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WF: Congratulations on crossing this wonderful milestone of Rs.10,000 crores in equity assets! When you look back at the astounding growth journey in the last 3 years, what would you say have been the most significant drivers that have helped you reach this milestone?
Aashish: Dear Vijay, Thank you for the kind acknowledgement. I wouldn't call our growth astounding to be honest because this growth has come in a period where industry has also witnessed astounding growth itself, I am just happy we have been a meaningful participant thanks to faith and backing of distribution partners as well as opinion makers such as yourself. We have been lucky.
There are 3 learnings or drivers which we practiced in our journey that I would think have contributed to our growth.
Focusing on core competency, we have learnt that positioning is built not by what you do; it is built by what you don't do. There is misplaced perception of the role of brands in our business. We are an equity AMC founded by an expert equity house. That's a huge strength; but brands can only open doors and from there on it's all about process and performance. If process is absent, that results in bad performance; if that's the case brand doesn't help. There is full financial democracy out here, if you do not communicate what you do and do not do what you communicate, money can move out at a click of a button. Whole hearted focus on B2B helps; a little bit of this and a little bit of that, spreading thin in all directions results in huge distraction for the senior management. AMC is about being an investment focused sales organization and not about being sales, marketing and product focused investing organization.
WF: What have been the significant business calls you have taken in this journey, which initially seemed to defy conventional wisdom, but which are paying off for you?
Aashish: We did take couple of unconventional decisions and we continue to be contrarian. The first was of course to declare that we are "small" by design and not by default. We are a focused equity house with a single philosophy and limited range of products. That's because we are sticking to our core competency of equity and our time tested investment philosophy. We are clear that we will not sell whatever customer is willing to buy, we will offer what we are good at. Our industry in that sense is quite easy to operate in, if you are focused that itself is serious differentiation because all other players do not like to focus. They all want to be no. 1 in size while all we want is recognition as an expert equity house. We are the only AMC to actually close funds and return money. We closed our Gold ETF and our passive Gilt Fund, because we were unable to add any unique insight to it plus the products were not capable of giving good results to investors. We have such conviction in our core competency of equity management that our promoters have wound up proprietary strategies and invested over Rs 1500 crs of group money into our equity Mutual Funds. We are pretty much invested in the same portfolios where we are soliciting investors' funds.
Apart from this of course there were other strategic and tactical calls. First on our market leading PMS where we manage nearly 5,500 crs of discretionary equity assets. A lot of AMCs operate their PMS as a high cost mutual fund product - a vehicle to load costs and now that MFs are priced very fine, they use PMS to pay 6-7% upfront and recreate all the practices which we have paid for dearly in MFs. Till a year back their PMS was in cold storage; some of them had even shelved the PMS and moved resources to the MF. Now they have revived these PMS ideas. Not so in our case! PMS for us has always been a strategic differentiator. We manage the same large cap model since 13 years and the same midcap model since 8 years! We even have clients who we charge NIL fees and only a share of gains we earn for them - that's our level of conviction. So not only did we persist with PMS, we have also managed it very strategically. Anyone who engages with Motilal Oswal on the PMS front, will come off the experience almost becoming an equity manager himself or herself. We have written about this on WF in the past. Links are pasted here:
http://www.wealthforumezine.net/CEOSpeakMotilalOswal020215.html
http://www.wealthforumezine.net/AMCSpeakMO291015.html
The other strategic area which I alluded to is our focus on distribution and wholesaling through few distributors and few locations. We didn't spread ourselves thin, we don't disintermediate anyone and we keep costs low. We now have over 20 people in investments and 30 people in sales all India. I believe that for a company managing in excess of 11,000 crs in equity assets, we are quite a lean organization on sales side. More than anything else, I think we deserve some recognition for our unique business design. Most AMCs complain on costs because they have much lower equity AuM than what we manage and yet they have 30-40 branches, 100s of sales staff and unproductive channel conflict in the distribution space. I have personally been to a lot of towns and cities where there are more AMC personnel than IFAs.
On the tactical side, I think our decision to launch no load funds when everyone was shortchanging IFAs in closed ended upfronted products has been very fair and we have got lot of appreciation for it - only from select few who understood what we were trying to do. While we paid high trail on appreciated assets, most AMCs paid 3-4% upfront on amount invested and then laughed all the way to the bank as they collected management fee on average assets. IFAs got the regulatory backlash and AMCs made money only to then come back and "self-regulate" upfront commissions!!!
WF: You recently launched a high impact brand campaign, for the first time perhaps in the history of your fund house. How has the campaign been received? How would you assess the efficacy of this initiative?
Aashish: The campaign "Sirf Ek Sawaal" was our way of trying to establish presence. Since we are only B2B focused since the last many years, distributors kept telling us that people know us because of performance or because of our parent company at the most, but a lot of people don't even know theres a Motilal Oswal Mutual Fund. I always felt that an equity mutual fund is a "prescription" product and not "over the counter" product so I never paid heed to the need for advertising. But then it became increasingly clear that even distributors need customers to be familiar with the very existence of a brand!!! Hence, we finally relented and started advertising. If it was left to me and me alone, I would have still stuck to my belief of "prescription" product.
To be fair, the campaign has got good feedback because like most things our company is know for, it is a very direct message. In line with what I explained above, we are just prompting the customer to ask his distributor or advisor for Motilal Oswal. That's all that we want. Customers should be familiar with us and distributors should be confident of recommending us. We have tested the efficacy and research shows that our TOM recall has gone up several notches.
Ultimately, I still hold the view that this business is about process and performance. Performance is an outcome, process is consistent input to produce that outcome on sustainable basis.
