CRISIL MF of the Yr Award to salute MF achievers

Excerpts from CNBC-TV18’s exclusive interview with AP Kurian, Anup Maheshwari, Pankaj Razdan and Krishnan Sitaraman:

Q: How have you seen the year gone by? In terms of growth, we had a great year for the mutual fund industry, assets have grown, penetration seems to be rising, the whole problem which we had of only NFOs coming in and being a distribution game, seems to have got kind of contained. So how is the last year been?

Kurian: Last year has been very expanding business wise for the mutual fund industry. YoY we have grown more than 60%, in terms of EVM. Even the net of the 40-45% growth in the value of assets in the stock market indices, still we have grown more than 25% YoY. More importantly, mutual funds have become a sort of talk of the town concept. This happened after 15 years of hard work by the association and by all of its members. The way the institutions are supporting it, whether it’s CRISIL, or the brokers, or whether it is RNT or banks, today it’s being talked about, we have reached that stage.

Q: So you are saying that the investor today is aware of mutual funds?

Kurian : I wont say he is aware of it, he’s getting aware of mutual funds.

Q: So this year has really marked 15 years of hard work in terms of people being far more aware of mutual funds than they were?

Kurian: The demonstrated effected of the 15 years of work has started coming in.

Q: One of the criticism of the mutual fund industry, over the last one or two years, was that they didn’t match the returns of the larger broader indices. Of course there was an argument for that, that it wasn’t the benchmark and in any case, the fund has to be seen as a long term investment thing. But from the small investors point of view, there is always a comparison game. 2007 seems to have even changed that logic because most diversified equity funds, in the average, is better than the returns of both the indices. Do you think that is one of the most defining features and what led to that?

Maheshwari: I think 2007, if you look at the last three years, we’ve seen pretty much of a 45% growth in the index each year. The interesting part in 2007, unlike the previous two years was that you actually had a lot of differential in performance in various sectors within that 45% of growth. So when the index looked like it was up, there were at least three sectors within the index which had given negative index in 2007. So clearly, it was a year where you had to be a lot more active in managing your portfolio. How you positioned it across sectors really made a big difference to net returns for the year and helped most funds clearly outperform the index. In that sense, it was a year that marked a lot more activity by funds, and that’s clearly going to continue into the current year as well.

Q: So, you saying that in 2007, mutual funds made a very determined effort to actually manage funds in a far better manner than they did in the past?

Maheshwari: The point is that, when you have a market which is moving in pockets, let’s say that there are some sectors that tend to do a bit better than the others, I think a lot depends on your analysis of gauging those strengths. If you could spot the fact that, let’s say the IT sector was facing some headwinds or the currency was not working in its favor early into the year in 2007, you could have added a lot of value to your portfolio, by underweighting that sector as most funds did. So it was a year when you had to take stronger calls that you had maybe in the previous year or two years.

Q: So that largely did them successful and that’s one of the reasons why the returns have been much better?

Maheshwari: Yes.

Q: These are good times so obviously AUMs are going to be rising and markets been rising over the last one or two years. 2007, on an overall basis, was certainly a good year for the markets. So how much of this was a lot to do with the fact that the markets itselves went up and how much would you give to the fact that funds innovated in terms of, fund management, were there better distribution mechanisms which were put in place, was there more effort on education or were there more innovative schemes that have launched?

Razdan: The first pivotal difference is that the industry has grown in confidence, I don’t even look at asset under management. The day you get the confidence of customers growing, money will automatically flow. This confidence has grown with a combination of a number of factors. If you look back two years, you were present in some 12-15 cities, you have some 15 players and you could see once in a while someone coming on TV, talking about mutual fund.

But in the last three years, if we put the map on the floor and look at the way the flags have been planted across the geographies of the country, is just unbelievable. Today you are getting money from 300 cities, so that’s one distribution.

It was for the first time, I would really say, that I was very impressed also with the distribution community which actually got together and at many places they were organizing this kind of camps for educating the customer. So the awareness went up, education went up, media played a critical part, investor confidence went up and that let to the growth. To add to all of that, you just can’t ignore the fact that a good market always proved of good sentiment, so that really helped them on that side.

