Because Quantum AMC is maverick fund house. It has a completely independent board of trustees with no employee or shareholder of the Quantum group on board. More importantly, it is the only AMC that has refused to pay distributor commissions by selling its funds directly to the investor. As you will see, that was the first issue we discussed when we met Quantum AMC's director, Ajit Dayal, and CEO and CIO, Devendra Nevgi.
What's the rationale behind not selling funds via distributors?
People want to save their money. We believe the cost of taking that money from the investor to the investment vehicle must be as low as possible. The fund distribution system in India is a racket. The distributors convince investors to invest in a new fund and after six months sell and invest in another fund. This earns great commissions and makes a lot of business sense for the distributor. But it makes no sense for the investor and these distribution costs significantly eat away his returns.
Has your business suffered because of this decision?
Yes, if our business is making money for ourselves. No, if our business is looking after the retail investor. So the answer is No.
You are not in the charity business, why should you care?
We will eventually make money because we have the investor interests in mind. If we perform, we will make money over time because investors cannot ignore performance. If we perform we deserve to get money. If we don't perform, we don't deserve to be in the business.
How long do you think it will be before you make money?
Our breakeven as a group requires us to have around Rs 500 crore under management or advice. We are not too far away from that because we act as investment advisors for overseas investors too. So we can patiently wait for another year to break even, if we have to.
The Quantum Long-Term Equity Fund breaks even at Rs 35 crore and currently we have Rs 31 crore under management. At 2.5 per cent per annum, the maximum expense ratio allowed by SEBI including the management fee, we will make enough to cover all the expenses of the scheme on Rs 35 crore. When you have heavy advertising, national TV campaigns and distribution fees, then your breakeven size shoots up. And that is why AMCs opt for the crazy business model of garnering more assets.
Your expense ratio is high at 2.50%.
There are certain fixed costs - transfer agents, custodian fee, management fee. As assets increase, the expense ratio will fall.
Advertising does not guarantee us anything and the breakeven shoots up dramatically. If we spend Rs 1 crore in an ad campaign, we need to get Rs 100 crore in assets to breakeven - at a 1 per cent fee.
But performance will guarantee us business. You cannot ignore performance. If we are top quartile performers consistently, we will not be ignored.
We are not in the business of gathering assets. If yes, then we would have to sell investors what they do not want. We are in the business of managing money. That means we have to make returns on certain risks taken. We want to earn the asset, not buy it.
Mutual funds are more sold than bought. Do you see a shift happening?
Right now it is an asset gathering industry and not an asset management industry. It should change over the next decade or two. It all depends on what the regulator wants. Depending on whether it is interested in an asset gathering or asset managing business, it will write the rules accordingly.
Even in the United States, 90 per cent of the funds are sold via distributors and just 10 per cent are directly sold to the public. But the malpractices here are much more.
What do you mean by malpractices ?
Look at the churn just six months after an NFO. A study done on this subject revealed that after six months of an NFO, funds lose a third of their assets and sometimes they are down to 20 per cent what they garnered at the NFO.
And that did not happen after your NFO?
Our inception date was March 13, 2006. Currently, we have around 1,500 investors and have lost 38 investors over the last year. In May 2006, when the market crashed, we actually got money.
What was your NFO target?
We at Quantum AMC had no target.
Plan to come out with any new funds?
Yes. Over time. But we keep away from products that require a huge distribution channel.
Like what?
Like Gold ETFs. Being exchange traded funds, you will have to transact on the exchange. That means you end up paying brokerage when you buy and sell. Gold is not something a retail investor has to research. It is a commodity you buy or sell. Why can't we have an ETF that trades on the Net? No distributor. No broker. The investor will immediately save more than 1 per cent. He will be buying and selling only at the value of gold.
What are the products you would like to launch?
A good time to launch a debt fund is when we feel interest rates have peaked.
Do you feel interest rates have peaked?
Not yet. Interest should move up over the next three to six months. The RBI will continue to raise rates till the time the credit growth and money supply come to its target.
We follow the practice of no distributors not only for our equity fund but also our short-term liquid fund. We interact directly with our investors which are predominantly corporates, banks and HNIs. When we directly talk to our investors, we can gauge for how long they plan to lock their money. For instance, a corporate may state that they need to deploy money for a month. The fund manager will then tailor his portfolio to deliver returns with this time frame in mind. But the corporate may come back within a week to redeem and if the fund manager does not have anything to backup, he will have to sell his asset, which he locked in for 30 days, at a loss.
We avoid this situation by being directly in touch with our investors. We try to gauge their situation and needs and minimise our risk. We look at avoiding distress selling to fund his redemption.
You are known to go heavy on cash in your equity fund. Why is it so?
When we launched in March 2006, the Sensex was around 10,000 - 11,000. We openly stated that we would not be investing because we thought the markets were too expensive.
We don't launch a fund because the markets are necessarily good. If markets are not good and we cannot find value, we stay high in cash. Under SEBI guidelines, for the first six months you can even be in 100 per cent cash. After that, you have to follow the investment guidelines. Our investment guideline allows us to go up to 35 per cent in cash. We will be that high if we choose to. Right now we are low in cash.
