The topic of the second panel discussion at the sixth edition of Mint Mutual Fund Conclave was: Refining Differentiators: Time to Look Beyond Returns. The panellists were: Ashwani Bhatia, managing director and chief executive officer, SBI Mutual Fund; Chandresh Kumar Nigam, managing director and chief executive officer, Axis Mutual Fund; Kalpen Parekh, president, DSP Investment Managers; Radhika Gupta, chief executive officer, Edelweiss Asset Management; and Vishal Kapoor, chief executive officer, IDFC Asset Management. The discussion was moderated by Sunita Abraham, consultant, Mint. Here are the edited excerpts:
Sunita Abraham: Chandresh, you have been a vocal advocate of looking beyond performance, specifically returns. Why do you think that’s important for investors and the mutual funds industry?
Chandresh Kumar Nigam: This is a long-standing thought. Mutual funds are largely invested in capital markets instruments which see volatility. There are various risks that need to be managed. As any responsible asset management company (AMC), it is important for us to ensure that we have the right approach and institutionalisation of “investment management" to ensure that we deal with these risks. We should also ensure that we have the right “institutionalised" approach to delivering what in our parlance is called alpha, and that too on a sustainable basis. We should also have the strategies spelt out for investors to give them confidence that they will be able to navigate volatile asset classes or markets and will meet their goals over three to five years (medium-to-long-term horizon).
We must not forget that the intermediary plays an important role because we can’t always expect investors to understand all that.
Abraham: What is a simple yet not simplistic way of communicating risk to the investor? Advertisements from the Association of Mutual Funds in India (Amfi) link it to investment horizon. What are some other ways?
Radhika Gupta: Firstly, I think the traditional definitions of risk—things like standard deviation and Sharpe ratio—are realities I don’t think any lay investor understands. I think in the case of equities, for instance, you have to talk about risk in the context of what it means for an investor. So, in very simple terms, risk is really what can go wrong. One is loss of capital and over what time horizon. You can illustrate that through a lot of mediums we have now because of digital. You can illustrate— through factsheets, presentations, literature and videos—what you can lose in six months, in one year, two years, and what the rolling performance of the fund has been. For instance, a lot of our factsheets publish one-month, three-month, six-month returns. But those do not match investors’ experience. They should see rolling returns, which is what different investors at different points in time have earned. The second thing that we don’t talk about is liquidity risk. We started doing this in our own equity presentations, where we talk about things like, if I had to liquidate a mid-cap portfolio, how many days could I do it in reasonably. These are metrics that are at least more consumable to an investor.
I think this is more challenging for fixed income, as we have seen in the last nine months. But illustration of what is duration risk and matching your time horizon to your investment, what does it mean to borrow at 9% versus 10% versus 11%, what we commonly call credit risk, and so on is important. I think that basic illustration needs to be done and communication is a very powerful tool.
Abraham: Ashwani, if returns are not the focus, then what will be the differentiators? What is it that the investor should be looking at when evaluating an investment option?
Ashwani Bhatia: So, typically when an investor comes in, he has a certain expectation of return. When you talk to a fund house, those returns may come later. The fund house is actually looking at risk, timing, process, system and the company, holistically. So there are factors that the investor doesn’t even understand. And understanding of risk is, of course, very tiny as far as the customer is concerned. If I can communicate to the investor that what he is doing with a mutual fund is different than a bank, perhaps we have taken the first step.
So, where do you go from here and what does a customer get and what are the tangible and intangible returns? Investors don’t understand proxy voting, ESG or the framework that a fund house brings. Look at youngsters today. They are not buying a product, but generally buying a brand. So how do you generally develop the brand over the next five to 10 years is going to be important. If you are rigorous in your processes, you’ll thrive.
Abraham: Vishal, your views on what the differentiators should be?
Vishal Kapoor: I have a couple of additional takes. Firstly, do we really expect the average investor to understand all of what we put out on factsheets? I would say they don’t. But they (factsheets) should be there because there is a group of investors who are sophisticated and will understand. But the bulk of our investors are relying on our intermediaries as well as independent researchers to decide what they want to buy. So what can we do to make sure that these intermediaries are best placed to provide an objective and expert guidance? I think what’s important is the entire process of transparency around what the investment strategy is and how we are going to manage our products. The two areas of focus could be defining the product as tightly and clearly as possible and being transparent.In defining the product, regulatory intervention last year really helped because now at least you have got buckets within which some rules are defined, while maintaining a fair amount of flexibility. By being transparent about what your fund team intends to do gives the intermediary as well as the end investor a fair chance of getting the probability of success better.
Abraham: Kalpen, DSP has clearly marked out investment manager styles. Is that meant for internal processes or for investor consumption? If it is for investors, how would you ensure that investors actually understand and implement that in the investment decisions?
