Quantum Long-Term Equity Fund (QLTEF) has turned five. List two-three biggest lessons you’ve learnt and things you would have done differently given the benefit of hindsight.
Given the culture at Quantum Asset Management Co. (AMC) Pvt. Ltd that we will only take money we think we deserve to manage and not money based on mis-selling by the distribution channel, the biggest lesson we have learnt so far has been to be able to attract people who believe in the same values as we do. When we started out, people were sceptical because a lot was written about us: We’re a small company, how can we afford to pay people well? How can we attract talent?
Our QLTEF fund manager, Atul Kumar, who manages assets worth Rs 65-70 crore, is respected by his peers because every decision he has made is reflected in the portfolio. Usually, fund managers’ views get diluted by distribution channels.
The other big lesson is how difficult it is to change the way people behave and invest. For example, a very few among my family and friends have invested in Quantum MF. It took me almost five years to convince them about our philosophy, values, why we avoid paying opaque commission and thereby save costs. The mentality of investors and distribution channels has been difficult to change.
Why do you think Indian investors haven’t yet warmed up to the idea of compensating distributors? If that is the case, was Securities and Exchange Board of India (Sebi) right in abolishing loads?
This concept needs to be explained in simple terms and the industry in general is not keen to do that. For example, we should ask investors whether they would like to be examined by a doctor and pay his bill directly and then go to a pharmacist to buy the medicines that have been prescribed, or would they prefer to be examined by a doctor who writes a prescription that forces them to go to a specific pharmacy and then when they pay for medicines, some of that money finds its way back to the doctor. Would they prefer independent advice and openness or opaqueness?
You have said several times that the MF distribution system is opaque. But as per latest Sebi rules, all distributors are supposed to disclose charges.
Yes, but I go to the ATM of my bank and see a chart saying that they earn, say, 0-2% commission, but I do not know which scheme gives no commission and which gives 2%. There is disclosure but it is not meaningful. Investors should know whether the fund that paid a 2% commission worked for them, or for the distributor.
If the investors haven’t yet warmed up to the idea of compensating agents, how should agents earn their commission?
We believe everyone deserves to earn money. We support Sebi’s decision that distributors are supposed to get commission from investors and not from fund houses. But since many investors aren’t paying, agents get their commission from fund houses. But they should be transparent and reveal complete commission earned from fund houses to all their investors upfront, and not just when asked.
Does PersonalFN, your sister concern that is in the MF distribution business, accept trail commission from funds that they sell? And does Quantum pay trail to PersonalFN?
I am the largest individual shareholder in PersonalFN and it is not a part of the Quantum MF family, but Quantum MF has not paid any trail commission or any commission to PersonalFN for Quantum schemes sold by them. I am sure of it. In fact, Quantum schemes aren’t supposed to be a part of its recommendatory list of PersonalFN because of conflict of interest. But yes, PersonalFN accepts trail commission from other fund houses, but it has emailed all its clients disclosing all such trail fees received. And that has angered distribution channels.
The industry is expected to enter a consolidation phase. Has any company evinced interest in buying Quantum?
We have coffee and meetings with many people, but no one has made a bid to buy us but people have come and spoken to us; though we don’t have a desire to sell. Since we’re at the bottom of the AUM heap and there are people who perceive us as a “weak” operator, so I am not surprised they’d want to come and talk to us. But we always ask them what they would want to change if they acquire us and the first thing they say that we would hire distribution. That’s when our talks break. But maybe one day someone will come by who respects what we want to do, respects our focus on working for the investors and respects our view that our salaries and bonuses can only be a by-product of the goodness we do for investors. But, like we say, integrity is a niche and a rare attribute in our industry so we will most likely live a long, unmarried life.
Keeping aside the income (and profits) that you earn from managing international money, how long will it take for your pure domestic operations to make money?
Probably, if we had Rs 400 crore of assets under management (AUM) from pure domestic sources, from Indian investors. Today we have about Rs 120 crore worth of assets.
But that is available if you demand it, again as per the new rules.
Yes, only if you demand, but I am saying it should be upfront. When you see the annual report for a mutual fund product, the fees paid to the lawyer, banker, custodian, fund manager, are all disclosed—it’s written there for the investors to see what the fee is, you don’t have to ask. Its part of the regulatory disclose in terms of the transparency of a fund scheme. But at the distributor’s office, you have to ask for it. We feel that if a distributor sells, say, a Quantum product and, say, we give the distributor 0.25%, while some other MF product gives him 3% commission, the distributor should communicate this effectively to his customer. And if the distributor pushes the scheme with the higher commission, the investor would then be able to ask him, why she is being sold the other, “costlier” fund and not Quantum.
