Publication – Business World
The Indian MF industry notched up a whopping 1,412 per cent growth in 15 years. The going is only going to get better. So strap up for the ride of your life
(This story was published in BW | Businessworld Issue Dated 20-04-2015)
By Vikaas M. Sachdeva
Publication – Financial Intermediaries Association of India (FIAI), March 2015
In reality, I believe there are three types of AMCs:
A] Ones with vintage, who happen to have a sizeable AUM under their belt (Let’s call them “Large”)
B] Ones which are progeny of the crisis during the global crisis of 2008 – 2011 (Let’s call them “Young”)
C] Ones with vintage, who do not have an AUM equaling their vintage (For lack of a better word, they could be termed as “small/ mid sized AMCs” So what makes the breed of young AMCs go forth in a world dominated by size? Few things which we noticed are:
1] Sharp positioning: Each of the young AMCs has the most amount of consolidation happening.
While one does not want to romanticize the travails of a young AMC – and there are quite a few – I think the level of ambition and audacious thinking is what needs to be had a baptism by fire. Knowing fully well that they cannot compete on the existing set of rules laid down
by the industry, they have striven to pick a niche and establish themselves in that. So whether it is low volatility equity investing, buy and hold strategies, value driven investment prowess or a strong fixed income base, most young AMCs have picked their battles
2] Keeping costs low: One of the striking features of young AMCs is the way they have managed to keep their costs low and their heads down till the time the crisis was over. Now, with the benefit of hindsight and strong tailwinds, these AMCs are scaling up operations at a far lower cost than what you would have expected them to do
3] Pick and choose your distribution partners: The younger AMCs have focussed on a clear set of distributors across geographies, who they think can support their cause. This breed of distributors itself is smart, hungry and ambitious and they have been more than willing to support a good AMC when they see one
4] Smart products and initiatives: What is common between an absolute return fund, investment through Whatsapp, creating a product to cater to behavioral finance, benefits of very long term investing and an aggressive FoF portfolio? They all are smart products and ideas coming in from young AMCs As a small / mid-sized AMC, the perennial question is “Should I invest more to grow, or should I rationalize my resources to be profitable….. which is where you find watched out for. After all, it is not the size of the dog in the fight which matters; it is the size of the fight in the dog which counts…
Disclaimer: Mr. Vikaas M. Sachdeva is the Chief Executive Officer of Edelweiss Asset Management Limited and the views expressed above are his own.
By Vikaas M. Sachdeva
Publication – The Economic Times
Source - The Economic Times
|Over the past decade, since January 2004, Nifty has offered a compound annualised total return of 16.3%. Of this, 14.6% came from capital appreciation, while a mere 1.7% came from dividends, assuming they were reinvested. Over the same period, the Dow Jones Industrial average has provided a compound annualised total return of 7.7%, of which, close to 3% came from dividends.
These examples point out that in a rapidly growing economy such as India, dividends are not as important for building investors’ wealth as capital appreciation, particularly, when the markets are bullish. This is in stark contrast to developed economies, where dividends contribute significantly to investors’ returns.
The contrast can be easily explained by comparing the GDP growth rates in emerging and developed economies. In emerging economies, higher GDP growth rates offer a greater growth potential to companies. Hence, the management prefers to retain a larger share of profits for investing in the firm’s growth than paying out dividends. In a growing economy, new opportunities abound. The firm needs cash to explore them.
Are dividends of no importance?
In addition to being a means for distributing profits, dividends are, importantly, a way of sending a powerful message to shareholders about the company’s performance and its prospects. It gives them an insight into the management’s thinking vis-a-vis the business.
Therefore, a dividend payout policy is a very sensitive affair. This is also a key reason one does not easily find a dividend-paying company cutting back on its payouts. Regular dividend payouts also bring in an element of discipline in the cash budgeting of the company. Finally, it is easy for investors to appreciate the value of a company that pays regular dividends. Thus, among two companies that have established businesses, a reasonable history and a regular cash flow, a company that pays dividend consistently stands a better chance of inspiring confidence among investors.
