India’s 2nd largest AMC, SBI has played the dual role of earning profits & expanding the reach of mutual funds…
18-Dec-2012 •Research Desk
The year 2008 was a wake up call to SBI AMC, with the performance of its dominant funds such as Magnum Taxgain, Magnum Income and Magnum Contra, and its set of new fund offerings (NFO) in free fall. Four years since then, these funds are yet to fully recover from the beating, compared to peers and the markets. Not one for aggression, the fund house has found it difficult to regain its pre-2008 performance, which is also to do with changes in its fund management team.
For an institution of its scale, it goes against the fund house to have depended on few people to achieve performance in its schemes. In this backdrop Navneet Munot joined the fund house as CIO in late 2008 and since then the efforts to focus on fund performance has started to show early signs of recovery.
Back to basics
Poor performance aside, most of its funds lacked clear definition or well articulated focus. For a old fund house, the complications only multiplied. Several funds were offshoots of closed-end schemes that had turned open-ended. And, several NFOs were launched during the 2004-07 bull run too. All of these factors resulted in little to differentiate across several schemes, with several of them with common goals. So, a little over three years ago, the fund management team started working towards defining fund schemes. This process helped in arriving at what a fund would do and what it would not.
Next, the team got into building investment template for each scheme, which was a challenging task. For instance, SBI Magnum Emerging Businesses and SBI Magnum Midcap were both mid- and small-cap funds, but also distinctly different. The effort gone in would have posed stiff challenges, considering the AMC did not resort to merging several schemes barring SBI One India, which was merged into SBI Magnum Equity in August this year.
The initiative has helped create clear identity for each scheme. This is a far cry from the time when every equity scheme was run without clear investment focus, when funds had predominant large- or mid-cap allocation, without any strong underlying philosophy or investment approach. Today, the AMC is moving towards running funds that are well articulated with defined investment mandate. The changed approach is visible, when one views Magnum Equity, which emerged into a large-cap, even in the Value Research classification.
So, today equity funds have a stock universe tracked by analysts with stocks entering the universe as and when they comply with the template for each fund. And, proper checks and balances are in place to make sure that there is no divergence from the defined objective.
A similar approach has been extended to debt funds too – Credit limits are set by the credit universe with individual limits on both short-term and long-term exposure. Next, each of the schemes has an internal mandate which is nothing but the template for the scheme. In this way, all regulatory and offer document restrictions are addressed. Further, stringent internal norms have been created, especially on the money market side, disciplining the fund manager to follow the template unfailingly.
Adequate filters are also in place to ensure that a fund manager does not stray and maintains the specified risk grade and liquidity for a scheme. For instance, in the money market and liquid category, the team follows a certain liquidity restriction. So, the debt fund team maintains liquidity on a weekly, fortnightly and monthly basis. Further, there is diversification of issuer within the portfolio, which also acts as the reference point or the universe for the fund manager.
Spreading its wings
For a fund house that commenced its operations in 1987, to become the first non-UTI asset management company, SBI AMC has come a long way with State Bank of India as its sponsor. The genesis of this AMC should be attributed to the government’s move to allow PSUs to set up an asset management arm, heralding the second phase of the fund management business. For the oldest bank in the country, the move was a natural fitment in its quest to increase its product range and offerings.
The fund house now has a strong management team with dynamic leadership that has steered its operations over the years. The impeccable State Bank pedigree has high connect and recall amongst both retail and institutional business. Though a dominant debt player, the AMC has a wide range of products across equity as well. The fund management team is organised into a flat structure, which has helped form a team with great camaraderie, which is open to exchange ideas and also maintain mock portfolios for funds.
With AMCs’ business dominated by the private sector, SBI AMC has also aligned with a competitive environment. The fund management compensation is linked to relative performance and compares with the best in the industry.
The changing business environment has also resulted in spreading the business becoming an important factor. Unlike several private-sector AMCs, this fund house plays out the dual role of earning profit and also spreading its operations beyond the top metros. For instance, much before the regulatory push to look beyond the top-15 cities, SBI had presence in the small cities. Today, it reaches to over 100 cities with 20 per cent coming from outside the top-15 cities. In fact, the AMC has a shade under 10 per cent of the assets coming in from outside the top-35 cities.
A regularly profit making AMC, the joint venture with Amundi Group (formerly Societe Generale Asset Management), has resulted in profits from advisory fee income. However, the foreign partner’s expertise is not being used enough, especially the missing international funds from its portfolio is a glaring omission. On road to regaining lost glory, the mood amongst the fund management teams is of exuberance. The same is demonstrated by the CEO, who is all eager to use the gym and health club facilities in the new office premise, to deftly handle not just the team but the business.