It’s A Race To Stand Out

The late Paul Samuelson, economist and occasional columnist for this magazine, once observed that investing was boring. For those looking for excitement, he suggested casinos in Las Vegas. But boring is not sombre, which is the mood in the mutual fund industry nowadays. Given the state of affairs, that seems fitting. Growth in assets under management (AUM) — a key objective and indicator — has been absent. In equity funds, it has fallen by about 2 per cent. The rate at which new fund offers have come to the market has declined, too. Retail participation — after all, this is the route individual investors are expected to take to stock market investing — has not grown at all, if it has not declined. It is not a pretty picture.

The mood notwithstanding, a few things within the industry have changed. For instance, the bigger funds have got bigger, or are achieving some scale. Some have exited, mostly the foreign players. Fidelity was the latest to shut shop, selling the business to L&T Finance Holdings after accumulating losses of just over Rs 300 crore in the first half of April this year. Others that threw in the towel include Temasek-sponsored Lotus AMC and Stanchart.  "Fidelity is the largest asset management firm in the world," says the head of a leading financial services firm. "Its exit should tell us something about how we manage the competitive landscape for the asset management business."

Talking to other industry folk and a range of financial services analysts and observers, a few themes have been advanced to explain the state of affairs in the mutual funds business: intrusive regulation (opinion on this is divided, though), the absence of innovation and new product offerings — an expert called it "too much of a me-too industry" — and the inability to go beyond metros to the small cities and towns.

No doubt, the industry has come a far way from its small beginnings, and a number of mutual fund houses (as they describe themselves) have grown in size and stature too, to become well-known brand names. But somehow that does not seem enough to dispel the damp sentiment. Will things change, and how?

Scaling Up
To be fair, the mutual fund industry has not been without its fair share of problems, which did not emanate from within, but are a function of the external environment. For instance, a year ago, we were on the sidelines of what seemed to be a battle between market regulator Sebi and the Insurance Regulatory and Development Authority (Irda) over the ubiquitous unit-linked insurance plans (Ulip) offered by life insurance firms — which looked like siblings of mutual fund schemes — over regulatory jurisdiction on collective investment schemes.

But the two industries operated under different sets of rules. Sebi constrained mutual funds on their fees, distribution and expense ratios, while insurance companies captured the same market with no such restrictions at all. The ‘battle' went up to the Supreme Court and an understanding was reached. In the end, mutual funds may have lost out, but there are a couple of things that could change that.

"What would happen if the definition of an asset management business included insurance companies and pension funds?" asks Alpesh Shah, partner and director at Boston Consulting Group in Mumbai. "That would mean similar rules, and an infinitely bigger market for asset management companies, and mutual funds."

More than anything else, it would create big opportunities of scale for AMCs, and a deeper market, better services and perhaps even better performance. "Currently, it's an overcrowded market, with nearly 40 fund houses offering similar products," says Vikaas Sachdeva, chief executive officer at Edelweiss Mutual Fund. "That also means more innovation and a varied range of investment options."

No doubt, there has been some innovation despite difficult conditions. "Look at the systematic investment plan that suits most of us, whose preferred savings mode is monthly," says Sachdeva. "And gold — with which our love affair is eternal — has spawned the exchange- traded fund, which is working out quite nicely."

Then there is outbound investment; more Indians are putting money into investment funds that invest overseas. Indians are getting more adventurous in investing outside their home market, and some funds are stepping to help them find the appropriate markets to invest in.
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Winning Ways
How much has the performance of mutual funds over the last three years been affected by the aftershocks of the 2007 crisis and the global slowdown? Quite a bit, initially; mutual funds were badly affected the world over when markets dropped as dramatically as they did in 2007 and 2008, and India was no exception.

To some degree, regulatory constraints — real and perceived — on expense ratios, distribution costs and management fees are often blamed for poor performance. Others point to distribution models that need to be changed, or at the very least, strategically reconsidered as another way of addressing the performance problem. To be fair, many funds are attempting to address the problem. Better yet, many have bounced back.

Take this year's winner of best equity mid-cap and small-cap mutual fund, SBI Magnum Emerging Businesses Fund (AUM Rs 561 crore), which returned 48 per cent in the three-year period under review. In FY2012 it returned 12.6 per cent, when Nifty50 declined by 9 per cent.

We do not live in a culture of star fund managers, but the fund manager of the above-mentioned fund, R. Srinivasan, also manages Magnum Global (AUM over Rs 900 crore), a mid-cap fund that returned over 9 per cent in FY12 when the Nifty declined by 9.3 per cent. Not exactly a Peter Lynch, but we may get there yet.

Idea Outreach
There have been many positive changes and triggers in the last few years that may become the basis for the next shift up for the industry. "In 2006-07, the geographical distribution of mutual fund investments was 92 per cent from the metros," Shah points out. "Now that's down to 75 per cent on a much larger industry-wide AUM."



Distribution, despite being expensive, is penetrating wider and deeper. The larger players are expanding into the top 100 cities, and building networks. They see bank fixed deposits in these cities and towns as presenting a huge opportunity to tap for equity funds; for the safety conscious, debt funds are an attractive alternative.
"Money market funds with cheque books is a feasible idea, technologically and from a regulatory standpoint," says one fund manager. So far, the results of the push have been encouraging.

Funds like Fidelity may have given up, but other Indian mutual funds continue to enter into joint ventures and partnerships. There is differentiation too, as many of the large fund houses are positioning themselves in investors' minds with certain styles. If you want to go aggressive, try Reliance Mutual Fund or ICICI Mutual fund; if you prefer going conservative and steady, there's HDFC Mutual Fund.

Existing funds that look similar could be restructured under the AMC into a single entity to create scale, and control expenses. As Sachdeva points out, the mutual fund is a platform.

Good ideas. What's left is for mutual funds to take them on a roadshow. Success comes from being able to communicate positioning, investment ideas and performance. Only then will they win people's trust and their money too.

srikanth(dot)srinivas(at)abp(dot)in

(This story was published in Businessworld Issue Dated 30-04-2012)