In For The Long Haul

Years ago, K.N. Atmaramani, now 78, could call up any of his buddies from other investment firms for information on promoters, shady companies and dubious off-market deals. And if it was not a busy day on the bourses, the duo would assemble a few friends for a round of cutting chai and samosas from eateries along the bylanes off Flora Fountain, south Mumbai.

“Even fund managers from LIC and GIC used to join us. We used to share notes, warn each other about fly-by-night promoters and discuss companies. It helped us a lot in our work those days,” says Atmaramani, former investment chief of Unit Trust of India.

“Fund managers don’t interact a lot these days. They don’t even share common corporate assessment views. The industry has become very competitive now; a fund manager is apprehensive about talking to another lest the ‘other guy’ outperforms him in the next quarter.”

Atmaramani and his friends lived in a different era, one where there were few investment firms and fewer investors. He belonged to an industry that managed just about Rs 70,000 crore across all profiles of investors — from rich corporate treasuries to some high net worth individuals (HNI) and a small number of retail investors. Atmaramani did not have to run the ‘NAV race’ as fund managers do these days; his critical mandate was to make enough portfolio profits to offer investors a dividend that was at least 1 per cent higher than the bank fixed deposit rate. 

“Aggressive marketing changed the game. Fund performance and periodic returns became the sales pitch — and rightly so,” concedes Atmaramani. Consequently, the fund industry grew in size. It took 188 months (or 15.6 years) for the Indian mutual fund (MF) industry to grow from Rs 79,500 crore (in July 1999) to Rs 12.02 lakh crore in February 2015 — a gain of 1,412 per cent. It grew over 33 per cent in the last 14 months alone.

“Inflows have been pretty good in the past year,” says Vikaas Sachdeva, CEO of Edelweiss Mutual Fund. “Investors are moving their money from other asset classes to MFs. Also, there has been an increase in the number of investment folios from smaller cities. Growth in MF assets, in broader terms, has mostly been on tailwinds.”

If you split the inflows vertically, gains were led by inflows into equity, balanced, gilt and liquid funds. A break-up by Crisil Research shows that equity funds attracted net inflows for the tenth consecutive month in February. The category’s assets rose 1.41 per cent to close at a record high of Rs 3.46 lakh crore. Balanced funds, gilts, income and liquid funds too saw inflows through 2014.

“MFs will continue to gain in size over the next few years,” says Nilesh Shah, CEO of Kotak Mutual Fund. “Retirement and pension pools will present the next set of opportunities for asset management firms. There’s a need for such products as large sections of the Indian population don’t have access to well-structured retirement plans.”
 
Performance Pull
Apart from asset bundling, mutual fund houses have managed to generate fabulous returns for investors. The small/mid-cap category has done admirably well, logging over 70 per cent in gains in the past year. Almost all other fund categories — from sectoral funds to flexicap pools, large-cap funds and tax savers — have posted 40-60 per cent gains last year.

“In terms of performance, equity portfolios mostly gained on (stock) momentum,” says Sachdeva. “Several poorly managed funds have gained while well-managed portfolios are languishing at the lower end of the charts. This will change soon; well-managed funds will gain in the long run.”

On the fixed income side, short-tenured funds yielded lower gains in 2014; this category of funds — given the nature of their portfolios — log moderate-to-low returns in falling rate scenarios. Long-term funds topped the charts as most portfolios placed duration bets last year. Most mid-to-long-term portfolios have increased their duration play from three-seven years to 9-14 years over the past year. When rates fall, portfolios with longer duration gain as long-tenured papers gain more than comparable bonds with shorter durations. In the asset allocation category, moderate allocation funds outperformed conservative portfolios on account of higher equity exposure.

Asset managers expect equity funds to stand out in terms of performance. Lower crude prices and improving macros would make India an attractive market for both domestic and foreign investors. The positive overhang will spur the equity market to further highs in the mid-to-long term, say analysts and market watchers.

“The outlook for equity markets is very positive in the long term. We recommend investing in a staggered manner through equity mutual funds over the next six-nine months to create wealth over three-five years,” says Nimesh Shah, MD & CEO of ICICI Prudential AMC.

“If investors are underinvested in equities, they could invest lump sum in equity strategies, which are defensive (or have cash) as equity markets have run up, and if the markets offer opportunities over the next few months or one year, these strategies will have enough cash to buy equities,” advises Shah. “It may be prudent to add the flavour of funds to the balanced advantage or dynamic asset allocation category. These funds seek to increase their allocation for equity when markets are cheap, and book profits in equities when markets are rising, thereby reducing volatility and boosting returns.”

The safest bet (for investors) is to not hunt for short-term gains. Their short-term objective should only be to beat inflation and save taxes. “Investors should aim for higher returns by staying invested in funds for longer periods. They will get benefits from both fixed income and equity investments in the medium term,” says Nilesh Shah.

Business Gains
Rising assets under management (AUM) is good news for all fund houses as this will ring in higher fee margins at the end of the year. It would be fair to assume that most asset managers would report better numbers to their boards in FY2015. Heads of asset management companies (AMC) expect the trend to continue next year.



“There are significantly large opportunities for asset managers in India,” says Harshendu Bindal, president of Franklin Templeton Investments. “Indian AMCs had scored double-digit growth even in the immediate aftermath of the financial crisis. This trend is likely to continue for many years. This industry has the potential to double its asset base every five years.”

“Higher earnings, more young investors, retirement solutions et al will help the industry do well in the long term,” adds Bindal.

A comparison of AMCs’ net profits for financial years 2013-14 and 2012-13 by fund tracker Value Research found that industry profits shot up in excess of 56 per cent over the previous year. The 21 profit makers in the industry collected Rs 1,567 crore while the 20 loss makers lost Rs 303 crore. The growth in profits is skewed, favouring large fund houses. Richer AMCs are able to leverage their size and strength to pull even further ahead of the rest, notes the Value Research study.

The Bottom Line
For a fund manager, it’s all about securing a place for his fund in the top half of category rankings. Good funds are allowed to have some bad years; while it will pull them down the order in those years, it doesn’t affect their status as performers.

So if your otherwise performing fund does not feature in our charts this year, you need not panic. Just give your fund manager some more time to turn it around. For even among money managers (as with cricketers), form is temporary, but class is permanent.

(This story was published in BW | Businessworld Issue Dated 20-04-2015)