While Reliance Industries Ltd.'s Jio is known for disruption, BlackRock has expertise in financial services. Together, they can have a promising partnership, according to experts.
Reliance Industries' demerged financial services arm, Jio Financial Services, and investment manager BlackRock signed an agreement to foray into the asset management industry on July 26. The 50:50 joint venture, Jio BlackRock, will deliver tech-enabled access to affordable investment solutions.
After disrupting the telecom and retail space, Jio may try to do the same in the asset management sector, Suresh Sadagopan, founder of Ladder7 Wealth Planners, told BQ Prime. However, the presence of seasoned players means that success is not a foregone conclusion for the company, he said.
"What they are actually going to do on the ground, what kind of products they are going to bring to the table, and whether it is ultimately exciting to all of us and for our clients is what will actually decide whether they are really successful and how quick the uptake is," he said, adding that digital-first kind of an offering can be a big bet.
There is always the potential for a new player to come in and put forward their products to reach a bigger audience, said Harshad Chetanwala, co-founder of MyWealthGrowth.com.
Jio has a lot of reach in terms of different types of distribution channels and it can focus on reaching out to new clients, beyond the top cities and towns, he said.
New Fund Offer
Mirae Asset Multicap Fund is a new fund offer and the category has allocation across large, medium, and small caps, with a minimum of 25% each in all the three buckets and another 25% flexibility to allocate in any of these segments, said Fund Manager Ankit Jain.
"This is a very interesting category because if you really look into historically, one part of the market will behave, maybe to outperform one year and then sometimes large, mid, small (will perform). This, as a product, can combine all these three buckets in the right proportion," he said.
According to Chetanwala, the multicap category has gained a lot of popularity in the past few years because a lot of investors are excited about the mid-cap and small-cap space.
Taking a contrarian view on NFOs, Sadagopan said, "We would want to see some kind of a track record performance over a period of time and after that only we would want to recommend that."
Charity Fund
Calling the HDFC Charity Fund for Cancer Cure a "wonderful initiative", Sadagopan said people intend to contribute to charitable causes and this fund gives them the right avenue to participate in helping others in a useful manner.
"I am seeing only HDFC currently doing that. If more and more AMCs come out with these kinds of initiatives, it’ll be good and investors’ money can be channeled back to the society at large," he said.
Watch The Full Interview Here:
Edited Excerpts From The Interview:
Suresh, did this announcement about a joint venture, Jio and BlackRock, excite you?
Suresh Sadagopan: Yes, I mean, I will be slightly cautious about saying anything about this. See, the point is there are about forty-three other players in the market as it is, and I would not call any of them a pushover.
If you really look at the pedigree of most of these players, they have deep domain knowledge. They are from the financial services industry, and some of them have, again, global partnerships and they have done wonderfully well for more than two decades. So, if it is anything but a pushover for Jio-BlackRock.
I do understand that BlackRock has expertise. They have had one more inning for the country in the past, along with DSP, so they know the terrain to at least probably some extent and Jio of course, they are a juggernaut today, and they had that intention of coming into financial services. I think this is a very good propitious partnership that way. It is expected to do a lot of things.
Jio is known for disruption, they have done that in the telecom space. They have to some extent done that in retail space, and they are known as a disrupter and it is possible that they may do something here, only that there are very, very seasoned players here and I would say that their success is not a foregone conclusion, what they are actually going to do on the ground, what kind of products they are going to bring to the table, and whether it is ultimately exciting to all of us is and for our clients, is what will actually decide whether they are really successful and how quick the uptake is.
In that case, it's a digital offering, I believe, digital first kind of an offering, which I think they are absolutely on the button as far as that is concerned because that is the way the entire globe is going on various fronts, whether it is payments or whether it is retail or anywhere else. I think digital is the way to go. So, they have a lot of things going for them.
But I would be cautious to say that it is not a foregone conclusion, that success. It's certainly a very exciting time for the mutual fund industry. These people are expected to expand the mutual fund cake and can probably get to the Rs 100-lakh crore mark faster with Jio being there.
Harshad, does it actually open up the sphere of low cost investing even more in most categories, especially the large-cap and could that be beneficial to investors?
Harshad Chetanwala: Let me start off with the universe first and then I will come to the question that you have put forward. I think that's very important when we say that a big player like Jio and BlackRock when they come in to create a lot of buzz around, we have to understand that today despite of all the efforts that the industry has done, we have grown to around 3.75 crore unique investors in India, which also includes NRIs. So, the market space is huge.