If we were to construct an equal weighted index of Nifty stocks—established companies with a reasonable history—that have consistently paid dividend in the past five years, with dividend payouts increasing with each subsequent year, such an index would have generated a compound annual growth rate (CAGR) of close to 18% over the past 10 years. The Nifty’s CAGR stands at 15%. Moreover, these additional returns would have come almost at the same volatility as the Nifty, implying a higher risk-adjusted performance.
However, saying that consistent dividends are mandatory and sufficient for superior, risk-adjusted returns will not be accurate. If investors limit their exposure to dividend-paying companies, even the ones paying dividend consistently, their investment universe will become very restricted. Such investors will miss out on many wonderful companies that redeploy their cash in growth opportunities available to them. Also, paying out a higher proportion of earnings as dividends could lead to erosion of shareholder value in the long term. This may be because of rationalisation in valuation ratios—PE and PB—which take future growth in earnings and book value into account.
Finally, the dividend payout policies of companies are also governed by the tax regime in the country. In India, companies have to pay dividend distribution tax (DDT) to the government on the total dividend paid to the shareholders. However, there is no tax on long-term capital gains from equities. Since the cash paid by the company as DDT effectively reduces its intrinsic value, one may argue that paying dividends is an inefficient way of increasing shareholder wealth. It would be more beneficial to redeploy the cash in the business, improve the stock price and let the shareholder benefit from accumulating long-term capital gains without any tax implication.
To conclude, apart from being a source of income, dividends also play an important role as a tool for doing stock analysis. Dividends reflect the management’s view of the company’s future. However, relying on a simple strategy based only on dividend-paying stocks shall not be to the investors’ advantage.
(The writer is Chief Executive Officer, Edelweiss Mutual Fund)
So we have come full circle again – the list of holders of foreign accounts which had been lying with the government for three years and was given to the SIT four months ago has now been submitted to the Supreme Court and has been passed on to the SIT again yesterday. Hallelujah! The Chairman of the SIT has announced that their investigation into all the 700 accounts shall be completed by March 2015. Amen! Whether they will find even a cent in these accounts, now that their holders have had three years to move the moneys to anyone of 193 countries, is the next big thing to be debated on prime time television.
Actually, lets admit it. Indians love black money and treat with renewed respect and a sneaking admiration anyone raided by the Income Tax Department. We welcome, nay invite, Laxmi into our houses but prefer that she comes with hard cash rather than with a bank transfer or a draft. To fully understand this phenomenon, and the government’s convoluted strategy in the present case, we need to understand the Hindu view of wealth.
Nirad C Choudhury, that iconoclast of everything Indian, explains in his book ” Passage to England”. Hindus, he says, are devoted to wealth and to the hoarding of it because of their belief in reincarnation or rebirth. The devout Hindu reasons that since he will be coming back to this mortal coil at some future date, he may as well hoard his wealth to ensure a good life in his second innings. Nirad Babu is aware of the flaw in this argument – how can the person be sure that he will come back to the same family where the wealth has been hoarded? He answers this by contending that if all, or most, Hindus do the same thing, then statistically there are good chances of the new soul landing in a family with amassed wealth! To put it bluntly then, the Hindu is genetically and spiritually primed to hoard his moneys – black money, therefore, is something to aspire for and to respect.
Enter the government with its farcical attempts to recover this stockpile. To comprehend its PC Sorcar kind of moves we must first understand another facet of Hinduism – its rituals. Hinduism is all about ritualism, not substance. We can commit all manner of wrong doing-kill, cheat, beat, destroy, molest – provided we observe the right rituals: wash our sins in the Ganga, organise weekly havans, shave our hair, sing kirtans, feed portly Brahmins and so on. We garland the cow with many incantations and then let it starve to death on the streets. We feed widows in temples and then throw them out of our own houses. You get it? The ritual is everything. We are in no way interested in doing the right thing, we merely want that we should not be punished for doing the wrong thing.
