Will Reliance AMC win back investors?

These are tough times for Reliance Capital Asset Management Co. Ltd. Since it lost the top slot to HDFC Asset Management Co. Ltd in the quarter-ended September 2011—after ruling the roost for 46 consecutive months between March 2007 and June 2011 as India’s largest fund house—the Anil Ambani-promoted fund house has been slowly losing assets.

By Jayachandran/Mint

Between January and March 2012, Reliance Capital lost a corpus of Rs 4,068.4 crore, the most among the 45 asset management companies (AMCs) in the Indian mutual fund (MF) industry. Poor performance of its flagship schemes and its erstwhile chief investment officer Madhusudan Kela moving out of the fund house and being elevated to its sponsor company does not paint a positive picture. Has the fund house lost the plot or is this a temporary blip?

Uncertain times

Ever since the equity markets the world over, including India, fell on the back of the global credit crisis in 2008, equity funds have failed to deliver consistent returns. Between 2008 till date, equity funds have lost 4% on an average. But many of Reliance Capital’s equity funds fell harder.

Schemes such as Reliance Vision Fund (RVF) and Reliance Growth Fund (RGF)—its two equity schemes that were, for years, a compulsory addition to everyone’s portfolio—failed to live up to expectations.

Also See | Top 10 NFOs Since 2003 (PDF)

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Between 2003 and 2007, RGF and RVF were in the top 10 having returned 80.78% and 65.16% returns. Their downfall began once markets crashed in 2008. In 2011, RVF’s returns were among the bottom 10 in its category; it lost 29% as compared with the category average that lost 23%. Of its eight actively managed equity schemes in 2007, four were among the top 10 and only one among the bottom 10. It got worse in 2011. Of its 11, actively managed, equity schemes, only one was among the top 10; five figured among the bottom 10 of the respective categories.

For a fund house—and more so for its investors—that was known for its performance, this came as a rude shock. “They seem to have lost their consistency that investors have grown accustomed to. When you market schemes based on past performance and don’t live up to investors’ expectations, there’s a problem,” says an adviser of a wealth management outfit of a large private sector bank, on conditions of anonymity.

But the problem, says Kela, is more with the way the markets have behaved, rather changed the way since he first joined Reliance Capital.

The good old days

When Kela, who headed the equity fund management team back then and is now the chief investment strategist at Reliance Capital Ltd, joined Reliance Capital AMC in 2001—he had no mutual fund experience till then—the equity corpus of the fund house was just Rs 11.32 crore; the AMC was ranked 29th in terms of assets under management (AUM).

At that time, Reliance Capital AMC had just two equity schemes—RVF and RGF, two of India’s most volatile equity schemes living an insignificant existence. But Kela—who was personally recruited by Amitabh Jhunjhunwala, then CEO of Reliance Capital and now said to be Anil Amabani’s right-hand man—and Anand Jain, then vice-chairman of Reliance Capital, and his team of fund managers he got to recruit after coming on board, turned around the fortunes of the fund house in a manner no one ever dreamt of.

The team specialized in picking up small companies ahead of the market. They picked up Jindal Steel and Power in 2003 when its market capitalization was just Rs 300 crore (at present it is Rs 44,758.22 crore), Divis Laboratories Ltd when its market capitalization was Rs 200-250 crore (at present it is Rs 10,957.19 crore), Siemens when its market capitalization was Rs 500 crore (at present it is Rs 26,499.16 crore) and Eicher Motors Ltd when its market capitalization was Rs 300-400 crore (at present it is Rs 5,905.68 crore), among many other small companies.

“I could never reconcile at that time given the state of equity markets and economy that we should be happy just outperforming the benchmark index. I saw screaming opportunities in the market that could give us much, much higher returns,” says Kela. Between 2003 and 2007, RGF was the best performing actively managed equity scheme. Kela and his team made their names as being one of the best mid-cap fund managers in the industry.

Tweaking its strategy

The year 2008 changed things, however. Equity markets fell, mid-cap stocks fell faster and harder. Kela and his team’s thinking got turned on to its head as investors found safety in holding equity shares of only large and established companies, giving impetus to fund houses such as HDFC Asset Management Co. Ltd that specialized in investing in such companies.

