Asset management: a story of distribution
Over recent years, driving along any major road in one of India's main metropolises has become an experience similar to a frustrating wait in line at the bank. With traffic moving in stops and starts, one can feel the unwanted burden of being bombarded by information on roadside billboards outlining the latest financial products on offer. In India's case this is asset management and, in particular, mutual funds. Advertising space in the country's financial capital, Mumbai, is dominated by the asset management industry. On street lights, traffic cones and 10-metre billboards, besides a host of other more creative spots, the players of India's mutual fund sector dare not waste an opportunity in the battle to grab their share of the public's attention. This incredible marketing effort is testament not only to the success that the mutual fund space has had in India over the past decade, but also to the extraordinary potential that many believe the sector has to grow exponentially in the years ahead. "The mutual fund industry will be the brightest spot in the financial services sector over the next few years," says Ved Prakash Chaturvedi, managing director of Tata Asset Management.
Despite dating its origins back to 1963 (when the Unit Trust of India was created as an initiative of the Government of India and the Reserve Bank of India), 1993 is seen by many as the mutual fund industry's year zero. That year saw sweeping changes with private sector fund houses making their debut and the introduction of comprehensive mutual fund regulations by the SEBI, which Chaturvedi believes have developed to be amongst the best observed in the world. "The quality of regulation in India really has been very good and though many might not suspect it, the governance practices in most fund houses really are of the highest order." Within this frame work, the Indian mutual funds industry has since witnessed impressive growth, riding piggyback on the economic boom and the arrival of a number of international fund houses. "All the groundwork has already been done and it will prove to be a very exciting area," adds Chaturvedi.
Indeed, given the amount of hype that already surrounds the mutual fund industry in India, it is hard to imagine that the industry really remains in its nascent stages of growth. Compared to developed countries, such as the United States, for example, where assets managed by mutual funds represented 78.6% of GDP in 2006, in India the figure is relatively tiny. However, it is indeed this notable difference that indicates the enormous market potential in India. As India's middle class continues to develop in terms of size, wealth and aspiration, the demand for investment products as an alternative to bank deposits is booming. "The level of household savings in India, some 30% of GDP, is amongst the highest in the world," notes Vikrant Gugnani, CEO of Reliance Capital Asset Management. "But of this proportion, only roughly 3% runs into the capital markets. The way I look at it is that just by getting that figure from 3% to 4% the incremental in flow to the equity markets will be in excess of $6bn. Do the maths and you'll see that the potential in this country is huge." According to the Association of Mutual Funds in India, the mutual fund sector, which currently consists of 33 fund houses, already manages just over $141bn in assets, a figure that has shown growth in excess of 60% over the last year. And if a study by McKinsey & Co is anything to go by, the industry will continue to grow by at least 33% each year to reach as much as $440bn by 2012. In what is currently a quite top heavy sector, the top five asset management companies account for more than half of the total assets under management with the top two, Reliance and ICICI Prudential, controlling over 25.8% of the total AUM as of June 2007. Furthermore, lured by attractive fees and rising valuations in Asia's third-biggest economy, there is a horde of new entrants knocking at the door. Following Mirae Asset Management's debut earlier this year, Bharti-AXA, Religare-Aegon, Edelweiss, DLF-Prudential and Japan's Shinsei Bank are all queuing up to get regulatory approval. For overseas players, India is an increasingly obvious target destination, whereas for many domestic companies, particularly brokerage houses, asset management is the next logical step for the diversification of their businesses. Yet few existing asset managers appear be worried about the forthcoming increase in the number of players - a number that has remained pretty consistent over the past decade. The country head of Fidelity International in India, Ashu Suyash, (pictured above right) believes that there is little cause for concern: "There is room for everyone," she says. "There is a long way to go before we can say that the market is over-served and any consolidation that does happen is not a market driven need as such. The market need is for companies with scale, committed to expanding the market over the long term." Having been investing in India for its global clients for more than 10 years, Fidelity launched its Indian arm in 2005. At present, with just over $4bn in Indian equities, India represents less than 1% of Fidelity's AUM worldwide but that is a figure likely to change. Suyash comments: "This is going to be a big market and along with China will drive the business globally. With a very large customer base already, I say to my colleagues around the world - you give me your assets and I'll give you some of my customers, then we're both happy!"
