A debt quality crisis is raging through the industry and actively managed funds have had a tough year, falling behind benchmark indices apart from giving poor returns. We speak to industry doyen A Balasubramanian, chief executive officer, Aditya Birla Sun Life AMC. He speaks about the performance of the AMC’s flagship schemes, the situation in debt funds, and more. Edited excerpts:
Aditya Birla Sun Life Fronline Equity has seen its performance flag over the past 12-18 months and this is also true for Aditya Birla Sun Life Tax Relief 96 over the past one year or so. How do you reassure investors about these last schemes?
The last one year has been tough for equity money managers, mainly because markets were driven by four to five stocks which have high weightage in the index. The longer term performance of both schemes has been very good. Second, the divergence between mid-cap and large-cap is quite wide and there is some bit of dip on relative performance. Indian market is a stock picker’s market although last year was tough for stock picking. In the long run, there will be an increased breath in the market. Stocks outside the Nifty and Sensex will also show strength upon earnings coming back. We normally do a course correction vis-à-vis the index, which we have already done for Aditya Birla Frontline Equity. For instance, our NBFC exposure was more than that of the competition. We have moved from wholesale NBFCs to wholesale banks.
The engines of the economy seem to be slowing. Consumption has been a pillar of GDP and the latest results of some of the largest FMCG companies are showing a slowdown. The NBFC sector is in turmoil. Where will growth come from?
Consumption has definitely been a big driver of economic growth in the last few years. It has been that one constant support for growth. Infrastructure expenditure is something where the government did quite a bit in the recent past. This spending on building infrastructure by the government, both state and central, will definitely continue.
I am, however, a little worried about the consumption-led growth. It has been coming from two places. One is more money in the hands of people; like the seventh pay commission had an impact for about two and a half years. There is no incremental push coming for consumption. The normal income of the people will drive it and the rural income has to stay high. So far, rural income is not bad. But it also depends on how the agricultural output is going to be. If monsoon impacts this area, there will be an impact on consumption-led growth. Another barometer to measure consumption is car and two-wheeler sales. This part is also going through a tough time, mainly due to NBFCs having lost the power to go aggressive, like they were in the past. If this continues beyond four to six months, this could also impact growth.
What can lead to a correction or improvement on this front?
The RBI appears to be in favour of rate cuts and that could lead to good liquidity. If oil remains favourable, we could see interest rate-led demand growth come back in the next 1.5-2 years. The spending power is there but right now the problem is that the confidence to spend that money is lower, which I think will come back if a stable government is voted back. The new government can also consider taxation more favourably from an individual taxpayer point of view. This can be done as long as GST collections are good. The new government can also step up vigilance to improve GST collections.
Coming to the debt problems of some of India’s large corporate groups that affected mutual funds, were adequate covenants placed when exposure was taken? What would you do differently going forward?
Covenants are not an issue. If you look at all the mutual fund debt exposures including ourselves, all the financial numbers have to fall within the tolerance limits we have set. This time around, the debt problem is internal rather than overseas. Dependency of borrowers has increased on players outside the banking system like mutual funds and NBFCs. As money managers, we have become risk averse in our new investments. One of our learnings is that the percentage exposure could have been better. But this is also a result of outflows from debt schemes. We don’t generally expect fall in AUM; we assume growth.
Sebi has introduced side pocketing. Very few AMCs have implemented it because you have to amend the scheme information document to allow for side pocketing. Has Aditya Birla Sun Life amended its SIDs to allow for side pocketing?
Board approval is there. The amended documents are ready internally but we have to take approval from Sebi. We are open to do this. However, we have to provide a 30-day window for investors to leave without paying exit load. There is also a cost element. We will probably combine this change with the derivatives changes introduced by Sebi for mutual funds. Not many AMCs have made this change. Every customer may not understand it. It’ll be easier to make the changes when the market stabilizes.
FMPs have seen a lot of pain over the past year. Structurally, an FMP can hold only a few papers and is hence inherently undiversified. Is there a place for FMPs in investor’s portfolios?
There are two types of FMPs—those with 100% AAA and credit FMPs. If someone has taken risk with credit FMPs they should have the ability to digest it. All the problems in the debt funds are not in traditional debt funds. Total industry debt fund size is around ₹14 lakh crore and credit fund size is ₹1.27 lakh crore. These schemes are meant for credit, which is less than AAA. Companies like IL&FS, DHFL, Reliance Commercial Finance, Reliance Home Finance, Reliance Capital etc were AAA about 6-8 months ago. All these FMP investments were made around three years back. This is not a repeat item. It’ll happen once in a while. Multiple downgrades of AAA are an exceptional scenario.
What are the next few trends you are seeing in terms of digitization now that we have the Aadhaar judgment behind us? Is it SIP mandates through UPI or can we expect measures for KYC simplification?
For one, we have introduced video KYC. Also, since PAN is a must for investment, we are also looking at assisting people with getting a PAN number through a tie-up with someone. In our case, almost 18 lakh folios have registered for one-time bank mandate. Most people unknowingly allow SIPs to expire. They are then forced to re-register. We are looking at whether such SIPs can be revived on an as-is basis without completing additional paper work. We may also promote our digital assets like our app for both distributors and customers.