AMC Speak 2nd December 2013
Small caps are actually your best bet against inflation
Sunil Subramaniam, Director - Sales & Global Operations, Sundaram Mutual


At a time when Sundaram Mutual has achieved a lifetime high AuM by crossing Rs.17,000 crores, Sunil shares with us the convictions that guide his fund house as it charts out its growth path ahead. He makes a very important point about investing in mid and small caps : though they are seen as high risk due to volatility, they are perhaps your best bet to beat inflation in the long run. This and other such key messages will be the central theme of a new investor education initiative - "Small Is Big" - that the fund house is set to launch, and small caps will be a key focus area in terms of new products over the next few months at Sundaram Mutual.

WF: Congratulations to you and your team for scaling a lifetime high AuM of Rs. 17,000 crores. At this juncture, with this milestone now behind you, how do you assess Sundaram Mutual's key strengths and weaknesses? What are some of the things that have gone right and what are the areas that you and the team are working on to strengthen your position?

Sunil Subramaniam: Thanks a lot Vijay. The Rs.17000 crore landmark is a happy moment for us. It is important not just in the context of the absolute value of the size but also in the nature of the composition of our business. Previously we were at the Rs. 16000 crore levels at the time of the stock market boom in 2007-08 and equities were our main asset class. We were 80% into equities and were riding on the stock market boom. But today 65% of our assets are in the fixed income space. Our business now is therefore a lot more balanced than it has ever been before.

Talking of strengths, I would like to focus on three main convictions that we have, which are guiding us as we move forward. The first is that we are very firm believers in the India growth story. We believe not only in our growth story but in the fact that India is going to be one of the vehicles for world growth given our population and demographics. This is why right from the beginning, we invested significantly in research and focused on understanding not just the large companies, but also small and mid sized companies that will grow with the India growth story.

The second strong conviction comes from the first. A strong long term India growth story will mean that Indian equity markets will deliver good returns in the long term. If that be the case, retail investors across the country must participate in the India growth story through equity funds, which is the best way for them to gain from India's growth. Without a strong domestic retail support for the financial markets, the equity markets representation of India's growth story is not going to happen. If you are going to rely on foreign funds or big institutions to buy and sell in the stock markets then the true development of India's mid cap companies will not happen. They need the retail investor base to provide some sustainable capital as a way to support and fund their growth. This comes from the DNA of our parent Sundaram Finance that as a retail company we are firmly committed to the belief that retail should always be the basis of the financial markets in India.

The third aspect is that from a customer perspective, one of the weaknesses in the past is that we provided solutions to the customer only on one aspect that is providing equities only as an asset class. We have done our best efforts to address that by having many different products. But that is clearly still a huge opportunity area for Sundaram for the future.

Our weakness in the past was that we were focusing on retail only. But the market consists of institutional players and wealth players too. We were not focusing on the institutional and the wealth space. We have started working on this aspect and corrected this over the last three to four years. It is more of an opportunity rather than a weakness where there is a huge potential for us to grow.

WF: Sundaram Mutual's key focus areas are smaller companies and midcaps. At this market juncture, the mid and small cap companies are perhaps seeing the maximum apathy from retail investors that we have seen maybe a decade. What are some of the steps that you and your team are planning to take or already taking in terms of increasing investor awareness about the opportunity to more meaningfully create wealth through this segment of the market? What are some of the product strategies that you are taking to strengthen your position in this space?

Sunil Subramaniam: We are working on an investor education campaign that will hit the markets in the next few weeks. Here we essentially are going to focus on the fact that small means big in terms of wealth creation. If you look at the long term, the smaller companies are going to create wealth. So we are going to come up with a series of 25 to 30 messages which will communicate this. We will use multiple media to broadcast this via the Internet, email and hoardings to get across the message to the investors with appropriate visuals. This will communicate the key message that though the smaller companies are risky and more volatile, in the long run, they act as a hedge against inflation. The key message we want the focus on is the fact that true safety in growing your capital and protecting the purchasing power of your capital lies in relying on the diversified portfolio of smaller companies. We expect the investor awareness campaign to roll out in the next couple of weeks.

We also have some product related initiatives planned. We have taken an internal decision that we will strengthen our product suite in the smaller companies segment with a series of closed ended fund launches in the next few months. We have received approval from SEBI for five close ended micro cap funds which we would be launching every month one fund each over the next five months. Each one will look at leveraging various themes within the micro cap space. We feel the timing for micro cap space is good right now because many companies which were in the mid and the smaller side are actually in micro cap space because of the market correction today and the potential for them to reenter the mid cap or the large cap space is present. So we will aim to pick the right ones for customers but they need to stay invested for a longer period of time hence we are launching these as five-year close ended products. All are around the micro cap stocks but each product may have a specific theme.

