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Ajit Dayal: Why A Great Process Can Outlive Any Individual

Posted On Thursday, Aug 31, 2017

On August 22, 2017, Founder Ajit Dayal resigned from the Board of Quantum Asset Management Company. A communication sent to existing investors in the Quantum Mutual Funds drew a fair bit of response and discussion via email or social media commentary.

We asked Ajit to respond to some of the comments and queries that have arisen so that you may put your worries to rest. As members of Quantum Asset Management Company (Quantum AMC), we know the answers, but here it is in Ajit's own words!

1. Did the new shareholder or the Board ask you to leave? Are you giving up on the Idea of Quantum Mutual Fund (QMF)?
Neither the new shareholder nor the Board members of Quantum AMC wanted me to leave, and the very idea that I am giving up on the path of Quantum Mutual Fund is laughable! QMF stands on a solid foundation of a core desire to do what is good for our customers. No other fund house can claim that - no one. We have succeeded in building the foundation of a robust, sustainable institution with a solid team to see Quantum grow over the next few decades.

2. If the Board did not ask you to leave, then why didn't they offer you some sort of Chairman Emeritus role as with Mr. Ratan Tata?
The Board has suggested that I be elevated to the status of Chairman Emeritus. I am not keen on that...but mulling it over. Many of you have heard me say that we are building the Vanguard of India. John Bogle, the founder of Vanguard and father of low cost investing, was not made the Chairman Emeritus of Vanguard, despite the full identification of Bogle to Vanguard in the early decades of Vanguard. In the note I sent out to our investors, I explained that I was booked on a plane that crashed 14 days after I started Quantum in 1990...my focus since that event has been to build a team of professionals...to ensure that a wrong plane ticket does not end a dream.

I understand why many people want me to continue having a role in Quantum till I die - it is part of the Indian psyche to seek a Great Leader. But please step back and review that risky desire inherent in us: the fact is that every Great Leader has failed you, whether it be a Prime Minister or a "Godman". The focus should be on systems, on processes. When people say that they invested in Quantum Long Term Equity Fund because of me, it is humbling, but what they really mean - and don't say it or recognize it - is that they invested in the idea of a mutual fund that would be low cost, would fight for good practices, and would offer simple and sensible solutions for their investment needs. They invested in integrity and competence. I was the face of their trust and they are worried that, after this face that the investors recognise is gone, they will be subject to the whims of just another financial company! It is an accident of history that I happened to be the person who got up on the dais and spoke about the Quantum dream. When you have a rotten system, goodness emerges from somewhere. Quantum MF happened to be that goodness. I don't claim 100% ownership of integrity or competence! Perhaps we should open our minds to the fact that there are many people out there who are honest and competent? It so happens that Quantum is full of them; that's why we hired them!

I remember when we launched Quantum Long Term Equity Fund in 2006, Subbu was the portfolio manager. People asked, "Why not Ajit?" and we explained that I had trained Subbu and we had worked together since 1996. Now, Atul Kumar is the Fund Manager (with Quantum since 2005) and Nilesh Shetty is the Associate Fund Manager (with Quantum since 2009). No one asks "Where is Subbu?" because the team-driven research and investment processes have ensured a solid, predictable track record. Teams have been built, people have been trained. Vanguard has grown 20x since Bogle left, and no one today invests with Vanguard solely because of what Bogle did. His successors have been trained and ingrained in a customer-focused culture where their personal salaries and bonuses do not drive their actions. I think Quantum will grow its customer base 10x in 5 years after my resignation, the track record will continue its predictable path, and no one will remember me. Wait and see, it will happen: Processes will be remembered; Godmen will be forgotten! ☺

3. How long has this change been in the works?
The fact that we are a process-driven entity was absorbed by us during the years of our partnership with Tom Hansberger, the legendary value investor who was the co-founder of Templeton, Galbraith, and Hansberger (now known to you all as Franklin Templeton). The first internal discussions on succession planning began in 2012, just a few years after Jimmy Patel took over as CEO of Quantum AMC in May, 2010. The first step was to force ourselves internally to think about this long and hard and begin to imagine functions in a company that will carry on without me; we had to break the demon of a Great Leader and a Godman internally within Quantum! As a rehearsal, I stopped attending office on a regular basis since 2015 - but was there when needed. Today we have heads of departments who have identified their juniors. The reason for doing this is to assess their capability and train them with skill sets well ahead of time. Our integrity screens have already done their work by filtering out people who do not believe in our philosophy - that customer-focused culture is reinstated regularly.

4. You've been involved along with the Board on investment policy, but not portfolio management? What's the difference?
Every mutual fund product has an objective and investment guidelines as laid out in the offer documents. The role of the Investment Committee at the Board level - of which I was a member - is to ensure that guidelines are created and followed. The actual stocks or bonds or securities are selected by the fund manager. The Investment Committee is not a Portfolio Manager but a SEBI-requirement as a reaction to past poor practices in the mutual fund industry. Every fund manager of a Quantum mutual fund product has a well-defined research and investment process in place (and individuals to help) which allows them to select the specific stocks they wish to buy or sell. The Board cannot question these individual stock and security level decisions. That is the fund manager's job, and this translates into a track record that investors love or hate. When an investor buys a mutual fund product, they are not buying the skill set of the Investment Committee of the Board, but the skill set of the portfolio manager.

