The MF Industry in India has gone through three distinct cycles. The first cycle started in the early 1990’s with the entry of PSU Bank floated MF’s into the industry that was just UTI at that stage. The initial phase of growth was very short where investors were largely unaware of what MF’s were and invested in Equity MF’s as if they were listed equities. There was hardly any investment education and no professional Fund Managers existed with funds in most PSU floated MF’s being largely managed by bankers on deputation to these AMC’s. The first wave of growth got hit by the economic downturn of the mid to late 1990’s.
At that stage there was the entry of private sector MF’s and professionalization in the MF industry on both the Fund Management and sales side grew. There was moderate growth till the TMT boom of 1999 where huge money flew into MF’s with expectations of exponential returns and most MF schemes that grew were also largely investing into these sectors. The subsequent crash saw investors lose a huge amount of money and total disinterest and apathy emerged towards Mutual Funds. This phase lasted till 2003.
As economic growth picked up in the year 2003 the stock markets started booming from mid 2003. The first phase of the rise was accompanied with total disbelief where investors continued to be on the sidelines or withdrew money as the markets rose. It was only after a new high was formed in the year 2004 when big money again started coming into Equity Mutual Funds. This phase lasted till 2008 by which time equity assets of MF’s excluding UTI jumped by nearly 10 times. At that stage equity assets became nearly 50% of overall Assets under Management. The subsequent fall in the markets and largely lacklustre markets over the last 5 year has seen the percentage of Equity Assets in the overall asset mix drop to below 30% as per the latest data available.
In this entire phase debt oriented MF’s continued to grow in size as this became a liquidity management instrument for corporate as well as a more tax efficient investment avenue for other investors who would hitherto only put money in Bank Fixed Deposits. Several Debt oriented schemes came about to cater to the needs of investors across the time horizon.
THE “HAVES”, “CAN BE’s” and “THE HAVE NOT’s”
As I look at the MF industry today I can see three distinct categories of Fund Houses.
• The “HAVES” are those who have established themselves
• The “CAN Bes” are those who have a proposition to sell and can become haves at some stage
• The “HAVE NOTS” are those who will continue to languish with small asset bases
THE HAVES –
• The haves are those who have established themselves with a long term track record, have a good brand perception with investors & are on an autopilot
• These Fund houses also have a strong parentage & strong established Fund Management Teams
• The haves will continue to grow due to the size of their assets which gives deep pockets, their strong presence and relationships with distributors, wealth managers etc
• These fund houses also have the ability of attracting good talent
The Fund house in this category are HDFC MF, Reliance MF, ICICI Prudential Mf, Birla Sunlife MF, UTI MF, DSP BR MF & Franklin Templeton MF.
Over the last few years funds from this category have got most of the inflows
• Over the last four years a bulk of Equity Flows have gone to HDFCMF, IDFCMF, ICICI Pru MF and DSPBR MF
• The reasons have been different. HDFC & DSPBR have got money on the consistency platform
• IDFC & ICICI Pru have got inflows on strong outperformance over peer group schemes
• Other larger funds like Reliance, Birla SunLife & SBI along with a fund like Fidelity continued to get SIP flows while losing money on the other side
• Besides this some smaller funds have also shown growth, largely driven by performance
THE CAN BE’s –
• These are fund houses with strong parentage that gives a positive brand recall
• Most of them have established themselves somewhat, and some are still small
• The values of trust and durability are associated with the parent brands which can be translated to the MF
• These are the next potential “Haves”
• These Fund Houses are either part of large groups which have not focused on the MF or
• Have not focused on building their Fund Management capabilities
• Have had poor sales and marketing strategies which have not been consistent over time
• The Mutual Funds that fall into this category are Tata MF, Kotak MF,IDFC MF, AXIS MF, L&T MF, LIC Nomura MF,Sundaram MF & BOB Pioneer MF.
THE HAVE NOT’s –
• These are the remaining players that do not have a clear proposition to sell to the clients
• In some of the cases the parentage might be strong but they do not have a clear India Strategy at this stage. E.g. JP Morgan, Goldman Sachs
• Some like Religare, Deutsche, Canara Robeco & HSBC despite having good brands do not have a clear expansion strategy, they also have very small Fund Management teams; in some cases single FM teams
• Most others are just there
Post the Lehman crisis investors into MF’s have largely taken a risk reduction strategy where they would rather reduce downside risk, unless and until a smaller Fund House has got a distinct proposition to sell. This move has further accelerated after the regulatory changes that have come in the MF industry subsequent to the end of the “Entry Load” era. In this phase where huge loads could be loaded on to the investors we saw an era of large number of NFO’s as well as hard selling of funds just for commissions by various kind of MF agents be it Banks, Wealth Management outfits or IFA’s. The sentiments for MF equity schemes has got further marred by the losses investors have suffered due to investments in mis-sold ULIP schemes where the charges on investors were so huge that they have lost a lot of money. However that’s not the main point of the article.
