I find it difficult to envisage funds in India taking their products directly to clients. The awareness of funds is not very high, and the average retail client is not very comfortable deciding from the vast array of choices. That’s why we have to rely on third party distributors.
Mr. HARSHENDU BINDAL, PRESIDENT, FRANKLIN TEMPLETON INVESTMENTS INDIA He would like to see the Indian mutual fund industry evolve to manage assets for different classes of clients — retail, high net worth and institutional, says Mr Harshendu Bindal, President, Franklin Templeton Investments India. Explaining h ow the Indian MF model is very different from the West, he also talks of why the industry may find the transition to a zero-entry load regime challenging in the short term.
Excerpts from the interview:
You have overseen Franklin Templeton’s operations in several regions before taking up this India stint. Would you say a fund-house focussed wholly on retail investors is not viable in India?
It is not a question of being viable; there are certain fund houses globally which do focus on retail clients alone. But my question is: why restrict to one segment alone?
I would like to see the mutual fund industry in India grow into an asset management industry which manages assets for different classes of clients — retail, high net worth and institutional investors. If you look at the way the Indian industry has grown, you will see that almost half the money managed is invested in liquid and liquid-plus segments that reflect corporate flows, and only half is in the retail segment.
Given that we have over 38 different fund houses managing just $120 billion; that limits the scale advantages to players. Globally, asset management is emerging as a low-margin, high-volume business. At one point in time, in the global context, $500 billion was considered a large asset size. Today, there are funds managing even $1-2 trillion.
The other point is that if you look at the developed markets such as the US, the bulk of the money comes into the industry through 401K benefit plans and pension plans. That the fund industry cannot meaningfully participate in either of these segments in India is a big constraint.
Even in the US, the proportion of funds sold directly is not high.
Is that because expanding distribution requires massive investments?
Unlike insurance or banking, the mutual fund business is a low margin one. In fact, the asset management industry does not invest directly in building a large sales force in any part of the world. Clearly third party distributors are very important.
Currently there are only 75,000 AMFI certified agents in the country which is very low for a country India’s size. That entails a lot of education and investment; the low margins of the industry are not allowing it to make that investment.
Seen in that context, how will Franklin Templeton react to the entry load waiver on mutual fund schemes proposed by SEBI?
The objective of the move is clearly to benefit clients through reduced fees — that is largely a good goal. However, operational challenges over the short term need to be addressed, as distributors/fund houses evolve suitable business models. Also, as we have been saying, there needs to be parity amongst different financial service providers in terms of regulations and transparency.
The challenge is that if funds cannot compensate distributors, they will have to seek it from clients, who might not be amenable to paying over the short to medium term. As distributors have the choice of selling other products, there may be pressure on AMCs to compensate distributors out of their revenues relatively more, compared to current levels.
As fund houses do operate under fee structures that are controlled, there may not be steep price differentials among fund houses. Even when we talk about increased trail fees (recurring fee paid to the distributor), there isn’t much room. Therefore, I don’t see us returning to the old revenue streams for distributors or manufacturers. We have also seen similar moves in countries like Australia and UK, but the effective dates are 2010/2011, giving room for seamless transition.
Franklin Templeton will continue to focus on selling products through its distribution partners. I find it difficult to envisage funds taking their products directly to clients. The awareness of funds is not very high, and the average retail client is not very comfortable deciding from the vast array of choices.
But is it really so difficult to get investors to pay a separate fee? Retail investors do pay separate brokerage on equity market transactions.
When you compare mutual funds to equity, it is important to know that the fee on equity investments is based on transactions which are quite frequent. With funds, the investments are expected to be of a longer duration, with the fee being collected mainly for advice. When you have a longer duration in mind, you cannot operate on a transaction-fee equivalent.
Can an online platform where investors buy funds directly, replace the traditional distribution channels?
An online platform would be suitable for clients who are well-informed and are only looking for convenience. But we feel that Indian investors, by and large, are not that well aware and do need advice from distributors on choosing between products. The second disadvantage that I see with online platforms is that clients have tendency to get into a trading kind of mindset.
With funds, it would be better if clients took a long term approach and tailored their investments to a proper financial plan based on their needs and risk profile.
Investors in India do tend to chase returns. So have you seen inflows into your equity funds pick up after the post-election rally?
We are beginning to see a lot more interest and activity from investors. Call volumes to our call-centres have actually tripled and we are witnessing flows into our equity funds.
We believe that timing becomes less of an issue with a longer investment horizon and that’s what we tell our investors.
We have consistently held that timing the market is difficult. When this rally happened, for instance, not only retail investors, but many investment professionals were caught off guard!
How is your new theme fund- Franklin Build India Fund differentiated from the host of other infrastructure funds?
Through this fund, we are looking to offer investors access to a wide range of themes in one single offering, representing opportunities in the key building blocks of the Indian economy.
The way we look at it is - there are three main constituents of the economy, investment, consumption and exports. FBIF focuses on the investment side. We at FT are launching a new fund after a long time. We try to launch products that are sustainable over the long term. When we look at new products, we see if the product is different from our existing products and if it presents a sustainable idea.
Isn’t the investment theme overheated, with much of the stock market action happening around the public spending theme in recent months?
We don’t look to timing the market when we launch our funds. We looked at valuations for these sectors and they were either at or below long term averages. That suggests that, from a valuation perspective this isn’t a bad time to invest in these stocks. The question is whether we find enough value for the medium to long term — which we are finding at this juncture.
Typically we have found theme funds holding large cash positions and underperforming diversified peers over the last one year. What is your stance on this?
