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Is SBI MF set for a Turnaround?

If it reverses the poor performance numbers and its biggest distributor gets more aggressive, the downslide would be stemmed

When Achal Gupta took over as Managing Director of SBI Funds Management in 2008, his goal was to make the fund house one of the largest in terms of assets under management (AUM). Not an impossible task given that this is an asset management company (AMC) promoted by State Bank of India (SBI). Fortunately for him, the chairman of the bank, O P Bhatt, shares a similar ambition. Apparently, at a recent board meeting of SBI Mutual Fund, he expressed dissatisfaction at why the fund house was not amongst the very top in terms of AUM. Nevertheless, cynics wonder if they will ever succeed in their shared vision. Despite being around for over two decades, the AMC has failed to capitalize on its first mover advantage and neither has it managed to leverage the immense distribution network of SBI.

SBI Mutual Fund is currently amongst the Top 10 in terms of assets. However, its success in terms of garnering assets is simply because of the sensational run of a few schemes which helped tremendously in bringing in the moolah. The AMC was initially known for its closed-end funds. In 1994, it came up with its first open-ended scheme, Magnum Global. Later its open-ended offerings made their mark and aggressive fund management during bull runs under Sandip Sabharwal served it well. It was the performance of three equity funds — Magnum Taxgain, Magnum Contra and Magnum Global, that resulted in investors’ changing their perception of this fund house. Amongst the hybrid category, Magnum Balanced was a great performer. As these funds had a sensational run their assets grew multi-fold leading to a rise in the AUM.

Unfortunately, the good times did not last for long. After Sabharwal quit in November 2005, the funds continued to rally for a short while. In 2007 and 2008, they began to falter. They were not topping the charts in the 2007 rally and fell hard in the 2008 downturn. When Navneet Munot took over as CIO end-2008, not only did he have a faltering portfolio but even a global crisis that took its toll on the Indian market. To add to it, the size of the funds had increased considerably which made it difficult to reproduce the returns when the assets were less. This was all the more vital since the fund house was always known to tilt towards mid caps where a smaller asset base helps. Though Munot worked hard in putting process in place, the 2009 returns were not impressive enough.

Performance takes its toll
Why have the funds been faltering? On October 9, 2010, a meeting was apparently held at the head office of SBI Mutual Fund where fund managers were asked if they had been leaking information to the press on the going-ons inside the organization. The trigger was a report in an economic daily which implied that SBI Mutual Fund is going through a rough patch with its foreign partner. Though the fund house denied that there was any truth to the report and a consequent meeting, the rumours are not quenched. Even though the public sector bank promoted AMC has been in partnership with a French entity for years, there still appears to be a clash of working styles. The European player has apparently laid down a list of tough rules on how fund managers should deploy their funds, stock selecting parameters, limits on exposure and other filters, which restrict the fund managers to a large extent. Société Générale Asset Management has also expressed displeasure at the dismal performance of the schemes. To make matters worse is the so-called “lack of unity” in the investment team.

All these, if true, could be contributing factors on why the equity performance has been hindered. However, the senior management at the fund house rubbishes every single one of these claims, puts it down to baseless rumors and bad mouthing and claims that both partners are working in close co-ordination with each other. In other words, implying that there is a whole lot of smoke with no fire! But what the management cannot wish away is the poor performance. Numbers do not lie and in this case, they have disappointed.

Which begs an answer to the question: Is poor performance resulting in the lack of AUM growth? Difficult to say. Take for instance, inflows in the equity linked savings scheme (ELSS) category. “Net sales in ELSS last year were Rs 1,554 crore, out of which Rs 633 crore was garnered by SBI Mutual Fund, which is around 41 per cent of the new money coming into tax-saving schemes,” says Srinivas Jain, Chief Marketing Officer. “This seems like more than fair share in a segment which is fairly competitive and has a wide choice.”

Point noted. But even if bad performance did not have a disastrous effect on inflows, there’s no denying that inflows could have been even better had the funds continued on their winning streak. Currently, what is working in SBI Mutual Fund’s favour is the perception of performance and great branding. Thanks to earlier performance which has led to top-of-the-mind recall for a lot of their funds, it is perceived performance that continues to play a strong role.

All’s not lost
If one keeps its public sector heritage in mind, SBI Mutual Fund has been a very bold player in a number of aspects. Its aggressive fund positioning and performance which began under Sabharwal is a case in point. If one looks at the AMC from a business point of view, the picture is quite impressive. In terms of profitability, SBI Funds Management is one of the most lucrative players around. In March 2006, the AMC initiated electronic payouts and today has an arrangement with almost 50 banks. As a result, 85 per cent of the payouts (dividends and redemptions) are done via the electronic mode. When one considers that this is predominantly a retail fund house with 57 lakh folios, it’s a major achievement.

