Passive no longer means inactive, at least in stock market parlance! Passive investing in mutual funds has caught on in a big way and passive assets under management (AAUMs) now constitute about ₹4.8 lakh crore, or 13 per cent of the total industry pie today. Nippon India Mutual Fund is among the leading players in this category with over three dozen schemes, managing about ₹62,000 crore.
Sundeep Sikka, ED and CEO of Nippon Life India Asset Management, joined us at BusinessLine’s Chennai office recently, giving insights into various aspects of passive fund management as well as what he thinks of the future of the industry. Excerpts from the interaction:
Nippon India AMC has built its offerings around a wide range of passive funds, which is good. But if the passive side of the industry were to dominate in India like it does in the US, would it lead to active managers quitting this industry? Would this not mean loss of stock-picking talent?
The way I see it, the growth of passive funds in India was inevitable. Anything that happens elsewhere in the world happens with a lag effect in India. This was the thought process when we acquired Goldman Sachs AMC, earlier Benchmark AMC, in 2016. From a long-term point of view, it’s very important for us to see what is good for the investor. As a manufacturer, it is our duty to offer both active and passive funds to the investor. We must not become biased with our track record, or our profitability, or what is good for us, when offering this choice. The investor has to make that choice of whether he wants active or passive funds.
To the question whether passive will become larger in India than the active business, I don’t have an answer. At this point of time, we are still far away from that. When we compare with the US, we need to understand that the US market has always had two things — a strong equity culture and a strong stock trading culture. In ETFs (exchange traded funds), you don’t need a push or a nudge for people to buy the fund. But in India, that’s not the case yet. Indian mutual funds (MFs) still have a long way to go. Today, the number of unique investors is less than 3 crore. Usually, new investors come into active MFs. As they mature, they may go to ETFs. This is a journey. I think the funnel available for active funds is large.
As to your question on talent moving out, I see it the other way around. We see a lot of talent joining this industry. For investment professionals, this is an industry with 3 to 4 crore investors today and that can go up even 10-fold from here. Fund managers in MFs get to manage the kind of pool of money that is not available on any other platform. So, I remain very optimistic. As to star fund managers, Nippon India AMC has a very different concept. We do not believe in star fund managers.
Isn’t the fund management business individual-driven?
At Nippon, we would like to have a faceless organisation. Our philosophy is that a mutual fund cannot be individual-driven. It has to be process-driven.
While every individual will play a role, the organisation cannot be dependent on the one person. If you look at the biggest asset management companies in the world, you don’t have anybody’s name that comes to mind. I have done a lot of research on this subject, being in a Japanese company. There are 4,000 companies globally which have lived more than a 100 years and out of these, 3,000 are from Japan. I think the unique feature of all these companies is that they are built on an institutional approach. There is no one individual dominating them. We think the star fund manager concept by itself is a dangerous concept. Talent will move out for various reasons and investors need continuity.
At Nippon, we would like to have a faceless organisation. Our philosophy is that a mutual fund cannot be individual-driven. It has to be process-driven. We think the star fund manager concept by itself is a dangerous concept. Talent will move out for various reasons and investors need continuity.
SEBI’s MF categorisation rules have limited the launch of too many new fund offers (NFOs) on the active side. But the passive side continues to see many NFOs. Do investors really need this much choice?
I think we somehow give a lot of importance to new product launches in this industry. Personally, as a CEO, I think this industry may not require these many products. I think this categorisation is an outstanding job. It has made it easy for an investor to compare apples to apples. Secondly, why does the retail investor need so many products in his portfolio? If you look at a core portfolio, you may first choose the market-cap orientation and then you go with style — growth or value. With this, you can create the entire portfolio and don’t need anything else. Yes, if you’re good at spotting themes, you can have some allocation.
Coming to your question on the launches on the passive side, yes, innovation is happening. But I think what we have to understand is that these funds are, again, for very savvy investors or accredited investors. Let’s take an example. Nippon has a Taiwan fund. Now a Taiwan fund is an innovation. But the fact remains, there are 60,000 to 70,000 investors in that fund. We don’t want that fund to attract all investors — only those who understand the risks and returns of that product. We don’t want anybody who does not have an idea of what currency fluctuation means, and what chips are, to even invest in the fund. We will be launching an EV Fund, but we don’t want everybody to get excited and come into it. There are people who were associated with the automobile industry who are interested in such a fund. So, as a company, we’ll come up with innovations on both passive and active. But these funds may not be core funds for the investor.
The other point is, with NFOs, we don’t want mega launches. We don’t want too many investors coming in at the same time, riding the same market cycle. We want to phase out the investor experience. For this, you should launch a fund when the theme is out of favour. In fact, we like to see our new funds gain traction slowly with investors. Today, we’re advertising the Nippon Nivesh Lakshya Fund, which invests in very long-term gilts. This product was launched four years back and we didn’t promote it heavily then. But now we see that the time has come for it.
We somehow give a lot of importance to new product launches in this industry. Personally, as a CEO, I think this industry may not require these many products.
At over ₹20,000 crore, Nippon Small Cap Fund is among the biggest in the category in terms of AUM. When would you think size can become a problem and impact performance?
