No market for overseas funds in India, yet
Category: India, Asia, China, Hong Kong, Japan, Middle East, Singapore, Southeast Asia, Europe, U.S.A., United Kingdom, Asia-Pacific
By Ravi Ananthanarayanan
Investors look at Asia as an asset class and do not consider specific countries
Asia Asset Management, in conjunction with BNP Paribas Securities Services, held the third in its regional series of Quintessence CEO Luncheon events in Singapore on January 17. The theme for the day was “International Expansion of Indian Asset Managers” and Tan Lee Hock, moderator for the event, and the publisher of Asia Asset Management, kicked off the luncheon by giving details on the format to the participants. Lawrence Au, head of Asia-Pacific, BNP Paribas Securities Services, then explained how the aim of the gathering was to differentiate the event from other forums, which were either over-technical or covered the region on too broad a scale.
Once the formalities had been dealt with, Mr. Tan set the ball rolling by asking the participants about their growth aspirations in Asia and why they selected Singapore as a base.
Anu Sahai, CEO, Aditya Birla Sun Life Asset Management Company, said that the firm’s parent company is one of the largest domestic fund houses in India, and has managed offshore funds for the past 15 years, based in jurisdictions such as Mauritius and Canada. She explained that there was a need felt to tap into the international investor base, not just sitting out of India. “We developed a footprint both in Singapore and Dubai at the same time, to tap into the Asian and Middle East markets,” Ms. Sahai noted.
She went on to add that Asia would be the best base for international efforts from India, and the choice was between Hong Kong and Singapore. Singapore was chosen due to it being a window into India for investors, regulation friendly environment, availability of talent, and quality of life. Singapore has now become a hub for Southeast Asia, including India, and Hong Kong has become the hub for access to China.
The increase in the cost of living was raised as an issue. Christina Cham, director-sales, Southeast Asia, Religare Capital Markets (Singapore), said that both Hong Kong and Singapore have seen costs rising. Her firm is using Singapore as a hub for Southeast Asia and Hong Kong for North Asia – the firm also has a presence in Japan.
“If you want to have a presence, you have to bite the bullet,” said Ruchit Puri, director and CEO, Kotak Mahindra (UK), referring to the increase in the cost of living. He said that there was no choice but to be based in Hong Kong or Singapore, as these are the two main markets.
Michael R Smith, chief executive officer, Reliance Capital Asset Management (Singapore), said that his firm has full-fledged operations in Singapore such as portfolio management, operations, and finance. But they also have Shariah client operations in Kuala Lumpur.
“Singapore offers a very diverse pool of talent,” said Abhijit S Singh, vice president – business development, Asia, UTI International (Singapore). According to him, the company chose Singapore over Hong Kong because it is one of the stops for companies which are reaching outside of India to raise capital or interact with investors. “Even from a fund manager or analyst’s perspective, you get a lot of access without the noise in Mumbai,” he said. He pointed out that in Mumbai, you get a lot of sales calls, but in Singapore, you get access to a lot of visiting companies.
Talent in Singapore
Mr. Puri said that finding the right mix is difficult, that is you need someone who can market an Indian product from an Indian fund house; so you want someone who can speak different languages, and suit the fit you are looking for, which is a challenge. Mr. Smith added that Reliance recently did some hiring for its compliance function, which proved to be difficult as many competitors were also looking for the right people in compliance, due to tighter regulation and focus on corporate governance. According to Ms. Sahai, the overall challenge is how to match the demands for hiring with the perceptions and demands of people, and the ability to pay. “Everybody has to work within budgets,” she said.
Evolution of the distribution channel
Ms. Sahai said Birla Sun Life started with Singapore and the Middle East for international expansion. The sister firm has a full distribution license in Dubai and has also used partnerships in the region with banks and marketers to set up the distribution pipeline for the parent and the Singapore entity. She said the market in Asia is more institutional, and that the firm has focused on sovereign funds, pension funds and on building partnerships.
“India is a huge opportunity, we can easily estimate US$50 billion flowing within the next couple of years into India; you are looking at about a $1 trillion infrastructure spend required over the next five years,” Ms. Sahai claimed, “and that’s why asset-raising will happen through multiple channels as nobody has the ability to set up a footprint quickly across geographies to be able to bring that in.”
Mr. Puri revealed that Kotak Mahindra has offices in other locations which cover North and South Asia, and a London office from where the firm covers the US and European markets. “We keep our fingers crossed that assets keep coming to India,” he said, adding that he thinks there is enough room for everybody, and that each participant will have to follow their own model to succeed. “They primarily look at tie-ups in Asia while Europe will be more of the family office variety. Joint ventures are difficult to do,” he said.
Joint venture issues
Mr. Smith said Reliance has had a presence in Singapore since 2006 and that the firm’s business model is organic. Mr. Singh added that differences in aspiration could be one factor which could work against joint ventures. “If you look at any other asset manager in Singapore or elsewhere in Asia, they either aspire to be pan-Asian or they would like to have a footprint in other parts,” he said.
Ms. Cham commented that Religare operates a unique strategy that is aimed at building a global multi-boutique asset management platform, which is more focussed on the services side. “We want to partner with top performing managers with unique strategies and bring some of those services to Asia. But on the distribution side, we would rather have our own network because we have a presence in Asia through our investment bank – so we would like to leverage on that and expand,” she said.
Expected inflows
For India to reach $50 billion worth of inflows in the next three-to-five years, it will not just be because of reforms but also because of interest generated in the country, explained Aditya Birla’s Ms. Sahai. “If you look at the US and Europe, growth prospects are really dismal in the near-term. We see global funds adding to their presence in India,” she predicted. “It is not just about what Indian asset managers can pull in. India is seeing 7%-10% GDP growth and market growth of 15-20%, volatility notwithstanding. That’s what’s going to bring investors to the door. We are seeing a lot of cash waiting on the side-lines.
