‘Greater penetration of financial products, need of the hour'

Mr Puneet Chaddha, CEO, HSBC Asset Management, believes that allowing more players in the mutual fund industry is key to increasing penetration of this industry. In an interview to the Business Line , he talks about his fund house, the industry and the various issues that the industry needs to address.

How was the asset management business for you in 2011?

We are no different from the industry and our business was also slow. Our portfolios are to a very large extent linked with that of our capital markets, which have seen one of the worst performances. So, it obviously has had an impact on our business, even though many of our funds have done better than our competition and the benchmark.

If you look at the pure domestic business, we had a very exciting 2011 because we managed to reshape or at least add to our pipeline of products. We were very successful in the cross-border launch which is the HSBC fund. Another exciting thing for us in 2011 we were able to win a re-bid for our EPFO mandate. We are one of the four AMCs that will be managing the employee provident fund for the government and we had pitched again as the mandate expired in March and then there was the re-bidding process. The tenure for this mandate is typically three years.

From a business point of view, how has 2011 been for you?

We have not hired more people. We have actually shrunk, but I don't think that had to do anything specifically with the asset management business. Under the new leadership of our group CEO, HSBC has decided to look at our internal structure and reshaping the organisation. Keeping with that philosophy, since I took over the business I have re-looked at how the business overlap and how we could make a lot of changes so that we could be a lot more… As far as the year is concerned, our January to December 2011 performance is in line with what we expected. We have gotten to the point where we wanted to get to.

Are you taking measures to increase retail participation in the equity markets?

What we are doing is assessing the risk appetite of our individual customers through the distributors and then appropriately offering products to them. There will be customers who will have money to spare for the next two or two and a half years. For them, it is a great time to go into equities. Then there are also those who are probably a little older– past their working-age, retired people – for them equity is very risky. So, for them we are coming out with funds like capital protection fund and give them that kind of benefit. We are not going and saying buy equities for everyone because that would be inappropriate. But the negatives have been factored into this market and this could be a very good time to invest in equities and have a longer-term investment horizon.

Do you think investing in international (offshore) funds is more exciting at this point?

International funds give you diversity, but they also expose you to risk because there is the currency risk that is involved and of course that you are investing in another economy. So, if it's a smallish portfolio that you are building, then my recommendation is stay in India. India is a very strong market. But as your portfolio grows what you do need is diversity. You don't want to be concentrated in one market. So, if you have a sizeable portfolio you have to break it up into various components – fixed income, equities, equity short-term, equity long-term and then offshore funds.

What should be the industry's strategy going forward from an AUM point of view?

The key issue today for the regulator and as a country is that we need to have greater penetration of financial products. For that, you have to necessarily educate your customers and make them aware of what these products are. What we should do is look for an economically viable financial model for the asset management industry in this country. Because when they are fundamentally strong as companies, they will invest in growing the industry pie. Right now there are just a few AMCs who are making money and they are serving a small share of customers.

How do you propose to increase investor awareness?

The awareness can come only when you have people who can pay the money to spread awareness. If you look at the telecom business and how it grew, there were sharp drops in pricing and they had very high tariffs, but the penetration levels did not increase. What led to the penetration and reach was allowing more number of players to compete in that space. So when you have more choices and therefore, more competition, then people will try to expand the pie and raise awareness levels.

Would opening up pension funds be a solution to increasing retail participation?

It would be a great way of improving awareness. In the US, which has 70 per cent penetration in the retail sector, every time you start working you have to necessarily decide which mutual fund or pension fund your pension money is going to be invested in. This means that you have to necessarily understand what mutual fund products are all about. Today we have that problem in India. A lot of people don't understand what mutual funds are.

But there are reports that in the US that a lot of people have not made good returns or even lost money having invested in pension funds because of the cycles of the equity market.

You don't have to put all your money into the equity markets. You can put it in debt. It depends on your choice. I am not for a minute saying that everyone who starts working should start allocating money to various funds. It's a good idea if you do that. But what I am saying that you would still have a choice.

As an AMC, what initiatives have you taken against front-running?

We have a very clear data protection and internal control processes. We have segregation between the investment decision and the actual dealing. So, let's say the fund manager decides he wants a stock X. He tells the dealer in our system who sits in a stipulated area that I want to buy X. The dealer then in turn goes into the market and identifies which is the best available price. That's just a simple example of how we have created controls of checks and balances.

But our biggest strength is our recruitment process. We are very careful about who we hire. The second thing is we have a culture where everybody follows the rules and anyone seen violating rules, no matter how senior or junior gets penalised. So, in HSBC for that matter, that culture is a very big factor in ensuring that our workforce is very compliant.

> sneha.p@thehindu.co.in

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