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Fund industry heading towards an absolute return environment?

Navneet Munot, CIO, SBI MF

4th August 2017

In a nutshell

SBI MF's 30 years of wealth creation coincides with 30 years of development of Indian capital markets says Navneet, as he traces the journey so far and peeks into the future on how fund management may evolve in the coming years. Is the growth of solutions and asset allocation products a symptom of the industry being pushed into an absolute return environment? And if so, how will a fund manager's role change in this context? Navneet shares very interesting insights on the road ahead for fund management and how it will change and yet not change in response to evolving investor needs.

WF: Its been a long and momentous journey for SBI MF over the last 3 decades. What are some of the big changes you have seen over the years in fund management? Have we as an industry moved decisively from a "star fund manager" approach to a process oriented approach towards fund management?

Navneet: SBI MF's journey over the last 30 years has coincided with three decades of evolution in the country's capital markets. Its been an exciting journey and we look forward to the next 30 years with even more passion and dedication that we have demonstrated in our first 30 years. We always say within SBI MF that just as our parent aimed for and became the banker to every Indian, we at SBI MF will work towards becoming the wealth creator for every Indian.

Capital markets in India have come a long way in institutionalization of all aspects - dematerialization, electronic trading, transparency etc. Along with this, our fund industry too has evolved - and one area where we have gone far ahead of all other segments in financial services is transparency - which has been aided by regulations, self regulation and market forces. There is no other product in Indian financial services that is as transparent as a mutual fund.

Our industry has also learnt valuable lessons from every market crisis - like in 1992, in 2000, in 2008 and then the 2013 scare. From each episode, the industry has turned wiser and institutionalization of processes has assumed increasing importance. But on the people vs processes issue, my view is that while processes are absolutely fundamental in all aspects - clarity of mandate, research, portfolio construction, risk oversight, disclosure etc - you cannot undermine the importance of people. In my view it is a combination of people with the right competence and attitude, backed by the right processes, that enables fund management teams to deliver good results.

WF: What do you see as the biggest changes that perhaps lie ahead over the next 5 years in the way money is managed? Do you see ETFs becoming a retail proposition in the coming years?

Navneet: We are at a very interesting juncture where digitization of financial services is happening alongside financialization of savings. We are also seeing a very interesting developing trend of financialization of real assets. Today, a host of real assets - whether real estate or roads or transmission towers - are being financialized and sold to institutional and individual investors. That's a trend that is going to become very meaningful in India, which opens up choice for investors across a host of asset categories.

The other big move that's underway is creating solutions that minimize drawdowns and therefore provide an overall smoother investor experience. These solutions could either be individual products that aim to deliver this or a combination of underlying products put together in a manner that achieves a particular objective.

ETFs are now coming of age in India, thanks to institutional and pension interest in the category - involvement of EPFO in index funds is a big move in terms of gaining wider acceptance for the product category among retail investors over time. Smart beta is still evolving in our market. We will see increasing retail interest in ETFs and in smart beta products in India in the coming years

WF: There seems to be a growing appetite for dynamic asset allocation / advice embedded funds. Is this a secular trend or a symptom of present valuation concerns? What does this imply from a fund management perspective?

Navneet: Part of it could be a response to current valuations, but there is an underlying secular trend here. We have a very large segment of investors who dislike volatility and therefore have stayed away from mutual funds and remained in deposits. Products that minimize volatility, that reduce drawdowns, yet provide an equity upside meet the needs of this large category of investors. In theory, a product that provides close to equity returns with close to debt volatility is what will catch the imagination of these investors. The closer you can get to this, the more acceptance the product will have. This is where products like dynamic asset allocation funds, multi-asset funds, macro hedging, absolute return funds etc come into play. There is clearly a secular trend here.

WF: Is the fund industry being pushed into the realm of absolute return expectations? What changes might this bring into fund management?

Navneet: If you see globally, there has been a huge rise in ETFs which are purely relative return products, and on the other hand, we have also seen a big rise in absolute return products especially in the hedge funds space. In India, fixed income funds have always had an absolute return orientation - nobody looks at outperformance over benchmark here. On the other hand, equity funds have always been sharply relative return oriented. So what we will perhaps see is a confluence of the two perspectives going forward - especially as we progress deeper into the dynamic asset allocation and multi assets spaces. But we need to take care that as we talk about absolute return expectations, we also need to put a clear context on the time horizon around these expectations. You just cannot have an equity oriented product with a zero drawdown expectation on a quarterly time horizon basis.

In terms of how this can change the job of a fund manager, my belief is that it is the solution that will work towards delivering the outcome, while the individual fund managers continue to focus on beating their respective benchmarks within the given mandates. So, an equity fund manager responsible for the equity portion of a dynamic asset allocation fund will continue working the same way. But the solution overlay on top of the equity and debt portions will need to be managed in a manner that it delivers according to the mandate and expectations of the solution.

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