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Challenges may remain for newer fund houses

LiveMint logoLiveMint 27-05-2014 Kayezad E. Adajania

As the new government at the Centre gets down to business, equity markets are expecting the improved sentiment to continue. A majority of the `9.45 trillion Indian mutual funds (MFs) industry shares this view. But chief among them are the new fund houses, specifically the ones that were launched between 2007 and 2013. These funds couldn’t have picked a worse time to launch in India. Falling equity markets, competition from larger and established peers and tough regulations made it difficult for them to attract inflows.

As they heave a sigh of relief for now, the question we’re asking is: What is the future of these fund houses? If markets kick off from here, will they recover or will they fall further behind larger fund houses that come with a long track record?

Playing up strengths

Apart from dwindling markets, the problems of the new asset management companies (AMCs) were compounded by the fact that the top 10 AMCs have held close to 80% market share. Some fund houses tried to respond by tapping a different market space while sticking to their competency. To begin with, Motilal Oswal Asset Management Co. Ltd has stuck to only equity funds as it draws its experience from the portfolio management services business that its parent firm is well known for in the marketplace. Its sole debt fund is a passively managed government securities scheme that invests the entire corpus in just one instrument, the benchmark 10-year government securities. Also, it initially launched only exchange-traded funds (ETFs). Eventually, it realized that ETFs lacked popularity so it launched a handful of actively managed funds as well. The MF has kept the number of funds to a minimum for now.

Edelweiss Asset Management Ltd chose to avoid plain-vanilla schemes and instead adopted the quantitative model in managing its equity schemes. “We wanted to target high net worth clients with sophisticated products. Our products, therefore, aim to participate in the upside as well as try and protect the downside,” said Vikaas Sachdeva, chief executive officer, Edelweiss AMC.

Launched at a time when equity markets were peaking in 2007, JP Morgan Asset Management (India) Ltd’s maiden equity scheme didn’t take off well. The AMC then turned to offering feeder funds (fund-of-funds schemes that collect money from Indian investors and invest abroad in international schemes run by its international parent). “Being a global fund house, our expertise is spread across global markets. Further, no single market outperforms every year, so diversification to international markets is necessary,” said Nandkumar Surti, managing director and chief executive officer, JP Morgan AMC, which claims to offer “80% of the world’s geography” through JP Morgan India.

Captive distribution

The removal of entry loads in August 2009 led to a fall in number of distributors, and the fund houses that had internal distribution held an edge over others.

Small wonder then that among all the AMCs launched between 2007 and 2013, Axis Asset Management Co. Ltd (launched in October 2009) has amassed the highest corpus till date (little over `20,000 crore as on March 2014). Out of `909 crore that Axis Equity Fund (AEF), its first equity offering, collected during its new fund offer period, Axis Bank mobilized around `700 crore. Of 138,000 AEF investors, 95,000 invested through the bank’s network.Paras Jain/Mint

But Chandresh Nigam, chief executive officer, Axis AMC, said he still had to offer products that would be picked by a bank’s investors who were hitherto fixed deposit investors. “Bank customers typically look for capital protection,” said Nigam. So, like many fund houses, Axis AMC also launched many capital protection-oriented schemes but with tweaks such as using derivatives for its equity portion instead of buying and holding equity shares, a monthly income hybrid scheme that adjusts its asset allocation between equity and debt in such a way that its maximum fall in a year is restricted to 5%, and a scheme that invests equally among equity, debt instruments and gold.

Realizing the importance of captive distribution, Pramerica Asset Managers Ltd tried to acquire a distribution firm some years back, but the deal didn’t go through. “It always helps to either have a captive distribution firm or tie up significantly with few distributors so that your products remain on the shelves,” said Vijai Mantri, chief executive officer, Pramerica AMC.

Union KBC Asset Management Co. Ltd, a joint venture between Union Bank of India and Belgian fund house KBC Asset Management, sold its first few schemes predominantly through the bank’s branches.

Limit on costs

Some of the new fund houses such as Mirae Asset Global Investments (India) Ltd learnt to keep costs in check, the hard way. In the first year of operations (2008-09), Mirae’s spending on advertising and business promotion was 21% of its overall expenses.

“Back then, we wanted to increase our market share substantially in the short run, so we spent big money on advertising to create a brand,” said Gopal Agrawal, chief investment officer, Mirae Asset Global. In September 2008, the AMC’s debt schemes—like most other debt funds in the industry—saw losses, but it refused to take the losses on its own books, unlike other fund houses. This led to a significant chunk of withdrawals from its debt schemes.

In 2009-10, it cut down marketing sharply to just about 3% of overall expenses.

Some costs were necessary though. This year, Motilal Oswal AMC would incur a small loss compared with a small profit last year. Earlier last year, it realized that ETFs weren’t as remunerative or popular as actively managed funds. Hence, it has launched three actively managed funds in the past one year. “We hired 22 sales people in the last year alone and had to incur some marketing on these new launches”, said Aashish P. Somaiyaa, chief executive officer, Motilal Oswal AMC, adding that the fund house does not plan to launch another MF scheme in the next three years.

What the future holds

Just because equity markets turn around (as and when) doesn’t necessarily mean that all fund houses will start making money. Avinash Kalia, associate director, PricewaterhouseCoopers, said, “The big firms will keep getting bigger because they will still have the muscle, they are visible and, some have shown a good track record in returns all along. It’s not going to be easy for the newer funds.”

Kalia believes that newer fund houses that play to their strengths well would create a niche and survive.

Abizer Diwanji, national leader, financial services, EY, said there was “very little differentiation between the products offered by the newer AMCs and by the older and large AMCs”. Instead of being too optimistic about “turning their businesses around and expecting investors to flock in”, some of the smaller fund houses should take advantage of rising markets and sell out, he added. “The additional capital requirement (up from `10 crore earlier to `50 crore now) is bound to put pressure on some of the smaller fund houses. They need to evaluate whether it’s worth continuing,” said Diwanji.

Assuming the markets pick up hereon, the next 2-3 years will be crucial for these AMCs and would ascertain who stays and who doesn’t.

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