This is precisely the kind of ritualism the central government (and dare we say, the Supreme Court?) is indulging in the matter of the Black Money. It signs treaties, obtains lists from foreign banks, sets up SITs, makes announcements about getting back the lucre in 100 days, promises investigations-and allows business to go on as usual. The business, of course, being the continued generation of black money in the country.
Forget the foreign accounts: there won’t be a farthing left in them by the time our sleuths get there. One report states that Rupees 14000 crore has already been moved out of Switzerland in the two years ending 2012. The obvious solution is staring the government in the face but it won’t even look at it: take immediate steps to stop the generation of black money within the country itself. Just three measures will ensure that 90% of the tap can be turned off.
First, tackle the real estate and property sector, the main generator of illegal and untaxed wealth. The devil here lies in the difference between the price actually paid for a transaction and the price at which it is registered, which is between half and one-third of the former: the difference is the black money. Today, anywhere in India, an all-white money sale is unheard of: if some idiot wants only white money for his property he will have to settle for a price far lower than its market value. All state governments have performed the mandatory ritual to counter this problem: they have fixed circle rates below which a property cannot be registered. The problem is, these rates are so far below the market rate they have no effect at all. In Greater Kailash of South Delhi the real rate is about Rs. 5-6 lakhs per square yard but the circle rate is about Rs. 2 lakhs. In the village where I betook myself after retiring to lick my wounds (above Shimla) the circle rate at Rs. 35 lakhs per bigha is only half of the actual market rate. It is inconceivable that the governments are not aware of this, what with their armies of Registrars, Tehsildars, Patwaris and what not, all with their hands on the pulse (if not the pocket) of our citizenry. Simply by doubling the existing circle rates the government would instantly knock off the major chunk of black money from the economy: in the process it would also realise thousands of crores of additional revenue as stamp duty every year and real estate prices would come down to sane levels as the speculators with their illegal money would be driven out of the market. A win-win situation, you would say? Well yes…..except that our politicians only want to win-win elections, and for that they need the difference between the two rates to continue. As Adam exclaimed after having a long, hard look at the uncovered Eve: “Viva le difference!”
Second: why make a joke of our Income Tax mechanism? Only 4% of our population files income tax returns and only 1% actually pay income tax! Can you believe that there are only 40000 people who have declared an annual income of Rs. One crore (and above) as per the IT Department’s own figures? In a country where thousands of luxury cars are sold every year, where gold imports crossed the figure of US $3.5 billion last month, where a flat in South Delhi sells for Rs. 15 crore, where one peg of premium single malt at the Habitat is priced at Rs. 7500/, where the Presidential suite in a Jaipur hotel at US $ 45000/ for one night is the second costliest in the world? Why, I could point out 40000 of the one crore plus types within a ten minute walking radius of my mother-in-law’s house in GK-I! And this is when one can barely walk in GK-I what with all the Audis, Mercs, BMWs and Rolls parked on the roads there!
Furthermore, I am fairly confident that most of the people in that hallowed neighbourhood pay less tax than I do on my pension. Their salaries would be negligible and every single expenditure they incur, down to the toilet paper in their eleven bathrooms, is booked to either their company or their business – drivers, servants, electricity bills, fuel, parties, travel, holidays, even their pet dogs who are probably covered under Security Expenses. (OK, there may be some exaggeration here but not much, I assure you). Not only does the government lose on Income Tax, it is also fiddled of its Corporate Tax.
The other great escape route deliberately provided is the exemption from Income Tax for agriculture. There is no rational basis for this and therefore its justification does not even merit a discussion. This exemption may appear obtuse and stupid but actually its quite clever, from a crooked perspective: it enables politicians and bureaucrats to launder their ill gotten wealth by showing it as agricultural income even if the land they own is as barren as the Gobi desert. I can bet my next DA installment that there is no major politician in this country who does not” own” agricultural land. It is not for nothing that Ms. Jayalalitha bought 2000 acres of land – such a huge area can launder far more than what she is accused of amassing, and I have a feeling that she may yet avoid the VIP cell on the strength of this acreage!
