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Corporate Report

Published on: Oct. 8, 2023, 4:06 p.m.
ICICI Pru MF explores new frontiers
  • Shah: guided by the triangle of trust; Pix: Sanjay Borade

By Daksesh Parikh. Executive Editor, Business India

Can bankers make good mutual fund leaders? Bankers are tuned to look backward and focus on the risks before building debt assets. Mutual funds, on the other hand, particularly equity funds, have to continuously look ahead and take a call on future trends before investing. They are risk-takers as opposed to bankers who are risk mitigators. The debate over whether a banker will ever become a good mutual fund house leader can go endlessly, without arriving at any conclusion. There are of course some exceptions. 

Nimesh Shah, 53, CEO and MD of ICICI Prudential Asset Management Company, is a banker turned fund house leader. He was with the erstwhile ICICI, development financial institution which was later merged with ICICI Bank. A CA with the ICICI group for nearly 10 years, Shah had worked in various divisions: corporate finance, international banking and project finance of ICICI and ICICI Bank, before taking over as CEO and MD at ICICI MF.

Leading the firm for the last 16 years, Shah would easily get a A+ if ever the rating agencies expanded their services for rating CEOs’ and MDs’ performances over a one-year, three-year or five-year period and since inception! Another two plusses would be added if it became the numero uno/most profitable fund house. 

Size is certainly one aspect considered by rating agencies. The total assets managed by the fund and its growth trajectory are important factors. In December 2013, when Business India did a story on ICICI Pru MF the fund house had reached a milestone of Rs1 lakh crore, up from ₹36,000 crore 6 years earlier, when Shah took charge. At that time ICICI Pru MF, ranked fourth in the industry, based on total AUM, trailing behind HDFC MF and Reliance ADAG MF (now Nippon). 

A little over a decade later, in July 2023, ICICI Pru is ranked second in terms of AUM, (see chart) behind SBI Funds which has made a dramatic turnaround in the last 10 years to emerge as the number one fund house, ranked by size. Incidentally the top 3 fund houses, SBI, ICICI and HDFC all have strong bank parentage.

A strong brand does make a difference. Nippon and Aditya Birla Sunlife are two large fund houses which do not have an Indian bank as a promoter. UTI has five leading banks as major shareholders. Newer players like Jio Finance, Bajaj group and Groww are expected to enter the industry and grow it still further.  

The investment environment in India has been favourable for several years, and is reflected in the mutual fund industry’s AUM growth from Rs7.61 lakh crore in 2013 to Rs46.63 lakh crore currently – a growth of more than 6x. One of the significant factors driving the shift from banks has been the decline in savings bank interest rates.

The MF AUM as a percentage of total bank deposits, has steadily increased. In 2013, MF’s AUM accounted for 10.2 per cent, more than doubling to 23.2 per cent by July 2023.

  • Naren: 'we are moderately bullish'

Rising SIPs

More important than the growing shift in the preference to MF is the sustainability of growth. Many salaried youngsters have started committing funds to investments at a much earlier date than their parents. This is evident in the overall growth of Systemic Investment plans or SIPs as they are popularly known. The total monthly SIPs in July 2023 amounted to Rs15,245 crore. In other words, the annual domestic investments in the country, if the pace of SIPs continue, will be over Rs2 lakh crore by July 2024, much higher than the net investments of FPIs.

Many new investors who started investing during the turbulent Covid period have chosen to invest directly in the markets through FinTechs. What is more noteworthy is that incremental funds have been coming from smaller towns, not just from the metros. The new age investors have so far been unruffled by market volatility and continue to stay committed to SIPs despite the swings in the markets.

However, there has been no major trend reversal witnessed in the stock markets. Chances are, however, that despite reversals, these investors will continue to remain invested.

It is not just the AUM but also the quality of AUM that is considered for ranking. The number of retail investors and the proportion of equity funds to debt are also taken into account. In the case of ICICI MF, retail customers form the bulk of the customer base. The number of customers, at 89.26 lakh, forms 99.61 per cent of the total customer base.

Corporate clients, as of 31 August, accounted for just 34,812 clients. What is more relevant is that the AUM is largely tilted towards equity. The equity funds, as a percentage of total AUM, are 53.9 per cent. Debt is 13.5 per cent, while passive funds account for a little under 10 per cent. Fund of Funds and other funds account for the balance. 

Nimesh Shah is not overtly happy about chasing AUM. “I am happy that my 88 lakh customers have a good experience and have got better returns on their investments compared to traditional investments with the banks.” Shah points out that most of his funds are in the top two quartiles. A study done by the independent research house, Value Research, has given a five-star rating to 57 per cent of the equity and hybrid funds of ICICI Pru. This is the highest amongst all fund houses. HDFC has 42 per cent and SBI 16 per cent.

However, HDFC has a higher amount of AUM in the four-star rating. 91 per cent of the total AUM of ICICI Pru has a five-star and four-star rating. HDFC has 86 per cent, while Nippon has 58 and SBI 43 per cent.

ICICI Pru has been focused on performance for years. In 2013, talking to Business India, Shah had pointed out: “Investor centricity and investment centricity are the two main pivots (which we are focusing on).” This strategy is still being followed diligently across the funds. Says Shah: “ICICI Pru will continue to be guided by the triangle of trust. The three apex points of the triangle will be: customer first; profitable growth and low risk to the brand and shareholders.” This implies that the growth in market share is not at the cost of lower margins. The fund house, in fact, has the highest operating margins with a return on equity at 80 per cent in the quarter ended 23 June.

