Archive for August 10th, 2007

Indian Mutual Fund Industry’s outsider

August 10, 2007

I came across this story in ET of Ajit Dayal, Director of Quantum Mutual Fund, India. I knew that Quantum does not give the distributors any money and markets its MFs by word of mouth and distributes mostly by internet. What I didn’t know was the reason.

Most MFs pay huge monies to distributors for increasing former’s assets under management. So much so, that last year distributors made more money than AMCs (Asset Management Companies) themseleves.

Here is Ajit Dayal’s story:

The story behind Quantum Mutual goes back to late 2005, when after getting permission from Sebi to start his own AMC, Ajit Dayal met several distributors to create awareness about his funds. But he was shocked to see them put forth ‘a pricing sheet’. For 6% commission, you’ll get Rs 6,000 crore, for 5%, Rs 500 crore and so on, distributors told him. “Without bothering to check whether a product is suitable for investors, they came up with a sliding fee structure,” reminisces Mr Dayal, who is one of the first stock analysts and investment managers of the post 1991 era. “But who is going to pay for all this?” he asked them.

The last straw came when Mr Dayal went to a senior broker and asked him to recommend his funds to investors, but refused to pay him the hefty commission that he demanded. “We make elephants in the industry dance to our tune, you are just an ant,” thundered the broker. The decision was made. 

He has taken this agenda of selling Mutual Funds to people with as low cost as possible and has some useful articles on its website on how distribution costs can lower returns . 

How about the performance?

The AMC just has 2 funds one equity and one liquid.

Equity fund is called Quantum Long Term Equity which was launched in Feb-06. As per Valueresearch, the AUM is just about Rs 37 crores (Rs 370 million) compared to giants like HDFC Equity which is at about Rs 4600 cr. It ranks 139th in AUM size out of a list of 167 equity schemes.

In terms of returns, it has given around 30% in last one year compared to JM basic which has given 70%+. It ranks 131 in 161 schemes. The numbers for other tests like Sharpe Ratio, Alpha are not calculated as it is just about an year old. 
So performance of the quantum equity fund has to be spruced up as it lacks behind its peers by a huge %. It may have lower costs but can only be recommended if it produces returns higher net of costs. Other funds may have higher costs but produce higher returns as well.

But still, a great initiative and as it is only one year old, only time will tell how well Quantum fares in its objective.

I have a suggestion which could lower further costs. The equity fund still has high expense ratio = 2.5% which is just like its peers. It has its office in Nariman Point, the area which has the highest commercial rent and is one of the costliest in the world. It could do with an office at a less costly place in Mumbai.

Assorted Links

August 10, 2007

1. Percy Mistry responds to all the comments on MIFC (Mumbai International Financial Centre). It was a series of 6 articles in BS which Ajay Shah has compiled in his blog.

2. New economics points out to The economics of pre-school.

3. European Central Bank added about USD 130 bn into the system to calm down markets as participants scramble for liquidity. Fed too entered the market twice to inject Cash. Read insightsfrom WSJ Blog.

4. Finance Prof has nice collectionof articles on BNP Paribas scare y’day.

5. BS points to 2 academic papers which look like a good read. First by TCA on US Supreme Court and second by Bloomberg on Fed which says Fed is less transparent that its peers.

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