Recently, the fund house met with a lot of success with the systematic investment plan (SIP) campaign that was distributed by the bank. SBI was its largest distributor way back in 1991, when the initial Magnum schemes were launched. In the mid-90s, it lost its role as the largest distributor because it was not a focused activity within the bank. During this time there was a lot of transition within the industry as closed-end schemes began to get replaced by open-ended schemes and it became mandatory for distributors to get certified by the Association of Mutual Funds (AMFI). Around 2006, AMFI training initiatives were once again initiated with gusto in the bank and currently there are 18,000 AMFI-certified employees in SBI and its associate banks who can sell mutual funds. So while the bank seems to be getting its act together, albeit slowly, the performance needs to pick up fast!

Munot has completed around two years and the pressure on him is immense. Individuals who worked with him earlier are convinced that he is the right man for the job and he will set the mutual fund house back on track. Others are skeptical because they feel he is a debt investor, not an equity one. That however is rather unjustified because he does have expertise as an equity trader in his prior stints and in Birla Sun Life Mutual Fund handled the hybrid funds where he looked at equity and debt. “Don’t write Navneet off, he knows what he is doing,” says an ex-colleague. Can Munot stem the downslide? He does believe he can and swears that he will do a turnaround job.
We’re watching.

Fall from glory
In October 2007, SBI Mutual Fund had 6, out of these 9 schemes, rated as 5- and 4-stars. Three years down the road, none hold such a rating. We look at the performance of a few select schemes from 2005 onwards.

Magnum Balanced (Hybrid: Equity) Rated ***
Its ranking has continuous slipped from No. 2 (2005), to No. 6 (2006) and No. 10 (2007) till it landed in the 4th quartile (2008). It pulled up its socks in 2009, but did not top the charts. The returns this year are not impressive either.

Magnum Contra (Equity: Multi Cap) Rated ***
Though in subsequent years it never delivered as impressively as in 2005 and 2006, it did not hit rock bottom either. It managed to beat the category average and stay in the 2nd quartile for all the successive three years. The YTD, 1-, 2- and 3-year returns are below the category average.

Magnum Multiplier Plus (Equity: Multi Cap ) Rated ***
Though it never matched its performance of 2005, it never left investors disappointed either. In all the following years, it did manage to beat the category average, barring the downturn of 2008. This year too it has been an above average performer.

Magnum Equity (Equity: Large & Mid Cap) Rated ***
This one has been an erratic performer. A very average performance in 2005 was replaced by excellent numbers in 2006 and 2007 (the latter being a year when other equity funds from this AMC did not do well). Come 2008 and it fell harder than the average but showed a marked improvement in 2009. This year it has been doing fairly well.

Magnum Multicap (Equity: Large & Mid Cap) Rated **
After a decent performance in 2006, it disappointed in the following two years, delivering below the category average. It beat the category average in 2009 but still landed up in the 3rd quartile. This year it has disappointed.

Magnum Emerging Businesses (Equity: Mid & Small Cap) Rated **
After being the best performer in its category in 2005, it turned out to be an average one the next two years (2006, 2007). In 2008, it fell much harder than the category average and found itself in the 4th quartile. Since then it has shown a marked improvement. Last year it climbed up to deliver a 2nd quartile performance and this year it has impressed.

Magnum Global (Equity: Mid & Small Cap) Rated ***
A fabulous two years (2005, 2006) were followed by two very disappointing ones (2007, 2008). Last year turned out to be very good and the fund posted a top quartile performance with a return of 119.56% (category average: 99.54%).

Magnum Midcap (Equity: Mid & Small Cap) Rated **
A good run in 2006 and 2007 gave way to a crash in 2008. The fund found itself move from the 1st quartile to the 4th quartile. It did salvage the mess by beating the category average in 2009 and landing in the 2nd quartile.

Magnum Taxgain (Equity: Tax Planning) Rated **
After grabbing the No. 1 slot for two consecutive years (2005, 2006), it surprisingly slipped to 3rd quartile in 2007. After that it has managed a 2nd quartile performance.

Getting its act together
Simplification and consolidation: The product basket has gotten way to diverse and it’s difficult to differentiate one product from another. For instance, Magnum Global, Magnum Emerging Businesses and Magnum Midcap all fall under the Mid & Small Cap category. While Magnum Equity and Magnum Multicap are both categorized under the Large & Mid Cap one.

Leverage the bank network to the hilt: Despite the lack of interest in the past, the bank’s role in distribution needs to be aggressively channelized going ahead.

Consistent performance: If the schemes are to be aggressively marketed in rural settings, then consistent performance is what is needed. SBI Mutual Fund need not revert back to grabbing the top slot, above average performance will do. Its investors will be more than happy if the schemes do not shift between top quartile and bottom quartile as has been the case over the past few years.

Assets Under Management (Rs Cr)
Date  Equity  Hybrid  Debt  Cash*  Total AUM
31-Oct-05 5,582 168 917 3,939 10,605
31-Oct-06 9,067 279 576 5,553 15,474
31-Oct-07 18,450 428 355 7,349 26,582
31-Oct-08 10,661 896 275 12,883 24,715
31-Oct-09 17,902 1,322 350 18,663 38,236
30-Sep-10 19,726 1,420 272 20,548 41,966
* Cash refers to short-term debt and liquid schemes