Mutual Funds

‘Like Dairy Milk or KitKat, funds too must be true to label’

Anand Kalyanaraman Yoganand D | Updated on January 09, 2018

It’s been less than a year since Radhika Gupta was appointed CEO of Edelweiss Asset Management Ltd. The mutual fund industry has seen much transformation in this period, and so has her company. In a candid chat, Radhika shares her views on the changing dynamics. Edited excerpts:

Of late, the visibility of Edelweiss has increased significantly. What has changed?

Edelweiss as a diversified financial services group has grown from strength to strength. What you are seeing in terms of brand visibility is the group’s increased focus on the retail businesses. That could be retail finance, wealth management, asset management.

Last year, we decided to increase our presence in mutual funds and the acquisition of JP Morgan’s business was a step in that direction. For the asset management company, our ambitions are large.

But it’s not about scale in itself. It’s about delivering value to customers. We have skill sets across the board — equity, debt, fund of funds. Sometimes, diversified means running 40 or so schemes. Our idea is to run a limited number of offerings within each category and deliver excellence in that.

How do you see SEBI’s recent rules to consolidate funds?

We think it’s wonderful. With still very low penetration of mutual funds in India, just about 11 per cent in terms of GDP, the opportunity for the industry is immense. What holds consumers back is the array of choice and confusion. Any industry needs to have strong definitions.

A lot of the talk after SEBI’s mandate is around scheme consolidation. The truth is, not many schemes will consolidate. But there will be clarity on what is what. All funds in a category will now follow the same definition, and that definition will be clear to the consumer. The schemes will be true-to-label.

When you are buying Dairy Milk, you want Dairy Milk, not Eclairs or KitKat. It’s the same thing with funds; consumers should know what they are buying. It will also help investment performance. When we sit as a review board to look at investment performance, there is no dispute as to what the peer set is.

But the industry seems to have apprehensions.

Some valid concerns have been addressed by SEBI. They were primarily around implementation clarity in equity and further clarity about fixed income categories.

Honestly, if you were to leave it to the industry, everybody would want more flexibility. Flexibility is always a wonderful ask. But there is a right balance between flexibility and definition. So, some of those representations have been made. Any change that is put out will lead to some amount of adverse reaction. We are very happy about the change. Others may or may not be. But the point is, if we have to move forward as an industry, it is a positive change.

Recently, you shifted to the Total Return Index (TRI) benchmarks. But most of the industry has not yet moved to this. Your thoughts?

TRI is not just a global best practice, it’s global hygiene. It is very important to be transparent to the consumer and place consumers’ interest first. As India becomes a significant capital market, to attract investors from all parts of the world, it is important that we benchmark to global standards.

My suspicion as to why others have been resisting it is that, with TRI, particularly in the large-cap space, your alpha could look significantly reduced. But that’s ok. If large-cap alpha has shrunk a little, then maybe we need to think about what we are doing in the large-cap category. Maybe, we need to talk about expenses ratios, maybe we need to have other discussions. But to hide behind TRI, to overplay the alpha, I don’t think is good. Do what’s right for consumers and what’s in line with global standards.

Some argue that unless applied across the board, they will not implement it.

I hope the regulator enforces it as a rule. There is a lot of discussion on TRI being ahead of its time, or that we will do it when it’s a rule. I think anything that is in investor interest is never ahead of its time.

Secondly, as you grow up as an industry and become an adult, you don’t have to do everything only when you get a knock on your head. Some things you can just do out of sheer adulthood. The mutual fund industry has grown up; it’s one-fourth the size of the banking industry.

What’s your thought on SEBI’s idea to segregate advice and distribution?

It’s a difficult question and it doesn’t have a right answer. I would say that investment is a very emotional business, and the role of distributor or advisor is very important in the business. Not just in transactions; because investment is not just a transaction, it is an experience. And guiding the investor through that is very important.

Our view is that distributors play a very important role in taking the industry forward, and the rule may be a little premature today. In India, what’s more important today is to increase mutual fund penetration. We don’t think independent financial advisors (IFAs) missell; their businesses are often built on referrals. Good IFAs in general don’t missell. This is not the solution to misselling. You can reduce misselling by improving investor communication, improving the quality of literacy, having regular interactions with the customer after they have invested.

There is a lot of concern that there is too much money flowing into the mutual fund industry at extremely high valuations and investors will have a bad experience. The thing to curb that is to encourage investors to participate in lower risk instruments.

There is a belief that mutual funds mean long-only equity. It is definitely not right for a fixed deposit investor to start his mutual fund journey by investing in equity funds. Equities have drawdowns and if someone with fixed deposits all his life has a drawdown in his first year, he will probably never come back. There are lower risk instruments such as dynamic balanced fund, equity savings fund and arbitrage funds.

Unlike peers, Edelweiss Dynamic Equity Advantage fund is against the philosophy of value investing. Can you explain the rationale?

The Edelweiss Dynamic Equity Advantage construct is an asset allocation principle. It is definitely against the philosophy of value investing. Value investing has been sort of made the holy grail of investing. There is nothing to say that value is the right way to allocate or to time between equity and debt. It is one approach. Momentum is another approach. Each approach works as long as it is applied consistently.

Value will do poorly in extreme markets, both on the upside and the downside. Momentum will do very well in those markets but will do a little poorly in non-trending markets. The value approach gets a lot of hype and media. There are seven funds doing dynamic asset allocation based on value; there’s one that’s not. And since this calendar year when we have re-launched Dynamic Equity Advantage in its new form, the results have been very good.

How difficult is it for relatively small fund houses to compete and expand?

We are in an industry where the larger players are doing a lot of commoditised, ‘me too’ stuff. The opportunity for the younger fund houses like us is big. The business is not like it was 20 years ago and 20 years later it will not be what it is today. We are fortunate that we don’t carry the legacy, baggage and history.

We can look at product innovation and customer innovation in a new way. We are not in a mature industry where MF penetration is 50-60 per cent. We are still starting out as an industry despite a lot of progress but we are still starting out. To be fresh today in the industry, it’s only an advantage. Because of lack of legacy, we can do things that others can’t. Product communication at Edelweiss, for instance, is a lot more personalised. We can be a lot fairer in our pricing to the consumer.

Published on December 31, 2017

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