In a candid interview with Mutual Fund Insight in February 2003, Vivek Reddy shares his experience, his plans and what he thinks is the future of the industry.
How did you start the first private sector mutual fund in India?
Having returned from the US in the early 1990s, and working in a large bank like Grindlays, there was a restlessness to do something meaningful. With the first wave of economic reforms unfolding, the air was full of opportunity and optimism. Around the same time, my friend Shyam Kothari was also looking to grow his finance company, ITI, in interesting ways. The idea was brought up between us in early 1992 and discussed for all of 30 seconds. I still remember Shyam's immediate "Done!" to my one line, "The private sector is opening up—let's start a mutual fund."
My view is that it needed a strong individual-driven enterprise with guts to take a decision like that on an unproven idea. If I had approached one of the so-called professionally managed large institutions or corporate houses at that stage, it is unlikely that I would even have been heard. Or else, they would have worn me down with requests for proposals and business plans, evaluated it over many committees and meetings, and even after that probably still ended up with a "No".
Then Pioneer came along—another individual-dominated company with Jack Cogan as their CEO. He and his team were seasoned, but the company was also small enough to be adventurous and experiment with us. The fact that they were one of the first foreign mutual funds to enter India speaks of their own guts and vision. Between us, there was an instant rapport and chemistry when we met, creating the foundation for what would turn out to be a very harmonious and smooth partnership.
I would like to say that as the original minds that formed the company, all of us had a perfect understanding and vision that mutual funds would experience phenomenal growth and that we would be in the centre of action.
But we did not give too much thought to five year plans or specific goals for the future. We were instead driven by ideas of innovating and revolutionising the industry, penetrating markets and reaching customers, and creating a solid and enduring infrastructure to support the unique things we were doing. We were just a bunch of guys working hard, having fun and most of all, stimulating ourselves with great conversations and lots of ideas. After all, being the first in the private sector, we had a clean slate with all rules open to being rewritten.
And it is not just the sponsors who said "let's go for it". Even my initial band of colleagues such as P. Krishnan, Ravi Mehrotra and others were all clearly gutsy, risk-taking guys who left big companies to join a start-up with no track record. Clearly, the overall success of the firm was a result of team effort with the imagination and creativity of many people being embedded permanently in the fabric of the company.
What would you say was the unique aspect or guiding principle that ran through Pioneer ITI?
To be different, even for the sake of being different. To stand out in this world of clutter and abundant choice, one has to be unique and special. Of course, we believed we were different in a better way, and in a way that our customers could benefit and appreciate.
Remember that when we started, the competition was pretty stiff. Maybe not as intense as now, but there was still UTI and the public sector funds, all of whom were successful, had great reach and presence, and were regularly collecting thousands of crores in each of their schemes.
But we chose to break new ground and follow our own path, and introduced many dramatically new concepts and conveniences such as the first open end fund with daily NAV (net asset value) and instant redemptions, account statements instead of unit certificates, a money market fund with a constant NAV, the first tax advantage pension fund and many other investor-friendly products and services. These are the industry standards now, but at that time it was pretty bold stuff and a big leap of faith in our part.
What kind of employees did you have and where did you find them?
They came from all over—overseas, out of town and within Chennai with all kinds of different backgrounds and thinking. The fact that they joined us itself meant they were mavericks and mini-entrepreneurs themselves. The key to hiring for me was not so much a fancy MBA or a blue chip resume, but people who had a strong core and really believed in what we were doing. Hardly anyone (including myself) had any direct mutual fund experience and in retrospect, this fresh thinking and no preconceived notions were probably some of the contributors to our success.
At the same time, our team was well-balanced. There were a few of us always straining at the leash to break new ground, but others would provide the balance and reality checks to ensure that we did not get derailed as we attempted to soar with our imagination.
What were the major milestones at Pioneer ITI?
