At a time when the private sector mutual fund industry is celebrating its 25 years, it is surprising that there are few foreign players who have made the cut. The first player in the private sector – Kothari Pioneer – was sold to Franklin Templeton within the first few years. While Pioneer has re-entered the Indian market by buying a stake in Bank of Baroda’s mutual fund arm, there are other illustrious names such as BlackRock, Goldman Sachs, Fidelity, JP Morgan, ING, etc, who came into India lured by its growth prospects, found the going tough and pulled the plug on their India business.
The foreign players ran into several problems. For example: Fidelity, despite having a strong equity base, exited after it found the business unsustainable due to the ban on entry load in 2009. When it exited in 2013, it had accumulated losses of Rs 3 billion till FY11. Some entrants also tried to bulldoze the system by asking distributors to only sell their products. There was a revolt of sorts, and the fund houses suffered.
There were other problems too. While UTI had been around since the 1960s, it ran a fixed-return product. Once private players were allowed entry, they were not permitted to promise fixed returns. “Time was needed to educate the investor about a product where market risk had to be borne by him, and for per capita incomes to grow,” says KN Sivasubrmanian, former chief investment officer at Franklin Templeton Asset Management (India).
Developing distribution strength was another hurdle. “The fund industry was still in a nascent phase and required distribution strength more than it needed asset management skills. Foreign players who did not have a strong distribution presence found the going extremely tough,” says Sanjay Sinha, founder, Citrus Advisors (and former chief executive officer of L&T Mutual Fund). The distribution channel in India was also different. The banking channel predominates in developed economies, while in India they had to deal with independent financial advisors (IFAs). Building a network of IFAs requires time and effort.
Asset management was not the primary business of many of the foreign players who entered it here in India. Banking and investment banking were their forte. They lacked the single-minded, long-term focus required to succeed here. The inability to scale up and the insignificant size of the India business compared to their global operations at times led to exits. “The board would one day decide that the India business was not worth the trouble,” says R Balakrishnan, an industry veteran who is now an independent analyst. Short-term focus too played a part. “If the results didn’t come fast, they lost patience. If there was a change in management, the new person wanted to do something different,” adds Balakrishnan.
A study in contrast is Franklin Templeton, which has thrived in India. “The decision to be in India had buy-in right at the top in the case of Franklin,” says Sivasubramanian. Besides looking for growth in the Indian market, the parent also treated India as a source of managerial (like Lever) talent. Franklin took an early lead in setting up a large back office in Hyderabad to cut costs globally. “The parent realised that India was a local market, so they gave the management and investment teams here a free hand to come up with strategies that would suit this market,” adds Sivasubramanian. Asset management is Franklin’s only business.
Company-specific factors, too, played a part. Goldman Sachs was hawking passive funds at a time when there were few takers for them. JP Morgan’s decision to pull out may have been a part of its global restructuring exercise, with the debt default debacle acting as the last straw.