The Ant and the Elephants - A True Story

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 Posted by Quantum on Wednesday, July 01, 2009

This is a true story.

We don't know the ending as yet.

But we know who we are and why we exist - and we know who we want to win.

Quantum Mutual Funds work for the millions of investors in this country who wish to place a portion of their savings in sensible - but simple - products.

With the money of the investors being put to work in the stock markets - and not being used to finance the holidays of distirbutors and wealth managers.

Yes, we want the investors to win.

A dream turns into a nightmare

I had a dream in 1984: to launch mutual funds investing in India.

There was no SEBI then.

There were no mutual funds.

(Well, we had the Unit Trust of India which was a mutual fund, but, like many entities set up by the government, it lost its way. I know the rot that had crept into UTI - I worked there for a few months and resigned when I smelt it.

UTI - the old UTI - blew up and now there is a more vibrant UTI in its place. And I wish them well.)

In 2005, Quantum Asset Management Company Private Limited was born as the 29th mutual fund house in India.

Happily, I trotted along with my license in hand to meet various distributors of mutual funds to see how they could help us raise money from investors.

"Hello, Mr. Distributor", I said, "you know the reputation that Quantum Advisors enjoys as a research and investment advisory group. Now we have a mutual fund license and we would like retail investors be made aware of our track record and experience. We would like to launch a diversified equity mutual fund."

The distributors I went to meet were some of the largest groups in the financial services business. I knew most of them over the decades. In 1990, Quantum was the only equity research group that was set up to target foreign investors. This was before foreign investors were even allowed to invest in India. The term "FII" had not even been born.

Once the FII avenue was opened up in 1991, we had a joint venture and partnership with Jardine Fleming, one of the first FIIs in the country. And, as one of the largest FII fund houses and foreign groups, I had the opportunity to meet with many of the brokers, bankers, and distributors in the country.

So getting the doors opened to meet them was not the problem.

And opening my mouth to say, "Hello" was not a problem.

The distributors listened to what I had to say about our long term investment process; how we assess risk; the mistakes we made in the past; why we follow a team-based investment approach and not a 'star' fund manager approach.

And then they asked me the plain baniya ka hisab kitab question: what is in it for me, the distributor?

"Uh", I stuttered, "but you already charge your client a fee" I told one person who managed a private client business on which he was getting a fee from his client.

"Uh," I told the mutual fund placement factory, "isn't there some rule on entry loads and isn't that what you get?"

Welcome to Plunderland

I was so busy trying to improve the way we manage money, I had not seen the world around me change - for the worse.

The distributors laughed at me.

Their business model was very clear.

They would dump the clients into whatever NFO was out there as long as they got paid a high fee; a nice, fat commission.

They had a rate card: the way you buy samosas or channa.

If you pay us a 2% fee, we cannot promise you anything.

If you pay us 6%, we can give you Rs 500 crores for six months.

Trips to Malaysia, Mauritius, Singapore, and Switzerland were their other rewards.

All paid by the mis-led and ignorant investor.

But what about track records?

What about the fact that the fund may be a great fit for their investor base?

What about what is good for their clients?

They laughed.

I was living in Wonderland.

They were living in Plunderland.

"But", I pleaded, "mutual funds should be selected based on performance; based on risk taken; based on what is good for the investor. The way mutual funds are distributed needs to change."

And then one of the defining moments of my life.

A dialogue etched in memory like the "bach gaya saala" of Gabbar Singh in Sholay.

"In our industry", said the very prosperous head of a well known private client group, "the elephants dance to our tune. You are an ant. What will you do?"

Doing what ants do

Being an ant is not a glamorous job.

You need to buzz around busily collecting scraps of food on the ground.

The elephants can trample you. The elephants are the large mutual fund houses with armies of agents and distributors and the fire power to pulverize you in any ad campaign and brand building exercise.

So we were busy being ants.

Doing what we believed in and writing to create awareness of what we were doing - and why we were doing it.

On a small scale, as ants are used to.

We had to build an ant hill.

