Photo: Abhijit Bhatlekar
Photo: Abhijit Bhatlekar

After I joined, I quietly halved the expense ratio of our large-cap fund

Radhika Gupta, chief executive officer of Edelweiss Asset Management Ltd

Edelweiss Asset Management (AMC) Ltd has always been a fund house with a lot of promise. For some time, it did deliver; by launching differentiated products and focusing on a certain segment of investors. But too many such changes over its 9-year history has resulted in the fund house still being counted as a small and niche fund house. Last year, it acquired JP Morgan Asset Management Co (India) Ltd after the latter’s debt fund crisis, but the benefits of the acquisition are yet to be seen. Radhika Gupta took over as the fund house’s third chief in February 2017 in its 9-year history. In a candid chat with Mint, Gupta says that Edelweiss will no longer be a niche fund house and has ambition to become big. Edited excerpts:

This is your first job with a mutual fund firm and your first as the head of a mutual fund. You come with no prior mutual fund experience. Does this help you or goes against you?

I love change. My father was a diplomat, I’ve moved to a different country, every three years. I do well with change, otherwise I get bored. Earlier, I used to think it’s 50:50, but having spent the time here so far, I feel it is as advantage.

I have been an investment professional throughout. Whether we do alternative funds management or traditional mutual funds, the core investment management is the same. The process of orientation, focus on performance, consistency or understanding of clients is the same whether you manage money for high networth individuals or retail. I have always wanted to do retail. When I was involved with the JP Morgan India mutual fund takeover over six odd months, I had realised that I had spent a lot of time doing the alternate assets and high networth individuals’ space. That was also when I found my calling to cater to the retail business.

People like fresh ideas. We have large fund houses doing what they do. And that’s great. But if a small and new mutual fund house brings quality and new ideas, it too will be accepted. For instance, some distributors told me recently that every other fund house gives them views on equity and debt markets…they expected us to share our knowledge and expertise on distress sale of assets and real estate, that our group companies are known for.

Then again, if you see the factsheets of many fund houses, it starts off with the equity and debt market view. I was sick of that nonsense. Who wants to know what the value of Nifty index was, five days ago, in a digital world? And we are not good at predicting Nifty levels either. So, there again, I scrapped the market commentary. I decided that I will write the introduction to our factsheet going forward. Our communication will focus on insights for investors and advisors. They could be insights about global markets / asset management, discussions around changes and challenges in our industry, and what trends we see emerging. Last time for instance, I wrote about my experiences at a global conference, how change is becoming a reality in the global investment world, and how portfolios in India need to be more dynamic. The written word is extremely powerful and fund house communication is my chance to connect with our investors and advisors in a style that is hopefully more personal, thoughtful, and different.

So, being new to this industry, there is an ability to bring freshness in thinking and product innovation.

Edelweiss AMC has changed its focus many times in the past. When it started out in 2007, it was mostly focused towards corporate money. Then, it changed its focus to asset gathering with a lot of liquid funds and fixed maturity plans. Then, it started focusing on high networth individuals with complex products. Somewhere along the way, it talked about how exchange-traded funds are the way to ahead. Meanwhile, it nurtured Edelweiss Absolute Return Fund (EARF; now Edelweiss Dynamic Equity Advantage Fund or EDEAF) and it became the fund house’s unique selling point. After you took charge, we don’t hear much about ERAF / EDEAF, it has become low key and has lost assets. Do you want to position Edelweiss AMC as a niche fund house or do you want it to be retail investor oriented?

I agree. In the past it was a niche fund house. Today, the mutual fund business is a focused business for the Edelweiss group….

Was it not the group’s focus earlier?

In its initial years, Edelweiss AMC had chosen to focus on the institutional segment. And I guess, it reflected what Edelweiss’s capabilities were at the time. Looking at the time and focus that is going into the AMC business today, from the group’s point of view, wasn’t there a year ago. The time of Edelweiss AMC in the Edelweiss group has come.

We don’t want to be a niche fund house anymore. Edelweiss is a diversified financial services company and we are a diversified fund house. That doesn’t however mean that I want to run 25 schemes. I like to run less (number of schemes)...limited schemes in each category and be very true to label. The idea is to have chief investment officers who are specialists in their domain and run a limited set of products in their respective categories and bring out the best quality in them.

EARF / EDEAF was once upon a time your largest fund where the focus of the fund house was. Today, the scheme has dwindled in assets and the fund house’s focus doesn’t seem to be on it. Its objective has also changed. What went wrong?

EDEAF is actually the single fund where we have the largest focus today, and the hybrid category where we intend to focus as a fund house, and my note in our last factsheet talked about this.

Relooking at ARF/EDEAF was one of the first things I did when I took over. I believe when we want to run any fund successfully, there should be complete alignment between the what the fund strategy is and how it is perceived by the advisors and investors. The fund was benchmarked against the MIP index, but it was always compared to the balanced funds, It just created confusion. This was our challenge with regards to the EARF. The idea to rename the fund was that I wanted the fund to be in a very clear category; that is the ‘balanced advantage’ category.

Our performance in this fund is in the top quartile of balanced advantage funds this year. The turnaround hasn’t been easy...We lost assets but we have built them back up, and I am confident this fund will be a flagship for our fund house. We’ll be very proud over the long term of the journey we have travelled with EDEAF.

But you have also increased the risk profile of the scheme. Now, it invests in mid-caps as well as part of its pure equity exposure. You plan to capture higher portion of Nifty upside but as a result, you will now aim to capture a larger portion of downside also.