  • Anand Shah: AIFs help us offer customised products

    Anand Shah: AIFs help us offer customised products

Dedicated team

ICICI Pru is fortunate to have a very good dedicated top-tier leadership team, many of whom have been with the fund house for at least 10 years. Sankaran Naren, IIT (Madras) IIM-C, is a well-respected veteran in the industry. Naren has been with ICICI Pru for the last two decades. Starting as a fund manager in 2004, Naren has been with the fund since then, first as a fund manager and later as the CIO since 2011. Naren leads a team of 200 analysts.

Having seen a few cycles in the markets, Naren says: “We are moderately bullish, not extraordinarily bullish at this point in time.” This, despite admitting that India has done quite well compared to other markets. The challenge currently, according to him, is managing too much money and high investor expectations. Naren adds: “Many of the new-age investors have not seen a downturn, and the realisation has to seep in that markets cannot remain perpetually in bullish mode.”

Having witnessed the evolution of the mutual fund industry for two decades, Naren explains that investors today are spoiled for choice. They have a lot of products to suit their temperament, and the regulatory environment has made it far easier and safer to invest. Liquidity will be even better with technology allowing same-day settlement of trades as mooted by SEBI.

Many fund houses have seen the growing requirement for passive funds. ICICI MF has the highest number of index funds and ETFs. The portfolio comprises 29 ETFs across categories like commodity, debt, market cap-based, thematic, and smart beta ETFs.

Every fund house has its own set of regulations governing fund deployment. ICICI Pru has a predefined set of around 470 companies that are well-researched and approved. Fund managers have the freedom to buy or sell shares, but they have to adhere to this set. If they feel a new company should be added, they have to convince the investment committee of its value. Small caps and midcaps also have to strictly adhere to the objectives of each scheme. Unlike some other funds, ICICI Pru does not believe in the creation of star fund managers or celebrity managers.

Risk management

Risk Management is also taken very seriously and not limited to just ticking the boxes. The AMC’s Board outlines the fund’s risk appetite, and the investment management team must operate within these defined parameters. A dedicated risk management team oversees risks at both the fund house and scheme levels. “We utilise a blend of quantitative analysis and qualitative assessment for risk assessment and monitoring,” states Amit Bhosale, Head of Risk Management.

With 25 years of experience, Amit, a former banker with ICICI Ltd, has managed risks at Tata Motors and Bajaj before joining the mutual fund in 2014. His team of nearly 32 individuals meticulously assesses investment risks, operational risks, and controls. While total risk elimination isn’t feasible, the challenge lies in managing risks aligned with the fund’s philosophy and individual scheme mandates.

  • Daga: we offer credit to borrowers

    Daga: we offer credit to borrowers

According to Bhosale, risk management professionals are like midfield players in a football team. “They need to be strong in attack, ensuring proper passes to the forwards, and equally resilient in defence when under attack. They operate silently, rarely in the spotlight.” In debt funds, the mix of time liabilities and payment tenures is crucial.

All investment decisions undergo a rigorous five-tier approval process, and are reported directly to the MD and CIO. The research team monitors scheme portfolios against respective benchmarks and indicative fair values over 1 year and 4 years.

PMS and AIFs

“HNIs and other large investors have different aspirations from regular retail investors. Alternate Investment Funds (AIFs) allow us to cater to these investors by offering customised products,” says Anand Shah, one of the few lateral hires in ICICI Pru MF. Typically, top-tier leadership teams are formed through in-house promotions.

Researchers have the opportunity to progress to Senior Analyst, fund house manager, and beyond. Anand, an MBA from IIM-Lucknow, has previously worked with several leading fund houses including Kotak, ABN Amro, Canara Robeco, and BNP. He currently serves as the Head of PMS and AIF (Alternate Investment Funds).

The PMS division, founded in 2000, offers a variety of investment opportunities across core and thematic sectors, including PMS Value, Large Cap, PIPE fund, Long-Short fund, Infra fund, Growth Leaders strategy, Wellness fund, Flexicap Fund, and Equity Opportunities Fund. Anand Shah’s expertise has resulted in appreciable returns for some PMS schemes.

The Contra Strategy, for example, has yielded returns of nearly 44 per cent over the last year, 19 per cent over the last 2 years, and 32 per cent over the last 3 years. Contra Funds have also performed well.

Private credit AIFs has also been added to the suite of AIF products. With the overall growth amongst MSMEs and the corporate sector, the demand for credit has gone up significantly. This has seen the growth of AIFs with investors seeking risk-adjusted returns. These AIFs can tailor their investment strategies based on the risk appetite, duration preferences, and sector specific expertise.

  • None

This flexibility, (compared to most other investment instruments be they debt or equity) allows AIFs to capitalise on various market segments and enhance their risk-adjusted returns. “We typically offer credit to borrowers who can technically get funds from banks, but are unable to do so. Borrowers typically have to be investment grade and the typical tenure is 4.5 years,” says Sekhar Daga, Head, Private Capital. ICICI Pru also has a real estate AIF.

With the overall rise in wealth across investors, there is a continuous demand for newer and newer products. Manufacturers of products who keep in mind the growing aspirations will succeed. As of now ICICI Pru has demonstrated its ability to come out with newer products. Besides widening its array of products, non-traditional mutual fund products allow fund houses to build diverse income streams. 

With newer players, all adept at managing finance, entering the mutual fund industry, competition is bound to go up. And building newer products and income streams will give the existing players a first mover’s advantage, till others catch up. Just to maintain its second rank in the industry ICICI Pru has to grow faster than others.

While listing of the fund house could probably provide funds for faster growth, as of now ICICI Pru is not inclined to go public. ICICI Bank and Prudential, the two shareholders, are content to remain unlisted. The Top Two fund houses, SBI and ICICI Pru, are the only two unlisted ones amongst the top 5. The banker turned fund house leader, Nimesh Shah, is in no hurry to request his board to push for listing.

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