Calls HDFC MF as part of a racket in the mutual fund business which has focused on gathering assets and figuring out ways to ensure that the payment of commissions to distributors is never compromised
It is extremely rare to see an Indian CEO publicly lashing out at a competitor. But Ajit Dayal, founder, Quantum AMC, has done just that and that too against HDFC Mutual Fund. “HDFC Mutual Fund is no saint. It has been a part of the racket in the mutual fund business which has focused on gathering assets and figuring out ways to ensure that the payment of commissions to distributors is never compromised. The mutual fund industry—indeed, the country—is paying for this mis-adventure. While the distributors, CEOs, and CIOs may have stashed away their little treasures from the boom times, the retail investor has withdrawn from the equity markets and left share prices to be a function solely of FII flows.”
Dayal says this in the context of examining his once-held belief that there are four things of immense value in this country: the HDFC brand name, Infosys, Tata, and gold. Now he says, “Gold is the only thing of value left in the country—despite the wild swings in price; most corporate groups have shown that they respect price more than they respect values.”
In his blog post titled “Oops, the GHIT has hit the fan”, Ajit Dayal writes “Gold got a beating on 12th and 15th April—and still being punished. Infosys continues to prove that this baby has great potential—but probably needs to be adopted by someone other than its founders.” Dayal argues that “there is something more sinister about what is going on in Infosys—and it's not about their strategy and what they will do with their cash. It is a more fundamental question: how do they select their key leaders, including their CEO? Watching their CEO on TV always brings up a fundamental question: is he there in the post of CEO because he was a founder? Or because he, indeed, deserves to be the CEO? Is that the legacy of Narayan Murthy—the man who is seen to be the king of corporate governance in India? And, for all their talk on corporate governance, why can't a non-founder be a CEO? The Tata group has not released any bad news (as yet!) but it has been in a gradual state of decline in my ‘integrity’ assessment.”
He does hold high opinion of the mortgage lender HDFC saying, “The parent HDFC is the saint of the mortgage business and would, in my opinion, never mis-sell its products, and incentivise a distribution channel to be aggressive on the home loan front.” HDFC Mutual Fund, in contrast is portrayed as evil.
“At a time when Deepak Parekh, as a ‘captain of industry’, was writing an open letter to the prime minister about a clean and corruption-free India, HDFC Mutual Fund never came out on the open to support the extension of the tenure of then SEBI chairman, CB Bhave—a person who tried hard to break the stranglehold of the legendary distributors on the industry. And SEBI did not spare the large mutual funds—including levying fines on HDFC Mutual Fund. Ostensibly, one only writes letters to cleanse the system when the cleansing does not affect one's own business!” Dayal’s fondness for Bhave is touching given that killing distributors was a mindless and Tughlaq-like reaction to excesses of the bull market when mutual funds were palming off excessive commissions to distributors who sell their schemes. Bhave “succeeded” in his surgery; except that he turned the patient comatose. Dayal also seems to be ignore (deliberately) that SEBI under Bhave reached its nadir in enforcement of rules regarding stock manipulation and then let off habitual offenders of capital market without so much as a fine through an opaque system of “consent orders”. (Con by Consent)
HDFC Mutual is not the only one to get Dayal’s stick. He points a finger at the recent CobraPost sting operation saying that “HDFC Bank and HDFC Insurance may also be less than saintly.” With a sufficient number of videos on its website, CobraPost, says Dayal, has raised a lot of questions such as did pressure of these monthly targets force the bank and insurance employees to suggest creative solutions for converting black to white? Also, in addition to these taped suggestions, were any actual transactions actually done and whether any senior person knew about this?
“While the answers will be known over time, the saintliness of the HDFC group has been dented”, adds Dayal. “HDFC may still be a saint, but lending its name to the bank, the insurance business, and the mutual fund business has diluted its integrity factor though, in a world of market cap, there has been tremendous value addition to the stock price of HDFC. But does the end justify the means? Maybe the "captains of industry" can write an open letter to us on that?”
Dayal’s attack against HDFC Bank and HDFC Life is more than justified as Moneylife articles show. But while malpractices against banking and insurance customers can go on for years, it will show instantly in the performance of a mutual fund. HDFC MF has managed to deliver consistently good long-term performance. It may have used distributors to its benefit, and that is one of the reason it has the largest Assets Under Management (AUM) of over Rs1 lakh crore. But a fund company’s performance depends on two key variables: expenses and capital gains. If HDFC MF is evil, how has its performance not been bad at all?
Dayal of course does not get into any of that, because he cannot see beyond his narrow self-interest. That self-interest is a business model that does not rely on distributors. It has meant anemic asset under management for him, since nobody is keen to sell Quantum schemes. But since Bhave's move gladdened Dayal (by hindering the growth of the other fund houses), Dayal expects the whole world to join him in supporting Bhave even though mutual funds is just one of many divisions of Sebi, and Bhave's record in every other area has been pathetic. Meanwhile, whether before Bhave's Tughlaqi reign or after, HDFC Mutual Fund has grown from strength to strenth.
The irony is that despite Dayal's rant, there is something common between Quantum and HDFC MF. Strangely, it is gold, which Dayal is so crazy about. Both have launched gold ETFs, a wrong product for the masses given the behaviourial flaws we all suffer from. Launching gold ETF was a pure asset-gathering move. Surprise, Quantum suddenly looks like HDFC MF after all!
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