29th October 2011

WF : The MF industry's financials for FY11 do not paint a pretty picture. The top two AMCs seem to have earned 25-27 bps on assets at the net level and most others have not been able to make a profit. From what you see internationally, what is the norm in terms of MF business profitability? What should ideally be an AuM scale where AMCs should expect to make a reasonable shareholder return?

Saurabh : AMC financials are a function of the business model chosen. An institutional business model may require lesser staff, faster profitability but volatile assets,whereas a retail business model would mean larger investments upfront and more stable AUM but longer period for profitability. Globally the net margins have consistently shrunk to under 15 bps now for global biggies.

The Benchmark in India would be Rs. 10,000 crores in aum for a reasonable sized set-up. The asset mix too is important though in India debt aum too has proved profitable especially since the removal of entry load in august 2009 - resulting in AMCs paying upfront to distributors from their balance sheet for equity assets.

As AMCs in India grow larger, a range of 15-20 bps net margin will be a good target on a long term basis. I must however point out that operations and compliance cost have increased significantly in the last 2 years and may shave off 2-3 bps further in the years to come.

WF : Is scale the only solution to bring back some profitability into the MF business or are there other avenues that can be explored?

Saurabh : There are small, niche business models, which too are profitable but cannot be scaled up beyond a point.

It is therefore very important to be clear about your business model and follow it. It is important to reach scale in a few funds / strategies, as compared to multiple funds of very small size.

At Religare AMC, we are clear that we want to build a scale business across geographies and asset classes. We have invested upfront in setting up large investment teams and platforms and wish to focus on delivering consistent performance. If the performance is there, AUM will follow.

WF : Inflows - which are down to a trickle - seem to be getting increasingly polarised in favour of the top 5-6 names in the industry. Is this just a phenomenon of gravitating to big names during weak equity markets or are there other reasons for this polarisation despite increase in competition?

Saurabh : I would not agree with this. There have been small / new fund houses which have grown while the top 10 players too have slipped. In these tough times, flows will go towards better performing funds. Even in the top 5 fund houses, big individual funds have lost more than 50% of their AUM due to under-performance and the more consistent ones have doubled their AUM.

Weak equity markets force distributors / investors to re- align their portfolios and shift to quality. These are times to correct your "wrongs".

Even amongst asset classes, the biggest inflows are in gold Etfs which has performed the best in the last 2 years.

Unfortunately, innovation in product is available for a very short window in the current structure and therefore very little value is attached to the same. The second player in all likelihood will launch in 30 days time.

WF : What is your sense on how the distribution fraternity is responding to the opt-in vs opt-out options for transaction fees? Do you see this move as a growth driver in the retail segment?

Saurabh : As per the latest AMFI data, only about 6,000 distributors have opted-in for the transaction charge. I think the recent paper on advisor regulation put up by SEBI for fedback has been a big contributor where the distributors are not clear of the model going forward and therefore would like to wait and see the outcome over the next 1 year.

Also once you choose opt-in, the charges will be deducted from debt schemes too which may become an expensive proposition for the investor and he may not agree for the same. Imagine a retail investor wanting to invest Rs. 10,000 in a liquid fund and Rs. 100 goes in transaction charge - difficult to explain for the distributor to the investor.

WF : The concept paper on advisor regulations has heightened anxieties of the distribution fraternity, which fears that there is too much by way of commissions that has to be given up in order to qualify as an advisor. Do you see this proposal genuinely spreading the reach of the financial advisory profession in the country or is it likely to result in a very tiny niche being created for advisory services? What are some of the changes you would like to see in this, which can help spread the advisory profession across the country?

Saurabh : If you consistently see zero or negative growth in AUM, but yet Rs. 2,000 crores being paid in commissions annually, you have to question the existing business model of this industry. This is currently a universal phenomena and regulators globally are asking distributors to align only with investor interest and nothing else. I am seeing this in multiple markets where we operate in - UK, Australia, Korea and it is on the anvil in many countries as we speak. 5 years from now, it may become a norm globally.

We need to introspect and move on, else we will lose out on emerging opportunities. There will be a pain period but if it is in investor interest, it will succeed.