So disclosures are not adequate, but when those disclosures come, Quantum will be happy to be a part of that system. We are no-load today not because no-load is fancy, but no-load is a good thing because more of your money gets invested and works for you. At the same time we are fighting a distribution system which hates what we are doing, and we face this hatred everyday. But we’re not going anywhere. We have had five great years; we wake up every morning charged up by what we do. So, unless our track record tells us that we don’t deserve to be in this business, we will be around to fight for a better and more open transparent system.
With Goldman Sachs acquiring Benchmark AMC, what is the future of niche funds such as yourself? Good intentions don’t seem to be raking in much assets, it appears?
We must be living in a strange world, a kalyug, as it were, that a mutual fund house that is trying to work for the benefit of its investors is called “niche” or “maverick” by the press (smiles).Quantum is not niche; we could even be a Rs 10,000 crore fund over time. But yes, I would call it an alternative platform. Now it so happens, we are the only guys, say 0.0001% of the industry that you could call it niche because we avoid distributors, while in countries like the US, about 15% to 20% of the fund industry is direct. And that number is going up. Vanguard Asset Management is larger than Fidelity International Asset Management and Goldman Sachs Asset Management in the US. So we may be niche in terms of our market share terminology, but its not niche in terms of what can happen to QLTEF or what can happen to the proposition that distribution fees must be transparent. Integrity needs to be mainstream. The finance industry, as we have seen, in general lacks integrity from a client perspective.
Again I’d like to restate, we have no problems in people earning money. We earn money tooon the assets that we manage. But we disclose the fees. The bankers, custodians, and auditors who we deal with, they all earn money along the way. But every fee is disclosed. The distribution fee is not disclosed.
But what is the future of smaller fund houses with a different approach after Benchmark AMC’s case?
Benchmark AMC focussed on exchange-traded funds (ETF) which, frankly, I think are bad products for the Indian market. An ETF reflects a stock market index. The BSE 30 or NSE Nifty or BSE 200 are quite suspect as indices. These indices are managed by committess that seem to act like active fund managers They change stocks in the index to the extent of 20% every year. Where is the stability of the index?
Besides, every time a stock goes in and out of the index, the index fund incurs a cost to change its realign its underlying portfolio to reflect the changed index. Besides, an ETF or an index fund is doomed to underperform its benchmark index because of management fees and brokerage costs. But if you have the time, and can track good funds that are managed well, you are not doomed to failure if you invest in an actively-managed fund. To name a few, Quantum and HDFC equity schemes have outperformed the index in the past five years, and dramatically.
Are you saying ETFs don’t work only in India or elsewhere globally, too?
No I think it works wonderfully in US and abroad. But in India, ETFs are bad because of the underlying indices being changed so frequently. Satyam Computers was in the index when the fraud came out in January 2009. That day the stock lost about 70% of its value. After the crash, the ETF fund manager would have had to sell the stock and buy the one that replaced it. Costs were incurred. Over the past 8-9 years of data that we analysed, we observed that there is a 10% to 20% turnover in the Index, year-on-year, in the BSE 30, BSE 100, BSE 200 and NSE 50 indices. The way we change the index components so frequently requires a high cost of transaction by the ETF which will make the ETF underperform the indices themselves. Compound this over years and there will be a huge gap between ETFs which has your real money and an index which is a notional number.
We hear you have bought Tata Nano cars, pasted your advertisement and your employees drive them. What is that all about?
We have four Tata Nano cars for this purpose, that carries Quantum AMC’s advertisements. They should have a minimum of three year driving licence. We buy the car; the employee must drive the car to office atleast three times a week.
People say your product suit looks a bit incomplete. Like, Quantum AMC have a mid-cap or a small-cap fund.
Mid- and small- cap stocks are pure momentum stocks and they move up or down depending on foreign inflows. When such flows come in, these stocks rise and vice-versa. Honestly, we don’t have a process that we feel is suitable to help us find small and mid-cap stocks that will grow irrespective of fund flows coming in or going out of small and mid-sized companies.
QLTEF’s cost structure is 1.50% for a fund size of Rs70 crore. How have you manage to curtail your costs?
That has happened mainly because we don’t pay the distributor commission. To run a fund, we need to pay fees to our custodians, banker and distributor. But we don’t pay the distributor. There are funds more than Rs 7,000 crore of assets in them that have an expense ratio of 1.7% or 1.8%. If we were to reach that level of assets, I am sure our expense ratio would drop to 1% or 1.1%. the benefits of scale, the advantage of being large would be passed on to the investors—not to the distribution channels.
Kayezad E. Adajania & Harini Subramani