A decade back, Morgan Stanley – the first foreign asset manager to enter India – made a disastrous start when it faced the ire of retail investors.
|
View graph. |
||||||
Unfamiliar with the risks of investing in equity funds, these investors had seen their savings shrink with a falling market.
Learning from those early mistakes, and helped along by tax breaks to mutual funds and troubles at giant state-controlled asset manager Unit Trust of India, foreign fund managers have had an impressive run of growth.
Foreign companies, including joint ventures, now manage 35% of the $21 billion assets under management. After over a century of operations in India, 42 foreign banks have just around an 8% market share of assets. Not surprisingly then, HSBC, ABN Amro, Standard Chartered Grindlays and Deutsche are ready to enter the fray.
Recent acquisitions have put the spotlight on the sector. In March California-based asset manager Templeton announced the acquisition of ITI Pioneer for around Rs2.6 billion ($53 million) to form the biggest private investment house. It will manage nearly $1.5 billion in assets.
Templeton’s India head, Rajiv Vij, says the acquisition brings ITI’s large and profitable equity funds that complement its own portfolio of bond funds. Taurus, in which investment bank Lazard has a stake, acquired the assets of two equity funds managed by a state bank. Canadian securities house TD Waterhouse bought into local asset manager Tata Mutual Fund last year.
Ved Prakash Chaturvedi, CEO of Tata
TD Waterhouse, says these acquisitions help late entrants to grow to scale fast. “The new entrants are mostly foreign players who want to enter at the mezzanine level. Three to five years from now there will be a real need for consolidation.”
Sanjay Sachdev, who heads IDBI Principal, another late entrant, says his company will grow organically. “While size is important for profitability, there is a lot of hype about current valuations.” Private managers have only scratched the surface, with the market growing in the past three years in eight large cities, he adds.
Despite the growing popularity of mutual funds, total bank deposits are 11 times the assets managed by mutual funds. Fierce competition is forcing some to reassess the cost of doing business. Merrill Lynch, which has a successful investment banking joint venture with local securities firm DSP, moved to divest part of its majority stake in the asset management joint venture to its Indian partner recently. Even after its recent acquisition, Templeton manages about a sixth of the assets of Unit Trust of India, India’s biggest state-controlled asset manager. UTI has a 51% market share and is heading for its third bailout by the government this year.
Several foreign companies, such as Zurich Life, UK life assurer Prudential, Sun Life, ING and Principal are drawing on the synergies between their insurance and asset management businesses in India. ING is seeking to raise its stake in Vysya, a local bank, to gain access to a distribution network. Pension reform is on its way and last year a few private insurers were allowed to launch pension funds. That is clearly the next big opportunity. Sachdev says: “If the government keeps its promise of pension reform by June, we should have products in the market by January next year.”
