Why are foreign fund houses exiting India?

Slowdown in developed world, higher capital requirement and lack of profitability seen as triggers

In calendar year 2014, the assets under management in the domestic mutual fund sector rose 26 per cent to touch Rs 11 lakh-crore (Rs 11 trillion) for the first time. Inflow in the more profitable equity segment, at Rs 50,000 crore (Rs 500 billion), was one of the highest witnessed by the sector.

Amid such a turnaround, three foreign entities -- Morgan Stanley, ING Mutual Fund and PineBridge -- sold their MF business to Indian ones.

According to reports, two more foreign ones have put their mutual fund businesses on the block.

Given the buoyancy in the capital market and a favourable long-term outlook, what is triggering such exits?

At a macro level, experts say the slowdown in the developed market and new capital requirement back home have made foreign entities review their business plans.

Besides, the strategies adopted by the latter have failed to click in the Indian market, typically where smaller fund houses have struggled to attain reach and profitability.

“A majority of foreign fund houses are unable to comprehend Indian dynamics.

“Unlike their domestic counterparts, foreign players have not been able to focus on distribution needed to get the retail investor.

“They continue to focus on institutional business, which doesn’t yield high margins,” said Dhirendra Kumar, chief executive officer of Value Research.

Experts believe ‘brand connect’ is important in a trust-business such as fund management.

Most large fund houses, such as HDFC MF, ICICI Prudential AMC, Reliance MF, Reliance MF, Birla SunLife MF and SBI MF, have the backing of large banks or financial institutions, giving them reach and understanding, they say.

“A successful combination of brand, people and performance is a must to succeed.

“One needs to get these factors right.

“A majority of the top domestic fund houses have cracked this formula but foreign players have failed to implement.

“On top of it, the high cost structure of foreign players impact profitability,” said a senior official at a large fund house, who didn’t want to be named.

Sectoral entities say garnering equity assets is another critical factor for success.

Fund houses charge more fees on equity assets, while assets in the debt category yield very low fees and aren’t too sticky.

The AUM data show most foreign fund houses, except Franklin Templeton AMC, have lagged their domestic peers in building equity assets.

The mix of equity to debt assets for most foreign ones is below sector average. 

Equity assets at Rs 3.2 lakh-crore (Rs 3.2 trillion), as on December 2014, accounted for nearly 30 per cent of the overall AUM of Rs 11 lakh-crore (Rs 11 trillion).

Experts say fund houses with a good distribution network and high equity mix generate profits.

The case in point is Axis MF, which being relatively a new entrant, has managed to break even in its fourth year of operations.

The Securities and Exchange Board of India’s move last year to increase the minimum net worth sharply from, Rs 10 crore (Rs 100 million) to Rs 50 crore (Rs 500 million), has prompted many smaller entities rethink whether they want to continue in the asset management business, sources say. 

Sponsors face the difficult question of whether to put more money into their fund business that wasn’t generating returns, said the official quoted earlier.

Established players don’t rule out further consolidation in the MF space.

“Non-serious players have sold out. We might see more smaller fund houses exiting. In the next five years, it won’t be surprising to see just 25-30 players,” H N Sinor, CEO of Association of Mutual Funds of India, had said in an interview recently.

Currently, there are 43 fund houses, of which 18 have AUM of less than Rs 5,000 crore (Rs 50 billion).

Milind Barve, managing director, HDFC Mutual Fund, is also of the view that the MF sector will witness more consolidation.