16th January 2012

WF: Congratulations on your elevation to the top job at J.P. Morgan Asset Management. You have joined an illustrious league of CEO's (right from the times of Ravi Mehrotra to present day Bala, Sandesh, Rajiv Anand and Suresh Soni) who have ascended to the CEO job using the same route as you - debt fund manager to CIO to CEO. What do you believe makes this career path so successful in our industry?

Nandkumar: Thanks Vijay. I think when one deals with fixed income particularly; there is zero tolerance to losing money on this side of the business unlike equity which is marked to market. As fixed income fund managers or analysts, we scrutinize the company's balance sheet, cash flows, management quality and other parameters very closely as there is zero margin for error. Understanding business fundamentals is something we imbibe from such practical experience and insights.

Secondly, as fixed income managers, we work very closely with the business side of the asset management company and we interact very frequently with large investors. In fact, large treasuries will not invest with you unless they speak to the fund managers. This gives us very good hands-on experience with the business side of an AMC. I think a combination of both these factors perhaps puts us in a good position to manage a CEO profile. I am happy to have joined this illustrious club.

WF: We had a very challenging market scenario as far as equity is concerned in 2011. And perhaps, somewhat disappointing first 10-11 months for fixed income barring December where we saw a nice little rally. What is your market outlook on equity and fixed income for 2012?

Nandkumar: Addressing the fixed income side first, I think its going to be a year of bond funds particularly, short term bond funds. This year, there will be rate cuts for sure. But along the way RBI and the market participants will have to contend with the fact that oil was at around $100 and rupee was at 44 not so long ago and today, oil is at $105-110, and rupee is trading around 52. Fiscal deficit at 5.5% will continue to remain a challenge in the current year as well as in the next year. The fact that the economy is slowing down is a certainty and there will be support from RBI to manage the interest rate levels in the economy. So I believe that market yields will be much lower but one will have to take little bumps in their stride as we move forward.

On the equity front, we know that policy paralysis is probably the biggest negative. Domestic Asset Management companies and FIIs both have been negative on flows. The brighter fact is that if $47 billion came into the market in 2009 and 2010, the outflow in 2011 has been $500-700 million only, which means a large part of the money that came into India has stayed back. Having said that there will have to be a definite improvement on the part of government in the form of policy decisions. Compared to 2008, the challenges of the current year are slightly different. Since the entire market is negative on news flows at this point of time, anything marginally encouraging could be seen as hugely positive. If we look at some of the bluest of the blue chip companies and the amount of cash they hold on their balance sheet, I think valuations from a historical perspective are looking extremely attractive. So what the market needs is some positive news flow and we will definitely see an improvement.

Overall, I believe 2012 will be a good year for fixed income and as interest rate cuts materialize and that's translated to corporate India, six months from here down the road, it could be good for equity as well.

WF: One of the themes that JP Morgan in India has been advocating very strongly over the years has been about international diversification and you have also introduced some offshore products last year to augment the range that you had already built earlier. Do you think the events of last year; especially the weakness on the domestic front further strengthens the case of international diversification?

Nandkumar: Absolutely. We have been maintaining this over the course of last three years when we started introducing international funds into India. We have some of good performing large international funds. Unfortunately, India has this habit of under delivering on its potential. Over the course of last twenty years, we always maintain the growth potential for India to be in the range of 9 and 10%. But, barring a superlative 2004-2007 period, we have rarely achieved our potential as a country. As domestic investors, deep inside, we firmly believe that India and China will grow much faster than any other economy in the world. But because of our habit to under deliver, it is not necessary that India as a market will always outperform under all market conditions. That is where international diversification of Indian investors' portfolios makes a lot of sense. This is what we have been saying for the last 3 years. If you see the ASEAN fund we launched last year and the Greater China fund that we launched in India a couple of years ago, both have significantly outperformed domestic Indian equity funds. We are planning to enhance our bouquet of international funds this year too.

WF: So what are the kinds of the products that are in the pipeline?

Nandkumar: At this point of time, we are looking at the commodities space and also an America fund. As the US economy starts doing better, Indian investors should find this theme appealing.