“The particular set of holdings that Reliance MF had specialized in investing, worked well between 2003 and 2007. The same kind of stocks, sectors and investment style has not been working since markets crashed in 2008,” says Sandip Sabharwal, head of portfolio management services, Prabhudas Lilladher Pvt. Ltd. Sabharwal knows because his fund management style too specialized in identifying smaller companies at nascent stages; his strategy suffered a similar fate after markets crashed in 2008, when he headed equity funds at JM Financial Asset Management Co. Ltd in 2007 and 2008.

One of the steps that Reliance Capital AMC took was to give more impetus to macroeconomic indicators while picking stocks. The fund house hired a team of six people just to track macroeconomic indicators, prepare research reports that get circulated not just within the fund house and fund managers but also among the sponsor company. Numbers such as Index of Industrial Production (IIP) and inflation are calculated and tracked in-house by this team; the MF aims to track its own calculations rather than those being put out by government agencies.

The MF swears by the team’s contribution. “It helps us to evaluate companies based on a particular factor. So if you know that the rupee will depreciate, you know very well that you need to be overweight on export-oriented sectors,” says Sunil Singhania, head (equities), Reliance Capital. Kela adds that since they were bottom-up investors, they gave “perhaps only 10% weightage to macroeconomic factors. He says that present times call for more emphasis, definitely more than 5-10% weightage, to such factors. “We now give up to 40-50% weightage to such factors,” says Kela.

What went wrong

Too many new fund offers (NFOs): Its fund management style was just part of the problem. The other part of its problem also comes from the way it— along with most of the Indian MF industry—evolved over the years. Rising equity markets and a favourable fee structure that allowed mutual funds to compensate distributors handsomely—as well as make money for their own operations— tempted many fund houses to launch new schemes frequently.

Between 2004 and 2007, the MF industry launched 351 equity-oriented and hybrid schemes that collected a huge Rs 1.23 trillion, according to data provided by Value Research. Reliance Capital was no different; it aggressively launched new schemes. And since its track record was good, investors came in droves.

Between 2004 and 2010, it was among the top five mobilisers of funds every year. The two highest grossing NFOs (equity and hybrid schemes) since 2003 belong to Reliance MF; five of the top grossing NFOs since 2003 also belong to Reliance MF. Reliance Equity Fund (REF) created history in March 2006 by collecting the maximum inflows in its NFO period (Rs 5,790 crore) that any scheme had ever collected in the Indian mutual funds industry till that time, according to Value Research.

Wrong timing: It was a smooth ride that hit a bumper, eventually. The AMC got its timing wrong while launching some of its equity funds. Launched in February 2008, just before the equity markets collapsed, Reliance Natural Resources Fund (RNR) collected Rs 5,660 crore. Today its corpus is Rs 1,772.4 crore and its net asset value Rs 9.77. REF’s corpus, too, is down to Rs 1,122.5 crore. “Because Reliance MF hit the markets at their peak with NFOs, there were a lot of investors. Their underperformance has led to a lot of pain both to them as well as investors,” says the marketing head of a government bank-owned sector fund house, who did not want to be named.

But the fund house has a defence. “The MF industry grew on NFOs at that time and we were also a part of it,” says Sundeep Sikka, CEO, Reliance Capital Asset Management Ltd, who reminds us that NFOs were the flavour at the time. One of the lessons that Sikka and his team learnt was to try and get the launch timing right. “Our learning has been to not to launch too many themes or products that the investor does—or may—not understand. Many people invested up to 25-30% of their corpus in RNR despite it being a thematic fund,” he says.

Performance aside, multiple schemes confuse the investor when choosing what may suit her best. But Singhania says that there is method in madness. “All our offer documents have clearly mentioned the mandate. And this is also where the role of the financial adviser comes in; to help the investor select the fund that suits her best. Two large-cap funds from within the same fund house may differ by only a couple of percentage points in the long run in terms of their returns, but if their philosophy is different, there is merit in having both the schemes,” says Singhania.

Still, when the equity markets recover, Reliance Capital will have a lot of catching up to do; the days where it had to worry about just two equity schemes (RVF and RGF) are long gone.

