Sundeep Sikka is the Executive Director and Chief Executive Officer of Nippon Life Asset Management Limited (NAM India), formerly Reliance Capital Asset Management.
He joined the company 18 years ago and built its domestic operations with the acquisition of Goldman Sachs’ Asset Management business in India.
Under his leadership, the company forged a joint venture with 130-year-old Japanese insurance major Nippon Life Insurance of Japan, which later acquired a 75% stake in the asset management firm.
Sikka, who is an alumnus of the Harvard Business School, has held key positions at the Association of Mutual Funds in India (AMFI)—the industry body for mutual funds in India— at the Reserve Bank of India, the National Securities Depository Limited and nonprofit trade body FICCI.
He led the initial public offering (IPO) of NAM India making the company the first-ever listed asset management company in the country.
NAM India has a market capitalization of $2.2 billion as of September 30 and manages assets of over $60 billion across mutual funds, offshore funds, pension funds, exchange-traded funds and alternative investment funds.
Sikka is an ardent follower of the change culture and his life philosophy is, “play to win, don’t play not to lose.”
In a conversation with Forbes Advisor India, Sikka spoke about how India stock markets will see household savings come in and why risk management will become the most important part of an asset management business.
How has India’s outlook on investing changed over the last two decades?
I think we are lucky to be born in a time when India is going through a big change in terms of the financial sector, especially in the last five years.
India, as a country, has one of the highest gross saving rates in the world. And as we go ahead, we will clearly see more and more people coming to the formal economy for savings.
Whenever interest rates are high, you always see people going into physical assets. So effectively, if you were to go a couple of years back, people were investing in real estate, gold and other various things. I think that big change is taking place now.
The real estate story is pretty much over, and a lot of money that used to go into real estate and gold is now finding its way into the banks.
Until about 20 years back, when we were getting double-digit returns on bank savings, there wasn’t much need to invest because every five years your money was doubling. Now we’ve come to a point where the interest rates have gone to the lower end of single digits, and returns from bank savings have substantially gone down.
Now due to lack of options to invest in, people are investing in mutual funds or investing in the stock market, which was earlier seen as a speculative activity. You will continue seeing long-term capital flow coming into capital markets through mutual funds.
At this point of time, only 200 million people are investing in mutual funds. In India, I think every Indian household will eventually become a mutual fund investor. And whether that happens in the next 15 years or 20 years is not important. I’ve always believed direction is always more important than speed. And for me, I think I’m very convinced that we are going in the right direction.
Do you think India has matured enough to take savings to the stock market?
You cannot expect 50% of the country to start investing in the markets tomorrow morning. It’s going to be a journey people will take as we go ahead.
Some people will have a positive experience, some of them will have a negative short-term experience; emotions will be high. But I think over the next few years, things will normalize when you look at it from a longer period of time perspective.
I don’t think it is not going to be binary: that people will stop investing in other places and will only invest in mutual funds and find them desirable. And neither should that happen.
I think we need to grow. But I think we cannot grow at such a fast pace that people don’t understand the potential upside and downside of investing. Looking forward, it will be good for both consumers and the industry.
Where is the asset management diversification expected to happen? And what are the key areas of growth in the coming five years?
From the way I see it is, I think many times it’s very important to have a disciplined financial approach. And this is not only for an investor but even as a portfolio manager, it is important to have a control on emotions.
I think one of the most important things to realize is what is good for the investor from a long-term point of view. The financial sector has this problem of many times coming out with products that are very exotic, which look good but are not the best for consumers.
We have always believed it’s very important to come up with products that are very simple to understand. I mean, this industry is a very, very simple industry and is not as exotic or as complex as it is made out to be.
I think the portfolio is going to be created based on two-three metrics: One is completely based on liquidity, which is going to be based on the requirements and the needs of investors. The other parameter, I think it’s going to be broken down into different asset classes.
What is also important is diversification of asset class and geography. So what I mean by that is, till now in India, only 2% of the household savings have been coming into capital markets. Many times the reality is that out of a hundred rupees only two rupees are coming into the capital markets, whether it’s through mutual funds or direct stocks. So, it’s important to know asset class diversification or graphical diversification.
If I’m investing for 28 years, I do not have to worry about how big the portfolio is. But if I’m looking for investing for six months, liquidity becomes important. The other thing, it’s also important as markets mature, investors also mature.
What challenges do you see in your business?
I think the biggest challenge for a lot of businesses in India and globally is to respond to the changes. On one side, you get a very strong foundation and the other side, you know you have to keep responding to changes happening so fast.
So from our perspective, there are no mature markets, they’re mature mindsets. And so it’s critical to ensure the momentum does not take over our emotions. Delay in growth, trying to grow too fast, or trying to live in the past, all these three things can be a very dangerous concoction for a company to burn out.
I also think it’s very important to be conscious of the fact that at the core lies the investor and he will only get more educated, he will only get more aware and he will become more demanding. So, for me, ensuring that I do not live in the past and know the investor will become more demanding.
It is also important to understand investors are giving us money in anticipation of returns. I’m conscious of the fact that the challenge is going to be in this business being less about investment management but more about risk management, which is a very understated thing.
I think if there’s one thing that gives me sleepless nights is how we are going to be evolving and strengthening our risk management because the world is changing fast and the risks that we’re taking are changing too. Unknown risks come up every few weeks and months.
What has been your motivation to serve in the same company and industry for 18 long years?
I’ve never felt I spent 18 years in the same company. Every day, I have the same excitement I had as a management trainee. So every day for me is a new day. I think one of the best things has been the environment. I’ve never felt I am working for someone else’s company. I’ve always believed this in my company. And that is something which has helped me take long-term decisions.
The biggest satisfaction is to have the honor and privilege that somebody trusts you with their money. And today, the fact remains we are in this industry where people are trusting you. We are custodians of millions of investors who have shown faith. In the financial sector there are many small investors who do not even know what they’re getting into but they’re giving you their money for 20 years. That gives me a lot of satisfaction.
What would be the one thing that you would like to change about the Asset Management Company (AMC) industry?
I would break it in two parts:
One is the industry needs to get away from the assets under management (AUM) thinking. It’s important how much value we add rather than what the size of the assets we manage.
No. 2 is that there needs to be more positive activism that the industry has to show as shareholders in companies because a single shareholder may not have much say. I’m very happy to see the way things have happened in the last few years. And that’s something I’d like to see the mutual fund industry play a far bigger role on behalf of investors in all investee companies.