22nd April 2011

WF :The mutual fund industry is having to virtually reinvent itself due to the wide ranging changes in the rules of the game that the regulator has made in the last couple of years. What are some of the key initiatives that you have taken to help ICICI Pru AMC navigate these changing times?

Nimesh :Over the last 3 years we all had to adjust to stock markets halving in a matter of 9 months and then bouncing back. Investors who had invested say Rs 100 in 2007 would have found the value at Rs 50 in a matter of 18 months and then in the next 18 months, the value came back to Rs 100. It was natural for worried investors to bolt for the door and I was not surprised with the huge redemptions. I'd say a double whammy because pricing related regulation changed exactly in the middle of this stock market behavior and somewhere the "non-serious" distributors left a large number of investors unattended exactly when they needed handholding. We did hundreds of road shows across the country directly and with distributors to have a frank and open dialogue with investors.

The entire experience was painful but I must say it was much needed. We ourselves have learnt a few things about the kind of distribution we should have. Also we have realized that while there is change, it is our job as manufacturer to ensure that our distribution is "healthy" and "fighting-fit". To come to your question, apart from the area of Investor and Distributor Communication, we have made major changes in Distribution and in Product Management.

On the Distribution front we have definitely become choosy who we want to work with. Secondly we have taken it upon ourselves to train, mentor and coach some of our serious distributors so that they can take their offering to a level where they are seen as advisors in true spirit and they can rightfully charge a fee to investors for services rendered. Through this period we realised that we may make a little less profit as an AMC but we will ensure that being in this business is worthwhile for our distributors and they are seen through this period smoothly so that they can build a healthy vision of the future. If we become profit conscious at the "wrong" time, we may make a lot more money for our AMC but we will ensure that distribution loses interest. That is a long term loss for the industry and for the business. To put it concisely, we have become liberal in our ability to invest in the business and on building relationships.

I hope our partners appreciate this and look at us in a differentiated manner for this stance. One thing is very clear - Mutual Funds are advised by intermediaries, they are not bought off a super market shelf because of performance or star fund managers or glitzy marketing. We are absolutely aligned to our distribution.

On the Product front I am happy we have made far reaching changes not only to the bouquet but also to the management. We want to be "An Advisors' Dream AMC". In order to be able to achieve that we have worked towards having a product range that is well positioned and can be clearly slotted into investors' portfolios. I believe a lot of MF products today are not well positioned and are managed just to deliver performance. We believe that we should "Say what we do, Do what we say". This is consistency. Consistency is not just giving returns - there has to be a method in the madness. Otherwise all performance is one man's individual brilliance, it is neither scalable nor sustainable. Also, having perfectly slotted and well positioned products, makes life easier for our fund managers. They know exactly what is expected, what they can do and what they can not, the boundaries are clearly marked. There is limited scope for surprises and no need for explanation on hind sight about "which call went wrong"!!! As you will appreciate even in Bollywood nowadays one sees that character artistes are being appreciated more than mega-stars, I believe that is because of well defined roles, expected delivery and limited room for surprise.

WF :How do you see the fund management business evolving over the next 5 years and what are some of the steps you are taking to ensure a leadership position for your AMC in this scenario?

Nimesh :Performance and consistency of performance coupled with range of products to meet all advisors' needs are the key to this business. On scaling our investments capabilities we have done the hard work over last 3 years and I think in Naren, Chaitanya and their teams we have a winning combination. This is amply reflected in the performance numbers, the increasing market share, improving distribution relationships and the awards and accolades that we have been winning.

In the past, AMCs had this retail vision of having some1000 branches, 5000 sales staff and lakhs of agents etc. Now its clear this is the job of the distributor. We will still have a large scale retail vision, but it will be achieved by delivering well performing, well positioned products efficiently to our distributors who in turn will deploy advisors on the ground. We are moving towards being an efficient and expert Investment Management and Investment Marketing company, rather than being a Sales machine that churns out products with glitzy advertising. The last 2 product launches RSF and MIP-5 from our side have been soft launches, where we are talking to advisors, getting money gradually and building the investment portfolio. This is deliberate.

WF :How do you see distribution channels evolving over the next 5 years and what are some of the significant initiatives that you are taking to deepen your engagement with these channels?

Nimesh :I think some of this is answered in the previous 2 questions. Advisors who are qualified in their own right or Distributors that are focused on advise on their own or have the capability to deploy well trained advisors on ground, who can offer a wider product range to investors and back it with top quality service delivery are the ones who will drive the business. Investors have given the thumbs up to MF as the preferred vehicle over the last 3 years, that's very clear if one sees equity sales, SIP registrations, retail fixed income, any such indicators. But distribution has shrunk in size. If the channel points have shrunk and business volumes have actually gone up, its evident that people who have adjusted to the new environment have gained saliency in the business.

WF :What are some of the changes you are ringing in to the fund management side of your AMC to align it with changing times and maintain a robust competitive position in the market?

