G. Pradeepkumar, chief executive officer, Union Asset Management Co. Ltd
Union AMC looks set for its second innings with a new chief investment officer Vinay Paharia, who has a good track record. But with the industry now focusing on profitability rather than asset gathering, small fund houses have a long way to go. Chief executive officer G. Pradeepkumar talks about the fund house’s preparedness.
After a while, Union AMC is in the news again. You have a new chief investment officer, Vinay Paharia, who comes with a good track record. Your former partner, Belgium-based KBC Asset Management, has exited the joint venture and Japan financial services major Dai-chi Life Holdings has bought 39.62% in the AMC. What are the other changes at the fund house?
Vinay’s joining Union is the biggest change. With a fairly long experience in his bag, he has put in place a very robust investment process. It means this: We look at companies from three filters; business, management and valuation. And we create an investment universe consisting of only those companies that meet our threshold level on these three parameters. At the moment, we have about 135 companies in our investment universe, which we’ll probably expand to 150 or so. These processes ensure quality control and discipline. Irrespective of a fund’s objective, the fund manager has to choose from this universe of companies.
I don’t think fund management needs an IQ (intelligent quotient) of 200. We need a lot of hard work, focus, of course reasonable intelligence, but discipline is very important. And we should stick to our conviction.
So didn’t Union AMC have processes before Vinay’s arrival? Your fund has been around since 2011.
We had processes before, but they weren’t as robust. We did have a universe of stocks but we didn’t have the conviction to stick to our processes. Now, it is cast in stone. Earlier, we made deviations and picked stocks that didn’t necessarily pass through our earlier filters and we made some mistakes. Later, we realised that if we had stuck to our processes, we wouldn’t have done damage. That was the learning for us.
Putting in place processes is fine. But equity markets have been going up narrowly and few stocks are driving up the rally. That’s partly the reason why so many equity funds are underperforming the markets. Can a small fund house like Union AMC afford to wait it out?
Yes we can. About 70% of our investors are first-time investors. They are retail investors and mostly from smaller towns. About 44% of our folios had come from Beyond top 30 (B30) towns. These investors are patient and stick around for long. They don’t jump around, they don’t react to markers news, etc. We also make it clear in our communication that investors must have a 3-year time horizon when they enter equity markets. Distributors also understand this and they communicate this to investors.
Over long periods, equity funds do perform well. Fortunately, most investors look at whether they made money or not, instead of comparing their funds to benchmark indices and peers.
Coming back, Union AMC has been around 2011 but is still tiny. Its market share is just about 0.20%. Is it serious about its existence or is it just drifting along?
The fact is that 96% of the MF industry’s assets are with the 20 largest fund houses. The remaining 4% lies with the 20 smallest fund houses. But our sponsors are serious. Union Bank has put in additional capital in the last couple of years. Dai-chi has also acquired 39.62% stake in the AMC through compulsory convertible preference shares. So, if Union Bank wasn’t serious about us, it would have sold us off.
But the banking scene is scary and state-owned banks are undergoing stress due to non-performing assets. What if Union Bank needs money?
Fortunately for us, among state-owned banks, Union Bank is in a better shape. They are not under the prompt corrective action unlike many other peers. The expectation is that the NPA scene will turn around by year-end. We will wait and see. Even under difficult times these past two years, the bank continued to support us. It added more capital and our MF sales through bank branches doubled.
But despite having a large state-owned bank with wide branch network, the sales hasn’t pushed you up on the AUM (assets under management) ladder.
I know. But for any AMC, in today’s times, it is probably not realistic to reach a corpus size of ₹2-3 trillion. The way top fund houses added assets over the years cannot happen anymore because of regulatory changes, reforms in commissions and so on. The scale game is a thing of the past.
Smaller fund houses today cannot reach that size. But given the size of the market and potential penetration of the MF industry, it doesn’t matter if I have 0.5% market share. If that share gives me ₹25,000 crore of assets and a profit of about ₹50-100 crore, then I am happy.
We have never tried to compete with large fund houses. We never had the wherewithal. I cannot compete with the HDFC AMCs and ICICI Prudential AMCs of the world.
But the fact is that we have grown; we have added 200,000 folios. Out of which, 75,000 folios are first-time investors. And this market will only grow, so there is room for all fund houses to grow.
How important is profitability of an AMC now?
Extremely important. From now on, almost all AMCs will focus on profitability. Promoters have become more sensitive about this. There was a time when fund houses gathered assets and then sold off to another company, got the price at a certain percentage of its assets and walked away with the cash. That game is over. Today, buyers look at profitability. The MF business has to be commercially viable and sustainable. More AMCs today are focusing on profitability and sacrificing assets at times.
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