A fall in market share, sliding performance on the equities side and top managerial exits in the past 2 years have plagued IDFC Asset Management Co. Ltd. Vishal Kapoor, who was earlier the head and managing director of Standard Chartered Bank’s wealth management division in India, joined as the chief executive officer (CEO) of the fund house around September 2016. Ever since, two new products have been launched and an attempt has been made to extend a closed-end fund. Has the change in CEO changed the asset management company’s (AMC) thinking? Kapoor gives the details to Mint. Edited excerpts:
When you joined IDFC Asset Management Co. Ltd sometime around September 2016, what were the top three targets you set for yourself for the year ahead?
We start with our customer. We can bring value to her through our product range and performance. It’s about having an institutional process and a great team that works very well together. It’s not good enough to have just a few stars (fund managers), it has to be a team that really works together and can stick to a process under an institutional framework.
Along with that, we must have a full product range. In the last 6 months, that is the reason why we launched two major open-ended schemes—a balanced fund and a credit opportunities fund—both of which we didn’t have. Both belong to very large categories. The products should deliver what they set out to do and they should be true-to-label. That also means that we’ve had to define these products far more sharply than maybe what the category in general would have. IDFC Credit Opportunities Fund, for instance, has been defined at a tighter level of segmentation than what the category today presents. We are targeting the mid-yield segment, not the full wide spectrum, because to our mind that is a very good spot for us to optimize risk returns within the credit space. Similarly, the cap on long-only equities in the portfolio of IDFC Balanced Fund is at a more modest 60%, and not going up all the way, because to our mind that’s where the right amount of risk and return for a balanced or moderate customer comes through. And these are clear opportunities. The market category is wide enough for us to come in and segment further for products that are more tightly defined and, therefore, offer significant amount of value addition from what is already existing in these categories.
Then, it’s about engagement with our partners, our distributors. The mutual funds industry is largely a business-to-business (B2B) industry. Barring some very large and institutional investors who are with us directly using ‘direct’ plans, a large effort in the market is dealing with retail customers, the average savers. This is largely done through our distributor partners like independent distributors, banks or national distributors and robo-advisors.
Let’s start with your first target: investment process and team. What did you notice lacking when you came?
It was not lacking or anything wrong to be fixed, per se. But this is our No.1 priority because we cannot build a great asset management business without making sure that all aspects of it are really looked at robustly. We had a great team but the reality was also that some members on the team, especially on the equity side, had changed recently. The market gave us feedback that they needed to see continuity in our equities team. So, in addition to the existing strong talent within IDFC AMC, we’ve attracted more. Three people have joined on our equities side and one on the fixed income side.
…and possibly also ring-fence the team from the sort of exits that’ve happened in the last couple of years at IDFC AMC?
More than ring-fence, it’s just to make sure that institutional process is well understood by everyone. And that is what we are adhering to. The investor gets the comfort that, irrespective of who is managing the funds, the products will be managed similarly and as per stated processes. That assurance the distributors and investors wanted from us.
We’re happy to see our equities growing, backed by consistent performance.
Earlier, IDFC AMC seemed averse to launching too many schemes. But within 6-7 months of your joining, the AMC has launched two funds. It even tried to extend a closed-end scheme, whereas we were told during its inception that the money will be returned to investors once it matures. Is there a realization that the only way to grow business is to grow assets and not just performance?
The product philosophy continues to be consistent. We have to offer products that give value to the customer. In (some) categories, for example, balanced or credit funds, where we are not the first fund house to launch such schemes, we have to create differentiation in order to offer additional value. Should we offer products in these categories at all? Yes, we should. Why? The customer needs them; she is interested... why shouldn’t we offer something that adds value?
IDFC AMC was known to be averse to credit funds. Where does a credit fund fit in now?
It is a core category. The current interest rate cycle makes it attractive, and we believe we can add value. Our late entry works to our advantage because we learn from the market. Is there a better way to define credit and make sure that our customers are coming in for the right reason? Yes, I believe so.
About distributors, IDFC AMC has been known in the market to be conservative about commissions that it has given to distributors. Do you see that changing?
Commissions should not matter to the investor. What matters is the total expense ratio (TER). If the TER comes down, the costs—and distributor commission is a big part of it—comes down too. It is the TER that matters. How a fund house splits the TER between the fund house and distributors, doesn’t matter.
Investors invest in a fund knowing what the TER is and returns are always calculated post-expenses.... Distributor commissions could matter for sophisticated investors who come through direct plans.
Therefore, given a certain TER, how we split the income between the fund house and the distributor is something we can look at.
If the feedback from distributors is that the AMC has been taking a larger share as compared to the rest of the industry and therefore not being competitive, then clearly we have to be competitive. We cannot operate in a market where we can ignore market forces.
Have you got any such feedback?
In some quarters, yes. We have to be competitive. We don’t need to be excessive or too conservative. Because there is a lot of value that the distributors bring. It’s only fair that they ask for compensation. If that means we have to run ourselves more efficiently and tightly, then so be it.
IDFC AMC has largely been known as a niche fund house, among the large fund houses. What’s the way forward? To remain an important firm in this industry, do you think a supermarket approach is necessary with multiple products, or can you afford to remain niche? Is size important? Or is it a matter of choice?
It is a choice, but we need to tie it back to our customer. I don’t think it is necessary for us to choose to be niche or supermarket. If your customer needs 25 different products, having 200 may make it unnecessarily complicated, but having just five is also limiting yourself. We ask: what does the customer really need? If we have that, then it’s great. But if don’t have that, then can we make something for her?
But that’s very subjective. If you ask a fund house with five schemes, it most likely says that is all what customers need. If you ask a fund house with 200 products, it will say that customers need the 200 products.
Which is true. That is why this process will have to be dynamic as we have to recognise the customers’ needs. The options available in the market are also changing all the time. But that doesn’t mean we complicate the matter unnecessarily. It has to meet a very specific purpose, like when we launched our balanced and credit debt funds. Our approach is not to remain niche or supermarket. Our every product must be sharply positioned and true-to-label.