Roy Stockell, Partner, head of asset management EMEIA (Europe, Middle East, India, Africa),Ernst and Young. Edited excerpts.
Budget 2011 has allowed foreign individuals to invest in Indian mutual funds (MFs). What are your first impressions?
This can have a huge impact on the Indian MF industry. There are potential headwinds though in terms of constraints such as the ability to tap the international distribution network. If you look at wealthy international economies, such as the US, the UK and northern Europe, the things that will worry the domestic asset managers are how well they know their clients, KYC (know-your-client) laws and how well they are prepared from an investor servicing perspective. Safety and segregation of client’s money, which wouldn’t have been that big a worry two years ago is now so, thanks to the 2008 global crisis. In the short-term, the impact would be minimal. But in the medium to long term it has significant potential, depending on how well Indian fund houses can demonstrate their capability to handle foreign clients’ money. Obviously, the regulations that are formulated by Sebi (Securities and Exchange Board of India) would also be important.
You’ve said that the biggest challenge remains distribution and how well domestic fund houses can market their products. What about the registration of the fund houses in the international markets?
The most obvious way for Indian MFs to market their products in areas such as the EU (European Union) is through a vehicle called Undertakings for Collective Investment in Transferable Securities, or UCITS. The downside of UCITS is that you have to have a registration in an EU market if it was a true one and therefore should have a manager in the EU country. UCITS have been in existence for over 20 years.
But isn’t it a bit of a hindrance and also a costly proposition to have an office abroad?
Yes, you have to have some level of presence in the EU territory, but it’s a lot easier now than what it used to be when the first UCITS came 15 years ago. You had to have the ability to administer the product in an EU country. With the change of UCITS regulations coming through, you can have the same fund distributed in many jurisdictions.
In the light of Goldman Sachs Asset Management acquiring Benchmark Asset Manager Co. Ltd, what is the future of niche or boutique fund houses in India that have remained small in size? Is it all about mass marketing, asset gathering? Will large funds continue to rule the roost?
What we are seeing in the market is polarization. Though it’s not in as big a degree as before, but nevertheless big asset managers will become very big and there will be very few boutique fund houses in the middle to bottom segment. The reason behind it is that distribution has really become the king.
In the past, power used to be around manufacturers and asset managers. Money can still be made by small and niche firms. But they need to have a clearly defined proposition and performance will become more important than before to niche organizations than to the big ones that come with a brand.
You say distribution is king, but would you say so despite the abolishment of entry loads?
The global trend is to abolish entry loads. But yes, a strong distribution has a big hand in the success of any retail product. If you look at the demographics of the world, you would realize that India and China are the two mega markets at present. To be successful, an asset manager would need to access these mega markets and figure out how to tap them (the population and rising middle class).
They need to figure out what distribution model will work in, say, India. I think there is a need to educate the underlying investor that the investment product is really for saving and pension income opposed to generating trading income, liquidity and quick cash. So I think distribution and brand will become more important.
However, I am not sure whether it will be a brand that we recognize today because brands don’t tend to last long in the financial services market. Fidelity, for instance, is a very strong brand, but they had to work their way up in the Indian market and use the distribution model, among other mediums, to increase awareness.