You can be sure the government performs its rituals in this matter also. It sends notices to you and me for not declaring the Rs. 2373/ received as interest on our Savings Accounts, and fines us for filing our returns two months late. It conducts raids with much fanfare and nets the plankton and shrimps but allows the sharks to get away. But it will do nothing to broaden the tax base or to suck the undeclared income out of the parallel economy. It will not mount surveillance on some HNI individuals to match their life-styles with their declared incomes. It has PAN, TAN and what not but cannot or will not track purchases to any effect. Nothing else can explain the deplorable tax base of a country whose GDP is estimated at almost a trillion US dollars.
And finally, that other great repository of black money – our political parties. The disclosed accounts (and these accounts are about as transparent as the sludge in your sewer line) reveal that both the Congress and the BJP have collected funds in excess of Rs. 2000 crore each and BSP is not far behind. We have no idea where this money came from, and we will continue to remain blissfully ignorant because ALL parties have ensured that the RTI Act will not be made applicable to them. They have refused to comply with the order of the Election Commission to provide information to querists. The Commission itself, clearly surprised by its own temerity in passing such an order, has retreated into its protective carapace, trying to figure out which way the wind is blowing before even attempting to enforce its order. And so tens of thousands of crores of black money continue to be spent on elections. The ritual? Oh yes, the EC fixes modest limits on expenditure by candidates, appoints Observers, audits expenditure statements, issues notices and warnings and is interviewed by Rajdeep Sardesai and Rahul Shivshankar.
We don’t need treaties or SITs to flush out the black money in this country. We simply need to go beyond rituals, to the one real religion that this country so badly needs – good governance.
Their returns have been as high as 9% a year; they carry lower risks than equity funds and yet enjoy the tax breaks that equity funds do says Vikaas Sachdeva, Chief Executive Officer of Edelweiss Asset Management Limited
Why opt for an arbitrage fund?
Equity is a well-understood asset class in India. Every second Indian is either an equity analyst or a cricket commentator. But a lot of money gets allocated to debt as well. Arbitrage funds have a role to play in the asset allocation toward safer instruments. Data shows that arbitrage funds have managed to beat liquid fund returns on a consistent basis. And today, investing in very short-term debt funds for 90 days or so, whether liquid funds or FMPs, has become tax-inefficient. Arbitrage funds are equity funds and thus enjoy a favourable tax regime.
Opportunity for arbitrage funds in a rising equity market
In a rising market, when everyone is gung-ho about stocks, it creates a lot of opportunities for arbitrage funds. One, when everyone is positive, that is when you get good liquidity. Two, when markets are rising, many investors want leveraged exposures and are willing to pay higher premiums for leveraging their positions. You can therefore become a counter-party to them and earn a good spread. Both conditions are good for arbitrage funds.
Types of arbitrage opportunities that one should look at
A renowned asset manager providing excellent investment solutions would look at cash-futures arbitrage as well as dividend arbitrage opportunities, which is a subset of the former. In the first, you buy a cash contract (on a stock) at Rs.100 and sell futures at, say, Rs.101, thus pocketing a profit of Rs.1 per contract.
Say, if Reliance Industries is trading at Rs.1,000 in the cash market, its futures may be at Rs.1,010. On the last Thursday of the month (expiry date), one have two options. either square off both the legs of the trade or hold on to the cash positions, buy current month futures and sell the next-month futures once again. This reduces the transaction costs because trading in futures costs only 5 basis points, while cash market trades cost 35 basis points.
In dividend arbitrage, you buy a cash contract at Rs. 100 and sell it in futures for Rs. 99 after a dividend is declared. Thereby, your loss of Rs. 1 is made up by the dividend of, say, Rs.2 received during this period. There is always uncertainty about how much dividend a company will declare. There is also uncertainty about the record date and whether it will fall in the same expiry. Through analysis, you can arrive at an educated guess and make arbitrage gains.
|Vikaas Sachdeva, Chief Executive Officer, Edelweiss Asset Management Ltd, has roughly 18 years of experience in developing and marketing financial products. In a conversation with livemint, he elaborates on how the focus on performance and clear client segments are the driving force at Edelweiss AMC. He also thinks that there is room for more fund houses, but for the industry itself to grow each fund house needs to find a niche and focus on a differentiation strategy.|
The fund house has been around for about six years. What strengths have you built?
