Driven by ethos
Aarati Krishnan speaks to Milind Barve, MD, HDFC Mutual Fund on topics ranging from the AMC's recent IPO, fund performance, fund management post reclassification and other things
By Research Desk | Oct 16, 2018
The initial public offer (IPO) of HDFC Asset Management Company Limited (HDFC AMC), only the second mutual fund business to seek a listing on the Indian markets, has brought a spot of cheer to investors who have been suffering through a carnage in mid- and small-cap stocks. Folks who were lucky enough to bag allotments in this heavily over-subscribed IPO were sitting on a 72 per cent gain on their shares at the time of writing this story. But if the bumper gains have put HDFC AMC's newly minted shareholders in a celebratory mood, they seem to have evoked mixed feelings in the mutual fund fraternity, which has been raising a bunch of doubts on what could now change at India's most respected fund house.
Usually happy to stay away from the spotlight, Milind Barve, the managing director of HDFC AMC, readily agreed to chat with Glade Guides when we approached him for an interview on this subject.
In IPOs, it is par for the course for promoters to try and squeeze every last drop of value out of the share while pricing the offer. But the 65 per cent listing gain on HDFC AMC's shares clearly tells us that this didn't happen with its IPO.
So I kick off the interview by asking if HDFC AMC made a deliberate decision to price the offer cheap?
'While pricing any IPO, it is very difficult for anyone to make an accurate assessment of the valuation the business will fetch in the market. Listing gains depend a lot on market conditions and many other factors. But having said this, yes, we were keen while pricing this IPO to leave money on the table for our new shareholders. Keeping shareholders happy is central to the HDFC group's ethos. So, while deciding on the pricing of this offer, we did try to make sure that our new shareholders would benefit,' says Milind, with characteristic under-statement.
But why does an AMC need a stock-market listing in the first place? A bank or insurance company needs regular intravenous infusions of capital to remain in business and to scale up. But with AMCs, as long as they meet SEBI's minimum net-worth norms of Rs50 crore, the business is self-sustaining and sky's the limit to scaling up, I comment.
'It's true that an AMC does not need as much capital to scale up as a bank. But in our case, we decided to still go for a market listing for two reasons. One, a market listing allows the promoter to unlock value. Two, our decision to list was also driven by the ethos of the HDFC group. In our group, we believe that once a business scales up to a reasonable size, it is good to work with a wider cross-section of public shareholders rather than sticking with just one or two promoter-shareholders. This is how all our group companies have grown and we felt that the AMC should take the same route. We plan to eventually structure the shareholding so that HDFC holds 50 per cent in our equity capital, Standard Life holds another 25 per cent and the rest is with public shareholders.'
There has been much talk in the market about the IPO allowing HDFC AMC to offer lucrative ESOPs to its star employees. Was that a trigger for the IPO?
Milind firmly scotches this idea. 'No, though that has been the public perception, our decision to list had nothing do with ESOPs. We have been running an ESOP programme for our key employees right from the year 2007. Under that programme, the company offers to buy back stock from employees whenever they want to sell back their ESOP shares. Therefore, there was really no need to go for an IPO to provide an exit. The only thing that a listing does is that it helps ESOP holders sell their shares in the market if they would like to.'
Some have been speculating that after its IPO, HDFC AMC, which has so far been quite unitholder-centric, will be tempted to chase short-term profits now that it has new shareholders on board. Some decisions that are good for shareholders could hurt unitholders - charging high total expense ratios across its schemes for instance.
Milind seems a little vexed with this question but tries to be patient. 'A lot of people have been asking me about what will change after the IPO. And the answer to this is that not much will change. We have always remained unitholder-centric with our mutual funds and will continue to remain so. I don't think a listing materially changes anything. On whether we will raise TERs, etc., the answer is no. The industry in which we work is a competitive one and we cannot break away from the rest of the industry to raise expense ratios. That will hurt our market share. I think our shareholders will understand that to sustain growth in the long run, we will need to continue to run a unitholder-centric business.'
On a lighter note, Milind notes that one thing that will change is that HDFC AMC will now get a taste of its own medicine! 'As an AMC, we have always sat on the other side of the table, demanding disclosures, transparency and asking hard questions on performance to the companies whose shares we own. Now, we will know what it is to be on the other side. But we are willing and prepared to answer every difficult question that our shareholders put to us,' he says more seriously.
Why the rejig
Switching gears to topics that would interest HDFC's mutual fund investors, I ask why the fund house has chosen to make such significant changes to its flagship schemes in the SEBI recategorisation. HDFC's ever-popular Prudence Fund has transformed into Balanced Advantage Fund and the flagship HDFC Top 200 is now Top 100 after the rejig.
