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Sunday, May 25, 2003

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`Investors are taking to active management' — Mr T. P. Raman, MD, Sundaram Mutual Fund

Aarati Krishnan
Suresh Krishnamurthy

Over the past year, Sundaram Mutual Fund has done a lot to shed its staid, conservative tag. It has rolled out four new funds, one of which is an aggressive equity fund which will take concentrated exposures to stocks and another, a debt fund designed to invest in bonds rated below triple A. But the larger asset size has come with greater volatility in the fund base. In an interview with Business Line, Mr T.P.Raman, Managing Director of Sundaram Mutual Fund talks about the changing profile of the mutual fund investor and how fund managers are coping with it.

Excerpts from the interview.

Some of your new funds have seen their corpus shrink sharply since their initial public offering. Why?

Let me talk about the equity funds first. When we launched the Sundaram Select Focus Fund and Midcap Fund, both were relatively offbeat ideas. The market mood was also mildly bullish at the time. The funds were well received when we launched them in July/August 2002. In this respect, we were fortunate in our timing. But as the markets fell investors got panicky. We explained to our distributors that the idea behind these funds was to generate long-term returns.

But then, investors who were uncomfortable with the returns on these funds pulled out.

Did the large corporate investors in these funds pull out?

No, the redemption was felt across-the-board, across various sections of investors. Now, with the recent improvement in returns, we can see investors coming back to our equity funds.

But do retail investors really track performance that closely?

Yes, they do. In fact, I see a sea change in the way investors manage their mutual fund investments nowadays. They get in, track the performance and book profits after they attain a 12-15 per cent return, even if this return is earned in three months.

They are not content buying and holding for the long term.

Isn't it unhealthy to have investors treating mutual fund investments like stocks?

I cannot really blame them. If you see the index; on a point-to-point basis, it is exactly where it was two years ago. But there have been many money-making opportunities during this time. For instance, there has been a sharp run-up in banking stocks over the past few months. Funds that had large exposures in these stocks benefited.

If investors have to benefit from such episodes, they may like to book profits and re-enter the fund at a later date.

Most of your funds held a large portion of their assets in cash in March-end. Why?

This was deliberate. The year-end is always an uncertain period. It is just ahead of the Credit Policy. There may be year-end pullouts by large investors. Therefore, in this period, it may be better to err on the side of caution and hold liquid investments.

The cash portion has been wound down substantially of late. At present most of the funds are 95 per cent invested, especially the equity funds. We would not hold cash for a prolonged period; it would pull down returns.

So as investors manage their investments more actively, managing liquidity is becoming very important for you...


How much does this hamper fund management?

It makes fund management quite tricky, because there is no stability in fund flows. But at the same time, the market depth has expanded and so has the universe of liquid stocks and bonds. You also develop a feel for how fund flows operate, after you have managed a fund for some time.

For instance, if the markets have climbed by 10-15 per cent, you come to expect some profit-booking from the fund.

Why don't you discourage the pull-outs through exit loads?

It would not be very investor-friendly to impose exit loads. Instead, we would like to hope that over time, investors will become comfortable with our way of managing funds.

After an investor stays with you for a long time, he develops a certain confidence about your fund management skills and thus, may stay with you despite short-term setbacks. In fact, this has happened in the case of Sundaram Growth Fund, which we have managed for over five years now.

Declaring regular dividend payouts may also help investors lock into any realised gains on the portfolio from time to time, without resorting to redemption.

Expectations of the Sundaram Income Plus were high at the time of its launch. It was expected to generate higher returns than the Bond Saver. But this has not happened. Why?

The Income Plus was a play on spreads. The spreads between triple A and lower rated securities were as high as 80-90 basis points while the fund was launched.

But after the launch, there has been a fall in yields and a sharp narrowing on the spreads. Now the spreads are around 35 basis points, even 25 in some cases. So, the yield has dropped correspondingly.

The average portfolio maturity of the fund is just two years, compared to over six for Bond Saver. If the maturity had been higher, this may have improved the performance...

The problem is with the availability of long-dated corporate paper. There are very few long-dated corporate debt issues in the market. And if they are available, they are not liquid.

Even triple-A rated companies are not issuing debt with a maturity of over five years.

Yes, we could have added G-Secs to the portfolio to lengthen the maturity. But the fund is not a play on the gilt market. It was positioned as a fund which would invest in lower-rated corporate bonds. We have tried to stick with this objective. It is still a good fund for long-term investors seeking steady income.

Compared to a bond fund, which returns 12 per cent at some times and just 7 per cent at others, this fund may offer steady middle-of-the-road returns of around 8.5 per cent.

Going forward, what level of returns can investors expect from plain bond funds such as the Bond Saver?

It is really difficult to take a call on interest rates for over a six-month period. There are so many uncertainties. On the positive side, corporate results have been good and the war-related uncertainties are over.

But on the other hand, there are the looming elections. So we do not know what strategic direction the market will take. But I can take a shorter-term view based on what I own, say, for the next four-five months. Over this period, we can expect further gains from trading, and returns may be in the 8 per cent range.

The G-Sec market has seen such a sharp run-up in prices over the past year. Do you think the situation in the G-Sec market is becoming akin to the one in software stocks in 2000?

No. Unlike the IT boom, where the entire run-up hinged on potential, the G-sec rally is based on hard numbers. Liquidity, the government's borrowing programme, the amount of G-secs floating around in the system.

Using this data you can take an educated call on where you would like to position yourself on the yield curve. We have recently taken on an economist to read the macro-economic trends.

Is there scope for a reduction in the expense ratio of debt funds?

Once it becomes more difficult for funds to generate trading gains, they will have to rely on measures such as reduction of expenses to improve returns. And competitive pressures will make sure that this happens.

But the expense ratios are a total of the charges paid to service providers, such as brokers and registrars. Each have their own internal compulsions. If you look at Europe or America, expense ratios may be low, but the entry and exit loads take care of a lot of expenses such as brokerage.

Seen in this context, expense ratios are not very high in India.

On the shrinking assets of debt funds...

DEBT funds are dominated by informed investors, such as banks, corporates and institutions, and they track performance pretty closely. In fact, investors in debt funds tend to switch between various debt products based on their view of the markets. Between December and February this year, the debt funds shrank, while the money market funds swelled. There was also a phase when investors switched to short-term plans of mutual funds.

This was a time when money fund yields were low and bond funds NAVs were quite volatile. Short-term plans were created to offer a via media between money market funds and bond funds. But when these funds experienced high volatility, investors switched out of these funds too. Therefore, debt fund assets have been quite volatile over the past few months.

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