Building Profitability Harder in AMC Business Than Building Assets: Edelweiss MF CEO
From riding on Bharat Bond and Target Maturity funds (TMFs) to innovations such as the recently-listed IPO fund, Edelweiss AMC has made its presence felt over the last few years. Radhika Gupta, the MD & CEO, in an exclusive chat with bl.portfolio during her recent visit to Chennai tells us why she wants to run a ‘full-service AMC’ and how her fund house works on providing ‘solutions’ and not ‘products’ to customers. Edited excerpts:
Radhika’s professional voyage commenced with Microsoft, transitioned to consulting at McKinsey, and further evolved in the finance domain at AQR Capital Management. She co-founded Forefront Capital Management in Mumbai, which was later acquired by the Edelweiss Group in 2014, marking her entry into the asset management space
Today, there are quite a few models among AMCs (asset management companies) – some ride on digital presence, some offer only passive products, some are active-focused and have big physical presence. How would you like to be seen?
We don’t like to draw definitions, because we know asset management, market and regulations can change. We want to be a full-service AMC that offers fixed income, equity, hybrid, active and passive. We are present in about 35 locations today, which we put together over the last five years. We are adding 30 more branches (physical locations) over the next three years. Otherwise, our approach is omnichannel. We want to have 60-70 branches and then supplement it with online, social (media), etc.
Unlike bank-backed AMCs, we must build independent distribution. We don’t have a group company either. It has not been easy, but it also has been an advantage because it forces you to work. This means you ought to have products that speak for themselves. You can’t compromise on product quality or on performance.
After you got the Bhart Bond mandate, you did try a specialisation in TMFs, which, of course, was dampened by the tax change. Today, aiming to be a full-service AMC, you don’t see value any more in specialising?
We can build equity AUMs on the back of performance. Fixed income is tough to build. You need institutional relationships and you need size. So, everybody tells you, ‘Show me size, I’ll give you the money’. And that’s chicken and egg. Then Bharat Bond came as an opportunity finally to crack the fixed income space. I don’t think we predicted that Bharat Bond and TMFs would be as successful as it became. But then, we started getting branded as fixed income or TMF AMC, which was never the case. I repeat, we’re a full-service AMC. On the equity side, our mid-cap fund is one of the best performing over the long term. In Bharat Bond and TMFs, a little bit of steam is lost because of the taxation change for debt funds. But we still believe that versus FD, there is an advantage. One is the deferment of tax. Also, you have such long-dated options – we have a product maturing in 2037.
The hardest thing to do in the AMC business is build trust. And once we build trust, as a brand, the consumer should have a variety of products. That said, we are a full-service AMC with a collection of boutique teams. One of the things that is unique about us is that we have a separate team to manage hybrid and solution-oriented funds. In most AMCs, hybrid funds, which is an extremely large category, is managed part by equity, part by fixed income. So, we have a hybrid team that does more quant strategies, model-driven strategies. Then there is a long-only team that does pure play fundamentals.
AMC business for the listed players has high margins. As a young AMC without a readymade distribution network to bank on, would you say that setting up the infrastructure is the largest cost for you, apart from say, employee costs?
If you look at the legacy AMCs, they have been around for 20, 25 years and they have a book where they are paying very low trail (commission) on assets. So that naturally makes it very profitable. Actually, we have not seen an AMC that has come up in the last seven or eight years getting listed. In the new regime, I always say, you could build assets in the AMC business, but profitability is much harder. From being loss-making in 2017, we have moved to being profitable last year and I think we will be meaningfully profit-making this year. So we’ve done this journey while making investments in the business. We went from seven locations to about 35 in the last five or six years. We really invested in people and talent. For us, in terms of branch expansion, we work on a very thin model. So, it is really about finding one talent and having very peripheral costs around talent. And we see that we are able to break even in 18-24 months in any centre that we open. That’s been our historical experience. In fact, in many locations without having branch presence, we have a little bit of asset base already because the brand is getting there. We have relationships with good distribution partners. And so, it’s just capitalising from that. And we would like to expand a little gradually. So in 2017, we didn’t go out and say let’s open 60 branches. We said, let’s build as we can, let’s get to break even, let’s get to being profitable. And even now, we add 30 branches gradually over next two/three years.
A SEBI consultation paper released last year spoke of smaller AMCs being at a disadvantage and suggested AMC level TERs (total expense ratio). Would that help you?
I was AMFI Vice-Chair when it was put out. I know that as an industry, we gave a certain set of feedback. I do agree that parts of what were proposed in that paper were actually quite good for mid- and small-sized AMCs. But nothing has so far come out of it. Maybe it is still work-in-progress. An industry where many players can be present is ideal as having just a few players is bad for the customer.
In retail, there is a metric called ‘same store sales growth’. Similarly, I would like to have a certain volume of business every month from existing funds. I get worried when people celebrate NFO collections. Radhika GuptaMD & CEO, Edelweiss Mutual Fund
Why does the industry always come up with NFOs only on the hot themes ? Can’t you get investors if you’re convinced about your investment thesis, even if is something out of favour currently?
I don’t know. It’s certainly not how we work. When we budget and plan for the year, it is most important that we have regular recurring business. NFO, for me, is like an icing on the cake beyond the recurring business.
We believe that in NFOs, we can’t get the timing perfect. However, for our NFOs, our timing has been reasonably good and we don’t want to do themes that are top of mind. So for instance, we’re doing technology NFO now, which is certainly not top of mind. We did a small-cap NFO in 2019 after the crash. We did US tech NFO in March 2020 during Covid and we collected very little money in there. But I believe that if that record is good, we can scale up. In retail, there is a metric called ‘same store sales growth’. Similarly, I would like to have a certain volume of business (net sales) every month from existing funds. And I get worried when people celebrate NFO collections. It should not be the milestone.
After the straight jacketing of categories, AMCs just have to fill the gaps. Isn’t the room for innovation limited?
I think categorisation per se is actually good because some boundaries are needed. But I do believe that even within the categories, a lot of innovation is possible. For example, in our tech NFO, we are bundling India tech along with US tech, which I think is a reasonably innovative solution because otherwise the taxation is not in favour of international funds. We have a recently-listed IPO fund and this is again an example of innovation. We are planning an NFO in a mainstream category in April, but the investment style will be very different. If you look at our balanced advantage fund, we are running a momentum-based model unlike others. We did a lot of innovation on the fixed income side too. Innovation should not be for the sake of innovation. It should be used to solve a customer problem. For example, most people don’t wake up thinking, ‘I need a large & midcap fund’. Products have to be repositioned as basic things solving problems and innovation can exist in standard categories.