Dependence on NFOs Must Go

When Paul Vrancken, COO, Canara Robeco Mutual Fund, visited India in 2005, it was his first trip to the subcontinent. The then Vice President and Head-Corporate Development, Robeco Group, had the task of scouting the land for a mutual fund partner.

He narrowed in on Canbank Mutual Fund, amid a fair amount of scepticism. The joint venture between Robeco and Canbank Mutual Fund took place in less than two years and in August 2007 he shifted base to India and stayed on as the Chief Operating Officer.

Now, three years down the road, after Canara Robeco has left behind its dreary past, he is moving on to a more senior position in Hong Kong. Here he speaks of his experience of the fund industry in India and what made him narrow down on such an unusual candidate.

Canbank Mutual Fund was virtually written off by many. What made you narrow down on it?

It was certainly the potential, not the company per se. The company was not in very good shape, performance of schemes left much to be desired, net sales were limited and market share was shrinking. There were issues related to brand, investment process, systems, infotech, etc. It was not a platform for growth.

We looked through the problems and the seemingly lack of potential but yet saw a future with Canbank Mutual Fund. We visited the branches and spoke to the branch managers of Canara Bank about the potential of such a distribution network. We felt we could turn it around eventually.

Actually, Robeco was not that interested in the company itself. We believed we could change it. The key to success is looking at the potential of two joint venture partners coming together.

What were the aspects that stacked the odds in favour of Canbank Mutual Fund?

We looked at the other players that came in on their own and realised that it took a while for them to obtain the licence, so our main focus was on picking up an asset management company (AMC) that had a licence.

In addition, the sponsor company - Canara Bank - has a huge network across the country. It is one of the largest banks in India. That was the potential we were going after - the immense distribution network.

Canara Bank also fit the profile that we were on the lookout for. Rabo Bank, the parent company of Robeco, is an AAA conservative player. Ditto for Canara Bank. Look at the crisis the banking industry went through in 2008. In such moments of stress, Rabo Bank had adequate liquidity as clients added to their Rabo deposits, instead of withdrawals, which was the mainstream picture in the industry. And public sector banks like Canara Bank too received inflows from clients. Both these brands convey the value of trust and such intrinsic value of the brand is a great asset.

At the time when we were surveying the market, Sundaram Mutual Fund was in the process of tying up with BNP Paribas. The other standalones were not interested in a joint venture partnership. And neither were we interested in a much smaller AMC.

We wanted to get into India, we wanted a player with a licence, a certain amount of assets and funds to begin with, and we wanted a reliable partner who shared a similar vision of where we both wanted to end up. And Canbank Mutual Fund fit the bill.

In the end, I think our choices have been right.

Did you ever entertain the thought that this joint venture may fail?

No. It never came up. It's impossible to succeed when you are entertaining the thought that you might fail.

What was the market perception when you were closing the deal?

I remember at that time people were quite sceptical. Actually, there were two broad opinions when we spoke to people in the market. On the one hand, we were told that it would not take us anywhere and it was more or less a hopeless cause. On the other hand, we were told that it would require a lot of work but in the long run its potential could be realised. No one in-between, it was very black and white.

What of this business has left you disappointed? Something that did not move as you would have liked it to?

I feel retail equity distribution could have moved faster.

When I look at the overall fund scenario in India, a lot of money has come in through new fund offerings (NFOs). But the ongoing schemes do not really attract fresh investments. At most it is churning within the existing unit holders - moving from one scheme to another. So one AMC will face a redemption to the benefit of another AMC where the same investor will move to. So all existing schemes take money from each other, so to speak.

Over the past 10 years, all new money that has come in has been via NFOs. The fund industry has to find ways to get fresh retail money come into the existing schemes - a task that is far from easy. From a business plan perspective, this has been a setback.

If I look at the bank per se, it has taken a while but we have things in place now. Canara Bank has 500 investment officers dedicated to selling mutual funds and insurance products. They are placed in bank branches across the country. Now they have plans to double this figure. So it has taken time, but the potential to employ the bank as a distribution network is immense.

What do you find difficult about working in India, especially since you are not in a standalone venture? When you took over, was there a lot of resistance?

A difficult moment was at the beginning when the joint venture took place. We went through major changes in the organisation. Half the staff opted for a voluntary retirement scheme (VRS). The half that stayed back was mainly on the operations side. This has been a key success factor for us. Our operations staff has been the backbone which the company could depend on in times of need.

When one works in India as an expatriate, one aspect that stands out is the particular way of coming to execution, in terms of preparation, decision making process and execution itself. For an outsider, it may look like this process is somewhat ad-hoc, with a single person responsible for decisions, while the execution can sometimes wait till a late moment. But I do know that when there is a problem, it gets fixed. Not necessarily through a process or a system, but it gets fixed, and there is complete alignment in the organisation at those moments. However, one cannot rely on such a system for everything and all the time.

One of the things we have done is put committees in place because we wanted more involvement from everyone and we want them to be aware of the consequences and repercussions of a decision. So we now have a products committee, an investment committee, a risk management committee, an IT committee and a Canara committee. This way there is consensus and no confusion on decisions taken. If we did not have it then we would have to rely on a more obscure decision making process.

My impression of Indians has been that they are very entrepreneurial, open and wanting to connect. Moreover, they are very business minded, a great combination to grow and succeed globally.

What do you see as an area of concern in the Indian mutual fund industry?

When I came to Mumbai in August 2005, it was just after the flood and the consequences of the flood were clearly visible during my trip from the airport to the hotel. But what caught my eye was the billboards across the city with NFO hoardings. And I wondered how it could be that the mutual fund industry could be so in-your-face, so thriving and vibrant? Of course, AMCs were launching NFOs and the costs of up to 6 per cent of expenses could be charged to investors as fund raising expenses. But now that has stopped because the regulator stepped in. I think the direction that the regulator has taken is very good. A lot has changed since my first visit.

The first issue I am concerned about is how retail money is going to come into this industry. Investor education has to increase and eventually the investor must be made aware that he can, and should, pay a price for the value he receives from the distributor's advice.

The other issue is that new retail flows are not being channelised into the industry but find their way into another industry. This is putting a strain on the fund industry.

How different is it in Holland?

In Holland mutual funds are popular amongst retail investors. Over there the bank will evaluate your risk profile and suggest products accordingly. The concept of churning is not really there and distributors earn mainly through trail commission. There is no NFO mania, so to speak. Investors prefer a tried-and-tested product.

Is Canara Robeco now in the AUM race? Any plans to be in the Top 10?

I am not sure if we can call it chasing AUM but every business will have ambitions of growth. We would like to be in the Top 15 by March 2011. When the joint venture was signed, Canara Robeco was No. 26, today we are No. 16. But do note that when we were at the 26th spot, there were just 32 players. Now there are around 40 players and we have managed to inch our way upwards. Now that we have our risk management measures in place and performance has picked up across the board, we want to grow continuously without too many ups and downs.

Robeco has a strong presence in Europe. With that in mind, what plans do you have for Canara Robeco?

We want to expand domestically by penetrating the Canara Bank network and increasing retail sales. But we also want to grow internationally. From August we will start Robeco India dedicated funds and function on an advisory basis. Our first institutional mandate came from Taiwan. Another mandate from a European pension fund is due to go live in July. What our potential investors in Europe like is that we have the local India expertise as well as the international brand and global infrastructure. We have sales offices across the globe. These offices are already servicing institutional pension funds, insurance firms and sovereign wealth funds. So all the processes and mandates are done via our European offices and we provide advisory services in India.

Source: http://new.valueresearchonline.com/story/h2_storyview.asp?str=14950