Local AMCs turn to offshore advisory biz as inflows dry up

These days, leading asset management companies are focusing more on their ‘offshsore advisory’ business, where they give research-based advice to foreign funds that invest in India for a fee. This comes in the wake of a slowdown in their local investment management business, with money flows into mutual fund schemes drying up, because of the reluctance of distributors’ to sell these products due to lower commissions.

“We are now forced to look at other avenues such as offshore advisory more seriously, because the local market looks dull at the moment, as distributors are just not co-operating to sell mutual fund products,” said a senior official with a private mutual fund, which runs this business.

Top officials of some leading asset management companies are believed to have made overseas visits recently to make a pitch to potential investors for advisory services. Among domestic fund houses, Reliance Mutual Fund, ICICI Prudential Asset Management, DSP Blackrock Mutual Fund and UTI Mutual Fund, among others, are known to have offshore advisory business.

In this business, AMCs get a fee of around 15-50-basis points (100 basis points is equal to 1%) of the transaction size, said industry officials. In some cases, the fee is based on a profit-sharing agreement, but such instances are fewer, they said.

“The offshore advisory business is not easy, as there is heavy competition from broking houses. But this has the potential to make up for the slackening of the local business,” said a top official with another private mutual fund.

Distributors have been averse to selling mutual fund products from August 2009, when the Securities and Exchange Board of India (Sebi) rule to clamp down on fees to distributors came into force. The market regulator barred the practice of charging entry loads by mutual funds, where the fund house deducted 2.25% of the investors’ money to distribute to the brokers. Now, distributors are aiming to sell more of insurance products and companies’ fixed deposits, as they fetch higher fees.

The offshore advisory business of AMCs came under the Sebi lens recently, a reason why fund officials were unwilling to officially comment for this story.

The market regulator felt that some fund houses were not maintaining a ‘Chinese wall’ to operate local investment management, offshore advisory and portfolio management services units, according to a source privy to the matter. AMC officials clarified that the mutual fund, offshore advisory and PMS teams do business separately.

Critics feel AMCs’ focus on offshore business is not in the best interests of the industry in the long-term. “Fund houses should use their time and resources to build a network here rather than overseas, given that India is among the most under-penetrated markets world-wide,” said a sales head with a mutual fund, jointly owned by a foreign institution and a local bank.

Source: http://economictimes.indiatimes.com/Local-AMCs-turn-to-offshore-advisory-biz-as-inflows-dry-up/articleshow/6005510.cms