At the recent Confederation of Indian Industry’s Annual Mutual Fund Summit, the Securities and Exchange Board of India’s chief, while highlighting the mutual fund industry’s performance, alerted the audience that a few asset management companies have been consistently underperforming. HSBC Asset Management Co. Ltd is one such fund house whose investors are hoping to see a turnaround sooner rather than later. After a brilliant start in 2002, when it also got its launch timing right coinciding with India’s five-year bull run, the fund house seems to have lost its sheen and turned conservative. HSBC AMC’s new chief executive Puneet Chaddha talks about his plans and what the fund house has been up to.
You started in 2002, 10 years back. How has the journey been? What is your future here in India?
It has been fantastic. When we started, we were convinced that India is the right market for us. That hasn’t changed, so we aren’t going anywhere.
But we have reconfigured some of our businesses. After we shifted out off-shore advisory business to Singapore in 2006-07, the mutual fund industry experienced the global shock in 2008. Our liquid funds returns suffered, because we took a conscious decision to focus entirely on liquidity instead of providing high returns. As a result, a lot of our institutional investors decided to invest elsewhere. The third leg of our stool, the domestic (equity) business, we managed it conservatively from 2009 through 2011. We knew that people like to make returns, but they like it less if they lose money.
Puneet Chaddha is CEO of HSBC AMC (India) Ltd
The key objective for me, once I took over the asset management company’s business in India, was to create a strong and consistent business model. To ensure the sustainability of our domestic business we adopted a new investment framework, price-to-book versus return on equity. This framework allows for a much more consistent approach to portfolio management which as we know is a prerequisite for consistent investments returns. As far as possible all the companies whose shares our schemes invest in must comply with this framework. This is not a model, it’s just a broad framework that our fund managers use as guidance. Apart from that we also look at the company’s environmental impact and the governance levels within; that for us is important too.
Your equity funds have underperformed and are mostly at the bottom.
You are referring to a very specific period in 2009, the global financial crisis. Given the prevailing uncertain conditions at the time, our focus was to ensure protection of the investor’s capital and not to chase high return. So in 2009 our funds had a higher cash composition relative to our peers. This strategy worked very well until the results of the general elections were announced which in turn led to a sharp rally. Given our level of cash holding, the appreciation of our funds was lower compared with other schemes which had adopted a more aggressive position.
Looking back our decision was the right one because a fractured election result, which was probable, could have adversely affected the market sentiment. I expect that by end of this year, the three-year period will cover our performance post this development and will truly reflect the quality of our investment performance since then, which has been very satisfactory.
Few other fund houses too were caught sitting on cash. But they recovered eventually. Somehow, HSBC AMC could not.
I am not sure that is an entirely accurate reflection of our performance. Investment decisions need to be carefully deliberated and cannot be knee-jerk. The euphoria in the market was because of an expectation that the election results will lead to a spate of reforms. Our view was more cautious and has been borne out by the events that have unfolded since then.
That said, we have taken some proactive measures such as appointing a new chief investment officer and adopting a new investment philosophy. The results of these changes have been good. In FY11, 5 of our 8 equity schemes have outperformed their respective benchmark indices and in FY12, 7 of our 8 equity schemes have outperformed their respective benchmarks.
Another important issue to understand is the allocation effect. Most of our funds are true to label—the large-cap funds focus predominantly on very large companies and our mid-cap funds on small companies. This is different from some of our competitors who tend to have a mix of large and small companies in their portfolios as is permitted by the regulations. So in many cases the comparison is not like for like. In terms of numbers, our large-cap schemes would invest 90-95% in large-cap firms whereas many other large-cap schemes invest about 65% in large-cap firms.
Here again our belief is possibly somewhat different from a few of our competitors. We believe that if an investor has invested in a large-cap fund, it is incumbent on us to ensure that the underlying investments reflect that mandate.
You haven’t been able to communicate this to investors because your assets under management was about Rs 17,000 crore in September 2008 and it dropped to about Rs 4,000 crore in March 2012.
A significant proportion of this decline is due to outflows from our liquid funds by institutional investors. Equity assets have been by and large stable.
Given the increased volatility during the financial crisis and the then prevailing regulatory framework for liquid products we had changed our approach to our liquid schemes in 2008/09 to preserve liquidity instead of focusing entirely on returns. There have been significant changes in the regulatory framework since then such as valuation norms, tenor of holdings, inter-scheme transfers, participation by banks and so on. We have therefore repositioned our funds in keeping with the operating environment and are looking to target the institutional segment proactively. Work on this front has commenced in right earnest and I am very confident of building asset under management in this category.
They say HSBC AMC does not give enough freedom to its fund managers.
Our fund management unit is independent. But it works within a framework. Yes, there is scope for dialogue and discussion but we believe in responsible investing. The framework is not rigid, but is still absolutely important; otherwise you will have people running away in completely different directions. We are in the business where it is all about trust. So boundaries are vital.