4 questions for Kalpen Parekh

By Larissa Fernand |  22-05-19 | 
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Larissa Fernand is Website Editor for Morningstar.in. She would like to hear from you and welcomes your feedback.

DSP Mutual Fund has been grabbing a fair share of the news recently. And most of it has not been flattering. Kalpen Parekh, President, DSP Investment Managers, engages in a quick chat.  

There have been significant resignations from your fund house. I am not referring to the past few years, but the very recent past. Let me be specific. Pankaj Sharma resigned as head of fixed income. Harish Zaveri, who headed the equity research desk and been with the AMC since 2011, has resigned. Would you comment on this? 

DSP Investment Managers is a 23-year old company. After long stints, some of our colleagues wanted to move on either for other career opportunities or even take a break from the corporate world.

What’s important is how we adapt to these changes.

Our success in this business is an outcome of our investors succeeding. Our core is to be a successful, consistent investment management company and we have constantly strengthened our teams by hiring new talent and promoting existing talent.

Saurabh Bhatia moved in as Head of Fixed Income. He comes with experience of managing EPFO money at HSBC Asset Management Mutual (long term money) as well as trading at ICICI Bank (absolute return).

We added three analysts to our research team; Banking (largest weight), Capital Goods, and Mid Caps (where we have large AUM).

Gopal Agrawal joined us to lead our thinking on macro drivers, apart from managing select equity and hybrid funds.

This month, there have been exits post a violation of the code of conduct. Your AMC has categorically stated that there was no front running or insider trading. Could you please tell us exactly what happened? And if there was no front running or insider trading, why was employment terminated? 

We received a whistle blower note commenting that some colleagues in our sales team having inappropriate investment transactions. We formalised an investigation committee that did a thorough check. The conclusion was that 8 employees in the sales function had personal transactions with an ex-employee who also happens to run a stock broking business.

Technically, any employee can lend money / invest in stocks (with pre-clearance from compliance). We observed there were frequent transactions with this stock broker without any internal reporting to compliance.

While investigations were ongoing - these colleagues resigned. We accepted the resignations with the larger principle that if these transactions are with a broker, we can't ascertain the nature of transactions as loan or stock purchases, we would have expected compliance pre-clearance.

This was breach of our internal code of conduct and DSP as a group and as an AMC has always stood for zero tolerance on governance issues. With this background - we felt it's prudent to accept the resignation.

There was NO evidence with regards to the allegations of any connection with the investment team. There has been NO element of insider trading.

We manage other people’s money and hence we need to have higher standards of reporting in the way we invest our own money. Keeping that spirit in mind - even though there was no insider trading, we acted in a way a fiduciary organization should.

Your AMC was always emphatic about the fact that when it comes to debt schemes, you play it safe and sport a strong credit rating team. Would you comment on DSP's exposure to Yes Bank (equity schemes), and DHFL and IL&FS (debt schemes).  

We have no exposure currently to Yes Bank, be it debt or equity.

A large part of our DHFL exposure matures next month. We observed unusual yield movement in September in DHFL bonds and acted in line with our risk management framework to reduce exposure to the extent we could keeping market liquidity in mind. We were questioned at that time on why we sold, and today we are questioned why we hold.

We continue to have strong norms on credit evaluation done independently by our research and investment team. At the same time, I agree that we need to constantly evolve our approach to risk, especially credit risk, keeping its binary nature in mind and the fact that credit bonds are very illiquid, whereas we run open-ended funds that offer daily liquidity.

In the light of the above, can you tell what changes or initiatives have been implemented to display the commitment to the investor? 

As a company, commitment to investor outcomes is not about recent actions but is an ongoing commitment in perpetuity. Over the past year we have taken many such steps that point to our intent and execution.

In my first answer, I explained how we have strengthened the team.

We have very transparently articulated our investment framework for two styles; one managed by Atul and one by Vinit. It’s work-in-progress for Gopal and Rohit’s investment beliefs as well as funds.

We are attempting to build a platform with common principles of consistent fund performance but with style diversity across Value, Growth and Quality. With these frameworks we are committing ourselves to a way of investing around core principles and then measure ourselves on how true to label we are.

This allows the market to also measure us more effectively and challenge us if we deviate from the stated objective. These styles are reflection of our fund manager’s core beliefs and show with evidence how we are building them in the portfolio.

Many times, we complain that investors and advisers chase performance. However, we can't blame them as that's what we show them all the time. This is a long-term attempt to define styles and style purity. This should help us achieve more consistent performance and also help the market measure us more objectively.

We have tweaked our performance measurement to focus more on alpha generation over benchmark, apart from consistency vs peers. This is adapting to the fact that indices and markets are becoming more efficient.

We introduced the role of skeptical analyst in the investment team whose role is to seek disconfirming evidence and help the analyst and fund manager test their conviction and avoid behavioral errors.

We recognise that many times fund returns and investor returns don't match. We were the first fund to stop taking all inflows in our popular small-cap fund at the peak of its performance in February 2017. When we reopened in September 2018, after a large correction in valuations, we did so only via the SIP and STP route with a message that although we are happy to take new flows, investors must recognise that small caps have risk and its worst case 1-year performance was -67 %. We seek to show risk and rewards to our investors to help them preempt volatility and thus prepare better. We are the first fund to show rolling returns and rolling *worst* returns in a stated period so only the right investors with awareness of risk invest.

We moved to measuring our funds via the Total Return Index (TRI) well before it became a regulation.

A lot of these steps point to us taking our fiduciary role extremely seriously, and positioning us as a responsible and honest investment management firm.

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