THE WAY FORWARD FOR “CAN BE’s”
• These MF’s need to build strong Debt and Equity teams to inspire both investor and distributor confidence
• Even Fund Houses that propound a “Process driven approach” are associated with strong Fund Managers, whose views are associated with that of the MF.
• After the end of the “Entry Load” era, fund houses with sustained & strong performance have grown and the rest have de-grown or stagnated.
• In order to get back to the investors radar consistent long term performance is essential
• Along with the performance, investors & advisors also need to know what will drive this performance & who they are investing with
• The proposition being offered to investors needs to be clear
• Historically MF’s that have seen strong growth have one or two core funds that are top notch performers
• As the core funds do well, the performance of these funds leads to growth and flows into other schemes too. There are several examples of this in the MF industry.
• A talented, stable & process driven team, who have a long term commitment can lead to this transformation
MF INDUSTRY FROM “PUSH” TO “PULL”
· The MF industry was built around the “PUSH” platform in the era of high entry load
· Funds that paid out high commissions got more inflows. Performance was important but not critical
· After entry load ban the industry has become a “PULL” industry where fund performances are the most important criteria for inflows
· AMC’s with strong all India presence, good brands & strong equity performances will continue to grow.
• Sales teams of most MF’s which were used to pay out huge commissions to get inflows have been unable to adapt to the changing reality
• Distributors who were earlier focused on transaction commissions, either have moved out or are transitioning to the “Wealth Creation” platform
• Direct selling of the proposition, that a MF offers & working with Investment Advisors to get funds into the recommended category is the future
• The proposition needs to be clear to the investors i.e. why should they invest with you and not the top 5 MF’s
• Sales teams need to be either retrained in order to adapt to the current realty. Just distributing commissions is not going to lead to inflows
• With the average investor life in an equity MF scheme being just around 18-20 months the payouts for getting assets has to be more back ended and profitability will have a huge operating leverage play. The older MF’s that are in the “HAVE’s” category have a much greater investor longevity as investors have made money with them over a period of time and are as such much better positioned.
• The “Can Be’s” need to have an equity corpus of at least Rs 5,000 Cr in order to sustain a strong Fund Management and Marketing team and move into a phase of auto growth. This is because the fixed cost of building a successful Fund Management and all India Sales outfit should be in the region of Rs 30 Cr per annum.
So if once in HAVE’s does that mean always in Have’s
The main advantage of building an annuity Fund Management business is that although the climb up might be tough, once you have climbed it is also difficult to fall drastically. So what this essentially means is that once you are up there it will take time to be dislodged. This will largely happen if performances remain below par for a prolonged period of time. We have already started seeing this happen with one of the largest Fund Houses that has been floated by a large industrial house where the performance now is a flicker of the earlier top notch performances. This is also evident in the case of a prominent global Fund House promoted MF that operates from down south. However even in the case of these fund houses they continue to be significantly profitable due to legacy assets and the move down is also slow. However it does open up the opportunity of some other MF’s from the “Can Be’s” category to build a performance track record and move into the “Haves” category as the next wave of growth starts.
IN SUMMARY
In summary, as a keen observer of the MF industry it is very clear that the industry has gone through a strong phase of consolidation. Investors into MF’s and distributors have become cautious, which has made it difficult for smaller MF’s to grow. This has also been accompanied by regulatory changes that have made payouts for selling MF’s seeing a major reduction. Clear strategies and distinct propositions are necessary to be shown to investors for smaller MF’s to grow from here on.
However that said it is also very clear that markets and growth in an industry moves in a cycle. With the macro indicators for the economy clearly having bottomed out growth revival in the economy is imminent. As inflation and interest rates decline sharply over the next six months we will see the economy revival start, companies starting to report more profits and stock markets picking up. It is my strong belief that in a country like India investors will make inflation beating returns in Equities & Real Estate over the long run. Real Estate has become a favoured investment destination over the last three years as equities have underperformed. Relative valuations are now in favour of equities.
The last three market cycles have seen peak Price to Earnings ratio at 30-32X earnings. What goes up comes down; similarly what goes down also rises. The cycle always turns and it will turn this time too.