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Business News/ Money / Calculators/  Taking the common man’s money meant that we had to be sure it works
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Taking the common man’s money meant that we had to be sure it works

Nimesh Shah, managing director and chief executive officer, ICICI Prudential Asset Management Co. Ltd

Photo: Aniruddha Chowdhury/MintPremium
Photo: Aniruddha Chowdhury/Mint

The largest equity-oriented fund in the mutual funds industry by assets under management, not so long ago was only at a size of Rs250 crore. Today, at over Rs16,000 crore, ICICI Prudential Balanced Advantage Fund’s is a growth story that Nimesh Shah, managing director and chief executive officer, ICICI Prudential Asset Management Co. Ltd, is passionate about. Shah believes this concept has the potential to become bigger than the equity category for the industry collectively. He spoke to Mint about the nuances of this product and why he has put a large amount of organisational energy and effort behind communicating the concept to distributors and investors. Edited excerpts:

Q. How did you  manage to grow the fund from 250 crore in 2013 to over 16000 crore today?

A. Thanks to volatility in financial markets, despite good fund performance investor experience is not always good. Which got us thinking, when we get money should we always take it in a fully invested equity fund or suggest one which has a mix of both equity and debt? Many of our investors are looking for returns just a little more than what a fixed deposit gives. Can we create a dynamic asset allocation strategy that swings between debt and equity based on the volatility or riskiness in the market? Money will come when the market risk is high – this automatically gets invested more in debt and less in equity and that’s good for long term investors. That was the genesis of the fund. We have an in house model based on the market price to book ratio to determine how expensive it might be at a point in time. As a fund house we have a 13-year track record in this strategy.

Q. While the fund has become popular over the last three years, it has been around for much longer. What changed in this time, other than the name?

A. We had a track record which made us more confident about the product. Taking the common man’s money meant that we had to be sure it works. Once the track record was established with this model we went to the market with more assurance. The other thing we did was creating a team of concept sellers. A team of 40 concept sellers was created to reach out to distributors and talk about this idea of dynamic asset allocation. We have been using this model for more than ten years now. There are two other products in our basket which also draw from the dynamic asset allocation concept.

Q. How conscious are you the risk of actively managed equity and duration and credit risk in the portfolio?

A. We understand that the fund is for the common man. We have kept limits both for the duration and credit risk in the fund. In equity there is large and mid-cap exposure. There is an internal research team. There are three groups of fund managers (equity) and a central research team which does in-depth analysis for each company. This can be used both by the equity and the debt team in picking securities.

Q. Who is the ideal investor for this fund?

A. It’s meant for all types for investors. For example, for a retiree this fund can be used with the systematic withdrawal plan to draw regular income. They don’t have to look at the market. For people known to me who are not keen on following market movement but are retired – I have suggested investing the entire corpus in this fund. Recently, a group of people part of an alumni from college days collected funds towards for one of their college member’s requirement to treat a terminal illness – these funds too were invested in this fund. The breadth of investors is very encouraging – across 29 states, across all distribution channels. Even HNIs are buying this product – although primarily it is designed for the retail customer, anybody looking for peace of mind is investing in this product. The endeavor is to give a fixed deposit plus return.

Q. Markets saw a rally between 2013-2015. Post which it’s been sideways and one year rolling returns for the fund have dipped into negative territory for brief periods. What happens if there is a long bearish trend?

A. If you consider the three year rolling return data since 1st March 2013, the fund has always delivered an annualized return of more than 6% with no negative observations. In periods (from 2010 till 2016) where the market has been flat with no return the fund has given returns in the range of 7.5%-10.5% annualized. Despite having a lower allocation the fund has beaten the large cap index consistently. I’m quite happy with the returns. Dynamic asset allocation also allows you to take some trading profits, which is also getting built in. That’s why even after equity being at 67% or 2/3rd risk of the market - the product has been able to beat the market.

Q. So this is a product which one needs to remain invested for at least three years?

A. Yes. No investment should be momentum driven. Our fund managers are rated for a three-year period. They are supposed to take calculated positions in the market and that takes time to manifest. So we consider fund performance from a three-year perspective.

Q. How do you define the benchmark for this fund? Does it get confusing since there is equity large cap index, fixed deposits, and balanced funds to compare with.

A. There is no benchmark for this. The idea is to take relatively less risk and deliver an absolute performance. There is no exact comparison. How can one compare with a static allocation balanced fund? This is a dynamic asset allocation fund where we have to continuously communicate about the concept against the market. In different dynamic asset allocation funds, the equity levels can vary and that’s why one can’t compare so simply.

Q. There was a presentation last year which spoke of a money back facility in the product and compared it with other fixed return products, is that valid?

A. We have now removed the use of the money back term as the regulator asked us not to use it. It’s a systematic/automatic withdrawal plan (SWP). You take a dividend option but in case the dividend doesn’t get declared every month, you get into the SWP. Once the dividend payment is resumed you stop the SWP. In this manner the monthly inflow is ensured.

Q. If an SWP is done when dividends are not paid, isn’t the investor eating into capital?

A. The SWP facility helps investors to receive regular monthly cash flows. So when dividends are not paid, if an investor believes that in the long term they can get an annualised around 9% return in the product, so it should be okay. In some years you might get less, and in others returns will be much more, but on the whole that is how the product concept works.

Q. Monthly dividends paid in this year are not as uniform as what we saw in 2015. Why?

A. We have clearly communicated to investors that there are times when dividend may not come and tried to ensure that its clear they made the choice for a dividend option. In February when markets were down, there was no distributable surplus and hence, we were not able to pay. Later we compensated with a larger monthly dividend what got missed out. Consistency in dividend payment is a function of the formula given by SEBI to calculate the distributable surplus and we go by that. If the markets go down systematically, the surplus goes down. In good times we give a higher dividend to make up.

Q. Given this equity risk in the product is it fair to compare it as a fixed income plus kind of return?

A. Endeavour is to use the dynamic asset allocation strategy to give a return which is higher than fixed income. We aren’t promising, but the strategy is designed in a way that it doesn’t focus on superlative return rather it gives something more than the fixed income return. When markets are cheap you invest more in equity, hence over a period of time you are likely to earn more than fixed income.

Q. Is this the right platform for the fixed income investor to come into?

A. Our equity income fund is the right product for the pure fixed income investor. Those who are switching into this product should expect much more volatility in this product but over a period of time we believe returns (risk adjusted) can be much better. One has to consider it from a three-year perspective at least.

Q. Is it a risk for the organization to put in so much energy and effort being aggressive on one concept?

A. I would say that as a company we are defensive. Rather than trying to capture every upside in the market, our endeavor is to protect the downside more successfully. Mathematically as well, if you fall from 100 to 80, it’s 20% slide, but to reach back to 100 it requires a gain of 25%. So, is it smarter to grow more than the market at incremental risk, or take less risk and fall less than the market? BAF by nature is a risk averse fund and is designed keeping in mind investors who are averse to volatility associated with equity markets. This strategy has worked well both for my investor and the brand/company. As a result of its defensive nature, the percentage of happy customers is likely to be more which is visible in numbers - Around 41% repeat customers in the fund. Overall our equity assets across products have grown so it’s not just for this concept. We would like to have 25% of our equity AUM in this product.

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Published: 05 Dec 2016, 06:10 PM IST
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