Blackrock-DSP split showcases that even the best of foreign investment managers can’t handle India’s Mutual Fund Industry

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Dundee Mutual Fund is the oldest investment and gives a sharp attention on everyone’s mind as soon as they hear it. You’ve probably spent years in the asset management industry. Else why would anyone remember a Canadian investment management firm that set up shop in India in 1999, launched a handful of schemes, raised about Rs 20 crore, sponsored the rowing team, tried investment business and failed miserably  wounding up its India business and they flew back to the Great White North all in less than four years!

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And Dundee is just one name. Newton Investments UK, Foreign & Colonial, Cazenove UK and Capital International are others from the 1990s- 2000s whom the Rs 23 trillion Indian mutual fund (MF) industry has forgotten after they failed to pick up “meaningful” business.
A few others like Morgan Stanley, JP Morgan, ING and Deutsche stayed on for more time, but eventually wound up their MF to focus on other lucrative businesses in India. Players such as Goldman Sachs, Pinebridge, Daiwa and Merrill Lynch did not even try to be relevant in MFs while the fairly successful Fidelity sold its India book after Sebi barred it from transacting in Indian shares via their Singapore investment desk.

So when Blackrock severed its 10-year joint venture with Hemendra Kothari led DSP Group last week, it simply reinforced the old contention that foreign investment managers — regardless of asset size and heft — cannot run successful mutual fund business in India.

“About 16 foreign players, with trillion dollar businesses the world over, have exited India over the past years,” Sundeep Sikka, executive director, Reliance Nippon Life Asset Management, does the math. “Running MFs in India is not about a wide capital base; it’s about execution, the right kind of products, maintaining a stable team and brand recall.”

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Dhirendra Kumar, chief executive at mutual fund tracker Value Research, adds one more element. “One common thread that ran through most cases is that these players lost patience mid-way,” he says. “When top bosses in the US or UK found their mutual fund subsidiary in India was not making money even after being here for a few years, they simply exited. These foreign managers do not allow the fund house to adapt locally; they just don’t get the local pulse.” But a Blackrock or Fidelity cannot be bracketed among “foreigners” who abandoned India without giving a decent shot.

They dug in their heels to stay relevant and were fairly successful. They also left on their own volition. “It’s difficult to apply one theory to all asset managers who left. Each had a specific reason for exiting India,” says AP Kurien, former chairman of Association of Mutual Fund in India (AMFI). “Some wound up due to accumulated losses. A few shut their fund business to focus elsewhere. For many others, MF was non-core business, so they opted out… The reasons are varied.”

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Adding to Kurien’s assorted ‘list’ is one more reason — diverse and worthy enough of a detailed mention. DSP and Blackrock parted ways because both parties craved for 100% ownership of their fund business.

THE BLACKROCK HISTORY
Blackrock sailed into India acquiring the MF assets of Merrill Lynch Investment Managers in 2006. Their partnership with DSP Group lasted for nearly a decade during which time DSP Blackrock amassed assets under management (AUM) worth `89,000 crores.

Unlike Merrill Lynch, Blackrock took an active interest in day-to-day affairs in India. Larry Fink, the top boss of Blackrock, visited India almost every year; Asia-Pacific heads helming various functions flew in almost every quarter. “Blackrock was very committed to India… I won’t be surprised if they come back by buying acquiring an existing fund house,” says a former executive of DSP Blackrock on conditions of anonymity.

So was 40% JV partner Blackrock hamming? “No, it was not,” reasons the executive quoted above. “Blackrock was worried about reputational risk. They did not want even this minority JV to soil their globally clean record. They took extra care about processes, risk and compliance.” Rumour is that Blackrock wanted 100% ownership of the fund business.

Kothari was not very happy but agreed to sell if Blackrock paid 12% for assets under custody. That would make Kothari `4,800 crores richer (if only equity assets are considered for sale). But Blackrock was not willing to shell out that much. According to industry sources, Kothari was quoting big bucks because he was selling the last of his family’s 152-year old capital market legacy.

That apart, he desired full control of the fund business. “He saw an opportunity to make money. He can sell his assets to a strong player like HDFC five years down the line. He can do an IPO,” adds another source close to Kothari. It is not clear how Blackrock and DSP broke the impasse. Final exit terms and valuation are still under wraps. For now, Blackrock is exiting MFs in India, but there are rumors of it making a comeback by buying out IDFC Mutual Fund with equity assets worth Rs 19,250 crore.

