Ours is a Strong Retail Brand | Value Research Milind Barve, MD HDFC AMC talks about the fund's big plans after the acquisition of Zurich India AMC and also about managing risks and growth
Interview

Ours is a Strong Retail Brand

Milind Barve, MD HDFC AMC talks about the fund's big plans after the acquisition of Zurich India AMC and also about managing risks and growth

Despite being a late entrant in the mutual fund industry, HDFC Mutual fund has registered a tremendous growth since its launch in July 2000. With Rs 13,191 crore of assets under management, it is the fourth largest fund house today. In early 2003, the AMC took over Zurich India AMC's Indian operations, thereby adding to its kitty, a number of equity funds with strong performance. In a candid interview with Mutual Fund Insight, Milind Barve, MD, talks at length about how a strong brand has helped it evolve and how should mutual funds be regulated and marketed

Tell us something about your career, how you came to be running one of India's largest AMCs?
I started my career with Bajaj Auto in Pune, where I'm from, after doing my CA. Then in 1984, I joined HDFC and did some business development work in Pune. After a year or so HDFC set up a team for some IT work—these were the does when 'computerization' was a big thing. I was part of the IT team, which was a new and exciting thing in those days; I even did a bit of programming! Sometime after that I was moved to Bombay. In 1986, the person who headed HDFC's treasury left and Mr. Parekh asked me to handle treasury. In those days treasury was a fairly straightforward thing, mostly placing corporate deposits or buying some units. And the size was also very small, with numbers like five or ten crores. It was just money that we didn't need for a month or two.

Although I was managing the treasury, I was always part of the fund-raising team. Gradually, as the company grew, the treasury management part of the job became bigger. I still remember the excitement when our surplus first touched a hundred crores. Of course, as the size of the treasury grew the job become more complex. I had to start tracking markets, taking views on interest rate movements, taking views on corporate credit risk for inter-corporate deposits and things like that. We had to build expertise on tracking companies, on how to evaluate their short-term ability to pay. In those days there were no published data or research reports available.

This added many dimensions to fund management like taking credit calls, interest calls as well as building relationships with market intermediaries, which is something I benefited most from. Along with all this, since 1997-98, I was also asked to manage the retail part of the business. This was very exciting and a great learning experience as it involved traveling to a wide variety of places and seeing many things first hand. This was my experience and background at the time the HDFC entered the fund management business and I was asked to head it.

What are your investment management team and process like?
Sanjoy Bhattacharya is the chief investment officer. We have two very distinct teams, since we have a large range of products. Prashant Jain is the head of equity products and Rajiv Shastri looks after the fixed income products.

We have brought in some practices from Zurich. For example, Zurich had a universe of companies that individuals in the investment team tracked. Then, in weekly meetings, they would make a presentation on these companies and their prospects would be discussed. This is something that we've just brought in. Of course we had plenty of talented people in the team. What we have now is a bottom-up approach where companies are assigned to people and—apart from managing the funds—these companies are their individual responsibility in terms of doing research and presenting this research in a transparent manner to the rest of the team. So we have a process where the effort is very democratic but the final judgement call is with the fund manager.

What kind of risk-management processes do you follow?
Firstly, we follow basic risk management measures like exposure limits to both companies and the industries, business distribution to brokers and to distributors. Apart from that there is a strong internal documentation of the entire research and investment management process.

For example, all research that comes in gets combined into a single database—its not just kept limited to whoever is directly going to use it. I can also go into that database and access anything. We also have a process whereby people who go out for any kind of a research-related meeting come back and make a report—which could be as short as five lines or as long as two pages—which is about the key take—away of the meeting. This too goes into the database.

This database becomes a board where people can go and see what is being discussed and thought about an investment. It's like a trail of all opinion about a company. Of course this not open to just anyone. It's just the investment team and Sanjoy and I and the compliance people who can access it.

So we have very strongly defined ways in which information flows through the organisation. And of course dealing is completely isolated from fund managers. I mean fund managers know what is going on, they give price ranges to the dealers and they get feedback on intra-day prices and so on but they play no role in the actual placement of the orders.

We are trying our best to strike the right balance between creating a very strong risk-awareness by putting into place processes that raises a flag any time anything is close to a limit and still keeping sufficient freedom for personal flair and investment styles to come through. Of course there is no golden balance for this—its very much a perception that a CEO and a CIO can have and that's what I believe we have.

Interest rates in the Indian economy have been on the way down for a very long time and are probably at an inflexion point right now. How will this impact the whole business of managing and marketing mutual funds?
I think that today the main challenge in debt funds is definitely how to manage exuberant investor expectations. But, in balance, it must also be said that if you look at where interest rates are today then debt funds still stay attractive. Its just that the 'attractive' is now on a relative basis. Its not attractive because the returns are going to be like last year's but because it must be compared to the 6 per cent of a bank deposit or the 6.5 per cent of a relief bond and not the 8 per cent of a relief bond as earlier.

So the relative attractiveness of debt funds stays intact. But if people are expecting returns of the kind that there were last year then there is a need to manage those expectations. Also, systemically, there is a need to get investors to move part of their portfolios—whatever they are comfortable with—into equities. Equities is always a question of timing and prices and so on but for genuine long term investors, and most people are long term investors, there is a need to educate them to move five or ten or twenty per cent of their portfolio into equities so that they can get that extra bit of returns. This could be done directly, or through products that do it.

