Sunil cannot understand why there is so much fuss about upfronting of commissions on closed ended funds - to the extent that upfronting of commissions and closed ended funds are viewed as a deadly duo that must be killed, by some industry participants and a section of the media. Why this kolavari (this murderous rage - a phrase made popular by South actor Dhanush) on upfronting of trail, wonders Sunil, as he articulates a business rationale for both closed ended funds and for upfronting or front-ending of trail commissions on them. But, that's not all we spoke to Sunil about - he also shares the strategy behind the launch of Sundaram Mutual's World Brand Fund series and why he thinks the fund series will add value in retail investor portfolios.

WF: You are taking a brave call, launching a fund that invests internationally, when everyone's attention is fully focused on domestic equities. Is the forthcoming fund launch a tactical offering or part of a broader strategic move for Sundaram Mutual?

Sunil: It is a very pertinent question and the simple answer is that it is clearly part of a strategic move for Sundaram Mutual and not any tactical launch given the current situation or whatever. During our association with BNP Paribas, we experienced both aspects of international business - raising international money for domestic investment as well as raising domestic money for international investing. That experience gave us the impetus to gain international experience on our own rather than going with another partner. So, a few years ago we applied to the Singapore Monetary Authority to set up a full fledged Asset Management Company in Singapore. Two year ago we got the license and one of the main goals there is obviously to tap foreign money - specifically the non FII money, which is headed towards India. We have set up a full fledged investment management capability in Singapore and not just a marketing outfit. This is a team with strong experience in Indian and international markets. This expertise is what we are looking at leveraging for international investors wanting India exposure as well as on an advisory capacity basis, for Indian investors wanting global exposure.

Our World Brand Funds is the first step in this direction of offering Indian investors global exposure. There is more in the pipeline in the months ahead, which will broaden our suite of global offerings. That's from our business perspective.

From a domestic investor's standpoint, I think there is a lot of relevance for funds that provide exposure to World Brands. India's GDP is set to rise at a faster clip in the years ahead, and urbanization is going to be a key theme going forward - this is also very evident from the Government's focus. Rising GDP amidst rising urbanization tends to create larger disposable income which typically gets directed more towards discretionary and aspiration consumption rather than more of the necessities. This is a pattern that has clearly been seen in China, Indonesia and several economies that have gone through a similar growth spurt. The India story therefore is not just about domestic products and domestic brands, but also about global brands that Indians are getting increasingly exposed to and consuming - whether it is McDonalds or Nike or Apple or Samsung. Its not just Indian companies that are leveraging the India growth story - there are several global brands that are doing just that. So, for an Indian investor, if you really want to fully participate in the upside of the India growth story, having an exposure to global brands that are leveraging this growth makes a lot of sense. So, it's a strategic move - for us as a fund house as well as for investors.

WF: Global Brands logically should find place in the core portfolio of an experienced investor's portfolio - yet, global diversification has more often than not been a tactical focus in our market, during periods of currency volatility. How do you propose to tackle this potential positioning issue?

Sunil: That is a very pertinent question, let me step back and build upon what you said. I think typically the international funds which have been hiterto launched have either been geography centric - US, Brics, Europe etc or asset class / sector specific - gold, commodities etc. These lend themselves more to tactical allocations at times when that theme is doing well.

Sundaram Mutual is primarily a retail brand and our focus will remain sharply at serving retail investors. For retail investors, we don't think tactical allocations into such thematic international funds - which goes with a need to actively monitor entry and exit strategies from the theme - is a great idea. We think that a fund that gives a retail investor a taste of global opportunities should be one that does not get too influenced by bull and bear markets as also whether one geography is doing well at a point in time or not. All weather products are what really add value in retail investor portfolios. This is why, after considerable internal deliberations, we chose World Brands as the appropriate vehicle, specifically for retail Indian investors.

When we consider leading world brands, they cut across geography, across product categories and are always relevant to consumers around the world - irrespective of bull or bear markets. . Take Apple : it's there in the music business through iPod, it's there in the mobile business through iphone, it's there in the camera business through the iphone and its there in the laptop business through the ipad and MacAir series. Take Google - it is a search engine, it's an android platform, it's a chrome browser, it's a Nexus cum Motorola mobile phone, and today they are into Google glass and they are into cancer detection. Global brands cut across product categories. Take geographies : when the commodity cycle turns up, it benefits Brazil and Russia more than it helps China and India for example - and you will see higher discretionary spending in those markets. When the commodity cycle turns down, exactly the reverse happens, and you will see higher discretionary spending in India and China. Global brands are relevant across geographies and are not tied to any one - they may just sell more in one and less in the other at any point of time.

This resilience is what helps them smoothen an investor's experience of investing in them. Backtesting that we did over several years suggests that if you held a portfolio of global brands for a period of 5 years, in 95% of all occasions, you made a positive return irrespective of whether you got in during a bull or a bear market.