Just too really touch on a point, because markets necessarily don’t give you a lot of money. Look at the month of January, the market lost Rs 38,000 crore in marked to markets as an industry. Despite that loss of Rs 38,000 crore because of only MTM, you have Rs 9,000 crore of NFO positive and you have Rs 6,000 crore of net sales in existing equity schemes in equity.

Q: From what you saw in 2007, every quarter, when you looked at the CPR, what was that one big change that you saw from where you sat, not at as a player of the market, but as someone who was evaluating the market in 2007 versus the previous years?

Sitaraman: One key point I would say is maturity of investors. In pervious years, what we saw is the moment there is some southward moment in the markets, people actually tended to go to the fund house and try to get their money out. That trend has changed a lot, today people are able to live with some element of decline in the key areas in the month of January. So the thing is that money is still continuing to come in even when the markets are down.

But I’d like to make one larger point. I have been talking about one year before last year, when probably MFs in India, the equities had underperformed at broader indices, That’s one year. If you look at the last five years, four out of the five years, Indian mutual fund equity managers have actually out performed the Sensex and the Nifty and that’s a unique feature in India.

If you look at the US markets, most actively managed funds actually underperformed the broader indices and actually thus underperformed the index based funds. In India, equity fund managers have been doing relatively better than the broader indices, the key reasons is the diversification into the midcap and the small cap stocks.

So only in 2006/07, the midcaps and the small caps actually underperformed the broader markets. Hence, because of the presence in the portfolios, the funds also underperformed. But if you look at the last year, 2007, while the Sensex grew at about 46%, the small cap index grew at 90% and the midcap index grew at about 60%.

It’s more a perception that funds haven’t outperformed indices and global facts are completely different.

Q: Was 2007 the year where according to you, the Indian investor, matured?

Kurian:  I would use the economist Rosto’s language - we are on a drive of maturity, we can’t say we are mature enough; we have a long way to go. But certainly, ideas like long termism that have now come in are talked about.  There is data shown that the holding period on account of plus 2 years or 3 years like that, which wasn’t so 2 years ago.

Q: In 2008, where we stand at, we started on a very good note, even though the markets haven’t done so well, but record collection - what according to you is the big development an investor can expect in this industry over the next one year?

Kurian: Under one hand, there is going to be more number of players coming in to the market. It shows the confidence of the entrepreneur and the potentiality of the market. Therefore, confidence built up is the key to that. Secondly, I must congratulate young people that we have always been innovative in product innovations. Way back in 80s, we started the first children’s gift growth fund, today we are coming out with thematic funds, energy funds, natural resources so these would also be a trend. We started with gold ETF, today it has gone to about four gold ETFs and eight equity linked ETFs again going into the almost second generation of new products. Now all that we lack is and we need to do is structured products, high-risk products which are all in the conceptual thinking stage of the players which will all roll out.

Q: How do you look at 2008 panning out?

Razdan: This would be one more year, which would be written in the mutual-fund history, simply one reason I clearly believe is a lot of number of players coming in as MR Kurian said, the more you create resonance, the more people hear about it, so more number of players is not a noise but a good resonance, more number of people talking about funds, each will make its own effort. We have clearly seen last in 2006-07. Initially, only top 5-6 players used to go and spend time on awareness and branding and talking about funds, that moved to 15-20 funds and I am sure it's going to go to about 30-40 funds, so there is positive resonance.

Q: So there is place for 40 according to you? No scope for consolidation at this point in time?

Razdan: If you really ask me that does India really have the potential to go and absorb 40? It depends on the next 10-11 players coming and what is the time horizon. If the time horizon is also like 1-2 years, its not there for, but if they are going to invest money time and effort, you have the right demographics, you have constant ever increasing savings in this country, you have a tendency of moving these savings into investments and mutual funds playing a dominant part in that investments.  So it used to have investments go somewhere else, savings are going into banks, we were not anywhere a very dominant player, today you are a dominant player. At Rs 5 lakh crore, you just can’t ignore an industry and out of which Rs 2 lakh crore in equity fund, so I see clearly a big movement because of their resonating a lot of mutual funds. A lot of innovations coming in on in alternate assets through the mutual funds route, whether its real estate, structurally linked to various other things, which would also get a lot of customers who are sitting on the fence who want to participate and coming back to it. Third, the evolution of distribution which has happened, multi-channel distribution in this country will play a very effective role because regulations will force them to get more towards advice oriented and you are clearly seeing that today distribution is making an effort to go towards advice orientation.

