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"There is no logic in the correlation between the NASDAQ and the local markets" - Views on News from Equitymaster
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  • May 25, 2000

    "There is no logic in the correlation between the NASDAQ and the local markets"

    Mr S. V. Prasad, President of Zurich Asset Management Company (India) Pvt. Ltd. has over 20 years experience across banking, investment banking and financial consultancy. He has played an instrumental role in setting up the Association of Merchant Bankers of India (AMBI) and Association of Mutual Funds in India (AMFI). Currently he is on the Regulation Committee of AMFI and is the Chairman of the AMFI Accounting and Valuation Committee.

    In an interview to personalfn.com, he spoke at length about the volatility in the stock markets and its impact on mutual funds. He also outlined Zurich India Mutual Fund's future strategy.

    PFN: What are your comments on the economic environment in the country?

    Mr. Prasad: I think the economic environment is pretty healthy. The government has done well on several fronts like privatization, reforms and the union budget. If we can combine this with our huge potential in providing software and back-office services, we will do well for ourselves.

    PFN: There are some concerns that inflation has caught on a little too early on the growth upturn. Do you think this could signal higher rates in future?

    Mr. Prasad: Considering we have seen double-digit inflation in the past its not very high. Moreover, the Reserve Bank of India (RBI), the Indian government and all other political parties take an interest in it, as inflation is a political issue. Now the Indian economy is a lot more open and as long as Foreign Institutional Investments (FIIs) and Foreign Direct Investment (FDI) inflows are good, inflation can be controlled.

    PFN: Where do you see the markets bottoming out?

    Mr. Prasad: I am not a great reader of markets as I don't track it on a day-to-day basis. More than the fundamental factors, we find the markets driven by moods. When the mood is upbeat, every bad news is forgotten. When the mood is subdued, even good news (like good corporate results) does not perk up the markets.

    But I am not really concerned about all that and I think post-May 31, we could see some correction in the markets with the phasing out of naked short-selling (short-selling without holding shares).

    PFN: What are your comments on the new correlation between NASDAQ and the local markets?

    Mr. Prasad: To me, the correlation does not make sense, there is no logic. On the NASDAQ you have companies like Cisco Systems, Microsoft, Intel and Infosys (among the top 30). So it's a pretty mixed bag. And so many people are talking about the NASDAQ, we talk about it, the Federal Reserve talks about it, the media talks about it, that the reality actually starts following a myth. All these companies (listed on NASDAQ) are totally different from Indian companies and so there can be no comparison. Apples can only be compared to apples. More and more people are saying that there is no umbilical cord between the two markets and hopefully this sentiment will overcome the current sentiment.

    PFN: What is your view on the Indian mutual fund industry?

    Mr. Prasad: The industry is doing very well, particularly private sector mutual funds. From approximately 6-7% last year, I think private funds have cornered close to 22% of the market in the current year. I think it's the convenience factor that has seen mutual funds becoming so popular. As an individual, if I had bought an Infosys or Satyam, I would have lost a great deal of my investment as compared to a mutual fund investor investing in a truly diversified mutual fund.

    A lot of investors bitten by the get-rich factor invested heavily in technology IPOs. Others invested in tech-overweight mutual funds and other so-called diversified funds with high exposure to tech stocks. These investors have now learnt their lesson the hard way. By no means am I running down tech stocks. I only want to stress the need for proper diversification of the portfolio. For instance, we have taken exposure to tech stocks in our growth funds keeping in mind the investment objective. We have been careful not to change the basic nature of the fund from a growth fund to a tech-heavy fund. This is where we have been different from others. When tech stocks were shooting up, people were saying we should come out with tech funds. But with the correction, people have witnessed how tech-heavy funds have performed over the past few months. When the time is right even we will come out with some sectoral funds.

    PFN: When everyone was launching sectoral funds, Zurich India launched a Sovereign Gilt Fund. What was the rationale behind the launch?

