Freedom to price is good but freedom to price arbitrarily leads to monopoly, says Puneet Chaddha, CEO, HSBC Mutual Fund. He tells Ravi Samalad that the current framework of free pricing is hurting the industry more than it is helping it.
HSBC MF posted a net profit of Rs. 10.38
crore in FY 2009-10 and in FY 2010-11 you posted a net loss of Rs. 8.20 crore.
What caused this slip?
It is because of a combination of factors. We were conservative on the liquid space. Our focus has been more on providing safety in the liquid fund category and not much on excessive returns. We launched HSBC Brazil Fund last year. Given the current fee structure, any new fund launch results in an upfront loss for an AMC. The costs are recovered over a period of time. The market environment was also negative across indices. Our fee income dropped as the markets came down. The larger question is that how many AMCs are making money from their domestic operations? There are not many.
The industry has been talking of devising a fair incentive structure which benefits both AMCs & distributors. What is your take on this issue?
I think the current framework leads to an un-level playing field. As a result, some AMCs have a larger ability to absorb distribution costs vis-à-vis others. It leads to product push based on payouts which is definitely not in the investor’s interest. The cost of the product to the investor should be constant across AMCs so that investors can make an educated choice whether to go with A, B or C. The distributor commission should not play a role in driving that choice. You don’t go to a doctor because he charges more or the other one charges less. You go to a doctor because he/she is a good doctor. I think banning upfront is an excellent idea provided it’s implemented consistently by all AMCs.
So should trail go up then?
Yes, but we don’t want a situation where trail is freed up and some are paying five percent trail. That can’t happen.
One school of thought is that AMCs should be free to decide how much they wish to pay..
I don’t subscribe to that view. I think we need to realize that freedom also brings responsibility with it. Freedom to price is good but freedom to price arbitrarily leads to monopoly. Pricing should be free but not up to a point where it starts to hurt the industry and that’s what is happening today. The mutual fund industry and the distribution capabilities are shrinking. I am not sure if the number of players is increasing. The penetration of mutual funds is low. We should actually look to see why we are in this space. There is no money for the manufacturer to pay to distributor. There is no money for distributor to have a meaningful conversation with clients. I’m a big fan of freedom of pricing. Today the freedom is harming the industry more than helping it.
Should there be a higher lock in period or a higher exit load if AMCs want to retain assets in order to recover costs?
An exit load is required for a longer period of time. Investors look for returns over a period of time. Every time an investor switches there is a cost involved in it. Transaction costs are also involved. So investors always benefit if they stay invested for a longer duration. If a fund manager knows that the money is going to stay for a longer period then he can manage it well. Any scheme that has a longer duration has a better chance of performing well. We need to create an environment where people think of mutual funds as long term investment vehicles and don’t equate them with shares. You can’t be switching mutual funds every three to six months.
Training and skill development of IFAs is becoming a top priority for AMCs. Are you also planning to engage your IFAs at an intellectual level?
There are two types of training that IFAs are looking for. The product training is ongoing. We are now looking to help IFAs with the managerial aspects of their business.
In the last budget FM announced that foreign investors could invest in Indian equity mutual funds. How is HSBC MF positioned to cash in on this opportunity? Has there been any progress on the KYC and operational aspects?
We are still waiting for clarity on a few things. It’s a right move directionally and it will broad base and open up our markets. This is a lot of interest from foreign investors to invest in India. It’s not just about KYC. You need to have vehicles which are registered with local regulators. Indian funds will need to have acceptability with the regulators of other parts of the world. There are some issues related to KYC and tax which need to be sorted out. We need to first ascertain what foreign investors are looking for in India. At HSBC we want to first identify the geographies that we want to target.
Very few foreign fund houses have been successful in India. HSBC started its operations in 2002. Currently you are managing Rs. 4,897 crore. Do you think you could have grown faster? Are you planning to leverage the bank network more aggressively?
We don’t want to leverage our banking network disproportionately to push products. We want to come up with quality products that remain for the long run. It is true that we have been around in this business for more than 10 years now. We have one of the largest offshore India funds which was a part of this business until 2006. All other AMCs run consolidated business but we run them separately for good reasons. We are also one of the four fund managers of EPF. Our focus now is on ramp up of equity assets.
What are the challenges facing HSBC MF?
I think the challenges that we are facing are common to what the industry is facing. All foreign fund houses need to be mindful of the fact that what they do in a particular geography has its impact on another geography. We tend to be a lot more compliant with not only local but also international regulations. In a developing market you find that the international regulations tend to be one step ahead. We adopt global standards for our liquid funds. The standards that other funds in India adopt are different. SEBI is already moving in the right direction. So sometimes you see two set of regulations overlap. So in that intervening period you will find that some of the foreign fund houses like us tend to feel the impact of following global standards. But eventually that approach always succeeds. It is better to adopt global practices before the Indian regulators move in that direction. So we are very well positioned. I have found this similar across all businesses and not just mutual funds.
What are your demands from the regulator?
The regulator needs to understand that the current model is uneconomical. The current regulatory framework entails us to bear a lot of upfront costs with no guarantee that these costs will be recovered by the AMC in the future. This actually leads to lack of penetration. There is a real need to relook at the economics of distribution.
Any new funds in the pipeline? You have not launched ETFs and gold funds which has been the flavor of the season…
We don’t like to have a cluttered portfolio. All our funds are designed to provide sustainable returns over the long run. We have stayed away from fancy funds. Investing in equities is probably a better option for long term returns.
What is the roadmap for HSBC MF? Have you set any AUM target that you wish to achieve?
We look at it every year but we are looking at it as a longer term journey. India is a part of our strategic market. Our global CEO has made it clear in the Indian media that we would like to double our market share. Our strategy is consistent with that and we want to grow in India. Our philosophy is also clear that we want to grow sensibly. HSBC Brazil Fund was a solid example of how we brought a fund which is unique in India. We would be looking at more such offerings. We are looking at coming up with very interesting solutions to our customers which are not just products.
Do you miss a domestic partner?
HSBC
has been in India for over 150 years. If we still look for a domestic partner
that means it suggest that we haven’t learned much about the Indian markets
yet. We understand the Indian market well. We are very comfortable with the
approach we have adopted. I don’t want to disparage local partners. They have
played an important role. We have joint ventures in other parts of the world.
