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Business News/ Money / Calculators/  We delivered below expectations; took an objective look at what went wrong
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We delivered below expectations; took an objective look at what went wrong

HDFC Asset Management Co.'s Milind Barve talks about how the company aims to recover its lost ground on being the top fund house

Aniruddha Chowdhury/MintPremium
Aniruddha Chowdhury/Mint

The going has been tough for HDFC Asset Management Co. Ltd. Last year, it was toppled from the top spot by its closest competitor, ICICI Prudential Asset Management Co. Ltd, after spending nearly 5 years being the largest fund house in the Indian mutual funds industry, between 2011 and 2016. Its two largest and marque equity schemes also went through a rough patch for long though they now seem to be recovering. To be fair, all fund houses go through cycles. The fund house’s managing director Milind Barve spoke to Mint Money about how HDFC AMC aims to recover its lost ground. Edited excerpts:

Despite volatile markets, and commissions being capped, investors invested in mutual funds all through 2016. Do you think investors are maturing?

Yes, investors are investing in mutual funds because they are catching up on their under allocation in equities. From 2014 onwards, investors have started to realise how underinvested they were in equities as historically they have favoured physical assets like gold and real estate, compared to equities. It is almost a behavioural change setting in. Inflows that are coming into equity markets are not a short-term reaction; we are witnessing positive flows for the past 30 months in running. I recall in the past when equity markets were volatile, investors would either redeem or stop investing. Now when markets have been flat or moved down like in the last month, investors have invested more money. They are now finding it opportunistic to invest when markets go down. This is also because other asset classes have not delivered relatively.

True. So is equity becoming an option because fixed income returns are also going down, or do they actually believe equity as asset class deserves allocation?

There is a small element of their decision being influenced by (lack of returns from) other asset classes, but now I think investors’ understanding of equities is improving, and hence, they are realizing that equity deserves a higher allocation, which they have been missing out on so far. 

The entire asset management industry has been speaking in one voice on two issues: systematic investment plans (SIPs) and long-term investing. These messages have been communicated well and we can see the results.

Your two largest equity funds—HDFC Equity and HDFC Top 200—went through a bad phase these past few years. They seem to be now turning around. What measures or processes did you put in place?

We don’t try and run away from the fact that we might have delivered below expectations, given that our funds historically have a good track record. We did two things: we have and will continue to support the convictions of our fund managers and the rest of the team. Also, we took an objective look at what went wrong and what we needed to correct. Therefore, now, we have a combination of the fund managers’ natural talent and a better framework of managing portfolio risk. Additionally, I think we are in a phase where you cannot have one without the other because investors want to see performance as well as consistency of returns. They want to see less volatility. 

So, we have carefully analyzed how and why our funds performed well in some time periods and why they probably didn’t do so well, in other periods in comparative terms. 

We analyzed periods when our funds were doing well in terms of portfolio characteristics and diversification and compared them with other time periods. This helped us map areas of improvement. Some of our important portfolio calls took time to deliver but have eventually played out well. We need to be supportive of the investment team’s long-term conviction. But we now have to put in place a mechanism that strives for steadier performance. 

So as of today, how strong is you risk framework as opposed to what it used to be before?

We now have a stronger risk management framework and have used our joint venture partner Standard Life Investments’ expertise in this domain. Combined with the talent of our investment team, we believe we are well positioned to sustain our performance with better consistency.

In 2016, you lost the top spot (in terms of fund houses ranked as per their assets under management). You and Prashant Jain (chief investment officer of HDFC AMC) have constantly spoken against the need to launch closed-end funds. But that could have cost you the top spot. Is there any reorientation in your sales and marketing activity?

We do not have anything against closed-end equity funds. Our stand is that we will not launch closed-end equity funds unless there is genuinely a new idea behind it. If we find that there is a differentiated product strategy that lends itself to having a closed-end fund, then we will go ahead with it. But it should be product driven and not sales driven. That hasn’t changed. We may launch an Opportunities Fund, which is a series of closed-end equity fund. 

