 "Kunal Kapoor, CEO, Morningstar Inc")
Ahead of his investment conference, Kunal Kapoor, chief executive officer of Morningstar, in a discussion with Jash Kriplani, draws parallels with the global fund management industry to show the promise and potential of India’s Rs 22-trillion mutual fund industry. Edited excerpts:
What are the major drivers of India’s fund management industry?
It’s likely that the trend around the world away from government safety nets towards individuals managing their retirement funds will continue to gain momentum. India is no different and because its population includes more retirees, it’d be difficult for the government to take care of them without private market solutions. Globally, the responsibility of saving and investing for retirement has been pushed to individuals. They have to manage their money and live with the consequences of their investment decisions after retirement. In the US and Australia, we have seen this play out. While not in the near- or medium-term, it is going to be true for India as well at a later stage. The responsibility will shift towards individuals. That is where Morningstar can come in. And this is not just an opportunity for us, but for all the stakeholders in India’s mutual fund industry. More and more savers will become investors.
What are some of the global practices that India’s comparatively young MF industry can adopt?
Every market has its own pros and cons. India is still a young market that is growing fast. As the fund management industry gains scale, we are going to see investors benefit as competition and economies of scale drive down costs. Competition itself will be enough to drive efficiency. We can see this globally. Players like Vanguard and Blackrock have been able to bring down their costs by achieving massive scale. Investors win in this scenario, and, by extension, those who serve them responsibly benefit.
What are your business plans in India?
We were helping advisors to build portfolios with the help of our tools. At some point, advisors asked us if we could build portfolios for them. We have created this capability in the US, South Africa, England and Australia, where we manage money and we also run funds in some instances. India is also somewhere on that continuum. While we don’t have any robust plans in India as far as managing money is concerned, we are experimenting with ways in which we can help advisors. For now, we want to focus on helping investors demonstrate their value and impact.
What do you think of active fund management in India? Could it be difficult to sustain alpha (fund outperformance vs respective benchmarks)?
We have seen globally that active management has struggled in recent years. This is because it is a cost issue. When you are competing against a no-frills index option and you lose a long-term orientation, outperforming becomes challenging. Indeed, one must understand that underperformance is part of any active investment strategy from time to time. Nothing goes up in a straight line forever. Coming back to India, the ability to generate alpha is great at present. But, as markets become more efficient in terms of information flow, the level of outperformance would continue to diminish.
How can the distributor/advisor community bring in more value to the table?
Independent financial advisors (IFAs) have a huge role to play in the mutual fund industry. They have a lot of value to add, but the problem is that they are not able to articulate this value. This is not just an India-specific issue, but a global one. As markets become more complex, it is important that IFAs also become more sophisticated. They should be able to guide investors to build long-term wealth through portfolios that are much more diversified in terms of asset class. We’d like to introduce IFAs to more sophisticated tools to deal with this emerging complexity.
Any specific products planned for India?
A couple of years ago, we realised that to meet investors’ interests in our covering more stocks, we needed to do more than hire analysts. So, we have created quantitative machine-learning techniques that ape our analysts’ preferences to deliver ratings on all Indian companies. We are planning to introduce this soon in India.
