The Hindu Business Line : `Fund managers will continue to outperform the market'

With equity fund assets still making up just 3 per cent of the overall market capitalisation, there is still a long way to go... With the Gross Domestic Savings up to 34 per cent, huge amounts of savings are coming in.

Mr Ajay Bagga

Lotus India Asset Management Company, a joint venture between the Temasek arms: Sabre Capital and Fullerton Fund Management, may be a start-up managing just five mutual fund schemes. But with a 12-member investment team, 160 employees and over 7,100 distributors for its products, the fund house claims to have put the infrastructure in place to rival some of the leading players.

Business Line met up with Mr Ajay Bagga, CEO, and Mr Tridib Pathak, CIO-Equity, in Chennai during a recent road-show, to discuss the fund houses' USPs as well as trends in the stock markets.

Excerpts from the interview:

There are over 30 fund houses already managing a couple of hundred schemes in the Indian mutual fund industry. What does Lotus Mutual Fund have to offer to investors that is different from other players, in terms of investment process or style?

Ajay Bagga (AB): I think it is not an overcrowded market at all. If you see the penetration of mutual funds in India, at $77 billion, it has not even scratched the surface. Of this $77 billion, a good $47 billion is debt money which is largely institutional; the actual retail money is hardly there. If you look at developed markets such as the US, there are over 500 mutual fund complexes running there and thriving. We therefore think that there is place for even 100 or 200 players here and anyone coming in is only going to expand the market. A player like Lotus, with its pedigree (between Temasek and Sabre), can expect to substantially expand the market. What we really bring to the table is the pedigree of solid financial institutions backing us, experienced people and our long-term philosophy and investment process. Clearly, we see our task as market expansion and market penetration. Differentiation comes in only when it is a saturated market.

The market for fund products may be under-penetrated, but what about your investment universe? Isn't that very limited? After all, most mutual funds typically track 150-200 stocks and everybody seems to be chasing the same set of stocks!

Mr Tridib Pathak

Tridib Pathak (TP): We think that finding out new ideas and expanding your investment universe can happen only with a well-defined investment process. We do not believe in an individualistic style of fund management. We feel that scalability in the investment universe can only come from a strong framework. There are three key parts that we stress on in our investment process — Discipline, scalability and repeatability. We currently have coverage on 137 companies. We know this is not enough and has to be expanded. We will be adding to our team size as we go forward and will be increasing the coverage. In addition, we will use external research to our advantage to generate new ideas. Our job will be to add value to this through our internal processes.

With so many new players setting up shop, there is a tremendous war for talent within the fund industry. What are your retention strategies?

AB: One unique feature of our business model is that we have reserved a significant portion of the equity stake in the AMC for our employees. All our employees get stock grants and stock options and are owner-employees. Thereby, over time, their net worth grows with the customer's net worth and the AMC's net worth. We are also looking at other HR practices that can help in retention. People do love to work in a growth company, and Lotus is a player who is totally focused on rapidly growing this business in India. We think this will help in attracting and retaining quality people.

What is the size of your fund management team?

AB: Right now, we have 12 people on the fund management team, of which seven are on the equity side and five on the debt side. We also have a dedicated person heading advisory services, which we are going to ramp up. These people have over 100 years of experience among them. This is a pretty big team size for a start-up in the fund management industry.

Can you elaborate on your investment process?

TP: We go sector by sector and assign scores to each company in the sector. We compare all companies within a sector on five key parameters: Business franchise, management quality, change in fundamentals, capital efficiency in terms of ROE or EVA and actual business growth. These inputs are based both on our analysis and on interactions with the management. We assign a score on each of parameters from 1 to 5. We compare this score to valuations for each company in a sector, and rank the best picks in a sector. Once you do this across sectors, you arrive at a list of companies that you would prefer to buy at this juncture.

I would like to stress that this is not a quantitative process, it is completely judgemental; it breaks down the thinking process into a logical step-by-step process. We plan to review this every quarter or based on price movements. We believe that this process will also help us act quickly. If we are looking at say, cement, we already know which are our top picks; we don't have to discuss the stock choice when it is time to act. We also plan to repeat a similar process at the sector level and assign scores to sectors, to help us arrive at our top sector exposures.

Diversified equity funds, which easily outpaced the indices in earlier years, struggled to do so in 2006, with only one in fivebeating the Sensex. Given more difficult market conditions, will you be able to deliver market outperformance?

AB: I think it is somewhat misleading to look at the 2006 numbers alone, given that there are equity funds with a 13-year track record of consistently beating the markets. I do not think 2006 is any kind of inflexion point on fund performance because the rally has been led by very few stocks, maybe just seven or eight, with mid-caps not performing at all. Mid-caps have delivered 25 per cent on a one-year basis, but account for 30-40 per cent of the diversified fund portfolios. This is why funds under-performed indices such as the Sensex or the Nifty, that delivered a 42 per cent return. However, I believe that there is still a lot of alpha to be generated in the Indian markets and fund managers will continue to outperform.

If you look at the three- or five-year track records of funds, many have still managed a substantial outperformance. With equity fund assets still making up just 3 per cent of the overall market capitalisation, there is still a long way to go. In fact, I would think that if you were conservative in 2006, if you stayed away from certain stocks because you thought valuations were high, you would have missed out on the returns. Momentum was king last year.

What is your outlook on liquidity flows into the Indian markets? Will last year's inflows of $8 billion be sustained?

I don't see any problems with liquidity. Wherever our teams have met foreign investors, they have said they are looking to enter India on any correction. Despite the recent hike in Japanese interest rates, we do not see the carry trade unwinding substantially. Yes, liquidity is a function of global risk appetite and that we do see a softening happening. Though global liquidity is there, domestic liquidity really has to come in. Current equity fund mobilisations at $7-8 billion, are still a drop, if a big one, in the domestic context.

Look at the Korean example. FIIs have been net sellers in Korea for the last three years, but the markets are still up. This is largely because households have got in through the regular savings route, which is something like our SIPs. What are the macro-variables favouring this here? With the Gross Domestic Savings up to 34 per cent, huge amounts of savings are coming in. We have had four years of very solid growth in stock prices and this will give people higher comfort levels with equity funds.

More Stories on : Interview | Mutual Funds

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page