The backbone of any industry, especially financial services, is how it is regulated. And the regulations, right from 2009, have made MFs very clean products. Currently, around Rs23 trillion is being managed by the industry, and it is working in the customers’ interest. Existing customers have had a good experience and are coming back again. Almost 80 per cent of the sales are happening to existing customers. Thanks to financialisation of savings in the past four years, the industry has grown very well. Going forward, I think the reach of MFs will become wider. The future growth will be decided on how much we can push debt MFs in the retail space, because there will be phases when equities will not work. We need to ensure that more retail money comes in the debt segment than has happened till now.
In our 25th year, we are proud and happy about what we’ve done. But, the fact is that only 28 per cent of the assets under management (AUM) come from retail investors, 28 per cent comes from high net worth individuals (HNIs) and the balance from corporates. So, corporates and HNIs make up more than 70 per cent of the AUM. So, we still have a long way to go when it comes to retail. In the past three-four months, the slowdown in equity flows has mainly taken place because of HNIs. As an industry, we should focus on retail. Today, we are in a far better position to go deep into smaller cities and towns. We need to have more distributors. The core of the industry will continue to be fund management and wealth creation, but the distribution model will change. Therefore, the way the industry has grown in the past, it cannot continue to grow in the same manner in the future.
While we talk about long-term investing, funds are marketed for one-year or two-year holding period and over 56 per cent of retail investors hold funds for less than two years. Does the industry practise what it is preaching?
Anuradha Rao: That is the crux of the whole issue. We have enjoyed wonderful growth so far, but are we going to continue to grow in the future by doing the same? Or, do we do something different, maybe dramatically different? The opportunity lies in retail. While you speak of long-term investment being required, but the positioning is based on short-term performance, then we are not meeting the expectations and actual needs of the retail investor.
What is the investor’s need?
If we need to reach a stage like in the US where every household owns a mutual fund, we need to position mutual funds
as a solution – not as equity or debt products, but a complete package which serves the needs of the customer, in terms of their goals. We need the regulator to come on board and help us fashion that package which will help customer consume it for his five-year, ten-year, or long-term retirement goals.
If you look at Mumbai, the number of points at which an investor can access mutual funds
is one per 225 households. In Chennai, it is one per 440 households, in Delhi, one per 930 households, and in Visakhapatnam, one per 1,600 households. In Navsari, it is 1 per 20,000 households. And in Navsari, 8,000 households are earning more than Rs 500,000 a year, meaning that there is substantial investment capacity in Navsari. These households have moved away from land and gold, but an alternative to bank deposits is not accessible. Therefore communication also needs to be in the local language. This will make the customer comfortable. And the only practical way to address customers will be through technology.
Large-cap funds have underperformed exchange-traded funds (ETFs) in recent times. With more provident fund money coming, this space is expected to get bigger. While the industry doesn’t seem geared towards this shift, will circumstances force you all to get into ETFs?
Obviously, we do need to create a broader set of products, including ETFs, which will happen. When the entire industry is shifting to passive, this creates material distortions in asset allocation because you have momentum chasing stocks which don't deserve that and market equilibrium eventually will take you back to stock picking, which too is happening in the West.
On cost implications, as an industry we are very sub-scale at this point, how much ever high the growth rate is. The entire size of the industry is smaller than a mid-sized European of American asset management company, and these firms are worrying about operating leverage. While regulators may tell the industry to bring costs down, it’s competition which will lower costs. This is a highly competitive industry and the disruption will happen from within much sooner than you realise, which in turn will drive consolidation. No country has as bright a future for the asset management industry as India at this point.
The industry is essentially a four- or five-horse race even after all these years. How do you see competitive intensity among them?
We are at an early stage of discussion regarding issues around alpha and index funds. It will have an impact on costs, and you are already seeing it with large-cap funds. If you look closely at what is happening, prices are dropping in those segments which are directly impacted because of a lack of alpha.
You are seeing institutionalised retail investing driving costs down in the form of pension funds. That is retail money coming into the market, but in an institutionalised fiduciary capacity. Those trustees are driving down costs, again very dramatically.