5. Since Fairfax purchased an ownership stake in the Sponsor, the AMC has introduced regular plans after years of avoiding them, and now you are leaving. What was Fairfax's role in pushing these changes?
Please don't link the Fairfax group's purchase to any of these actions! And please don't use the term "pushing"! That is very unfair and untrue. If you had followed us over the years you would have heard the steady simple mantra (of a Godman!? ☺): "When the distribution channels adopt transparency, we will work with them." SEBI mandated the disclosure of commissions beginning in October, 2016. The distribution channels are now reasonably transparent, so we can work with them and force them to be fully transparent with our customers. Hence the launch of the Regular Plan at the start of the financial year April 1st, 2017.

My departure is part of this long-term thinking we started in 2012 - much before the Fairfax group became our shareholders. I wish to stress that Quantum AMC is run independently by well-trained and experienced professionals. The management teams make decisions within a broad governance framework at the Board level. That governance level was set up by Subbu, me and many others in the firm - and tends to exceed regulatory requirements. There is no representative of the Fairfax group on the Board.

6. Has business consideration overruled or overtaken the philosophy on which Quantum was founded? How will your principles endure if you're no longer there to oversee things?
Absolutely nothing has changed at Quantum. Our investment philosophy, our focus on low costs, our focus on transparency, and more - all remain the same. We will be implementing a Charter of Principles which will state that philosophy, a guiding light that will long outlast me. It will be my endeavor to have this published on the web site for our growing customers - and for our team - to see and gauge whether practices within Quantum follow the preaching.

You know from my past Path to Profit sessions and press interviews that I am more vocal than a Narayan Murthy or a Ratan Tata. So, if something goes amiss, you will hear from me! (So follow The Honest Truth articles that I plan to write more often!) Having said that, you should recognize that Subbu will still be there on the Board and the two of us have worked together for 21 years. There is continuity.

7. Who will replace you on the Board?
The Board has invited Jimmy Patel, CEO since 2010, to join as the Managing Director of Quantum AMC. So Jimmy will be the "MD & CEO".

8. Are you starting something new?
No. I do expect to be a mentor to many at Quantum. I am available to meet them when they need guidance. We had already started having meetings of two groups of people: (i) senior management to ensure a core ethical value is intact, and (ii) a portfolio discussion on the investment world and on specific issues like demonetization, GST, etc. I would hope to speak to our loyal investors at many more Path To Profits - more time with our investors will be great! I will spend my time sharing my views on the financial services industry which continues to be largely unethical and powerfully connected.

9. Should investors continue investing their savings with Quantum?
Well, I cannot guide them on that! But I can say that my investments will remain in the Quantum Mutual Funds, barring normal redemptions that I may need for my expenses or rebalancing actions. Subject to regulatory requirement, I would have no problem disclosing my investments in the Quantum Mutual Funds every year and updating it every quarter. This way, if you wish to track me, you will know exactly what I am doing. I think that everyone needs to understand that I did not struggle for 27 years to throw everything away. There is no "cashing out". This is not the action of a serial entrepreneur who sets up companies to cash - out and then set up the next "play". I am committed to the dream of building India's most respected mutual fund house and I know the team has the capability to reach that goal. We will never mislead people; we are not Godmen! ☺


Disclaimer, Statutory Details & Risk Factors:

The views expressed here in this article are for general information and reading purpose only and do not constitute any guidelines and recommendations on any course of action to be followed by the reader. Quantum AMC / Quantum Mutual Fund is not guaranteeing / offering / communicating any indicative yield on investments made in the scheme(s). The views are not meant to serve as a professional guide / investment advice / intended to be an offer or solicitation for the purchase or sale of any financial product or instrument or mutual fund units for the reader. The article has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Whilst no action has been solicited based upon the information provided herein, due care has been taken to ensure that the facts are accurate and views given are fair and reasonable as on date. Readers of this article should rely on information/data arising out of their own investigations and advised to seek independent professional advice and arrive at an informed decision before making any investments.

Mutual fund investments are subject to market risks read all scheme related documents carefully.

Please visit – www.QuantumMF.com to read scheme specific risk factors. Investors in the Scheme(s) are not being offered a guaranteed or assured rate of return and there can be no assurance that the schemes objective will be achieved and the NAV of the scheme(s) may go up and down depending upon the factors and forces affecting securities market. Investment in mutual fund units involves investment risk such as trading volumes, settlement risk, liquidity risk, default risk including possible loss of capital. Past performance of the sponsor / AMC / Mutual Fund does not indicate the future performance of the Scheme(s). Statutory Details: Quantum Mutual Fund (the Fund) has been constituted as a Trust under the Indian Trusts Act, 1882. Sponsor: Quantum Advisors Private Limited. (liability of Sponsor limited to Rs. 1,00,000/-) Trustee: Quantum Trustee Company Private Limited. Investment Manager: Quantum Asset Management Company Private Limited. The Sponsor, Trustee and Investment Manager are incorporated under the Companies Act, 1956.

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