BS Fund Cafe: Regulation, distribution to drive growth, says MF houses CEOs

The role of skilled talent in technology-driven times still attracts attention, according to the fund houses

The importance of regulation in driving the now-soaring growth of mutual funds (MF), and in deciding how the sector’s potential plays out, came into focus during a panel discussion of top executives at the Business Standard Fund Café 2018, on Wednesday. 

Nimesh Shah, managing director and chief executive officer (MD & CEO) of ICICI Prudential Asset Management Company, said regulatory effort had resulted in a highly transparent product. 

“The backbone of any industry, especially in financial services, is how is it regulated…80 per cent of the sales today happen through existing customers. They had a healthy experience, they are coming again,” he said on the role of such factors in pushing MF assets under management to a record high of Rs 23 trillion.  

Sundeep Sikka, executive director and CEO of Reliance Nippon Life Asset Management, noted a majority of assets come from high net worth individuals and institutional investors.  He said retail investors (the term for individual and non-wealthy ones) needed to be addressed better. Future success would also be determined by how the sector handles technological change and the challenge of distribution.

“I am really sure the way the industry has grown in the past, it cannot grow with the same method in future,” he said. 

Leo Puri, MD of UTI Asset Management Company, pointed  to an area that could require some oversight. He said the most successful asset managers across the globe were not only good at asset allocation but also share another characteristic. They are typically independent, not owned by banks or corporates. 

“I think we have an ownership problem in the industry structure we have, where the leading asset manufacturers are actually owned by banks, which have captured materially significant share. Not necessarily through foul means but certainly not through fair means either, because they are able to essentially exploit distribution in a manner that essentially involves using a brand, and switch people from savings deposits into risk-bearing products without perhaps a complete understanding as to what has happened in that transmutation.”

There are inherent conflicts, he added, in lenders who are also investment managers.  He pointed to a scenario where a lender is restructuring a corporate entity. There is a conflict if the investment arm is buying the company’s bonds at the same time. This would be so even if there was no ill-intention or illegitimacy intended.  There could  be similar issues with associated companies in the case of corporates, he said.

“You will have mis-selling and you will have conflicts of interest abound. That will be a limiting factor on the growth of our industry,” he said, suggesting better structures would evolve. 

Anuradha Rao, MD & CEO of SBI MF, said banks did not necessarily account for a large portion of the assets. “The bank has invested in the company for a reason…if you look at the composition of our assets, 25 per cent of it comes from the bank and 75 per cent from all other channels.” 

The challenge, she said, was not about being bank-sponsored or otherwise. A bigger challenge was perhaps the huge hinterland that was still not addressed. And, there is need for a 'disruptive' way of getting there, through innovative distribution and use of technology. 

The role of skilled talent in technology-driven times still attracts attention. Kalpen Parekh, president, DSP BlackRock Investment Managers, said personnel changes attract a disproportionate amount of attraction in the MF sector. This might be unfair, as fund houses have a structure that helps with various processes and should not be considered dependent on an individual.  The life of a company is typically longer than that of an individual. So, changes are to be expected.  The ability to attract talent is important but no talent is irreplaceable. “Talent is fungible,” he said. 

Also discussed were restrictions on distributor commissions, which, while removing conflict of interest, also reduce incentives for distributors to take the product to citizens at large. Neeraj Choksi, co-founder at NJ India Invest, said distributors had a major role in guiding investors through turbulent times.  

“A successful investor is one who doesn’t take irrational decisions. Most of the time, when we look at the fund’s returns and investors’ returns, there is a gap. This gap is because of…behaviour,” was the way he put it.