We have actually not materially changed the equity composition of the fund, but rather upped the equity range on average to be in line with the balanced category. We are also very confident about our hedging process, so the idea is that we will be able to drive wealth creation on the upside and retain downside protection

It has been close to a year now since you acquired JP Morgan Asset Management (India) Ltd. The number of schemes in your basket has gone up, but the performance hasn’t really shown up.

I would say that if you look at the past 3-month, 6-month and 12-month returns of the flagship funds that we acquired from JP Morgan, that is Edelweiss Mid and Small Cap Fund and Edelweiss Equity Opportunities Fund, they have been there in the first and second quartiles.

We can’t build a fund house where every scheme will be ranked Nos 1 and 2 all the time. If we are constantly in the first two quartiles, that is a very good outcome for the flagship funds. Besides, JP Morgan’s acquisition is not just about schemes, we acquired a lot of talented people. We took over almost 32 people and most of them are still with us.

In February 2017 when I joined Edelweiss AMC, it’s size was about Rs6,500 crore. Today we are on verge of touching Rs10,000 crore. The growth has started and schemes have turned around. Lot of JP Morgan funds were bleeding when we had acquired JP Morgan India AMC, but now, more money comes in them than what goes out.

Your two largest funds right now are an arbitrage fund and a liquid fund. Both such funds don’t earn much revenue for a fund house and are typically targeted towards a short-term investment horizon. Does their disproportionate size in your product portfolio bother you?

No it doesn’t. For one I don’t look at our present size of close to Rs10,000 crore, and percentages relative to that when the aspiration is build a mutual fund business in lakh crores. Our journey has just started, and debt / liquid businesses grow more quickly than equity businesses than need vintage and track record. I am very happy about the size of the arbitrage fund – it is one of the oldest funds of the AMC, has been consistently a category leader in performance, and the category is growing because the post-tax proposition is great for investors. Arbitrage funds are not an unprofitable business.

With returns of just around 8%, how much money would a mutual fund house be making from an arbitrage fund?

Arbitrage funds are typically priced at around 1% and have a profitability between debt and equity, especially if your assets have longevity which ours do . They are not liquid businesses.

But that is still far from what equity fund could fetch you?

Yes, the net revenues on arbitrage are not the same as equity, but investments stay on average for nine months. It’s not short term money. Arbitrage is a core capability for us as an AMC and as Edelweiss Group, and the growth of the fund is exciting not stressful. Our liquid fund at Rs1500 crore is the second largest fund in our basket because liquid grows quickly as a category. Equity takes time to grow because track record builds with time. In liquid, the time horizon is days and weeks.

By the way, that also makes your arbitrage fund, one of the costliest arbitrage funds in the market today.

We are not significantly more expensive than the category average in arbitrage. I always look at the net returns to the investor in a fund, and in this category, we have consistently been top of the pack on a net basis. There are other categories like corporate debt where we are priced the lowest in the market because of where yields are in a falling rate world, and we want to deliver the best net yield to investors.

What happened to Edelweiss mutual fund’s plan to focus on ETFs? We don’t hear much of that, these days

<sighs> It’s early to say. ETF is a platform. We will definitely launch innovative products; that’s on our radar. Now, whether we launch them on an ETF or the mutual funds platform, I don’t know yet. I don’t want to launch ETFs for the sake of launching ETFs and have, say the fifth Nifty Junior Fund or whatever. Our funds must- and will- be differentiated.

But I thought you had partnered with MSCI to launch ETFs based on their indices?

We had a conversation, but nothing was formal.

Word on street is because Edelweiss mutual fund doesn’t have an established and long-term track record and you are also new to the funds industry and are seen to be wooing distributors, you might be called upon to pay higher commissions that most of your peers.

We’re looking at what ways we can add value to the distributors. We just don’t want to stick to commissions, because frankly that’s a race to the bottom. For instance, we are having a big distributors event on November 24, where we are flying down many distributors from all over the country.

But you still have to pay a little bit more than the comfort level, isn’t it? Let’s be honest; Edelweiss mutual fund’s performance has not been there, despite the fund house being around for many years now. Besides, it is being said that since you are new to this business, you would take time to realise the repercussions of high commissions.

Yes obviously there is economic incentive…you have to give…But frankly, too much is being said about it (high commissions). There are a lot of advisors who are less revenue-centric and there are advisors who are more revenue centric. Both are fine, depending on what your objective is. Distributors in this business have to make money. Distributors, fund houses and investors have to make money and yes there is a cost to distribute. We won’t do anything that is out of whack of standard market practices. I certainly hope that my being new has nothing to do with the payouts that we have to pay.

You recently wrote a column saying that large-cap funds will find it tougher and tougher going forward.

Large-cap funds will find it more and more difficult to outperform their benchmark indices. That has started to show up already. There is still space for large-cap funds but at lower costs. We cannot charge 2.5% expenses in a large-cap fund when it outperforms the benchmark index by just 3%. It’s not right.

Hence, after I joined Edelweiss mutual fund, I quietly halved the expense ratio of our large-cap fund- Edelweiss Large Cap Advantage Fund- to 1.3%. We’re now the cheapest large-cap fund (actively-managed) in the market today.

I also think that corporate debt funds should relook at their expense ratios now. If yields have dropped from 10% to 7%, they cannot charge 2% expenses. It is my belief in large-cap funds’ outperformance over benchmarks will continue to see decline. And after the Securities and Exchange Board of India’s circular gets implemented fully and all large-cap funds would need to realign their portfolios to invest atleast 80% in the 100 largest companies- their performances will come under more pressure.

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