When you enter the Industrial Assurance Building, near Churchgate railway station in South Mumbai, the headquarters of LIC Nomura Mutual Fund Asset Management Co. Ltd, you would know why this fund house appears to be warped in a time zone. From the outside, the building looks impressive, but as you step inside, it actually seems to be gathering dust—a loose wire here, a broken window on the staircase there. The brightest spot in the building appears to be the fourth floor office of LIC Nomura MF despite its worn out appearance.
Launched about 18 years back in 1994, the fund house is not even a shred of what it could have been had it piggybacked on its strong parent, Life Insurance Corp. of India (LIC; the country’s largest insurance company) to sell its MF schemes smartly. Instead, poor track record, credibility issues and a loose focus on distribution has stunted the fund house’s growth for years. But the year 2011 could turn out to be a watershed if the fund house manages to get its act together. Nomura Asset Management Co. Ltd, one of Japan’s largest fund houses, picked up a 35% stake in LIC AMC last year. The fund house is now trying hard to shed its poor image and determined to put its house in order.
Here’s the story of LIC Nomura AMC, what went wrong with it and how it plans to get back in the game.
According to the agreement between Nomura and LIC at the time the merger got finalized, Nomura will manage the MF’s equity schemes, while LIC will take care of debt schemes. Nomura Japan’s Nobutaka Kitajima looks after the equity schemes; V. Chandrasekaran comes on deputation from LIC to manage the MF’s debt schemes. At the top of their agenda, they say, is improving performance.
The equity funds certainly need this help. Most diversified equity funds of the fund house have completed at least five years, yet only one among them has given more than 10% returns since inception. Schemes like LIC Nomura Top 100 lost money since inception in December 2007. In the past seven years, its diversified equity funds returned about 6-7% compared with Sensex’s 11% in the same period.
We took a look at Value Research ratings at the end of every quarter since 2005 till date and saw that none of the equity-oriented funds were rated 5-stars or 4-stars. Such was the lack of performance that at one time in 2001, the net asset value (NAV) of one of its equity schemes, LIC MF Growth Fund, fell to Rs.1.69 (compared with the scheme’s first NAV of Rs.10 in August 1994). Its debt fund performance has been better though. LIC Nomura MF Liquid and LIC Nomura MF Floating Rate funds have been rated 5-stars many times by Value Research.
But the fund house’s management is conscious of its performance or the lack of it. “The performance of equity funds, in general, has been bad. Fund managers from Nomura will handle our equity funds because we decided to try out a different approach. Nomura has expertise in managing equities, globally as well as in India,” says Nilesh Sathe, chief executive officer, LIC Nomura MF.
When Nomura entered LIC MF, it put in place systems and processes to buy and sell securities, something that Kitajima says was missing. “When we first came here, we realized that fund managers used to come to office in the morning and then randomly start buying and selling without adequate research. We have since institutionalized the investment process and ensure that every scrip we buy is backed by sound research, something which was absent earlier,” he says. Among other things, Kitajima’s team tracks more number of stocks than before and doesn’t hesitate in selling them if they find the right price to exit or doesn’t hesitate to book losses in time.
Improving portfolio quality
Nomura came to LIC at a time when LIC AMC was grappling with portfolio quality issues. When the global credit crisis hit India in 2008, most debt MFs faced panic redemptions and had to sell their underlying securities at throwaway prices. Fund houses like LIC MF were doubly hit because many of its debt schemes were filled with junk securities from the real estate sector.
From some of its fixed maturity plans (FMPs) that had between 60% and 80% in just a single real estate scrip to other illiquid scrips, its debt funds suffered miserably on account of poor fund management. Its parent, LIC, had to eventually bail out the fund house as it bought the latter’s illiquid paper, worth about Rs.1,755 crore from the fund house, according to a 2008 Mint story.
One of the consequences of the bailout was a change in fund management. One of its former fund manager was shifted first to Delhi and later to Guwahati, Assam, where he now manages the branch office’s administration. “One of the fallouts was also that we stopped taking risks, like we drastically reduced our debt funds’ exposure to corporate scrips like commercial papers (CPs). The fund house did not feel comfortable. But then, we put processes in place to suitably track corporate firms and their debt scrips; we’re now back to investing in CPs, but good quality ones,” says Chandrasekaran, who along with Sathe reiterates the importance of churning portfolios regularly to be able to get a returns kicker as against a “buy-and-hold” approach that LIC adopts for its insurance policies. “That doesn’t mean we are resorting to taking undue risks beyond risk management parameters. Taking excessive risks today means incurring losses tomorrow,” says Sathe.
