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How PGIM Mutual Fund’s Ajit Menon is mending its schemes and setting DHFL's ghosts to rest

The CEO led the move towards cleaning up the fund house's debt assets. Today, PGIM’s debt fund portfolios consist of good-quality securities

July 27, 2021 / 12:25 PM IST

Ajit Menon’s elevation as the chief executive officer of PGIM India Mutual Fund (MF) couldn’t have come at a more ominous time in September 2018.

A day after he took over, he was told that the stock of the fund house’s co-sponsor (DHFL) fell by 44 percent. Another fund house had sold its bonds at a discount the in open market. The DHFL brand took a big hit. Back then, the fund house was called DHFL Pramerica. It was co-sponsored by DHFL and PGIM, the global investment management business of the US based-Prudential Financial.

After the crisis hit, investors withdrew from schemes of DHFL Pramerica MF. The fund house’s average asset base had shrunk 52 percent, from Rs 22,699 crore in the September 2018 quarter, to Rs 10,756 crore in the December 2018 quarter, shows AMFI data.

Eventually, DHFL decided to sell its stake to its joint venture partner PGIM in December 2018, and exited the asset management business. The fund house was renamed PGIM India MF.  Things have been looking up for Menon since then. But can it rid of the ghosts of the past?

Cleaning the debt funds’ muck

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One of PGIM’s biggest headaches was its debt funds business. When DHFL Pramerica MF had acquired Deutsche MF in 2016, the latter was focused on its debt business. A chunk of its investors (80 percent of its overall corpus) were large and institutional ones. Liquid funds accounted for 58 percent of its total assets.

Now, institutional investors can withdraw quickly on signs of possible trouble. And that is what happened once the DHFL crisis hit in 2018.

After the IL&FS crisis of late 2018, the fund house couldn’t sell certain securities immediately, as credit quality had sharply deteriorated. Meanwhile, large withdrawals from funds compelled them to sell their most liquid securities. The result was that the funds were stuck with poor-quality securities, leading to scheme concentration and passive breaching of SEBI’s group exposure limits. So, the fund house decided to merge some of its schemes in May 2019.

This also led to the clean-up of its debt assets. Today, PGIM’s debt fund portfolios consist of good-quality securities. Data from ACE MF shows that most of PGIM India MF’s debt schemes have close to 90 percent exposure to a mix of AAA-rated corporate bonds, A1-rated commercial papers, government securities and cash & equivalents. For example, PGIM Ultra Short Term Fund has about 99 percent of its debt investments in this mix, from 90 percent back in August 2018.

“To enhance the internal rating process, we spilt companies into three buckets – non-bank financial companies, financials, and manufacturing. So, we evaluate companies, keeping in mind the sector dynamics, as well as the company’s fundamentals,” says Menon.

Finding the balance between equity and fixed income

While it got about cleaning its debt fund portfolios, Menon and his team knew that if a fund house were to become profitable, it needed to rely on its equity funds. These funds charge higher expense ratios than debt schemes, thereby generating a significant chunk of revenues. Besides, investors in equity funds typically, stick around longer than those in debt funds. About 57 percent of PGIM India MF’s assets was in equity-oriented schemes as of June 30, 2021, while about 26 percent was in debt-oriented schemes. The fund house had assets of Rs 9,214 crore as of June 30, 2021.

Improvement in scheme performances have helped to attract flows. PGIM India Flexicap Fund is today the second best-performing flexi-cap scheme over a three-year period and third-best in the five-year period. PGIM India Midcap is the top-performing fund in both three-year and five-year periods in its category. After PGIM’s takeover, the fund house also brought in Srinivas Rao Ravuri from HDFC MF, as CIO-equities.

Are financial advisors impressed?

Menon says that he and Ravuri changed the way they reward performance. “Fund manager appraisals and KRAs are tuned to reward consistency and for their inputs. Just rewarding top-quartile performance or outputs conflicts with that goal,” he says.

Advisors have now slowly started to warm up to the fund house. “PGIM India MF has a team of fund managers with good stock-picking ability. Their equity portfolios don’t have many overlaps with other schemes. Their investment style also seems to be different, as they look for upsides in cyclical stocks as well,” says Ravi Kumar TV, co-founder of Gaining Ground Services.
Some distributors want to watch performance for longer periods. “We need to see how their schemes do when the market trend changes,” says Deepak Chhabria, chief executive officer and director at Axiom Financial Services.

Looking to acquire  

While the asset base has improved, PGIM India MF is on the lookout to acquire another asset manager, which can add to its existing strengths. Such a move could quickly push up the fund house on the ranking board in terms of asset size. A larger asset size could help the fund house attract bigger distributors.

To get larger share of investor assets and hold onto it, PGIM India MF will need to start building a track-record of consistent performance in the coming years.

Disclaimer: The views and investment tips by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decision.
Jash Kriplani is a journalist with over ten years of experience. Based in Mumbai. Covering mutual funds, personal finance. His last stint was with Business Standard, where he covered mutual funds and other developments in the financial markets
first published: Jul 27, 2021 08:53 am

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