There's always the potential for a new player to come in, and then put forward their products and reach out to a bigger audience. So, I believe it should not stop with just Jio and BlackRock, there has to be many more good players that need to come in. There are already very good players who are doing very well for the industry and that’s what we are seeing in the numbers, the way in which the acquisition is happening, and the way people are investing through mutual funds.
Coming back to the question of yours, which is related to passive funds, we all have seen what passive funds have been doing in the last couple of years, particularly post Covid. In fact, it started off way back in I think 2019 where the focus on passive funds performing better than the active funds.
There have been multiple reasons for this. Today, if in case we look at that data again, because the markets have surged in the last one quarter or more than that, we look at that data and I would not like to split it between just and I would not like to restrict this conversation only up to the large-cap and I will bring in large and mid-cap and flexi-cap category.
If you look at that, and there are close to around 140 or 150 funds, which are actively managed and out of which if I put them on a horizon of a three year or a five year, more than almost 50% of these active funds have performed better than the passive funds or if in case I make an index fund, a Nifty 50 Index fund as a benchmark. So, there is always a space for a good active fund to do better.
If in case they are able to generate returns no better than the benchmark, very frankly, but yes, we have seen globally that passive funds have been one of the most preferred options by the investors and that trend has picked up in India but we have still believed that it is better to create a blend of active and passive.
Coming back to Jio, of course, they have a lot of reach in terms of different types of distribution channels that they can come up with. Another space which probably a new asset management company can focus on is probably reaching out beyond the top cities or towns, because that's where I think, barring the reach, I think education is very important. All those things we have done, education is the key.
In the end, whosoever comes with any disruptive idea, this is an asset management business, till the time the assets are managed in the right way and generate returns for the clients. That is where the investors are going to put their money in.
HDFC Charity Fund for Cancer cure, Suresh, is it a good investment option and what kind of investors should or could look at a fund like this?
Suresh Sadagopan: Actually, a wonderful initiative coming from HDFC. They have done this in the past in 2011-14 and ‘17 and this is the fourth iteration and they have already helped about 13,000 patients till date. So, a lot of people and a lot of investors that we are in touch with also want to do this kind of philanthropic activity.
A lot of people have this intention to give to good charitable causes. A lot of times where they stumble is that they are not able to find a proper avenue to channelise that and I think HDFC through that charity fund now in the fourth iteration, I think that is exactly what they are trying to do, and they are giving an avenue for a lot of people to participate and in helping our other countrymen in a useful manner.
So previously, they raised about Rs 226 crore, and like I said it has gone to about 13,000 people. So, this is a wonderful initiative. In fact, I would go on to say that they are doing this for cancer care. There are lots of areas where people are suffering and where people do not have the money, especially people below a certain threshold.
Probably they can look at those initiatives in healthcare also, they can look at their education, elderly care etc., I think there's a need for that. I am seeing only HDFC currently doing that. If more and more AMCs come out with these kinds of initiatives, it’ll be good, and investors’ money can be channeled back to society at large.
Now, coming to the question which you asked me whether this is a good investment option. It is not really an investment option per se. I mean if you consider maybe two or two and a half percent return as I mean sufficient return, only then is a good investment option.
See what exactly they are proposing is that 50 to 70% of the so-called dividend which they're going to get our IDCW option, which they are going to get is going to be channelised to that Indian Cancer Society and they will be in turn distributing that money. So, this is a social impact project and people who are donating here will also get the 80TTA benefits because they are donating 50%, they will get 80TTA benefits to the extent of 50%.
So, it's a good initiative. It's a social cause and people who are interested in participating in the social causes should look at this. So, kudos to HDFC, I would want to see more of these initiatives from other fund houses as well.
Harshad, any thoughts that you have?
Harshad Chetanwala: So, I agree with Suresh, it is a very good initiative, no doubt and I think the numbers are 13,000 patients and I think if you take the average, they are probably helped around the average amount is around Rs 5 lakh per patient which is good for the people who come with that kind of illness because very much help that they need, right.
But this is an FMP at the end of the day, and there is a segment of investors who will typically use these kinds of investments when they look at of course, this is not an investment. I think I agree with Suresh, it is more about people who would like to donate back to the society in the form of investments at the same time, probably the IRR or the returns for the investor at the end of the day would come to around 2% rest of the money they are passing on to the society, which is good.
But there's a segment of investors who will typically invest into these funds, and when you look at FMPs that have been used by HNIs or retired investors. So, retail investors may not be that keen to participate. Of course, there are a lot of people who would like to give it back to society and they may participate in these funds. But at the end of the day, it's a very good concept. It's a very good initiative and through the investment, if we are able to help people who need it, it's a very good way to do it.
