How do you evaluate the Budget 2016?
The budget is positive because it has acknowledged and continued some of the pro-growth initiatives started by the previous UPA government. For instance, The Fiscal Responsibility and Budget Management Act, 2003 (FRBMA) which was initiated by former Finance Minister Chidambaram has been continued by NDA. So from a foreign investor’s perspective, it is a good sign of continuity.
While the NDA government opposed Mahatma Gandhi National Rural Employment Guarantee Act (MNREGA) during its pre-election rhetoric it has allocated to spend Rs 38,500 crore crore in 2016-17 in the budget. This will keep the rural economy afloat if we have a bad monsoon. Similarly, they are planning to give a statutory status to Aadhar.
The lower oil prices have helped fiscal consolidation but the government has not used this opportunity to spend a lot of money. Also, the government has conveyed to RBI that they will be disciplined which is a good sign. So I would say it is pragmatic budget.
There was not much for the MF industry in this budget…
You will always be disappointed if you expect a lot of things from the budget. On the contrary, there was a lot of noise before the budget about the government changing the definition of long term capital gains from one year to three years. So we were hoping that the bad news doesn’t come which fortunately didn’t happen.
You are coming up with closed end funds again. Do you think there is an appetite for such funds at this juncture?
The timing of launch is very critical for closed end funds. A good time to launch closed end funds is when there is negativity in the market. When investors come in open end funds when markets are down, they exit after making gains in 18-24 months. If they remain invested for three to five years, they benefit from a full cycle. For instance, we launched our closed end Micro-Cap Fund in 2013 when everybody was negative about the market. So far, we have given back 80% returns as dividends. Similarly, we see an opportunity in the markets now. Thus, we have launched some closed end as well as capital protection and hybrid funds having exposure to equity. There is a fair amount of interest for closed end funds now.
Do you see robo advisors posing a threat to brick and mortar advisors?
I think distributors can use robo services to their advantage because it can be an asset allocation tool for their clients. Robo advisory model can be useful through a distribution driven model. But robo service may not be so helpful for direct retail investors because there is information asymmetry in Indian markets. In developed markets, fund managers struggle to generate alpha. On the other hand, in a developing country like India fund managers have an edge over average investors because they have access to information. So investors are better off investing through distributors who can select the right funds for them.
So advisors can collaborate with robo advisors to service their clients better.
SEBI chief U K Sinha has made a case for reducing TER. Do you see AMCs reducing TER voluntarily?
SEBI is not pushing us to reduce the TER. It has the right to fix the TER so I don’t think they are expecting AMCs to reduce the TER voluntarily. It is SEBI’s prerogative. SEBI chief has said that they would like to see a reduction in TER based on some international studies which showed that the TER charged by Indian AMCs is on the higher side.
The majority of expense from the TER goes to distributors. Distributors use this money to invest in their business and get more clients in the industry. If you reduce TER, it will impair the growth of the industry.
Today, distribution is not an attractive industry for somebody to join because of low commissions. If we are not able to attract more distributors, we can’t expand the market. If you look at any industry, it is the commission borne by investors which helps expand the market.
It is not that AMCs are charging higher TER in all categories of funds. For instance, liquid funds charge ten basis points TER because investors won’t accept if we charge a higher fee. We charge the maximum permissible TER in equity funds because the cost of acquiring these investors is high.
So we have to take a balanced view in formulating a TER keeping in mind the interests of all stakeholders.
Do you see more distributors opting for trail model now?
Yes, because trail is a success based fee. The trail model is a win-win for investors, distributors and AMCs. As a concept it is good but you need to recognize that to acquire an investor you incur some costs. So upfront is equally important.
A trail based model is useful for well-established distributors who have a certain AUM size. On the other hand, upfront is useful for new distributors because they have to invest in the business.
So distributors who have a good AUM are opting for trail model while the relatively new distributors want upfront and trail.
How has been the current fiscal for Sundaram MF?
We touched an all-time high AUM of Rs. 26,000 crore last month. Our mid and small cap funds have done well and hence we have been able to get five times (inflows) of our market share in in this segment.
Apart from equity, we have grown our fixed income book as well. Though the FMP inflows in one to three year category were hit due to the change in tax structure, we received more than Rs. 1,000 crore in above three year tenure FMPs. We have set up an institutional sales team which has worked hard in achieving this success.
So overall, it has been a good year from a topline growth perspective. The bottom line will not grow at the same pace next fiscal because we incurred distribution costs in launching new funds this year. Also, there have been redemptions from older assets which were more profitable for us. So to that extent the new assets will be profitable later.
On the distribution front, we empanelled 500 new active distributors. We have also added 100 employees. So we now have a strong team with 94 branch offices and 400 employees. With this, we are poised for the next phase of growth in the coming years.
Are you seeing new distributors entering the industry?
I would say not very much. The business is not looking attractive for new distributors to join the industry because of the higher costs involved in onboarding retail clients. Thus, new distributors may find catering to HNIs more feasible. Some distributors who have joined the industry are bankers who have the resources and contacts. While the industry has added new distributors, the growth is still miniscule given the size and population of our country. We need a much larger distribution force to cater to the untapped markets. The regulator and AMCs need to think about making this business more lucrative to attract new distributors.