We did take an objective look, across our business functions, to understand why market share dropped. We have already discussed performance. Distributor engagement is another area we looked at and how we can improvise or improve. We looked at market segments, from a distributor and geography point of view…where our market share is less we are putting in effort to gain that share back. It’s a rigorous ongoing process. We are also investing in the business by adding new branches and employees to our existing team. We are not happy at being No.2 but it doesn’t disturb us as long as we deliver consistent investment performance and keep an eye on the changing market place.

You said you will soon launch a series of opportunities funds. That opens the door to launch multiple funds; much like what some of your competitors have done? What’s the difference?

As I mentioned to you earlier, we have never been averse to launching closed-end equity funds. We have been averse to launching funds with a non-differentiated idea (from our current stable of funds). What we have in the opportunities fund is a significantly differentiated product proposition. We will never launch funds indiscriminately.

 Balanced funds garnered a lot of money in 2016 on the back of performance and the fact that they drew from both equity as well as debt markets…. 

Balanced funds found a natural connect because of the fact that they could draw the best from both the worlds; equity and debt. Yields in the debt market came down, therefore positively impacting government securities (gilts), and HDFC Prudence Fund (a balanced fund) had gilts in its portfolio which assisted its performance. Previously, debt was just a neutralizer to equity, but now it is also becoming a contributor to performance. 

One more reason why balanced funds caught investors' fancy is that some fund houses started to harp on monthly dividend options. HDFC Prudence launched a monthly dividend option last year. But does a monthly dividend lure work in an equity-oriented fund like a balanced fund?

In today’s world, yields of tax-free bonds have gone down close to 6%. Investors want returns. In a balance fund, the combination of equity and debt makes the possibility of a dividend a bit more realistic. Of course, you can’t expect a 100% equity fund giving regular dividends, but the way a balanced fund is structured, the presence of a debt component lends itself to the possibility of dividends. 

But do you think the proposition is sustainable? It might be that HDFC Prudence is a large fund, so it has reserves. But what will happen once the reserves dry out? How will it sustain dividends now that there is a monthly dividend option?

It is just a frequency of declaring dividend. It is always subject to the availability of distributable surplus. 

Do investors understand that? 

Of course, they do. They are informed about it being only a possibility, not a guarantee, which means there will be times when they don’t get dividends. And by the way, more than 45% of the money comes through the growth option. 

That’s almost half your inflows.

Yes, but in other equity categories, the dividend option corpus is 25% of the total fund. Here it is 45%. That’s the only difference. The difference isn’t that big as it is made out to be.

 HDFC AMC is set to launch the third edition of HDFC Debt fund for Cancer Cure. How has the journey been? 

We run this programme in association with the Indian Cancer Society (ICS). The ICS gets applications for donations for cancer treatment from all over India. A team of oncologists do the due diligence and then forwards the application to the governing council. Through this fund, in the last 6 years ICS has sanctioned Rs69 crore and disbursed over Rs50 crore to more than 3,000 patients through 16 empanelled hospitals across 2,500 towns.  

It is meant for people whose income levels are below Rs2 lakh per annum; it used to be Rs1 lakh per annum earlier. It caters to the really weaker section of the society. 

This fund aims to garner investments in a 3-year closed-end fund. The structure of the fund is such that there is very little chance of losing capital. The dividends are donated to ICS in the investor's name and not HDFC AMC. It is a zero-expense fund; HDFC AMC bears all the expenses, including distribution and marketing and does not charge management fees. The AMC contributes an equal amount to the donation from the scheme. The fund has reached a scale where we want to take it to the next level. 

How do you plan to popularize it?

It’s a challenge to make it popular. We intend to market this product through our distribution channel and use advertising in various mediums to create awareness. I will personally talk to our top investors and urge them to invest. We are committed to this cause and will do our best. 

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Published: 16 Jan 2017, 04:01 PM IST
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