Note to readers: Mutual funds’ chief executive officers are of broadly two types. One group typically rises from fund management. The second group rises from sales and marketing background. Who is better at heading a mutual fund house? The jury is still out. In this series of CEO profiles, we look at the successful fund managers who went on to head fund houses, later in their careers.
Nilesh Shah’s humble beginnings in a middle-class neighbourhood, growing up in a 210 sq. ft. room in a chawl in Mumbai, as well as his single-minded focus on his education, would mould him and help him reap rich rewards later.
In 1997, just as he was about to join a large engineering company, a senior executive there advised him to join the financial markets. Shah then joined the ICICI group and was positioned in ICICI Securities. That was a stepping stone to him becoming one of India’s most successful fund managers. Today, Shah is the chief executive officer of Kotak Mahindra Asset Management Co Ltd (AMC), which manages Rs 2.97 trillion of assets. Kotak Mahindra AMC is India’s fifth largest mutual fund (MF) house.
He was the head of debt funds at Franklin Templeton India MF between 1997 and 2004. That was the golden age of debt funds, when debt funds outperformed equity funds, and Shah became a star fund manager. In 2002, Franklin India Corporate Debt Fund (Templeton India Income Fund, as it was known back then) gave an 18.3 percent return. Equity funds, on an average, gave 16.4 percent. Between January 2000 and June 2004, when interest rates fell from highs they would never again reach, his debt funds at Franklin Templeton gave a 12 percent return. Equity funds gave just 4.5 percent return in that period.
When he joined ICICI Prudential AMC in 2004, the great Indian bull run began. The days of debt funds were over and equity funds staged a massive comeback. Shah took charge as the fund house’s chief investment officer just at the right time and oversaw debt as well as equity funds. He built a solid team of fund managers and research analysts.
Overcoming challenges
That doesn’t mean things came easy for Shah. He had to roll up his sleeves and dig in. Just as he studied hard growing up (he was a gold medalist in the Chartered Accountancy exams, arguably one of India’s toughest exams to crack, in November 1991), he worked hard in the office. When Shah started managing debt funds at Franklin Templeton, Morgan Stanley India MF had just collapsed. “At many places, Franklin Templeton was not accepted as we were a foreign entity and they equated us with Morgan Stanley,” Shah recollects.
His first debt scheme raised just Rs 35 crore. At the time, debt funds competed against assured-return schemes. A bad investment made by him towards the start of the fund’s cycle, was yet another setback. But he was quick to learn lessons. Shah followed the duration strategy. His efforts paid dividends and his debt funds outperformed even equity funds at the time.
In 2004, Shah realised that the days of debt funds were over. Equity markets, at their lowest point back then, were an opportunity. Having successfully managed debt funds, he now wanted to manage equity funds. But with pedigreed and experienced equity fund managers already at Franklin Templeton, it was time for Shah to pack his bags and move out. He joined ICICI Prudential AMC. Here, Shah had the onerous task of building a team of fund managers and analysts across equity and debt. Was it easy? “From being a batsman or a bowler, you have to become a coach. As a coach, you can give all the guidance you want to give. But at the end of the day, when the ball comes, the player has to play; you cannot go to the field and play the ball for them,” explains Shah using a cricket analogy on the transition from being a fund manager to being a chief investment officer (CIO). As a CIO, Shah was also responsible for setting up processes. More importantly this was to ensure that fund manager exits did not affect the fund house.
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Shah’s reward came in May 2006, when ICICI Prudential MF became India’s largest fund house, overtaking UTI AMC, which was the largest up until then. That, Shah, remembers was a big achievement.
Managing funds when there was no social media
Shah recollects that in those days, managing MFs was not easy. “Today, thanks to the media, we are able to get a lot of good information. In those days, getting good information on promoters was not easy,” he says. Aside from company visits (a must in those days at top fund houses), Shah also relied on vendors of companies that he and his team tracked, asking for references. Being part of ICICI Bank also helped, says Shah, as “it gave us access to certain sets of information from a banker’s point of view (which typically lends based on the financial strength of companies).”
Shah said that among his biggest triumphs was how he and his team avoided Satyam Computers, despite many other market experts buying its shares. Sometimes, values played a role in their calculations, like when he came to know of a promoter who mistreated his own family members and company employees. Shah’s team, which was all set to invest in the company’s Initial Public Offering (IPO) at the time, stayed away. “We focused a lot on promoters’ integrity rather than just the business model, and used our resources to figure out which companies were doing what,” he says.
Can fund managers become better CEOs?
Yes, says Shah firmly. “When we go from being a fund manager to a CIO, we go from being a player to a coach. When we go from CIO to CEO, we still have to make the adjustment. As a CEO, I am no longer in charge of just managing money, I am now in charge of managing the brand. And there is a mental adjustment necessary. Most fund managers should be in a position to do that, because they have seen how businesses evolve,” he says.
Are processes more important than fund managers? Shah says yes. A fund manager, he adds, could be among the best in the business, but sound processes will hone his or her stock picking skills, ensuring consistency, continuity and success.
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