With equity assets of about R100 crore, Quantum Asset Management Company is the smallest and best-performing equity fund in the country. Recently, its chairman Ajit Dayal decided to cut the annual fund expenses to 1.25% of NAV to enable investors to earn more returns. In addition to the mutual fund business, Dayal also advises pension funds and other global funds through its group arm Quantum Advisors and has been actively tracking equity markets for the last 25 years. In an interview with Muthukumar K and Chirag Madia , he said that fund expenses need to come down? at least for big funds?and that distributors need to be properly regulated so that they sell the right scheme to investors.
You have gradually been decreasing expense ratio in your equity schemes. Globally, as asset size increases, the expense ratio has come down for equity schemes, but not so in India. Why is that so?
Our investment philosophy is clear?that we are investment managers and not assets gatherers. The return is a function of share price performance and cost that you impose on investors. So while rate of return might be higher for a fund, if you follow 2 by 20 hedge fund model of charging (2% of assets and 20% performance fee of fund?s profits) then costs would be very high.
But if you are looking from the client?s interests, you have to keep the costs lower. Returns for an investor is a function of two things: One which is earned from investing in shares and other from keeping fund expenses lower and thereby allowing more client money to be invested into the stock market.
I think unfortunately our industry has become an asset gathering industry and perhaps should be renamed as asset gathering company. It is a surprise that larger funds with assets over R9,000 crore have expense ratio of around 1.9% per annum. We know that they are spending these money on distributors.
Our view is that the existing investors should not be penalised for advertisement or marketing cost to bring new investors into the fund. If you give R10,000 and that amount grows to R15,000-20,000 over the year, then your expense can?t go up, it should come down. So the logic of lower expense ratio is that I can?t penalise existing investors to grow the investor base. So we are paying from the AMC fees. That?s why we have recently reduced the expense ratio for our equity funds to 1.25% per annum while the industry charges the maximum of 2-2.5%.
But in US, the front load fees are higher, while back home it is nil. So investor shouldn?t be complaining.
In the global markets, while they have a front-load structure. Their expense ratio are also lesser over a longer time period (about 0.95%). In the US, every prospectus has that statement 12b-1 fee, which is nothing but distributor?s fees. Our argument has never been that distributors shouldn?t get paid, but that his or her fees be disclosed separately as it is done abroad in the form of 12b-1 fees. Let the investor also know that he has got from of Fund A, which has got a 6% front end fee for his distributor, and another from Fund B, which has got a front end fee of 0.25% fee.
Let?s go back in history, (to) 1992, when the private MF industry started setting operations in the country. At that time, the ownership of UTI alone was about 10% of the entire stock market. And today the entire MF industry along with UTI owns only around 3% of the stock market. And during the same period, FIIs have grown their equity ownership from 1% to 22%.
Only 3% of the entire stock market is holding equity MFs and that too in a country with a savings rate of 38% of GDP. At current GDP of over $1.2 trillion, you are saving about $400-450 billion a year. And out of that annual savings, only about $ 6 billion came into mutual funds till now, which is a very small number.
The MF industry has failed to provide a long-term financial savings solution to retail investors. Whole industry has to wake up and stop blaming everything around them.
You have bypassed distributors and are selling directly. Now you seem to be in a rate war by cutting expense ratios.
Let me make one thing very clear, that we have a very low market share as compared to other fund houses. We are that irritant fly in the room that the fund industry would want to squash. When we launched the fund we were going with clear determination that we must first build a track record. If track record is good, then we deserve to survive and then we would put more money to bring in more investors. This is why we started an advertisement campaign in March after building a five-year track record which has proved that we are making sense for the long term.
What is the way forward for Quantum MF? Are you looking at cashing out like Benchmark MF or a stake sale?
We don?t have any plans to sell our business like Benchmark did; we have lot of people who have come to us for a cup of coffee. But after the first cup of coffee and our explanation of investment philosophy, generally they don?t come again. We are happy to partner with a bank with a large branch network provided they are willing to sign on the dotted line that they would not interfere with our fund investment philosophy. But chances of that happening is slim to zero right now.
Over the next decade, Indian GDP is likely to grow at 8-9%. Could investors make more than double of that in returns during this period?
Firstly, we don?t believe India could manage 8-9% GDP growth rates. While it is possible, given the spreading corruption across the country, we don?t think it will happen. We are believers in 6.5-7% maximum range of GDP growth.
Since 1980, the average annual growth rate of the macro economy in real terms has been 6.2% per annum and during the same period the Sensex moved from a base of 100 to about 19,000; so over a 30-year period it have given a return on average of 18%, which is a wonderful number. That?s more than bank fixed deposit rate or that of the yield on a 10-year government bond.
While I am not saying investors should move all money into equity funds, they should invest at least a bit of their portfolio into equities. We don?t think we need 8-9% of GDP growth for investors to become rich. Even with 6.5-7% growth they can be better off.
What are your views on the equity markets?
We feel the Indian economy will do well as compared to the world economy, so we are optimistic on India. We think Indian companies will show better profits in general in future. But price of a share will depend on buying by foreign investors. So if they get risk-averse, then there will be massive decline in Indian share prices. Saddeningly, there is no counter-buying to fully offset the fall, as retail buying of equities is not much. But we expect a Lehman-like crisis to crop up again globally but we don?t know whether it will this year or next year or in 2013. And that will pull down global equities sharply including that of India.