On the occasion of Birla Sun Life AMC's 20th anniversary, Mahesh traces BSL's remarkable journey as it transitioned from a star CIO approach to a robust process driven fund house. There was a time in the late 1990s, when Bharat Shah of Birla and Samir Arora of Alliance were the reigning superstars of Indian equity fund management. BSL experienced the good and not-so-good aspects of the star CIO syndrome, after which Bala and Mahesh went about painstakingly creating a team, putting in processes and developing an environment where individual skills and flair are optimally leveraged within a well defined investment and risk framework. The results of their efforts are increasingly evident in recent years as team BSL powers on, delivering consistent equity performance, year on year, enabling it to regain market share that it lost in the equity segment, and be counted now among the leaders not just in debt, but also in equity.

WF : Congratulations on Birla Sun Life AMC's 20th anniversary! Looking back over these 20 years, how has equity fund management changed over these 2 decades? How has BSL evolved to keep pace with changing times?

Mahesh : Over these 20 years, many things evolved and changed, but some have remained the same. At the core of the equity fund management philosophy, nothing has changed - it was and is still about doing your own fundamental research to identify good companies run by sound managements available at reasonable valuations. What has evolved over time is systems and processes that enable us to do this better and better. Each market upheaval provides us new learnings, which we need to take on board to further strengthen processes. I think the area where we have evolved the most over these 20 years is the risk management framework that governs the equity fund management process. Managing volatility that is associated with performance is one area where we have done a lot of work, especially over the last 5 years.

The second area where we have really evolved is the strength of our own equity research. Today, we have 9 sector specialists who track different sectors and help us independently identify trends early enough. Staying ahead of the curve is becoming increasingly important, and that is made possible with your own independent team. Strengthening the research processes is an ongoing effort. For example, we now have a model in place that helps us evaluate company managements. This takes out a gut feel and forces us to rate every company management on objective parameters.

One of the ways I would say we have not just kept pace, but catalyzed change in the industry is the introduction of niche equity products that serve specific client needs. We launched an MNC Fund, which has gone on to become a strong performer in a focused niche. We were the first to launch a Dividend Yield Fund and GenNext Fund, again targeting a specific investor need.

WF : One striking feature of Birla Sun Life's equity management is a transition from a star fund manager approach to a process driven organization. What were the insights that prompted this change? How did you manage the transition? What were the key challenges in this evolution? What are the benefits you see of the current approach?

Mahesh : I think for a fund house to establish itself as a credible and trustworthy money manager, it is important for it to have not one person, but a team and a team that adopts well defined processes within an overall fund management framework. That's what builds a fund management brand, more than an individual.

Nine years ago, in 2005, A. Balasubramanian (Current CEO) took over as the CIO and that's when I had also joined the firm. Together, we set about pretty much reconstituting large parts of the team and putting in place processes and a clear framework. Team approach is what we focused on very sharply. First was to get quality team members with diverse skill sets, and give them assignments best suited to their skills. This goes for fund managers, where we looked at best fits for each strategy - large caps, mid caps, multi-caps, thematic etc and gave funds to managers according to where we believe they add most value in terms of their abilities. Same is the case for equity analysts and sector allocations.

Then, we worked on ensuring a team effort, so that all team members contributed to each other rather than working in their own silos. Then, we built a risk management framework, on the back of which we empowered each team member to do his or her own bit, without too much of overbearing influence from a CIO, as would happen in a star fund manager approach.

For the organization, a team approach with multiple fund management styles and capabilities de-risks the organization. In a star fund manager situation, often all funds of the company tend to follow the style and views of the star, exposing the company to significant risks if the style does not work.

For us, the biggest benefit is consistency in fund performance. Our objective is that at any point of time, at least 75% of our overall equity AuM, if not more, should be in the top two quartiles of relative peer performance. A team effort, with strong processes and a good risk management framework enables us to deliver on this consistently.

This process orientation and knowledge sharing is something we have built across equity as well as debt management within the company. We have a strong consultative approach which helps us avoid blunders that can significantly impact performance. Making less mistakes and leveraging each other's strengths has enabled us to maintain consistency in fund performance.

WF : The resurgence in equity performance of Birla Sun Life over the last couple of years has been widely noticed and appreciated. Is it the processes you have talked about that are delivering this performance, or is it particular market or sector calls you took at a fund house level that are working in your favour?

Mahesh : I think there are two things that have really worked for us. First is the strengthening of our equity research team, where we brought in very capable and experienced analysts with specific skills in areas we thought we had gaps in. Second, our process of allocating strategies to our fund managers according to their own skill sets, has enabled us to get the best out of each fund manager. Specialisation in research as well as fund management, is delivering value for us.