We see this very differently. In 2004, our growth fund had ₹1,800 crore AUM (assets under management) and we stopped subscriptions then. But at that time, the Sensex was at 3000 points. So, overall market caps have increased, and we need to see the asset size in that perspective. Having said that, we control it from the risk management point of view. We have 100+ stocks in the fund and the top 15 stocks constitute 60 per cent. So, using our strong research, we will build up the tail. We believe that there will be new companies that will keep coming up in India. If India has to move to a $5-trillion economy, it’s not only the top 5/10 companies that will continue growing their market cap. Even in the top 100 stocks, look at the churn that is happening. Some of the established companies are moving out and new ones which were started are coming into it. There are 25-30 companies in the portfolio right now which were not even listed when the fund was launched.
However, if we feel at any point that we are unable to deploy the money due to any reason, we will take a call of stopping inflows in the fund. But I don’t see this as a challenge. For us, we have always had a bottom-up approach. We have one of the largest research teams and we are continuously working on getting the small-cap choices right.
Recently, there have been allegations of front-running against a fund manager/dealer in a competing AMC, triggering governance concerns across the industry. What are the checks and balances that Nippon AMC has in place to prevent such instances?
The industry continues to be well-governed. Any wrong act of an individual should not be seen as something being wrong with the industry. Such cases are rare and are not widely spread. Coming to checks, SEBI itself has introduced a lot of measures — such as audio recordings of meetings which trustees and auditors also listen to many times, restricting dealing room access, etc. Even as CEO, I don’t have dealing room access as I have no business to be there. So, I think it is continuous evaluation. Risk management has to be strengthened. We’ve seen ourselves as an investment management company/industry so far. Now I think it’s time to get risk management also to centre stage by putting in place a framework.
On the equity side, we have set up a 17-factor ‘fund casing’. Within this, you are allowed a + or – 5 per cent deviation. If, for example, financials are given 25 per cent weightage, you can either be at 20 per cent or 30 per cent. You cannot be 0 or 100. The point is, it is not about what you do right. It is also about where you should not go wrong. And that, after all issues that have happened on the fixed income side, we have taken a call that we will not go below AA-rated instruments. Investors may say we should go below that, as portfolio yields may be better. But we have taken a conscious call and we communicate it. So, if people don’t want to invest in it (because yields may be lower), it is ok with us. Thus, setting up the risk framework is going to become a critical thing.
The industry continues to be well-governed. Any wrong act of an individual should not be seen as something being wrong with the industry. We’ve seen ourselves as an investment management company so far. Now I think it’s time to get risk management also to centre center stage.
Listed AMCs have been seeing a decline in profit margins and yields lately, though they’ve managed good asset growth. Is this going to be a feature of the AMC business in India in future?
AMC business is a volume game. So, right now, one of the reasons for yields to come down is that in the last two years, a lot of allocation has moved to low-duration funds, liquid funds, etc. and hence the impact is showing up. Besides, as per SEBI circular, as you grow the size of the fund, you charge less — this is also coming into play. That said, we have to live with it. Expenses (fee) will come down because of regulations, competition or investor need. We have to build lighter operations.
As we go forward, a lot of fees that is attached to the asset management industry will clearly have to be relooked to remove inefficiencies or older style of operations. Whether it is to the AMC, the distributor, the depository, the index provider or someone else in the chain, it is ultimately the investor who is paying for it. Older rules and limits need to be revisited. So, while the business should be profitable for everyone in the ecosystem, running lighter operations will be an important theme for the industry, going forward.
Expenses (fee) will come down because of regulations, competition or investor need. We have to build lighter operations.
How do you see the equity markets today?
Globally, while things are not looking so good, I think the India story is intact. Now, how do we translate this to our portfolios? We have already started moving to more domestic-facing companies. But at the same time, we are also trying to be very nimble. We are worried about the actions of global central banks and their implications, as India will not be spared from the impact. Also, Q2 earnings have been a bit of a disappointment. So, I would not thump the table and say everything is good. We must be cautious.
A lot of retail investors seem to think that they can invest by themselves and don’t need mutual funds. If you look at shareholding data, direct retail holding is equal to the mutual fund holding. Options like smallcase seem to buttress this mindset….
If you see the percentage of retail holding vis-à-vis the volume of trading they do, it is disproportionate. While it is good to have these investors, the platforms you are talking about, in my view, are not creating long-term investors. They are creating traders. If you go back to the history of capital markets in India, the highest number of investors have come to Indian markets after some IPO, examples being Coal India, Reliance Power, etc, and after one or two years, with a lag effect, these investors have come to MFs.
Now, I am not trying to make a case for MFs, but it is human psyche. You make money in a few stocks and then you lose in some; You realise that this is not your day job and move to MFs. Clearly, direct investing has its own challenges. We have seen the profile of these investors who have come in this bull run. They have no experience in capital markets. In a bull run, it is easy to make money. I would be worried for them if things go wrong. With fixed income rates being low, today, people will have to start investing in equities, whether they like it or not. The fact that EPFO is doing it may not be because of love for it, but because of compulsion. The point here is these investors should do it the right way. So, this is where MFs will be popular. This is why I’m confident that whatever be the headwinds, the MF industry will do well.