Kalpen Parekh: While different views were being expressed, it was making me go back to the same framework. So fund managers are told to answer four questions; what’s your source of alpha, why do you say that is the source of alpha, is that evidence-able, and are you reflecting that in the portfolio? Or is the alpha coming out of randomness? Now the whole idea of this exercise was not intended initially for the consumer; it was more for our internal reference point and investors who understand it. So our attempt is that whatever we say, we should do that and if we are not doing it, we should not say it and gradually move towards style purity and style clarity so that when advisers mix and match portfolios, they can pick the right funds. The need for simplicity is extremely vital, more so now when more and more customers are joining the bandwagon. A year back someone from my marketing team who comes from a consumer lens said what is risk at the end of the day? The risk is how much money can you lose either temporarily or permanently. We say that markets are volatile, so the losses are temporary if you don’t book them. If you stay put, you’ll make up. But how do we convey that? And this guy came up with a very simple articulation of risk. He looked at one of the most popular funds, which we were talking about, and he just wrote a number—minus 67%. And what was that minus 67%? It was the one-year worst case return that fund had witnessed. When we digitally communicated it, we had lots of interactions and we realised the maturity of the customers also. We also realised maturity of the advisers when they recognise that understanding of what can go wrong upfront is given in a very simple crisp tangible way.
Abraham: If you had to nudge the investor to look beyond the six-month or one-year return, what is it that you think would work for their investment decision?
Bhatia: I give my own personal examples. The biggest mistake perhaps I made in the ’80s was not to invest in mutual funds. Just give an example and if the returns are there, people get convinced by the simplicity.
Nigam: If we give little information to investors and advisers, they have no other choice but to talk about short-term returns. We also need to say why something is going to happen. People won’t believe that just because it has happened in the last 20 years, it’s going to happen in the future too. If you make the connection that it has happened due to of an underlying fundamental, people may stop taking short-term numbers as a proxy.
Parekh: First of all, we also have to ourselves start respecting time the most. The portfolio turnovers have to be lesser and not close to 60% or 100%. Because ultimate compounding comes from time which we speak; so start the change from ourselves to showcase benefits more than the features. I think we have not done justice in telling investors basic things like, you have a portfolio of ₹10 lakh and you need ₹1 lakh out of it, you can take it. Benefits of indexation—for example, in fixed income, most people don’t know what indexation is and how it works. A very simple example to highlight what are the benefits if you stay for longer. Third is, how do we reward investors if he crosses five years and then 10 years and then 15 years. Can I give him some incentive in terms of lower fees over time if I am willing to stay longer? Or bundle up products where there are some examples of innovation done in the past and I have seen it work in the years 2008-09-10 when markets were very rough. Products which were bundled with insurance gives investor a hook to stay longer because I know that if I exit right now, I am going to lose this other advantage.
Gupta: Interestingly, we did a session for our financial advisers and we just released a video on the power of nudges for investors. While I take all the points, I think, markets and investments are a part of life and they can sound very complex and also very dull. Nudge tells you one thing, like if you take the example of megapixels in a phone camera, nobody understands what a megapixel is. But if you say, a higher megapixel camera will take a 5x7 photo more clearly and lower megapixel camera will take a 4x6 photo more clearly, it suddenly becomes a lot more real. The other simple example is that if you ran a business as a business on yourself and it had two bad quarters, would you shut the business down? Probably not, right? You would continue it and you would try. Same thing; you are investing in underlying companies.
Kapoor: If I understand correctly, it’s about nudging the investor to not look at the one year, or the recent performance. I think we need to communicate better. Whether it is simplifying some of these complex things or communicating how we want to manage, what is the investment thesis, how we want to manage the money because there is a very evolved, expert group of advisers, and intermediaries, who are looking at that input. Along with continually refining a process and admitting to ourselves what we did not do very well, what did we do well etc; so these are the two things that the manufacturer should do better. But for the investor, while technology has helped a lot across many areas, going back to allocation and the importance of allocation, which is so fundamental to a portfolio, is something that often gets overlooked.
Abraham: So the conversation seems to be coming back to the adviser so we should deal with that question before we go on to the rest. Ashwani, obviously they are one of the most important links in getting your message across to the investor. Is the industry empowering the adviser enough? If we ask the advisers here today, do you think they would say that they’re getting a fair deal from the industry since the bulk of the responsibility seems to be lying on their shoulders.
Bhatia: See, the problem is everyone is impatient. The investor is impatient, the adviser is impatient, the IFA is impatient and we as an industry looking after AUM and numbers are looking for a bigger piece from the banks or the insurance industry. Finally, it is a game of patience and whatever changes Sebi has made over the last year or whatever has been implemented, they’ll take time to settle down. But finally, I think it is going to be a volumes game. It is a challenge today to ask a customer to open a folio. Once he has one product, it is a bigger challenge to get a second product, a third product. So what you got to reinforce again and again is your value system, how important that is to us, the processes as far as the investment is concerned, the vintage of the investment team.
