Rule-based active strategies have attracted attention, fund flow and have emerged as a leading investment approach
They revolutionised the mutual fund distribution game, beating banks at their game. Now, NJ Group is joining the asset management space with a novel mutual fund that seeks to build the rule-based active investing model, an area where Vanguard disrupted the US mutual fund industry. In a free-wheeling chat with Outlook Money, NJ Group Founders Neeraj Choksi and Mr. Jignesh Desai discuss their strategy, product focus, and business expansion plans for the newest fund-house – NJ AMC.
Jignesh Desai & Neeraj Choksi - Co-Founders, NJ Group
NJ Group is one of the largest distributors of mutual funds. Today the group has also entered the asset management segment. What made you enter the space?
As a group, it has been our intention to expand our financial services footprint. We already have a presence in Insurance Broking and in the lending space with our NBFC offering loans against units of mutual funds. This is in addition to our stock broking and depository participant presence. We have also been a SEBI registered Portfolio Manager for the last 11 years now and believe that the mutual fund industry is a logical extension. While all our businesses leverage the group’s distribution strength, these businesses are managed independently by a team of professionals.
Tell us about NJ Group’s journey from a top mutual fund distributor to an asset management company?
NJ Asset Management, which was formerly called NJ Advisory is a SEBI registered Portfolio Manager and has been focusing on rule-based active investments for the last 11 years. It is amongst the largest portfolio managers in the country and currently manages Over Rs 2,800 cr for more than 3,400 investors.
And as one of India’s largest mutual fund distributors over the last 25 years, we have gathered strong domain knowledge and a deep understanding of investor behaviour. This equips us with what we believe is an essential ingredient to success in the mutual fund industry. Having played a role in the success of the industry as a distributor we believe that we are in a strong position to contribute as a participant as well.
What, in your view, are the unique advantages of the asset management company?
Apart from the synergies arising from our experience in the industry, from a purely business point of view, once it achieves scale the asset management business offers not only high ROE, but significantly higher revenue visibility compared to other businesses in the financial services space. This makes it an attractive proposition since we believe that we are uniquely positioned to achieve the size needed for its benefits to emerge.
What would be your way forward over the medium to long term?
We believe that there is room for innovation in the way money is managed. We have always had a data centric approach to our businesses and would like to extend this data centricity to the investment function as well. Rule based active investing, which has been extremely successful internationally, offers an opportunity for us to offer differentiated products at a lower cost and gain market share over a period of time.
What kind of market share are you looking at in the AMC space and how do you plan to achieve it?
As far as the mutual fund industry is concerned, while it has mature and well-established participants it is still a nascent industry. It reaches a tiny portion of the population and manages just over 12% of GDP in assets. Both these indicate that the industry has a long way to go and we expect it to grow at a substantially higher pace compared to the rest of the economy in the coming decades.
Given the scale of growth that is expected, we believe that there is room for us in the industry. And while we are not targeting a specific market share, we aim to be a meaningful, significant and respected participant in the industry
What kind of products are you planning to offer your customers, and what would be their philosophy?
As mentioned earlier, our focus is on rule based active investment products. Rule-based investing is a term that is used interchangeably with a lot of others like Smart Beta, Strategic Alpha etc. The essence of rule based active investing lies in the intersection between passive replication and discretionary management. It is an attempt to capture the benefits of both extreme approaches. One such strategy that has succeeded globally is factor based investing, which seeks to select stocks that have certain desirable characteristics (called factors) that contribute positively to performance.
Globally, over the past decade or so, rule-based active strategies have attracted a lot of attention and fund flow and have emerged as a leading investment approach. We expect this trend to continue internationally and want to pioneer it in India.
Could you elaborate on the pros and cons of this approach?
Traditionally, the term active management refers to funds that are managed using a discretionary approach. These allow the fund manager a lot of flexibility and discretion but offer the possibility of outperforming the indexes. On the other hand, passive funds that replicate the index are inherently disciplined but offer no possibility of outperformance. The rule-based active investment strategy offers the best of both worlds, combining rule-based discipline with potential outperformance.
What would be the role of rule-based investing in the mutual funds that the group launches?
We intend to focus our efforts in this space and develop investment solutions that are suited to the various categories of existing investors as well as those who are not currently served by the industry.
NJ Group is known for its might in distributing mutual fund products. Now that the group has also forayed into mutual funds, how would you pitch these products to your customers and what would be your USP?
Since our products are clearly differentiated, we do not see any conflict in our group’s role as a distributor and as an asset manager.
We do not envisage entering the active management domain because there are many competent options already available in that space. In addition, these two approaches require different skill sets and organisational focus as evidenced by the manner in which they have evolved across the world.
We have put in a lot of effort over the last few years to develop factor attribution tools and a factor library. These allow us to not only decompose the performance of any portfolio to its factor specific attributes but also to develop proprietary multi-factor strategies for both asset allocation and stock selection. These are very clearly differentiated from the predominantly active approach of the MF industry as well as passive replication strategies. Some of these strategies have been successfully implemented through our portfolio management service, which is already among the largest in the industry.
You have plans to launch a New Fund Offer in October. What kind of mutual schemes have you decided on offering?
Our first offering will be NJ Balanced Advantage Fund, which allocates assets between equity and debt markets dynamically and seeks to deliver superior risk adjusted returns
Rajiv Shastri - Director & CEO, NJ AMC
How will this fund cater to the investor psyche in the current volatile market?
The NJ Balanced Advantage Fund is perfectly suited to these conditions offering a dynamic mix of equity and debt which varies based on market valuations and other economic factors. This offers the opportunity to calibrate exposure to equities and seeks to reduce the volatility experienced by investors when they invest in this fund.
Will rule-based investing play a major role in this offer?
NJ balanced Advantage follows NJ Mutual Fund’s rule-based active investmentphilosophy which ensures that both asset allocation and stock selection happen based on rules without any human intervention. Once asset allocation, stock selection and weightages are decided based on our proprietary protocols, these cannot be changed. This makes the process inherently disciplined and eliminates human bias.
This process is repeated at predetermined intervals which allows the portfolio to change with the times like in an active fund. This rule-based active investment philosophy makes NJ Balanced Advantage Fund completely different from other funds.