We are open to more acquisitions but it is not our core strategy for growth, says HDFC AMC Managing Director

HDFC Mutual Fund is the largest fund house in the country. Milind Barve, Managing Director, HDFC Asset Management Co. Ltd., recently spearheaded the acquisition of schemes of Morgan Stanley.

This process is expected to be completed in three months. He believes that people should invest in difficult times, so as to reap gains at an appropriate time.

He spoke to The Hindu on various issues, including the downturn in the economy and future of the mutual fund industry in the country.

Excerpts:

HDFC MF has been consistently No. 1 in terms of AUM Ranking driven by long term fund performance, distribution strategy and parent HDFC brand trust. However, in the last few quarters performance of flagship Funds like HDFC Top 200 has been impacted (ratings came down to 4star from 5 star)? What steps are being taken to address these issues? Is your investment strategy on course, now?

Performance of HDFC Top 200 is probably below the high expectations that people have from this fund. But we remain fundamentally optimistic and this fund has been constructed to capture growth and revival in the market which has been the core strategy. Last year, the economy had a slower growth rate than expected; inflation has been persistent and so recovery has been delayed. These factors impacted the performance. If you look at performance of our fund over a long period, we have a substantial degree of consistency in beating the benchmark. Also if you look at performance of the fund in the last three months, recovery has been dramatic. High conviction ideas take a longer time to yield results. Last quarter the market went up by 11 per cent, this fund gave almost 18 per cent return. So it gave 7 per cent more than the benchmark. It has shown very strong recovery. Both investors and distributors have taken a note of the recovery in the performance

Recently, HDFC MF acquired Morgan Stanley schemes. What is the future plan and investment strategy for these schemes?

We have signed the definitive agreement and we are in the process of getting regulatory approvals. We are hoping to complete the process in the next three months. Our objective is to identify which of the schemes of Morgan Stanley can be retained as it is, and which can be merged with the existing HDFC MF schemes if it is very similar. For some schemes we are creating a new style, particularly asset class, which will be distinct from what we already have. At the end of this exercise we want to offer our customers a new range of products, which are not already with HDFC MF. We are taking a little time. But we want to create differentiated products post merger.

Is HDFC MF looking at acquisitions considering the pain that MF industry is undergoing?

We are open to more acquisitions but it is not our core strategy for growth. However we will continue to be open to opportunities as they come. We want to grow our Asset Under Management (AUM) more organically.

Considering that the industry is too fragmented and the regulator had stipulated recently that asset management companies has to raise its capital base from Rs 10 crore to Rs 50 crore, do you expect more acquisitions in the mutual fund industry?

In any market you will have the top 5 players who will have the 30 to 40 per cent of the market share. In developed countries, it will be the top five local brands which will always have a large market share and this industry is no exception. Hence I don’t think it is fragmented. There are 44 players in the industry but if you compare with some of the developed markets, there are 100s to 1000s players. But they all have built their own products and operate in their own area. As long as everybody finds their own roles and builds a reasonable quality of business and start making at least a reasonable amount of profit, it is fine.

Why did the regulator make an observation that more serious players should enter the market?

I think my understanding is that the comment was made more in the context of having some minimum capital in the industry. But I think there was a debate for some time about having the minimum capital which is Rs. 10 crore and it was fixed in 1996 to be reviewed upwards. It is not about fragmented, or large or small players, it is more about increasing the minimum capital.

You are launching HDFC Debt Fund for Cancer Cure Series II by the end of the month. What is your plan and the target on corpus this time around, given the backdrop that Series I contributed Rs 10.87 crore through dividends? Have you raised the target for the donations for cancer patients?

The objective of the fund is to use our distribution and fund management capability to raise money only for the purpose of philanthropy. So we don’t charge any asset management fee, cost of distribution and cost of advertising. The entire cost of running this fund will be zero, as HDFC AMC will bear the entire cost. The first fund has contributed approximately Rs. 10.87 crore till December 31, 2013; also we would have approved financial help to more than 500 patients all over the country. There is a very strong process followed in considering the applications. For example, the medical criteria which is the most important and the second is the income of the person. We restrict the financial help to a person whose family income is Rs One lakh per annum. It is really the poor who get the benefit. As a part of the process, the Indian Cancer Society follows-up with people whether they got the money on time, is the patient taking treatment, what stage of treatment he / she is, are they feeling better and it is very gratifying that we get heart-rendering response of how this money has helped the families.

We are very much encouraged by the first initiative. So we are doing a repeat of this and hoping to raise more money. However, it will be difficult to put a number, the first one raised Rs 80 crore, hopefully we should raise above Rs. 100 crore. The idea is not 80 crore or 100 crore, the idea is how much donation it can create. The more important thing is that in addition to this donation that will come from the fund, HDFC AMC will make a matching donation of an equal amount. Our objective is to double the scale of this activity and double the beneficiaries of this project. The idea is to make this philanthropy initiative bigger and our challenge is to convert investors to donors.

The RBI is worried on inflationary pressures and has been hinting hike in interest rates. Is this a negative for equity markets and the banking sector as a whole? What are your views?

I think we remain optimistic about the future. We do recognize that we have been in a cycle of low growth but we have reasons to believe that growth will improve from here. However, it will take some time to attain optimum growth rate. We see improvement in growth and inflation outlook, we have already seen an improvement in current account deficit. Many factors which are affecting the macro indicators of the economy may not be fully resolved but economy is on the way of recovery. If we look at data and history, investing in times when growth is low, gives better return for the next three years. Unfortunately people invest when markets are at the peak and buy when PEs are high. If you invest at tougher times when normally PE multiples are low, you tend to make higher return. If you are a disciplined investor and if you invest in difficult times, those investors will make good returns.

What is your outlook on interest rate and inflation?

We do believe rates will come down. But the uncertainty is on when that trajectory of rates to come down, will commence. Unless we see some decisive move in consumer price index (CPI), both core and non core CPI going down, inflation will not come down. The recent figures show that there will be some more time for inflation rate to come down. These things do have impact on underlying market, equity as well as debt. Mutual Funds reflect the impact on markets.

More In: Industry | Business