As far as the business of selling funds goes, there are many other things that are wrong with the way funds are sold. It's really distressing to see the kind of selling practices that are being followed in the industry. There may be AMFI certification that ensures that the person selling funds has the basic product knowledge, but what is needed is a kind of code.

Because debt funds are the main products that are selling and because the returns look similar, there has been a sort of commoditisation of the product. Therefore you have fund houses that sell mutual funds like an FMCG product. The promotions and campaigns and launches that take place are very similar to what you would use to launch a watch or a lipstick. I am personally very distressed at the things that are happening.

I am quite disappointed that we in AMFI—where there is a best practices committee of which I'm not a member but where I'm always invited—we've not been able to come to a consensus on selling methods. For example, in the UK, there is no ban on rebating. A distributor can rebate the entire commission if he wants, but you have to disclose what you get out of the fund house. You have to say to the investor that the fund house is giving me 2 per cent commission and out of that I'm giving you 1.8 or 1.5 or whatever. Today what is being done blatantly here is that the selling process is entirely commission-based. You can do as much Sharpe ratio or whatever you like but finally, there is a campaign, there are contests, and what matters is who is running what kind of a scheme this quarter and that's the way you sell the product.

What is the use of passing the AMFI exam if you choose the product to sell based on the commission you get rather than based on the investor's needs. Why do investor profiling and figure out risk return appetite if finally you have to say 'buy this' based on the fact that you get to go to Malaysia to watch the Grand Prix?

Everything can be justified under the name of marketing and the expediency of building a business but at the end of the day the distributor is being enticed through these campaigns which makes the product selection completely a function of what the distributor is getting and not what the investor wants.

I think people have to understand that you can pay the distributor what you want but he should not have a target for doing business. We also spend money, we have programs for investors and distributors but we don't have targets. Why have targets?

What would be kind your ideal list of regulations be?
The selling process is between three entities: the manufacturer, the distributor and the consumer. Now, we at the AMC never see the investor—I'm talking of retail here—we always deal through the distributor. What SEBI has done is that they insist on a great deal of transparency from the manufacturer in terms of fact sheets, offer documents and the like. But the sale process is actually not happening between the fund house and the distributor, it is instead between the distributor and the investor. What is needed in this chain is transparency between the fund house and the distributor and between the distributor and the investor. The distributors are not regulated at all. From a regulator standpoint there is a bit of a black hole in what transpires between the fund house and the distributor and between the distributor and the investor. I think this leads to a distortion of choices which is not in the interest of investors.

Where does HDFC Mutual Fund go from here? The Zurich acquisition has given you a reasonable equity asset base, even though you are still primarily a debt fund house.
I don't think balance between equity and debt is a corner room strategy. It's a choice that the customer wants and we are in the business of giving customers what they want. We must have range of high-performance products in whichever category he chooses. Of course we now have Rs 1,500 crore of equity assets. It may not be much out of a total of Rs 12,500 crore but of course the equity money is predominantly retail and we are the second largest equity fund manager.

What should investors expect now that you've become the second largest fund house? What is special for an investor in a larger fund house?
Clearly when the size of products becomes larger the cost of running those products is lower. Our ability to reduce costs, or rather our ability to cover fixed costs becomes much higher. So we become more profitable. Therefore we have the flexibility to price products lower. That's one benefit of size. Aggregate size gives us the room for giving the investor the benefit of scale.

Also, it gives us the ability to offer a very wide range of products under the HDFC umbrella. So as the investment climate or an investor's priorities change we can make it easier and cheaper for investors to shift from one kind of investment to another. So we are in a better position to give a comprehensive range of investment solutions to our customers.

The scale also gives us the opportunity to expand to different parts of the country and offer services to customers in areas where funds do not reach now. This is very high on our agenda but we are not adding numbers indiscriminately. It's very difficult to get good quality distributors. But now we do have the resources and the organisational capability to go into these markets and choose people and train them. Size helps us to invest in technology and solutions. We have done pioneering things like the ATM fund. It's not that people are lining up outside ATMs to buy and sell funds but it's important to offer such choices.

What do you think your retail-to-institutional ratio is like compared to the rest of the industry?
These numbers are not really published so it's a little difficult to compare ourselves to the rest, but we are about 40 per cent in retail. I'm told that this is one of the highest in the industry. You will accept that we are a very strong retail brand and clearly, our objective is to leverage this brand.

Our retail participation is very high. If you look at the number of transactions, between April-May and July our number of transactions almost doubled. We did an analysis comparing Zurich sales in the 30 days before the acquisition to the 30 days afterwards. In the earlier period, Zurich sold Rs 30 crore of products, in the latter period this was Rs 159 crore. And this is fresh sales, not AUM gain.

We have great respect for our brand and think it is a big asset for us. For people like me who run the business and for those who work under me, we know it is a big asset but we also know it is a big responsibility. We have to deliver on it. The stronger the brand, the more it keeps you on your toes. At HDFC you can't fail so you just have to deliver.



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