Wednesday, August 08, 2012

An epilogue to the financial crash: the rise

With low penetration levels coupled with climbing growth rates, the Indian mutual Fund industry is all set to unleash its true potential. by Manish K. Pandey

If you love drama, emotion, pathos, watching The Tragedy of the Moor of Venice – Othello – on Broadway could be an option; the other could be investing in the Indian mutual fund (MF) industry. It had it all packaged for you in 2009. From negative returns that saw several portfolios bleed to death to positive returns as high as 160% garnered by few schemes, from fund houses running for cover to banks at the start of the year (during 2008 fund houses had incurred heavy losses leaving the industry shattered with a huge liquidity crunch) to the same banks banking on them for profitability during the latter half of the year, the MF industry took investors on a roller-coaster ride in 2009 as the benchmark index Sensex oscillated between the 9,000 and 17,000 mark.

Apart from dramatic stock market performance, the year gone by was the year of reforms for MFs in India. The key changes included elimination of entry and exit loads on purchase of schemes and the government allowing MFs to be traded on the bourses. While some were in favour of investors, others pampered the industry. Whatever the situation may have been at the start of 2009, most investors definitely seemed relaxed and happy as the year approached its end.

But the question now is – how will the year 2010 unfold for this beleaguered industry that is still adjusting to the regulatory changes? Will the promise of growth sustain in the near future? Is the sector ready to bounce back? A quick look at numbers and one probably would get an impression that not many are interested in investing in the sector. In fact, the MF industry just saw its 5th consecutive month of net outflows. The net outflows in December 2009 were to the tune of Rs.1.57 trillion (though the net inflow for the year to date stood at Rs.1.41 trillion). What’s more? The profitability of the asset management companies (AMCs) that clocked an average of 23% in 2006 was down by about 28% to an average of 16.5% during 2009. But then, that’s just a narrow picture. A broader look at the macroeconomic scenario of the industry and you get it all right.

Driven by various favourable socio-economic factors such as rising income levels and the extending reach of AMCs, the Indian MF industry has grown considerably in the past few years (Indian MF industry grew at a 25% CAGR during 2004-2009 to reach an AUM of $150 billion in March 2009). However, despite clocking growth rates that are amongst the highest in the world, it continues to be a very small market comprising just 0.32% share of the global AUM of $20.34 trillion as of June 2009. Though the ratio of AUM to India’s GDP has gradually increased from 6% in 2005 to 11% in 2009, it’s still significantly lower than the ratio in developed countries, where AUM accounts for 20-70% of the GDP. And that’s what holds the key to its success going forward starting 2010.

Experts believe that although the challenging times for MFs will stay for some time in the near future, but overall, 2010 should be a better year for them, considering the improving economic conditions and relatively good performance by the Indian stock markets. U. K. Sinha, CMD of UTI AMC tells B&E that the Indian MF industry is expected to secure growth in the near future by catering to the evolving aspirations of retail customers. He feels that the industry seeks to target an increased share of the customer wallet through product innovation combined with deeper retail penetration by expanding reach into Tier 2 and Tier 3 towns.

Dinesh Thakkar, CMD, Angel Broking also is of the view that in 2010 the markets would build on the gains put up in 2009. As per him, the acceleration in the economic activity, would hasten the earnings growth for India Inc., supporting the up move. Further, the strong liquidity inflows are unlikely to die down on back of the strong fundamentals and quality of earnings produced by India Inc., supported by reasonable valuations. This all in turn will certainly ramp up the returns garnered by fund houses by several times.

Celent, a Boston-based financial research and consulting firm, too estimates that the industry will grow at a higher rate of 29% in the next five years. “A very high household savings rate and low retail penetration make the market a target for foreign asset managers,” say Arin Ray and Sreekrishna Sankar of Celent. Even as per a latest CII-KPMG report, the Indian MF industry may grow at the rate of 22-25% in the period from 2010 to 2015, resulting in AUM of Rs.16-18 trillion in 2015. And why not? The increase in revenue and profitability of fund houses has not been proportionate to the AUM growth in India in the last five years. Low share of global AUM, low penetration levels, limited share of MFs in the household financial savings and the climbing growth rates in the last few years that are amongst the highest in the world, all point to the future potential of the Indian MF industry. Meanwhile, as research reports suggest, the retail segment is expected to be the largest contributor to the growth of the asset management industry in India and is expected to grow at a CAGR of 35%-42% in the next five years. In fact, during this period AMCs could see an addition of nearly nine million first time retail customers. Not to say, positive economic indicators like higher than expected GDP growth at 7.9% for Q2, better IIP numbers at 10.3%, continuous improvement in auto sales figures are there to provide the much needed support to the industry in 2010.

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posted by Editorial at 5:20 PM