Nothing seems much different as you walk into the cramped office of Benchmark Asset Management Co. (AMC) Ltd at one of Mumbai’s oldest business district at Nariman Point. A nondescript reception quite unlike any in the Rs 7 trillion Indian mutual funds (MF) industry, a dusty sofa that gives you a feeling you’re sinking in as soon as you sit on it, an office security guard doubling up as a receptionist, cramped cubicles, a casual dress code with shirts hanging out and just a few jackets hung over chairs; that’s as formal as things get here. But life is set to take a 180 degrees turn for the 50 employees of this fund house.
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Goldman Sachs, the US-based fund house that manages assets worth $844 billion (Rs 38.29 trillion) globally has just acquired it. India’s first fund house to focus only on exchange-traded funds (ETF) has now moved to a big league. The exit option for investors to withdraw without paying an exit load expired on 10 August. For those who missed the exit opportunity, is it too late? Or should you rather hold on? Read on to find out.
Bringing ETFs to India
ETFs were unheard of in India before Benchmark AMC launched its operations in 2001. Around 1998, two finance professionals with an entrepreneurial streak—Sanjiv Shah and Rajan Mehta—came up with the idea of bringing ETFs to India. While Shah was employed at DSP Merrill Lynch, Mumbai, and headed their debt and equity sales desk, Rajan was based in London and was with Merrill Lynch’s wealth management division. In 2001, Shah collaborated with Niche Financial Services, a non-banking financial company which agreed to be the fund house’s sponsor; Mehta joined around August 2001.
With a capital of Rs 10 crore (the minimum requirement as per the guidelines of the capital markets regulator, Securities and Exchange Board of India), Benchmark AMC hit the markets with its first offering, an ETF called Benchmark Nifty BeES. Their mission: to launch only passively-managed funds, and specifically ETFs; stay away from paying high commissions to agents; keep fund costs low and pass on the benefits to investors. It launched India’s first ETF, Nifty BeES, in December 2001.
After launching ETFs on basic indices such as the Nifty and the Nifty Junior, Shah and Mehta strived to launch ETFs on different asset baskets. For instance, Benchmark AMC was the first fund house in the world to conceive the idea of launching a gold ETF and filed its draft offer document with Sebi, way back in May 2002. But in the absence of norms for gold ETFs back then, Benchmark’s draft offer document remained in cold storage till former finance minister P. Chidambaram announced in his 2005 budget speech the government’s intention to allow gold ETFs. Benchmark later got the nod and launched its gold ETF in February 2007. In the meantime, the idea of gold ETFs had spread and the world’s first gold ETF got launched in 2003 in Australia.
Braving tough times
Convincing Indian investors to put money in ETFs was not easy. Globally though, ETFs gained popularity. As per Reid Steadman, global head of ETF Licensing, Standard & Poor’s, ETFs’ AUM (assets under management) touched $1,311 billion in 2010, up from $797 in 2007 and $105 billion in 2001.
Competitive returns: India was a different ball game where actively-managed funds offered stiff competition. Active funds such as HDFC Equity Fund (HEF) and Franklin India Prima Plus (FIPP) were consistent performers even around 2005. HEF and FIPP returned 41.62% and 34.46%, respectively, in the five years ending December 2005 and 30.82% and 28.54%, respectively, in the 10 years ending December 2005. “Bank-based distributors would also not sell Benchmark schemes since they wouldn’t get the insane commissions that most other fund houses were paying them,” says an industry source close to Benchmark MF, who didn’t want to be named.
Advertising concerns: Traditionally, Benchmark AMC has not advertised aggressively, unlike the top fund houses that hawk their products regularly. For instance, the fund house spent 0.03%, 0.04% and 0.17% of its AUM in the fiscal years ending March 2011, March 2010 and March 2009, respectively. Its budget is small when compared with those of other fund houses (see graph).
However, global experience shows that advertising is crucial if the product is new and investors are generally ignorant about it. A study conducted by the Harvard Business School (HBS) in 2007, observed that Barclays Global Investors (BGI), that owned iShares ETFs before BlackRock Asset Managers acquired it in 2009, took the aggressive and risky approach to popularize ETFs and achieve penetration. In 2000, its existing 17 ETFs were rebranded as iShares, launched 40-50 more such funds across different categories tracking several indices, hired at least 100 people just for its iShares business and earmarked $12 million for television and print advertisements. “We had to educate the markets about the whole ETF category before we could sell our own funds. If BGI had not spent nearly $100 million over the last six years, I doubt the ETF market would have taken off the way it has,” said Jim Keagy, managing director, BGI, in the HBS report.
By 2006, the iShares sales team had at least 100 people around the world, including Latin America and Asia apart from the US and Europe.
By December 2006, BGI managed 194 ETFs worldwide and its ETF AUM worldwide reached $285 billion. The iShares bargain paid off as it was the largest ETF provider in terms of both the number of products (473 ETFs) and assets ($578.6 billion) at the end of 2010.
