July 22, 2024

☕Is Aladdin Jio’s secret weapon to disrupt mutual funds?

In today’s Finshots, we tell you about why everyone believes that a world-famous tech tool will help Jio make inroads into the Indian mutual fund industry.

The Story

Mukesh Ambani’s foray into mutual funds business is now official. A few months ago Reliance Jio announced a partnership with global asset management company BlackRock. And last week, the duo finally asked SEBI for permission to disrupt the industry.

Okay. We say disrupt because that’s what everyone believes is going to happen. Ever since Reliance set the cat amongst the pigeons in the telecom industry, the base expectation is that every industry Reliance wades into will see a mammoth change. And right now, Jio has the might of the Reliance distribution network — 450 million telecom users and the physical presence of over 18,000 stores in the Reliance Retail umbrella.

So will it happen this time?

Well, we don’t know. But it’s not going to be easy.

For starters, there are around 45 rivals already. The ones who’ve been around for a while have their ‘star’ fund managers who do their in-depth research before deciding which stocks to buy and sell. They’re the ones who already have a long track record to boast of. People will look at the past performance and make their choices. So if Jio wants to avoid that trap, it’ll have to pull a rabbit out of the hat and snag someone who’s already a stalwart in the industry — back in September, there were rumours that Nilesh Shah, the MD of Kotak Mutual Fund, was jumping ship to Jio. And that got people excited. Eventually, he had to quash the rumour, but that’s the kind of person Jio might need at the top. Otherwise, it’ll take some work to convince people about Jio’s potential.

Secondly, playing a price game is hard. If Jio could offer ultra-cheap bundles to lure telecom subscribers, that wouldn’t work out the same way in the mutual fund world. There are plenty of low-cost funds already swarming the market and Jio will be just another one in the pack. Also, they can’t offer freebies or run big promotions either to entice investors because the market regulator SEBI frowns upon all that. Or as journalist Debashis Basu put it, “no one can throw money and buy loyalty.”

So yeah, disruption seems to be a far dream at the moment.

But wait… maybe, just maybe, Reliance could have something up its sleeve — the partnership with BlackRock could give it access to the world’s most sophisticated portfolio management tool. We’re talking about Aladdin, a neat acronym for ‘Asset, Liability, Debt and Derivative Investment Network’.

See, back in the late 1980s, Larry Fink was a young 30-something Wall Street banker who was tasting sweet success. He was the toast of the industry and made millions of dollars for the investment bank he worked at. But soon, some of his trades went sour. With his magic dimming, the bank shunted him to less glamorous positions. But Fink blamed the fiasco on the lack of a proper risk and portfolio tool.

So he decided to set up his own venture along with a few other partners. In 1988, BlackRock was born in a tiny one room apartment in New York. And the focus was simple — use tech to be the best portfolio manager ever.

And initially, they dabbled in the bond market. They vacuumed millions of data points so that the tech could study every minute movement in prices; analyze how random events affected bonds too. But then, in 2006, it added stocks and the European markets to its kitty — BlackRock bought Merill Lynch. And 3 years later, it ventured into getting a data foothold in the Exchange Traded Fund (ETF) market by buying a unit of Barclays.

The world had become Aladdin’s oyster. No one else had such a powerful tool.

And to put this in perspective, some people call Aladdin BlackRock’s ‘central nervous system’. Or put another way,

Rick Rieder, CIO of BlackRock’s $1.7 trillion fixed-income business, uses it to track and analyse the risks embedded in his thousands of complex holdings. He loads his $31 billion Strategic Income Opportunities Fund to show how the portfolio will react to different market environments. A scenario called “Eurozone Breakup” will cost Strategic Income 79 basis points of performance relative to Rieder’s targets, Aladdin calculates, displaying asset-by-asset and risk-by-risk where the impact is acute. “China Credit Crunch” would be twice as painful. Strategic Income’s biggest potential risk? “Spring 2013”, a repeat of the taper tantrum, when the Federal Reserve signalled it would unwind its stimulus efforts, causing bond yields to surge.

Now that’s just analyzing the risks embedded in the portfolio. But it can even tap into its billions of data points to tell a fund manager what action to take when an adverse event shocks stock markets. For instance, say there’s any Chinese incursion into India’s borders and India retaliates. Aladdin could point out to the fund manager and say — “Look, these stocks in your portfolio are now under threat. If you don’t want to underperform, load up on these safe stocks, or buy these specific government bonds.”

Of course, it’s up to the fund manager to decide whether they should execute this call. But you’d imagine it’s tough for a human to ignore a computer that seemingly has a treasure trove of historic data points to justify a recommendation, no?

I mean, the US Federal Reserve, the European Central Bank, and others have all turned to Aladdin’s prowess when financial markets have been hit. They wanted answers from what’s touted to be the world’s best portfolio tool.

So yeah, now you see why everyone thinks Aladdin could be a game changer.

But there’s one thing you must know about this tech.

BlackRock actually rents out this software to other financial companies in the world. So it’s not like other fund houses can’t get their hands on it.

Also, this isn’t BlackRock’s first rodeo in India. It partnered with the DSP Group for over a decade. You’d think Aladdin would’ve catapulted DSP to the top then. But that didn’t happen. So would it be different for Reliance?

These are interesting times for sure.

Until then…

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