It is not true to say our costs are coming down. We see it. We run our businesses, we can feel it. And we see it in the mix of assets. One of the largest funds today is an ETF, which earns 6.5 basis points. It’s not a very profitable fund by the standards of what we have been used to. So absolutely competition works. We should not interfere too much with it.
The other day there was news that Paytm is going to go live with its mutual fund distribution soon. Will that be a WhatsApp moment for distribution?
I believe that as far as investments are concerned, there is always a personal touch which is required. So while technology is there to facilitate investments, it is behaviour and emotions which drive decision-making. In such a scenario, a distributor or advisor becomes a very important person to take care of the investor’s interests, particularly during turbulent times. When times are good everyone is greedy. Investment happens in a cycle of fear, greed and hope. So for a distributor or advisor to become successful, I think it is very important to manage the emotions of the investor.
Mutual fund investing is not like buying books or flight tickets online. It’s a journey and a process. A successful investor is one who doesn’t take irrational decisions. Most of the time, there is a gap between funds’ returns and the investors’ returns which is caused because of behaviour.
While we talk about growth, we only have 175 million unique investors. If the country, as a whole, has the potential for 250 million investors, more distributors are needed. At an industry level, we don't even have 100,000 active and serious distributors. There is the potential to have a million distributors. Only then, can we really talk about costs.
The industry has lagged behind on innovation. For example, debt products are still designed for treasuries. Your views?
I don't think we need innovation in products as the need for deploying money has been the same for centuries, and it hasn't changed. For almost two decades, mutual funds
have had the whole range. I keep saying mutual funds are not only about equity or duration funds. It can replace a savings account through liquid funds and even replace fixed deposits through short-term funds. I think the range is good enough.
Banks have roughly around Rs100 trillion in deposits, but there has been no innovation there for the last 50 years. Without innovation, they have been able to thrive and grow. We need simplicity and all those pipelines to reach the customer and talk to him in his language. Innovation is needed to reach these consumers.
We have the growth, but only a handful of fund houses are profitable. Is this not a problem?
No I don’t think it is a problem. If a fund house is managing Rs3 trillion of assets, it has a profitability of 20 basis points or Rs6 billion, which is good. Now, for these fund houses, it has been achieved over a period of time, because of scale and due to the investments they made in the past.
Five or 10 years back, they were not making this kind of return. So profitability for the others will grow as there is operating leverage in this business as the cycle grow it really helps. Size definitely helps over a period of time to make more money. I think it is a very healthy industry and as it has happened in the West, scale and customers’ confidence will matter. As time goes by, margins are going to come down, so scale is what is going to help us.
It’s a very important call that every asset manager will have to take that whether they want to go for growth or profitability. Unfortunately this industry has aimed for top line, but with the listing of two asset management companies and more listings in future, the new benchmark is going to be profitability. In the pursuit of higher AUM, today the industry is not as profitable as it should be.
What leads to the next problem, is if you don’t have profits, you can’t invest in branches, and can’t go to smaller cities and towns, and the industry doesn’t grow. There’s a dichotomy here, where we have 50 per cent of the industry which is institutional, where we run at sub-optimal 2-5 basis points, that is more a top line game. On the other side, one part is HNIs, where the AUM is concentrated in a few cities with few distributors, so there is an auction for that. Funds pay a higher cost for acquisition but, when it comes to the actual retail investor, because the profit pools are not there, fund houses are not able to invest. Going forward, every fund house will have to take call of either building up scale or going for profitability.
How do you see the recent Sebi scheme categorisation and benchmarking?
Rao: The whole idea was to simplify and bring about transparency and make it clear to the investor what he is getting into. That has been achieved phenomenally well. And, all of us today are taking about the need for simplification. When you are trying to communicate and reach a meaningful product bundle to the end investor, it needs to be simple for him to understand.
All of us agree that it is good for the customer and, therefore, offering it either on a digital platform or a distributor platform becomes much simpler because, there is a push factor. It creates a pull factor where people come and start demanding that I need this, I’ve seen it on TV, where is it, where can I get it. So, it has to be as easy as buying something from a kirana shop. And, I think all of us are really beginning to sort of coalesce our thoughts around that.
