BackMint conclave: Industry will only grow with more investors
CEOs of asset management companies discuss what the industry needs to do and how it needs to change to achieve its growth objectives
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Mumbai: A long-term road map for the mutual fund sector set out by the capital markets regulator, the Securities and Exchange Board of India (Sebi), seeks to double the assets under management (AUM) of the industry over the next five years. While a number of industry representatives feel that target is achievable, others question whether the industry should be focused on increasing assets or if it should focus on improving the reach of the mutual fund industry by drawing in more customers and offering them a better experience. In the second debate at the annual Mint Mutual Fund Conclave, moderated by Mint’s Ira Dugal, CEOs of asset management companies discuss what the industry needs to do and how it needs to change to achieve its growth objectives. Sundeep Sikka, CEO, Reliance Capital Asset Management Co.; Nimesh Shah, CEO, ICICI Prudential Asset Management Co.; Nandkumar Surti, CEO, JPMorgan Asset Management India Pvt. Ltd; G. Pradeep Kumar, CEO, Union KBC Asset Management Company Pvt. Ltd., and Kalpen Parekh, CEO, IDFC Mutual Fund, took part in the discussion.
Edited excerpts:
Dugal: We have an ambitious long-term policy note set out by Sebi, talking of doubling of the AUM (assets under management) for the industry in the next five years, taking it to ₹ 20 trillion. Do you think it is doable?
Sikka: My first impression is that it is doable. We shouldn’t get carried away with what happened at the budget announcements. Mutual fund industry is always going to be about the retail investors. But what we saw in the budget has affected the institutional part of the business. In the short term, AUMs can go down by 1 lakh or 2 lakh crores. But the long-term plan by Sebi does not get affected. Of the many changes since 2008, the biggest is the capacity to create wealth for long-term investors. With the kind of wealth this industry has created, I don’t see why more investors will not come into this industry. Even if we are still 10% of the GDP or only 2% of the population is investing in the mutual fund industry, that is exciting. How long can you see people investing in fixed deposit, gold? Money has to come into the industry; it is proven that anyone who stays long in the industry has earned good returns.
Dugal: What are the enablers? Even if the AUM has grown, has the number of investors actually grown?
Shah: Many changes have taken place in the last five years and I am satisfied with it. Our product is extremely transparent. We should stop looking at 10 lakh crores and 20 lakh crores. I find them meaningless. As long as you are making money for the investors and beating the benchmark, money is coming to us. If there is performance, you will get money. Daily, weekly and annual updates of our performance is available. At the end of the day, you feel good that the final investor is happy.
Dugal: Do investors see it that way?
Surti: Investors must realize the way they see the risk. In the recent past, there is a perception that the return is with the investor and the risk belongs to the asset management companies. More so on the fixed income side. Investors need to realize that the risk is also theirs. We need to invest in educating the advisors so at the end of the day, an informed decision is taken by the investors. It is up to the advisor to advise the client if they want to invest in a highly performing asset class or an under-performing asset class at this point which is likely to out-perform in the days to come. The days to put the blame on portfolio managers are gone.
Dugal: So you think that improving investor experience is the backbone to reach the target?
Surti: It has to be. The recent tax changes show us that the hurdle rate was so high. Investing in just money market gave 8% or 7.5% tax-free returns on a daily basis. That hurdle rate has gone. Now, investors know that for better returns, they have to (take) commensurate risks. On the fixed income side, you talk about the risk, the duration or the credit risk; the equity side is an inherent volatile asset class. Who gives them this advice? In the days to come, the industry is going to be more advice-based product-savvy than commission-based product-savvy.
Dugal: Is the process of giving advice mature enough?
Kumar: What are these objectives that we are talking about? The whole industry and Sebi keep talking about retail investors. But how many asset management companies are evaluated based on the number of investors they have added that year? Why do we not have a target that in the next five-10 years we will have X number of new investors adding 20 lakh crores? The whole system is incentivized. If you talk about retail investors and incentivize on the basis on total AUM, retail investors will always take a back seat. The whole system really needs to be aligned towards adding more investors. Our job as mutual funds is to create wealth for the investors. It doesn’t matter to me that if the market is down by 20% and you tell me that you are down 10%, as an average investor, I say you have to create wealth for me. There is a crisis of confidence among the investors because we have not been able to create wealth for the investors. Until the perception of the investors is changed, nothing can change, if you spend 2 basis points or 20 basis points on advisor education.
