Motilal Oswal: Building and Diversifying India’s Asset Management Industry

Aashish Somaiyaa, Managing Director and Chief Executive Officer of Motilal Oswal Asset Management, believes that the outlook for India’s wealth management market is as positive today as it has ever been. Rapid GDP growth aligned with young demographics encourage a savings culture to provide the platform for ongoing expansion of the Indian mutual fund industry. However, there are issues to address, including the excess number of funds and product launches in the market rather than consolidating investment in the type of established, stock-picking longer-term strategies that Motilal Oswal champions. Somaiyaa met with Hubbis to cast his expert eye over the world of Indian asset management, and why he is optimistic about new funds coming in both locally and offshore.

“Many people in our business,” he began, “seem to believe that the only way to get new money is by showing new products to potential customers every month, or every quarter. This means that there is too much of buying which happens on the basis of novelty, and perhaps on too short a time horizon perspective. This means too much focus on tactics, and not enough focus on risk-return expectations based around client goals. Product selling and even worse, ‘feature’ selling can be counter-productive, after all the most essential is the return.”

Following the US model?

Looking from a wide-angle perspective, Somaiyaa sees India moving towards the US model. “In the US, for every hundred dollars of assets managed in mutual funds about half of that is managed by way of alternatives, such as hedge funds, concentrated portfolios and other strategies,” he reports. “India is actually just beginning to go that way, with mutual funds becoming more and more retail and standardised, while at the same time there is a nascent trend for some of the more successful asset managers to open their own shops focusing on alternate assets. In the West today, the mutual fund managers are no longer the big names, it is all the alternative and hedge fund managers.”

Moving towards alternative strategies

He extrapolates on this, noting that long-term buy and hold is a great strategy, proven over time, but it needs patience and maturity at investors’ level. Alternative platforms enable right investor segmentation with focus and conviction as opposed to mutual funds. That apart, specialist and alternative funds have been rising in prominence because the average individual’s inability to stomach the continuing intermittent volatility offers them a fertile ground to seed their funds with strategies of varying risk return combinations.

Regulation, he elucidates, is one of the factors that is somewhat commoditising the mutual fund industry, both in equities and increasingly in fixed income. “Creativity and innovation,” he observes, “will therefore come only outside the mutual fund sector, while many of the wealth managers, private bankers, high net worth and ultra-wealthy investors gravitate towards the specialists. This trend will become increasingly prominent.”

Diversity

Somaiyaa does not make any judgement on whether this is a positive or a negative development. “It is a trend towards diversity and greater choice,” he explains, “so we will see new strategies such as long-short and other ideas that might offer a better return per unit of risk. Second, pushing risk aside, returns might be higher for those willing to push for maximum returns. Meanwhile, the mutual funds increasingly become the retail asset allocation, for financial planning, savings and somewhat of a commodity.”

He also observes that at the same time, the understanding of risk in India is rising. “We are at the early stages of this portion of the market’s evolution, as everyone has been so focused on growth, but there is the beginning of a greater sensitivity to risk.”

Matching assets to investors

He also maintains that there needs to be some improvement in distribution, to more accurately match products to expectations. “The product makers and products are tightly regulated, but the distribution practice is not yet regulated, so standards are lagging,” he reports. “For example, we need to be wary of what we call ‘incidental advice’.”

Incidental advice, he elucidates, is advice as applicable or relevant to just what role the product may play in a context or a particular investment for the client. This may be more “here and now” when a client approaches a distributor or vice versa while they are trying to promote a particular product, without sufficient sensitivity or regard to how that product might fit the client’s asset allocation, or long-range financial plan.

“We need a better definition of advice and better regulation in that sense,” Somaiyaa comments. “There is some consultation going on regarding advisers and distributors, but much more needs to be done.”

He also observes that the wealth management industry is under some pressure on pricing. “There is some pressure to offer more passive products or at least cheaper products because of the move towards advisory practices and the need to move to a fee-based pricing model rather than depending on embedded commissions,” he reports. Since this is happening at a time when recent performance of active funds is below par there is a sort of fillip to passives and they are getting increased attention. While we believe that active funds have huge potential to outperform in Indian markets, the interest in passives is not just related to alpha or lack of it, it is also fuelled by regulatory drive to advisory practices, cost consciousness and also the rise of digital and DIY cult.

He analyses equity products as having four component parts. The base is beta and beta-plus (what the western world names closet indexers or funds with low tracking ranges), the third level is alpha chasers, and the fourth level is the alternate strategies. “The more basic strategies are seeing greatest fee pressure, naturally,” he comments, “as they are not so differentiated. But pressure in India is only at the early stages, this is not the Western world. And we learn a lot from developments in the Western markets, so you already see a lot of private bankers making early moves to get into the advisory and the fee-based space. This is actually happening quite rapidly, due to the pace of development here and in India today, the wealth managers and private bankers that I speak to are already reinventing their business models.”