Nimesh :One of the lesser known facts about ICICI Prudential AMC is that we advise a larger corpus off-shore than the amount of MF money that we manage onshore. While our market has matured in the last 3 years of turmoil, I have experienced that international investors are a bit more focused on purity of product positioning, process orientation etc. That coupled with our parentage has given us a good grounding. This is why we are working towards having a pure product range. As I explained earlier Fund Management becomes more efficient if parameters of expectation are well defined and what's more advisors can also advise better if they know what to expect from a fund. So Focused BlueChip as a large cap fund will only have a universe of top 100 stocks by market cap, will pick 20 best ideas from this universe and will not participate in small and mid caps under any circumstances. Discovery will be a value fund with minimum 55% small and mid cap, its average P/E should be at discount to Nifty average and it should under-perform in momentum driven markets.

On the process front, I believe we have always been fairly process oriented. We follow a model portfolio based approach where analysts give inputs to fund managers build model portfolios and review them once a month. Fund Managers manage schemes based on these inputs. Analysts are measured for the documented advise that they give Fund Managers which is captured in the systems and Fund Managers are measured for performance vis-a-vis benchmarks and relevant peers. This ensures a clear team-based approach rather than a "star fund manager" approach and is more scalable and sustainable.

We have always had saliency in fixed income fund management but I am happy to share with you that on the equity side of the business we are finding more coverage of our products on our distributors' recommendations and our market shares are on a steady rise.

WF :The regulator seems to be very keen on product rationalisation and simplicity in mutual funds. Does this restrict product innovation ? Are complex products best left to the PMS field and should mutual funds be focussed on plain vanilla offerings for retail investors? What is your product strategy?

Nimesh :We are all for product rationalization, it is a must for us if we have to implement the above product strategy in entirety and become an advisors' dream. We have taken some genuinely big "calls" if I may say so by proposing merger of Fusion 1, Equity Opportunities and Fusion 3 into Dynamic Plan effective May 13, 2011. We have few more on the anvil. In fact product rationalization will create space for genuine innovation, there will be clarity and differentiation or genuine ideation is a must.

PMS is disadvantaged on cost and taxation. And hence we have done a recent overhaul whereby now on PMS we do not do strategies which a MF can more efficiently execute. PMS is best suited to themes, small caps or the long only absolute return ideas.

WF :The fund industry has not really achieved any significant levels of retail penetration in the 15 years since it was opened up to private sector participation - at least in the context of the vast opportunity. What needs to be done to make a material difference in penetration levels over the next 5 years?

Nimesh :When I see SIP registrations and retail fixed income I do see expansion happening. I think promoting fixed income in retail space is key, we have tried to do this with our Regular Savings Fund. All said and done sometimes we flog ourselves a bit too much on penetration, lets accept that our products are slightly complicated compared to traditional products, we have a legacy of traditional products that are very simple and gave returns without perceived risks. The regulatory changes are in the right direction because they have made each one's role a bit more clearer and I am confident we are on the path to expansion.

Secondly "Investor Education" needs to be well directed - it needs to be in the realms of "making the need to invest felt by investors" and "telling investors what to do and how to do it". I feel that a lot of times our "Investor Education" attempts are comparable to a situation where a patient goes to the doctor and instead of giving basic information and treatment, the doctor opens Grey's Anatomy and starts giving insights into how the kidney actually functions. I am sure that patient will never return though I am certain the doctor was not of bad intent.

WF :We begin a new financial year today : how has the year 2010-11 been for your AMC and what are plans for 2011-12?

Nimesh :We have single point agenda, we want to be a preferred partner for all our distributors. We want to ensure that we operate in the best interest of our investors. If we can achieve this, numbers will all fall in place automatically.

WF :Sales momentum seems to be gradually coming back in the industry : is it fair to say that the worst is perhaps behind us and that we can look forward to a better business environment going forward?

Nimesh :I am convinced about this. I have covered a lot of ground meeting distributors over the past few months and so has my senior sales team. I have even been to IFA conferences recently, and people who I respect and people who I believe know a thing or two about this business are all telling me that we are back in the game. Investors in any case have given a thumbs up and in all fairness when one compares to the stock market behavior funds and fund managers have done a good job.

WF :What are your key messages to your distribution partners as we begin a new financial year?

At an AMC level my message to distribution is to treat ICICI Prudential AMC on merit, judge us on our performance numbers objectively in every category, our pricing competitiveness not only commercially but as a supportive AMC, our service and our positive attitude. Give us our fair share and some recognition to our people.

We are open minded people, we have mastered the art of listening, we love to say "Yes", and we have a positive attitude to top it of.

At an industry level, in the last few years the industry always told investors simplistically that if you want to invest in stock markets equity mutual fund is the best route, and within that SIP is the best mode. We have come out flying colors on both counts through the worst turmoil. Lets reach out to more and more investors, this is a time to go all out and capture new ground. This phase of stock market consolidation where market does not seem to be doing anything dramatic and all report cards are looking good; is ideal for us to increase participation.