Q: Would fund management become even tougher on one hand, you still are in a very fairly volatile market as far as equities are concerned and on the other hand, you have to also mange funds which are related to real estate, gold etc, which will need certain skill sets being presented?

Maheshwari: It's going to be an interesting year rather than a challenging year, getting into new domains like real estate, alternate assets like gold, private equity perhaps, requires different skill sets. It’s not something that the same equity fund manager or a public listed equity space will necessarily carry forward. So you will have more teams coming in, more products on offer that will be the challenge really to manage that.

Q: On the equity side?

Maheshwari: The key would be, one is managing of existing funds, in an environment which is very globally linked and very volatile and there is a lot of uncertainty globally and it’s not just what’s happening here but there are a lot of other factors involved. So that’s a challenge clearly, getting your sector selection, last year was a very crucial aspect, this year will be equally crucial if not more, the other issue of course is the fact we are looking at a lot more newer products even in the listed equity space, I feel we are very keen to see derivative based products for instance come up with very different risk return characteristics. It’s a huge market, its 4 times the size of the cash markets yet a very few innovative products in that space. 

Krishnan: We give away awards to funds which have performed consistently over the last five years; we also have an normal set of categories - 15 different categories of the award for funds which have been performing well on the CPR in 2007. We would be having the Mutual Fund House of the Year and another award called Emerging Equity Fund of the Year which has a track record between one and two years. So, on an overall basis, this time we are having 21 different categories of awards. We have also added one category called Index Category, which is a new category this year.

Q: What according to you is it going to take for a mutual fund- you are talking of 30 already, another 10 coming along, most of them global players - according to you, what is that one big differentiator that’s going to set away one entity from another terms of attracting more investors?

Razdan: The big differentiator is going to be going to restaurant and not having a good food - so fund performance definitely will remain, which is the ability to perform consistently well. Because in India, when you are going back to as fragmented across a number of cities and towns, your brand and distribution will play another significant factor. And third would be how well you can develop a customer relationship, that is, engaging a customer in a relationship. These would be the three critical factors to really differentiate. To make a mark - an entry on that side, you have to be consistent on these three minimum parameters.

Q: Many of your schemes have been CPR1 for many years - what does it take to consistently be able to perform better than others?

Maheshwari:  A couple of things - you need a process; there is no way you can achieve consistency without doing something consistently. A process introduces an element of consistency in decision-making. So if you create the right framework for people to work in and then they can add their own element of creativity on top of that and an analysis above that; for us it’s worked very simply in terms of creating that consistency. Beyond that, managing is not rocket science; it’s a lot of common sense - doing the basics, getting it right, not getting carried away and following what is worked for you in the past. As long as you just stick to it; you will always have a few patches where you will not do well and some patches where you will do extremely well. But you have to slip through that phase, and eventually I think you will come out okay.

Q: Is there one particular industry wide situation, which you wouldn’t like to see going ahead?

Kurian:  There are practices which we need to address ourselves. Competitive, race for garnering assets and showing off that you are one up above the other, on a very short-term basis. I think this has to be turned around. We are telling everyone that we have to develop ‘long term-ism’ on equity markets - the players should also have a long-term perspective. And secondly, there are areas where the distributors play a very important and critical role. They have been one of the drivers of the industry, they have developed them over the years. At the same time, there needs to be some discipline.

Q: Do you think it’s time to bring in the regulatory rein?

Kurian:  They have been brought into what’s called a quasi-regulatory anchor. In some areas, for example, there is something like passing an exam, then registering themselves. Beyond that, there is nothing. But now we need to graduate ourselves into the second platform of bringing all of them under one umbrella, setting guidelines and rules and ensuring that they are followed.

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