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Interview with Vishal Jain – Head of ETFs, Reliance

Interview with Vishal Jain – Head of ETFs, Reliance
Reading Time: 20 minutes

As Head of ETFs at Reliance, Mr. Vishal Jain is one of the pioneers of index investing in India. In this smalltalk session, we get up-close & personal with Vishal Jain. The background of his career, his entry into the passive investment world, and his rewarding career that’s been till now. More importantly, he speaks about Index investing in India and what the future might hold for this industry.

Anugrah: Just to get started – you have had quite a fascinating journey in the financial industry. You started with ISL – you were one of the very first employees there, and you were also a part of the team that launched India’s first ETF, right? So why don’t you talk a little bit about your background and how’s the journey been so far?

Vishal: So, I passed out of my MBA college in 1996 and I joined a company called Skindia Finance – that company was also into indices. This firm used to calculate indices. I don’t know how many of the people are aware but there used to be an index called Skindia GDR Index at that point of time. Back then, GDR’s were very popular in India, especially for foreign investors and it’s an index that we used to create. Post that, I joined Crisil in the index division. Crisil had a whole set of indices called The Crisil 500 index. And a lot of sector indices that, actually back then no one used to calculate. Crisil then had a joint venture with NSE, where they set up an independent index company called India Index Services And Products Ltd. I actually moved in from the Crisil team to start this venture way back in 1997 and today it’s become what it is. NSE NIFTY indices are the most traded indices probably in Asia today.

Post my stint with ISL which was for about three years or so, I joined a bunch of friends who were setting up a mutual fund called “Benchmark Mutual Fund”. I was the first employee over there. We launched our first ETF way back in December 2001 called “Nifty Bees” and since then we’ve launched about 16 ETFs currently and we have about $3 billion in assets in these ETFs. At Benchmark, when we launched our first ETF, for the first 4-5 years we didn’t see too much of traction because India was at a huge growth stage and people used to sit back and ask you questions as to why should I invest in an index when India is growing at such a high rate of growth. That was a big challenge that we faced initially, but one of the products which took off was a product called “Bank Bees”, which a lot of foreign investors were interested in.

Anugrah: When did you launch “Bank Bees”?

Vishal: I think we launched Bank Bees somewhere in 2004. It became a $2 billion fund by the time it was 2007/2008 until the financial crisis and that is what generated a lot of interest in ETFs in India. In 2011, our entire ETF business – Benchmark Mutual Fund – was bought out by Goldman Sachs Asset Management. The entire team moved to Goldman Sachs Asset Management, and we were there for about 5 years or so and then in the year 2016, the entire team then got bought out by Reliance Mutual Fund since Goldman Sachs wanted to get out of the asset management business in India.

Anugrah: Understood. Currently, you are a part of Reliance Mutual Fund. They create mutual funds as well as ETFs and index funds. So for everyone’s benefit, especially for the retail investor, why don’t you explain the major difference between a mutual fund and an ETF?

Vishal: Well! I would pose the question a little differently. Whether it’s an ETF or a mutual fund, I think it depends on what philosophy you follow. So in the investing world, there are 2 schools of thought. One is what you call is active fund management and one is what you call as passive fund management.
What’s the difference between these two philosophies? The difference basically is that in active fund management, you have a fund manager, who says “Look, I have the skill, ability and knowledge to pick stocks and to pick multi-baggers, to pick winners, and give much higher returns than what the market index is giving”. Which is why people are willing to pay a fee in return for the fund manager’s services.
On the other hand, what is a passive fund, what is the philosophy in passive fund management? Passive fund management basically says that the price of a stock is decided on the basis of the collective knowledge of all investors/traders in the market. The price which is traded on the stock market is a price which is a culmination of all the factors and all the news and all the views that are there in that particular stock at that point of time.
Basically, what passive philosophy says is that, “Look, there is no way for you to beat the market because all the information that is out there is already consumed by the markets instantly.” Therefore how does one fund manager beat the other fund manager when you have the same pool of stocks with the same information that is there in the markets? Therefore, what is a skill that one fund manager has versus another fund manager, keeping in mind that the same amount of money is going in just those many stocks that are there?
We did a bit of analysis, a couple of months back, and we saw that there are nearly 45,000 companies in India, which are in the business of generating alpha. 45,000 organisations right from broking entities to asset management companies, to foreign investors, to provident funds, to you name it and all these companies are in the business of generating alpha. Just in those many stocks. So you can imagine the amount of horsepower, the amount of brainpower, that is going into it. Moreover, data is proof that beating the market is incredibly hard and very few active managers do it consistently.