Similarly, Kitajima’s approach, among other things, involves looking at mid-caps more than in earlier times, when LIC MF had gone in a shell, and also to cut losses if required.
As the fund house gets its act together on fund performance and putting in place systems, industry officials say that one of the biggest problems at LIC Nomura MF has been the practice of its top officials coming on deputation from LIC. “The work culture has always been LIC Nomura MF’s biggest problem. Since most of the top management comes from LIC, most of them don’t know how really an MF works. They take almost a year to understand the nuances of the MF business after which it is time for them to leave, they go back to LIC and another one comes from LIC; the learning curve starts again,” says a former sales official of the fund house, who did not want to be named.
Sathe doesn’t think this is a big problem. “Since we get people on deputation from LIC, the salaries are not necessarily market-linked; they come on LIC pay scales. Hence, the fund house’s operation costs are lower as compared with many other fund houses,” he says. But Sathe is quick to add that as compared with earlier times, LIC Nomura MF has also been recruiting more and more professionals directly. “Matching the pay scales with that of market, if need arises, should not be a problem for us. Because if you throw peanuts, you will get monkeys,” he says.
When Sathe himself was asked to lead LIC Nomura AMC last year, he requested his boss, LIC’s chairman, to allow being with the fund house for, at least, three years, unlike most of his recent predecessors who led the fund house for about one and half to two years, each. For instance, the previous two heads of the MF, Sushobhan Sarkar and N. Mohan Raj headed the MF for only two years each. “There has to be continuity if you want to make some reasonable turnaround and see results,” says Sathe, who was posted here from LIC New Delhi.
One of the areas where fund houses looks for outside expertise these days is in its marketing and sales teams. Another former sales executive of the fund house told us that earlier the fund house used to deploy the same sales official to service all kinds of distributors such as banks, independent financial advisers and national distributors. “In most other fund houses, especially the top 20-odd ones, there are different teams that cater to different distributor channels. To cater to a large number of distributors with different needs, we need specialists. When I was at LIC Nomura AMC, I was made to look after both retail as well as institutional clients, something which is unheard of in other fund houses these days,” he says. “We recognize this problem and will soon have dedicated sales people in our team to look after different distribution channels”, assures Sathe.
One of the fund house’s biggest strengths is—or could have been—a large distributor force that are also LIC agents. Sathe claims that 80-90% of its distributors are also LIC agents. These agents, adds Sathe, have inroads in cities beyond the top 15 cities, referring to the incentive they stand to gain from the recent ruling of the capital market regulator, Securities and Exchange Board of India (Sebi). In September, Sebi said fund houses can charge an additional 30 basis points as fees if they are able to penetrate beyond the top 15 cities.
And to aid this penetration, Sathe is particularly excited about one scheme—LIC Nomura MF Unit Linked Insurance Scheme. There are only two such schemes in the Indian MF market; UTI Asset Management Co. Ltd manages the other one. The scheme is a combination of an investment plan with an insurance cover, a combination he claims resonates well with most investors. Since Sathe took over, he has made it operationally easier for investors to invest in it by reducing, say, the number of documents required at the time of investing.
With shrinking margins of the Indian MF industry and tough competition, is Nomura disappointed with the slow progress? “Absolutely not,” says Vikas Sharma, chief executive officer, Nomura India, whose investment banking arm advised Nomura AMC Japan on the LIC MF-Nomura deal. “The Indian MF industry is not an overnight trade or a short-term business. It is a very long-term business and it takes many years to build an institution. We are committed to building a world-class institution, with adequate structures and processes in place,” he says.
Tough competition and strict regulations don’t make things easy for LIC Nomura AMC, but it looks like the fund house is ready to forget its past. But success in the Indian MF industry comes slowly and steadily; LIC Nomura AMC will have to be patient and wait for its turn if it manages to stay focused and aggressive.