Cut to 2018: Investor interest was growing for mutual fund (MF) schemes of DHFL Pramerica—an equal joint venture between Dewan Housing Finance Ltd (DHFL) and PGIM, the global investment management business of US based-Prudential Financial. The fund house got mired in trouble that year following complaints of fraud against the promoters of its parent firm, DHFL. It was then that DHFL decided to sell its entire stake to PGIM. The firm was rechristened PGIM India Mutual Fund. It has been on the road to recovery for almost five years now. It is slowly clawing back lost space, having shifted focus from its legacy debt funds early on to equity funds.
Chief executive officer Ajit Menon is visibly excited about the AIF business. High net worth individuals seek more sophisticated investment strategies—something that MFs can’t offer, but is possible on an AIF platform. “As we are seeing, regulations are tightening for AIFs. So, large investors are likely to prefer institutional players than boutique wealth managers, where they are more assured that all the necessary compliances and regulations will be adhered to,” says Menon.
What changed?
Soon after its separation from DHFL, the fund house embarked on a cleaning-up of its debt funds, which had exposure to debt papers of DHFL, and a steady build-up in its equity assets. Today, 90% of PGIM India’s assets under management (AUM) is in equity assets. A big change from the 30:70 ratio that the fund house had in favour of debt assets just three years back. The overall AUM has also improved sharply. In the aftermath of the DHFL-crisis. Its AUM had sunk to as low as ₹3,690 crore in June 2020. Today, the fund house manages ₹21,000 crore of AUM and is the 22nd-largest fund house in the country.
And there is more. Menon says the fund house is not only expecting to break into the top-20 soon, but also plans to hit the ₹1 trillion mark in terms of AUM.
Improvement in performance
PGIM’s equity funds have started to do well in recent years. The PGIM India Midcap Opportunities Fund is the second-best performing fund in three-year and five-year periods, with returns of 31% and 19%, respectively.
PGIM India Flexicap Fund is the second-best performing fund in the flexicap category in three-year with returns of 22% and third-best in the five-year periods with returns of 15%.
Naha, who manages the PGIM India Mid Cap Opportunities Fund, says what has helped the fund is being underweight on potential underperformers at the right time, as well as getting early into potential outperformers.
For example, the mid cap fund went 5%-6% underweight on financials after 2019, following the IL&FS crisis and DHFL troubles. “We felt that there should be liquidity tightening, even though financials were darlings of the Street,” Naha says.
At the same time, the fund went overweight on mid-cap IT stocks as lockdown restrictions came into force after the covid-19 outbreak.
“We saw an opportunity for IT companies offering cloud computing technology post-lockdown. Cloud computing orders were not huge, so it would not move the needle for large IT companies. Cloud technology was also something that was just developing, so even the mid cap IT companies were quite competent in this space,” Naha points out.
He adds that the fund management team follows the investment philosophy of GARP (Growth at Reasonable Price), which involves looking for companies that can offer strong growth potential, but are available at reasonable valuations.
PGIM India ELSS Tax Saver Fund has also done well, with returns of 20% in last three-year period, making it the fourth best-performing fund in its category. The fund is managed by Ravuri.
The fund performances have started to make PGIM India MF’s schemes more popular among MF distributors than before.
Menon says that, on a monthly basis, the fund house now has 4,900-5,000 MF distributors who are actively allocating money to the PGIM India MF’s schemes. The fund house now has a monthly SIP (systematic investment plans) book of ₹325 crore, he adds.
Handover
In line with the planned changes, there has been some churn within the organization as well. Effective 1 April, its current CIO Srinivas Rao Ravuri will head the international business. Aniruddha Naha, its current head of equities, will be in charge of the AIF vertical. PGIM has hired Vinay Paharia, former CIO of Union MF, to take over from Ravuri. Paharia will be responsible for how the funds will be managed from 1 April.
MF distributors have strong belief in Paharia’s fund management capability and process-driven approach, but some also say that they’d like to wait and watch to see how the PGIM India’s funds do during this period of transition, before they make allocations.
