For JPMorgan Chase & Co and other global firms vying for a share of India’s mutual-fund industry, the world’s fastest-growing major economy has been a land of missed opportunity.
JPMorgan is joining the likes of Goldman Sachs Group, Morgan Stanley and Deutsche Bank in exiting India’s Rs13.5tn ($204bn) mutual-fund market, the seventh international manager to leave in the past three years. Foreign money managers have struggled to build scale in India, accounting for just 8% of assets, as they’ve lost ground to homegrown rivals that have been able to weather weak investor demand thanks to deeper sales networks.
Selling mutual funds to risk-averse Indians is no easy task. With competition from bank fixed deposits offering interest rates as high as 9% and investors’ long-standing preference for hard assets such as property and gold, mutual funds have held little appeal - especially given the nation’s volatile markets over the past decade.
Take Udita Mukherjee, 26, a college professor from Kolkata, who has invested her savings of about 1mn rupees in bank deposits and says she won’t consider mutual funds for her nest egg.
“There is no risk in bank deposits and returns are assured,” Mukherjee said. “Mutual funds are riskier. My parents also advise me to invest in fixed deposits as there is no downside to it.”
Indians had stashed more than 43% of their wealth in physical assets such as real estate at the end of last year, according to data from Karvy Private Wealth, a Mumbai-based wealth manager. Even among financial assets, mutual funds accounted for less than 3.4% of investments as investors put a majority of their assets in bank deposits, insurance products and fixed income.
On top of lacklustre appetite, global managers have had to contend with sales costs that are among the highest in the world and onerous disclosure requirements, including rules passed last month requiring fund companies to publish detailed data on costs, commissions and salaries for top executives.
“These big foreign funds don’t find it worthwhile,” said Dhirendra Kumar, CEO of Value Research, an independent research firm for mutual funds. “All the failures can be attributed to their inability to adapt to Indian conditions.”
JPMorgan, which manages more than $1.7tn globally in its asset-management unit, gathered just about $1bn during its decade-long stint in India. The New York-based bank sold its India mutual fund unit to Edelweiss Asset Management Ltd last month without disclosing transaction details. It was part of a global strategic review and the manager decided to focus on other priorities, a JPMorgan spokesperson said in an e-mailed response to queries from Bloomberg News.
Some local firms have been beneficiaries of this exodus by foreign managers. Goldman Sachs last year sold its fund business in India for 2.43bn rupees in an all-cash deal to Reliance Capital Asset Management Ltd, India’s third-largest mutual-fund provider. A unit of Housing Development Finance Corp acquired Morgan Stanley’s fund business in the country in 2014 and DHFL Pramerica Asset Managers took over Deutsche Bank’s fund business in India in 2015.
Spokesmen for Goldman Sachs and Deutsche Bank declined to comment, while a spokesperson for Morgan Stanley didn’t respond to an e-mail seeking comment.
The sales illustrate how hostile India has been for global brands that collectively manage trillions of assets in mutual funds in the US and elsewhere. India, which saw the launch of its first mutual fund more than half-a-century ago in 1964, accounts for less than 0.5% of the $33.4tn global fund industry dominated by the US and Europe, according to an industry study by The Associated Chambers of Commerce and Industry of India.
China, which ceded its status as the fastest-growing major economy to India last year, has far outstripped its Asian neighbour with $1.2tn in mutual funds, more than five times the assets in India, data from the Asset Management Association of China show.Despite the fact that mutual funds have been around for a while in India, the industry is still in its infancy, said Value Research’s Kumar. Institutions such as pension funds are almost absent from mutual funds and investor flows are driven by retail investors, who are notorious for timing their entry and exit based on rising and falling markets.
Flows have been unpredictable and more than 65% of industry assets have been concentrated in lower-cost fixed income funds as India’s stock market has gyrated since 2000. The S&P BSE Sensex Index declined almost 35% in 2000 and 2001 before rebounding 83% in the following two years.
Fund flows remained volatile in the aftermath of the global credit crisis, ranging from inflows of 1.53tn rupees in the year ended March 31, 2008, before the crisis to outflows of as much as 494bn rupees in 2011. It has taken seven years to reach yearly inflows of Rs1tn again. Still, with the market down 5% last year and more than 3% so far this year, that trend may not be sustainable.
The number of retail investor accounts fell to 39.5mn in March 2014 compared to levels of 48mn recorded in 2009, data from the Associated Chambers of Commerce showed. It recovered slightly to 42.8mn accounts as of June 2015, the data showed.
Distribution expenses, or costs to sell mutual funds to investors, are as high as 4%, higher than most markets in the world, according to Vishal Kampani, managing director at JM Financial, ranked the top merger and acquisition adviser last year.
That puts foreign firms at a disadvantage compared with those affiliated with local brands such as HDFC, which can use its client base as the nation’s biggest mortgage lender to cross-sell products and reduce costs.
Higher costs are “hitting their balance sheets every year,” Kampani said. “Multinationals take losses for few years, but if the business doesn’t pickup they walk away,” he said.
In addition to costs, tightening rules and more disclosures are adding to the industry’s woes. JPMorgan in September restricted payouts from local funds holding Amtek Auto’s bonds as some investors demanded their money back, prompting regulators to tighten mutual-fund redemption rules.
The regulator has also capped commissions for agents selling mutual funds, which has prompted agents to switch to selling products such as insurance, which are more lucrative.
The Securities and Exchange Board of India last month published rules requiring mutual funds to provide a host of data on a half-yearly basis, including the total compensation paid to the companies’ chief executive officer, chief operating officer and chief investment officer, along with details for managers earning more than a certain threshold. In addition, the companies have to disclose commissions paid to distributors, average expense ratios and top ten portfolio holdings.
Those international firms that have managed to survive so far have teamed up with Indian companies. They include Prudential, which has tied up with ICICI Bank, and BlackRock, the world’s biggest money manager, which joined with one of India’s oldest financial-services firms to start a venture called DSP BlackRock Investment Managers.