WF: The industry is winding down a very eventful calendar year which has seen it reach historic business milestones on AuM, retail expansion and SIP growth. What is your prognosis for 2018? Can we expect this business momentum to sustain, to accelerate or slow down? What are the business drivers and business risks you see in the year ahead?
Kalpen: I would love business momentum to accelerate. After a long time, we are seeing a sustained trend of new investors coming into the industry. Some of the drivers are structural - capital markets are becoming gradually mainstream and are being viewed as better investment options compared to traditional investment products.
We in the industry are beneficiaries of all the hard work done over the years by us, by distributors, by all stakeholders in popularizing systematic investing in mutual funds. That's the alpha we have created - but we must remain cognizant of the fact that there are market tailwinds - the beta - which has been a significant factor in rising investor interest.
None of us are in control of the beta. Can you expect cyclicality to manifest itself? At some point, it will. Nobody knows when. But what we can control is our alpha - our messaging to our investors. What we need to think about today is whether investors are buying only returns or also risk. We need to balance out our communication on returns as well as risks in equity oriented investments. Far too often in the past, investors have bought into only the returns story in an uptrending market and were quite unprepared for the risks that presented themselves subsequently.
Volatility in bond markets in recent months is a reminder that investing is not a one way street. Volatility in equity markets globally is at unusually low levels for an extended period - which is not a comforting thought. Many investors who have come in during the last 2-3 years haven't really experienced equity volatility. It is our job, in this context, to keep the messaging balanced, to educate investors about returns as well as risks. That I think is our biggest priority, going forward.
WF: How has 2017 been for DSP BlackRock? What have been the big hits and misses of the year?
Kalpen: We have grown our AuM from around Rs.62,200cr to over Rs.92,000 cr this year, across all asset classes and business activities - and the most satisfying aspect of this growth is that we achieved this after taking a decision to cap inflows early in the year into our top selling fund, which at that time was contributing 60% of our inflows.
As you know, we capped all inflows into DSP BlackRock MicroCap Fund early on this year, when it crossed Rs.5100 crAuM in February 2017 and our team felt that further inflows would result in sub-optimal changes to the portfolio. Given the liquidity conditions the Micro Cap segment has been witnessing, we weren't comfortable committing too much additional cash to these positions, which meant creating a longer tail from fresh inflows, which we believed would not have been in the best interests of existing investors. Shutting down inflows in your top selling fund and still maintaining and then accelerating your run rate is a challenge - and I am glad we were able to achieve this.
We promoted our hybrids range, we focused our messaging on SIPs, we put a spotlight on products like our absolute returns focused Long Short product, we continued our momentum on our Tax Saver product - all of which got us good flows across our equity and hybrids suite.
One of the key things we did was to focus our conversations around our processes and highlighting the depth in our equity team. Each of our fund managers has a unique style and flair - which we map to products that are best suited to their natural styles, even as we maintain overall process discipline. For instance, a certain fund manager may gravitate towards a well-diversified portfolio, with a buy and hold style. Another fund manager may also be a buy and hold person but with a preference for concentrated portfolios. Some of them may be more agile with a thematic mindset while some may be pure bottom-up stock pickers who put a lot of emphasis on management quality and specializing in mid, small and micro caps spaces. Overall, the focus is on growth at a reasonable price. Our products have been mapped to the managers in line with the style preferences, to ensure that we get the best out of them for our investors.
On the fixed income side, one of the things we introduced this year is an industry-first, and a very retail friendly proposition in our view. In equity, we offer diversified equity funds to first time investors - we don't ask them to make a choice by market cap size or by style - we offer a simple diversified product that captures the essence of the market. In the fixed income space, we however ask first time investors to choose a credit or a duration strategy and then have various categories within these two strategies from which he has to pick one.
What we have done with repositioning our DSP BlackRock Bond Fund, is to create a truly diversified fixed income product that is diversified across rating profiles, diversified across duration and diversified across issuer classes. We have also kept the expenses intentionally moderate - total expenses are only 80 bps per annum. A truly diversified product at a reasonable cost can give first time debt fund investors a much better holistic experience of the category and encourage them to stay invested for the long term. It is also simple to communicate - just as a diversified equity fund is.
In terms of misses, we could have done better in the dynamic asset allocation category - which saw huge traction in 2017 - if we had received approvals for a change in the structure of our dynamic asset allocation fund. Ours is currently structured as a fund of funds which does not get the tax benefit. We had an application pending with the regulator to change it from an FoF structure to similar strategies managed directly within the fund - which can then give investors the tax benefits. We received the approval recently. The other product gap that continues in our suite is the lack of an arbitrage fund, for which we continue to await regulatory approval, which is expected anytime.
WF: You launched an equal weight Nifty fund - a smart beta product and then your ACE (Analyst Conviction Equalised) Fund which is equally weighted on analyst conviction stocks. Is there a conscious effort to build an alternate suite of products that sit between traditional active and passive strategies?
Kalpen: Active strategies will remain our core proposition and we will continue to put our efforts in promoting and scaling them up. There is a set of investors today who are looking at smart beta alternatives in the large caps and perhaps this universe may grow in the years ahead. We have generally seen that a 200-300 bps alpha of an equally weighted Nifty over the market cap weighted one - mainly because some of the newer entrants into the Nifty, which otherwise get low weights, tend to be faster growing businesses. An equally weighted Nifty fund is a simple smart beta product that allows investors to get that alpha. The analyst conviction fund is a globally popular concept - we are perhaps the first to introduce it in India. So, the idea is not to move focus away from active strategies - they will remain our core proposition - but the objective to introduce select products where we are seeing some investor appetite now and which can grow over time. The ACE Fund launch was an intent to shift the narrative away from predicting markets and focussing on process.
WF: What are your business plans for 2018? What more or different can we expect from DSP BlackRock in the coming year?
Kalpen: On the products front, we were among the first perhaps to submit our file to SEBI - we did it within a fortnight of the classification circular coming out. We have clarity on our existing product suite and positioning of each fund, and now with the new classifications, we hope some of our pending product approvals will come through in their respective categories. We would like to reposition our dynamic asset allocation product, launch our arbitrage fund and scale up our presence in short term income funds. We will introduce interesting smart beta ideas into the market in 2018.
Our core focus will continue to be on encouraging scientific and evidence based conversations - with distributors and investors. One thing that was really encouraging about ACE Fund was that our entire conversation during the NFO process was about process - no forward looking statements on markets.
We have soft launched our Power Play Tools - which are aimed at helping advisors position investment concepts to investors in a novel manner. We will be putting focus on this initiative in 2018. There's one tool that enables advisors to explain the fixed deposit to debt fund conversion in a creative manner. It shows what investors stand to lose by not making that switch from FD to DF. It explains the powerful concept of double indexation in a simple manner.
There's another one that enables advisors to begin conversations around the power of compounding. It's a visiting card format which says "I help you grow money". And then the advisor can demonstrate just how, by using the visiting card itself to showcase the effect of compounding. There's another one on beating inflation. Simple and critical investment concepts - hopefully transmitted better by advisors to their investors through these Power Play Tools.
On the technology front, our IFA Express has been well received and recognized as best in class. There is a lot more that we need to do to scale IFA Express in 2018 to make it an even more invaluable aid to distributors. And there is our Futurist knowledge platform, which we will continue to invest in, and continue to bring to advisors, cutting edge knowledge insights to help them get future ready.
Overall, it's about keeping things simple, driving simplicity in our narratives and continuing to focus on process led conversations, on evidence based conversations - and on helping drive investor communications that strike a balance between returns and risk, at a time when returns are in sharp focus and risk perhaps isn't.
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