First, there was the exciting growth phase of late 1993 to early 1995 coinciding with the equity market boom and our successful ride on it. Then the bust phase from mid-1995 to mid-1999, where the industry just drifted along with the assets actually declining. Then it was growth again from mid-1999 where the industry, particularly the private sector, has grown about six to seven times in size, both in equity and fixed income assets.
At Pioneer ITI, there was uncertainty at the shareholder level from late 1997 with the different owners in continuous review of their stake in this company, which led to the sale in July 2002. The changes in shareholders and the various dynamics over a protracted period were probably unique to us, and a dimension of my job that most other CEOs wouldn't have dealt with. It was an interesting saga with drama and twists and turns—quite an enjoyable and learning experience.
Actually we had established ourselves in a sense by late 1994, which was only a year after we started. In this regard, we had a better experience than some of the other players who only saw negative news in the first few years of their existence.
I suppose 1995 to 1998 was a lean period, when mutual funds were completely out of favour with all classes of investors and even distributors. But at our firm, we hung in there and went with the flow, not trying to force the pace or making things happen when there was no response. If we had put in tremendous efforts and spent huge monies in this period, we would certainly have been frustrated. But our attitude of just waiting and watching, in hindsight, served us well and we were able to ride the wave when it started in 1999.
Were there any nasty surprises that caught you unawares, and can you recollect any regrets or mistakes you made?
While there may have been some minor tactical mistakes and errors that we made, these do not have much of a long-term impact in the life of a company. In the investment business, the big calls on the financial markets and our consequential investment strategy is what fundamentally shapes the future of the enterprise. In this regard, one inevitably goes through the same 'second guessing yourself' that everybody in the financial markets experiences. "Why didn't we see the IPO and small cap bust of 1994?" or "Why didn't we see the crazy overvaluations and excesses of early 2000?" The issue for mutual fund managers is that even if we have close to a perfect insight into the future, what can we do about it? Do we stop sales or do we even encourage redemptions?
Clearly this is not what any mutual fund manager worldwide does. But at the same time, I am uncomfortable with the tendency of us fund managers to encourage fresh investments at all stages of the market cycle either through product launches or public proclamations of optimism. We did adopt a cautious tone and message to investors but I am not sure whether it worked. Next time around, I would take more effort and get the message out more clearly to our distributors and clients that we see the markets as overvalued if that happens to be our internal conviction. On the other hand, I must say that our investment folks were one of the first to spot the potential of software services in India as early as 1997-98, so we have to view the past with a balanced perspective.
Fundamentally the launch of our open-end funds when we started was to ensure that we were able to get inflows at all times and not just at the time of a product launch. Having said this, I will admit that much of our retail base of clients came in during IPOs. This is something that the industry has to address through a steady and concerted effort to make a deeper penetration into both metro and non-metro markets.
How did you deal with emerging competition that was starting from some of the larger, better-known, more resourceful financial institutions?
By being nimble and fast... That is the only way for a smaller firm to battle larger ones. Also, by being efficient and low cost. There is a fair amount of wastage and inefficiency in large companies, and smaller companies can take advantage of this. Finally, all big companies and multinationals give resources to their operating management, but they came at a heavy price and a big burden. There are proposals, justifications, reports to be given continuously, and there is significant expectation attached to these resources.
In a small company, one is free from this whole routine, so in the end the balance between big and small tends to even out. Also, a fair number of us as customers favour the underdog, and that may have helped us too.
Any particular strategy that really worked for you?
We had a unique strategy, but it was not the strategy that was the big deal, it was the execution. By moving fast and conserving resources, success will happen, irrespective of the strategy or direction. While a strategy can be identified and copied with ease, effective execution is hard for competition to follow. It is subtle and is woven into hundreds of decisions being taken daily.
Yes, we were different as we had the strongest equity and retail franchise in all private mutual funds. We remained the leaders not because our strategy was such a secret, but in our execution, which was such that competition could not match.
Can you elaborate a little bit more on this execution?