Dugal: Should we throw out this paper and actually start talking about the investors?
Parekh: Most of the fund managers have created immense wealth on their NAVs (net asset values). You have great performance and you have NAV crossing good numbers. So, I don’t see why there should be questions asked. These are all great returns on Excel sheets. How many of them are transferred to account statements? The challenge is to see how we forward this. Here is where how we build the business. The fund manager meets the benchmark but the investor does not. First, let us take them to beat the benchmark. A lot of wealth is created in 20 years, but who stays for 20 years? The industry has great content, we must now create great content. On one hand, we are talking about the next cycle and on the other, we are talking about profit booking. Where are the profits to go? Last one year, most fund managers created 70-80% returns. Money comes in looking at those returns. If we are looking to deliver 60% in the next one year, it would be over-promised and under-delivered. Because he is looking at 70%. We need to change our conversation around what is investing all about.
Dugal: There are two sides of the table with two different views.
Sikka: The Sebi long-term paper did not talk about investors. There is something called as the means and ends. The end is 20 lakh crores. The means is all about investors, how do you get them from small cities and towns, the long-term pension plan, etc. The point we are trying to make is the industry will only grow with more investors. The mutual fund industry is good, as it creates wealth for retail investors. Biggest issue is financial literacy. For many, the benchmark is the bank deposit rate. As long as the investor is getting more than that, he is happy. But if the markets are not doing good, you cannot give returns. This industry is not about AUM, it’s about touching more investors.
Shah: Our ability is to give relative return and not absolute return. In a consistent business, if you can beat benchmark, then your probability of creating absolute return is that high.
Dugal: In terms of understanding the risk, to what extent is it the responsibility of the fund and to what extent is it the investor’s responsibility?
Surti: Our primary responsibility is following the mandate of the fund. Unless the advisor is in a better position to explain the fund, investors will not get more returns. Even if it is our responsibility, somewhere the advisor and the investor must also take responsibility. The pricing in the system is in a manner where it encourages the distributor to go and churn the assets.
Kumar: The problem is, when the market goes up, people see this fantastic NAV. But when it goes down, they start panicking. And at the worst possible time, the investor exits the market with a negative experience. To counter it, we launched this product where we told the investors that during these three years, if the absolute return touches 30%, we will wind up the money and give you back. This ensures a positive experience. If we focus on creating a positive experience for the investors, a large chunk of our job is done.
Dugal: So there is a communication issue. Isn’t there short-termism in the way the industry pitches products as well?
Parekh: The wealthy know how to make money from their business. But they also know how to lose money by investing in markets at wrong times. But these are behavioural factors. The solution is better product design. You must also compliment the industry for raising a lot of money during this cycle. Money has been raised when prices were low. Product designs are also evolving. Many products look at tackling this behavioural bias. Product design, right regulatory nudges and right tax breaks, these combinations will help. Our biggest hurdle is, we try to talk exclusive, that leaves the customer out of what we talk.
Dugal: There is a talk in media about another change is commission structure. Where are we on that front?
Sikka: The AMCs and distributors all need to be aligned with the interest of the investor. From a long-term point of view, everything will move towards trailers. A lot of AMCs work in the big cities where the dynamics are very different. But in a small town, most of the AMCs are retail AMCs, where the way to acquire a customer is very different.
Dugal: In the macro picture, commissions haven’t really mattered in terms of the industry growth, have it?
Parekh: There are two views to this. Only revenue consideration is one side of it, commission structure is the other. Commission is probably not the answer. Then the headlines were about bond funds and today they are about equity. Ultimately, investors come when their experience is good or their neighbour’s experience is good. But durability of AUM has never happened.
Dugal: Is there an ideal idea out there in terms of commission structure?
Kumar: There is no one big idea that will change this whole thing. The industry has taken a lot of positive steps. The total equity assets of the mutual fund industry is about 2 lakh crore and the outstanding value of PE notes is 2.25 lakh crores. This shows the potential we have. The investor is looking for what is in it for me. Other thing is the product design itself. IDFC has done this: they say that when we believe that the time is not right, we won’t take money. We should be courageous enough to do that. Then we can give a lot of positive experience.
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