Blackrock senior managing director Mark Wiseman, in a recent interview to ET, had spoken highly of investment opportunities in India – especially in the private market space. He was not very forthcoming about mutual funds then. Kothari, however, does not expect Blackrock back in the “foreseeable future. Blackrock will be present in India to explore some PE-like investment structures. They may continue their advisory business, which manages investments of sovereign funds, insurance companies and pension pools in India.”

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If Blackrock keeps their advisory business, it may hurt “institutional aspirations” of DSP Group. According to company insiders, DSP Blackrock held the investment advisory mandates of several Gulf-based sovereign wealth funds in India. Now with the JV coming to an end, it remains to be seen if these bulgebracketed investors would stay with DSP or move on with Blackrock. “I hope our overseas advisory mandates stay with us… Our plan is to open up for more overseas institutional mandates. We’ll try to retain our clients,” Kothari adds.

Kothari is quick to add that DSP would be run pretty much the way it was when Blackrock was around. “The firm is family-owned, but it will be professionally managed,” he assures. “The JV with Blackrock was great. They helped us better our risk management practices, sharpened our research… We parted ways on friendly terms,” says Kothari, allaying rumors of any bitterness.
DELHI SAGA
Several foreign investment managers wound up their India operations for want of bulk domestic assets. They also did not want to mark up their marketing and distribution budget to widen reach. “The problem with the Indian MF industry is that it still is not big enough to be taken seriously,” says Sanjiv Shah, former co-chief executive, Goldman Sachs Asset Management, which sold its assets to Reliance MF in 2016. “There are about 1.5 crore Mutual Fund investors (if you discount folio duplication) …. Asset size is also not very large. Some foreign asset managers who exited India manage assets 3-4x the size of Indian Mutual Fund industry.

Their Indian assets could be as negligible as a rounding-off error in final accounts.” According to Shah, domestic savings started flowing into Mutual Funds only after demonetization, continuing in 2017 when the industry posted a 22% gain in assets. Prior to demonetization, most fund houses found it difficult to bulk up asset bases. The likes of Fidelity and Franklin Templeton managed to shore up assets at a faster pace, thanks to established distribution tie-ups (at a global level) with Citibank and HSBC. They also had products suiting the domestic investor.

“Domestic fund houses market products very aggressively. They use all channels and also open branches to distribute their products. Such strategies are alien to most foreign players,” says Kothari. “It may not take much of regulatory capital to start Mutual Fund business in India, but additional capital would be required to set up distribution lines and expand the business,” says UK Sinha, former Sebi chairman and former CMD of UTI Mutual Fund. “Only long-term strategies would work.”

This long path to profitability is a discouragement. It may take 6-8 years for a well-managed fund house to break even, experts opine. A larger share of debt assets may take even longer. Most foreign asset managers are not willing to wait. “India is a pure retail play, a fact most foreign fund houses do not understand,” says Vijai Mantri, co-promoter, Buckfast Financial Advisory Services and former head of Pramerica Mutual Fund. “They spent a lot (in dollars) to set up here and are disappointed when they see meager returns (in rupees). They just pack their bags.”

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Most foreign mutual funds that exited are subsidiaries of mammoth global and investment banks or wealth management pools. The local Mutual Fund team, per se, does not have much power. In case of losses, the management simply shuts the vertical and reallocates resources. “That’s short-sightedness on the part of shareholders and the top management,” says Sikka of Reliance Nippon. “Execution strategies have to be planned locally, not in some distant country.”

Locally-planned strategies and managerial autonomy helped Franklin Templeton survive its initial years in India. Today, it manages over Rs 1 lakh crore and is regarded as the lone foreign fund house that managed to crack the code. Mirae Asset Mutual, with Rs 19,000 crore book, is another success story. “These are good times for the Indian Mutual Fund industry,” says Sinha. “Banks have reduced deposit rates and money is flowing into MFs; markets are also doing well. Foreign players who exited India have missed the best years.” Simply put, Sinha infers that mutual funds Sahi hai. For more such news stay tuned with inventiva.co.in.

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