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Navneet Munot
Navneet Munot

Three things that Navneet Munot can do to turn around HDFC Mutual fund

The fund house has to highlight processes and strategies to keep investors in the loop

Who says elephants can’t dance? Louis V. Gerstner proved it with IBM. With the impending change of guard at one of the largest and oldest asset management companies (AMCs) in the Indian mutual fund industry—HDFC AMC—this may be a moment of reckoning for the fund house. The AMC has chosen Navneet Munot, who has largely been on the fund management side in his earlier stints, to head its business as chief executive officer.

This change comes at a time when the asset management company has been struggling to attract fresh inflows and, more importantly, to showcase performance in some of its popular equity funds. The choice does send out signals that the AMC is willing to change track—not just in running the business but in the way it manages its assets.

Here are three things that HDFC AMC’s incoming CEO Navneet Munot can look at to positively disrupt the way the fund management business is run at HDFC AMC.

Showcase processes not just people

HDFC AMC has for long ridden on the performance of its star fund manager Prashant Jain. While Jain has proven his mettle long enough, it is evident now that the fund house needs to showcase processes, not just people.

No doubt, HDFC AMC would have well-drawn processes built over the years. But it is equally important to communicate that to those who matter—the investors. Smaller fund houses such as Mirae Asset India and Invesco have, very early on, steadily showcased their processes more than people. In recent years, even larger AMCs like DSP have clearly communicated and shared each of their funds’ strategies and processes even at a micro level.

People matter but HDFC AMC needs more Cheteshwar Pujaras than Virat Kohlis now. Navneet Munoot himself and the recent additions to the fund management team—Amit Ganatra as well as Gopal Agarwal—all qualify perfectly as being the understated steady players than the flashy ones. They all have a history of building sound processes in the fund houses they were with earlier. That these fund houses continue to be well run post their exit shows the success of the processes built.

Diversify strategy

Waiting patiently for high conviction bets and deep value picks to start performing may be great investment philosophies per se. But for a fund house, it’s a dangerous road to tread, especially if they are practised across schemes. It is akin to putting all your eggs in one basket. When the index as well as peers outperform funds steadily—and by significant margins—it is asking too much from investors to wait based on trust.

It is time HDFC AMC laid clear strategies for each of its funds—value, growth, defensive and cyclical—and clearly communicate to the investors what to expect from each. When a fund house has multiple schemes, it is expected to keep this distinction clear.

The lack of this became evident post the re-categorization exercise by the Securities and Exchange Board of India in 2018. Some of the fund’s largest hybrid schemes refused to fit into the investing pattern followed by peers under the new categories (such as balanced advantage), thereby losing out.

Positive disruption

HDFC MF’s track record in the past decade saw some negative impact with product jugglery in dubbing and selling some equity-oriented products as “regular income" products. A large fund house can’t call such marketing gimmicks as product innovation.

Conviction in active management need not stop a fund from exploring the passive space, especially when the market presents opportunities for disruption. Failing to do so will likely leave an image of a fund house selling only high-cost products through its bank network. The Bharat Bond ETF from the Edelweiss house or the recent SDL ETF from the Nippon house are examples of positive disruption in the passive debt space.

In the active space too, the fund needs to take a relook at its cost structure, especially in equity and equity-oriented schemes. Many of its large equity schemes are strikingly more expensive than similar category schemes of other AMCs. With the scale at which the AMC operates, it is not difficult to rationalize costs.

This is true even in the direct plan space. If you take the list of equity schemes (other than index funds) with less than 1% direct plan TER (total expense ratio), there are 78 such open-ended pure equity schemes with an average 0.7% expense ratio. And there is just one HDFC fund in this list.

Product differentiation and cost competitiveness will become a necessity in an era of thinning margin of outperformance (or no outperformance) over benchmarks.

As of now, HDFC AMC is holding up well despite these issues, and that’s thanks to its sound and trustworthy team as well as its strong group banking network. But the evolving market—both financial market and investor behaviour—requires fund houses to have more nimble footwork and agility. This aging pachyderm will need to learn to dance to some new tunes.

Vidya Bala is co-founder, Primeinvestor.in

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