In the last three years, seven foreign fund houses have entered the Indian mutual fund industry
Despite the challenges surrounding the mutual fund industry, foreign asset managers are keen to get a foothold in India. In the last three years, seven overseas AMCs have bought a stake in Indian AMCs with the latest one being Invesco’s entry in Religare.
Fund officials say that regulatory headwinds have nudged foreign AMCs to go inorganic way than starting from scratch independently in India.
Foreign AMCs going solo in India may take time to understand Indian market. Thanks to the local expertise in fund management and sales, buying an existing Indian player helps foreign AMCs get a head start. The capital requirement for buying a small stake is less. “Indian AMCs get overseas distribution access. A foreign AMC needs to bring in $50 million to set up an AMC on its own. If they don’t want a majority stake then they just have to bring $5 million,” said Gautam Mehra, ED, Leader- Asset Management, PWC India.
Fund officials say that India will continue to remain a hot market for overseas players. “The industry will turn profitable after a period of time. It’s a cyclical business. India is a very big pie if you look at the vast population and our saving mentality. They (overseas AMCs) look for a right time to enter India. Distribution network and brand name are the two most important factors for any overseas acquirer. Going ahead, an AMC with a good reach beyond top 15 cities will be valued higher as we can now charge higher fees. Many consultants are of the view that the asset management industry will emerge stronger and turn profitable going ahead. Whatever be the regulatory challenges overseas players cannot ignore India,” says a sales head of a large fund house which has roped in a foreign partner.
Low penetration of mutual funds also makes India an attractive destination for overseas asset managers. While scouting for an Indian AMC, these players mainly look at the distribution network and assets under management, especially equity assets, of an AMC. High equity assets entail greater valuation because of the potential to earn higher management fee. Apart from asset class composition, acquirers look at fund performance, brand, branch, investor base, distributor network, among other things.
Foreign AMCs bring their best practices in risk management and operations on the table. However, they may lack the distribution/marketing know-how in India. “They may not have the expertise in expanding sales and distribution locally,” says an industry expert.
Bringing foreign partners may not necessarily result in superior fund performance. Some joint venture partners demand regular local portfolio monitoring. Most overseas partners who buy a small portion in Indian AMC give leeway to local fund managers. “It could help Indian AMC get access to international market and attract QFI investments but it may not result in better fund performance because the local manager remains the same. Overseas players are looking for expertise in Indian market through a local partner. Foreign AMCs running offshore funds get research support from the Indian partner, although the teams could be separate. Instead of joint venture, buying a stake seems to be the preferred way for many,” said Dhruva Raj Chatterji, Senior Research Analyst, Morningstar India.
Union Bank of India and Belgium based KBC Asset Management NV joined hands to set up Union KBC Mutual Fund in 2011.
There have been many exits of foreign and Indian AMCs due to a variety of reasons. Shinsei, Alliance Capital, Standard Charetered, Zurich, Sun F&C, Aegon and Fidelity have sold their mutual fund businesses in India.