Yes. A relentless focus on making life easier and more rewarding for our clients and distributors. We were completely 'investor-friendly' in everything we did, which went beyond the normal 'integrity' and 'not cheating customers' that most other institutions stand for.
To explain that, we really cared for our clients and associates, we had a simple and direct communication style—we were accessible, and we had an easy and friendly approach in dealing with them. This is what worked in getting us the largest national agent and investor base in the private sector. Of course, all this was built on strong and consistent investment performance as well.
For the time being, I am pursuing opportunities in the same asset management space in India, which could include starting a new firm or acquiring an existing one.
What future trends do you see in India's mutual fund industry?
I see the future probably a little differently from most in the industry, with three themes coming to top of mind.
The first is that while the action in recent years in Indian mutual funds has been in fixed income, primarily from institutional clients, as returns from equity funds pick up, this will change. The big story over the next few years will be the individual investor in both equity and debt.
The second big development is the commoditisation of mutual fund offerings. Granted funds will never be the ultimate commodity that banking and insurance products are, because the latter carry the risk and emphasize total certainty and security whereas mutual funds let the investor carry the risk in terms of uncertainty of future returns. Yet, a limited basket of securities, tightly defined asset classes, mandates and benchmarks, emphasis on risk management and process discipline rather than individual judgement and flair, and the strong tendency of fund managers to take safety in numbers—will all ensure that predicting future outperformers will become next to impossible. In a commodity, therefore, two things will happen—pricing pressures and a greater emphasis on sales and marketing as firms seek to somehow, and maybe even artificially, differentiate themselves.
Third, and this is again against conventional wisdom, that as the asset management industry grows and becomes richer and more vibrant, there will actually be more fragmentation with more players emerging. Take the case of the US. Beneath the surface of the high profile, glamorous mergers of large firms mating with each other, there are thousands of asset managers managing anywhere from $10 million to $10 billion who have been making a nice living for themselves for decades. With large firms tending to think alike, behave alike and look alike, there will be room for new entrepreneurs with fresh ideas to come in and thrive in this vast and growing industry.
There are hundreds of challenges—finding the right partner, choosing the right people, using resources wisely. There is also the task of convincing customers that an individual-backed enterprise can be as strong and enduring as a so-called institution. In my mind, this distinction is artificial but it does exist in the minds of people. And even after we convince investors, in those cases where they already have investments in other funds, we have to counteract the forces of inertia and additional tax when they switch.
But if we do the basics right, keep our customers and employees happy, communicate clearly and directly about our value proposition and stay balanced in this volatile, extremities-driven world of capital markets, then all the challenges will dissolve and success will happen.
Any role models you follow or companies you seek to emulate?
Yes, in mutual funds, Vanguard comes to mind. They have kept costs low, given good service and have quietly become the second largest mutual fund in the world. Theirs is an example where you can cut out much of the hype and mystique that financial firms create for themselves, and still be successful.
Another good story is South West Airlines, where people seem to have fun while yet delivering results. It is prospering while all other US airlines are bleeding, which shows that by executing right, one can do well regardless of the state of the competition and industry. By the way, when they started, all the larger airlines tried many things to squash them and ground their operation.
Closer home, a local organisation like Amul is worthy of admiration. Their products are world class, and they are 20 to 30 per cent less expensive than the multinational brands. Of course, there are companies like Infosys and Wipro, who showed that wealth can be gradually created the honest and hardworking way.
What are your final thoughts? Any advice to entrepreneurs?
This is addressed to the entrepreneur who lurks in each one of us, whether we are on our own or are working within the complexity and bureaucracy of a large corporation. I would say 'follow your dreams and go for it' with hardly a glance at competition and large institutions who can be slow, high-cost, cold and unfeeling.
The next 50 years is the age of individual entrepreneurs, and small, innovative, personalised enterprises. Make sure you create a world for yourself with dignity, where you feel energised and where work is easy and natural and if you experience anything like what I did, you will love every minute of it.