Q&A with Chief Executive Officer, HSBC Global Asset
Management
Mutual fund is a much-talked about financial product
currently in India. Despite several measures the industry continues to find it
difficult to grow. Sridhar Chandrasekharan, CEO of HSBC Global Asset Management
says Indian market is significant in terms of its potential in domestic as well
as cross-border business. HSBC AMC has a local presence in several of the
markets it invests and India is one of them. In conversation with Chandan Kishore
Kant, he shares his views on the challenges Indian fund market faces and what
needs to be done to curb it. Edited excerpts:
Is Indian fund management business a challenge?
There has been quite a lot of discussion about the distribution model in India where you have got no front-end loads for retail clients for distributors and on the other hand you have got the same distributors charging the AMCs for the front-end load. And clearly, at arms length, it is fair that AMCs are able to recover the costs of infrastructure they provide which enables them to have research and analytical capabilities. In retail distribution, this is a concern since due to this dynamic, AMCs are in the short-term not able to recover anything to offset these costs. Then I will be concerned if it led to perverse dynamics whereby somehow the level of infrastructure was diminished.
The industry framework should allow the asset manager to retain a decent return, in order to offset the costs of the infrastructure AMCs create. I am confident that the industry will evolve and so there is no way that we will diminish the quality of infrastructure that we have. But it will be useful to recognise that these things do not come out of thin air. It does incur a cost and it will be useful and healthy to see that there is something to support that.
How different is India's asset management industry compared with the world's?
It is at a nascent stage. Stability of the regulatory framework is going to be very important. If we look the developments taking place in the Indian industry, taking the ratio of proportion of investments that are managed within the asset management industry in the developed markets is above 25 per cent whereas in India and in the emerging markets, in general, the equivalent ratio stands below 10 per cent. It means that India is still in that upward journey where people are realising that asset management industry can add value to them. I see the mutual fund industry continue to grow in India and along the way it will look different in terms of conduct of business, revenue and distribution dynamics.
Last year Indian government allowed foreign retail investors to invest in Indian mutual funds. But it has not been successful. What went wrong?
There are discussions relating to tax related developments both domestically and for cross-border investments. I would be concerned more about the uncertainty it creates. Whatever it is that is intended to be the rules, as long as it is transparent and clear then investors can reasonably make a decision. You have a situation now that investors are prepared to hold money at negative interest rates when there are strong attractions over here. And we have to ask ourselves the question
Is Indian fund management business a challenge?
There has been quite a lot of discussion about the distribution model in India where you have got no front-end loads for retail clients for distributors and on the other hand you have got the same distributors charging the AMCs for the front-end load. And clearly, at arms length, it is fair that AMCs are able to recover the costs of infrastructure they provide which enables them to have research and analytical capabilities. In retail distribution, this is a concern since due to this dynamic, AMCs are in the short-term not able to recover anything to offset these costs. Then I will be concerned if it led to perverse dynamics whereby somehow the level of infrastructure was diminished.
The industry framework should allow the asset manager to retain a decent return, in order to offset the costs of the infrastructure AMCs create. I am confident that the industry will evolve and so there is no way that we will diminish the quality of infrastructure that we have. But it will be useful to recognise that these things do not come out of thin air. It does incur a cost and it will be useful and healthy to see that there is something to support that.
How different is India's asset management industry compared with the world's?
It is at a nascent stage. Stability of the regulatory framework is going to be very important. If we look the developments taking place in the Indian industry, taking the ratio of proportion of investments that are managed within the asset management industry in the developed markets is above 25 per cent whereas in India and in the emerging markets, in general, the equivalent ratio stands below 10 per cent. It means that India is still in that upward journey where people are realising that asset management industry can add value to them. I see the mutual fund industry continue to grow in India and along the way it will look different in terms of conduct of business, revenue and distribution dynamics.
Last year Indian government allowed foreign retail investors to invest in Indian mutual funds. But it has not been successful. What went wrong?
There are discussions relating to tax related developments both domestically and for cross-border investments. I would be concerned more about the uncertainty it creates. Whatever it is that is intended to be the rules, as long as it is transparent and clear then investors can reasonably make a decision. You have a situation now that investors are prepared to hold money at negative interest rates when there are strong attractions over here. And we have to ask ourselves the question
why does that persist?
If we talk about reliability in terms of the rule, it is a significant focus. So the attractiveness of India, in many ways, as a destination is beyond doubt. If that is the observation, all of us need to ask the question ‘what is it which is inhibiting investors’? And, based on the feedback that I had in terms of conversation with some of the clients, the uncertainty factor is a result not so much on the underlying risk but the frequently changing rules.
Post crisis, it is difficult to sell MF products in India. What measures should be taken?
