Western funds seek a passage to India

Written by Ellen Kelleher | Updated: Mar 31 2013, 06:23am hrs
Western fund houses with a presence in India are failing to persuade locals there to buy equity funds an unfortunate development that throws a spanner into their business models.

As Indians plough their savings into cheaper debt funds, gold and property instead, efforts by Franklin Templeton, JPMorgan and DSP BlackRock to promote equity funds across the country are meeting resistance, according to industry watchers.

This exodus from equity funds, which carry higher expense ratios and generate considerable profits, puts pressure on fund houses revenues in a country where it is difficult to make money.

Fund houses remain committed to staying in the game in India, however. They refuse to follow the lead of Fidelity, which called it quits in the country around this time last year, after making a loss every year since entering the country in 2004.

The Fidelity move was counterintuitive. It surprised me that they made the move to exit the market, says David Graham, BlackRock managing director with responsibility for the companys India and China joint ventures. The Indian mutual fund market is worth less than $200bn now. But when that inflection point comes, and I dont know when it will, it will be worth considerably more and considerable profits will be made there.

Mr Graham adds: Our business has grown in India. Our profits have grown. But our market share has been pretty static, especially our equity market share, which wed like to see get much higher.

As of late last year, total assets of the Indian fund industry came to Rs7,86,544 crores (about $175bn), according to Morningstar. For outsiders, however, the challenges of setting up shop in India persist. Local players such as HDFC, UTI Asset Management Company - Indias oldest mutual fund group, which was set up in the mid-1960s and Reliance Capital Asset Management still dominate the market and roughly 40 fund houses operate there.

The cost of building an infrastructure in India is extremely high. Its ridiculously competitive, says David Cornell, managing director at Ocean Dial Advisors, an advisory group in Mumbai.

The main reason behind the record net outflows from equity funds, which reached Rs14,148 crores ($3.1bn) last year, is that Indians are taking advantage of the recent revival in the performance of the Sensex index. It gained 26 per cent in 2012, to book profits, according to Dhruva Raj Chatterji, a senior research analyst with Morningstar India, the fund tracker. This trend continues into 2013 as well so far, says Mr Chatterji. Although the magnitude of outflows have reduced a bit now.

Equity funds are out of favour. But investors still pour money into lower-cost debt funds to capitalise on the fall in the countrys key interest rate, which the Reserve Bank of India this month cut again to 7.5 per cent from 7.75 per cent.

Long-term debt funds received net inflows of Rs56,745 crores ($12.6bn) in 2012, after witnessing net outflows in the two preceding years of Rs12,165 crores ($2.7bn) in 2011 and Rs83,470 crores ($18.6bn) in 2010, the same study states.

Intermediate and long-term duration bond funds in India have been receiving large inflows lately, notes Mr Chatterji. This is primarily because the central bank in India has been engaging in monetary easing in 2012, and continues to cut interest rates in 2013 as well.

The manner in which western fund houses choose to engage in business across India varies.

Franklin Templeton is the largest fully foreign-owned fund company in India, with assets under management of $8.1bn as of last year, but most western houses operate joint ventures with local financial groups. These include names such as Prudential ICICI, Birla Sun Life and DSP BlackRock. A tie-up with a local player allows western houses to access distribution networks and set up better relationships with Indias regulators.

Recently, US and European fund houses have moved to pick up stakes in Indian asset managers, which allow them to enter the country almost immediately.

Last year, Schroders agreed to take a 25% stake in the asset management arm of Axis Bank. The move came as Invesco, the US money manager, reached a similar deal to buy a 49% stake in Religare Asset Management, the fund arm of Religare Enterprises, which is based in New Delhi.

Gavin Ralston, global head of product with Schroders, says the move to take on the Axis stake was necessary as the fund house had no exposure to India whatsoever. Having a joint venture was a more attractive means of entry than setting up our own business, he says.

Ralston continues: We're not particularly focused on the equity outflows happening in 2013. Were taking a long-term view. India has a huge middle class and people are saving more and will eventually buy more mutual funds.

Chatterji, meanwhile, points out that distribution is the key to enjoying some business success in the country. The foreign fund houses that have done well are the ones who have been able to play the distribution game well, he notes.

Indians still express more enthusiasm for gold, property or cash than they do for risky equity markets. They have been disappointed by the markets dismal returns, which compare poorly to the performance of the main US and UK indices.

The MSCI India, which tracks Indias large and mid-cap stocks, lost 10.8% in US dollar terms over the past three years, for example, while the S&P 500 gained 42.1% and the FTSE 250 saw a 53.1% rise. Cornell adds: Indians say why bother with equity markets when you can make enormous gains in property here. A property portfolio might throw up a 75% compound annual return.