A fund house has to manage investor expectations in terms of not just returns but also risks
In a candid chat on the sidelines of the last media interview that N. Sethuram Iyer, former head of Daiwa Asset Management Co. Ltd, gave to Mint, in July 2013, Iyer recollected his times when he headed the fund management team at SBI Funds Management Co. Ltd; one of his previous assignments. Coincidentally, in 2013, SBI Funds Management acquired Daiwa AMC and Iyer was in the middle of packing up, both at his Daiwa AMC office and his official residence. Nostalgic about the times he had spent in the industry, Iyer recounted how, at SBI Funds Management, he had to tightly control the reins of his fund management team, especially one fund manager who reported to him and who had the reputation of taking risks. “Whenever he used to buy a scrip that accounted for, say, 6% of the scheme and later it went to 8% of the portfolio on the back of price rise, I would immediately order him to trim the exposure. Nothing doing. Returns are important, but risk control is equally important," he had said. Eventually, when this fund manager joined a smaller fund house and didn’t have such boundaries, he threw caution to the wind. A terrific 2007 for him was followed by a disastrous 2008, which almost ended his mutual funds career.
If you thought managing your money is boring, ask a fund manager how she feels managing corpuses worth 1,000-5,000 crore, and even more, on a daily basis. Computer terminals, numbers, graphs, charts, balance sheets; the offices of fund managers could be mistaken for being the MI6 headquarters we are used to seeing in James Bond movies. Of course, fund managers are no James Bonds, but they still have to navigate volatility on a daily basis, and ensure that you make money on your investments.
An approved list
No matter how many schemes your fund house may have, there is always a pool of stocks in which all its fund managers dip into. Typically, fund houses don’t permit their fund managers to buy any company’s stock outside this pool, but this is not sacrosanct. For instance, Reliance Capital Asset Management Co. Ltd has a pool of 140-150 companies. “This pool is only for large-sized and larger mid-cap companies, from where our fund managers are supposed to pick up stocks," said Sunil Singhania, chief investment officer-equity investments, Reliance Capital Asset Management.
That doesn’t mean fund houses don’t track anything else. There are more than 5,000 companies that are listed on the stock exchanges and 2,700-2,900 companies get traded on any given day. Singhania said his team passively tracks about 1,100 companies and actively tracks 450. Every new company that a Reliance Capital AMC fund manager buys outside this pool must adhere to a screening process that gets signed off by the analyst who tracks that sector and the fund manager who buys it.
Analysts who track an individual sector or two—and who work under fund managers—track these closely on a daily basis and contribute ideas to the pool. As part of their analysis, they also meet company managements. “When we include a company in our pool of approved list, we track it particularly closely in the first year, on a quarter-on-quarter basis. Meeting its management and other analysts who also track them is a routine," said Ravi Gopalakrishnan, head-equities, Canara Robeco Asset Management Co. Ltd.
One of the aspects of a company that Gopalakrishnan keeps an eye on is core business. “Typically, the first generation of a business family would have kept the focus tight and used the cash wisely. But sometimes, the second generation tends to use the cash in the business to diversify into modern but unrelated areas. We need to watch out for such deviations," he said.
“Meeting companies is an on-going exercise to stay abreast with what is happening with them. We may even visit them and talk about this," said Sujoy Das, head (fixed income), Religare Asset Management Co. Pvt. Ltd.
As fund houses grow in size, typically, the number of schemes in their stable also grows and so do their fund management teams. Fund houses privately admit that apart from chasing assets growth to get ahead in the league table, ambitions of fund managers and analysts also need to be taken care of.
New funds are launched also give opportunities to analysts to become fund managers. The question is: can two fund managers within the same fund do opposite things? What if one buys a company and another sells it?
“Generally not," said Gopalakrishnan. “Unless there is some redemption pressure and a fund manager has to sell the stock to generate cash."