“Paharia seems to be a good stock-picker, as can be seen from Union Small Cap’s performance when he was there at the fund house,” says Ravi Kumar T.V., founder of Gaining Ground Investment Services.
For three-year period (FY19-FY22), Union Small Cap delivered returns of 28%, which put it in second quintile compared to its peer group.
“Every fund manager will come with his or her own distinct investment style, even if the investment philosophy would more or less be same. Naha and Ravuri were managing funds that had become quite successful. Paharia is also a very capable fund manager, but it would be important to see how he takes these funds forward,” says Mahesh Mirpuri, a Chennai-based MF distributor.
“We will have to see how the portfolios of PGIM India’s funds shape up after Paharia takes over,” Kumar adds.
Paharia says his investment philosophy also involves looking for companies that can offer good growth, but are available at reasonable valuations. At Union MF, Paharia had laid down the investment process that followed both fundamental and quantitative (by using statistics) approaches.
He says his journey towards bringing science to the art of investing will continue and says this approach helps to make any investment process a lot more disciplined.
For Paharia, PGIM India Midcap’s recent fall in performance could be his first test. In one-year period, the fund has delivered just 3.4%, which puts it in the 24th spot compared to its peers. The fund has always carried 18-22% exposure to small cap stocks, and a correction in small cap stocks put the scheme’s performance under pressure during this period.
Interestingly, Union Mid Cap also had 15% exposure to small caps, which has weighed on the fund’s performance. The fund has delivered 3.3% returns in one-year period, slightly behind PGIM India Midcap Opportunities.
Future plans
PGIM India plans to launch new funds as it has not yet filled up all the fund categories that are allowed by the Securities and Exchange Board of India (Sebi).
The fund house does not have a ‘large and midcap fund’ as yet, a focused equity fund or a multi-cap fund. As and when it deems it appropriate, the fund house will launch funds in these categories.
“We don’t have a retirement fund. It is a small but important category. We might launch something there too,” says Menon.
The fund house has been adding to its bench strength of fund managers. Last year, it promoted two of its analysts to fund manager role for its hybrid strategies, and is now looking to add one more fund manager on the equity side.
Meanwhile, it will strengthen its research analyst team, and the research pool will be a shared resource across all three businesses – MFs, AIF and the international business.PGIM India may also set up a subsidiary in Gift City (Gujarat International Finance Tec-City) for its international business, to manage the foreign investors’ money.
Within the AIF space, PGIM India is likely to first launch a long-only category III fund and later a long-short fund in the same category. “So, over the next year, we will build our track record internally. Sometime next calendar year, we will look at long-short strategy,” Naha says.
A long-short strategy is where a fund manager can take both long (bullish) and short (bearish) positions on individual stocks, sectors or indices. Unlike regular investment vehicles like MFs, where a fund manager can only buy a stock or security i.e. long-only, here the fund manager can even sell to make returns from the downside of a stock or security. The fund is also allowed to use leverage upto 200% of its AUM.
There is also a plan to build expertise over time and look at category II, which is meant for investments in unlisted space. Here the AIF product, will look at investing in late-stage businesses; some of which may get to float their initial public offerings (IPOs) for market listing.
At some point, Menon says PGIM India might also apply for license to become a fund manager for the National Pension Scheme (NPS), but that is still some time away. First, the fund house would need to turn profitable to make such an application, which Menon says should happen by 2024-25. For this, a joint venture partner would also be required as a 100% foreign-owned subsidiary cannot apply for NPS license. “But, we will look at it when we reach there,” Menon says.
PGIM India’s losses have been narrowing, from ₹103 crore in FY20, to ₹39 crore in FY22.
What it means for MF investors?
For MF investors, a new fund manager coming into the picture can be tricky, as no two fund managers can have exactly the same investment style. There are bound to be few differences at least. So, new investors can track the funds’ performances, before investing in PGIM India’s schemes. For existing investors that have allocation to PGIM India’s schemes, Paharia is known for rigour with his investment processes and stock-picking ability. It’s now time to keep track of how PGIM India’s schemes are performing vis-à-vis its peers.
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