Entry fee ban unsettles money managers

India's fiercely competitive fund industry is set to become even tougher for fund managers as a ban on entry fees slows growth, adds to distribution costs, cuts profitability and delays the path to breakeven for newcomers.
The country's stock market regulator said earlier this month it would abolish front-end or entry fees charged by mutual funds from August 1, a move aimed at cutting costs for investors and to discourage aggressive selling.
The ban threatens the incomes of over 87,000 distributors, agents who sell funds for a fee, and bring more than 90 percent of the business to money managers. It is expected to be particularly hostile to small and new players who depend on agent networks.
Beyond a handful of firms such as Reliance Capital Asset Management and UTI, Indian money managers have limited reach and rely heavily on distributors to build up their client base.
The move will also make it harder for the more than 20 would-be entrants into the market, which is forecast by Boston Consulting Group (BCG) to manage $520 billion by 2015, compared with $120 billion now.
Allianz, UBS and Credit Agricole are among foreign firms looking to set up shop in India.
"It's bit of a blow ... a lot of the AMCs will have to look back at their strategy," said Sanjeev Gupta, chief executive of the emerging market investment unit of South Africa's second-biggest insurer, Sanlam.
"It's not just something that affects newcomers," said Gupta, whose firm is looking to enter the Indian market and had anticipated a ban on entry fees.
For existing players, it would mean taking a hit on revenues to pay agents at a time when sales have dropped and operating expenses have nearly tripled to 113 basis points since 2004 due to higher marketing, distribution and administrative expenses.
The upcoming rule change has led to a scramble to launch funds before it takes effect. Units of Religare, Canara Robeco, JPMorgan, BlackRock and Franklin Templeton are among 10 firms who have launched funds in July.
LONGER PROFITABILITY PATH
Domestic money managers typically charge about 2.25 percent as entry fee on equity mutual funds, their most profitable assets, and pay the entire amount as fees to distributors.
By comparison, funds charge three to five percent in Singapore and about one percent in Europe and the United States.
Funds also offer 30-100 basis points in yearly recurring fees to agents which comes out of their annual expenses capped at 2.5 percent of the assets. Funds now fear they will have to sweeten the other commissions and pay entry fees from their revenues.
While the industry is busy figuring out a new compensation model, many expect a hit of about 5 to 20 basis points on annual investment management fees of about 55-58 basis points, depending on how aggressive the large players become to sustain growth.
"The entry barriers have been raised," said Rajnish Narula, chief executive of the Indian fund unit of Robeco.
"For the new player, the break-even gets delayed a little bit more. You need to have the sustaining power which means you need to have capital to be able to delay your break-even," he added.
BCG estimates a firm would need at least 100 billion rupees ($2.1 billion) under management to break even.
Of India's 36 fund firms, only 15 managed assets in excess of $2.1 billion in June, according to data from the Association of Mutual Funds in India.

DISTRIBUTION HEADACHE
With investors in the top 20 cities accounting for 90 percent of industry assets, according to KPMG, funds are worried that lower payments will cut the incentive to distributors to expand into smaller markets in order to fuel growth.
Instead, distributors might opt to sell other investment products, such as those offered by insurance firms that could earn them up to 30 percent of the first premium as upfront fees.
Distributors have already threatened to stop selling funds and said they might go to courts over the fee ban.
"That's the fear. If you increase regulation of one financial product, people would move to a different financial product which is not necessarily better," said Ed Moisson, director of fiduciary operations for Europe at global fund tracker Lipper.
While the next couple of years will be tough for fund houses and distributors adapting to the new compensation model, longer-term prospects remain bright.
PRESENT TENSE, FUTURE PERFECT
India had just 0.3 percent of the $18.97 trillion global asset management industry in 2008, and only 7.7 per cent of its household savings went into mutual funds as compared to 26 percent in the UK, according to data compiled by KPMG.
With one in every six human beings on earth an Indian and rising income levels of its middle class, already larger than the population of the United States, the country presents a powerful long-term lure for money managers.
In the last two years the Indian fund industry has attracted the likes of JPMorgan, Italian bank UniCredit's Pioneer Global arm and France's Axa.