Kapoor: I don’t think it is an additional role. I think that has been the role right through. And you know, clearly the community has done a great job in taking that responsibility. Proof of the pudding is, if the millennial chooses them despite the Google generation, it is telling something about the value that they bring. But maybe for sometime, we’ve been very focused on one part of a small problem or a limited problem, which is mis-selling and then taking certain decisions around it. I almost think that as an industry, including us as manufacturers, as the information becomes freely available and lot of this data is getting put up, including performance data etc, we should actually worry about the opposite end, which is someone mis-buying. You know this case in point where we are seeing this 5X jump in our ten-year constant maturity guilt fund; why? Because it suddenly has a one-year return which is 20%. If someone is going to look at that and buy it and suddenly we are seeing five times, ten times the volumes in that fund, no one is selling that. But it’s mis-buying them; so maybe that’s the other part of the problem we’ve got to tackle.
Parekh: I think I’ll just give you a story of the first adviser of the world. This was 700 years before Christ and there was this man called Joseph, who was the adviser to the Egyptian Pharaoh, the king there. The king used to get these dreams everyday, and these dreams were very weird. His dreams were of two types—one where he would see seven very healthy cows and then immediately he would see seven very thin cows and it would keep repeating. And then, the next day the cows stopped coming; he saw a great harvest of crops and then immediately after few minutes, he saw famine. So these dreams were recurring to him. So he goes to Joseph and says that I am getting these dreams; can you cure me, or can you solve this? It’s very disturbing. And Joseph who was the adviser to the kingdom said that these are nothing but nature giving you a signal of cycles; like markets have cycles, asset classes have cycles, you have seven good years and then seven bad years and the same is reflected in every asset class where we invest. So he said that this is a learning for you and these dreams will keep coming till you don’t make changes in your behaviour or in the way you are ruling the country because there will be seven years of good crops and then when the famine hits, you won’t be prepared for it because you’ll extrapolate the seven years into the future; hence, from now on, every year, create storage systems and keep 20% aside every year so that we’re ready for bad times. I think the real advisory is about preparing for the cycle to change. Like we say, the four most powerful words are—this too shall pass. So in good times, we need to recognise that bad times will come and how do we prepare for it. How do we make people aware about it and not just extrapolate good times. Likewise, in bad times, not extrapolate pessimism alone. So if investors are coming on our websites and buying volatile funds, which are giving highest returns, what stops us from just putting a banner there and saying that this fund is going to be volatile, don’t get carried away by last one-year returns or used to happen even in our funds and we said let’s stop putting this highest return as a tag in itself.
Abraham: Yes, Chandresh
Nigam: I think what you’re trying to say is how do we help our adviser community to do what is right for their customers. There are two parts to it. One is obviously what the manufacturer does. Responsible manufacturer has right products, manages in the right way and that’s a communication which needs to go to him so that he is able to evaluate what are the products which he should be ultimately going out and pitching to his customers. It’s relatively easy to start talking about goal-based investments. It is easier said than done; the first thing is that significant amount of effort is required to understand each of your customers. There are two aspects to it. How effective an adviser is in understanding his customer and able to communicate what the right investment or portfolio strategy is. The second aspect is, as compared to effectiveness in an adviser dealing with his clients problems, is efficiency. If I am able to do it only with 10 clients, I won’t have a business. I have to probably be able to do 500 clients, it’s an issue of efficiency. We’re talking about CRM (customer relationship management) solutions. So I think there is an embrace of technology. But I think what I’ve seen over the last 5-7 years is that a large number of advisers have their realisations that if I do the SIP route, ultimately my client is going to happy; so that’s kind of already going to be done. How do I engage with my customers? Do I still go back to the return number, or do I engage on a much more emotional platform to say that I’m going to talk to you about your future.
Gupta: I just have one point. While there is a lot we can do to educate our advisers and our brand campaign is “advice zaroori hai". To what Vishal said, we only have 2 crore odd investors, and one of the big challenges and needs is also to educate investors that they need advisers and also what advisers can bring to the table. The advisory community is quite competent. We’ll do a lot to educate them, but from mis-buying to just telling investors that you need advice and this is what advice can do for you, is also something we can do as an ecosystem.
Abraham: The SIP was the last blockbuster idea. What is the next big idea from the industry?
Bhatia: Index funds.
Nigam: I think any product that can harness volatility as an advantage will be a great idea. Some part of it is already being done through multi-asset products, which have the ability to move allocations, through simple formulae like time-based rebalancing and so on.
Parekh: I hope SIP is not the great product of the past because when we sold it in the last few years, it was with permanency in mind and we have said it was forever. It is an evergreen product and belief. So that will remain. I agree with Chandresh—asset allocation funds
Gupta: Passive fixed income products and not active ones. And SIP was not a product, it was a feature. As my product head says, feature is the future. So, more innovative features.
Kapoor: Not really products. I would like to focus on simplicity as the big idea—whether it is in buying or meeting your goal or the way you interact or the way you understand or transact. I think there is humongous scope for simplifying what is intrinsically a complex market.