- We create many disappointed investors when we push products that are either inappropriate or are not properly communicated. AMC sales teams will continue pushing their own products – that’s their job. But IFAs need to resist the temptation to follow suit and must put their clients’ interests first – because that is their job.
- In this lower margin era, cost reduction potential is limited for IFAs. While the long term solution remains volume growth, the short and medium term difficulties can best be addressed by going for higher wallet share of your existing clients. Diversification of product portfolio is the key mantra for IFAs now.
WF: Flows into equity oriented schemes have been coming down sharply in recent months – exactly as Aashish had forecast in Dec 18, in our last interview with him (Click Here). What is your prognosis from here on for business volumes? Which categories do you see gaining and losing traction in FY 19-20?
Akhil: Actually, like equity markets - sales in mutual funds has also become very volatile in last 3 months like in March Equity Net sales was approx. 8000 cr and April Equity Net sales was 2400 cr and the first 10 days of May suggest slightly better numbers than April 2019 at 1200 cr already. If the markets continue to remain volatile without a clear direction then for sure we are heading for tough times as investors will lose patience. While it should not be that way, the fact is that investors cannot tolerate two years of waiting period of money not being made.
A lot of what happens to flows will mainly depend on election outcomes and what investors perceive as a positive outcome for election which will help them decide for or against making allocations in equity. Thus it will be important to see what the short term mood of the investors is post-election, and if it is positive flows will improve else it will only deteriorate.
Lastly, we are still to see the exact impact of TER changes and consequent changes to revenues of the distribution fraternity. I believe that there will be segments of distribution whose interest and commitment will digress from the industry for a while and in some cases for a long time.
WF: Now that TERs have been reduced for large funds and consequent trail cuts have been implemented, in what ways do you see business dynamics changing in the AMC and distribution worlds?
Akhil: I am quite confident sales will move in small sized funds for higher revenue, large sized funds will get allocations only on pull from investors basis their performances. In addition, PMS platform and ULIPs will stand to gain as flows will be diverted to these platforms through various channels of distribution. At the same time, I will clarify that neither of the above is a sustainable flow because well performing small funds don’t remain small forever and as their size growth their average and incremental TERs will be reset and their pricing will also have to be reset as they rise in size. And there is a limit to how many clients can buy PMS or ULIPs and up to what quantum of their surpluses can be allocated.
WF: After the flame-out of balanced funds due to inevitable disappointments around the “monthly income” proposition, dynamic equity funds/balanced advantage funds are also seeming to be given the cold shoulder. What lies behind the disinterest in hybrids and how do you see this space evolving in the coming couple of years?
Akhil: I strongly believe there is a market for hybrid/ dynamic funds, these funds are best suited to investors who wish to minimise volatility or those who want investment managers to invest rightly between equity and Debt asset classes based on the nature of valuations (this means more equities when markets are low and vice versa).
The issue I see many a times, not only in this category of funds but in general all categories of mutual funds schemes, is that the same are not being sold to right audience for the right purposes. When there is a mismatch in expectation and delivery between client and supplier then there is loss of faith which leads to clients walking away from the products with bad experiences and most of the times to never return back. I feel that communication at the point of sale is very important. Instead of being influenced by what AMCs want to push, if client’s interest is kept in mind and MF products, instead of being pushed, are advised properly then these kind of cyclicality of sales in various asset classes will reduce drastically and AUM would be more stable. The pit fall is that for some time the growth will slow down but so be it, right selling is more important that growth for long term success.
WF: How are flows into large cap actively managed funds? Are flows reflecting the high media glare on vanishing alpha? How do you see business momentum in different product categories within the large caps space going forward – including alpha, smart beta and beta oriented products?
Akhil: I find a lot of this discussion on alpha basis last year’s occurrences very premature. The moment we say last one year, a lot of people will say no the underperformance is for 2 and 3 years also. This is the trickery of following CAGR. If the last one year has been bad obviously it pulls down the previous year or two of averages and equally if next one year were to witness a turn around which is most likely, we will be seeing different set of numbers and conclusions in the near future.