Source: http://in.reuters.com/article/topNews/idINIndia-41363820090728?sp=true

Mutual fund managers comment on RBI's policy

The RBI left key rates unchanged at its first-quarter policy review on Tuesday. The bank said it expects the economy to grow 6 percent this fiscal and inflation at 5 percent by end-March 2010. The Reserve Bank of India also said it will maintain the accomodative stance of monetary policy until robust signs of recovery are visible, adding that its exit strategy will be modulated in line with macro-conomic developments.
Following are comments from mutual fund managers on the policy review:
RAMANATHAN K, HEAD-FIXED INCOME, ING INVESTMENT MANAGEMENT: "The status quo on key rates were in line with expectations. The policy maintains a balance between the nascent recovery and the need to nurture the recovery and the necessity to moderate the accommodative stance when inflationary trends emerge. "The RBI has also upped the inflation expectation to 5 per cent from 4 per cent by March 2010, again something which was expected by the market. With no surprises in the policy we expect the market to shift focus to the government borrowing program. "With front loading of the borrowing program, the supply is expected to reduce as we go along which would be positive for the markets in the short term. However with growth picking up and inflation rearing its head towards the end of the year we expect yields to head higher in the medium term."
LAKSHMI IYER, HEAD-FIXED INCOME, KOTAK MAHINDRA MUTUAL FUND: "Accomodation in stance to continue for now but not for eternity as macro economic situation may warrant change in stance in future. "Shorter end of the curve to remain supported. Longer end to trade range bound in response to OMO purchase and auction supplies."
MAHHENDRA JAJOO, HEAD-FIXED INCOME, TATA ASSET MANAGEMENT: "It's pretty much in line with expectations. People were expecting rates not to change and RBI to reassure about the credit policy till economic growth pick-up happenes. "I don't think there is any significant move in the bonds.

Source: http://economictimes.indiatimes.com/News/Economy/Policy/Mutual-fund-managers-comment-on-RBIs-policy/articleshow/4829103.cms

Entry load ban: MFs may pay more trail commission to distributors

Distributors and fund houses are looking at different ways to counter the Securities and Exchange Board of India’s (Sebi’s) ban on entry load from August 1. The ban announcement came on June 18.

Industry sources said fund houses could increase the trail commission for equity funds to compensate distributors. At present, fund houses pay 0.25 to 0.75 per cent as trail commission to distributors for equity schemes. This number, according to some distributors, could rise up to 1.25 per cent. Trail commission, which is paid to distributors on a quarterly basis, for debt funds is slightly lower at 0.1-0.5 per cent at present.
Sources said any increase in trail commission for debt funds was unlikely as there was minor or no entry load in a majority of these funds.
“It depends on the asset management company’s (AMC’s) strategy whether it wishes to increase trail commission, or upfront commission, or go for a combination of both,” said a distributor. Some distributors said if an AMC was well-established, it would increase only trail commission. This could come from the fund management fees it collected from investors annually. However, smaller fund houses might have to pay both higher upfront and trail commission to promote their products. Some fund houses felt that there could be other ways in which they could help distributors garner more business instead of hiking trail commission.
Amit Gupta, vice-president & country head (retail sales), Taurus Mutual Fund, said, “We will not increase trail commission. We believe in helping intermediaries through marketing support, such as organising joint meetings, which will help them get clients. We are trying to educate distributors as much as possible to make them financial advisors.”

Source: http://www.business-standard.com/india/news/entry-load-ban-mfs-may-pay-more-trail-commission-to-distributors/365102/

‘Asset management is a low-margin business globally’

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.

Source: http://www.thehindubusinessline.com/iw/2009/07/26/stories/2009072650110700.htm