However, different fund managers within the same fund house can have different styles. For instance, A. Balasubramanian, chief executive officer at Birla Sun Life Asset Management Co. Ltd, told us that his head of equities, Mahesh Patil, who manages a large-cap fund, is good at picking large-cap scrips. His other fund manager, Anil Shah, “doesn’t like any limits to hold him back. He likes to pick and choose from a wider canvas". Shah manages the MF’s multi-cap fund that can pick up companies from across sectors and of various sizes.
Chandresh Nigam, chief executive officer of Axis Asset Management Co. Ltd, said a fund manager’s background and temperament are crucial when it comes to assigning funds. For example, his head of equities, Pankaj Murarka, used to mange the MF’s mid-cap fund before he became the head of equities. “Typically, fund managers are biased towards balance sheets. Murarka had worked with Rakesh Jhunjhunwala (one of India’s best known and savvy equity investors), helping with his private equity (PE) venture. When you track mid-cap funds, it’s essential to see what happens in a company’s operations, day-to-day functioning, and such finer aspects. People with a PE mindset can dig deeper," said Nigam, adding that Murarka was the right man for the job.
Checking on risks
Things work similarly in debt funds. A debt market investment by your debt fund is essentially a loan that the fund gives to a company that needs money. This company then keeps paying interest to the fund through the tenure of the loan and finally repays the principal. Das said that they track about 400 companies to whom the MF feels it could lend. Typically, most fund houses assign weightages that indicate how much the fund can lend to whom. At times, companies try and reach out to fund houses directly; sometimes there are arrangers or middlemen that bring fund houses and borrowers (companies) together.
In addition to publicly available credit rating of the borrower, an internal credit rating system is very important, said Das.
Most of the large and well-established fund houses have an internal ratings system in place. This way fund houses avoid getting caught on the wrong foot the way a foreign fund house recently had to suffer as its debt investments, in Amtek Auto Ltd, went horribly wrong.
Some fund houses, like DSP BlackRock Investment Managers Ltd, have a separate risk team (internally known as RQA team or Risk and Quantitative Analysis team) which monitors the risks that the fund house takes.
Ordinarily, fund managers are also supposed to be conscious of the risks that they take in their portfolios; partly because of their own expertise and partly because of system-driven tools. For instance, as per rules laid down by the capital market regulator, Securities and Exchange Board of India (Sebi), equity funds cannot invest in a new company in excess of 10% of the scheme’s corpus. Dealing systems are programmed in such a way that if a fund manager, even by mistake, attempts to buy in excess, the systems won’t allow the trade to go through. But there are other finer elements of risk management that some fund houses monitor under separate dedicated teams meant to do just that.
“The RQA team is an independent team that partners with the fund managers at DSP BlackRock and other operational areas to help understand and manage risk across the firm. The RQA team has a firm-wide role that is intricately involved in the investment management process. It presents a mirror to portfolio managers to highlight that risk positions have to be in consonance with their market views and the risk exposures are deliberate, diversified and scalable," said Pankaj Sharma, head, business development and risk management at the fund house.
He gave another example. “If, say, a balanced fund’s portfolio shows a bias towards small- and mid-cap equity securities, we bring this size bias to the notice to the fund manager. The fund manager may be great at picking such stocks but a product like a balanced fund is suitable for investors who have lower risk appetite than pure equity fund investors. Hence, size bias towards small- and mid-cap equity securities is intuitively a higher risk proposition to an investor who is seeking a lower-risk investment strategy."
Likewise, on fixed income, the RQA team has active engagement in analysing credit risk- issuer analysis as well as associated covenants and collaterals.
The era of star fund managers appears to have been left behind where the entire fund house’s hope depended on one person. Post the Lehman crisis of 2008, and the recent credit fiasco at one fund house in India, MFs are increasingly realising the importance of processes. But that doesn’t mean that fund managers are redundant and it’s only the systems that drive the business. A right mix of both will decide which fund house forges ahead and which one falls by the wayside.