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‘It’s not the best time to increase allocation to mid and small caps’

  • CEO George Heber Joseph talks about the challenges in the debt fund space and future course for the fund house
  • Mid- and small-cap are risky segments. When you are entering, that market should be extremely cheap, that is the simple philosophy we have

ITI Asset Management has joined India’s already crowded mutual fund space with the launch of two schemes—ITI Liquid Fund and ITI Multicap Fund. The AMC has started operations at a time when some funds are under pressure due to their debt holdings. CEO George Heber Joseph, former equity fund manager at ICICI Prudential Asset Management Co. Ltd, talks about the challenges in the debt fund space and future course for the fund house

There have been cases recently where a corporate group owns a mutual fund and the mutual fund, in turn, holds debt of the parent group. Some of these companies have faced some debt issues that have also hit the mutual funds owned by them. The promoter of the ITI Group is also closely linked to the promoters of Sun Pharma Ltd, which recently faced certain accusations from a whistle-blower. So what is the objective of the promoters in launching a mutual fund?

If we look at the mutual fund landscape, there are good promoters and there are a few bad promoters also. Most large mutual funds are run by banks which are leveraged entities. There are very few cases where a strong cash-rich promoter is starting a mutual fund. This is where ITI Mutual Fund promoters stand out compared to leveraged entities. Over the past 25-30 years the promoters have built businesses without leverage and being cash rich.

To my mind, a cash-rich balance sheet promoter is very important for a investment management franchise, to build trust and to create a smooth experience for investors in the long term. That is also a predominant reason why I chose to join ITI Mutual Fund.

Even when you look at Sun Pharma, the balance sheet has been very strong. As an analyst and a fund manager, I go by the cash flows, not news flow.

But the whistle-blower’s complaints regarding governance at Sun Pharma were made to the Securities and Exchange Board of India (Sebi) after ITI Mutual Fund got its licence. Has there been any communication from Sebi to you regarding that?

I am better placed to talk about ITI Mutual Fund. But to my mind, the group’s ethics and ethos are very strong, and the promoters have shown the capability to grow a business and create wealth for investors from a long-term perspective. At ITI Mutual Fund, we are not here for short-term business. We are thinking about launching the right product at the right time for investors. We have created a very strong investment philosophy on which we will run the fund house.

One of the funds you have launched is a liquid fund. One of the issues with small-sized liquid funds is that due to the high ticket size of certain debt papers, they are able to hold only a few papers. If one of these holdings gets hit, there is a disproportionate effect on the fund. So why should an investor invest in a small-sized liquid fund?

We don’t think the size (of the fund) makes a difference. So when you are buying a bond, typically, you are giving a loan to a company. In such a situation, the most important factor to look at is when the money will come back. For this, you need to study the underlying company thoroughly.

Many times people don’t understand the intricacies of the balance sheet of a company, and the in-house credit research is pretty weak. So here companies are making this mistake, irrespective of their sizes. The question that needs to be asked is if you are doing your job as a fund manager and proper research is going into decisions, irrespective of the rating given by an agency. We will not go for mediocre businesses at all. We will not just be chasing returns, and will focus on the quality of our investments.

Coming to the distribution network, as you pointed out, most large fund houses are backed by banks and hence have a solid distributor network in the form of bank branches. How will you go about it?

We are going to open 30 offices in the top 30 cities in the first year itself. If required further, we will open more offices in these cities only and not spread ourselves thin in other cities.

What will make a distributor recommend an ITI Mutual Fund scheme over schemes from other large fund houses? How will you carve out an edge for yourself?

I also come from a large fund house, which was the top fund house. I have been a top-rated employee at that company, which was because I excelled at my role (of fund management). Each person that we have chosen in the company are from the top 10 asset management companies (AMCs). So the distributors know me, my work as well as what we stand for. Long-term investing is what we believe in and a lot of existing people in the mutual fund space are not doing that.

There is also the issue of cost as Sebi allows smaller funds to charge a higher fee. But as a fund house, you can still charge a lower fee which would be attractive to investors. Would you do that?

The highest that even a small fund house can charge is 2.25%, which is nothing in the equity market. At times, Nifty moves more than a percent in a single day. So if you safeguard one or two falls, you have earned that much for an investor.

So if you have a very clear and strong investment philosophy, then I don’t think 2.25% is something that will matter. If you are generating 5-6% alpha, and charging a 50 basis points higher fee compared to a larger fund house, I don’t think that will matter.

You have launched a multicap fund benchmarked against the Nifty 500 Total Returns Index (TRI). However you mentioned that you are not very bullish on mid- and small-caps, which is why your multi-cap fund will be heavily large-cap-oriented. Do you also have a sectoral view?

Our multi-cap fund will be a sector- and benchmark-agnostic portfolio because we are predominantly bottom-up research guys and we don’t believe in macro investing. Macro research and understanding is important and the analysts and fund managers will do it. We will look at the macro environment in which each company is working. That is more important to us than anything else. For example, if we are investing in a housing finance company, we need to look at how the housing finance sector is doing.

In terms of sectors, we are looking at pharma, corporate banks, infrastructure and capital goods, which have not done very well in the past five to 10 years and are reasonably valued. We also like some of the consumer names that have the potential of higher margins from here.

Mid- and small-cap are risky segments. When you enter a market, it should be extremely cheap, that is the simple philosophy we have. So when the aggregate valuation of the market is expensive, we need to control the risk in the portfolio.

Predominantly, we will have large-caps, that too non-leveraged large-caps and some high-quality mid-caps. Our aim is to be 90% invested in equity. We will use the 35% debt exposure that is allowed only when we see extreme frothiness. When markets become cheap, we will increase allocation to mid- and small-caps, but today is not the best time to do that.


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