Any company (asset manage-ment company, or AMC) that was formed around 2008-09 has gone through catharsis. Markets have been unkind. Also we realized a long time ago that what works for the large sized asset managers may not work for us. So, we took this time to become proactive in en-gaging with distrihutors and at the same time, focusing on perform-ance and rationalizing costs.
Performance might suffer in the short-term but needs to be consist-ently good over the long term. We have also worked a lot on our com-munication with distributors be-cause it’s important that they un derstand event product well, There is no point in trying to second-guess the market; if you build your performance and communicate well, when things turn, you will stand to gain.
The third thing we have done is keep costs under control. Along the way, we have also trained peo-ple and focused on a niche cus-tomer base and products. We needed a differentiated strategy and our value proposition was to help distributors get high net worth investors (FINI) in equity or full-fee products.
This helped because in the inter-vening period, when markets wer-en’t supportive. it was better to fo-cus on a particular segment rather than spreading across the board. We also focused on equity and started categorizing our assets un-der management (ALUM) on the ba-sis of fees and measured all funds in terms of equity. For example, 100 units of liquid AUM is, say, one unit of equity. While overall assets reduced, the proportion of equity AIM went up.
We asked distributors for help in understanding which products make sense and which don’t, and improve communication. Products that we thought were brilliant. didn’t go down well with distribu-tors because they could not simpli-fy and communicate those well enough. Instead we found they wanted simple products. In the past three months, our market share in net sales has consistently increased.
In terms of unique products, we haven’t seen anything after the Absolute Return Fund.
We are focusing on conventional funds to build a track record. The Absolute Return Fund is like our calling card. It works on volatility control. It was an alien concept when we launched and it took us a lot of time to convince distributors. The average ticket size for this fund is now around /4.5 lakh, which corresponds to the HNI seg-ment. Now people have started asking us to showcase other prod-ucts.
In terms of new products, we re-alized that for unique ideas we may not have the distribution strength to get the minimum AIM in the product as mandated. So, we have launched some such products within our Portfolio Management Service umbrella. Now we might have the requisite pull and are fil-ing for new products. These may or May not be on the conventional MF platform.
You have products with very small AUMs as well. How do you manage those in terms of costs?
We wait for the right time. For example, our Edehveiss Diversified Growth Equity fund’s AUM moved from /8-9 crore to around -,Z30 crore in a year. Similarly, every fund will require a push at the right time. Creating a track record is important. We Nvill look at ramp-ing up AUMs across the board.
Do you plan to expand to inves-tors in smaller towns?
Right now we have six branches. Our focus is on 1-INIs, and the bulk of this category is in the larger cit-ies. We are testing waters in small-er towns as well but we will do a proof of concept. We have to make sure that there are clients there be-fore setting up branches. Our modus operandi is to work with wealth managers and private bank-ers with access to IINIs. In smaller towns we are testing waters with independent financial advisers.
Are you open to taking over an-other AMC?
We have a clear long-term plan. We don’t intend being at these lev-els of scale and profitability forev-er. If there is an opportunity, we ire open to it. We have scanned the industry, but as of now don’t find anything al the right price. If there is an opportunity at the right price and fits into our objertives, then why not?
Do you think the industry should consolidate?
If you (AMC) keep playing in the same MI; space, it will grow at its own space. We need to look be-yond. There is a huge market that has still not been tapped with dif-ferentiated products. There is room for many more firms; what’s missing is clear strategy. In some cases, investors buy products be-cause of trust, returns and a prod-uct pull. Today, most AMCs are known by their best selling product rather than the brand, which, was the case earlier, if you don’t have the positioning right as a company, you will suffer. Apart from a few, there is no clear positioning of woducts and AMCs, and so, no clear answer to why investors buy certain funds. If the majority of the industry does not have a focus, then the industry itself will find it difficult to grow.