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Fixed Income Prowess

JM Mutual is one of the country's oldest private AMCs and is a specialist in generating high debt-fund returns. But, with the end of the rally in debt markets, it will have to look at equities to occupy mindshare commensurate with its size.

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JM Mutual fund has become a major fund house by concentrating on doing one thing very well --running an aggressive income fund. While the AMC has recently started getting some mindshare to new products, it will take some time before these become important part of its product portfolio.

For five consecutive years between 1999 and 2003, the AMC's flagship—JM Income Fund—has occupied the first quartile of its category. Investors have also recognised the strengths of the scheme and have flocked to it in droves. Along with JM High Liquidity, JM Income accounts for three-fourth of the total assets under management. In contrast, the AMC's equity funds had remained pallid. JM Equity-G has been a below average performer and in the past five years has never risen above the third quartile in it is category. Except for 2001, JM Balanced has also performed below average in the last five years.

The absence of an attractive track record in equities is reflected in JM Mutual's low base of equity assets. Equity and balanced funds taken together account for less than 1 per cent of total assets (Rs 4,273.51 crore as on December 31, 2003).

Background
JM Mutual Fund is no new kid on the block. It came into existence in September 1994, just after the opening-up of the mutual fund industry to private players. At the time there were only six private sector funds in the market. JM Mutual launched itself in the business by bringing in three funds, JM Income, JM Equity and JM Balanced, which were launched simultaneously in December 1994. JM Mutual Fund is sponsored by J.M. Financial and Investment Consultancy Services Private Limited (JMF) and J.M. Share and Stock Brokers Limited (JSB).

Fund Philosophy and Performance
JM Mutual Fund is known for its aggressive investment style in debt. For instance, the average maturity of both JM Income and JM G-Sec funds (both PF and Regular Plans) had always remained on the higher side in the category. While this has helped these funds deliver higher returns they have also been among the more volatile funds in their respective categories.

According to Krishnamurthy Vijayan, CEO of JM Mutual, "The investment strategy in JM Income Fund is based on the philosophy of maintaining a relatively higher duration when the bias towards softening interest rates is strong. Due to credit risk and liquidity risk considerations the exposure to government securities is higher compared to corporate bonds".

This aggressive stance is also seen in the recently launched JM MIP. The funds average portfolio maturity at November end was 8.65 years against a category average of 3.32 years. In October this was even higher at 9.84 years. The result of this volatility was that between October 16 when bond yields bottomed out and December 2, 2003 when they peaked the fund lost 1.4 per cent. In the same period the average MIP was up 0.35 per cent.

Commenting on the higher portfolio maturity Nandkumar Surti, Head–Fixed Income said that "he average portfolio maturity of JM MIP is high as we expect that yields would soften on the back of lower inflation, liquidity and the implementation of the LAF report. The philosophy of the fund is to capitalise on this opportunity and shift to money market instruments by mid February. Hence maintaining a high average portfolio maturity is only a temporary strategy".

On the equity side JM follows a conservative approach. According to Vijayan, "Our investment philosophy has been to invest in 'Best of Breed' companies. 'Best of Breed' essentially means companies that are the industry leaders, possess excellent management skills and visibility, have strong brand equity and are financially sound.

Product Innovations and Services
JM Mutual has been a pioneer of sorts in the debt arena. JM Income was the first income fund to be launched in India in December 1994. JM Mutual was the first to give investors the flexibility and freedom to move across funds under what was called the lateral shift option in 1994. The AMC was also the first to introduce Bonus Plan under JM Income Fund in March 2002. The facility of a bonus plan allows an investor to defer tax which would otherwise be deducted in the form of dividend distribution tax.

Recently JM Mutual was in the news for distributing dividends from the growth option of its balanced scheme. While this is an unusual unique practice the fund had had sought approval from the unit-holders to declare dividends in the growth option, which was granted. Subsequently the offer document was amended to incorporate the change and filed with SEBI.

Interestingly, most of the multi-option products of JM are managed separately. The reason for this appears to be historical. This is because when JM Equity, Income and Balanced were launched in 1994, regulations stipulated that 90 per cent of the profits earned by the fund should be distributed. Therefore paying dividend meant booking profit for the entire scheme. Thus to avoid muddling of portfolios, the AMC maintained separate portfolios for its growth and dividend plans. Over time this has resulted in a wide difference in the returns of the two plans making them incomparable.

The Way Ahead
The end of the rally in debt means that JM is at a critical stage in its history. Both investors as well as AMCs will have to look at equities in the coming years and growing its equity business is a challenge that JM mutual will have to tackle if is to occupy mindshare commensurate with its size.

Strategy Note
Krishnamurthy Vijayan
CEO
JM Mutual Fund
On JM's Debt focus
During the debt boom, we focused on growing our products in this segment because we believed that then and in the times to come debt would be the mainstay of the asset allocation of most prudent investors. As a mutual fund house our objective is not only to penetrate mutual fund investor market but also to target the fixed and assured income investor segment by converting them into debt and debt oriented products.

Approach to equity
Equity should always be minor part of the asset allocation of any retail investor. Having said that you will observe that our equity assets have grown exponentially in the last few months with the safety seeking investor segment appreciating our best of the breed approach. To the prudent equity investor we will be launching 'additional flavours' but this will in no way dilute our approach towards providing low risk products for non savvy investors.

The distribution network
JM Mutual Fund has perhaps one of the most aggressive strategies for expanding into the lower and middle-income segments across the country. While our service to top run and premium segments is of high quality, we are trying our best to extend the same level of quality and service to small distributors in small cities with smaller investors. With this end in view we have appointed Certified Financial Advisors in 75 cities and through them are trying to expand our coverage to individual distributors.