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There is an ongoing debate about whether there is a need for just one entity to manage all the assets of the financial sector. Panellists from the fund management industry who attended Mint’s annual mutual fund conclave on 31 July in Mumbai say that it is the asset management companies (AMCs) that have the core competence to do so. Leo Puri, managing director (MD), UTI Asset Management Co. Ltd; Dinesh Khara, MD and chief executive officer (CEO), SBI Funds Management Pvt. Ltd; Sundeep Sikka, president and CEO, Reliance Capital Asset Management Co. Ltd; A. Balasubramanian, CEO, Birla Sun Life Asset Management Co. Ltd; Nilesh Shah, MD, Kotak Mahindra Asset Management Co. Ltd; and Milind Barve, MD, HDFC Asset Management Co. Ltd, took part in a discussion moderated by Mint Money’s editor Monika Halan. Edited excerpts:

Halan: Should the mutual fund industry think about being asset managers rather than vending a scheme or a product?

Shah: Absolutely, we should become asset managers. Today, we have so much replication. And instead of consolidating the fund management skills, we are trying to diversify it and decentralize it. So we have to break these boundaries or walls, and create a uniform fund management capability in fund management in mutual funds.

Halan: This change will be a tough one to bring in, though.

Khara: It is actually the AMCs that have the core competency and that can offer value for money. If you look at insurance per se, though their core area is to offer insurance, wherein they are managing money, the returns that they are generating are suboptimal. This is something that we all know, but it does not get captured in the minds of potential investors.

I do agree that change is not easy. Nevertheless, merits of the initiative to change is appreciated and there is a concerted effort on the part of the regulator as well as the industry to move in a particular direction. With AMCs having the core competency, they can gain an edge over others and become asset managers.

Halan: What does the industry have to do to rethink its role as an asset manager?

Puri: We have always thought of ourselves as asset managers. The underlying problem, however, is that there is not a lot of money flowing anywhere in India. It is not that there has been a big missed opportunity. I do think that is about to change. The reason why I am quite optimistic is that basically there are three broad shifts happening. There is a recognition at a policy level that we need to get serious about household participation in capital markets as a catalyst to develop it. I think we are also beginning to see development of an institutional market, which we have not really had, which is also one of the reasons why our institutions have remained small. There is also the creation of products, which are broadening the variety of asset classes.

Financial sector development is about developing markets as well as institutions. In India, we develop markets to a faster extent when it comes to our capital markets. And we develop, at least domestically, the institutions.

We are fundamentally a bank-driven economy. So the attention that has been given to capital market-oriented institutions has been low. I think that is going to change. You will actually see domestic institutions grow in terms of sophistication and scale.

Sikka: One good change that we are seeing is that people are realizing that AMCs, and mutual funds, are for wealth creation, while insurance is for risk. I see a lot of financial planners advising investors to invest in equity funds and go for term insurance, instead of just a unit-linked insurance plan. I believe that ultimately this has to start as a need and post that comes education; education of both the investor and all the regulatory parts. Right now, be it insurance, or pension managers or mutual funds, we are all managing the same pool of money, which is going to get invested in the capital market. I see a case where anything to do with the capital market should be with the AMCs rather than replicating it.

Balasubramanian: I am not so sure when these walls will collapse, but we will see a change. The mutual fund industry has gone through ups and downs, and it has made mistakes. But, of course, it has taken right calls as well. And despite all the mistakes and a mix of decisions, it has outperformed the indices with a reasonably good margin. This is because fund management capabilities have been proven.

Halan: Having agreed that asset management should be a function that goes to a set of firms, where is the value and what are the impediments?

Barve: Mutual fund managers or asset managers believe that they should be managing all the pots of money. I am concerned about the fact that there are fairly hardline views being taken about these ‘walls’, and these have not been created by mistake. There is a lot of thought the governments in the past have put in, and I find it difficult to believe that this will all go away. It will take a lot more talking to the government, explaining to it what the global models are and so on. The government’s position is that within the group, you can have an insurance company, manage EPFO (Employees’ Provident Fund Organisation) money, set up a pension manager, and so on. So, I don’t know if it is looking at all of this in one entity or as a group.

There seems to be a view that as long as there is a group, there is the capability of doing the business.

Halan: With the Indian Financial Code, there is finally a document which puts the consumer at the heart of the financial sector. We have now managed to shift the focus of the government from the firm to the customer, to say what the world looks like from your own point of view. Will this translate into some change?

Barve: I think it should translate into a change, but does it mean it should happen almost immediately. I think the voice of the customer is not being heard loud enough. It is difficult in India to be practical about it. That governments decide to close down one regulatory body and say that the function of this will be moved on to another…

Halan: …But we saw this with somebody else…

Barve: Now that was an extreme situation.

Halan: Maybe a first step could be that the regulation changes to the choice. The choice is left to the insurer to outsource. Will it be easier?

Puri: You can’t make it mandatory for them to outsource, nor should it be mandatory for them to let the market develop it. But coming back to your question on where the value is, there are a couple of points. One, in India, there is the temporary phenomenon where we all outperform the benchmark. So, the question is that how long can that be sustained. Because around the world there is some fundamental questioning about the appropriate amount of value capture that can happen from the process of investment management. Which is of course the debate between active versus passive. On the other hand, on distribution, a lot of value has been captured over the decades in the process and there is strong regulatory attack on that.

So, as a whole, you are seeing a fair amount of squeeze globally on this industry and therefore there are two or three interesting things starting to happen. One, is the push towards scale. And the other is the attempt to do something new, which is why people are focusing on trying to differentiate themselves either through alternative strategies or exotic strategies. So there is going to be a little more of an existential question as those questions start to hit us. As of now, there is a reasonable amount of value capture, but it is happening at a small scale. Unfortunately, in India, we tend to compress at small scale.

Halan: Is it okay for the market to not be compressed because it is at a growth stage?

Puri: I am not arguing about being permissive about mishaps.

Shah: Today, we are a $2-trillion economy. Probably if the country works well, in five years we might be a $4-trillion economy. So what has been created in the past many years, we will see in just 5-10 years. And we will capture enough value out of it. The active fund managers will still be able to move into those sectors ahead of index inclusion and justify their position. I don’t think there is any value compression possible in fund management; we will create value because the current environment will push it to us.

Halan: Do we then have 20 years of alpha?

Barve: There is so much of under-penetration in simple mutual funds. If you look at funds that have given 10-, 15-year performance, and just the level of outperformance by the industry, we are many years away from actually seeing an attack from passive fund management. Also, passive management has grown in accompaniment with large sums of retirement money. So, if the customer has to make an investment decision between different products and regulators, I am confident that she will choose one of us.

Puri: I don’t share this optimism on 20 more years of alpha, not because I don’t think we don’t have fantastic fund managers, but because that is not a feat that is achieved anywhere. And the largest single incremental flow is actually all going into passive. You may not like it, but you can see where that is going and it is happening at a time when there is already a 15-year track record of alpha. On the outset, we are at a point where we are negligible in terms of relevance to capital markets, to a point where we will grow geometrically, and not just lineally, over the next decade.

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