'Asset Management Is A High Return Business With Free Cash Flow'

ArunaGiri N, Founder CEO & Fund Manager, TrustLine Holdings speaks to BW Businessworld on the PMS Business in India, his company’s growth plans and distribution strategies, and his take on the equity markets for 2017.

Tell us a little bit about TrustLine's business model. How do you compete against larger, more established PMS players?
Our business model is very simple. It is centered around building an unbeatable proposition that attracts long-term patient capital, not the flirting money. To put it in other words, attracting and retaining clients of long-term profile is the cornerstone of our business model. It is achieved in two important ways - one, by sourcing majority of our new business by referrals, word-of-mouth and second, by strengthening and growing our client-base in the CXOs segment. We have a powerful story in the senior management space.

Over the years we, at TrustLine, have gained rich domain expertise by focusing and specializing in Portfolio Management Services (PMS) that enabled us to build enviable performance track record. This specialization coupled with the niche market positioning has given us a huge competitive edge in this business.

What, in your opinion, are the hurdles for a new player venturing out to set up a PMS business in India?
Though PMS is intrinsically a high ROE business, SEBI's minimum networth requirement of Rs 2 crore and stringent compliance requirements make it unviable in small scale. Otherwise, potential for this business is huge given the rising share of financial assets in the overall household savings in India.

What's the so called 'sweet spot' when it comes to segmentation for the PMS business in India? Have you deliberately chosen to keep your minimum ticket size relatively low at 25 lakhs? Has it paid off for you till now?
Market for PMS is quite vast and large. Large banks and well established wealth management companies provide much of the reach to this market. Because of the low credibility and poor track record of such traditional channel, multiple segments of the markets are open for niche players who have the focus and performance track record. Early on, we identified ESOP diversification as a winning theme to tap the high potential senior management professionals (CXOs) in the IT space. The huge concentration risk in ESOPs and that too in an underperforming sector like IT, gave a much needed fillip to build our story in this space. This strategy has paid off well by establishing us as a clear leader in this niche space. With increasing business momentum, we have recently increased our min. investment size to Rs.50 lakhs.

Are all your clients based out of Chennai, or do you tap clients in other regions. What's your distribution strategy? Have you tied up with any banks or large advisors?
While much of our business comes from Bangalore and Chennai, we do have presence in other cities. We have a very focused and selective distribution strategy that emphasizes more on the quality of capital (attracting the right client profile) than on volume/scale. Consequently, our tie-ups are with focused family offices and advisors who are aligned to long-term Value Investing.

Considering your target segment, I suppose you consider Mutual Funds to be a legitimate competitor. How do you position yourself against them?
Being a leader in a niche space, rarely we find competition from mutual funds. Moreover, mutual funds with their inherent compulsions to chase momentum and to fancy flavor of season stories, can hardly compete with our more concentrated and contrarian portfolio strategy on a longer term basis.

Tell us a bit about your business growth. At ~200 Crores of AUM, are you a profitable outfit - and have you raised any growth capital till date?
Asset management is a high return business with free cash flow. It hardly needs external capital to grow. In a way, it is a compounding engine that grows your invested capital annually to build large surplus over time.

You launched your first PMS in September 2007. The carnage that followed just a few months later is now part of investment folklore. How did you fare during that tumultuous phase?
Looking back, what happened in 2008 was a blessing in disguise. Lot of our future alpha (out-performance) in our fund was seeded in 2008 when we kept investing in the down-cycle without worrying too much about world coming to an end. Our disciplined practice of "Value Investment" principles during those challenging times have enabled us to deliver superior risk adjusted returns with significant outperformance over bench-mark indices.

At TrustLine we believe, the quality of "Research" is fundamental to delivering out-sized returns. When research is complemented by contrarian investment approach, the rewards can be dis-proportional. This forms the foundation of our investment choices and stock selection process in our core PMS business.

What's your take on equities right now? What are the key risks that can affect sentiment and topple the markets? What would your advice to investors be at this time?
Everything is going for the markets except one. You have lavish liquidity, surging financial savings (from the structural shift from physical to financial assets) and soaring political capital of the PM etc. But the missing piece in this puzzle is the ever elusive earnings growth, which can be the potential risk to the elevated markets. While flows will keep the markets frothy, in select pockets one can still find attractive opportunities, far and few though. For retail investors, the broader approach that works well over long-term is the systematic investment in select mutual funds without worrying too much about short-term market gyrations.