is faced with the need for large-cap company exposure but runs into expensive valuations,it turns out that the best course of action is usually to go with a mutual fund.   There has been a growing trend recently of fund managers investing money from one scheme into different schemes from the same fund house.   It’s been noted that cross-investing is most common in situations where stocks are up to a price that makes them illogical to purchase directly. 

A cross-investment is when a fund manager uses money from one scheme to buy into a different fund that is managed by the same house.  Mutual fund inter-scheme holding rules allow asset management companies to cross-invest up to 5 percent of the total asset base of a fund house.   Another stipulation of the same rule is that a fund house is not allowed to charge asset management fees on holdings portion that was bought from the other scheme.  According to Value Research, a variety of known funds have declared cross-investments including Taurus Starshare, who had 2.6 percent of assets in different equity funds run by the same fund house; IDFC Enterprise Equity, who had no less than 2 percent in other equity schemes in its May portfolio; Mirae Asset India Opportunities, who had over 0.6 percent of their assets in other schemes in its December portfolio.

Waqar Naqvi, the CEO of Taurus Asset Management has been quoted as saying “we resort to cross-investing as we do not allow inter-scheme stock transfers.  Cross-investment strategy is usually affected in midcap funds, which may need small exposure to some large-cap stocks.”   Experts in the field will say that mid-cap funds tend to adopt this strategy in order to hold small portions of large-cap stocks in their portfolio.  When mid-cap schemes make a purchase of units of large-cap funds, it helps the mid-cap scheme have a wider basket containing stocks from a more diverse cross section of sectors. 

Experts say that, in times of expensive large-cap valuations, when the volume of trading is at a lower point, cross-investing can be quite useful.   According to some experts, a large amount of fund houses will utilize cross-investing but keep their investments small enough that they do not end up being reported in their monthly disclosures.  As equity funds open up more intelligent methods of investing public money within the strictures of regulations, fund of funds still adopt the standard “biased architecture approach” as they are limited to investing in other MF schemes.  Save for a couple fund of funds, such as ING Optimix and Kotak Equity FoF, the majority of fund houses who have fund on funds limit their investments to their own fund schemes.  Other fund of funds schemes are frequently exposed to their own growth and index, large-cap equity, and midcap schemes.  Some of these funds include the Birla Sunlife Asset Allocation fund and the ICICI Pru Advisor fund. 

Arvind Bansal, the vice president of ING Investment Management, went on record saying that “open architecture funds could do well in the long run as there are wider options for the fund manager to buy good funds and spread the (fund house) risk across several fund houses.  World over, investors are preferring open architecture FoFs.”