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A Bridge Too Far?

Monday, September 23, 2013

Attracting Investors To The Indian Capital Markets
Foreign Institutional Investors will require Indian asset managers to find new ways to accommodate an investor who is fundamentally different to the Indian investor. This developed market investor has a much more heightened awareness of the risk-return trade off. So to attract him, India will need a perception change says Ranjit Tinaikar, Managing Director, Asset Management, Thomson Reuters

India has been hailed as one of the fastest growing and most attractive markets in the world, yet the turbulent global economic and regulatory environment of the past three years continues to impact the prospects for India’s nascent but promising Asset Management industry.

Despite the continued struggles of the industry to achieve the “promised” growth, retail net flows into the market continue to be sluggish in a slowing economy where majority of personal net worth is still stashed in non-financial assets such as gold and real estate.

Furthermore, traditional institutional investors like pension funds and insurers are significantly constrained from participating in capital markets. It is not surprising then, that a majority of India’s  asset managers are  aggressively seeking to attract Foreign Institutional Investors (FII) either to access distribution channels overseas or to garner local fund management mandates.   A few have even had limited success signing partnerships with large Tier 1 banks seeking to establish a presence in the region. 

However to attract Foreign Institutional Investors will require Indian asset managers to find new ways to accommodate an investor who is fundamentally different to the Indian investor that they have built their business around traditionally.  Foreign investors from developed markets burnt by the 2008 crisis value consistency of performance more than above average performance for  given period..  The emphasis from this new investor in the Indian market is for much higher on returns relative to benchmarks than absolute returns that are still the norm of Indian investor behaviour.  This developed market investor has a much more heightened awareness of the risk-return trade off. In contrast, one research study shows that the Indian investor still perceives an insurance product to be lower risk and higher returns than a fixed deposit bank account - but this may be changing as investors experience ULIPs.

Indian asset managers will therefore need to significantly change their business model to meet the demands of this more sophisticated international investor who are expect a new level of service and experience that today only the well –equipped  large asset management firms have been able to respond to. 

Some asset managers may find that attracting such investors may require changes and investments that don’t justify the commercial benefits. But then again, it may be an effort well worth undertaking, there are many small and mid-size asset managers who have creatively carved out a strategic niche that even large institutional investors will find an attractive- despite the fact that they represent a greater element of business risk to investors.  These asset managers should be able to strike the risk-reward balance for investors because they are able to demonstrate that they bring unique experience  to the table, that they can create value, and that they have embrace a culture of compliance and have the controls that are necessary for their size.

Overall, even more change is expected over the next few years as the asset management industry continues to grow and adapt and there will be clear winners and losers.   Those that choose to think globally, are patient and focus on these three key areas should be better positioned for the time when the much touted demographic dividend of the Indian economy starts kicking up again - as it eventually will.
It may be a bridge too far for some but a bridge well worth crossing.

Key Areas That Need Focus
To attract international assets, Indian asset managers must focus on three key areas to accommodate this experienced and savvy investor:

  • Developing a repeatable and reliable investment process.
    Experienced investors have recalibrated their expectations to reflect the reality of a slow global economic recovery. A track record must instil confidence by its longevity not its peaks.  Consistency of return is what is important.  The days having one good year are over.
  • Enhancing governance. 
    The global asset management industry is experiencing unprecedented legislative and regulatory change. Global regulators are moving forward with regulatory convergence of the financial services sector.  Regulators and investors alike are focused on the conflict of interest between an asset managers desire to maximise its own profits and its duty to maximise fund returns.  Just as regulation has changed the landscape in developed markets, so will it in India. Firms that are vigilant and constantly seek to strengthen operational controls and transparency to their investors will be the long term winners. The downside to not paying attention to the asset manager can be substantial including the loss of prospective and current investors.  And once lost, investor confidence is very difficult to regain.
  • Demonstrating a mature risk management culture. 
    The weaknesses of historical VaR models were exposed during the financial crisis.  Indian asset managers will need to significantly invest in building out robust risk management capabilities and talent to provide sufficient transparency and improved reporting accuracy. Only then will they build the confidence of the international investor.  Stronger risk management practices will also be required to support this technology investment.
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