These are really the messages that we intend communicating and reinforcing, to help position our World Brand Funds as a core, long term hold for investors.

WF: During 2014, you have been actively launching closed ended funds - a product segment that has generated a spirited debate in the industry. What, from an investor's standpoint, is the case for closed ended funds?

Sunil: At the beginning of 2014, when we launched our first closed ended fund, we made public our intention to come up with a series of closed ended funds right through the year. Our actions during 2014 were not opportunistic - they were part of a carefully planned and clearly communicated strategy.

This strategy is not about enabling front-ending of trail commissions as the main purpose - as is unfortunately being highlighted in some sections of media. The idea behind closed ended funds is more about what investors are telling us and doing - and not about what distributors are seeking in terms of commissions.

After Mr.Viji took over as our MD, he initiated extensive consumer research, with surveys across our existing investors as well as outside. One key insight we picked up from these surveys is that over 60% of all investors told us that their typical outlook over tenure that they would like to stay invested in a mutual fund is 3 to 5 years. Then, we looked at actual investment period data in some of our flagship equity funds, which have a solid track record over 10 years, across bull and bear markets. What we found is that on an average, around 60% of investors exit within one year or just at the completion of one year. Only 30% remain invested by the end of 3 years and this number goes down to 18% for a five year holding.

There is clearly a disconnect between investor intentions and actions. Whether the actions are distributor led, or due to panic attacks that affect some investors during periods of market volatility or any other reason - the fact is that there is a wide gap between what investors ideally want to do and what they eventually land up doing. This clearly does not help investors get the real benefits of long term wealth creation, which is what equity funds are all about. There is sufficient data that all of us have seen which suggests that probability of negative returns reduces sharply as you increase holding period and predictability of returns improves dramatically as holding period increases.

Now, you look at it from a fund manager's perspective. Especially when he is casting a small and mid cap portfolio, he is aware of the fact that these segments are a lot less liquid than large caps. He hopes for longer investor holding periods that offsets the liquidity risk in the quest of higher returns. In an open ended structure, if data shows him that he needs to brace himself for a large section of investors exiting in a one year period, how can he construct a portfolio that can maximize investor value? Will he not be compelled to focus more on liquidity management in a relatively less liquid segment rather than looking for opportunities, which over time, can deliver much better value? In whose interest would this be?

Now, consider an advisor's point of view. If markets run up, some investors may have an urge to book profits out of fear of losing those profits in the next correction. If markets fall, some investors may want to pull the plug on their investments, out of fear of further losses. Fear and greed are the biggest enemies of disciplined investing - we all know that. Advisors face lot of challenges in keeping investors from making mistakes that are fuelled by fear and greed. A forced discipline of a closed ended fund helps them in their endeavour to keep clients and their portfolios on track.

It is with all these perspectives that we took a considered call that closed ended funds make sense, especially when investing in the small and mid caps space - and we have stuck with that conviction. As I mentioned, it is unfortunate that a section of the media chose to highlight front-ending of trail commissions as the main rationale for closed ended funds.

WF: How do you see commission models evolving, given the recent debate on toning down upfront commissions?

Sunil: Lets be clear about one thing Vijay - front ending of trail commissions is purely a business call and does not violate any regulations. Second, front ending of trail commissions does not entail even one paisa extra cost for the investor.

We pay trail commissions out of the total expense ratio that is charged to the scheme. If an AMC decides to discount future trail commissions and pay it in advance, that is purely a business call. It is a financing decision as the AMC needs to fund the outlay ahead of recovering it from the scheme over a period of time. There is a cost of capital involved - and as an AMC, we need to trade off this cost versus a potentially higher trail on capital appreciation that we would have paid in a regular trail model.

It is akin to bill discounting - which is a completely legitimate business activity. In any business, you can go to a financier and discount bills and future secured cash flows at an agreed discount rate, if your business needs that cash flow now rather than later. Here, the AMC is giving a similar option to distributors, who are free to choose it if their business needs that. Not all distributors choose it, and nobody is compelling them to do so - there are distributors whose cash flows are reasonably strong and who would prefer availing a trail on a hopefully higher NAV over a 3 year period as opposed to front ending of trail. To provide a discounting facility and to avail it - both are purely business calls, which do not entail any incremental costs to the investor. Look at manufacturing businesses across sectors - manufacturers who have financial strength regularly provide financing options to their suppliers and distributors. Is the consumer of those goods and services impacted in any way by these financing arrangements?

Now, there is justifiable and legitimate concern on mis-selling - and that must be tackled. Complaints on mis-selling must be dealt with firmly and quickly. If an investor has been misled or misinformed, swift penal action must be taken. As an industry, our focus must be on taking up and resolving mis-selling complaints so that the penalty for such acts becomes a deterrent for any potential mischief. Banning a legitimate funding activity between manufacturer and distributor in the name of curbing mis-selling, is akin to throwing the baby out with the bath water.

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