Continuing strengths

Aggressive marketing: Its aggressive marketing style had positives and few can question them. It launched Reliance Any Time Money (ATM) card first in January 2006 and again later in November 2011 with a slight twist.

A first in the industry, it allowed its investors to withdraw (instantly, from a bank’s Visa-enabled ATM machine) from its equity and debt schemes. Investors can also use it like a debit card at shops. It was the first fund house to launch a micro-systematic investment plan or SIP (just that it wasn’t called the micro-sip back then) in April 2007. These micro SIPs allow retail investors to invest as low as Rs 50,000 a year, without submitting a permanent account number (PAN) card.

Despite micro SIPs turning profitable for the MF only after three years (assuming an investor puts in Rs 100 and the cost of this SIP—verification, dispatch and sundry costs—is Rs 15), the MF has gone ahead with gusto marketing it.

Initiatives such as these helped Reliance Capital tap customers like no other fund house could. “Our innovation is always aimed at expanding categories. We are trying to get new investors in the industry who would start by investing Rs 100 and then later graduate to investing Rs 1,000 or Rs 2,000,” says Sikka. This is also why Reliance Capital launched its ATM card as Sikka felt that mutual fund investing got synonymous with equity investing. By tweaking and relaunching its ATM card in November 2011—yet at the same time making it mandatory for its ATM card investors to invest in its liquid schemes— Sikka took the fight to the banks’ doorsteps that were busy raising interest rates on their savings accounts late last year.

Aggression can also be seen in its fund management style. For instance, despite the 2008 credit crisis, the MF’s fixed income team does not shy from picking scrips other than the highly AAA-rated companies. A credit team—fixed income head Amitabh Mohanty claims it’s one of the largest of its kind in the Indian MF industry—that just monitors credit quality of companies enables its bond fund managers to pick up slightly lower-rated companies too. “But we ensure we don’t have bad credit in our portfolios. The idea is to not to become so conservative and avoid opportunities. Fixed income is not just about managing your average maturities; it’s also about managing credit risk,” says Mohanty.

Focused staff: Reliance Capital’s aggression comes from its culture: to get the job done at any cost. That’s not to say they flout rules. On the contrary, it speaks volumes of how savvy the fund house is in a sense that it believes in reaching its goals, no matter what the odds are.

A high collection to almost any new scheme that it launches to garnering huge responses to new facilities launched, like micro SIPs or ATM card, the on-ground sales and marketing force—the MF’s foot soldiers—have found rank and recognition elsewhere too. “When I look to enhance my sales force, I have recruited a lot of people who have worked at Reliance Capital. They are very good, sharp, well-rounded and focused,” says the head of sales and marketing of a leading foreign fund house. This official goes on to say that since it has been easy to recruit its former sales staff, perhaps Reliance Capital may not be doing enough to nurture its sales team beyond a point, purely on account of its gigantic size.

That’s not the same though for its fund managers. Continuity of fund managers has been a hallmark at Reliance Capital. Singhania and Sikka have been with the fund house since 2003. Senior fund managers Ashwani Kumar and Amit Tripathi have been around since 2003. Its head of fixed income, Amitabh Mohanty, has been around since 2005. Kela himself is no exception.

Many of the MF’s peers we spoke to hold Reliance Capital in high esteem purely on account of its nimble footedness, despite being a large firm. “They are street smart and very opportunistic in terms of launching new products quickly and at the peak of their performance. They know how to take advantage of market opportunities. Their orientation is: Let’s just do it; we should not be hesitant in trying out new things,” says the chief executive officer of a foreign fund house.

Way ahead

Compared with prior to 2008’s market crash, Reliance Capital has been quieter and has not launched many schemes, apart from fixed maturity plans.

But if it wants to retain its investor’s loyalty, it will need to monitor its performance. Its performance over the last three to six months indicates that the MF’s work is bearing fruit. Several schemes, including RVF, Reliance Top 200 and Reliance Regular Savings Fund – Equity, are back among the top 10 of their respective categories.

Singhania is confident that the MF’s equity funds’ performance will swing back once again. Time will tell whether the recent surge in performance is temporary or is here to stay.

Graphics by Sandeep Bhatnagar/Mint


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Sunday, April 29th, 2012 EN

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