Anugrah: Could you give some numbers to support the statement that it is difficult to beat the market because we keep reading & listening that mutual funds have been outperforming indices and people should invest into mutual funds – so, what does the data say?

Vishal: Data can be played around with. If you see historically what was happening – you had a lot of large-cap mutual fund schemes that used to invest a substantial amount in mid-cap and small-cap companies – there was no restriction earlier. So till about sometime back when SEBI introduced scheme categorization, large-cap focussed funds allocated nearly 30 to 35 percent in small caps and midcaps while they were benchmarking versus the Nifty50 Index (which consists of large-cap stocks). Therefore, you know, a lot of times there’s a very thin line between what you term as Alpha and what you term as Risk.
Basically, a lot of fund managers were taking on risk in the market and therefore outperforming the Nifty – it was an alpha in that sense. Now, this is harder to do since scheme categorization has been implemented. Basically, SEBI has now defined that if you are a mutual fund which focusses on large-cap stocks, then a majority of your corpus has to be invested only in large-cap companies. For context, broadly, the largest 100 companies are considered large-cap companies.

The classification has now been categorized and every fund house has to now follow that classification. And if you look at recent data, because of this classification that has happened, the majority of the fund managers are underperforming the indices. 

You should have a look at this SPIVA report. Spiva is a report that is independently made by Standard and Poor’s, it’s called Standard and Poor’s Index Versus Active report. And this report comes out every 6 months globally for different regions. For India, this report has been coming for nearly 10 years or so. There have been umpteen occasions, I would say, that at least 80% to 90% of the times active fund managers have underperformed the index if you use the right benchmarks to compare their performance.

Anugrah: Just for everyone’s understanding, when we say benchmark, are we trying to compare mutual funds/mutual fund strategy against something? It’s like, when you are running in a race, you say, “Okay, this person is first, this person is second, this person is third” and that is relative ranking. Similarly, in the case of Nifty, which is sort of a benchmark index for India, majority of the large-cap funds compare their performance against the Nifty and when they say that the fund is generating alpha, it means that fund is generating more returns than the benchmark without taking additional risk. For example, let’s say that a fund manager claims that in the last year the fund generated an alpha of 2%. What it means is that over and above its benchmark, it was able to give 2% returns for the same amount of risk as the benchmark. Basically, they’re playing in the same stocks and taking the same risk.

And when Vishal talks about scheme categorization, what he means is that before SEBI guidelines rooted fro scheme categorization, large-cap mutual fund managers used to allocated money into small-cap/medium-cap stocks (which are inherently riskier and thus likely to outperform large-cap stocks), and that was how mutual fund managers would try to beat the market. But that return is not exactly alpha because the manager has taken on more risk than the benchmark. However, with new SEBI guidelines, large-cap mutual funds are mandated to allocate a majority of their capital into large-cap stocks only, and this might result in lesser returns for mutual fund managers.

Vishal: That’s correct. Yeah.

Anugrah: Do you think this was probably one of the reasons why mid-cap stocks have not performed well since the beginning of 2018 and that large-caps have outperformed the midcaps by quite a margin?

Vishal: No, I think there are cycles. I think the cycle comes every couple of years when there are large events like elections coming in – you find people moving towards safe havens which technically are usually large-caps. You find that a lot of times large caps will start outpacing mid-caps, but once they reach a certain valuation then you find the mid-caps are catching up and showing the returns. So it’s a cycle. I think it cannot be that large caps just keep moving up, without mid-caps sort of catching up. On the flip side, it’s wrong to say that mid-caps never come up. The market is a very intelligent place, hence when the market sees value, these stocks start moving up.

Anugrah: Just to sort of build on the points that you were talking about. If you look at the performance of the Nifty, which sort of represents the large-cap stocks, compared to a lot of large-cap mutual funds – nifty has more or less outperformed all of the funds in the last 1-1.5 years. This looks like a roadway for passive investing becoming more and more popular as compared to active money management. What do you think?