Quantum Long Term Equity Fund had its first NAV declared in March 2006. It was a fund that was sold with no distributor commissions.

Sold on the internet, or you could email us and we would call you.

We collected less than Rs 8 crores from less than 800 investors.

Other mutual funds launched at the same time collected hundreds and thousands of crores. From tens of thousands of investors.

Still, we liked being the ant.

We were the 29th mutual fund house but the first to reject practices that were detrimental to the interests of the investors.

Unequivocally - with no hesitation.

All the elephant mutual fund houses around us were indeed the giants but - pardon the expression - were hiding their manhood.

They, like the distributors said, were happy to dance.

They did not care how the distributor got them their money.

The elephants wanted to play the "I have large assets under management" game.

The elephants knew that the investors in their funds were there because they had been mis-sold.

But they did not care.

The distributors were playing the music and the elephants were dancing.

Willingly.

Every AMC was the dancing elephant.

All, except Quantum AMC - the ant.

Buzzing around managing money; staying on the side of the investors.

Trying to avoid the thumping feet of the drunken elephants.

The regulator strikes

SEBI has stepped in now and stopped the music.

Trying to stop the leaks in the system.

To ensure that investor get sold the funds that they deserve to own.

And ensuring that investors are fully aware of the fees and incentives that distributors get.

In fact, SEBI has said that investors will pay a fee directly to the distributor for their advice.

A very transparent mechanism.

You get advice: pay what you think it is worth.

There will be a change in the landscape of the mutual fund industry.

Just as the dinosaurs went into extinction when meteors hit the earth's surface millions of years ago, the elephants and their music-loving DJ distributors are at risk.

We ants will find a way to survive - we were not in the ball room dancing with the elephants.

Still to unfold...

Don't go away - the story is not over.

The distributors are not yet out of business - or their Living in Plunderland mentality.

They may stop selling mutual funds, and start selling you a lot more of Unit Linked Insurance Products (ULIPs).

Do you want to guess why?

Yes, that is correct; the distributors make a lot more money selling you that junk than they did selling you the elephant droppings which were disguised as musk oil - an aphrodisiac.

The distributors and wealth managers will play the regulatory arbitrage: go where the regulator is less vigilant.

AIG did that.

Lehman Brothers and Bear Stearns did that.

Most who worked for AIG, Bear Stearns or Lehman did pretty well in life.

Their customers and investors - well, who cares about them anyways?

So, don't be surprised if your distributor and private client wealth manager calls you and explains to you why mutual funds are terrible places to invest and why ULIPs is the best thing since aaloo tikki.

And, yes, not all distributors are bad - or were bad.

There were many who were honest.

And gave honest advice.

For them we have good words and a lot of praise.

Like us, they are the ants, working away to build an honest business, an honest practice.

We did not have to wait for the regulator to tell us what is right.

We learnt that in school and at our home.

"Do good" my father's teacher told him seventy years ago, "and be good".

And those were his words of advice to me when I went to college:

"Do good and be good".

The elephants - mature adults with good college degrees and infinitely more intelligence than us ants - had to have the regulator instruct them that "good" is now the law.

Goodness is what you learn in your childhood.

For them, it is what the regulator tells them to do.

So the elephants are still trying to figure out what to do.

How should they respond to the SEBI circular?

Can they have one uniform response?

Meanwhile the distributors have held protest rallies objecting to the SEBI circular: the new regulations will destroy their source of livelihood.

How will they feed their families?

We don’t have these issues to deal with.

We stayed on the side of what is right.

What was the fair and correct thing to do.

And we fed our families.

No, we did not have fancy cars or the highest salary levels.

But we live well: our families have clothes to wear and food to eat. We can take them on holidays.

And we can sleep well every night: with a clear conscience.

Every day the ants at Quantum Mutual Fund come to work with one thought, one driving objective: to build a company that stays focused on what is good for the investors.

With your help, our ant hill can turn into your mountain.

Come and see what we have done so far, visit www.QuantumAMC.com

India's first direct-to-investor mutual fund house.