As securing a foothold in this booming market becomes increasingly attractive, valuations of asset management companies are rising accordingly. In March, IDFC bought Standard Chartered's Indian asset management business for $205m, which corresponded to about 6% of the value of its assets and notably higher than the 4% deal struck by UBS last year that was later cancelled. "I think the valuation game is playing out very strongly in India," said Ashvin Arora, director of the OptiMix division of ING Investment Management, who also noted that barriers to entry are likely to rise. Indeed, one estimate from Boston Consulting Group is that a firm today would need at least $2.5bn under management to break even; double the amount needed just two or three years ago. "In the early years, there was no scale in the industry," explains Ajay Bagga, CEO of Lotus India Asset Management. "There was an impression that you could come in at any time to buy market share. Now, with $140bn assets under management and $60bn in equity assets, the industry has more scale and it will continue getting harder for people to just come in."
The key to tapping the potential of the mutual fund industry, and likewise the biggest challenge for the industry, is distribution: How to access the growing middle class? While on the whole the last decade's growth has been fuelled by institutional business, many believe that it is the retail sector that will dominate over the forthcoming decades. At present, it is estimated that the top eight Indian cities account for three-quarters of the retail mutual fund assets and if the industry is to grow to the size that it is striving for the battle will have to move out of the main metropolises and into the lower tier cities. Those reluctant to invest in the infrastructure required to extend their presence to smaller towns, or without the right branding that has resonance in such areas, are unlikely to move very high up the industry's fiercely competitive pecking order. The importance of brand recognition outside urban areas is also helping to shape the industry leaders of the future. For example, when Société Générale looked to enter the Indian asset management industry in 2004 it found an obvious partner in State Bank of India, the country's largest bank with over 9,000 branches in the country. The result was SBI Mutual Fund. "It was perhaps easier in the past when the target was the main cities of India," says the company's deputy CEO, Didier Turpin. "Now that the market is more mature and more spread across the Indian population, it's crucial to partner with someone with the right name. When people are looking to invest for the first time in mutual funds, the brand name is key and for us to be with an Indian partner like SBI is fantastic." It is of little surprise that both Reliance and ICICI Prudential, the industry leaders, are also among the firms with the greatest physical presence and the strongest brands across the country. "The key philosophy of our founding chairman was to build a business based on large scale retail," states Gugnani. "We are now in over 300 cities across India with plans to double that footprint over the course of the next 12 months. Our presence in the domestic market follows a hub and spoke model and investors are already coming to us from over 2,000 cities through over 25,000 independent distributors."
What is more, besides untapped areas, new market participants are further increasing the market size by offering innovative and differentiated products. The most prominent examples of new products are gold traded funds, commodity traded funds, real estate funds, capital protection oriented schemes and systematic investment plans with monthly investment as low as INR100 (€1.50) per month. For the price of a pizza Indians can start saving for their future. And with many funds achieving compound annual growth rates well in excess of 30% over the last 10 years, it's hard to see why they wouldn't want to. "Compared to the alternatives, funds have delivered over a long period of time and the experience of people has been very good," comments Tata's Chaturvedi.
Perhaps surprisingly, given such returns, FIIs have to date had little exposure to mutual funds. Says AMFI chairman, A.P. Kurian: "Only between 1-2% of mutual funds are held by foreign institutional investors. But importantly it is growing very fast." The domestic landscape maybe the prevailing theme, but as India's asset management players continue to grow, the attractiveness of portfolio management and other services are sure to win favour overseas too.