Earlier this month, an Indian newspaper quietly published an article that seemed to say a lot about the country’s struggling mutual fund industry and the difficulty for foreign operators entering the sector.
Dutch financial group Aegon, said the report in the English language business daily, The Economic Times, had surrendered its asset management licence after a joint venture with domestic group Religare had failed to get off the ground.
While Aegon has not responded to requests for comment, the affair led to speculation that its fortunes reflected not only the breakup of its partnership but also India’s increasingly tough environment for mutual funds.
Whether this speculation had any foundation or not, what is certain is that regulatory changes 18 months ago that practically eliminated upfront fees for mutual funds have left these once popular financial products struggling to find traction. Gross inflows into mutual funds today have fallen below pre-global crisis levels.
“Given the economic growth in India and the increased need for financial services, one would have expected increased demand for mutual funds as well. In that sense, it is a worrying trend,” says Harshendu Bindal, president of Franklin Templeton Asset Management.
India’s fund management industry should be one of the most promising in Asia given its potential for growth, with the sector accounting for less than 4 per cent of household savings.
Assets under management rose in the quarter ended March 31 compared with December by 3.8 per cent to Rs7,040bn ($156bn), according to the Association of Mutual Funds of India. This was on the back of flows into money market funds as interest rates increased.
But it did not compensate for a 6 per cent drop in the December quarter compared with a year earlier.
Most fund managers put these sluggish flows down to the restrictions on frontloading of fees. These fees used to be paid largely to the industry’s army of distributors, who would then eagerly generate more business for the funds. Now distributors have moved on to insurance-linked products, which are not subject to the same restrictions.
Regulators counter that the purpose of the changes was to separate the advice and distribution functions. Combining these represented a conflict of interest for the distributor.
Ashu Suyash, country head of India for Fidelity International, says the removal of entry load will help the industry in the long term but the short -term impact is to limit its expansion.
“The drop in incentives as a result of the entry load ban has impacted the ability and willingness of independent financial advisers, several regional and national distributors and banks to promote mutual funds versus other financial products like unit-linked plans,” says Ms Suyash.
Others say the mutual fund industry must take some share of the blame. Some asset management companies focused on launching fresh products to keep tapping new investors rather than on long-term performance. Distributors, meanwhile, encouraged churn in their customers` portfolios to generate new entry load fees for themselves. A recent Morgan Stanley report showed that turnover – buying and selling of mutual funds – had fallen sharply since the new rules were introduced.
“About 50 per cent of schemes have underperformed, with varying degree, to their respective benchmarks,” says Virendra Jain, president of Midas Touch Investors Association.
The industry`s fortunes have also not been helped by a lacklustre stock market. The benchmark Sensex index of the Bombay Stock Exchange has lost nearly 13 per cent in the year to date.
The reduced returns are leading fund managers to defect to other areas of the financial sector. About 65 industry executives have left the sector in the past two years, according to Value Research.
“One big reason is that relative to funds, the regulatory environment in insurance and other financial services has historically been less tight,” says Dhirendra Kumar, chief executive of Value Research. “This sort of regulatory arbitrage is unfortunate but is a fact of life in India.”
So far, however, there is little sign that other foreign houses will follow the example of Aegon and exit the market.
“While there have been a select few who have rolled back their plans, we believe that has got to do more with their own strategic objectives rather than the market environment,” says Mr Bindal.
Hope may be around the corner. Indian media have reported that the Securities and Exchange Board of India, the industry regulator, is considering a new incentive structure for agents that might involve a service fee for distributors and a commission paid by the funds. In return, the distributors would have to submit to stricter supervision.
But until this relief comes, the industry will have to focus on providing better long-term value for customers. Only once the sector gets through this period of consolidation will it be able to persuade more Indian investors to switch their hard-earned savings from property or gold to stocks.
Source: http://www.ft.com/intl/cms/s/0/1384d826-888b-11e0-afe1-00144feabdc0.html#axzz1NoCBnZEm
Posts
