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Is Aladdin Jio’s hidden weapon to disrupt mutual funds?

(News Trust of India) : Mukesh Ambani’s debut in the mutual funds market is now official. A few months ago Reliance Jio announced a relationship with global asset management giant BlackRock. And last week, the duo finally petitioned SEBI for authorization to disrupt the business.

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 business, the base expectation is that whatever industry Reliance wades into will experience a massive change. And right now, Jio has the might of the Reliance distribution network — 450 million telecom customers and the physical presence of over 18,000 outlets in the Reliance Retail umbrella.

So will it happen this time?

For starts, there are roughly 45 rivals already. The ones who’ve been around for a while have their ‘star’ fund managers who perform their in-depth study before picking 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 prior performance and make their decisions. So if Jio wants to avoid that trap, it’ll have to pull a rabbit out of the hat and capture someone who’s already a pillar in the industry — back in September, there were reports that Nilesh Shah, the MD of Kotak Mutual Fund, was hopping ship to Jio. And that got folks thrilled. Eventually, he had to dismiss the notion, but that’s the kind of person Jio might need at the top. Otherwise, it’ll require some work to convince them about Jio’s potential.

Secondly, playing a price game is hard. If Jio could provide ultra-cheap bundles to lure telecom consumers, that wouldn’t work out the same way in the mutual fund world. There are many other low-cost funds already sweeping the market and Jio will be simply another one in the pack. Also, they can’t offer freebies or conduct major promotions either to tempt 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 time.

But wait… maybe, just maybe, Reliance could have something up its sleeve — the collaboration with BlackRock could offer it access to the world’s most advanced portfolio management tool. We’re talking about Aladdin, a nice 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 delicious success. He was the toast of the industry and made millions of dollars for the investment bank he worked for. But shortly, several of his trades went sour. With his enchantment diminishing, the bank shifted him to less glamorous jobs. But Fink blamed the catastrophe on the lack of an appropriate risk and portfolio tool.

So he decided to set up his own enterprise together with a few other partners. In 1988, BlackRock was founded in a modest 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 collected millions of data points so that the software could research every minute fluctuation in prices; assess 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 moved into obtaining a data footing in the Exchange Traded Fund (ETF) industry by buying a unit of Barclays.

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

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

Rick Rieder, CIO of BlackRock’s $1.7 trillion fixed-income unit, uses it to track and assess the risks buried in his thousands of complicated holdings. He loads his $31 billion Strategic Income Opportunities Fund to show how the portfolio will react to different market scenarios. A scenario labeled “Eurozone Breakup” will cost Strategic Income 79 basis points of performance relative to Rieder’s targets, Aladdin calculates, indicating asset-by-asset and risk-by-risk where the impact is extreme. “China Credit Crunch” would be twice as terrible. Strategic Income’s largest potential risk? “Spring 2013”, a replay of the taper tantrum, when the Federal Reserve hinted it would withdraw its stimulus measures, prompting bond rates to rise.
Now that’s merely examining the risks included in the portfolio. But it can even dip into its billions of data points to instruct a fund manager what action to take when an unpleasant event shocks stock markets. For instance, assume there’s any Chinese intrusion into India’s borders and India retaliates. Aladdin may 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, pile up on these safe equities, or buy these specific government bonds.”

Of course, it’s up to the fund manager to decide if they should execute this call. But you’d suppose it’s challenging for a person to dismiss a computer that seemingly has a treasure trove of prior data points to justify a decision, no?

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

So yeah, now you understand why everyone believes Aladdin may be a game changer.

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

BlackRock actually rents out this software to other financial organizations 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 almost a decade. You’d think Aladdin would’ve propelled DSP to the top then. But it didn’t happen. So would it be different for Reliance?