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WF: What prompted you to close the tap on inflows into your best performing and best selling MicroCap Fund?
Aditi: This decision to cap inflows into DSP BlackRock MicroCap Fund has actually been in the making for more than 2 years - and reflects our very strong commitment to put our investors' interests above everything else. Our first move in this direction was in 2014, when we capped the maximum individual investment per day to Rs. 2 lakhs. Last year, we cut it further to Rs. 1 lakh, in an effort to stem inflows to levels that Vinit was comfortable managing without diluting portfolio performance. The fund has grown rapidly despite this and is today an almost Rs.5000 crore fund - which is very large in the context of the micro caps space.
Typically, fund managers have a few high conviction bets where they take a sizeable exposure and like to maintain that weight in their portfolios. When liquidity is not a constraint like in large caps, more inflows means the fund manager simply goes and buys more of his high conviction stocks and maintains their weight in his portfolio. In the micro caps space, liquidity becomes a challenge, especially in high conviction stocks where the fund manager has built up a healthy position. When you give him more inflows, and he has to look beyond his highest convictions to invest simply because of liquidity issues at the price he is comfortable buying, he has to look elsewhere to deploy this cash. That in a sense is not his most preferred allocation of incremental money - and to that extent, is perhaps not in the best interests of the fund and its existing investors. Its not a question of running out of ideas - Vinit is able to find many that he believes are sound investment opportunities - but the key for us is whether he is comfortable that he is deploying incremental flows as best as he would ideally like to. And when that comfort is not there, it's best to stop inflows and let him focus his attention on delivering the best outcome for our existing investors. However, we are continuing to accept instalments of SIPs registered on or before Feb 17th, 2017.
WF: Are you worried about rich valuations in the small caps space? Should there be a large dividend payout from profit booking as a means to safeguard investor capital when fund managers get worried on valuations running ahead of fundamentals?
Aditi: Micro caps is a broad universe with many interesting investment opportunities, and Vinit focuses on picking stocks which he believes offer good value, irrespective of where benchmark valuations may be. The index is not really representative of the broader set of opportunities in the small and micro caps spaces. That said, we do emphasize to investors and distributors to consider our Micro Cap Fund and our Small & Mid Cap Fund only with a 3-5 year horizon, and not less than that. If you give yourself that kind of time, you allow these stocks to play out to their potential and deliver value in your portfolio.
On the issue of dividend payout, we don't think that's a great idea in the micro caps space, essentially because of liquidity issues. To pay a large dividend, you have to book profits, which means selling a substantial portion of what you own. When you have a fund like ours that received the flows it did, you then have to be quite aggressive in selling to create sufficient distributable surplus over a larger pool of money. You land up selling the more liquid names when there is a dividend payout objective within a finite timeframe - and what is then left as the portfolio may not be the ideal portfolio that the fund manager would have like to have in terms of relative weightages of various stocks.
I don't think we want the fund manager to force sell any stock - he should sell only when he thinks it is fully valued or when he believes he has found a better opportunity. That, in the long run, delivers a better investment experience to our investors, rather than making sub-optimal fund management decisions for the sake of paying out a desired dividend amount.
WF: CY16 was a very good year for DSP BlackRock in terms of AuM growth - in equity as well as fixed income. What went into this huge turnaround in investment and business performance?
Aditi: The primary drivers of our business performance were a sharp improvement in fund performance and the support we received from distributors who saw the effort we put into turning around fund performance and reposed their confidence in our funds. I thank all our distributors for passing on their conviction in our efforts onto their clients.
What went into turning around fund performance was that we made the changes that we felt were necessary in both the equity and fixed income spaces. We have a new Fixed Income team that Pankaj Sharma manages, which is delivering results that are expected of us. On the equity side, we reoriented the team to drive better performance. We decided to have no more than 2 or max 3 funds per fund manager, and we also focused on giving each manager funds that best fit with their natural abilities. So Harish Zaveri, who was managing the Focus 25 Fund well, has become our large cap specialist and manages the Top 100 Fund as well. Vinit Sambre was doing well with the MicroCap Fund - we gave him the Small & Mid Cap Fund also to manage. Atul Bhole came in from outside and he specialises in the diversified category - our Equity Fund and Balanced Fund. Rohit Singhania manages the Opportunities Fund and we gave him a couple of more funds aligned with his style and abilities. Apoorva Shah and Anup Maheshwari focuses on our international side. So what we've done is to create and nurture specialists from within our team rather than trying to hire star fund managers from outside. Anup also overlooks the whole equity investments process.
On the sales side, what has worked for us is that we continued to maintain our high distributor engagement levels, particularly on the retail side, even when we went through that patch of underperformance. We maintained our focus on Futurist, we ensured high connect of our fund managers with IFAs and NDs, and retail distribution has really rewarded us by reposing their confidence in us and in our funds.
WF: What are your plans for FY17-18 to build on the significant business momentum you have now created?
Aditi: Our focus clearly to continue doing what we are doing - more of the same is really the mantra. Incrementally, we will be focusing more on digital. We have IFA Xpress - our digital initiative for IFAs. We will continue to build and enhance it. The effort will be to continue improving productivity and efficiency in our business, and digital solutions will be key to achieve this.
WF: We now have 2 fund houses that are offering open architecture platforms as digital enablers for IFAs. In this context, what are plans going forward for IFA Xpress?
Aditi: A lot of IFAs have told us that IFA Xpress is the best platform. We have an in house team that develops our platform and gives us that cutting edge - which I think makes it that much harder for competition to copy. Some IFAs have suggested that if IFA Xpress were to go open architecture, that would really give them the best of both - quality as well as choice. I can't say it's a straight yes or no at this point - I guess if a lot of IFAs tell us, we might consider it.
WF: How do you see customer and distributor facing roles evolving within your firm, with the induction of Kalpen into the top management?
Aditi: Kalpen is a great addition to our top management team. He has sound cross-functional understanding of the business, has ably led successful teams in his previous roles in other companies and is well respected across all distribution segments. His problem solving skills and his ability to simplify and focus will further strengthen our distributor engagement and our investor service.
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