Should you be concerned about the change of ownership at DSP BlackRock?

By Morningstar Analysts |  09-05-18 | 
 

A few investors have mailed us regarding our view on the change in ownership at DSP BlackRock. The concern was with regards to the impact on the investment process of the AMC now that BlackRock, the world’s largest asset manager, is pulling out.

The Independent Financial Advisers (IFAs) that we spoke to all echoed the identical sentiment, irrespective of whether or not they recommend the funds to their clients: DSP has a good legacy and they will do well even without BlackRock. Just like L&T AMC has done very well after the exit of Fidelity.

Larissa Fernand, editor of Morningstar.in, and Himanshu Srivastava, senior fund analyst, look at two aspects; the team and the AMC.

THE TEAM

Last year, Naganath exited the fund company. He was an old hand and contributed to the success of the funds. Apoorva Shah moved out of the domestic mutual fund unit to the fund house’s offshore division. And now there are rumours and reports in the media of Anup Maheshwari moving out.

No one is underestimating the impact of the above personalities, but DSP BlackRock does have a solid team in place. What stands out is how different investment styles have been allowed to exist and thrive.

Harrish Zaveri’s style is definitely a buy-and-hold approach but he is not at all averse to taking concentrated bets to match his conviction. He won’t shirk from a 10% exposure if need be. In his fund, DSP BlackRock Top 100 Equity, HDFC Bank now corners 11.91% of the portfolio while Maruti Suzuki follows at 9.13%.

Atul Bhole shuns concentrated bets and prefers erring on the side of caution and having a diversified spread. DSP BlackRock Equity has a top holding of 5.41% (HDFC Bank) followed by Bajaj Finance (3.85%) and L&T (3.53%).

It is hard to nail down Rohit Singhania’s style since he functions best with an unconstrained process. He believes in his style being relevant to the market cycle and accordingly taking overweight or underweight positions. He has no bias towards growth or value but may go heavy with a value bent when valuations are rich or pick up cyclical stocks when he sees a recovery on that front coming up. Something Harrish and Atul would not do since cyclical themes are not their cup of tea. Rohit manages DSP BlackRock Equity Opportunities, DSP BlackRock T.I.G.E.R and DSP BlackRock Tax Saver.

Vinit Sambre, known famously for DSP BlackRock Midcap and DSP BlackRock Small Cap, is convinced that macros have zero impact on the long term and limited impact on the short term. He has an extreme focus on fundamentals - how promoters think, how they run their business, and how capital efficient they are etc. Which, of course, makes tremendous sense since his hunting ground is the mid-, small- and micro-cap space.

This brings enormous depth to the investing team. Regarding the investment team’s compensation, roughly 60-70% is variable in nature. While computing the variable portion, the fund’s performance (1- and 3-year time frame) is given more importance than factors such as growth in assets and the fund company’s profitability.

(The above funds are not a complete list; only the ones analysed by Morningstar’s analysts have been mentioned and linked to the research note. The portfolios are as on March 31, 2018.)

THE AMC

We have always maintained that DSP BlackRock Investment Managers is one of the best asset managers in the country.

  • In the past, regulations permitted asset managers to use a substantial portion of a new fund’s assets for marketing and distribution expenses. In effect, these expenses were charged to the fund. This fund company was among the few that chose to bear a portion of the expenses, which was an investor-friendly move.
  • When other companies over a decade ago were launching funds to grow their AUM, this fund house refused to join that race.
  • At one time, they stopped accepting fresh inflows into DSP BlackRock Microcap Fund given its large asset size.
  • The move to benchmark its funds against a more competitive Total Return Index was also an investor-friendly move.

All these point to a commitment to protecting investor interest.

A decade ago, in line with the realignment of Merrill Lynch’s business globally, the Indian asset management outfit DSP Merrill Lynch Fund Managers transferred 40% ownership to BlackRock.

While a collaboration with a behemoth like BlackRock would offer notable gains in various aspects, what would turn out to be most significant would be the impartation of technology and risk frameworks.

In an interview in 2010 with MoneyLife, Hemendra Kothari referred to Larry Fink as the guru of risk management. And rightly so. In 1988, BlackRock developed an internal risk tool called Aladdin, shortened from the Asset Liability And Debt & Derivative Investment Network. Aladdin started off as a technology to analyze risk but has evolved to support a range of business functions and processes, combining risk analytics, portfolio management, trading and operation tools on to one system. Last year, the Financial Times referred to it one of the best known pieces of technology in the fund industry; one that is widely outsourced to hundreds of firms, even rivals such as Deutsche Asset Management, Schroders and New York Life Investors.

Over the past decade, the India team used a portion of the technology relevant to the Indian market and customized it to the domestic environment and portfolio management approach. In collaboration with BlackRock they designed IMPACT, a software module employed for portfolio analysis, attribution, live monitoring of portfolios, stress testing and scenario building.

The Risk and Quantitative Analysis (RQA) team was set up to analyse the multiple facets of risk – investment risk, portfolio risk, credit risk, liquidity risk, enterprise level risk and organizational risk; in other words, risk in its complete gamut. While initially it conducted post mortem exercises, it shifted its focus to premortem, an approach that helps identify problems early on and reduces the damn-the-torpedoes attitude often assumed by people who are overinvested in a project. For instance, if a cyclical recovery is projected, the premortem will look at whether the portfolio has sufficient beta. This 6-member team was initially headed by Pankaj Sharma who relinquished responsibility to Aparna Karnik after he took over the fixed income portfolio at the fund house.

That does not mean the fund house was straddled only with BlackRock technology. They did employ MSCI Barra for their fixed income risk models. And going ahead, they will not be constrained by BlackRock. But the fund house has worked hard to ensure that processes are homegrown and in place. And while they leveraged the BlackRock technology and processes, they adapted and evolved from it.

The point we would like to make is that this fund house is stable and committed to its investors. While we encourage you to engage with your financial adviser regarding your apprehensions, our advice is to not panic and not make any decisions in haste. 

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N M Rajugopal Shreedhar
Aug 16 2018 03:46 PM
this article would be more complete if mention is made about Kalpen Parikh's investing style--heard he is coming in as president
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