Sunday, October 5, 2008

Managing your Funds. The Quantum Jump.

Dayal’s Quantum Mutual does not hire distributors to reach out to the public. It is the first fund house in India to offer services through informal channels such as the internet and word-of-mouth.

No banker or broker will ever advise you to buy the mutual funds that he manages. Actually there is a good chance, in case you tell your broker that you specifically want to buy them, he will strongly advise you against it. But Ajit Dayal is not your average asset manager. And if he succeeds in his mission, history will remember him as the man who changed the way mutual funds are sold in the country. 

India has over 30 asset management companies, each falling over the other to grab the retail investor’s money. Over the years, they have been influencing distributors (bankers and brokers) to sell their products to gullible investors. Things have turned so bad these days — distributors are calling the shots and routinely push products to earn that extra bit of commission from the asset management companies. 

But Ajit Dayal’s Quantum Mutual does not hire the services of distributors in reaching out to the investing public. It is, in fact, the first fund house in India to offer services through channels like the internet, to reach the investor directly. This not only eliminates the possibility of distributor misselling, but also ensures that not a single penny of your investment is spent on the distributor fees. As a matter of fact, it is invested in the market, helping you earn better returns. 

How It All Began 

The story behind Quantum Mutual goes back to late 2005, when after getting permission from Sebi to start his own AMC, Ajit Dayal met several distributors to create awareness about his funds. But he was shocked to see them put forth ‘a pricing sheet’. For 6% commission, you’ll get Rs 6,000 crore, for 5%, Rs 500 crore and so on, distributors told him. “Without bothering to check whether a product is suitable for investors, they came up with a sliding fee structure,” reminisces Mr Dayal, who is one of the first stock analysts and investment managers of the post 1991 era. “But who is going to pay for all this?” he asked them. 

The last straw came when Mr Dayal went to a senior broker and asked him to recommend his funds to investors, but refused to pay him the hefty commission that he demanded. “We make elephants in the industry dance to our tune, you are just an ant,” thundered the broker. The decision was made. 

Ethics First 

Mr Dayal tells us that in his long career in the financial markets, he and his team always believed in ethical and unbiased practices, where people should get no more than a fair share of business. As a matter of fact, he had first entered the world of finance as he thought it was the least corrupt service industry, especially because there were no licences. 

“So we decided to go for the direct-to-investor approach. We believe that investors should have the choice to invest, without paying the intermediaries,” he says. Today, the firm has its headquarters (and the only branch) in Mumbai. It accepts both online and offline applications. 

The business is loosely modelled on the lines of Vanguard Funds in the US. While all other fund houses in US also employ distributors to sell their products (a la India), Vanguard is a no-load fund that reaches it investors directly. In an industry which has over 10 trillion dollars in assets, Vanguard accounts for a tenth part and is the second largest fund house in the country. 

A Long Journey 

Currently, Quantum Mutual has only Rs 70 crore as its corpus, although it manages about Rs 400 crore for several foreign funds. With a single equity scheme (which we must say is doing well), there is not much to boast about. 

However, the low cost technology that the fund company employs has meant that the break-even for the company has declined dramatically. To put this in perspective — last year, Ernst & Young, a consulting firm, said an AMC would need Rs 9,000 crore and 30 branches to break even. Things are a lot easier for Quantum which only relies on word-of-mouth and referrals for publicity, not huge billboard adverts. 

“It took Vanguard decades to have a sizeable presence in the US. With faster technology today, we should be able to make it in next two or three years,” says Mr Dayal. We hope too. The still evolving Indian asset management industry requires heroes like Mr Dayal.

Mr Arjun C. Marphatia, CEO, Quantum Mutual Fund.

Excerpts from an Interview with the CEO.

With no conventional distributors, how will you sell your funds?

It remains a challenge in the backdrop of a system marked by frenzied activity on the part of distribution outfits.

What we have done is simple: distribution commissions have been kept out, so investors are sure that more of their allocation is being put to use.

Clearly, we are urging them to come to us directly.

This also means that they must break the old habit of going through intermediaries. And, as you know, this habit is really old, considering the history of distribution of savings and investment products in this country.

Is it a divergence from the usual industry practice?

It is. It is not that distributors do not bridge the gap between mutual funds and investors. But in the current format, their heavy presence results in certain costs.

This comes in the shape of commissions, including trail commissions, which are commonly paid to them.

This has become the norm in our market, a norm that is probably not paid the kind of attention it deserves. It is as if that the market has taken it for granted.

Your equity fund professes to appeal to the longer term investor...

Yes, we want unit holders to stay with us.

Quantum Long Term Equity Fund will not take sector calls. Instead, the fund manager's focus will be on specific stocks, which may bring about particular sector weightages.

Let me point out here that the portfolio should ideally have 25-40 stocks.

At the moment it has about 15 stocks, including such heavyweights as TCS and ONGC.

Mind you, we do charge a four-per cent exit load if an investor pulls out before six months.

This becomes nil if he or she stays on for a full two years.

You have not been able to invest much yet. How do you explain this?

It is true that over 60 per cent of the fund's corpus is parked in liquid assets.

Plainly, we are waiting for the right opportunities.

As to exactly when such opportunities will crop up is a matter that should not be speculated on.

The point is, we expect corrections in a few segments. And in a number of cases, significant value is yet to be unlocked.

Take, for instance, a company like Bajaj Auto, which should soon start to derive considerable value from its investment in its insurance joint venture.

Or consider Aditya Birla Nuvo, which has a latent telecom angle to it.

What are you introducing next?

We may consider a balanced fund and a tax-saving product.

In future too we will stick to our basic approach while trying to provide higher risk-adjusted returns.

It should be remembered that a bullish market such as this will easily eclipse the cost of collecting money through high-decibel NFOs.