Vishal: I tend to think that there are two or three factors that have changed in India in the last couple of years. The concept of Systematic Investment Plans (SIPs) in the mutual fund industry is something that has pulled a lot of people into investing in equity. This wasn’t the case earlier. If you look at most of our portfolios, we have always been loaded towards real estate, gold, fixed deposits as our asset classes. If you look at three of these asset classes, they’ve not done too well in the last 5-6 years. For example, real estate investments have not done as well as they did prior to 2014. Therefore you’re finding a lot of money coming in through SIPs and it’s a fantastic way for people to invest and experience the markets. People who’ve been investing in the last 3-4 years are reaping the rewards of that.
If you look at the amount of money that’s flowing into SIPs, it’s nearly 8,000 crores a month. In addition, Employee Provident Fund (EPFs), where each of us as employees puts in money, is investing nearly 15% of their incremental corpus into Nifty ETF’s and I think that itself is about 3,000-4,000 crores a month. So we’re talking about nearly 14,000-15,000 crores of long term equity money coming into the markets and this money has no exit as of now. It is all long term money that you’re looking at – 10 years, 15 years 20 years. I think that’s a paradigm shift that’s happened in the mind of investors where they’re looking at equity investments from a long term perspective – and this has never happened before.
Therefore now, once investors have understood that equities is the ideal asset class for investment, people come to me and ask, “Okay, what more can I do?”. That’s when passive funds like index funds, Exchange Traded Funds (ETFs) come in.

Anugrah: You mentioned a very important point that recently EPFs have started investing in ETFs. It was never the case that provident funds were investing in equities, right? Many people who might have provident fund accounts have no idea that their money is actually going into stocks. When someone goes to them and asks, “Why don’t you invest in ETFs or stocks?”, they would say, “Because it’s too risky”. However, they think that EPFs are the safest investments they have whereas those provident funds are investing in stocks itself. So what do you think are the things that need to be done in order to increase retail participation in ETFs because there’s still a huge potential market that is untapped.

Vishal: When it comes to ETFs, yes I agree that retail participation has been slow to pick up. But that’s been the case globally. I don’t think that there is any country where retail participation has taken up earlier – it’s usually institutions who get into this market first. If you look at the way the Indian industry is structured, you’ll find that mutual fund schemes are sold, they’re not bought. Therefore, you know you have to remunerate a distributor and once you remunerate a distributor, he sells a scheme for you.
In an ETF we don’t pay commissions to anybody, ETF’s are bought not sold. Therefore, you know retail participation has been slow to pick up but if I look at the evolution of the ETF market in India, it’s getting better every year. We see a huge amount of interest coming in every year from a new bunch of people. One of the things that are triggering a lot of interest in ETFs is also the government. The government has been very positive about this particular product class. If you look at one of the products that we have which is called the CPS ETF. We introduced this product in 2014 with the government and the government uses this vehicle for the disinvestment proceeds. Every time the government has a trench, there’s a huge amount of marketing push that goes into selling this product, educating people and selling this product to people in the market and that brings in a lot of new investors into the market.
What has also happened is that with the scheme categorization coming in, in the last 4-5 months we’re getting a lot of interest coming in especially from high net worth individuals.

There was a point of time when we found only institutions interested in the ETF. Now you have high net-worth individuals especially family offices looking at ETFs in a big way, because of the fact that they’re extremely low cost and typically when a family office will put in money they put in money for the long term, so it’s happening in fits and spurts. Institutions are there in terms of investments towards a mid-segment, HNIs and family offices are now getting in and my belief is its just a couple of more years, we will find a decent amount of even retail investors getting hooked onto ETFs and passive products.

Anugrah: So like everyone is saying that ETF’s are the passive products and they are the future of investing. Warren Buffett is saying the same thing. The Indian government is saying the same thing. I’m assuming that you, as a mutual fund organization, would also have a very bullish view about the passive products and ETFs coming into the market. Now you’re saying even the family offices are getting interested. So it’s just a matter of time that retail investors also see value here. As for us as a firm – we work with different brokers to provide smallcases. A smallcase is basically a portfolio of stocks or ETFs, which retail investors can use to take certain exposure in an ide/theme/strategy.
What’s your view about that? What’s your take about products like smallcase which provides an easy to understand platform for retail investors to take exposure to stocks and ETFs. Would these products help the industry grow or would it be easy for retail to start adopting ETFs through these products?

