Every stakeholder has to gain; only then can it work

Lisa Pallavi Barbora
Mint
15 December 2014

Birla Sun Life Asset Management Co. Ltd is completing a journey of 20 years in the mutual fund (MF) industry. Today, it boasts of total assets under management worth Rs.1.08 lakh crore, and is the fourth largest in the industry. Its chief executive officer, A. Balasubramanian, has been there since the very beginning of this journey. Starting out at the trading desk, Bala, as he is known, learnt new skills every step of the way and has held the top corner office for the past five years.

Balasubramanian spoke to Mint about how the industry has progressed in the past two decades, the challenges it has faced and how regulations have grown in step with the development of the industry. He strongly believes that all members of the industry are well placed to work together to overcome market challenges and address investor issues in an effective manner.

The past 20 years has seen evolution in the industry. The number of firms has grown through two main routes - rush to build assets, and performance. Which has contributed to your success?
The money management business essentially means that we take investors’ money for generating returns. Having a strong investment philosophy, processes, and the people who drive it, are the most important aspects, and key to the success of this business. The longer-term objective of the organization— delivering satisfaction to the customer in the form of returns — gets met through the three aspects mentioned above.

Secondly, whatever you do in the back-end, which is the heart of the business and which means focusing on distribution expansion and market, distributors need to be engaged. This is the second pillar of success. I always tell the sales team that they need to consider themselves as quasi-fund managers. They need to engage with distributors and investors with much more conviction.

Lastly, customer service is also important. Customer queries need to be resolved in a quick and satisfactory way.

So, while investment is the key philosophy in the money management business, all other aspects also need to revolve around this. As size and scale increases, one of the main things one has to consider is risk management.

The way this industry has taken shape, we see a handful of large asset management companies (in terms of assets under management, AUM) and then a long tail of smaller firms. Is this a stable foundation for the future?
The way to look at this is that everyone has to start at some point. We also started small. It’s the same for others who are now large. So, efforts have been made to increase assets and, in the process, also establish long-term performance and credibility. As an MF, despite being part of the top four, we aren’t present in every space we would like to be in. This is what competition does; it brings in the vision for you to grow further. You have to keep questioning why is someone doing well and then how you can incorporate the success strategy.

There is an opportunity still. In this industry, we still have a long way to go. Healthy competitive pressures bring in a push to grow the business and provide a higher degree of safety to customers.

At the end of the day, all of us have more or less similar practices but certain practices on risk management differ. At present, in terms of fund flow, the No.1 asset manager controls 12.5%, the No.2 may have 11%, the next, maybe 10.8%, and we have around 10% of the market share at fourth place. It’s not difficult for anybody to aspire to have 9-10% market share. This is largely because the customer base that has invested in MFs is only about 40 million out of a population of 1.2 billion. Even if you discount this number heavily, there is room for everyone.

You have seen many aspects of the business over the past 20 years. How has this journey evolved for you?
I have worked as a trader in both bond and equity markets. Moving from that to working as a portfolio manager required a real shift in thinking; you can’t be spontaneous all the time.

Ultimately, it’s about coming to a logical conclusion, taking a call and driving your team to make choices that can only be proven over a period of time; this is something that evolves over time.

I also worked with the sales function for about nine months and this made me realize that many a times, within the sales force, you end up talking without proper technical knowledge. I realized, the sales team lacked ‘masala’, which is nothing but intelligent talking points and conversations. I thought about how to make people richer in terms of knowledge and we worked towards that.

In 2009, I took over as chief executive officer. On 1 August, when I took charge, I called myself the ‘no entry load’ CEO (which was implemented on that day). The industry was panicking at the thought of moving to a no entry load regime. As a money manager, it was a very negative period. But it was a reality one couldn’t escape, so I decided not to worry too much about it and instead focused on building on the opportunities that existed.

Communicating the vision effectively to all employees across the organization is important for achieving success. From being a decision maker, I started getting decisions from people. The shareholders of the company ,who gave me this responsibility, also made me learn the tricks of the trade through two coaches. One for helping me manage time effectively and also articulating a vision for the organization. The second coach focused on improving my managerial skills, which helped me get the best out of tough people.

There is a fair bit of consistency in the performance of Birla Sun Life funds. Is it because of the people who manage these funds, or the processes?
It is a combination of the two. Mahesh Patil (equity head) puts it very well—it’s both a science and an art. The science can be fixed, which is 65-70% of the process. Once you start growing in scale, it is humanly not possible to be present everywhere and that is where standard operating procedures come into play. The art portion of it is individual based and that requires the individual’s skill in decision making.

In terms of human resources, we always strive for sustainability of the team. For the key people, the reward mechanism encourages them to be happy, remain in the organization for long and deliver their best performance.

You have many open-ended strategies that are doing well. Recently, you launched closed-end strategies as well. What was the need for this? Does this not go against the basic long-term nature of equity investing?
We keep debating internally before launching a scheme. One of the things we look at is building scale, and for that the underlying portfolio strategy has to be sustainable. Moreover, the distributor and customer base has to be managed in a way to expand the market itself.

For us, this year, the highest inflows have come in the Frontline Equity Fund, followed by the Sun Life Equity Fund and then the Top 100 Fund. So, there is focus on building open-ended strategies to a bigger size as well.

We started launching new fund offers through an open-ended scheme (Banking and Financial Fund) in December last year. What we realized is that customers have all their money in open-ended funds. We questioned this and asked whether there is merit in also having a closed-end fund in the portfolio. From a money management point of view, in volatile markets, closed-end funds avoid the concerns of market fluctuations and allow the fund manager to remain invested through the period without worrying about the flow of money.

During the launch of Rajiv Gandhi Equity Savings Scheme (closed-end scheme), we realized that the number of new investors (to mutual funds or Birla) coming into such funds is much higher. Secondly, we realized a large chunk of the money was coming from newer markets. We are not here just to generate returns; we also have to look at expanding the market. Yes, there is a question mark on whether the high commissions lead to mis-selling.

While mis-selling needs to be addressed, if we are able to take care of investments across assets and generate a good experience for long-term investors, there is no need to be worried.

What is the logical conclusion to the upfront versus trail discussion?
In this industry, every stakeholder has to be a winner and only then can it work—manufacturers, distributors and customers have to be winners, too. The entire discussion is taking into account the growth of the industry; we have to pay for expansion and remain profitable. Globally, the trend is changing with the advisory and trail model. Upfront helps in expansion; trail commissions help in long-term sustainability. Upfront also addresses the cost of acquiring a new customer. Suppose we move to a trail model. Is there any merit in it for a distributor who has moved to an advisory model?

One good thing about this industry is that regulations have developed along with the industry while keeping investor protection in mind. If there is a point that needs to be addressed, I would assume the regulation also supports it, as has been seen previously.

At the moment, this point about having upfront or moving to a pure trail model is still under discussion.

How do you manage your personal discipline in the midst of volatile markets?
One thing I have learnt is that you should never panic. If you do, you won’t ever arrive at a decision. Resolution is more important; whether it is right or not, is a different question. Taking firm decisions in the best interest of investors is critical, especially in tough times.

In good times, you have to keep a check on what gives you short-term versus long-term success. You can’t avoid tactical moves, but you have to see whether it benefits investors also. This applies to growth of AUM or money management. If the decision is not in the best interest of the investor, it is better to skip it. Also, one has to let go of some opportunities in the better interest of long-term sustainability.