In this second and concluding part of the interview, Pankaj Sharma, EVP – Head of Business Development and Risk Management at DSP BlackRock Investment Managers shares his thoughts on risks involved in various fund categories.
How should distributors/investors take an informed call by evaluating risk processes of an AMC before investing in a fund?
It is difficult for an investor or distributor to have access to an AMC’s risk management process. Perhaps the best way is to ask the AMC to give details on their investment and risk management process as well as the teams supporting these functions. Normally this information is provided by AMCs for due diligence done by large investors and/or distribution houses. Some investors may find this document a bit technical but if one needs to know more about how money management is done, perhaps this is the only way.
I also believe that investors should not look at the past six months or one year returns. They should look at the consistency of the performance for a period of at least three years. They should evaluate a fund’s performance under different market cycles. There could be bad patches and a fund may not be able to perform consistently all the time.
How should investors evaluate fixed income products?
The retail investor’s participation in fixed income funds is very low but it’s increasing. People are still looking at returns in fixed income products. They are not looking at the credit quality and associated risks of the portfolio. They should see if the fund manager is taking undue risks. For this, investors can look at third-party rating agencies’ outlook on a particular sector and company.
How has the MF industry’s risk management process evolved over the years?
In the early days of the MF industry in India, there were only compliance teams and there were very few people from a pure investment risk management background. Compliance teams were given the responsibility of managing risk. It is only now that the industry has built an active risk management function.
DSP BlackRock has had an independent risk function for the last ten years. It has evolved in the same direction that senior management had envisaged. We wanted an independent risk management function that can objectively assess risk. We have also established very good integration with BlackRock’s Risk Management team so that we could emulate their risk management practices. Our portfolio goes through the same scrutiny which any international portfolio of BlackRock goes through in other parts of the world.
How do you mitigate risk in a sector fund?
The returns of sector funds are linked to the performance of a single sector and hence may be more volatile than a more diversified portfolio of equities. We have only one pure sector fund which is DSP BlackRock Technology.com Fund, which invests in telecommunication, media and technology sectors.
Whether the fund is a diversified or a sector specific fund, we follow the same disciplined investment approach and risk management philosophy whereby every position is acquired after a thorough understanding of the business. Risks related to factors like market risk, style risk, top risk exposures etc are monitored at a portfolio level similar to other diversified equity funds.
Which new overseas funds are in the pipeline? Do you find that Indian investors’ appetite for such funds is very low?
Our endeavour is to provide various investment opportunities to Indian investors. It is up to the investors and their advisors to select the appropriate product depending upon their risk appetite and return expectations from such a product. BlackRock is the world’s largest asset manager offering access to an array of international products & investment themes and we provide that access through international feeder funds to Indian investors so that they can achieve desired diversification in their investment portfolios. We will continue to offer international products as and when we feel the time is right for the relevant product.
Are you planning an Infrastructure Debt Fund (IDF)?
We are not planning it as of now. IDFs are close ended products. Liquidity is an issue. Domestic investors are unlikely to invest in IDFs when they have an option to invest in open-ended funds. Liquidity has become an important factor for international investors after the 2008 financial crisis. They might not want to redeem but they may want an option to exit. IDFs in the current form are not likely to generate much enthusiasm among investors due to this perceived lack of liquidity.
Small & Mid Cap Funds are perceived to have greater risks as compared to large cap funds. What is your investment philosophy in both (Small and Mid-Cap Fund and Micro Cap Fund). How do you play the risk return trade off?
Small and mid-cap companies give good returns as they grow and mature. If it’s a mid-cap fund then it has to behave like a mid-cap fund. When investors are investing in these funds they are taking that risk. DSPBR Small & Mid Cap fund and DSPBR Micro Cap Fund are doing well in their category. We tend to diversify the portfolio as much as possible. These funds may be more volatile than large cap funds, but they can give good returns over the long run if investors are willing to take additional risk and remain invested over the medium to long term. Our internal guidelines ensure that the funds do not deviate from their investment objectives.