Vishal: I think the idea of smallcase is a fantastic one. Diversification is a very powerful tool, therefore the ability to create baskets is extremely important and this wasn’t there earlier. It’s only through smallcase that people are able to create their own set of baskets and create a diversified pool of securities instead of investing their money in just one particular stock. Taking that one step ahead, it becomes an extremely powerful tool for people to use when they want to take exposure to a particular asset class. For example, the All-Weather Investing smallcase – it’s a fantastic idea, because of the fact that at no given point of time is anyone able to predict which asset class is going to move. A lot of times you think that gold is not going to move – it’s not moved for the last 4-5 years, but then it has done very well this year. Look at it from a perspective which was about a decade ago back in 2008. When the financial crisis happened, all of us knew that the equity markets crash to the extent of nearly 50-60% would result in gold shooting up. Imagine if you are able to plug in gold and you had gold in your portfolio. It would have cushioned you from that fall. Therefore, no one is ever able to predict which asset class, whether it’s equity, debt or gold, is going to pick up. 

And therefore it makes sense for you to invest in all these 3 asset classes, and reap the benefits of each asset class because you don’t know what’s going to do well. Through the smallcase platform it’s easy to invest in equity, gold, debt, and it makes it much more easier for a person to reap the benefits of all these three asset classes. Moreover, people can also do a SIP with it!  

Anugrah: Yes. So Vishal, we’ve sort of discussed the domestic market. But internationally, ETFs have become a huge phenomenon. Everybody is just investing in ETFs and all the big, most popular investors are also talking about ETFs. How has ETF evolved globally, if you can tell Indian ETF investors? 

Vishal: Globally I think there’s been a huge spurt, especially in the US. Let me ask you a question Anugrah. Which do you think is the most liquid stock on the New York Stock Exchange?

Anugrah: Probably let’s say like one of the highest market cap stocks. Like, let’s say maybe Apple/Microsoft/Amazon/Google.

Vishal: Well, let me tell you it’s an ETF. There’s an ETF called Spiders. It’s called SPDR – Standard Poor’s Depositary Receipt and it trades $25 billion a day. The next most liquid stock, if I remember correctly, is Bank Of America – which trades about $6 billion a day. That’s how big ETFs have become. Nearly 60% of the trading volumes come from ETFs now. If you look at assets under management especially in the United States, the total AUMs of the mutual fund industry is about $20 trillion which is approximately the size of their whole economy as well. Today ETFs command $5 trillion so already 25% of the assets in the US are now linked to ETFs. And this has happened only in the last decade. What I understand from people is that in the next 4 to 5 years this $5 trillion will move to $10 trillion. What we’re saying is that nearly 40 to 50 percent of the assets internationally is going to be linked to ETFs. So that’s how big they’ve become. It makes sense for a lot of investors to invest money at them.

Anugrah: Before we conclude, what advice would you want to give to young budding investors – how should one go about investing right now?

Vishal: I think there are 2 big things here. One is…  I think the Indian story is quite strong. I think all of us are very confident about the fact that India is an economy which is growing and it will continue to grow for the next decade or so. India is likely to be a $10 trillion economy in the next 10 to 12 years. And if India’s going to go from a $3 trillion economy to a $10 trillion economy then I presume that the markets are going to do well as well. And if the markets are going to do well, we’re talking about the index. I think each of us should be investing in the index because one of the big factors of getting the investment right is discipline and SIP. SIP brings a lot of discipline to your investment. Investing in a very disciplined manner, in a diversified manner, is something that will reap rewards over a period of time. ETFs allow you to do that in a very perfect manner. The fact that something like All-Weather Investing allows investors to invest in a pool of ETFs investing in different asset classes is something that investors should look at as you go ahead.
So, therefore, your portfolio should have a bit of large-cap a bit of mid-cap, a bit of debt and a bit of gold depending on what your risk appetite is.

So a simple number could be – if a person is a moderate investor who doesn’t want to take too much of risk and is also not too risk-averse then his/her portfolio could look like this – 50% into equity, 25% into debt and 25% in gold. Even in 50% of equity, you can look at buying something like a Nifty ETF or Nifty Next 50 ETF. With 25% in debt, you could look at investing in something like a Gilt ETF which gives exposure to government securities, and the gold portion can come through a Gold ETF. Therefore, this brings a big good basket of securities. If you invest in this basket over a period of 5-7 years, I think it will reap good returns as you go ahead. 

Anugrah: Okay, great. So I think that probably my takeaway from this session is that people should start investing in index funds. It is the next big thing and it’s always good to keep your eggs in different baskets so keep your portfolio is well diversified.  One of the very easy and quick ways of doing so is through our All-Weather Investing smallcase, as Vishal mentioned. And Vishal, thanks a lot for coming in – it was a pleasure talking to you!


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Interview with Vishal Jain – Head of ETFs, Reliance
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