From launch till May 2006, all other NAVs were flying except ours because we put very little in the market and were heavy in cash. But in May, other fund NAVs which were rising collapsed and we were saved because we were high in cash.
We were 65 per cent cash in May 2006. We found a lot of good buys when the market crashed and were down to 18 per cent in June. In December we were around 10-11 per cent in cash and now we are below 5 per cent.
When the Sensex was at 12,600, you had a high cash allocation because the markets were expensive. With the index at 14,000, your cash allocation is just 5 per cent. Why?
We don't buy the index. We buy stocks. All stocks were expensive in May 2006 - small-caps, mid-caps, everything. Now there are just 5 or 6 stocks in the Sensex that are expensive. We don't own those but many other stocks. And the prices of the stocks we own are lower now than they were in April-May 2006 though the companies have 12 months of earnings. To us that is value.
You consider yourself a value investor?
Yes. We are value investors. If we don't find value, we step away from the market. If we find value at the individual stock level we will be in the stock. We have no sector bias or sector preferences.
So we will lag the index when the momentum stocks are moving upward because we will not necessarily be in the BSE 30 stocks.
Our fund management team will meet various companies during the year and update the research files every six months on each company that we track. At the board level we supervise the overall investment philosophy - valuations, long-term outlook, managements etc. At the micro level, the fund management team does the actual stock picking and decides when to make a buy or sell. Stocks may fall after we buy them but that will not deter us because at that price, with a two- to three-year angle, we see a favourable risk-return ratio.
We are long-term investors. When we came out with our NFO, we carried a statement on the likes of the statutory warning on cigarette packets: If you are looking for short-term gains, the Quantum Long Term Equity Fund is not for you.
If you look at India, there are three growth themes: Domestic consumption, the export story and infrastructure. We have a lot of exposure to domestic consumption and some exposure on the export side through pharma and textiles. We have very little exposure to infrastructure because we think the valuations are crazy. We have steered clear of the real estate sector.
You are not in FMCG but you have raised exposure to Hindustan Lever Limited. Why?
True. We have nothing of consumer staples. HLL is the only FMCG stock we own. When HLL fell at the start of the year, the valuations of the stock were favourable so we picked it up. It made sense on a risk-adjusted basis to own the stock at that price.
For every sector and company, we have predetermined ratios like price-to-sales, price-to-book, price-to-earnings, price-to-cash flows and so on. Based on these, we fix our buy and sell prices.
The 'E' is not the earnings of this quarter or year, but of the future. So it is future earnings and current price. Based on these, the stock will fall into one of the categories: buy, hold or sell. Based on where we expect the earnings to go forward, the status of the stock is revised.
Airline stocks are viewed as risky by many fund mangers. Yet you invested in Jet Airways?
Two years ago when Jet came out with their IPO, we found it very expensive. Jet went to Rs 1,200 but we started buying it at Rs 600. At this price, we felt the risk-return ratio made sense. People are getting wealthier and air travel - both pleasure and business - has increased. Airlines per se is not a great business to invest in due to government approvals, infrastructure hassles etc. But the underlying trend at Rs 600 makes a lot of sense for us to be in the stock.
Recently you increased exposure to TCS but not Infosys. Why?
Valuation is what drives our decision making. When we buy a stock, it has nothing to do with the numbers you are reading in the papers everyday. It's more about what we think the business will look like 3 or 5 years from now and the price we are willing to pay for that stock. So we like Infosys but are willing to buy more of TCS because we see margins of Infosys coming down and TCS going up. To that extent, TCS is trading at a discount to Infosys.
For every single company, there is nothing about the near-term that worries us. We always look at the long-term basis. Take the example of HDFC. The company has been through many economic cycles and interest rate cycles. It has a solid track record where management is concerned. They have managed their way through a lot of macro changes in the economy. They have systems and processes and a structure in place. HDFC is in the business of pricing risk and understanding the risk of default when people take loans. So when ICICI Home Loans was set up and HDFC market share dropped, they did not go out and try to cut price to gain market share.
It gives us great comfort being in a stock of this nature. Even with interest rates rising, it is not new territory for HDFC. They have been through this, they know what to do, how to react and they understand their market and business very well. They navigate themselves very well as a company.
Any contrarian picks?
We are not contrarian investors. Just because someone is selling does not mean we have to buy or when someone is buying, we must sell. We don't do something because others don't do it. We always look at the risk-return ratio. We bought cement in 2000-01 when the companies were losing cash and the stocks were available for a song. At that time it cost $90/tonne to create a new cement plant. In 2006, we sold our cement holdings. After we sold, the stock prices still went up a lot.
As recently as some months ago, when ACC was going for Rs 1,200, we were asked what price we would buy it for. We said Rs 500. So we are not contrarian, just very patient and disciplined.
Your final word to investors…
Everyone seeks returns. You need to understand the risk you are taking to get those returns. The investor must first look at the risk and then see the return that corresponds. And stay for the long haul.
This interview appeared in May 2007 Issue of Mutual Fund Insight.
Ask Value Research 
New episodes every Friday 
New Process Alert 
Seems like you've uploaded a wrong QR code. Please upload the QR code downloaded from MF Central platform.