'Plenty has been written about this, but the only thing I would like to say is that we made these changes to fill the gaps in our portfolio that we found after falling in line with SEBI's recategorisation norms,' says Milind.
'Lately, as you know, the regulator has not been in favour of scheme names such as 'Prudence'. We felt that such a stance is quite justified. Therefore, we were happy to categorise HDFC Prudence Fund as a balanced-advantage fund, which has leeway to invest anywhere between 0 and 100 per cent in equities and debt. The decision to change HDFC Top 200 Fund to Top 100 Fund was taken largely to preserve its large-cap character. The fund was always positioned as a large-cap-oriented fund and as SEBI now defines large-cap stocks as the top 100 by market capitalisation, we felt that it would be better to align this fund with the new definition for large caps, rather than try out any other course.'
Why did HDFC AMC merge schemes with very different mandates during this rejig? For instance, HDFC Growth Fund was repositioned as HDFC Balanced Advantage Fund and thereafter HDFC Prudence Fund was merged into it. And HDFC Premier Multicap Fund was repositioned as HDFC Hybrid Equity Fund and thereafter HDFC Balanced Fund was merged into it. Don't these entail drastic changes in mandates for investors?
Milind explains that these schemes did not fit clearly into any of SEBI's mandatory category buckets. But more importantly, 'These were relatively small schemes in our portfolio that, we felt, had not created any distinct identity of their own. We felt that it would be better for the investors if we merged them with our flagship funds that have a distinct identity and record.'
The assets under these schemes, Milind goes on to explain, were at a fraction of the fund sizes for Balanced Advantage Fund (erstwhile Prudence Fund) and Hybrid Equity Fund (erstwhile Balanced Fund). Most unitholders, when given the exit option, decided to stay on post merger.
In the last three years, HDFC's flagship schemes have taken sector and stock calls (such as being early buyers of PSU banks and metals) that were the polar opposite of the consensus view. These contrarian calls have resulted in short-term pain for both the investors and the fund house, with flagship schemes falling behind their benchmarks and peers for a year or two.
While there's nothing wrong per se in taking such calls, I observe, how did the fund tide over periods when it faced scathing criticism from all quarters?
'Yes, we did face a lot of pushback,' says Milind. 'What we did to manage expectations was to communicate more often with our distributors and investors.'
Taking contrarian calls, Milind goes on to explain, is the unique characteristic of HDFC Mutual Fund that has helped it build such a strong franchise in the long run.
'Our fund managers tend to have a very high degree of conviction in their calls. As a result, our fund portfolios are sometimes very distinct from those of the rest of the industry, and that has paid off for us over market cycles. For example, when we took corporate-bank exposures, we were sure that the process of clean-up of the balance sheets of corporate lenders would take place sooner than later and that the markets weren't factoring in this. We did know that these positions could result in short-term underperformance of our funds, but you should be willing to go with that to achieve long-term outperformance.
Yes, the process of clean-up of corporate lenders has taken longer to play out than we expected. But I believe that India has now put in place an extremely robust institutional framework for recovery of NPAs under the new Bankruptcy Code and NCLT. I am confident that it is only a matter of time before the turnaround is complete. In fact, these calls seem to be paying off recently, though it is early days yet to say this,' says Milind.
Having just attended the AMFI Mutual Fund Summit, I ask about the 'lack of opportunity' problem. The money managed by equity mutual funds is growing by leaps and bounds, but the Indian listed universe hasn't expanded much in recent years. Is this demand-supply mismatch likely to hurt fund performance at some point in time?
Milind disagrees quite strongly with this view and gives his reasons. 'I wouldn't agree that the investment opportunities aren't expanding. For one, if you see new issuances through IPOs, they have raised record sums of over Rs90,000 crore in FY18. These new listings obviously expand investible opportunities. Two, when markets are buoyant, already listed companies also tend to tap the markets for capital and that creates its own opportunities, too. Three, the government's disinvestment programme has raised record sums in the last two years, with over Rs1 lakh crore of PSU share sales in FY18. Finally, and some would say unfortunately, foreign institutional investors have been indulging in a lot of selling in Indian stocks in the last year. Whenever an FII sells, that creates supply for domestic institutions.
But yes, in the market, demand and supply will not exactly match each other at any given point in time. That's all right and that's what creates buying or selling opportunities.'
As I wrap up the conversation, I make a mental note to hold on, both to my own investments in HDFC Mutual Fund's flagship funds and the shares I have luckily bagged in the HDFC AMC IPO.