The penetration level is low and it is, from our experience of the emerging markets, bound to increase. One of the challenges is in terms of building the trust. There should be more measures to enable investors to access professional managers. Fundamentally, the way I look at this business is by understanding the value that industry adds to investors. By the mutualization of assets you have the scale to deliver. Because of the scale asset managers can more efficiently access the markets. MFs have infrastructure advantage and because of the scale one has a greater investment in the infrastructure around research and analytics. That is the core value addition which industry can provide to the investors and this is true anywhere in the world. Now within that what we need to be conscious of the fiduciary responsibility because at the end of the day people are trusting you to manage their money on their behalf. What that means is to articulate clearly what the investment process is by focusing on what it is we are seeking to do with client's money. And the more successful we are in articulating that, the more successful we will be in terms of building the client's confidence.
Do you feel that somehow Indian fund industry has been unable to generate that trust among investors and that, probably, has played a vital factor in decline of inflows and assets?
Absolutely. There are a variety of factors which go into this perception and hence this industry is not seeing inflows. Transparency is becoming a very key consideration. And it is fair to see when I look back at several of the regulations in India. But trust is something which is earned, you cannot regulate. One can, obviously, put in safeguards but it is a firm which earns the trust of its investors.
The quality or the value which an asset manager adds to an investor is very often described by the industry in terms of "look at my comparative performance" or "look at my quartile performance" etc. If you are discharging a position of trust then I would argue that your primary focus needs to be in terms of managing risk on behalf of your clients and it's a bit strange and unusual for me that the quality of that risk management is then measured in terms of return. There is nothing to be defensive about the performance, what I would say unequivocally is that performance is a consequence of managing risk well and frankly I would rather manage risk on behalf of our clients than necessarily focus uni-dimensionally on beating a peer group because at the end of the day I would be concerned if some of that meant that we were taking undue risk in client portfolio.
What role does your India presence play in overall asset management business?
We have a local presence in several of the markets we invest. And this does make a significance difference. If we take a market like India, our focus is both being relevant to the domestic market and also being able to play a meaningful role in the connection between foreign investors and Indian domestic markets. So the inter-connectivity is something that as an institution we are very strong on and this will continue to grow. In that context, the Indian market is very significant both in terms of the potential it has in the domestic business and also in terms of the cross-border business.
If we talk about reliability in terms of the rule, it is a significant focus. So the attractiveness of India, in many ways, as a destination is beyond doubt. If that is the observation, all of us need to ask the question ‘what is it which is inhibiting investors’? And, based on the feedback that I had in terms of conversation with some of the clients, the uncertainty factor is a result not so much on the underlying risk but the frequently changing rules.
Post crisis, it is difficult to sell MF products in India. What measures should be taken?
The penetration level is low and it is, from our experience of the emerging markets, bound to increase. One of the challenges is in terms of building the trust. There should be more measures to enable investors to access professional managers. Fundamentally, the way I look at this business is by understanding the value that industry adds to investors. By the mutualization of assets you have the scale to deliver. Because of the scale asset managers can more efficiently access the markets. MFs have infrastructure advantage and because of the scale one has a greater investment in the infrastructure around research and analytics. That is the core value addition which industry can provide to the investors and this is true anywhere in the world. Now within that what we need to be conscious of the fiduciary responsibility because at the end of the day people are trusting you to manage their money on their behalf. What that means is to articulate clearly what the investment process is by focusing on what it is we are seeking to do with client's money. And the more successful we are in articulating that, the more successful we will be in terms of building the client's confidence.
Do you feel that somehow Indian fund industry has been unable to generate that trust among investors and that, probably, has played a vital factor in decline of inflows and assets?
Absolutely. There are a variety of factors which go into this perception and hence this industry is not seeing inflows. Transparency is becoming a very key consideration. And it is fair to see when I look back at several of the regulations in India. But trust is something which is earned, you cannot regulate. One can, obviously, put in safeguards but it is a firm which earns the trust of its investors.
The quality or the value which an asset manager adds to an investor is very often described by the industry in terms of "look at my comparative performance" or "look at my quartile performance" etc. If you are discharging a position of trust then I would argue that your primary focus needs to be in terms of managing risk on behalf of your clients and it's a bit strange and unusual for me that the quality of that risk management is then measured in terms of return. There is nothing to be defensive about the performance, what I would say unequivocally is that performance is a consequence of managing risk well and frankly I would rather manage risk on behalf of our clients than necessarily focus uni-dimensionally on beating a peer group because at the end of the day I would be concerned if some of that meant that we were taking undue risk in client portfolio.
What role does your India presence play in overall asset management business?
We have a local presence in several of the markets we invest. And this does make a significance difference. If we take a market like India, our focus is both being relevant to the domestic market and also being able to play a meaningful role in the connection between foreign investors and Indian domestic markets. So the inter-connectivity is something that as an institution we are very strong on and this will continue to grow. In that context, the Indian market is very significant both in terms of the potential it has in the domestic business and also in terms of the cross-border business.
Source: http://business-standard.com/india/news/allow-amcs-to-retaindecent-return-sridhar-chandrasekharan/179747/on
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