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.
Vikaas Sachdeva, Chief Executive Officer, Edelweiss Mutual Fund – in an interview with Café Mutual, takes us through his journey in the mutual fund industry and what it takes to succeed in the investment management profession.
|How do you start your day?
I’m an early riser and physical fitness is high on my priority. 5 am to 7 am is when I pack in a lot of physical exercises, yoga, running, and catching up on the newspapers before heading to office. It is a nice quiet personal time that allows me to evaluate the previous day as well as objectively plan the day ahead.
What is the best part of managing other people’s money?
The blueprint of the process itself is geared towards removing financial illiteracy. You will be surprised how the smartest and most educated people at times can be simply so casual about managing their own wealth. The key here is to enlighten them on what their money can do for them. This is when you hand hold them into converting their money into wealth and empower them to live their dreams. The joys these bring are of a different kind.
What is the scariest part of managing other people’s money?
The responsibility that it brings with it. People trust you with their hard earned money – it could be their life long savings, their daughter’s wedding expense pool or maybe even their retirement savings – there is never a margin of error with the emotions that come with these. Therefore living up to these expectations means shouldering a huge responsibility.
What attracted you to fund management?
It is a mix of multiple factors. The very fact that it is the most egalitarian and transparent manner to making money – anyone and everyone can participate and is more ‘inclusive’ in the true financial sense than a lot of other options. Besides this, fund management has a huge potential, especially considering the miniscule percentage of people actually investing in mutual funds, even a 1% target mean huge numbers across a wider regional reach.
Though a more personal reason is that this industry has probably the best mix of people with a high beta intelligence levels who are naturally prudent and this extends across the gamut of sales, compliance as well operations. And just being around with this peer set and the ‘differential thinking’ that it brings along is a motivation in itself.
What are the things required to succeed in the investment management field?
Success in this space does not have a ready reckoner but there are a few things that could almost be a mandatory steps that could make life smoother:
Start with passion – Being passionate about the work you do could be a norm in everything where you apply your efforts and time. But this is a field where you will definitely see cycles and it is extremely important to maintain an equal amount of intensity and passion through all cycles. This coupled with the requisite intelligence will surely take you through a lot of situations.
Humility – to not let success get into your head and being able to brace for the next turn of events. Equally important is to be able to change gears swiftly and when necessary.
Process orientation – This is a very compliance driven industry and following the rule book itself could help ensure a good hit rate on achievable targets. Getting a ‘buy in’ from the entire ecosystem on any project further helps enhance speedy implementation.
What is the best advice you ever got?
Though each person I’ve met has helped mould me into what I am and what I will be, the one thing that has endured and I truly believe in is to be confident about yourself and be optimistic about things around you – sooner or later you are bound to succeed.
Where do you invest your own money?
I am primarily invested in equity, and equity oriented mutual funds. Also I have invested in property, as part of an asset allocation.
What does money mean to you?
Money has always been equated with success. But to me, money is the means to live life the way you want. A means to an end – not the end itself and this philosophy drives me and never lets me get too attached to money.
How do you strike work life balance?
I try and enjoy whatever I do, every moment in life. When not at work I enjoy doing the small things in life. I am very experimentative in a very safe way. I love doing things differentially whether it be lending a voice to a cartoon character or doing a radio show or even being a voiceover artist or maybe even running a few extra miles on a weekend jog exploring a new alley, life’s brought me here and definitely has a much larger purpose ahead too. A clear understanding of this helps you put things into perspective. Also, I love reading, catching up on movies and that I do even when being driven round. It’s been a while I stopped watching television entirely and trust me, that itself has given me so much more time in life!
Pope Francis has been dominating headlines lately — and not just for being named Time’s “Person of the Year.” He also recently released a document called “Evangelii Gaudium” (“Joy of the Gospel”), in which he criticizes global capitalism. In this new podcast globetrotting economist Jeffrey Sachs joins us to explore why the Catholic Church takes issue with the global economy — and what should be done about it.
I found this particularly invigorating. Hope you like it as much