Market sources say that Benchmark’s sponsor Niche Financials’ reluctance to add more capital meant that the fund house operated on a tight budget and was left with little cash to advertise. “Just like other products, we need to create awareness about ETFs, too. They need to be sold, too, like any other product. I don’t think we have the depth of advisory whereby we can just launch the product and then assume it will get sold automatically,” says Nitin Rakesh, CEO, Motilal Oswal AMC, one of the newer entrants that focuses only on ETFs. It spent around Rs 4 crore just on advertising and marketing last year across its three schemes; Benchmark AMC’s entire year’s (fiscal year 2011) spending on marketing was Rs 89.29 lakh across 13 schemes.
Though the fund house was a market leader among ETFs, its penetration wasn’t encouraging despite passively-managed schemes sporting some of the lowest expense ratios and tracking error (see graph). As of June 2011, equity ETFs were a mere 8.33% of the industry’s total AUM. Gold ETFs, however, grew in popularity over the last five years, thanks to a surge in gold prices and an increased appetite for gold among Indians. The AUM of gold ETFs is 5.67% of the industry’s AUMs, up from 0.08% in December 2007.
Far from adding more funds, whispers were heard on the MF street that Niche was planning to exit from the AMC, way back in 2008. There was a tacit understanding between Benchmark AMC and the sponsors that they wouldn’t add more funds by cash infusion, but through its profit, say sources, on condition of anonymity.
It was widely believed that, perhaps, due to old age, Dhirajlal S. Mehta (rumoured to be well over 75 years of age), chairman, Niche, was looking forward to bequeath the reins to his son Nirad. Market sources said it could have been Nirad’s decision to nudge the exit, though he told Mint it was a unanimous decision. “This was our investment and we believe we have made enough returns from it. It is our unanimous decision to exit; it’s very natural,” Nirad said.
When the fund house’s attempts to bring in a strategic investor failed in recent years, Goldman Sachs offered to acquire a 100% stake in the AMC. With a price tag of Rs 130 crore (around 4.43% of the AMC’s AUM) and an assurance to retain all its employees, Niche couldn’t resist the offer.
Taking it a step further
Here’s where Goldman Sachs comes in. With deep pockets, the global giant is expected to pump in money to help Benchmark’s ETFs penetrate the markets. So far, Goldman Sachs Asset Management International runs actively-managed funds and has stayed away from ETFs. By acquiring Benchmark AMC, it has reached the top position in terms of market share in the Indian ETF space.
“Benchmark is a pioneer of innovative products and market leader in Indian ETFs. It is true that index and ETF products are in nascent stages of development in India, but we believe that the share of passive and ETF products in India will increase significantly following the pattern in developed markets. The acquisition of Benchmark also immediately provides Goldman Sachs Asset Management with the No.1 position as measured in both AUM market share and breadth of products in the India ETF space,” said a Goldman Sachs Asset Management International company spokesperson from London, UK, in a reply to our questionnaire sent via email.
Surendra A. Dave, a trustee of Benchmark mutual fund says that Niche was able to take the fund house to “a certain distance, after which it was time a bigger company took it over to take the fund house to the next level”.
Adds Avinash Kalia, associate director, PricewaterhouseCoopers Pvt. Ltd, an audit and consulting firm that advises several fund houses on mergers and acquisitions: “These days, global funds entering the Indian MF industry prefer to acquire an existing AMC to get a head-start. They get a ready-made AMC, staff, investors and corpus.”
Says Rajeev Suneja, partner, Ernst and Young India Pvt. Ltd: “By doing this, AMCs can get to a ‘critical mass’ and save up to 2-3 years that it would have otherwise taken them to reach that stage. The Indian MF industry is very fragmented; they need to be of a minimum size to be profitable.”
What should you do?
Although the exit option (a window to exit without paying loads) for Benchmark AMC’s investors expired on 10 August, it doesn’t matter if you haven’t exited but still wish to do so as ETFs do not carry exit loads. You can simply sell ETF shares on the stock exchange; National Stock Exchange in this case.
“The acquisition of Benchmark broadens and complements our existing active capabilities in India. We also intend to bring a range of actively managed funds to the Indian market. We believe that there is a place for both active and passive funds in investors’ portfolios depending on their risk and return profile,” assures the Goldman Sachs spokesperson.
While Rajan Mehta has quit Benchmark, Shah has been appointed as a co-CEO of Goldman Sachs Asset Management (India) Ltd. Shah will head the ETF business, including schemes from the erstwhile Benchmark AMC. Goldman Sachs hasn’t yet disclosed its detailed plans about its future path in India; we’ll keep you posted on that.
For now, we suggest you hold on to your units.
Graphic By Sandeep Bhatnagar/Mint