Global investors across the board agree that the Indian economy is poised for significant growth and there’s near consensus foreign flows will continue to remain high. However, even as the Indian economy stands at the cusp of a rebound, foreign mutual fund (MF) houses are exiting the country, owing to their bitter experience. That cannot be a happy situation even if it leaves the field open to Indian asset management companies (AMCs).
At least five foreign MFs have completely exited their operations in India over the last four years and more may follow. Four others have sold stakes ranging between 25% and 51% in their Indian AMCs to domestic financial institutions. Some of the foreign MFs that have bid adieu to India include Morgan Stanley, PineBridge, ING and Fidelity. In the last few weeks, it has been reported that MF businesses like those operated by Deutsche Asset Management and Goldman Sachs are scouting for buyers.
The main reason why foreign MFs find India a difficult market to operate in is because they’re unable to scale up their asset base. Even when some of these players manage to build a substantial equity asset base, the high cost of operations eats into profitability. “If we take the example of Fidelity, despite a stellar track record of fund performance and a large equity corpus, they were unable to survive in a tight cost environment,” says the former chief executive of a foreign MF, which sold its business to an Indian fund house in 2014. He declined to be identified. In the year 2010-11 (before being acquired by L&T Mutual Fund), Fidelity’s Indian MF business reported a loss of R62.39 crore, wider than the loss of R27.55 crore it reported in FY10.
Having a high base of equity-linked assets is key to profitability in the Indian mutual funds industry and almost all the foreign players lacked such a portfolio. On the other hand, India’s top fund houses that are mostly homegrown like HDFC Mutual Fund, Reliance Mutual Fund and ICICI Prudential Mutual Fund have cornered a large chunk of equity assets in the industry.
Funds with a higher ratio of equity assets tend to do better financially because of the management fees that they are eligible to charge. Management fee is part of the overall expense ratio charged by an MF scheme. Regulations allows fund houses to charge an expense ratio of up to 2.5% of the sum invested. Consequently, with the ceiling on expense ratio fixed, a higher equity asset base allows fund houses to make more money.
Indian MFs score over their foreign counterparts when it comes to attracting equity assets, because often the asset management business is an extension of other large businesses operated by the promoters. Indian fund houses are also better at keeping their employee costs in control. Typically, employee expenses account for 20-25% of the overall expenses of a domestic MF. Whereas, a foreign fund house may end up spending 50-60% of its overall expenses on the same overhead.
In addition to the operational challenges faced by the foreign fund houses in India, the changed economic landscape in their home markets have also led many of them to focus on their core businesses. “With a slowdown in global markets, promoters want to focus more on their core business rather than putting in more money in loss-making ventures,” says the head of a foreign fund house in India, on condition of anonymity. “If we look at Morgan Stanley, it is primarily an investment bank; to some extent, even ING’s focus is skewed towards its merchant banking operations. So it made sense for them to move out and focus their energy into their main business. ”
A Balasubramanian, CEO, Birla Sun Life Mutual Fund, which acquired ING’s mutual fund assets in 2014, says his fund house is focusing on shoring up its customer base. “While we got ING’s assets, we added almost 85,000 new customers,” he said.
But it’s not as if all foreign asset management firms have burnt their fingers in India. Firms like Franklin Templeton Mutual Fund, DSP BlackRock Mutual Fund and even new entrants like Mirae Asset Managers and JP Morgan Mutual Fund have managed to register profits from their operations.
Jisang Yoo, CEO, Mirae Asset Global Investments (India) says that his fund house has focused on delivering stellar returns on the limited amount of money raised. The strategy and “hard work”has paid off “handsomely” for Mirae, Jisang Yoo says. “If we take care of investor’s interest, then in the long run profits will surely follow. The Indian asset management business is all about being patient and we succeeded because we kept our costs under control during difficult market conditions and focused more on performance,” he added.