Small MFs specialize to beat bigger peers
Now that sponsors of all asset management companies (AMCs) have to maintain a minimum networth of Rs.50 crore in their own mutual fund (MF) houses, the question of whether small fund houses are serious or not has been resolved. Or so it seems, at least from the regulator’s end. But the debate is much wider: Can small MFs survive in the competitive industry? Last week, PineBridge Asset Management Co. Ltd exited the Indian MF business; Kotak Mahindra Asset Management Co. Ltd bought its schemes.
Amid giants that come with track records of more than 10 years—and some of their schemes are managed by star fund managers—how can small firms attract investors, give them a better experience and compete with the larger firms in a meaningful manner? And, more importantly, can they find takers in the so-called “Beyond the Top 15” (B15) cities?
One on the ways in which smaller firms are trying to differentiate themselves is by being specialists—in the type of products they manage or in their style of management. So, if Motilal Oswal Asset Management Co. Ltd has chosen to manage only equity funds, Edelweiss Asset Management Co. Ltd focuses on managing sophisticated (and not the usual run-of-the-mill diversified funds) equity-oriented schemes that cater to high net worth clients, and PPFAS Asset Management Co. Ltd has launched only one equity scheme since its launch in 2013.
“Large firms launch various kinds of products. I can’t launch 20 funds and expect to compete with them on account of my size and reach. Hence, we become product specialists,” said Aashish P. Somaiyaa, chief executive officer, Motilal Oswal AMC. He was on a panel of small fund houses as part of the discussion on the course ahead for such firms, at the day-long Cafemutual’s MF conference, held in Mumbai on 12 September. Motilal Oswal prefers sticking to equity as its parent company already has strong expertise in the area through its portfolio management services.
But behind aiming to be product specialists also comes a desire to stand out. Here’s where smaller firms can bring out innovative products, said Rajeev Thakkar, chief investment officer, PPFAS AMC. “Historically, the earliest innovations in our industry have come from small fund houses. Be it the first exchange-traded fund or the first direct plan fund house (those where distributor commissions are not embedded in the scheme) or the first arbitrage fund,” added Thakkar, who was also on the panel of small AMCs.
Like Motilal Oswal AMC, PPFAS, too, sees itself as an equity specialist. Its lone scheme—PPFAS Long Term Value Fund—is an equity scheme. The fund house has not launched a single MF scheme since then. This, believe Somaiyaa and Thakkar, goes against what a large fund house would have done over years; build a product suite that caters to different classes of investors. “We don’t want to follow a supermarket type of approach where we give you all products and you can pick and choose,” said Somaiyaa.
Being niche is fine, but it comes with challenges. How do you attract investors with one or a handful of schemes, which may be designed for a select audience? The panel was in consensus when it said that size alone doesn’t ensure more investors. “Many people confuse size with efficiency and profitability. We will achieve profitability because our costs are under control,” said Thakkar.
Edelweiss has taken a slightly different approach to attract more investors. By identifying high net worth clients as its target segment, it has channelled its distribution network into specifically targeting such investors. Differentiated strategies such as Edelweiss Absolute Return Fund have gained the most; its assets have grown to nearly Rs.90 crore as of end-August from Rs.15 crore in January 2010.
For such funds, increase in investor base comes slow and steady. Vikaas Sachdeva, chief executive officer of Edelweiss AMC, and a panelist at the conference, said, “We realized that our target customer is the HNI (high net worth individual). We, therefore, also help our distributor showcase products to HNIs.” In the process, he elaborated, they have to let go of the business strategy that typically brings in chunks of inflows. This meant not pursuing companies and institutional investors aggressively, and also not expecting huge inflows through systematic investment plans (SIPs).
Somaiyaa, on the other hand, said that a distinct strategy would eventually lead to more investors. They also fall back on national distributors to sell their products.
Matter of survival
So long as fund houses aim to be niche and small, it’s fine. But for those like Mirae Asset Global Investments (India) Ltd, continuity became a big problem in 2008 when equity and debt markets collapsed the world over on the back of the global credit crisis. But with equity markets picking up this year, fund houses are hopeful of getting more inflows and seeing their profits grow, slowly but steadily. “It has been tough to do business in India, especially for a smaller firm. But it’s been tough for everybody in general. We have taken five to six years to settle down. Now that we have done that, we are ready to expand,” said Jisang Yoo, chief executive officer, Mirae Asset Mutual Fund, also a panelist at the Cafemutual conference. He added that the fund house has already started to expand in other cities. “We are in 12 cities now. Now that we have survived the tough times, we are ready to open branches in cities where we are not there and target investors there,” he said.
But memories of Fidelity International selling off its Indian MF business and exiting the country are still fresh. Besides, when the capital markets regulator, Securities and Exchange Board of India (Sebi), hiked the minimum net worth requirement for an AMC to Rs.50 crore from Rs.10 crore, there was added pressure on the sponsors of some of the smaller firms.
Industry experts believe that an AMC must be patient and shouldn’t be in a rush to get huge inflows. And here’s where some of them believe foreign firms take a hit.
“Foreign fund houses may be big names in their countries, but they must be realistic when they set shop in India. Just because they are famous in their own countries, doesn’t mean that every Indian would rush to invest in them. Those days are long gone, since Morgan Stanley Investment Management launched its first scheme in India, and in which people lost money soon after investing. In the investment management business, one has to first build a track record; the first five years go into doing just that,” said a senior fund manager on the sidelines of the conference who did not want to be quoted.
Small firms have realized that to be successful, they need to be different. That, they believe, is the way to get noticed and offer something unique that perhaps their larger peers don’t offer. Will they succeed? Only time will tell. We’re watching.