It was around October last year when experienced fund manager George Heber Joseph left ICICI Prudential AMC to join Investment Trust of India (ITI) Mutual Fund, backed by Sudhir Valia, who is the brother-in-law of Sun Pharma billionaire founder Dilip Shanghvi. George is a man on a mission. With over two decades of experience in equity markets, George is focused on building ITI Mutual Fund as the 'Sun Pharma of mutual fund industry’ and beat the biggest players in the industry at their game. In an interview to Kumar Shankar Roy, the CEO and CIO of ITI Mutual Fund talks about the company’s strategy, investment philosophy and vision. Isn't it too late to join the party? If you perform well, automatically money will come from investors, he says.
In a crowded asset management business, what are the goals of ITI Mutual Fund? What makes you different from other players?
All the big AMCs in India today are run by banks. Banks, in general, are leveraged entities. Banks do have a good distribution franchise, which is an area of selling and for penetration. For us, the strength of the promoters i.e. the Sun Pharma group promoters, who have scaled the business from Rs 50 crore to Rs 30,000 crore revenue company and made it the largest pharma firm in India with a high amount of cash, is a big thing. That sort of promoter strength is not there in any of the top AMCs in India. In smaller AMCs, there will be overseas partners but they are not that focused, and Indian partners are weak. Large foreign companies who have tried to enter the Indian space have not found great success because of the lack of understanding about Indian distribution and also the Indian investor mindset.
All Indian companies are thriving in the AMC space. The Sun Pharma promoter group stands out in terms of wealth creation and the strength of balance sheet. The same promoters who delivered Sun Pharma are now venturing into the financial space through ITI Group. The ITI Group already has 3,000 employees and is present in various businesses. Promoters have a long-term vision for the mutual fund business. After my interaction with Dilip Shanghvi and Sudhir Valia, I have realized that their vision is to outperform the largest of the largest mutual fund houses in India in the next 15-20 years.
Can Sun Pharma story be repeated in the mutual fund business? Can you adopt the best practices of Sun Pharma and make it work for the AMC?
When Sun Pharma entered the pharma sector, there were 20,000 companies in India. To this day, pharma is a highly fragmented industry. Thirty years ago, when Sun Pharma made its entry, they started in niche areas. They did not have too much of resources to spare, and so they thought let us focus on a few niche areas and get our things right. At that time, MNC pharma majors dominated those niche well-entrenched areas. At one time, Dilip Shanghvi's father Shantilal Shanghvi was a distributor to Torrent Pharma. Today, the situation is different. In the last 30 years, Sun has grown in its stature and scale. The promoters have never diluted their stake (for Ranbaxy deal there was a share-swap) and operated at a margin level that is double of the industry average. In 19 out of 20 years, they have outperformed the industry growth.
They have the business acumen, they know how to scale an enterprise and they have created the history of transforming the smallest pharma company into the largest one. When we look at the MF industry, we see it is pretty solid because the top 30 cities are contributing 85% of the AUM. There are eight crore folios in the industry. Investing experience is important for brand recall. Focus on investors, everything will be perfect. If you perform well, automatically money will come from investors.
The mutual fund industry has gone through a lot of trouble recently. IL&FS defaults, for instance, has turned the investors wary. Your comment
If you looked at the balance sheet of IL&FS, you would know the trouble. It seems nobody read the underlying balance sheet before investing. That’s the problem. I would avoid IL&FS for simple reasons. One, 60% of its lending goes to its subsidiaries. This means they are actually not doing lending if the bulk of the money is going into own subsidiaries. Two, some of the subsidiaries were almost bankrupt five years back also given the huge leverage at that time. Those companies were sucking the money out of IL&FS. Credit rating agencies gave triple AAA ratings. That doesn't make sense to me. Globally, ratings have never been able to be good lead indicators. Ultimately, as a fund manager, if you are putting in investors' hard-earned money, you should invest in a good set of stocks or the right set of bonds. Buying a stock is different from buying a bond.
How is buying a stock and buying a bond separate?
When you are buying a bond, you are actually giving a loan to the company. So, the big question is whether they will be able to give your money back or not. Interest rate movement is secondary. If interest rate moves, it will affect all bonds. In the case of equity, you are getting a piece of the business. You know you have a 'share', so if the company keeps growing, your 'share' or piece in the business will keep growing. So, equity investing needs to be done in a framework of understanding whether the business has potential to grow, how good are the company's promoters and its management.
In the case of bonds, there is no growth concept. In both the cases, however, quality of business that you are investing in matters a lot. That's why, when I look at the industry, I see some issues. People are not focusing on the bottom-up research properly. They are more looking at news flow. Equity guru Charlie Munger tells us that when we are buying a piece of business, we have to ensure that the piece of business is a very good piece of business. If the company is not generating cash, it is not a good company. If you look at Sun Pharma, they grew with accruals generated from the business. Cash flow growth is important when it comes to equity.
Howard Marks teaches us many lessons. One of them is bond investors should focus less on macros. Nobody gets macros right. You can read about it, and you can prepare yourself. But, beyond a point, you can't predict. Who can correctly predict the trade war? Who can consistently predict the RBI monetary policy? So, we should not base our investments on macro forecast.
At ITI Mutual Fund, we have our own investment philosophy, processes and risk management practices. These will help us find a way around the gaps currently seen in the AMC/MF industry. Our primary goal is to aim for a superior investment performance with less-than-commensurate risk, i.e. we will aim for superior risk-adjusted returns over the long-term. We believe that superior performance can be consistently achieved through in-depth knowledge of companies and their securities and not through attempts at predicting what is in store for the economy, interest rates or the securities markets. We do evaluate macro-economic variables but our investment process is entirely bottom-up, based upon internal company-specific research. Our investment process includes research-based and market valuation based asset allocation mechanism to manage risks at various points in time.