The Mutual Fund Show: How Risk Labels On Schemes Will Aid Investors
The market regulator’s norms stipulating mutual funds to label schemes based on the risk of their underlying securities should benefit investors, according to A Balasubramanian.
The managing director and chief executive officer of Aditya Birla Sunlife Asset Management Company said on BloombergQuint’s weekly series The Mutual Fund Show that this would give investors a definite idea of the risk they may be about to undertake.
He lauded the other recent measures by Securities and Exchange Board of India such as changing the way funds manage multi-cap funds. This regulation, he said, won’t impact multi-cap funds of Aditya Birla Sunlife as they’re “nearly true to label”.
As investors get more exposed to equity schemes, their return profile will also improve as equity funds will outperform over the long term, he said.
Balasubramanian said the asset manager’s latest fund offer, the Aditya Birla Sun Life Special Opportunities Fund, will invest in an opportunistic manner that may arise out of valuations, trends or other reasons.
Watch the full show here:
Here are the edited excerpts from the interview:
Can I start off with what really got people thinking about, for lack of a better word, this new product labelling that SEBI is asking to do—a risk-o-meter. I remember a conversation that we had in your office about two years back where you told me that you anyway do something like this for some of your products. I’m just wondering how do you view this? Is it sending out some kind of messaging, and what end would it serve?
Balasubramanian: One of the focus that has come as part of the regulatory framework in the last six-odd months is that wherever there is a need for better clarity to be provided as it is with respect to the product labelling or the way the management is managing the funds, what they say and what they do, and both have to be matching, which is called the walking the talk, that proves the level, and they keep looking at these things on a continuous basis. Also, risk is something that you see something but it in reality it is something. So, how do you the manage the risk, and therefore how do you actually communicate those risks to the investors as initiative towards giving more clarity to the investing public at large as well as the people who are advising for the mutual fund. In both the things that you referred, the classification of schemes, this is something that serves a greater purpose. When we introduced this about 2.5-3 years back, I was apart of that committee as well at that point of time from AMFI’s side. So, it gave us clarity and people really liked it and now, everybody has got a uniform definition of a mutual fund. In the multi-cap category, they felt we probably need to also have a similar kind of thing, that’s how the regulatory thing came in... The risk-o-meter is something largely to make both the advising community as well as the investing community to understand what are the risks involved by looking at the risk-o-meter’s signs. It is clearly mentioned as low-risk, medium-risk and high-risk but this is a further expansion of the same risk-o-meter with respect to a larger representation of the risk which reflects in the portfolio. What I mean by risk is- suppose you have a AAA securities fund and you end up having AA+ and below rated papers because it gives you a provision. At the same time, while you’re sticking to an objective, but the risk you’re taking actually goes beyond what has been practiced as a money manager for quite some time. Now, how do you reflect that? You have to retain the risk perception of the schemes on the basis of the risk that you add to the scheme which of course if the money manager is doing it with the trust of the investors, at the same you have to also understand what the risk is that is coming as part of the portfolio. Therefore, you will have the ability to adjust that. They have defined some rules and regulations with respect that the buyer at the time of buying will perceive this fund as the fund that takes so much risk. Then I make a course correction on the basis of changes. So, all these things have been defined very clearly. It’s also coming from the fact that during the last six months and the lockdown period, it’s taken enough feedback from the industry, therefore whatever is coming from SEBI is more of, I would say, a part and parcel of giving more and more clarity and defining more and more of the parameters that they can operate with.
Is it also a reflection of the fact that more and more people have seen that there were at times, the risks associated with a particular category not quite put out. I’m not saying by intent, maybe by mistake, we’ve had a few instances, especially on the debt side. Do you reckon that, let’s say, ordinary public might shy away from funds which are classified in a very high risk category?
Balasubramanian: Not necessarily. I think from a simple point of view, the very fact that one says openly, what the risk is that is associated with every fund- whether it is a low-risk fund or a medium-risk fund or a high-risk fund and that being reflected on the basis of the risk-o-meter symbol that has been given. I think it makes the job of investors as well as advisers much more easier to assess how much risk is to be a part and parcel of the portfolio. The way we are assessing the risk-o-meter, even from an investor’s point of view, he has to have a fund that is a low-risk and he has to have a fund which is of higher-risk in order to generate a high return his portfolio. As long as he knows that the return that is getting in the portfolio is actually is coming on the back of taking higher risk on those funds which are defined as a high risk fund. I’ll just give an example of the credit crisis. The credit fund comes with the risk associated which is higher than the fund that invest only in, say AAA securities. So therefore, if we are able to highlight that, if that is sufficient enough to generate a better return for him, say 1-2% or higher than the other funds, with any higher return, investors should accept the fact that this comes along with the risk that one is taking on those funds. Therefore as long as that’s clearly mentioned from an investor’s point of view, it’ll be reminded as part of the portfolio and at the same time he knows very clearly that he risk that I’m taking on these kinds of funds will give me some extra return and that extra return also comes along with the associated risk. This is something which becomes a part and parcel of the communication. It makes it much easier for the selection, to know the fact and also ensure the money manager to actually walk-the-talk from the point of view of maintaining the ‘true-to-‘label’ kind of mandate which they’ve given. In this process, there are 45 mutual funds will go to 55 and 100 and so on and so forth, but all mutual funds won’t have different definitions. They will all have the same definitions and if I talk about a large-cap fund or a credit-risk fund, it reminds of the uniform definition across all mutual fund players.