WF: Intermediation is now getting vertically split between distribution versus advice. There are two seemingly conflicting objectives that the industry needs to pursue - one is to significantly ramp up retail distribution so that we can make meaningful inroads in retail penetration and the other is the desire to significantly up skill distributors so that they become high quality advisors and serve their investors better. How do you see distribution models or intermediation models panning out in the next five years, in the context of these two seemingly conflicting objectives?

Sunil Subramaniam: There is a conflict apparent but it is only in the mind. SEBI has now laid down the law that you can't be both i.e. distributor of the products and also be an advisor for the client. You need to choose your position. So I think for the moment the conflict disappears because as per the law now, you can't be both.

Both aspects are critical for the industry's growth and for increasing the market penetration. As I said earlier, we firmly believe that the entry of retail investors into the equity capital markets and the debt markets through mutual funds is absolutely critical for India's development. So I think retail investors need to deal only with a distributor and not with an advisor because given the quantum of his ticket size, he cannot pay for the advice. I think the two models now have to exist in parallel and they have to be separate. For a distributor, the first step which SEBI has stated is product labeling. It helps the distributor to ensure that retail customers are sold simple products or are clearly made aware of the risk inherent in products that are exposed to equity market volatility.

From a perspective of growth of the industry on the retail side, clearly the need is for the manufacturers to provide simple products. The responsibility of communication as to what the product is going to do, lies with the manufacturer and hence the onus is on the manufacturer to create a pull with the means of media, advertising and communication. As a firm, we have a strong retail bias : just to give you an idea, we hold a 2.7% market share in the equity mutual fund space today whereas we hold 4% market share of the equity folios. So if you look at it per unit of AUM, we are probably among the highest in the industry. In that extent, having a strong army, and a growing army of distributors is very critical for us. We have always been very IFA centric and even today 48% of our AUM comes from the IFA space and that will continue to be a very important manner in which we will grow our retail share and increase market penetration. The product launches and investor education campaign are part of the ways to enhance retail distribution.

On the advisory space, the regulator is clear that the advisor is going to get his income from the fee he receives from the customer. So in that context, two things are important. One is that the cost of the product or the expense ratio has to be lower for those which are offered on the advisory platform as the customer is going to pay out of his pocket to the advisor. There should not be a double whammy because technically on the retail side we pay the distributor their commission out of the expense ratio. So I think in the long run from the advisory perspective, I think that the lower expense ratio will help. One of the solutions that SEBI had mandated here is the direct option. But one of the key challenges that the industry is facing is that AMCs have been specifically told that they cannot link direct assets to the distributors or advisors. So it means that the advisors need to invest in technology so that they can maintain an MIS at their end on customer applying for mutual funds after taking advice from them. So the key challenges is how those costs can be kind of taken care of and managed because otherwise an advisor can advise a client but he has no control over whether the customer is actually acting on that advise and hence paying him. This is one of the key things that advisors are grappling with.

At Sundaram Mutual, we are planning to launch more of passive funds like Index funds, ETFs etc. This is one area we need to grow in. We would like to provide an array of low cost solutions for advisors to choose from. Asset allocation is a key aspect of the job of financial advisors. He can advise the customer to choose low cost products and then be in a logical position to charge the customer for the advice. So that is the way we see the industry going forward and at Sundaram we would also build skills and products in that segment.

The second aspect is once the advisor comes into play, India is no longer the only space where he will do asset allocation. We are conscious of that in Sundaram. While we are a wholly Indian held company today, we have set up an office in Singapore. We have obtained an approval from the Monetary Authority of Singapore for an asset management license there. We have hired fund managers there and we plan to launch world based products and again they will be targeted at the advisory community, as global asset diversification is part of asset allocation that they will do. So we hope to use the skillsets available in our Singapore office to bring to our advisor friends products which they can use for global asset allocation.

WF: What are the key messages for your distributors as we move into 2014?

Sunil Subramaniam: Our key messages are as follows : (1) Sundaram remains committed to retail. It remains committed to small distributors. (2) Sundaram remains committed to offering simple products. Just like the government is talking about the EEE concept which stands for Exempt, Exempt, Exempt, we believe in the WWW concept which is the WIN WIN WIN concept for all the three participants - AMC, Distributor and Customer at the end of the investment period. We would like to provide solutions that make all the three winners. (3) If you go by the history of the mutual fund space in India, the longer the customers have stayed the happier they have been and more wealth they have created. So I think what we would like to tell our advisors to stretch the periods for which an investor stays with the mutual fund schemes. I think lengthening the period is in the best interest of all the three stake holders.

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