Inflows into equity mutual funds (MFs) have continued to remain strong in recent days. Sunil Subramaniam, MD of Sundaram MF, says fund managers are deploying incremental liquidity into select large caps. Subramaniam spoke to Samie Modak ahead of the launch of the new fund offer (NFO) of Sundaram Services Fund. Edited excerpts:
Equity inflows continue to remain strong. Do you think fund managers are being forced to buy because of it?
A scheme cannot sit on more than 3-5 per cent cash. So yes, they are forced to buy. We have seen a select few stocks rising this year. This is due to the flight to safety. The money is coming in and fund managers are forced to buy safer stocks, which are becoming more and more expensive.
Is this creating a bubble?
I don’t think so. These are all large stocks; they can absorb enough liquidity. When the tide turns and the fund managers have to buy mid-caps, selling these large-caps won’t be a challenge.
Alpha-generation has been a challenge this year. Do you think investors will move towards
exchange-traded funds (ETFs)?
In the long term, large-cap schemes may find it a challenge to generate alpha given a lot of ETF money is entering the market.
A fund manager who opts for stocks outside the index will always underperform. That’s how it has played out in the developed markets. But in the small- and mid-cap space, there is much scope to deliver alpha. Managing a mid-cap ETF is not easy. It causes its own volatility.
What have been the pros and cons of Sebi’s categorisation norms for MFs?
The negative was that in a very short term, it led to a lot of selling in small- and mid-cap stocks. A lot of large-cap schemes, which held these shares in their portfolio to participate in the growth story and generate superior returns, had to liquidate to comply with the norms.
However, in the long run, this is a very positive development. There is a level-playing field in terms of all mid-cap schemes having to choose from a universe of 150 stocks. So, the quality of fund managers will be tested — their research and ability to buy and hold. They will have to pick 30-40 stocks from a universe of 150.
Sebi has decided not approve any close-ended schemes. What could be the trigger?
Sebi’s rationale has been to eliminate duplicity of schemes. They found that fund houses were launching similar themed products under close-ended schemes. Second, there are these talks that commissions paid under such schemes are front-ended. Sebi’s intention is to bring down commissions to normalise levels. While they can’t legislate commissions as it is a commercial aspect, this is one way of controlling payouts.
Is there scope to further bring down commissions?
We have to live with the dynamics. There is no right or wrong with our commission structure. The acquisition cost of a customer needs to be financed by the expense ratio. In a market like India, investors are not too aware of MFs. The industry is advertising heavily to attract investors, but there also a physical cost of visiting customers. A balanced approach needs to be taken. Globally, costs are low as bulk of the market is in index fund.
India is still big in terms of actively-managed funds. In the US and Europe, fund managers find it hard to deliver alpha. But in India, fund managers are still generating lot of alpha, especially in small- and mid-caps.
Recently, Sebi brought down commissions by 15-20 basis points. I don’t think there is scope to bring it down much further.
What are your views on few players dominating the industry?
These big players are ones that have their own bank channels. Naturally, they will have an advantage. However, we can’t deny them their growth. We can’t have the regulator legislate against the big players; it would be unfair. Commercially that’s how the business has developed. We can’t do anything about it.
Do you expect more IPOs from asset managers? What are your plans?
Absolutely, there will be more fund houses that will go public. However, we don’t have any such plan as our business model is adequately capitalised. So there is no need for more capital.