BackRace to grab AUMs has led to low liquid fund fees
Our offshore advisory AUM, where we provide advisory services to funds launchedand money collectedabroad by Invesco, has grown to `6,000 crore in AUM
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Good performing schemes and avoidance of too many new funds are qualities that have set Religare Invesco Asset Management Co. Ltd apart from most of its mid-sized peers. But competition has increased; top fund houses continue to get a bulk of fresh incremental inflows. At the same time, tighter regulations have ensured that asset management companies (AMCs) have to wait a little longer to break-even and make profits. Will Religare Invesco manage to jump to the big league? It’s managing director and chief executive officer, Saurabh Nanavati, talks to Mint about the fund house’s path as well as the industry’s landscape.
Religare Invesco has solidified its existing business over the years, it has a good track record and boasts of a healthy joint venture with a foreign firm. But industry margins are shrinking and regulations are getting tighter by the day. How will you build a sustainable and profitable business in the long run?
We have strengthened our domestic business and built an offshore advisory capacity. When we formed the joint venture with Invesco (a global fund house headquartered in the US) in March 2013, we had close to 14,000 crore of assets under management (AUM). Today, we are about 22,000 crore in AUM. Within a two-year period, our business has grown by more than 50%.
Our offshore advisory AUM, where we provide advisory services to funds launched—and money collected—abroad by Invesco, has grown to 6,000 crore in AUM. That also helps our profits. Such synergies help us to compensate for the declining margins of the domestic business. Basically, due to declining margins, the minimum AUM required by AMCs to be profitable domestically have gone up substantially over the years—from about 2,000-3,000 crore in 2002-03 to almost 15,000-20,000 crore in today’s times for a large retail setup.
Across the mutual fund industry, liquid funds are being managed with near zero fees, while equity funds charge as much as 2.50-2.8%. Is it sustainable to run liquid funds at such low costs?
Liquid funds were earning healthy margins till around two years ago. The fact of the matter is that right now we are all running it at very low expenses. Competition and race to grab AUMs have led to this situation. At some point in time, we will all start charging a bare minimum fee because it doesn’t make sense to do business at zero or negative margins. So, while right now we are doing it because of competitive pressure, what I have seen in other industries also is that it doesn’t last for long. At some point sanity prevails. The liquid fund is providing liquidity and generating a higher income than other similar avenues in the market and therefore the fund manager should get compensated.
How severe is the credit assessment problem in debt funds?
The whole credit issue, perhaps, has been blown out of proportion because of one isolated incident in the industry. Since last year, banks haven’t been lending much, so there is less certificate of deposit issuance from banks. Regulations also make it mandatory for us to invest only up to 30% in a single sector, so we are forced to split across sectors even if there aren’t too many worthy options there yet.
As long as credit appraisals are done correctly, we do not have a problem. We have been running our own in-house proprietary credit appraisal model, which we also use for future projections, business outlook, and so on. At this time, we track close to 450 companies in-house, whereas we may have exposure in only 105 of them. It’s very extensive and has helped us avoid accidents. The so-called-credit crisis should hopefully settle down in another 15 days.
But do you think most of the fund houses have solid internal processes to prevent such credit mishaps?
Yes, a majority of the big fund houses do have good processes in place.
Have you taken a re-look at your fund house’s credit processes after this incident?
It’s an eye opener. We went back to our processes. We again re-tested and re-checked whether these sort of credits could have gone through our system. And luckily we found the system to be robust and eliminated the names. In fact, there were certain other names that were also being talked about in the market; we had some exposure to two of those names and then when we reached out to those companies, they bought back their instruments and paid us back and demonstrated that there was no liquidity or credit crisis.
You earlier worked in the insurance industry as chief investment officer of HDFC Standard Life Insurance Co. Ltd. And now you are in the mutual fund industry. So , how feasible do you think it is it to implement the recommendations of the Sumit Bose committee report?
I’ve gone through the report in great detail. It looks like the mutual funds and insurance industries have been painted with the same brush. It is as if the practices in the insurance industry are happening in the MF industry as well. I don’t see the connection. If you see the unit-linked insurance plans (Ulips) and their persistency ratios of 40-50%, it just means that the remaining policies have been mis-sold. We aren’t even close to those numbers in the mutual fund industry.
Some of the recommendations are worrying. If we start having a free-look period in the industry, it will be utter chaos. If and when markets crash on a certain day, people who had invested just prior to that day will withdraw. Or if people invest on that day thinking they’ve caught the bottom, and if the markets continue to fall subsequently, people will rush for redemptions. We really need to think through a lot of these suggested steps.
I do appreciate some of the positive observations that the committee has made on the efforts that the mutual fund industry has undertaken. However, I would differentiate the way in which typically insurance and mutual funds products are sold. Even on the commission side, insurance commissions are heavily front-ended while mutual fund commissions are spread over the entire tenure of the asset. Therefore, I would not agree with the suggestion of stopping trail commission to the distributor in a mutual fund product after a few years.
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