Specialisation works only when you have a sound framework for all processes - including stock selection, portfolio construction, portfolio monitoring, review mechanism and risk management. The work we have done in the last six years on building these processes is allowing specialization and independence to deliver value, without taking unnecessary risk.

Taking market, sector and stock calls is part of the day to day job. Weaving in these calls into this process is what I think is helping us deliver consistent performance.

WF : Equity fund managers today have to grapple with many more variables than 2 decades ago - including global markets, global commodity cycles, global monetary policies - all of which were hardly relevant 20 years ago. To what extent do you now have to be more top down as a consequence?

Mahesh : While we remain very bottom up focused, we have incorporated a strong top down input into our fund management process, as we see this as a very relevant input into the decision framework. We have a specialist who tracks the global macro environment and we have an economist who tracks domestic macro factors closely. Both these specialists provide valuable input to both debt and equity teams.

Let me put it this way : bottom up research is what helps identify stocks, which is what drives long term portfolio performance. But short and medium term performance gets impacted by macro factors, and this is where top down views are relevant in managing portfolios and delivering consistency of performance.

WF : Developed markets have seen an explosive growth of passive strategies in the large caps space, as it is increasingly seen as too difficult to extract meaningful alpha in well researched large caps. Do you see a similar trend gaining ground in our market in the coming years?

Mahesh : India is one of the few markets across the globe to have a wide diversity of sectors represented in the equity market and a wide choice of companies within each sector. The Chinese market is predominantly financials led, Brazil and Russia are more commodity led markets - whereas in India, you have a wide range of sectors. This is important because a wide range of sectors in completely different businesses results in sizeable sectoral divergences in terms of market performance. Sectoral divergence helps a fund manager search for and deliver alpha.

Given this, and the fact that even within sectors, we have a variety of stocks to choose from, I think there continues to be scope for fund managers to deliver alpha even in the large caps space. You must also keep in mind that many new companies will come into the market, which will not be part of benchmarks, and which can also contribute to alpha, if they are reasonably priced.

Arguably, the extent of alpha may have come down from what we saw 10 years ago, but there is sufficient alpha potential in our market to make active management in large caps worth the while.

WF : We have witnessed a complete market cycle in the last 10 years : the 2003-2007 bull market followed by the crash of 2008 and then a largely sideways market until 2013, and now a new bull market in 2014. What are the key lessons that you have imbibed from the last cycle - in terms of managing domestic retail equity money and in terms of managing investor and distributor expectations through a cycle?

Mahesh : In a bull market as big as we saw in 2003-2007, when everything worked and made money, there is a tendency to take things for granted. The sharp correction that followed didn't give many people an opportunity to get out of a number of stocks, as liquidity dried up completely. One lesson we learnt was to build resilience into our portfolios - such that they are able to withstand shocks. Withstanding shocks is about limiting downside risk as well as liquidity risk - both of which get accentuated if you venture too boldly into smaller companies with untested business models.

Second lesson is to distinguish companies based on management quality. The downturn showed us the sharp differentiation between good and not-so-good managements and markets have demonstrated a willingness to pay a premium for good managements, which can make their businesses resilient in tough times.

In terms of managing investor expectations, I think the big lesson from the last cycle is that while markets have delivered a 15-16% CAGR over the last 10 years - over the last cycle, and our funds have delivered a 20%+ CAGR over the same cycle, investors haven't got this in their portfolios. That's because most of the money came in during the last 2 years of the bull market, and didn't really experience the full cycle.

We need to continuously work with distributors and their investors to help them stay invested throughout a full market cycle. Get them into market early in the cycle and help them remain invested for the long term. I am seeing encouraging signs in this cycle, and I hope we are able to collectively help investors get the most out of our equity markets and fund performance. Simple techniques like SIPs continue to be relevant, and we must keep communicating the benefits of systematic investing and long term investing.

WF : What is your prognosis for equity markets for 2015? What do you expect to be the key drivers in 2015?

Mahesh : We are moving into 2015 on the back of very strong returns in 2014. Investors should not consider investing now solely on the basis of 2014 returns.

Looking ahead, we are getting into a phase where inflation expectations are coming down, where interest rates will be reduced and where corporate earnings will slowly start picking up momentum. Falling interest rates will also bring down the risk free rate of return and therefore support higher valuations. We are looking towards a 17-18% earnings growth from FY16 for the next few years, which should strongly support markets in the coming years.

We are also looking towards a much stronger domestic participation in capital markets, especially as inflation cools down. Higher domestic liquidity, earnings growth and valuation support from lower interest rates - all three factors appear well placed to continue supporting this bull market into 2015 and beyond.

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