High costs, poor distribution reach hobble foreign asset managers in India

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Reliance Capital’s decision to put up its stake for sale in Reliance Nippon Mutual Fund (MF) to foreign partner Nippon Life Insurance could culminate in the formation of a sixth foreign fund house in the country. However, foreign asset management companies (AMCs) going it alone have not had it easy in India and several have had to exit or sell their businesses to Indian players in the past few years.

Market players attribute the spate of exits to the inability of these foreign players to scale up and establish a meaningful distribution footprint across the country. Many ran high-cost operations, eating into profitability. Large fund houses such as HDFC MF, ICICI Prudential MF, and SBI MF have the backing of large banks or financial institutions, helping them make inroads across the country.

Some of the foreign fund houses that shut shop or sold their businesses include Fidelity, Morgan Stanley, PineBridge, and JPMorgan. Foreign players typically make the mistake of replicating their global business models in India, failing to understand the country’s cultural diversity.

“Succeeding here requires being a mass market player, understanding the diverse Indian landscape, and localising communication to a great extent,” said an industry official.

While several of these players may be big global names, they may not resonate with Indian investors.  According to Kaustubh Belapurkar, director, fund research, Morningstar Investment, foreign funds need to have a long-term approach and have the patience to ride out periods when asset growth is limited. “It’s not just about a name, but people, processes, and performance,” he says.

“Every foreign fund that exited created a misery of its own. Most were not able to scale up meaningfully and understand the local dynamics at play,” said Dhirendra Kumar, chief executive officer, Value Research.

Fidelity, for instance, was well-recognised in the market, but made the mistake of exiting too soon and at a time when MF assets were stagnating, say industry players. The AMC’s stay in the country was characterised by a high-cost structure and marketing overspends. 

The fortunes of JPMorgan took a turn in 2015 after two of its debt schemes took a partial write-down in value after investments to the tune of ~200 crore in debt papers of Amtek Auto, an auto ancillary manufacturer, missed bond payments. It subsequently sold its MF assets to Edelweiss MF.

It’s not that all foreign fund houses have been failures. Franklin Templeton, a top 10 fund house, has been able to establish a strong distribution network and localise some of its strategies.

Mirae Asset MF, after facing several teething troubles when it began in 2008, has established itself as a recognised brand. The fund, whose growth in equity assets was among the fastest last year, now ranks among the top 20 fund houses. 

Nippon Life, however, seems to be better placed than many of its predecessors. Reliance Nippon MF already has a wide distribution reach and has scaled up substantially, consistently featuring among the top five funds in terms of the assets it manages.

Currently, Franklin Templeton Asset MF is the only foreign player in the top 10 list.

BNP Paribas MF, Invesco MF, Mirae Asset MF, and Principal MF are among the other foreign fund houses operating in the country.

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