The share markets, particularly mid-cap and small-cap stocks, have seen a big price fall. Some are blaming the Securities and Exchange Board of India's new categorisation norms for the sell-off. In an interview with Jash Kriplani, RADHIKA GUPTA, chief executive officer, Edelweiss Asset Management, talks about the issue and her company's growth plans. Edited excerpts:
Would you attribute the recent market correction to the categorisation norms?
The regulatory changes are not as disruptive as how people are making them to be. In fact, they are an important step towards making funds true-to-label. It would not be right to attribute the market correction to these changes. These are due to changes in the domestic and global macro environment. Central bank policies, rise in crude oil prices, depreciating currencies and the geopolitical environment have led to subdued market conditions.
Are you looking to launch any new funds?
We have identified a couple of ideas in the hybrid and fixed income spaces, which we expect to launch this year.
Why a fixed income product in the current conditions?
The fixed income market has been through a rough patch over the past six months. At the short end, the returns are stable. At the long end, products like dynamic bond funds have disappointed due to heightened volatility.
We want to launch a product that is an all-weather bond fund, relatively consistent and providing a reasonably good investment experience across different rate cycles. This will be a very process-oriented fund that reduces the impact of any individual discretion and bias. Today, investors don’t understand why someone overseeing a dynamic bond fund is increasing or reducing the duration; it appears ad hoc. We are trying to change that and put a process around it.
Is there a case for large-cap funds to cut their expense ratios?
There are a couple of categories in India where the alpha (excess return of an investment, relative to the return of a benchmark index) might structurally come down. You could continue to generate alpha in the mid-cap and small-cap categories, and, to a certain extent, multi-cap, where there are emerging stories and a large universe of stocks to hunt for such opportunities. Not all such opportunities are understood well or are widely covered by sell-side analysts. Active funds have a very important to role to play in finding these and, hence, are entitled to their full fees.
As far as large-cap funds are concerned, the universe encompasses a well-researched, top 100 blue-chips, where the alpha is diminishing. It has come down to 200-300 bps against the benchmark. The solution here is to run a very process-oriented and cost-efficient fund. This is even more relevant after Sebi’s scheme categorisation norms, as 80 per cent of a large-cap fund’s investment has to be in the top 100 companies. Here, it is hard to justify an expense ratio of 200 bps.
Sebi recently lowered the expense ratios. How will this impact the industry?
There are three stakeholders in the MF industry — the investor, distributor and the AMC (asset management company). All three need reasonable economics to survive. Some pricing cuts the regulator has done are probably a part of the natural course of evolution; all of us will take the hit. Whether right or wrong is debatable.
I don’t think the battle today is about gaining or losing five or 10 bps; it is about increasing the penetration. Equity funds’ penetration to GDP is four-five per cent. The industry needs to focus on moving retail money from savings accounts and physical assets to financial assets. I hope these small cuts here and there do not come in the way of these larger goals the industry needs to focus on.
It is one-and-a-half years since you completed the acquisition of JP Morgan AMC. What were some of the low-hanging fruits?
I started in my current role at Edelweiss AMC in February 2017. While there have been a lot of low-hanging fruits, we have a lot more to do. We have added 100-odd people and are focused on running limited true-to-label products, with focus on consistent performance and innovative communication. We have also been increasing our coverage by tapping a larger pool of advisors in a large number of regions across India.
Last year was a foundational one for us, where we doubled our assets. This year, we will focus on expanding coverage, product innovation and, most important, maintaining the consistency of our fund performance.
We are always open to these. It has to be for the right reasons, at the right time, and must add value. Our next acquisition will more likely be to increase our retail (indoividual investor) penetration and distribution footprint.