WF: On the domestic front, we have seen very poor inflows into equity in 2011. But the further worry is that whatever little money that is coming in seems to be getting more and more concentrated into few AMC's. What is your own experience last year and how do you see this trend playing out this year?

Nandkumar: Well, it is a fact that flows are getting concentrated into few AMCs and I think this is due to the perception that there is safety in numbers. Few of these AMCs have a good long term performance track record of their funds for 5 years, 7 years and 10 years. They are excellent brands and there is size available. So in a volatile market, flows tend to be concentrated with them due to the perception of safety that all of these factors connote in the mind of a retail investor.

However, my take on this is slightly different. I think if you have strong performance, a reasonable 3-5 year track record, if your team is consistent, processes are good and the brand is strong then you can definitely make a dent in the incremental cash flows and increase your market share. We have demonstrated that very clearly in the December quarter when the industry has shrunk by 30,000 crores but we have grown the highest, both in absolute terms and in percentage terms - we have grown by 2,000 crores and approximately 42% in the quarter.

WF: AMC profitability is under severe pressure and near term prospects do not look encouraging. We all know that an India MF business is supposed to be a good ten year story, but for the next three years how do you see the whole industry panning out?

Nandkumar: Let me deal with our AMC first. In these times of strained profitability, every penny that we spend has to be profitable within a reasonable period of time. From the investors' perspective, we would look to demonstrate that our performance is consistent over a period of time. And from the distributors' perspective and an AMC's perspective, I would want both of us to grow profitably. The mandate I am looking at least for myself is that I will look for equal partnership between investors, distributors and Asset Management Company. I would let go of business which is a loss making proposition. We are not an AMC for sale, we are big internationally. I would rather grow my business systematically in the domestic market than chase unprofitable short term AuM.

As far as the industry is concerned, business models cannot be based solely on commercial deals. There needs to be recognition for your brand, your processes and your quality. If it is only near term commercials that drive the business, AMC promoters will be increasingly unwilling to be patient beyond the first 2-3 years of incubation period. Sooner the industry learns to change its style of functioning, it will be better for all of us. The industry has to grow on a sustainable basis; otherwise this itself will force a consolidation.

WF: On the other side of the spectrum, the distribution business is having its own share of stresses and seems to be in the cross roads in terms of revenue models largely because of regulatory intervention. We also had newspaper reports that upfront commissions maybe banned. What in your view is the sustainable revenue model that distributors can hope to build over the next few years?

Nandkumar: The challenges continue, but the way to look forward to it is there will have to be an equal partnership and all the partners in the business need to grow profitably. All the change that is happening is pro investors. We will all need to understand that there has to be reasonableness in all commercial activities. Where there was something unreasonable, the regulator stepped in. It is best that the industry adopts a reasonable win-win-win approach between AMC, distributor and investor to ensure we don't get the regulator to step in and do what we can achieve ourselves.

WF: What are JP Morgan AMC's plans for 2012?

Nandkumar: Well, we are certainly pushing our fixed income products very aggressively, particularly our short term bond funds. Their performance has been very strong and we have collected very strong flows from the retail market into those funds. We are looking to push our active bond fund in line with out expectations that rate cuts will materialize over the course of next one year. The money market space remains our bread and butter. In the equity space, we are looking at launching a 'concentrated portfolio' type of fund which will be a concentrated investment in the best investment ideas which we have.

Apart from that we have a couple of International fund ideas. We are predominantly looking at the SIP route on the equity side and not at lump sum business at this point of time because that is not remunerative for us. At an appropriate time, we will look at promoting lump sum business into our equity funds.

WF: What are your key messages to your distribution partners for 2012?

Nandkumar: I would like to wish my distribution partners the best for 2012 and would like to reiterate to my distribution partners that in terms of transparency and cost to investors, the mutual fund product continues to be the best avenue for their clients. I look forward to work together on a mutually beneficial and profitable relationship to ensure that together, we deliver good long term returns and a satisfying experience to our investors.

Disclaimer: The views / opinions expressed herein are the personal views / opinions of the interviewee and are for informational purposes only. JPMorgan Asset Management India Private Limited, nor any person connected with it, accepts any liability arising from the use of this information. These should not be construed as an investment advice. Please consult your financial advisor before investing

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