From the bottom of demonetization where Nifty was 7700-7800 the Nifty has risen 50% up to its recent peak near 11,900. In that same time frame small caps have gone up and retraced the entire move and midcaps are about 10% higher than where they were. Within that the Nifty up move is concentrated in top 7-8 stocks. It’s obvious that when market breadth is absent and only few stocks go up, any stock picker will struggle to beat that narrow up move. If we are to draw conclusions basis that occurrence and make people buy the index or buy large caps, God wish us luck or put other way God wish us sustained bad luck! In the previous 3 years before demonetization, Nifty kept oscillating between 7500-8950-6700-8990-7700; no trend in Nifty and we managed to get 10-12% compounded alpha year on year. Sometimes, what gives you alpha, tends to snatch it back temporarily because markets are cyclical and so is alpha. But that doesn’t mean we chase the recent past. Because small and midcap did well from 2014 till 2016, we buy small and midcap in 2017 and we see what happened. Then large caps did well in 2018 so in 2019 we will buy large caps and then I don’t need to tell you what will happen.
Coming to your specific query on large cap, I’d say the scope for alpha in large cap has narrowed due to the new categorization norms which required 80% in top 100 scrip’s. But, India is not USA so let’s not jump to conclusions. We seem to be very worried about the index capturing the market return, before the capital market captures our entire economic breadth and growth potential. For instance, our portfolios have 10-15% weightage to insurance, the first company got listed about 18 months back and the index has no insurance weight.
Lastly, on passives; the rise of passives will come but it won’t be just because of alpha or lack of it. It will be due to a multitude of other factors like:
o Digital and direct movement which needs simplicity of products – if you are a direct investor using digital mode, you would prefer to buy simple product and there is nothing simpler than Nifty 50 or Nifty 500 index
o Regulatory push towards advisory and fee based pricing – if you want to charge a fee to your client, you would prefer cheaper underlying product. And index is cheaper than direct plan of active equity MFs.
o Exposure to western writing and western discourse and hence western influence on thought processes
o Lastly, if you are investing for next generation, it’s even more difficult to pick the right equity fund, but index becomes a no-brainer for that long a time frame because fund houses and fund managers and their performances will come and go over every cycle, index is where it is.
WF: Within the equity oriented space, which product category do you see gaining maximum traction over the next couple of years and why?
Akhil: Larger flows in equity mutual funds will tend to be lop sided in favour of Multi-cap and mid/ small-cap funds as the room to play is much wider and investment in right businesses with right allocation will certainly help active funds to out-perform their respective benchmarks. All said and done we are big votary for midcaps because our faith remains this is where wealth will be created for times to come.
WF: What are your product plans for FY 19-20? Are you planning some NFOs?
Akhil: No plans as of now, we do have an approval ready for a Large and Midcap Fund but we have not decided on the launch date. Considering the flux in the situation and significant bounce back in our own funds in last 3-4 months, we are focussing on engaging with distributors and clients rather than launching new funds. In due course of time, we will launch the Large and Midcap for sure.
WF: We now live in a lower margin world, with a hope that volumes will eventually help us bridge the shortfall in income. The other angle to reduce the gap of course is costs: what propositions do you see coming up in the IFA space that can allow IFAs to lower the cost of doing business and thus enhance profitability?
Akhil: Given the economic construct of the products and the regulatory headwinds, there is limitation on increasing the prices. But within that framework, IFAs must negotiate what is best possible in their favour like any commercial entity would do...
Coming to costs, generally, I have seen IFA’s are on low cost models already as in most cases they are individuals who sell and service clients with 1-2 people in back office and 1-2 runner boys at best. Nothing really can be done to reduce basic infrastructure cost in this kind of a setup. The other larger overhead is the administration cost of paper work and conveyance to meet clients, completing documentation etc., and this is certainly one area where costs can come down drastically. This can be done by digitisation which is easy to talk about but difficult to practice, so what can be done?
1. Do one time capex and build your own platform
2. Use service providers who can lend you transaction platform
If you implement a policy of stopping usage of paper and doing this electronically, I think costs will come down.
Further, we have stated in multiple interactions and industry forums that IFAs need to desist from taking everyone and anyone as a client. It’s very important to have a segmentation of the prospective client base and go after few chosen segments or profile of clientele. This will enable you to easily implement any strategy may it be paperless or may it be a strategy led by promotion of certain suite of products and offerings. Hence, instead of reducing costs it might help to look at ways of increasing their revenues from chosen set of clients. How do you do it? Be open minded, is mutual fund the only need for your clients? Or do they want different solutions, products? What about risk (insurance), what about tax planning (can you partner with an expert and charge a fees), alternate asset classes (PE/ RE) and Portfolio Management Services. I have seen there is a general discomfort to all these things especially alternates and PMS due to some unfounded notions or even a stray past experience. A careful diligence of the available options will give the comfort to recommend the same in clients’ portfolios.
As is well known, we have a long runway to grow and the journey for savings and investments has just about commenced. We need to strategize our growth paths keeping the operating context and available opportunities in mind.
Courtesy: Wealth Forum