Quantum Mutual Fund, sponsored by the Ajit Dayal founded Quantum Advisors, is a rebel. In an industry that’s dependent on distributors, this fund house has gone direct. It has bypassed the traditional distributors channel and is selling its mutual fund schemes to investors directly, says Ravi Samalad.
It is more than four years since the first scheme was launched in March 2006 and the fund house has paid a price for not aligning with distributors. It’s assets under management (AUM) were just Rs 119.47 crore (from 9,620 investor accounts) at the end of September 2010. Quantum was not able to ride the high growth the industry witnessed in 2006 and 2007.
The natural reaction from the industry then was that Quantum was ‘mad’ and will see an early death. When it announced its maiden fund ‘Quantum Long term Equity Fund’, a large distributor had told Ajit Dayal, Chairman of Quantum Asset Management, his mutual fund would die.
In Dayal’s words, the distributor had said: “It’s very nice of you to worry about investors’ interest but some of the largest fund houses in the industry are elephants and we make those elephants dance. You are an ant. You will die away and get trampled in this industry.”
Ajit still gets ‘hate mail’ from distributors. After these long years and recent sweeping regulatory changes by the Securities and Exchange Board of India (SEBI) in the last one year, Quantum is still around, though a tiny player amid public posturing that the fund house has no ambitions to shore up its coffers.
Dayal has been around in the financial services industry for two decades now and was among the pioneers in equity research in the country. He has also co-founded the popular www.equitymaster.com in 1996.
The thought of launching an AMC in India had struck Dayal way back in 1983 when he was studying in the US. From 1992 to 1995, Ajit and Quantum Information Services were partners in Jardine Fleming in India, one of the largest FIIs then in the country.
“There was nothing like an AMC at that time. SEBI was not in existence then. So there were no rules for AMCs. There were very few people who were actually managing money in India,” Dayal told Cafemutual in an interview.
Dayal then believed the mutual fund industry would explode once the government allowed private sector to set up mutual funds. But he could not launch one then as he didn’t have the capital to invest.
He was one of the people who helped write the original initial framework of what mutual fund regulations should look like. S A Dave, then Executive Director at Industrial Development Bank of India and four others who are now holding senior positions in SEBI, NSE and other institutions were the main people who helped draft mutual fund regulatory framework. That draft framework is now the law. The group led by Dave had sought Dayal’s help to draft mutual fund regulations.
SEBI Act was still to be enacted by the parliament. In an ironic twist of fate, when the rules were announced, the minimum net worth criteria was set at Rs 3 crore. “I definitely didn’t have Rs 3 crore,” said Dayal.
Dayal was part of the group that helped write the rules but someone had thrown in that one line on the minimum net worth requirement. This minimum net worth criteria is very unique to India, says Dayal. The minimum net worth requirement became Rs 5 crore and then Rs 10 crore.
“Somewhere down the line, we caught up and in 2004 we applied for a license and got approval in December 2005,” recalled Ajit.
After dreaming for fifteen years, Dayal finally saw Quantum Advisors (the sponsor of Quantum Mutual Fund) receiving a go ahead from SEBI to start Quantum Asset Management Company Pvt. Ltd. Quantum was the 29th mutual fund to be launched in India.
The idea of no entry load came when Quantum approached some large distributors to market its funds when it applied for a license with SEBI. The shock that he underwent during his interactions with large distributors had sown the seeds of a fund house that would skirt the distributors.
“They gave me a sheet of paper which had a table. The table had three columns. The first column was the size of AUM you wish to have. The second column was how long you wish to have that AUM. And the third column was about the commission the fund house would have had to pay for getting a certain level of AUM for a given period.”
Dayal and his colleagues found the demands of the distributors to be very strange. They asked the distributors why they were showing the chart to them. The response of the distributors was appalling.
The distributors wanted to know how much money Quantum would like to collect. Quantum was told that their expectations could be met but for a price dictated by the distributor. On top of that a guarantee that Quantum would get a minimum of Rs 5,000 crore for six months was offered.
Dayal says the distributors seemed to be unconcerned about investor needs, smug in their belief that they could decide what to do with the clients’ money. This set off a reaction that led to Quantum becoming a fund house selling its mutual fund schemes directly to the customer. Dayal had decided not to associate with the distribution channel.
Quantum does not have any problem paying commission to distributors but it wants to ensure that they disclose the commission they receive from various fund houses, said Dayal. “If you walk into a leading bank’s branch, there’s an A4 sheet put up on a board which says: Please note that the Bank gets commissions on distribution of various products from fund houses.”
It’s a nice disclosure but it’s a meaningless disclosure, according to Dayal. He expects the commission earned from the fund house to be stamped on the application form.
Quantum’s argument is if their form says 0.50 per cent commission and other fund house’s form is stamped 4 per cent commission stamped on it, the transparency will lead to a debate. “Obviously, these channels don’t want dialogue. They will stuff investors with paper they don’t deserve,” points out Dayal.
Dayal, however, admits that the role of intermediaries is essential as they are the crucial part of the mutual fund industry chain.
When Quantum launched its first scheme it announced that none of its schemes would have entry loads. It also announced that the fund house would not pay a single rupee as commission to distributors.
The industry at large was taken aback. People called the fund house ‘mad’ and thought Quantum was completely out of sync with the reality.
Jimmy Patel, CEO of Quantum, says the distribution channel is important but it’s not the only channel. “There are alternate channels available and we are the first fund house to adopt this channel.”
A few months back, a SEBI sub-committee recommended a hike in the net worth of AMCs to Rs 50 crore from Rs 10 crore at present. This requirement for a small fund house like Quantum is too high.
“This doesn’t make sense. A mutual fund is a complete pass-through vehicle. At no point in time your money, which you invest in mutual fund is lying in our bank account. It’s lying in unit holder’s name. We are merely the managers. So to say that we need to have Rs 50 crore net worth is not a logical idea.” The fund house sees this as a way to keep competition out.
Its first fund Quantum Long Term Equity Fund manages a tiny corpus of Rs 65.75 crore. The scheme charges the lowest expense ratio in the industry of 1.50 per cent among the equity funds.
Quantum is confident that ‘Quantum Long Term Equity Fund’, rated five stars by mutual funds tracking firm, Value Research would continue to do so. This scheme has given 19.93 per cent CAGR since inception as on November 21, 2010. It has so far launched six schemes and has no plans to launch any new funds.
It has always followed a ‘value’ approach in its fund management style. “As a philosophy and to be fair to the end customer, you have to be upfront on what style you are going to follow. If you don’t do that then you end up with a style which only tries to take advantage of short term movements which is not good for long-term portfolio construction,” observed I V Subramaniam, CEO & CIO, Quantum Advisors.
Quantum Mutual Fund believes fund management is all about understanding investment philosophy and not about marketing and branding.
Quantum has been quite aggressive on online advertising to reach its target investors. The fund house reported a net profit of Rs 3.46 crore in the year ended June 2010.
Quantum’s mandate to its sales head and marketing officials does not include any targets. “The only time we have a target is when our CFO has to prepare a budget for the next 12 months,” said Dayal.