Mirae Asset Multicap Fund, the NFO is open for subscription from July 28. So, it opened a few days ago and it is on till August. 11th. The fund manager of this NFO Ankit Jain joins us. Ankit, tell us a bit about your NFO.
Ankit Jain: This is a multi-cap category which is a very unique category with pretty good allocation across all the three buckets of the market —large, medium, small — minimum 25% each in all the three buckets and then 25% is the flexibility to allocate in any of these segments.
So, this is a very interesting category because if you really look into historically, one part of the market will behave, maybe to outperform one year and then sometimes large, mid, small. This, as a product, can combine all these three buckets in the right proportion. It does have a lot of value as such and this will also be one of the product from our basket, I mean in terms of diversified portfolio with relatively higher proportion of the small-cap into this.
So, to that extent also, I think it becomes an even more interesting category. So, I think this is the category which provides a pretty good balance of the large-caps on the one hand during volatile times, and I think during buoyant time, I think mid and small-cap allocation also to provide I think, the desired sort of alpha over time.
You believe that the next three years are buoyant times and therefore higher allocation to small-caps could yield better returns?
Ankit Jain: Yes, absolutely. The last five years, if you look into small-cap earnings growth has been at around 14% of CAGR, and that is irrespective of the fact that the last five year might not be the best of the macros. Even prior to Covid, GDP growth was less than 5% then Covid stuck and then we saw geopolitical issues, inflation and interest rates, a lot of things that happened.
Despite this, small-cap earnings growth has been decent and going forward. If we are talking about, I think macros being pretty rock solid at this point and that being further sort of is supported by bottom-up micro improvement across many of the sectors in terms of deleveraging of balance sheets. That offers much more sort of an earnings visibility and if that has been the case, definitely yes.
I think near-term valuations are expensive than historical average, but if someone is having time horizon to play, I think three-five years all the time horizon, I think this is a product that could make a good mix of mid and small-cap, can really do well.
Ankit, what kind of returns that we can get?
Ankit Jain: So, this is first of all relatively newer category with newer benchmark, just couple of year old, but if we take the same sort of benchmark constituent and try to get this thing of data that I think last five-year rolling return has been in the mid-teens sort of a number.
So, if you try to look into from the return expectation point of view it has to be a function of earnings growth going forward. So typically, looking to market over a longer time horizon, ideally low teens expectations have to be there because nominal GDP growth rate itself is around 10% and within that the listed larger companies do tend to grow faster than the overall let's say nominal GDP growth rate in terms of earnings growth.
So, keeping that thing in mind and over a longer time horizon, typically mid and small-cap tend to give 2-3% additional sort of earning growth over large cap. I mean, for the reasonable sort of time horizon and if you try to look into. So, I think in a product with a mid and small cap, the weightage is going to be 50% plus for sure 55% or so.
I think aggregate earnings growth, ideally has to be somewhere at around let's say mid-teens sort of a number and even if let's say it's starting point of valuations being bit expensive, but still historical average I mean, ideally low teens sort of expectations, one should keep in mind from a longer-term standpoint.
Ankit, what is the kind of investing trait that the fund manager which is you in this case, brings to the table for this fund?
Ankit Jain: Yes, it has to be very balanced approach across style and then across the market cycle. So, we do follow a set template of our certain investment philosophy, which is obviously the first bucket being always to invest in growth-oriented companies, more so India being a growth-oriented market, first priority always remains to invest there and then that also has to be backed by to participate deep in value businesses.
So, this sort of a barbell sort of approach, where I think a large proportion has to be into maybe 75% of the portfolio into high growth-oriented companies up to a reasonable price and then second is about participating in value businesses. So, I think a pretty good blend of these two styles in the portfolio with enough diversification across different sectors typically tries to avoid taking very heavy active sector calls.
But I think active stock call can be significantly higher depending on our sort of conviction on that name, and our sort of internal price value frameworks. So, I think the idea always remains to try to deliver consistency. Coming across the cycle, while not taking very heavy active sector calls but at the same time try to deliver the desired sort of return to bottom of stock selection. So, I think that clearly remains the investment philosophy, and I think we will try to work with that.
Harshad, how would you look at this NFO?
Harshad Chetanwala: So, there's no doubt that Mirae as an asset management company has done very well when it comes to the equity fund and over the years, we have seen the proven track record.
Of course, every fund goes through its phases and every fund house can go through its phases so we can easily discount the near-term underperformance when it comes to just peer, but I think overall if it is we look anyone look at Mirae from a longer-term perspective, both of the funds have done very well for the investors, so we also follow the same theme when it comes to Mirae.