WF: There is a lot of talk on the need for a lower cost structure in the fund industry - lower TERs, lower distributor commissions, lower transaction costs. In 2 years from now, what is your sense of what a stable cost regime might look like - in terms of TER of actively managed equity funds and how this TER is likely to be split across the value chain?
Aashish: That TERs will decline at the customer end is now a foregone conclusion according to me. The largest cost within TER is the distributor commission and it appears that it will now be disclosed to customers. Distributors might eventually end up getting feedback from customers as to whats a high number vs whats an acceptable number. This will create reverse pressure on AMC; if distributors are under pressure from customers to earn lesser, then AMCs will be under pressure from distributors too to charge lower TERs. It already happened in fixed income long back - there are some debt funds within same category which charge 1% TER to customer and pay 60-70 bps commission and there are some which charge 25 bps to customers and pay 10 bps commission. We will have range of equity TERs and commissions along same lines. No one has told me this, there is no such regulatory indication, I am not privy to any special insight, I am only sharing what I can read of the landscape from here on.
In the end, we must respect that even if our product is becoming less remunerative to us, it is becoming very attractive to customers, margins are headed down but volumes haven't even scratched the surface. 20 years back youngsters who started earning first opened a PPF account in SBI, today they register SIP!
WF: Distributors are very concerned about enhanced commission disclosures and what appears to be a regulatory bias in favour of promoting direct plans. How do you see intermediation models settling down in the next 2-3 years - in light of regulatory developments and likely growth of the market?
Aashish: I recently wrote an article in Business Line; link pasted below.
http://www.thehindubusinessline.com/portfolio/mutual-funds/should-you-move-over-to-direct-plans/article8633183.ece
This article actually explains my view on direct. Direct is not to be seen as direct. Direct is seen to be as an option to buy the product and pay for advice separately. I would urge everyone to spread awareness about this. And if people don't want to pay for advice they are better of being in regular plans.
As regards intermediation models, I am confident it will be intermediary driven in my case certainly because as an AMC I don't see what role I have in directly reaching out to customers directly and how will it ever benefit customers. This is going to be longish but I must elaborate on various facets herewith:
I have stated many times before that customers want the full bouquet of products, and we offer equity funds only that too only 3 of them plus 1 ELSS. Customers want banking, credit, mortgage, life insurance, general insurance, equity, bonds, IPOs, et al. Within mutual funds there are equity funds and within some 45 AMCs we are one. When we are making a car component, our plant should be with assembly plant, not outside customer's door. Financial planning and asset allocation are strategic choices to be made by investors guided by their advisor. I find this buying and selling of equity MFs especially on an app at a click of a button - the only word I can think of is "frivolous". We are essentially converting a strategic choice into a tactical impulsive transaction. And anyway I wonder why AMCs have own apps. I don't think my iPhone can have 45 apps for 45 AMCs, 10 apps for 10 banks and then millions of others for games, ticket bookings, travel, news, etc etc. Customers love aggregators!!! I have seen data with my own eyes which shows that customers who buy funds direct - 1) chase past performance 2) churn assets more than intermediated customers. That's because they buy good performance and sell bad recent performance - all at the click of a button - and churn is more because its easy to act on impulse. Distributors / advisors are first line of defence for an AMC. All those who are excited with direct plans will learn some serious lessons when performance goes for a toss. AMCs have 20-30 funds in every category, if you ask an AMC guy to recommend one fund of his, he wont be able to name one fund. We expect customers to buy the the right fund and stick to it till goals are achieved? And how does one pick the right fund? All comparison of direct and regular forget that on a wrong train it doesn't matter whether you are going fast or slow! Direct sales by AMCs is not economically viable, it's a loss making proposition - it makes sense only if its online without human intervention. For implications of online direct without human intervention see point c. If its direct with human intervention, logically any AMC can only hire people with 5-7 lacs compensation because very large clients wont entertain a single product single provider sales person. And large clients have large family offices and private bankers already doing their work across multiple offerings and fabulous service. So, it boils down both ways that if AMC choses to do direct they can only hire low cost resources who will go to retail customers. If you pay an employee Rs 7 lacs to go direct, he or she needs to garner 7 crs equity assets in single product of single AMC in one year to do cost break even. Everyone reading this interview knows how easy it is to collect 7 crs equity for a single AMC in one year - you don't need me to tell you this. Also,keep in mind a 5-7 lac resource will only be able to reach certain category of customers above which it will be only qualified IFAs, bankers, wealth managers who can impress the customer. Its not everybody's cup of tea - what it takes to train a 2-3-5-7 lac resource, that also all readers of this interview know better than me!!! Finally when they do good job of training resources, those resources will happily join a bank or similar 'better' career opportunity!
Net net I can imagine some turmoil when commission disclosure comes, but eventually everyone will understand what works and what doesn't. Ultimately, this is a distribution led industry - that I am confident about. UK has done same experiments that we are doing now, they are said to be reconsidering the implications.
WF: In terms of a market perspective, while there is strong belief in India's economic revival, there is growing concern that the global equity bull market is ageing and showing some signs of fatigue. Can we realistically expect a strong domestic bull market if global equities turn volatile and head down?
Aashish: As a company we don't discuss markets and focus on markets. Our only job is to keep the environment in mind but finally pick a portfolio of 15-20 companies whose weighted average expected earnings growth individually and collectively should be in excess of 18-20%. According to us, that's the only way to consistently create wealth for clients. Only way share prices can double and remain there is if earnings double and our focus is to double portfolio earnings in about 4 years. As far domestic market is concerned, we are seeing the beginnings of a serious bull run. We are confident that India is in a sunshine spot in the global landscape. We must buy quality companies and remain invested.
Global scenario looks more encouraging than before because confidence in US economy is rising and that will spread cheer increasingly over rest of the markets.
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