The Indian market problem is that a lot of these changes are being made even before it has reached scale. If our scale of operation (read 4-5 times the current AUM and retail client base) would have been larger, these changes would have been better and more easily accepted. Also the regulatory changes have been very swift without giving time for the previous changes to take effect. Therefore this frustration being felt.

WF : What do you see as the biggest benefits of AMFI's proposed MF Utility?

Saurabh : As the Chairman of the Committee on Ops and Compliance, I will have a vested positive view. The benefits are manifold and we are working to get it implemented as quickly as possible. Most significantly it will reduce the operation burden of the AMC, distributor and give a single view to the investor with other conveniences.

WF : What should the industry be collectively doing (AMCs and distributors) to help drive up sales momentum and bring in a larger share of retail savings into the industry?

Saurabh : Sell Mutual Funds for the right reasons. Mutual fund is currently treated like an individual stock with tax benefits which needs to be sold or churned if it performs well. This is wrong.

Mutual funds are pass-through vehicles which are simple products, provides risk diversification, fund manager expertise and convenience to trade. If the fund performs well, you should stay invested as the fund manager will make the necessary changes for you on an ongoing basis. This is the right reason for investing in mutual funds and all our efforts should be focused towards spreading this message and correcting investor perception on the same. Sales will automatically follow if the concept is understood correctly. We have seen the benefits of SIP education done some years back and the benefits we are accruing for the same.

WF : What are your product and marketing plans for the next 5 months of this fiscal?

Saurabh : We plan to launch the Gold FoF next month and then will look at launching international feeder funds. Our marketing campaign on SIPs too will likely hit the screen soon.

In the last 8 months, we have grown significantly in the offshore market with mandates now in Japan, HK, Singapore and Mauritius. I a short span, we have USD 800 Mn of advisory mandates and we continue to grow rapidly offshore, whilst maintaining local AUM at Rs. 11,000-12,000 crores (in a declining AUM market) in India.

In Dec 2011, we will complete 3 years of our Lotus Asset Management acquisition and we feel it will be a critical inflexion point whereby distributors locally and globally will accept our track record (with minimum adequate time of 3 years elapsing).

WF : How has your distribution mix shaped up over the last 4 years? Which segments are the biggest contributors for you and how do you see this changing over the next couple of years?

Saurabh : In the local markets, our percentage of assets is growing in tier 2 and tier 3 cities. This would be a natural process for any AMC as it completes more time in the market and the brand keeps gaining more acceptance.

As I mentioned in the previous question. Our offshore assets have grown significantly in a short period of time and now form a substantial portion of overall AUM. In 3 years from now, we see our local assets growing by 20% p.a. whilst the offshore assets may grow at 50% per annum and reach similar size to local assets. Our PMS assets too should grow rapidly on a very small base. India Retail has to be our biggest market opportunity and we intend pursuing it with full commitment.

WF : How do you see the online channel shaping up over the next 3 years? Do you see it becoming a significant channel for you? Within online, is there reasonable scope for the emergence of a sizeable advisor-led online channel or is it more likely to be direct?

Saurabh : This has to be the future as we see tech-savvy young investors entering the market. Client service fulfillment too can become much easier for online advisors. There is phenomenal growth opportunity in this segment for both the advisor and consequently the AMC. We would prefer the online channel to be advisor-led. As an AMC, we are more focused on the manufacturing part (fund performance) and would like to leave the asset allocation to the distributor.

WF : What message would you like to communicate to your distribution partners in this challenging time?

Saurabh : My message would be that these are challenging times for both the AMC and their distribution partners. Lets embrace change with an open mind and try selling mutual funds the right way this time round.

It is imperative also to grow the market this time round as we have seen the fallacies of a small market and small volumes when regulations change and it becomes difficult to sustain your existing model when rapid changes occur. From an opportunity perspective for the future - it cannot get better than this. Investors with such a low allocation to MFs have to come back. We have seen investor allocation to Bank FDs jump from 50% to 59% in the last 12 months. A similar phenomena can happen with MFs too. Also new opportunities will arise in retail debt, alternative investments like Gold, property etc. for retail investors and the AMC /Distributor partnership must be able to service the client requirement for the same.