Coming back to the category, I think multi-cap category is a much younger category. It has gained a lot of popularity in the last few years. If you see that in over a one-year period, I think the highest number of jumps in terms of the highest AUM jump has come into this category, in case I leave out small-cap and dividend deal funds.
So, the focus has shifted to multi-cap and that's predominantly because a lot of investors are excited about the mid-cap and small-cap space and this fund offers that because you were able to put around 25% in mid-cap and 25% in small-cap and predominantly you would have seen the kind of interest or the flows that are coming into these funds in the past.
Every fund house wants to be in that category and so does Mirae, and it's a prominent category. Mirae has all the fundings in the prominent categories. This was one of the missing link, so they are trying to get into it. Of course, one can look at their track record over the past when it comes to equity fund management and then decide what is the right thing to do with the new fund.
Harshad, subscribe or not subscribe?
Harshad Chetanwala: So, I have been someone who prefers existing funds with a proper track record when it comes to the category. Their track record as an equity fund manager is great no doubt but at the end of the day, I am putting my money into a fund, and I may like to wait for some more time till the time to decide that is this a multi-cap fund which I want to be into or there are existing multi-cap funds with proven track record and I will like to opt for that, if in case I compare them, but I need some comparable data. So, I will wait for some more time.
Suresh, what is your thought on this NFO?
Suresh Sadagopan: So, I think you started with the fact that typically many people do not recommend NFO’s, and I am one of them. We generally do not recommend NFOs because typically, any NFO that comes typically there are many, many more in that category or a related category.
In this particular case, a related category will be a flexi-cap though it is not exactly the same, but the components can be very similar. So, in the flexi-cap category, there are quite a few, multi-cap there may be comparatively less, but if you look at multi-cap and flexi-cap together, I think we have a credible list of good performers.
I completely agree with Harshad that Mirae Asset has been a wonderful equity fund manager and they have proved their mettle with many funds across the board, across timeframes. So, it's anything for coming from Mirae Asset I mean, we really have to take notice, but having said that, I would be cautious about putting my client’s money into any NFO. It's not about this particular NFO because other credible options are already available, though we keep saying that.
Past performance is no indicator of the future, but it's still the past performance accounts for something, and we know what the fund manager style, we know what the kinds of returns they have generated in the up phase and down phase. I mean, we know all that right. So, from that point of view, we would want to be slightly cautious. We would want to see some kind of a track record performance over a period of time and after that only we would want to recommend that. So, there is one more point.
One more point is we will be ideal when we are putting together the portfolios for our clients. So, if we are putting together the portfolio, let us say a large-cap portfolio, mid-cap component or small-cap component, I would like to choose three different funds instead of a multi-cap or a flex- cap fund because I have a lot more control in what kind of components are there in my client's portfolio rather than a multi-cap category which I don't really have too much control over. So that is also another reason why I will be slightly cautious about recommending multi-cap as category.
Are there other good names in there in multi or flexi-cap category that you would recommend?
Suresh Sadagopan: I am not sure whether I am supposed to give you those names. I am not very sure. But there are flexi-cap funds, which we generally do recommend. In my opinion multi-cap funds, it is a bit of a straitjacket which has come into multi-cap funds because the fund manager has to invest at least 25% or more.
Flexi-cap that way is giving more latitude and more flexibility to the fund manager. I would prefer that if I want to trust the fund manager, I will want to trust the fund manager 100%, when it comes to that fund. In terms of going anywhere and putting that money so I would prefer a flexi-cap over a multi-cap category, if you ask me.
Harshad?
Harshad Chetanwala: So, I think the flexi cap, the multi-cap is basically has become a sort of a subset of flexi-cap which was earlier the same category which got split. So, there is a lot of comfort when it comes to flexi-cap because as Suresh said and I think he is right on that point because the flexi-cap fund have the option of controlling the allocation between the market capitalisation, which is not there in multi cap.
So, the comfort is more in flexi-cap very frankly and there have been very good flexi-cap funds. The Parag Parekh flexi cap and the HDFC flexi cap which is doing well and if you see there are other when it comes to multi cap, I don't recollect the name exactly, but I think there's Nippon multi-cap or HDFC multi-cap which is doing quite well. I need to recheck that on that particular aspect.
But having said that, you know if in case an investor would like to invest into more diversified way of parking money where because you have to understand that when it comes to multi-cap by default 25% will be in small-cap and mid-cap and 25% on mid cap. So, 50% of the portfolio will have a higher risk that may not suit all the investors in case they are in the initial state of the investment or not necessarily at the initial stage even though there are mature stage their appetite may not permit them to do.
So, flexi-cap category could be better, but having said that, as we have seen there are a lot of investors who park their money in multi cap. So, it clearly says that there are investors who are keen to park their money.
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