Chennai-based Sundaram Mutual is celebrating its 25th anniversary this year. The AMC began with the objective of providing an alternative debt product for FD investors of parent company Sundaram Finance and later on branched into equity funds through partnerships with institutions such as Newton Asset Management, BNP Paribas and ABN Amro/Fortis. We caught up with Sunil Subramaniam, MD, Sundaram Mutual, who tells us what it means for an AMC to be based out of South India, as well as the fund house’s learnings in the past two decades. Excerpts:

Has your investment philosophy changed over the years, considering that you have shifted focus a few times?

I would say that we are growth-oriented. Our core philosophy has always been GARP — Growth at Reasonable Price — which is blended with a buy-and-hold strategy. So, the churn in a typical mid-cap portfolio, for instance, will be very less, because we like to identify the opportunities early, buy a little of them and keep on accumulating those stocks, as our thesis gets proven. We don’t play momentum or value.

As a fund house, you have been through the dot-com bubble in the early 2000s, the global economic crisis of 2008 and the current Covid crisis. What has been your learnings from these market cycles?

I think that the overall strategy to move from mid- and small-caps to a more multi-cap approach itself is one of the learnings because we got hammered more than the competition when the market crashed. The liquidity of these stocks is less and they tend to fall far more in a downturn. Of course, they do realise far more in upturns. But I think the crisis has taught us that if you are overly exposed to mid-caps, your customers, as well as you as a company, will face greater degree of challenges.

The second lesson is to try and align closer to the benchmark and not to take too much overweight or underweight positions vis-à-vis the benchmark. Benchmarks rise because people buy those stocks. If you are taking bets which are way outside the benchmark and a crisis comes, you are left high and dry.

What are the pros and cons of being an AMC head quartered away from the financial hub of Mumbai?

One advantage of being in Chennai is that we’ve had a very stable, investment and senior management team. Most people hail from Chennai and hence their stickiness with the company and to its values has been great. The second plus is that when we chose mid- and small-caps as our main focus area, staying in Chennai and researching them without the noise and distractions of Mumbai have helped us build a long-term portfolio.

The minus is that we missed the large-cap space (early on). If we had been in Mumbai, we could have been more clued on to what the institutions were buying, what’s the momentum driving stocks, etc. We have a substantial staff presence though — the Head of Sales and Distribution, the Head of Institutional Sales, the fixed-income team and part of the equity team sit in Mumbai. We have 40 per cent of our Chennai strength in Mumbai.

Being a well-known name in the South, is your clientèle more from this part of the country?

Our largest market is Mumbai. And there it is comparable to the industry’s market share. Our second-largest market is Chennai. For the industry, the second-largest market is Delhi.

Among all the AMCs, if you take a comparable-sized AMC, we definitely have a higher B30( beyond top 30 cities) share. And again, B30 is not particularly concentrated in the South; it is well-spread.

While the Sundaram brand is recognised in the South, to attract customers from other parts of India, we could not rely on the parent brand. We could do it only based our own performance, which has stood the test of time and has built a very geography-neutral customer base for us.

You acquired Principal Mutual Fund recently at a market-cap-to-AUM of 4-5 per cent. Don’t you think that this is a bit steep, considering this valuation is comparable to that of UTI AMC, which is a much bigger player than Principal?

It is different when the company goes for an IPO to unlock value (referring to UTI AMC).We see a lot of cost synergies coming through from the acquisition. . Secondly, Principal is only present in 11 cities and comes with good performing funds. We have a presence in 88 cities and can sell their funds through our distribution network.

They don’t have any banks supporting them. We have at least one product approved by each of the top banks in the country. So if I get these products on-boarded by banks for distribution, it would help our business scale up dramatically. So that’s where the price gets justified.

Managing mid- and small-cap funds, especially when the AUM and size becomes bigger, seems to be a problem across AMCs. Is this what prompted you to launch a series of closed-ended funds in the small/micro-cap space a few years ago?

In mid- and small-cap funds, there is an optimum size beyond which it becomes a challenge. I think some of the industry players have been quite smart by stopping flows in such funds when they felt the size has become too big.

We felt that in the very small end of the cap curve, customers typically come into a fund when the past performance is very good and then get disappointed because cyclicality comes in. So, in our view, a closed-ended fund was the best way to play it as you could take the money when the cycle was right and deliver.

Unfortunately for us, the market took a turn for the worse in December 2017 — the mid- and small-cap segment collapsing, followed by the Covid crisis. But our reading then was that India was in a bull cycle. We felt that this was a sustainable seven- to eight-7-8 year cycle, but events proved otherwise. That’s the reason we ended up underperforming the benchmark in some of these funds.

However, today, we are happy that in all our closed-ended funds have not lost customers’ capital. While we could have extended some of the funds, we felt that as long as the NAV is above ₹10 and we have not lost the capital, we could give it to the customer and let them make the right choice.

Equity funds have been seeing net outflows since July. Why is this happening when the market is moving up and retail investors are subscribing, by the droves, to IPOs?

People who entered between 2014 and 2017 experienced a fantastic initial journey and didn’t book profits. From December 2017, markets corrected.Then the Covid crisis came and created huge destruction of value.

While the news was bad, markets started going up based on FPI flows. So confidence of investors that this rally will sustain has not been there.

The ones subscribing to the IPOs are not the same retail investors exiting mutual funds. See the number of demat accounts opened during the lockdown — these are new people who have not taken the brunt of the fall. Now, the economic news is getting better. So, the redemption pressure, over the next few months, I would expect it to ease up a bit.

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