    Mr. Prasad: We had planned to launch the Gilt Fund much before December 1999 (when we had actually launched it). Actually the merger (with ITC Threadneedle) took longer than expected. So there was a lot of integration to be done at our end in terms of people, and other resources. Consequently the Gilt Fund launch was held up till about December 1999 when we finally came out with it. We didn't really take a conscious decision to launch a Gilt fund while others we launching sectoral funds, just to be different from the others.

    PFN: There is a perception in the mutual fund industry that the daily NAV system puts additional pressure on the fund manager, which at times prompts him to take investment decisions not always in favour of the investors. How far is this true?

    Mr. Prasad: I don't agree with this perception. Pressure on the fund manager comes from the philosophy of the fund. We never claim that our fund is the best performing fund day in and day out, which is impossible. We just claim to offer consistent returns and try to be in the top quartile of funds in that category. This reduces pressure on the fund manager considerably. Sometimes we may not make the top quartile due to a wrong call or an error of judgment, but investors aren't really disturbed with that. After all investors are looking for consistency in returns and capital preservation. When they don't get that, then they are really disturbed.

    PFN: Zurich India is perceived as being very conservative vis--vis its competitors in terms of marketing its products, new product launches. Any comments?

    Mr. Prasad: We don't believe in being flashy for the sake of being flashy. We will be innovative, but with a lot of solidity, which has been our pursuit all along. For instance, not many people know that Zurich India has declared dividends 12-13 times last year across its growth, balanced and liquidity funds. We plan to launch more products, but as I explained earlier, some of our plans had to take a backseat as we had the merger with ITC Threadneedle (in December 1999), which came at a time when the markets were booming. As far as our image is concerned, we are getting more visible and you must have seen our name appearing frequently in newspapers, hoardings.

    And we are getting decent inflows, not great inflows, but pretty decent. At least we are not getting outflows. And what is more important is the average size of your investor base for each fund, especially equity funds. In a falling market, if a large investor exits from the equity fund, it could have a significant impact on that fund. A bond fund can have a larger investor base, as the exit cost for a bond fund is considerably lower.

    We have approximately 120,000 investors across our schemes. For a mutual fund with a total corpus of over Rs 5 bn, I don't think that's such a bad number. I believe that there is huge market out there in the Rs 500-5,000 investment bracket. Our existing and future products will be directed at that market. With the Internet and other technological breakthroughs our communication cost has reduced significantly while at the same time enhancing our reach.

    We have always followed the philosophy of getting our homework done before launching our products, which could take a while and gives the impression that we are conservative. But we believe that it is better to under-promise and over-perform, than vice versa. Unfortunately we Indians tend to over-promise.

    PFN: How did the recent volatility in the markets affect your funds?

    Mr. Prasad: We weren't affected at all. Investors realised that our NAVs weren't falling as fast as the others, as we had diversified judiciously.

    PFN: A lot of mutual funds have taken exposure to unlisted companies, particularly tech-related. What is your view on this development?

    Mr. Prasad: I believe that if it is a sectoral fund where my investment objective and rationale was outlined at the beginning, then investing in unlisted companies makes sense. But in a general fund given the kind of markets we are witnessing, this could be a dicey situation. The fund could even face liquidity problems at the time of high redemptions.

    PFN: How does a fund value unlisted companies in its portfolio?

    Mr. Prasad: There is a formula suggested by SEBI. I think funds take the book value plus capitalised earnings and you provide a discount for the fact that the stock is not traded. The trustees of the fund have to certify that the valuation method followed by the fund is correct.

    PFN: Who are the three persons you admire the most?

    Mr. Prasad: I think I admire Narayanan Murthy the most. He has shown that one can be a decent human being and very good in the field of business at the same time. I admire Swami Vivekanand - he achieved success at a very young age. I have heard that he was so gifted that he could read an entire page just by glancing at it, rather than reading it line by line. Another person I admire is Sachin Tendulkar. He has done very well in life and yet has feet firmly planted on the ground.



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