'Profits are likely to remain stagnant'
Franklin Templeton Investment (India), which manages Rs 42,142 crore, has the distinction of purchasing India’s oldest fund house, Kothari Pioneer Mutual Fund, in 2002. President Harshendu Bindal tells Joydeep Ghosh & Neha Pandey that the domestic fund industry’s profits of 12-15 basis points are much lower than the international standards. Edited excerpts:
While the stock market has been rallying, action at mutual fund houses, in terms of launch of new fund offers (NFOs) and fund collections, has been muted. Why?
It is due to a combination of factors. During 2006-08, we witnessed many NFOs due to buoyant market conditions. The pricing environment was also attractive. Many new players were entering the industry and building their product range.
Today, the conditions are quite different due to regulatory changes and most fund houses are focusing on selling existing products.
With the distribution community undergoing a change, they might not be able to push equity products. Our conversations with many of our distribution partners indicate that they may remain positively disposed towards the equity asset class but are not finding the environment conducive.
Despite their strong track record over market cycles, some of our equity funds like Templeton India Growth Fund or Bluechip Fund (with annual returns of about 26 per cent over the last 10 years), have not witnessed as much interest as they should. Whereas, if a bank announces 10 per cent rate on its deposits, investors line up outside its branches.
Recently, it was reported that the fund industry posted a net profit of around Rs 970 crore in 2009-10. On assets of Rs 6-7 lakh crore, we are talking of 12-15 basis points. What is the global experience?
In the US, profits are higher at 22 basis points of the average assets under management. This is true even in developed markets where margins have been under pressure due to regulatory developments.
However, it is a volume game. Without economies of scale, it becomes difficult.
The numbers in India are on the lower side (due to the large portion of money market assets). Only 10-12 players are making money in the industry. In India, you need a certain economy of scale, which only few players enjoy.
Also, the Rs 970-crore figure has to be looked at in the context of the previous financial year, which was one of the worst for the industry. The tightening liquidity impacted their money market books and the equity markets were down. This year, the markets have picked up and the asset mix is improving, so revenues were better.
Will this trend continue?
I think profits are likely to remain stagnant or fall. Now that fund houses have to pay distribution fees from their pocket, margins will go down further. So, the recent profits look great, but people have to be cautious. Our financial year ends in September and the latest numbers are not in, but the last three-four years have been profitable.
Are your profits operational, or is the purchase of Kothari Pioneer in 2002 for Rs 350 crore still being amortised?
The amortisation was completed three years back and we are actually in good shape with cash flows. We have benefited from our mix of assets – around 70 per cent of these are in long-term funds.
Reports suggest Franklin has been selling banking and automobiles, which others have been bullish on. Any particular concerns?
We are actually positive on the banking side. In the Indian context, the long-term story is an interplay of growing consumption and investment due to infrastructure spending. Given the low penetration of most financial services, the long-term outlook for the sector remains positive.
In our portfolios, our fund managers’ stock-selection depends on various factors, including relative valuations. Hence, rebalancing the portfolio should not be seen as a top-down call. We are bottom-up stock pickers. As a sector, we generally have a positive view on banking and financial services index.
Investors have booked profits aggressively. But they are not entering the market. Why? Even the number of folios is down.
In terms of composition of assets, around six months back, 60 per cent of the money was in the money market and 40 per cent on the long-term side. Now, it’s close to 50-50. In fact, it will be slightly higher on the long-term side. To me, it is a good sign that long-term assets are increasing, but it’s more to do with lower allocation to the money market amid tighter systemic liquidity.
Long-term money is coming on the hybrid and fixed-income side. However, on the equity side, we are witnessing outflows. Luckily, most investors are booking good profits, which is not a bad sign.
The flip side is if markets correct, will they come back? Hopefully they will. If we look at 2010, there were decent net positive flows in months when the markets corrected.
Lumpsum or systematic investment plan (SIP)?
SIP is my personal favourite. You can do STP (systematic transfer plan) or SIP, but systematic investing is always the better way to get exposure to the equity markets. Lumpsum sometimes becomes a question of timing in the investor’s mind.
Daily or monthly SIP?
A daily SIP may work for those convinced about daily averaging. However, it may encourage short-term behaviour and also may not make sense from an operational perspective. I feel we should encourage long-term investments and not look at short-term trends. A monthly SIP seems ideal, given the monthly income flows.
Source: http://www.business-standard.com/india/news/qa-harshendu-bindal-franklin-templeton-investment/411602/
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