One, we tend to be fully invested in our equity funds and as a fund house, we do not take cash calls. We think that has to be taken care of by the advisor and the investor when the asset allocation is decided on.
That’s the reason why we also looked at a more diversified theme and not just physical infrastructure. Through this, we hope to have more opportunities across market cycles.
Excerpts from the interview:
You have overseen Franklin Templeton’s operations in several regions before taking up this India stint. Would you say a fund-house focussed wholly on retail investors is not viable in India?
It is not a question of being viable; there are certain fund houses globally which do focus on retail clients alone. But my question is: why restrict to one segment alone?
I would like to see the mutual fund industry in India grow into an asset management industry which manages assets for different classes of clients — retail, high net worth and institutional investors. If you look at the way the Indian industry has grown, you will see that almost half the money managed is invested in liquid and liquid-plus segments that reflect corporate flows, and only half is in the retail segment.
Given that we have over 38 different fund houses managing just $120 billion; that limits the scale advantages to players. Globally, asset management is emerging as a low-margin, high-volume business. At one point in time, in the global context, $500 billion was considered a large asset size. Today, there are funds managing even $1-2 trillion.
The other point is that if you look at the developed markets such as the US, the bulk of the money comes into the industry through 401K benefit plans and pension plans. That the fund industry cannot meaningfully participate in either of these segments in India is a big constraint.
Even in the US, the proportion of funds sold directly is not high.
Is that because expanding distribution requires massive investments?
Unlike insurance or banking, the mutual fund business is a low margin one. In fact, the asset management industry does not invest directly in building a large sales force in any part of the world. Clearly third party distributors are very important.
Currently there are only 75,000 AMFI certified agents in the country which is very low for a country India’s size. That entails a lot of education and investment; the low margins of the industry are not allowing it to make that investment.
Seen in that context, how will Franklin Templeton react to the entry load waiver on mutual fund schemes proposed by SEBI?
The objective of the move is clearly to benefit clients through reduced fees — that is largely a good goal. However, operational challenges over the short term need to be addressed, as distributors/fund houses evolve suitable business models. Also, as we have been saying, there needs to be parity amongst different financial service providers in terms of regulations and transparency.
The challenge is that if funds cannot compensate distributors, they will have to seek it from clients, who might not be amenable to paying over the short to medium term. As distributors have the choice of selling other products, there may be pressure on AMCs to compensate distributors out of their revenues relatively more, compared to current levels.
As fund houses do operate under fee structures that are controlled, there may not be steep price differentials among fund houses. Even when we talk about increased trail fees (recurring fee paid to the distributor), there isn’t much room. Therefore, I don’t see us returning to the old revenue streams for distributors or manufacturers. We have also seen similar moves in countries like Australia and UK, but the effective dates are 2010/2011, giving room for seamless transition.
Franklin Templeton will continue to focus on selling products through its distribution partners. I find it difficult to envisage funds taking their products directly to clients. The awareness of funds is not very high, and the average retail client is not very comfortable deciding from the vast array of choices.
But is it really so difficult to get investors to pay a separate fee? Retail investors do pay separate brokerage on equity market transactions.
When you compare mutual funds to equity, it is important to know that the fee on equity investments is based on transactions which are quite frequent. With funds, the investments are expected to be of a longer duration, with the fee being collected mainly for advice. When you have a longer duration in mind, you cannot operate on a transaction-fee equivalent.
Can an online platform where investors buy funds directly, replace the traditional distribution channels?
An online platform would be suitable for clients who are well-informed and are only looking for convenience. But we feel that Indian investors, by and large, are not that well aware and do need advice from distributors on choosing between products. The second disadvantage that I see with online platforms is that clients have tendency to get into a trading kind of mindset.
With funds, it would be better if clients took a long term approach and tailored their investments to a proper financial plan based on their needs and risk profile.
Investors in India do tend to chase returns. So have you seen inflows into your equity funds pick up after the post-election rally?
We are beginning to see a lot more interest and activity from investors. Call volumes to our call-centres have actually tripled and we are witnessing flows into our equity funds.
We believe that timing becomes less of an issue with a longer investment horizon and that’s what we tell our investors.
We have consistently held that timing the market is difficult. When this rally happened, for instance, not only retail investors, but many investment professionals were caught off guard!
How is your new theme fund- Franklin Build India Fund differentiated from the host of other infrastructure funds?
Through this fund, we are looking to offer investors access to a wide range of themes in one single offering, representing opportunities in the key building blocks of the Indian economy.
The way we look at it is - there are three main constituents of the economy, investment, consumption and exports. FBIF focuses on the investment side. We at FT are launching a new fund after a long time. We try to launch products that are sustainable over the long term. When we look at new products, we see if the product is different from our existing products and if it presents a sustainable idea.
Isn’t the investment theme overheated, with much of the stock market action happening around the public spending theme in recent months?
We don’t look to timing the market when we launch our funds. We looked at valuations for these sectors and they were either at or below long term averages. That suggests that, from a valuation perspective this isn’t a bad time to invest in these stocks. The question is whether we find enough value for the medium to long term — which we are finding at this juncture.
Typically we have found theme funds holding large cash positions and underperforming diversified peers over the last one year. What is your stance on this?
One, we tend to be fully invested in our equity funds and as a fund house, we do not take cash calls. We think that has to be taken care of by the advisor and the investor when the asset allocation is decided on.
That’s the reason why we also looked at a more diversified theme and not just physical infrastructure. Through this, we hope to have more opportunities across market cycles.
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