insights

Penned by the CEO

"Trust must be built day by day. It calls for consistency." – John Maxwell

"Trust must be built day by day. It calls for consistency." – John Maxwell

Dear Investors and Advisors,

As this November comes to an end, marking the one year anniversary of demonetization, I was thinking of the distance that markets and more so, sentiment has travelled in this time. For us, at Edelweiss Group, November also marks the one year anniversary of the acquisition of Schemes of JPMorgan Mutual Fund and we have had our own journey and travelled our own distance. This month, we crossed a milestone of INR 10,000 crores of Assets Under Management, and while milestones are special, what matters far more is the trust that you have placed in us and the partnership that we are building with you.

At our quarterly Edelweiss Insights event in Mumbai this month, we had a chance to spend some time with more than 200 of our partners/advisors from across 12 cities. While the topics ranged from consumption in Asian economies to the future of smart cities, for me, the most powerful insights were about our own customers. Businesses – whether an AMC's or advisor's – are a labor of love and are built on a bedrock of trust. Advisors in particular, are entrepreneurs and are their own brand, and for a good advisor, maintaining this trust is always at the top of their mind.

Trust becomes more pertinent today when investors – consciously or unconsciously – are investing in the backdrop of high expectations, painted by the last one year's equity performance, and there is an increased responsibility on us as an ecosystem to deliver. While we are traditionally asked as an AMC- "How do you handle flows and manage performance in times like this?" an advisor posed an interesting flip on the question to me.

"If you were an advisor today, what are the tough questions you would ask an AMC on performance?"

This is both a fascinating and extremely relevant question, because performance is an outcome, but the process behind generating that outcome is much more layered. When it comes to a richer understanding of investment performance, I think three questions are especially important today.

The first is the importance of investment mandates, and on what mandate investment performance has been delivered. Like well governed nations, well run funds need boundaries and borders to be safe, effective, and have a clear sense of identity. Freedom and flexibility are important, but should be exercised within limits. While the SEBI guidelines on scheme classifications should drive towards more "true-to-label" schemes, as investors and advisors, we can keep a tighter watch on how funds are sticking to their mandate, whether it is market cap, investment style, or concentration philosophy. In good times, there is often a tendency for "mandate creep", a little extra credit risk or a little more small-cap exposure, but good funds will not change their mandates with the weather.

Size is a second very important question, because there is a right size on which any fund can deliver within its mandate and "size creep" is also a temptation of good times. Investors have seen spectacular returns delivered in the mid and small cap space over the last few years, and while there is nothing to take away from them, over this period fund sizes have increased substantially. If there is one thing that 2008 taught us, it is that when something becomes too big to fail, it usually does. Large corrections and large redemptions are unpredictable events, and when they come together, it is often the fund size that fails not the fund manager. As investors and advisors, maintaining a watch on liquidity in our funds, is something that we can do, and at Edelweiss AML, we will be now be making this a focus in our fund communication and literature.

A third question, that we can ask ourselves in extreme bull markets, is about extremes themselves. The truth is while all extremes are dangerous, when investment performance is concerned only negative extremes – periods of truly bad performance – are dissected, discussed, debated. All asset managers aim to outperform, but extreme outperformance should be questioned with as discerning a lens as extreme under performance. While there will be some false positives, behind extreme outperformance often lie hidden tail risks – particularly in categories like credit funds and small cap funds – and it is not a bad thing to ask a few extra questions. The truth of investment management is also that performance is mean reverting, so extreme positives are likely to be followed by extreme negatives, and consistency is usually a more comfortable outcome.

On a concluding note, I'll end by sharing a line from a mentor recently within Edelweiss, where risk has been so core to our values. He said, "Businesses don't fail because of bear markets. They fail because of bull markets." It is true of all businesses, but especially the investment business. At Edelweiss Group, we work towards building a partnership that is consistent and weathers the tests of cycles.

Thank you as always for your support.