The acquisition of Deutsche Bank’s mutual fund business by DHFL Pramerica Mutual Fund has helped the latter grow significantly. Its assets under management (AUM) have risen from under ₹2,000 crore in February 2016 to about ₹26,000 crore by August 2017. Suresh Soni, MD & CEO, DHFL Pramerica MF said the industry would continue to see consolidation.
What is your view on the equity and debt market and Indian economy?
Macro economic backdrop for India is one of the best in recent times. Over the last six years, the current account deficit and fiscal deficit have reduced by half; inflation fell from double digits to about 3-4% and our foreign exchange reserves are touching $400 billion. With the crack down on black money, we expect increase in financialisation of savings. This, coupled with continuing low inflation, would lead to sustainable low interest rates.
While the economy is on a solid foundation, near-term growth has been adversely affected by a few structural steps viz demonetistion, RERA, Bankruptcy code and GST. Though all these steps are very positive for the long term, there is some slowdown in the near-term as the economy adjusts to these changes. Last quarter’s GDP growth at 5.7% is one of the lowest readings we’ve seen in recent times. We, however, believe economic growth is likely to bounce back to 6.5%-7% over the next 12 months.
Indian equity markets are reflecting investor optimism on the corporate earnings recovery. While, the market is clearly trading above long term average P/E; on a number of other parameters valuations appear somewhat reasonable. The last few years have seen relatively weak margins, poor corporate earnings growth and low capacity utilization. Going forward with declining interest rates and margins normalizing one would expect earnings growth to recover to 15-18% for FY18-FY20 as compared to around 5% p.a. over the last 3 years.
While, long-term prospects for equity market remain strong, we must admit that the valuations are no longer compelling and give a little room for disappointment in near-term.
AUMs in the industry have grown more than 6 times in 10 years. How do you see the next 10 years?
The growth of the industry has been on the back of strong retail interest. Around 1.52 crore investors currently invest through SIPs. Overall, the number of retail accounts has now touched 6 crore. These developments are healthy and augur well.
Besides, there are strong drivers for structural growth of the industry, such as: the opening of around 30 crore new bank accounts over the last few years; the crackdown on black money; reducing appetite for physical assets; and falling interest rates.
Your own AUMs too have grown almost 10-12 times in the past year.
Acquisition of Deutsche Bank’s Mutual Fund business about 18 months back was a game changer for us. It was the largest acquisition in the mutual fund industry till date. Since then, we have continued to invest in the business.
The core of our business is investment management. Implementing a sound investment process with competent professionals is at the heart of it. We have a suite of well-performing funds across asset classes to meet varying needs of investors.
We have also taken steps to engage with our clients and distribution partners. The number of our branches has gone up from 10 to 23 over last year. We have also added to our coverage team and enhanced the service delivery platform. There is a continuous investment in a number of areas to enhance our overall proposition to the customer, both in terms of investment performance and service delivery. We are investing in building this platform for a significant scale up in years to come.
Pramerica, which is a part of Prudential Inc. of the U.S., has strong understanding in managing long term money, especially in the retirement category. How do you propose to leverage this?
I am glad you asked this. We believe the retirement market remains significantly underserved in India and represents a huge long-term opportunity. Our mandated retirement savings like PF and gratuity are woefully inadequate to meet retirement needs. Furthermore, over 90% of employees in our country work in informal sector and may not have access to even this.
With a strong international understanding of this space, we are uniquely positioned to offer products and solutions. We are working on a few product ideas towards it and would be happy to share them in near future.
Your MF is largely a debt-oriented fund house, with some top performing schemes. How do consolidate on this superior debt performance. The second trend is the surge in retail AAUMs is predominantly in the equity schemes. How do you plan to grow the equity assets of the fund house?
We are indeed privileged to have a very well performing Fixed Income platform. All too often, equity investments garner a majority of the focus while fixed income strategies receive scant attention. We believe fixed income MF offer very good opportunities to clients who are not comfortable with equity volatility. We offer a range of solutions from liquid fund to dynamic and credit opportunities fund.
While we continue to build on our strong presence in Fixed income, in the last 12 months we have seen our equity book double. Our focus on strengthening equity platform has led to significant improvement in equity performance. Some of our key funds like DHFL Pramerica Large Cap Fund and DHFL Pramerica Long Term Equity Fund grew 3x over the last 18 months. Our PMS strategy DHFL Pramerica Deep Value PMS has doubled YTD. We will further build on this momentum. This of course does not mean that fixed income will not grow, it surely will, but in the overall asset mix equity will grow at a faster pace than fixed income. Over the next 18 months we will be looking at more than doubling our equity assets.
SEBI has again come up with an advisory directing AMCs to merge schemes with similar investment objectives. Your view?
As the industry evolves, regulatory changes are natural and players need to adapt. We believe the regulatory efforts to simplify mutual fund schemes will reduce the clutter and make it easier for investors to choose the right fund in line with their objectives. Also, it will lead to true-to-label funds and a level-playing field among AMCs.
We have done significant work in this direction. Last year, when we acquired Deutsche Asset Management, we embarked on a consolidation exercise and merged similar products across the two platforms. We have also ensured that all our funds are clearly differentiated from each other and have a well defined investment guideline and are true to label.
SEBI has also suggested that advisory and distribution functions be segregated.
MF distributors have played a central role in expanding the market and bringing new investors to the fold. Around 90% of the industry’s investor base is contributed by distributors. Indeed, active and long-term participation of distributors is key to taking the MF industry to its rightful potential.
With the introduction of direct plans, investors have a choice to go direct to a fund house. However, most investors would need expert advice to be able to design the right investment portfolio. This is where the fee-based advice or RIA model comes in.
With varying investor needs, we will need multiple models of distribution to service investors. There is space for direct, online, advisory as well as distribution to co-exist.
SEBI’s recent consultation paper seeks to segregate the advisory and distribution function. Currently, most MF intermediaries are distributors. It is feared that a sudden ban on distributors offering any incidental advice may pose serious near-term challenges, leading to a large number of clients being orphaned. It is good that SEBI has a consultative approach on the issue. Deng Xiaoping once said, “Cross the river by feeling the stones”. As we move towards the regulatory ideal, it is also worth factoring in ground realities regularly and making adjustments along the way!
SEBI has also suggested that advisory and distribution functions be segregated.
The regulators have been very supportive and have helped the industry grow in a disciplined manner.
One area where some more work is needed is easing client on-boarding process. I am glad this area has received regulatory attention in past few years. However, there is scope to further enhance it.
Currently an individual is required to submit multiple KYC documents across his financial relationships:- to his bank, credit card, mutual fund etc. Having a unified KYC across financial system can significantly enhance adoption of funds by new clients. If we allow anyone with a bank account to access MF, as his KYC is already done by bank; this market can expand manifold.
