I started the year wishing our markets a normal year, in the process hoping that this gives us the opportunity once again to believe that no one and nothing else but we ourselves control our destiny.
Just like the advent of the automobile changed the growth pattern of cities, the financial crisis of 2008 has, in all likelihood, changed the growth pattern of the world forever. The emerging world is the increasingly accepted new “growth” driver. And India is confidently ascending the charts in making realize that dream. And why not? With the second fastest capital market recovery worldwide in 2009, a largely social and risk-averse banking system that stayed virtually insulated from the profits-at-all-costs model of the West, a compelling gross domestic product growth forecast of 8.2% with an upward bias for 2010, a just-in stable majority government at the Centre, the overall feeling of economic optimism in India is justifiably at its peak.
Illustration: Shyamal Banerjee / Mint
We as Indians are sub-consciously beginning to feel that we have started to “regain” our pole position (acceded just 200 years ago to the West) of economic dominance of our planet. With that preamble, I am happy to argue that the start to 2010 for us asset managers has been healthy.
January was the first month since August to see positive net inflows in the industry. A forward looking strategic shift by the regulator towards greater transparency which banned commissions from asset management companies (AMCs) to distributors in August (possibly the first country to do so) with just 30 days given to change, did baffle both participants. But it seems that distributors have since recalibrated their business models and have begun to implement it in the new year.
Investors may just have started seeing and even liking the more “need-based” recommendations from their advisors. If this hypothesis is right, then 2010 will start a long-term journey towards higher retail participation and stickier assets, which, over time, is tremendously healthy for the growth and stability of our capital markets.
On the other hand, despite this major regulatory change, asset managers have chosen to continue to pay distributors (albeit lower) from their own pockets. A “rank” race among the bigger players has modelled this structural disconnect. It is unlikely that they will “decouple” from this habit this year. Rehabilitation may need up to two years. This will, in turn, shrink AMC profitability per dollar of assets in 2010. An unsuspecting causality will be advertisers, who will not see the mega marketing spends as a result.
Interestingly, this has still not deterred as many as 23 aspirant asset managers (global and local firms alike), who are eagerly waiting to start shop. Consolidation, hence, is inevitable. Besides, existing players may dilute ownership to raise capital as sponsors may not be that forthcoming. US-based T Rowe Price bought a 26% stake in January into India’s fourth largest asset manager. This trend is likely to gain momentum in 2010. This is healthy for long-term sustainable growth of the industry.
As for the Indian investor in 2010, or should I say starting 2010, I am hopeful that they will open up to “innovation” in investing styles. They seem ready for an “upgrade”. For 15 years, they have invested primarily with fundamental managers. To that, quantitative style of investing seems to have made a confident beginning. The argument for disciplined investing sans emotion has found feet. A handful of players have already or are set to launch products using quantitative styles.
Recent successes show that investors are likely to adopt these as much-needed compliments to their portfolios—slowly, but surely. Separately, there is a small undercurrent arguing for investing now in global markets. Multinational banks as thought leaders in advisory have in fact begun training and have tasked their teams to seed client portfolios with global products. The intention here is not to enhance returns but to demonstrate benefits in lowering risk from diversification. Over time, as investors adopt this logic, multinational AMCs will benefit faster than those who stay local.
It is often said that time is a dressmaker specializing in alterations. We will have to adapt to the evolving view rather than work towards one that is preconceived. That is the new future.
Navin Suri is managing director and CEO, ING Investment Management India.
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