Meet the Manager. ‘Track record is what matters, not big announcements’

Be it approaching investors directly, batting for greater transparency or not offering too many funds without rhyme or reason, Quantum Mutual Fund has always focused on setting best practices for the mutual fund industry. In a conversation with BusinessLine , Ajit Dayal, Chairman, Quantum Mutual Fund, elaborates on the fund house’s philosophy and also explains why Indian markets may continue to give double-digit returns over the next two decades. Excerpts:

Ten years after you entered the mutual fund business, your assets under management (AUMs) are relatively quite small. The Quantum Long Term Equity fund manages about ₹550 crore, while most other funds manage less than ₹100 crore. Why?

That is a conscious decision we have made. It is to prove to the world and to ourselves that we indeed have a superior investment process. In these 10 years, we have gone through both global and domestic ups and downs, and fared decently well too. Track record is what matters; not big announcements during the NFO period that India is going to shine and we will benefit. In our business, when we manage money for large institutional investors of the western world, there are ‘four Ps’ that they look at. The first one is People — who are the people behind this business? They don’t care if you are part of an insurance company, a bank or a professional team. They want to know what makes you tick. The next is Philosophy — what is the philosophy of this group? Are they value managers or mid-cap investors? And then, they look at the Process — if you are a value manager, you should show them a process by which you will build a value portfolio. The fourth P is Predictability — what is the predictability of your performance? If you are running a value fund, now that the market has recovered sharply from its February lows, will you buy stocks or trim stocks? Ultimately, we are asset managers; not asset gatherers. Now that we have a 10-year track record, you will be hearing more from us.

Quantum Mutual Fund is not a big fan of using distributors and intermediaries to sell products. But if equity is among the best asset classes to own, given that its penetration in India is very low, don’t you need this distribution system?

Quantum Long Term Equity has no distributors as such. Our total advertising spends over 10 years has been around ₹5 crore. Of that, we spent ₹3.5-4 crore in 2011, the year we had a five-year track record. If you take out that blip, we have spent only about ₹8-10 lakh a year on marketing on an average, which is nothing. But we still have people from 680 towns buying our fund online. So penetration is possible.

I am not saying you don’t need IFAs (Independent Financial Advisors) or hand-holding. But investors should know what it costs to hold the hand. You should know whether it was just filling a form that cost money or whether advice is what has been paid for. It will definitely accelerate the process of directing financial savings into mutual funds if the distributors and IFAs took on their task with rigour and integrity, instead of predominantly pushing products that give a great revenue structure.

Is this also a reason why you don’t have too many funds or don’t come up with NFOs often — because it requires a lot of push?

We don’t think we need to have too many funds. Right now, we have an equity fund and an equity fund of funds. The latter is very unique, where we invest in funds of other fund houses. By doing this, we recognise there are other managers who are good at their work. We are also doing our competitors a favour by selling their products on our platform. For fixed income, we have a dynamic bond fund. I am not a big fan of debt funds for retail investors as many don’t understand what debt is all about. They don’t realise capital erosion is possible. I would advocate only liquid funds, which we offer as well. We have a gold fund too. What is missing if at all is a mid- and small-cap or mid-cap fund. But it is still there as part of the fund of funds. What’s missing is also a real estate fund. If it is there, it will complete all allocations that a retail investor would like to have — high-risk equity to low-risk liquid fund to gold and real estate.

Do you think Indian markets are maturing and we have to tone down our return expectations for the next 10-15 years?

Over the last 30 years, India’s average GDP was about 6.2 per cent per annum, in real terms. Inflation has been about 7-8 per cent. So, nominal GDP has been close to 14-15 per cent. Assume GDP growth as equivalent to revenue growth of companies. When companies grow at 15 per cent in the topline, profit growth is generally higher due to operational leverage. Even if we make an assumption that profits grew at the same 15 per cent, if you go back and see the index, it has given a return of 19 per cent per annum in the last 30 years.

Looking forward to the next 20 years, I don’t believe that 8-9 per cent GDP growth is achievable in India. It is likely to be around 6 per cent. Inflation will probably be 5-6 per cent. So, nominal growth will be 11-12 per cent.

Using the same assumptions, 14-15 per cent return per annum is definitely possible. Only thing is that there may be a marginal base effect — an economy that is smaller may give higher rate of return than a larger economy.

Unlike in many markets abroad, index funds and ETFs have not been popular in India as actively managed funds have scored much higher. Do you see this changing in the future?

I think the indices in India are sort of flawed. They are changed often. And when you change often, the index fund or the ETF has to mirror it and it involves quite a bit of transaction costs.

Hence, all ETFs and index funds have to underperform their benchmarks because the benchmark has no costs. But it is not that 100 per cent of the active fund managers outperform their benchmark index. In India, in the last numbers we looked at, roughly 50 per cent of the managers have outperformed their indices — not their declared indices, but the indices that they should be tracking.

We, for example, use a BSE 30 total returns index for the long-term equity fund.

In theory, as the economy grows, the indices should become more stable. In theory, if indices are more stable, it will be more difficult for active managers to outperform. But as long as we are an evolving or emerging economy, you will have enough scope to outperform an index. I think for the next 5-10 years, investors will be okay, if they choose the right active manager.

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