July and August in more ways than one have thrown up a number of surprises in terms of the kind of flows that have come in. So, has September been largely equal? What has been your experience at Birla?
Balasubramanian: After such a sharp fall in March definitely the fear factor on equity was high and therefore a lot of people were unsure about their monthly incomes and not sure about the jobs and they are not sure about how the economy will turn around and they are not sure about how the policy makers will react to emerging trends. It did have some negative impacts after seeing continuous growth over last 5-6 years. In September, it is coming down even for us as for the mutual funds. We have seen substantial reduction in the outflows that used to happen in the month of April, May and June and probably as we move into the next three months, we will see a trend reversal happen. This is something which historically happens and my own experience always says at these kind of ups and downs we do go through but as the equity market stabilises, the VIX comes down and confidence starts coming back then the flows also start coming back. I’ll give one simple example, just look at April 2021 and then look back at the one-year return. Look at this because March and April were very bad months and as you move forward, the number is better. The more you look back, the number is bad. So that’s the cycle which we go through every now and then. Therefore, I think the graph here which was there that outflows are happening. That is again very small in relation to the overall size of the fund but the outflow is of course a reversal of the trend but that trend in the month of September, I think got reduced.
I take it that you believe any way that these are apt times, and by these, I don’t mean the immediate months. I think the next few quarters or years are good times for investors to have a higher exposure to equity because we might be, on a relative basis, in a lower interest rate scenario. So, are you guys telling your clients, customers and distributors to make people understand about the benefits of investing in equity funds currently?
Balasubramanian: I think it is a pretty interesting scenario today in the sense that, there is a disconnect between the economic growth and the stock market momentum. There’s absolutely no doubt on that. I think everyone gets surprised or they start wondering how the market is going up when the economy growth is not coming but as it always happens that market is always pre-empted, it always pre-empts that some of the growth could come and then the growth comes and then the market gets stabilised and when the actual growth comes, you won’t see the market performing. So this is how the market cycle always functions. Though none of us would have expected the market to come back to full cycle and start touching the peak, but having said that, from an investor’s point of view, the way the regulations have gotten changed and so much of the focus has come to provide the necessary support to lift the economy as and when the lockdown gets lifted and things come back to normal- it is probably about six months away. So, when you expect that V-shaped recovery in 2021 on the basis of low interest rates, the focus from various governments have been in kick-starting the economy as the right time comes. So when can we expect that kind of a thing to happen, naturally equity and asset classes once you start building it or when you continue to build an asset class, you are not just looking at the next six months but beyond that. Having said that, the last few months of uncertainties that have been created, I think we must also keep in mind that the gradual relaxation that is coming in is also making companies to do a little better than what they thought. I think most of the companies start measuring coming back as a percentage of the pre-Covid levels. Some companies are saying 70% of the pre-Covid levels will come back. Some companies are saying that 100% of the pre-Covid levels will have come back from a sales point of view as well as from a profitability point of view. Therefore I think one cannot actually ignore the fact that equity as an class has to be performing as part of the portfolio and you cannot also ignore the fact that any alternate investment that you look at building today in the form of non-equity provides the least opportunity given the fact that the rates are low and therefore from an investor’s point of view, you have to choose between how much of a risk they can take in order to generate high return and international investments are actually not giving so much of a return for me. So that’s why the diversification has to come and that is what makes me believe that equity and the asset class will come back. Having said that, it will be more coming back to the SIP form and STP rather than big time lump sum money coming in.
One quick follow up there, in your so many years of equity market journey, have you come across a situation where the disconnect is so high—and it’s okay to have the disconnect frankly, markets don’t have to be at the mercy of the economy—that the interest rate environment or regime, never mind the flashes, looks like it’s going to be in a stable to a downward trajectory?