What’s your take on the governance standards, what are the areas of improvement and investor activism?
Puri: I had a public view, which is well-know, and a personal view. I think it would be better for our industry if we evolved our ownership and governance norms. And, I restate that once more. If we look around the world, the most successful asset managers, those who are really good at asset allocation and enforcing governance, are those that are typically independent. They are not bank-owned, they are not corporate-owned. We have an ownership evolution happening and I’m glad it’s started. The listing of Reliance MF and HDFC MF signifies that this evolution is underway. SBI’s partner Amundi is a good example of erstwhile bank-owned manufacturers, essentially moving into becoming independent, widely-held listed asset managers.
We have an ownership problem in the industry structure we have, where the leading asset manufacturers are actually owned by banks. They have actually captured materially significant share not necessarily through foul means but certainly not through fair means either. They are able to essentially exploit distribution in a manner that essentially involves using a brand to switch people from savings-deposits into risk-bearing products without perhaps a complete understanding as to what has happened in that transmutation that occurs. I don’t think that’s healthy in the longer term.
In terms of our role in implementing corporate governance in the corporate arena, activism and so on, it has to start with engagement and stewardship. India is not ready for a truly activist market in the western sense. What we are learning to do is, to be much more engaged. The Association of Mutual Funds in India (Amfi) has had proxy advisory committees and so on, on voting. We are seeing much more thought being given to resolutions.
You are seeing a debate between global proxies and domestic proxies as we saw recently, over so-called cultural differences. I am very skeptical about that by the way. I don’t believe there are cultural difference at all. I think there are norms on corporate governance (which are accepted) around the world. But, these are all forces, which are going to play out and that’s actually very healthy that you are seeing this quick maturity coming into governance and engagement and stewardship. But, I don’t think activism just yet.
Would one of you bank-sponsored fund house like to counter Mr Puri’s comment?
Rao: See the bank has invested in the company for a reason, right? And, if you look at the composition of our assets, 25 per cent of assets comes from the bank, 75 per cent is all other channels. And that is likely to continue. The challenge is not whether you are bank-sponsored or not, it is about reaching the huge hinterland, which is left unaddressed. All of us need to be looking at ways of getting there.
How can fund houses work closely with distributors and deepen penetration?
Choksi: After the abolition of entry load and of amortisation prior to that, there is only some upfronting of trail commission which can happen. Otherwise, it is a pure trail kind of a model. And, if you look at the 100,000-plus independent financial advisors (IFAs), excluding national players, regional distributors and banks, the assets are below Rs30 million per IFA. So, even if he is earning one per cent, which is on the higher side, that amount is very insignificant. After his costs, he is not even earning Rs 200,000 annually.
If we want to grow the market, one has to look at what the customer is earning, and not on the distributor’s income. That’s probably the view one has to take when we are talking about a larger audience. If we want to cover a larger mass to invest in MFs, then there has to be a viable mechanism for an individual to come and take this as a profession. So, that has to be studied well and thought through by all stakeholders - regulator, asset managers, distributors – and come out with a structure which gives long-term growth to the industry and the customer continues to benefit from that.
This industry is facing this huge problem of talent retention, and there is a lot of churn. Do you see there to be a problem?
The industry is crossing two decades of existence, and human careers are not longer than the life of organisations. As the industry crosses, you know, one-and-a-half or two decades of existence, it’s very natural that this transition will happen. I think collectively we overreact to people transitions. I am not seeing headlines being created in any industry because people move. This, in some way, also undermines the fact that in any asset management firm there are 40-50 people in an investment team who are contributing towards the final outcome. It is not just one or two people.
Look at the evidence. In the last five years, you take probably top 50 fund houses where changes have happened. In the five years since that change, has it had a significant impact on fund performances or outcomes to investors? I don’t think so. Probably somewhere it got better, somewhere it remained the same. So, maybe the correlations don’t exist or the cause-effect doesn’t exist. Change is natural, it will happen, it happens in every industry.
Talent is fungible. It is not bound to be stuck in one place. So as long as you can attract more talent and have the right institutional framework to continue to build up, I think life goes on.