When asked who these investors are likely to be and where the money will come from, UTI’s Mr. Singh gave the example of the world’s fourth largest pension fund, the National Pension Service of Korea (NPS), which is sitting on massive reserves: “If they have to generate a 15%-20% return on these reserves, which markets can give them this growth?” he asked. The allocation to India at present becomes a part of the allocation to Asia. “If we look at the Aussie Supers, their allocation was restricted to 5% for Asia, of which a miniscule portion flows to India,” he noted.
Kotak’s Mr. Puri said that one of the factors influencing a pension fund’s decision to invest in a country is also the size of the economy. The allocation to India is relatively low and in the MSCI Index, the percentage is less than 2%. If India keeps growing, then its share of the global economy will increase, which would become another pull factor. As the economy grows, liquidity will flow because there are more players participating. India sees inflows of about $17 billion in a good year by FIIs in the equity markets, and three times that figure is about $50 billion, explained Ms. Sahai. In a three-to-five-year range, she believes it to be a conservative estimate. Mr. Singh also said that this figure is doable, and from an infrastructure perspective, stated that India needs over $1 trillion in investments.
Ms. Sahai clarified that the $50 billion estimate was only for equities, and debt flows would be additional. Mr. Puri pointed out that the size of debt inflows depends on allocations. He said that $10 billion could be the possible inflows in the next two-to-three years – although he said this does not include the debt, which will come through the FDI route and will be a much larger amount.
Recent reforms and expected measures
The Indian government has opened up the qualified foreign investor (QFI) route, through which foreign investors can directly invest in the sub-continent’s capital markets. “They can bring about $10 billion of direct investment in mutual funds. They have opened up about $2.5 billion in debt and another $7.5 billion in equity,” claimed Ms. Sahai. Ms. Sahai noted that there are a few challenges for the regulator to tackle, including clarifying taxation rules and investment mechanism. “The main issue here is how to channel this, and the rules and regulations that will apply,” said Mr. Puri.
Ms. Sahai noted that the government is very keen to encourage dollar inflows, and added another step taken was the deregulation of interest rates on NRI (Non Resident Indians) deposits. Inflows so far have been to the tune of $1.7 billion, and the government is offering 8%-9% interest on these deposits to attract more dollar inflows.
Indian’s investing abroad
If a retail investor or a high net worth investor in India is getting 20% CAGR (Compound Annual Growth Rate) equity market returns, there is very little interest in going overseas to invest. UTI has a relationship with T. Rowe Price, but Mr. Singh said the firm does not distribute their products in India. “There is no market for overseas funds in India,” he claimed.
Reliance’s Mr. Smith said that this phenomenon is a natural evolution, where people when they start to invest, want to invest in the right market. “They need to be over-saturated in terms of investments in that market before they look at any other market. It is the same evolution as any developed market,” he said.
Attracting investors
Ms. Sahai divulged that international investors are concerned about lack of clarity of policy action in India. The rupee (depreciation) has been a big dampener: India was the worst performing market in Asia, down by 25% in rupee terms and by about 37% in US dollar terms, she said. Mr. Smith said that if you are invested in small or mid-cap stocks, the returns would be worse than that.
Last year, India was hit by a perfect storm with rising inflation, rising interest rates, tapering growth, a government which was paralysed by inaction, and very little policy reform.
Mr. Singh said that China is very active in promoting the country. He gave the example of India’s credit rating, which is BBB minus, and said that the Indian government does not engage with the credit rating agencies to get this changed. Mr. Puri said: “The issue is if I am in North Asia, I might be more inclined to put my money in China since it is not only familiar but it also gives me better returns.” Religare’s Ms. Cham claimed that in the BRIC asset class, in Singapore, the firm is focused on India. Mr. Singh added that UTI have a Chindia fund along with UOB, where they have a 40% allocation each and 20% is dynamic.
Mr. Smith noted that Reliance’s investor base and target market are on the institutional side. “These investors are not looking at a fund which is looking at investing in both India and China. Investors look at Asia as an asset class and do not consider specific countries,” he said.
To change investors’ mindsets, Mr. Singh said that apart from investor education, improvements are needed in the areas of jurisdiction and passport services. Mauritius is rated Baa2 by Moody’s Investor Services. “So partners who work with us could really help by educating investors about Mauritius,” he said.
He also pointed out that investors could see UCITS products being sold across the globe and drew attention to the fact that there is no similar passport service in Asia.
However, Mr. Smith said he had not found much of an aversion to Mauritius-based funds from institutional investors.
Infrastructure
Having earlier discussed the somewhere-in-the-region of $1.3 trillion that is needed for infrastructure projects, the participants at the luncheon were asked by AAM Publisher Mr. Tan where they thought this money was going to come from. Mr. Puri said that the public-private partnership is a model. “This is a huge sum we are talking about but it is self-generating,” he said. “The question is not about money but about getting green signals for the projects. It will be both domestic and offshore fund-raising.”
Mr. Puri went on to explain that the return on equity and IRR on these projects was very good and that there is no dearth of demand either. “You make the airports or build the roads and you see the consumption,” he said. Ms. Sahai revealed that the Japanese government has pledged $100 billion to India for infrastructure creation. She also mentioned that public private partnerships in infrastructure projects have been a success.
In the infrastructure space, the participants all said they can play a key role by raising funds, specifically for investing in infrastructure projects.
Discuss: No market for overseas funds in India, yet