Balasubramanian: This is the first time that I have seen that the disconnect is really high with respect to the economic growth versus the market... This time around, the regulators have done a great job in reacting very quickly, starting in the month of March, and then kept doing many things to ensure the sentiment towards interest rates and liquidity remains high. They kept taking many decisions and not just in India but globally and that has completely changed the confidence of the money coming back to equity. But at the same time, the way we measure the volatility index- this time it got settled fast on the VIX which also goes to show that the number of people who are taking actually are a negative call in the markets have gone down quite significantly. That was also reflecting. What I’m saying it’s different from what happened in the past, which was measured on the basis on the number of months which have remained uncertain. This time, the number of months which have remained uncertain is lower than it was in the past. That one big difference- I will probably say the way comfort has come how the government has been reacting to Covid situation and the central bank reacted differently from the financial crisis month that we saw in 2008-09.
Can you tell us about this Special Situations Fund that you are launching? What is this about because when I look at the description, it seems like it gives you the opportunity to almost buy anything that you would want? What’s the reason for launching such a fund in the current times?
Balasubramanian: We have been thinking about what kind of a product that we can offer given the fact that we are already are an established player in the mutual fund industry for the last 25. I think one of the opportunities that we saw while what you say is that one- this fund is clearly agnostic to the market cap, no doubt, it provides an opportunity because the situation itself is special in the areas of health. If you look at, there is a big change that is coming in post the pandemic and the IT space, there’s a big change that has come in with respect to automations that the whole cloud sourcing model I think is now becoming the new way of living. The way I think the companies are running in the past and the way post-Covid is running, definitely I think there is a serious focus that has come as to what are the steps that the companies have to take in building shareholders’ value. So from the money managers’ point of view, I will look at opportunities in this space purely with a bottoms up analysis that can benefit significantly post the Covid situation. At the same time we have also seen in the past that any company which goes through a tough time and has a good management and a good balance sheet are very focused on building the business for longer term on a sustainable model, many companies go through their own tough times but suddenly you see some companies coming back because the management balances them on the course of the business and the chances of being successful also remains high. So, such kind of opportunities will also come in this fund. Therefore the money manager’s job is to keep looking for opportunities in various sectors that can benefit significantly post the Covid period. Also, the companies that can benefit- I mean, the company has now grown beyond a certain size. Now they need to probably look at creating multiple business models in order to generate higher shareholder value. They have to look for such kind of opportunities. Therefore, we thought that during the Covid period, which of course is a special situation in general- both for the Indian economy as well as the broad economy in the world, there are many companies with a strong management can create a longer term value for the shareholders... We haven’t kept any bias towards large-cap and mid-cap... we apply a bottom-up stock picking approach with specific filters on those special companies which I defined, then he is free to invest in those funds or stocks. The only principle to be kept in the portfolio will be having about 40 to 50 stocks in the best case scenario so that we bring in a sharper focus in terms of ownership in a portfolio and therefore you’re able to create a portfolio that can generate reasonably good experiences over a period a time.
But there is no market cap criterion? You could very well have 50% in large caps or 50% in small caps as well?
Balasubramanian: There’s no market cap restriction but again, money managers will apply the principle of large cap versus mid-cap and multi-cap, or maybe the small-cap. This is only on the basis of the risk that is associated with such investments from the point of view of liquidity. The liquidity will play a role when one builds a portfolio and at the same time the companies are able to foresee that they can generate substantially higher returns in the next three to four years even if it means that it comes from a smaller mid-cap companies, some professional portfolio will go there. At the end of the day, from a money manager’s point of view, it is not restrictive in nature and at the same time, they’ll follow some of the risk management policies which has been defined as a part of our internal risk management tool that we’ve created for all funds.
One final question, since we are on that topic of funds having that flexibility and you spoke about it at the start, which is the criterion that SEBI got in for multi-cap funds. My question is if you have such a product, where in you would have to re-balance, what would you do? Because I think there is still some answers to be given with regards to whether SEBI allows funds to change the criteria or merge it with other funds, etc. What is the likely stance going to be at your fund house?
Balasubramanian: See we as a fund house, we have a clearly defined parameters for every fund that we have- right from an equity which is considered as a large-cap fund and an equity which is a multi-cap fund. Within that, there are cases of the framework that we have defined over a period of time- how much of the exposure should I have in the large-cap and the minimum over and above what has been defined by the regulation. We have our own internal limits that we have set for every fund. On the basis of that, clearly Sun Life equity is considered as the multi-cap fund and have invested about 60% large cap, roughly about 12% small-cap and roughly about 18% in mid-cap stocks. Now assuming that the regulation which is given from the Jan. 1, one has to re-balance it, then suppose we continue to run as a multi-cap fund, you’d have to make a marginal tinkering in the portfolios without impacting the portfolios too much. In our case, it is more or less status quo and not much will change. If there is more clarity which comes in from SEBI we can probably take a call whether which option is the best option to take and at that point of time I think we’ll play with what comes from the regulatory guidance.