In 1984, Joe Mansueto, who was previously a securities analyst, founded Morningstar Inc, a US-based mutual fund (MF) tracking firm. Twenty-eight years later, the firm is one of the world’s largest MF tracking firms. Its star ratings serve millions of MF investors across the world. Mansueto, chairman and chief executive officer, Morningstar Inc., tells his observations on how the MF industry has changed since the time he launched and how the landscape in India is also changing.
Since you founded Morningstar, take us through the changes in the US MF industry.
Some enormous changes have happened in all these years. The no-load funds or no-commission MFs were popular back then. Over time, financial advisers emerged as a preferred way to access MFs. Today, in the US, about 80% of funds are sold through an intermediary of some kind like financial advisers. Although the advice was loaded with a fee, investors wanted an adviser as part of their financial planning.
Passive investing has gone up over the years. About 15 years back, probably 2% of the market invested in passive funds; today it is about 25%.
Earlier this year, the US-based Fidelity Group sold its Indian MF business. But we have other international funds houses like Schroder’s and Invesco come to India. When you talk to international fund houses, do they sound interested in entering India?
Yes, they still have high expectations from the Indian market… in the long term. India has all the dynamics for a successful MF market such as rising wealth, rising middle class and rising investor class.
At the same time, penetration is low (in single digits). The expectation is that single-digit penetration can move into double digits.
In the US, for example, when I started Morningstar, household penetration in MFs was about 10-12%; today it is 40-50%. Entry loads may have slowed down the sales but it won’t change the long-term growth picture of the Indian MF market.
In September, the Securities and Exchange Board of India (Sebi) said that all MFs will need to introduce the “direct plan” effective January 2013. Distributors are very unhappy saying existing investors will move to “direct plans”. Do you think direct plans should exist?
I base my opinion on what I have seen globally. In many markets globally, investors have the opportunity to go direct or through an adviser. And when they have a choice, the majority of the people choose to go with the financial adviser and pay them some kind of remuneration.
So by offering a direct plan, I don’t think we’ll see a market shift because people still find it very intimidating to find the best funds and do the appropriate diligence; they really want a financial adviser to do all of that. Some self-directed investors will shift, but they will be a minority. I don’t think it will dent the distributor’s business meaningfully.
One new phenomenon that we are witnessing in the Indian MF industry is the emergence of various distributor associations. They want to be heard. What do you think of this trend?
It’s a positive step. Distributors have a set of common issues that is different from those of the asset management companies’ (AMCs) and so having a collective voice is good. I think the issues that distributors face need to be taken into account when the regulations are formed. I think it’s important that they have a seat at the table. You need to look at the industry from multiple perspectives. It’s not just the AMC’s perspective; it’s the investor perspective and the distributor perspective.
What would your advice be to a new AMC that is setting shop in India? Typically, they launch identical products and clone existing ones in the market. That said, they say launching complicated products must also be avoided; perhaps justifiably so. How do you break the mould and yet be different in a way that you expand the market. Is there an easy answer?
Yes, there is an easy answer but it is also a very long-term answer. We have done a lot of research on fund families that have succeeded in the market. The solution will not bring in success tomorrow.
What we found was that good stewardship leads to good results for fund companies. At Morningstar, we give stewardship grades to AMCs and we found that the ones that have better stewardship grades receive most of the flows. By stewardship we mean do fund companies take investor’s interest to heart. Are they offering competitively-priced products, do they have relatively good performance or are they launching products that are meaningful as against gimmicky.
Do they have a sales culture or do they take investors’ interest to heart, like cautioning investors into investing in fixed-income market right now even at the cost of their own fixed income funds’ sales. On the back of a good fixed income market, lots of investors are pouring money in debt funds, but it looks too hot right now.
AMCs that display these values tend to do better in the long term. My advice to AMCs that intend to enter the market: simple is better than complex in term of product offering, but make sure that you get an investor culture within your AMC. Make sure you are looking out for the investor’s interest and putting that ahead of your own interest. If you do that, investors will have a good experience and will come back and ultimately you’ll have a successful AMC. AMCs with a sales culture tend to win in the short run, but not in the long term.
We did this exercise in the US and we realized that those fund houses that came with a sales culture did not do well over the long term.