'The Key Challenge For Us Is Recognition & Acceptance In A Marketplace Dominated By The Larger AMC’s'

Rajiv Shastri, MD & CEO of Peerless Mutual Fund engages in a freewheeling interview with BW Businessworld on SIP’s, commission disclosure norms, robo advisors and more.

Peerless MF recently crossed the 1,000 Cr AUM mark - a great milestone, but there's still a long journey ahead! What do you feel are the key challenges that a relatively new AMC like Peerless faces in India faces while establishing itself? How do you compete with the big brand AMC's in attracting investor capital?
We are more focused on our mix of assets rather than the total number. What enthuses us is the fact that more than half are assets are from non - liquid schemes, which is where our focus has been for the last couple of years. The key challenge for us, as for other relatively new AMCs, is recognition and acceptance in a marketplace dominated by the larger AMCs. This takes time and the discipline to remain focused on investor benefit, along with the wherewithal to bear the financial cost that comes along with this. If these essential elements are present, then we are more than capable of competing with the biggest names since it isn't about size anymore. The marketplace is a mature one and fully capable of looking beyond size. It is able to capture the essence of our efforts in a lucid manner, and reward us for doing the right thing consistently.

As such, our effort over the last few months has been to establish a foundation robust enough for us to build on and we will see the rewards for it in coming months and years

How important is an efficient retail distribution network in the overall MF ecosystem? Do you foresee e-commerce and robo advisory models eventually making 'human' intermediaries redundant?
An efficient distribution network is one of the essential elements of success in this industry. Some AMCs are choosing to build this network in-house while others, like us, find immense value in partnering with distributors to extend our reach. Technology will play a crucial role in achieving penetration and inclusion in the coming years, with the emergence of Robo advisors and e - enabled transaction for both first time and repeat investors.

However, to assume that these will replace human intermediaries would be to exaggerate their impact significantly. These developments will complement human intermediaries who will find themselves offering more value - added services for more meaningful compensation. Distributors and advisors who successfully make this transition will remain at the top of the food chain, so to say, as the novelty of vanilla, one size fits all approach of the tech enabled tools wears off. This effect will be more pronounced during market downturns, when investors need solace and wisdom from real people rather than emails and websites.

How do you foresee the new commission disclosure norms impacting the MF distribution ecosystem? Is this a bold move in the right direction, or is it a case of overcompensation on the regulator's part - in other words, are we trying too hard to undo the damage that churning, NFO flipping and entry loads did in the latter half of the past decade?
Every measure that SEBI takes is targeted towards investor benefit. As such, every initiative should be seen through this lens and must have a clear and direct investor benefit that emerges from it. In the absence of a clear and direct benefit, it is possible that a measure may merely be one that 'looks' or 'feels' good, but doesn't have a meaningful impact on the marketplace. And while it is often believed that 'sunlight is the best disinfectant', one must keep in mind the concerns posed by exposure to too much sunlight as well.

Financial regulators across the world are faced with the tricky task of ascertaining the 'right' amount of disclosure; one that guards investors from malpractices and yet, does not pose a significant burden to other stakeholders. In the course of finding this balance, it is possible that we may tilt the scales one way or another for short periods of time. And while there is no escaping it, it is essential to ensure that these 'tilts' are inadvertent and well intentioned.

In principle, SIP's are a great long term wealth creation tool. In reality, a large percentage of SIP's are started and stopped for the wrong reasons, and distributors are struggling to prevent their SIP books from bleeding. Most SIP's end up getting terminated within a couple of years. How can AMC's and distributors collaborate to ensure a sustainable growth in the industry's overall SIP book?
We believe that the disillusionment of some investors with SIPs is a result of three gaps that exist. Firstly, there is often a gap between investment goals and the schemes selected to fulfil them. Secondly, there is often a gap between the understanding of risks associated with selected schemes and market reality. And lastly, there is often a gap between the returns expected from an investment and those delivered over shorter periods of time.

All of these combine, in various parts depending on the investor, to deliver a sub - optimal investing experience and has the potential of causing severe angst and disillusionment. As such, the only way to ensure an optimal investment experience, an essential element in persistency, is to fill in these gaps through better communication, awareness and transparency. And while the industry, both AMCs and Distributors, bear the primary responsibility for this, it is important to understand that this awareness and education relies heavily on a robust last mile. As such, any measure that has the consequence of reducing the number of distributors will have a severe impact on incremental and ongoing awareness.

While we know that timing the market is practically impossible (and what really matters is 'time in' the market!), what are your views with respect to making equity investments in the present scenario? Do you feel that the Indian markets are poised for a long term bull run, or are we in fact at the cusp of an impending bear market?
As one of the fastest growing economies in the world, India will always be on the cusp of a "long term" bull market for some years to come. On the other hand, since we are still a relatively small economy, we will continue to be exposed to the vagaries of the global economic cycle. The resulting environment has been, and will continue to be, one in which inflation beating returns in equities over the long term will be accompanied by elevated levels of volatility over the short term.

Moreover, in a dynamic economic environment, it is crucial that one chooses companies carefully. Just as there are companies that will grow at extremely high rates, there are those that will languish and more that will perish. Index based investing will essentially deliver the average returns generated by all these, which may beat inflation over the long term but be ineffective in building wealth. However, MF schemes with the wherewithal of charting a different course and focusing on the quality of the companies they own have the potential of outperforming not only popular indices, but also index hugging MF schemes. In this context, it is important to note that neither the size of the company nor its years of existence is enough to ensure quality; rather it is the manner in which it deploys capital and its approach to the wellbeing of minority shareholders.

And to close, a fairly loaded question but one we must ask nevertheless! Should market savvy HNI's switch to direct plans, or continue investing in regular plans? A 50 lakh saving on a 10 Crores portfolio seems like a lot of money. Is the value added by a Wealth Manager on a relatively passive MF portfolio really worth that much in Rupee terms?
It's one of the great myths of our time that MF portfolios are passive in nature. In reality, neither the amount of effort invested in selecting the right scheme for each investor goal, nor the amount of effort that goes into ensuring that these schemes continue to remain the 'right' fit can ever be overestimated. As such, the right distributors or advisors will be more than able to pay their way through the life of an investment.

The misunderstanding about the contribution of a distributor/advisor arises out of the fact that while it is easy to quantify the savings one may make by investing in direct plans, it is extremely difficult to quantify the negative impact that the absence of a distributor/advisor may have on a portfolio.

Analyses which highlight portfolio savings often ignore the fact that these savings accrue over typically a 10 year period. As such, the resultant annual savings may not be worth the additional time and effort that an investor will need to replicate the understanding and knowledge a distributor/advisor brings to the table. For example, wealthy investors with Rs. 10 cr portfolios are obviously good at their own work to have accumulated that magnitude of savings and wealth. They will surely be better off spending all available time in their core area of expertise than to try and replicate someone else's expertise to save Rs 5 lakh every year.